Allied Motion Technologies Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The filing issuer is Allied Motion Technologies Inc. (NASDAQ: AMOT). Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Business context and reporting period
The company designs, manufactures and sells precision and specialty controlled-motion products and systems for vehicle, industrial, medical, and aerospace and defense markets. It reports one operating segment. Q2 results include a full quarter of the 2021 acquisitions and partial-period results from three acquisitions completed in Q2 2022: FPH Group, ThinGap and Airex.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $122.7m | $101.5m | $237.5m | $203.2m |
| Gross profit / margin | $39.8m / 32.4% | $31.2m / 30.7% | $73.2m / 30.8% | $61.3m / 30.2% |
| Operating income | $7.5m | $6.7m | $11.8m | $13.3m |
| Net income | $4.6m | $4.6m | $7.1m | $16.6m |
| Diluted EPS | $0.29 | $0.32 | $0.45 | $1.14 |
| Operating cash flow | Not stated separately for Q2 | $(0.3)m | $16.5m |
- Q2 revenue rose 21%; management attributed growth to a 26% increase in volume, partly offset by a 5% unfavorable currency impact. Organic growth was 9.9%. For the first half, revenue increased 17%, with 7.6% organic growth.
- Q2 operating costs rose 32%, including higher selling, engineering, business-development and acquired-intangible amortization costs. Operating income grew 12% in Q2 but fell 12% for the first half.
- First-half net income declined 57%, primarily reflecting the absence of a $7.4m discrete tax benefit recorded in first-half 2021, in addition to acquisition-related costs and higher interest expense. The 2021 first-half effective tax rate was unusually low at negative 40.3%, versus 25.1% in 2022.
- Management reported Q2 adjusted net income of $5.7m and adjusted diluted EPS of $0.36, compared with $4.8m and $0.33, respectively, in Q2 2021. These are non-GAAP measures. Q2 adjusted EBITDA was $16.2m versus $12.4m; first-half adjusted EBITDA was $29.1m versus $24.4m.
- Cash and equivalents were $28.8m at June 30, up from $22.5m at year-end. First-half operating cash flow was negative $0.3m, reflecting working-capital investment, especially inventory built to secure critical components. Investing cash outflow was $50.9m, including $44.6m net cash paid for acquisitions; financing provided $58.8m, including debt proceeds.
- Inventory increased to $112.3m from $89.7m at year-end; trade receivables rose to $69.8m from $51.2m. Current assets were $222.3m and current liabilities $93.4m.
- Long-term debt was $228.9m, including $220.1m outstanding under the revolving facility and $9.2m in finance lease obligations. The revolver matures in February 2025; only $4.9m was unused at June 30. The company reported covenant compliance. Effective rate on the amended revolving facility was 2.92% at June 30.
Material changes and notable items
- Q2 bookings increased 17% to $139.2m; backlog increased 90% year over year to $323.9m. First-half bookings rose 26% to $294.5m. Acquisitions contributed to these comparisons.
- Industrial and aerospace and defense were the principal growth markets. Q2 industrial revenue was $47.1m versus $33.8m; aerospace and defense revenue was $17.1m versus $8.6m. Vehicle and medical revenue were broadly flat or lower.
- The three Q2 acquisitions had a combined purchase price of $58.7m, funded with cash, borrowings, and company or exchangeable shares. Their reported Q2 revenue contribution was $2.3m; FPH contributed $1.9m and ThinGap and Airex together $0.4m. Purchase-price allocations remain preliminary.
- Acquisition activity increased goodwill and intangible assets; June 30 goodwill was $125.0m and net intangible assets were $125.9m. Amortization expense rose to $2.6m in Q2 from $1.5m.
- Foreign-currency translation reduced first-half comprehensive income by $9.9m. The company also reported a Q2 translation loss of $8.7m. This is reflected in other comprehensive income, not net income.
Outlook, risks and contingencies
- Management expects a full-year 2022 effective tax rate of approximately 25%–27% and capital expenditures of $15m–$20m. No revenue or earnings guidance is provided in the filing text.
- Management believes cash, expected operating cash flows and borrowing capacity are sufficient for ordinary-course liquidity needs over the next 12 months, while noting uncertainty from COVID-19, the Ukraine conflict and supply-chain conditions.
- Risks discussed include inflation and higher input costs, supply-chain disruption and component shortages, labor availability, geopolitical and currency exposure, customer demand, and the ability to integrate acquisitions and realize expected synergies. The company noted that some components rely on single or limited-source suppliers.
- The Ukraine conflict was associated with increased energy and component costs, particularly in Europe, and longer component shipment times between Europe and Asia-Pacific. COVID-19-related disruptions continued to affect supply chains and shipment timing.
- The company hedges some currency and variable-rate debt exposures. At June 30, $100m of revolving debt was hedged; management estimated that a 100-basis-point rate change on $120.1m of unhedged floating-rate debt would affect interest expense by approximately $0.3m for a quarter.
- One customer represented 11% of Q2 revenue and 11% of trade receivables at June 30. The Twinsburg, Ohio facility consolidation was substantially complete; related costs were $0.3m for the first half of 2022.
- Management stated disclosure controls were effective as of June 30, 2022, and reported no material changes in internal control over financial reporting. No material changes to the risk factors in the 2021 Form 10-K were reported.
Important facts for investors to verify
- Whether acquisition-related revenue, integration progress and expected synergies support future growth and profitability, and how final purchase-price allocations may change.
- Whether elevated inventory converts into shipments and cash, and whether working-capital needs continue to constrain operating cash flow.
- Debt, interest expense, covenant headroom and revolver availability, particularly as interest rates change; reported unused capacity was $4.9m at quarter-end.
- Whether backlog and bookings convert to revenue, given acquisition contributions, supply constraints and customer demand uncertainty.
- The sustainability of gross-margin improvement and the effects of inflation, pricing, product mix, currency movements and acquisition amortization.
- The effect of the unusually large 2021 tax benefit on year-over-year earnings comparisons, and whether the 2022 tax-rate estimate is achieved.