Business Context and Reporting Period
Company: Allied Motion Technologies, Inc. (formerly Hathaway Corporation)
Reporting Period: Fiscal Year ended December 31, 2003 (Year 2003). The Company changed its fiscal year-end from June 30 to December 31 effective December 31, 2002.
Business Overview: Allied Motion designs, manufactures, and sells motor and servo motion products to Commercial Motor, Industrial Motion Control, and Aerospace and Defense markets. The Company operates through three subsidiaries: Emoteq Corporation, Computer Optical Products, Inc. (COPI), and Motor Products Corporation. In 2002 and 2003, the Company completed the sale of its Power and Process Business, transforming into a focused motion company.
Key Financial Metrics (Year 2003)
| Metric | Value (in thousands) |
|---|---|
| Revenues | $39,434 |
| Gross Margin | $10,267 (26% of revenue) |
| Operating Income | $1,270 |
| Net Income | $948 |
| Diluted EPS | $0.19 |
| Cash Flow from Operations | $2,152 |
| Total Assets | $27,497 |
| Total Debt Obligations | $1,833 |
| Cash and Cash Equivalents | $1,960 |
Material Changes vs. Prior Period
Revenue Growth: Revenues increased to $39.4 million in 2003 from $25.0 million in the Twelve Month Comparative Period (ended Dec 31, 2002). This 57% increase is primarily driven by the inclusion of Motor Products (acquired July 2002) for the full year. Excluding Motor Products, organic revenue grew 7%.
Profitability: Net income improved to $948,000 from $225,000 in the prior comparable period. Income from continuing operations turned from a loss of $59,000 to a profit of $948,000. This improvement is attributed to the Motor Products acquisition, lean manufacturing initiatives, and a $442,000 tax benefit from a prior year state income tax refund.
Margins: Gross margin percentage decreased slightly to 26% from 27% in the prior period, largely due to the lower margin profile of the newly integrated Motor Products business. However, on a pro-forma basis including Motor Products for the full prior year, margins improved from 22% to 26%.
Debt Reduction: Total debt obligations decreased significantly from $4.1 million to $1.8 million as the Company repaid $2.0 million on its line of credit during 2003.
Guidance, Outlook, and Risks
Strategic Outlook: Management plans to emphasize top-line growth in 2004 through new product launches and a re-aligned sales team. The Company will continue cost reduction efforts using "Allied's Systematic Tools" (AST) and strategic sourcing from low-cost regions.
Acquisition Activity: On February 10, 2004, the Company signed a merger agreement to acquire Owosso Corporation (Stature Electric) for approximately $14 million. The deal involves stock issuance, cash payments, and debt assumption. Financing commitments of up to $18.1 million have been secured.
Risks and Contingencies:
- Customer Concentration: No single customer accounted for more than 10% of revenue in 2003. However, in 2001, one customer accounted for 20% of revenue; deliveries to this customer were halted in 2002 due to economic downturns, though orders have resumed.
- Backlog Trends: Backlog decreased slightly to $13.4 million. Approximately 50% of commercial motor customers now use a "pull system," which reduces reported backlog as orders are recorded only upon delivery.
- Liquidity: The Company relies on a line of credit with Silicon Valley Bank (maturity June 30, 2004) for liquidity. The agreement prohibits dividends and requires compliance with financial covenants.
- Legal: An environmental contamination lawsuit regarding the former Power and Process Business was settled in 2002. A remaining payment of $250,000 is due.
Investor Verification Checklist
- Acquisition Integration: Verify the successful integration of Motor Products and the realization of projected cost savings and margin improvements.
- Owosso Merger: Confirm the closing of the Owosso Corporation acquisition and the impact of the $14 million consideration on the balance sheet and dilution.
- Debt Covenants: Monitor compliance with the Silicon Valley Bank credit agreement, specifically tangible net worth and profitability covenants, given the upcoming maturity in June 2004.
- Customer Demand: Assess the stability of the "pull system" customers and the recovery of demand in the semiconductor and telecommunications sectors.
- Tax Benefits: Understand the sustainability of the $442,000 tax benefit recorded in 2003, which was a one-time item related to a prior year refund.