ALNT

Business Context and Reporting Period

Company: Allied Motion Technologies, Inc. (formerly Hathaway Corporation)

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and six months ended June 30, 2003

Allied Motion Technologies designs, manufactures, and sells motion control products. The company completed a strategic transformation during this period by divesting its Power and Process Business (reported as discontinued operations) and acquiring Motor Products in July 2002 to expand its Motion Strategy. The company changed its fiscal year-end from June 30 to December 31, effective December 31, 2002.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased significantly year-over-year (156% for Q2, 141% for 6 months) primarily due to the inclusion of Motor Products, acquired in July 2002. On a pro forma basis including Motor Products for the prior year, revenues were slightly lower (2% down for Q2, 1% down for 6 months).
• Margin Compression: Gross margin percentage decreased from 37.5% to 26.2% in Q2 and from 33.3% to 25.2% for the six months. Management attributes this to the lower historical margins of the Motor Products business compared to the legacy Motion Business.
• Profitability Turnaround: The company reported net income of $302,000 for Q2 2003, a reversal from a net loss of $410,000 in Q2 2002. The prior year loss included a $433,000 loss from discontinued operations related to an environmental litigation settlement.
• Expense Increases: Selling, General & Administrative (G&A), and Engineering expenses increased due to the Motor Products acquisition and new executive hires, partially offset by reduced incentive bonuses.
• Restructuring: The company incurred $140,000 in restructuring charges for the six months ended June 30, 2003, primarily for workforce reductions and facility consolidation.

Guidance, Outlook, and Risks

• Outlook: Management expects continuous improvement in productivity and operating profits through lean manufacturing initiatives, offshore sourcing, and facility restructuring (targeting three facilities by year-end). The sales order backlog was $14.1 million at June 30, 2003, up 10% pro forma from the prior year.
• Liquidity: Cash and cash equivalents decreased by $569,000 during the six months. The company maintains a line of credit with Silicon Valley Bank with $1.2 million available as of June 30, 2003. The facility matures on September 10, 2003, and management expects to extend it.
• Risks:
  • Customer Concentration & Viability: Dependence on customers' ability to realize revenues from order backlogs.
  • Inventory Obsolescence: Volatile demand may lead to substantial charges for obsolete inventory.
  • Goodwill Impairment: Future impairment charges could materially impact financial position.
  • Foreign Currency: Exposure to British Pound fluctuations due to a UK subsidiary, though no hedging is currently utilized.
• Unusual Items: The prior year included a significant litigation settlement charge ($1.4 million pre-tax) related to environmental contamination in discontinued operations, which is not present in the current period.

Investor Verification Checklist

• Pro Forma Comparability: Verify the pro forma revenue and margin figures to understand organic growth trends excluding the Motor Products acquisition impact.
• Debt Covenants: Confirm the status of the Silicon Valley Bank line of credit extension, as it matures in September 2003 and is critical for liquidity.
• Restructuring Progress: Monitor the completion of facility consolidation and the realization of cost savings from lean manufacturing initiatives.
• Inventory Levels: Review inventory turnover and provisions for obsolescence given the company's warning about volatile demand.
• Discontinued Operations: Ensure no lingering liabilities exist from the sold Power and Process Business or the Calibrator Business.