Allied Motion Technologies, Inc. — FY 2017 Form 10-K
Filing identity and period: The supplied filing is for Allied Motion Technologies, Inc. (Nasdaq: AMOT), rather than an issuer identified as “ALLIENT INC.” It reports the fiscal year ended December 31, 2017; figures below are in U.S. dollars unless noted. This is an annual report, not a standalone fourth-quarter filing.
Business context
The company designs, manufactures and sells precision motion-control components and integrated systems for vehicle, medical, aerospace and defense, and industrial/electronics markets. It operates globally and reports one operating segment. Its strategy emphasizes integrated, multi-product motion solutions and continued investment in engineering, sales capabilities and operational improvements.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $252.012m | $245.893m | +2% |
| Gross profit / margin | $75.679m / 30.0% | $73.004m / 29.7% | Margin +0.3 percentage points |
| Operating income / margin | $18.800m / 7.5% | $18.883m / 7.7% | Income slightly lower |
| Income before taxes | $16.136m | $12.803m | +26% |
| Net income | $8.036m | $9.078m | -11% |
| Diluted EPS | $0.87 | $1.00 | -$0.13 |
| Cash from operations | $25.407m | $14.303m | +$11.104m |
- Revenue growth reflected approximately 1% higher volume and 1% favorable currency impact. Medical and industrial/electronics markets grew; vehicle-market softness partly offset the gains. Gross-margin improvement was attributed primarily to product mix.
- Operating expenses increased 5% to $56.879m, including engineering and development expense of $17.542m, up 8%. Operating income was nearly flat despite revenue growth.
- The effective tax rate rose to 50.2% from 29.1%, primarily due to a provisional $3.133m net tax charge associated with the 2017 Tax Cuts and Jobs Act, including the transition tax on certain foreign earnings. Excluding the Act’s effects, the company reported a 30.8% effective rate. Tax accounting remained provisional at year-end.
- Management-reported adjusted net income was $11.316m, or $1.22 per diluted share, excluding the tax-law impact and business-development costs. Adjusted EBITDA was $31.123m versus $30.499m. These are non-GAAP measures and are not substitutes for GAAP results.
- Cash and cash equivalents were $15.590m. Working capital was $53.358m and the current ratio was 2.8. Total debt was approximately $53.155m; net debt was $37.565m, down $18.371m from year-end 2016. Shareholders’ equity was $87.347m.
- Operating cash flow improved, which management attributed mainly to lower working-capital requirements, including changes in accrued liabilities and accounts payable. Capital expenditures were $6.201m. Financing activities used $20.166m, principally reflecting long-term debt repayments. Cash increased by $0.107m during the year.
- Bookings rose 9% to $271.941m; year-end backlog increased 28% to $100.708m. The company said most backlog converts to sales in roughly three to four months and cautioned that backlog is not a reliable indicator of future sales.
- Fourth-quarter 2017 revenue was $65.355m and net income was $0.095m, compared with $55.343m and $0.709m, respectively, in fourth-quarter 2016. The filing attributes the annual earnings decline primarily to the tax-law charge.
Material changes and notable items
- Interest expense fell to $2.474m from $6.449m, reflecting the October 2016 debt refinancing and lower debt; income before taxes consequently improved substantially even as operating income was slightly lower.
- Debt was refinanced in October 2016 through a $125m revolving credit facility with a five-year initial term and a $50m accordion feature. At December 31, 2017, $53.266m was outstanding before unamortized issuance costs. The company reported covenant compliance. The contractual-obligations table shows $52.694m of long-term debt due in the three-to-five-year period.
- Five customers accounted for approximately 33% of 2017 revenue; one customer represented 18% of revenue and 15% of trade receivables at year-end.
- In January 2018, the company acquired substantially all operating assets of Maval Industries’ original-equipment steering business. Management expected the transaction to be neutral to slightly accretive to 2018 earnings; purchase price and other detailed financial terms are not provided in the supplied filing text.
- The annual goodwill impairment test found no impairment; the reporting unit’s estimated fair value exceeded carrying value by more than 25%. Management stated that future impairment remains possible if business or economic conditions deteriorate.
- The independent auditor gave an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2017. Management said a financial reporting system implementation was substantially completed in the fourth quarter, with existing processes still used at year-end.
Outlook, risks and contingencies
No quantified revenue, earnings or margin guidance is provided. For 2018, management planned to pursue growth in served markets, evaluate strategic acquisitions, continue engineering and integrated-solution investments, and advance its enterprise resource planning implementation, which it expected to be largely completed during 2018. Management anticipated that integrated solutions and operational-improvement initiatives could support growth and margin improvement, but did not quantify those expectations.
- Key risks include economic and cyclical demand changes, customer order deferrals or cancellations, competitive pricing, customer concentration, and uncertainty that backlog will convert to revenue.
- Execution risks include aligning capacity with demand, developing and qualifying new products, integrating acquisitions, implementing enterprise systems, controlling costs, and retaining skilled technical personnel.
- International operations expose the company to currency, trade, regulatory, political and supply-chain risks. A hypothetical 10% U.S. dollar movement against major foreign-currency exposures would have affected 2017 sales by approximately $11.5m, before offsetting cost and expense effects.
- Raw-material price volatility, product quality and warranty claims, cybersecurity or IT disruption, pension and healthcare costs, tax estimates, and potential impairment of goodwill and other intangible assets could adversely affect results.
- Ordinary-course legal matters were disclosed; management did not expect their resolution to significantly adversely affect consolidated financial position or results. Operating lease commitments totaled $9.952m. The credit agreement includes financial covenants and secured substantially all non-real-estate assets.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Allied Motion Technologies, Inc. (AMOT), not “ALLIENT INC.”
- Review the final tax accounting and any subsequent adjustments to the provisional $3.133m Tax Cuts and Jobs Act charge.
- Assess the cause and sustainability of weak fourth-quarter net income, the difference between GAAP and adjusted earnings, and the effect of customer and product mix on margins.
- Verify debt repayment, refinancing and covenant headroom, including the large long-term principal amount scheduled within three to five years.
- Track customer concentration, backlog conversion and demand trends in the vehicle market, and obtain the Maval acquisition’s final terms and performance when available.
- Monitor the ERP implementation, integration of acquisitions, working-capital trends and whether management’s expected margin improvements materialize.