ALNT

Business Context and Reporting Period

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

Filing Type: Form 10-Q (Unaudited)

Reporting Period: Quarter and nine months ended September 30, 2003

Allied Motion Technologies designs, manufactures, and sells motion control products. Following the sale of its Power and Process Business in 2002 and the Calibrator Business in March 2003, the Company now operates exclusively as a Motion Control Business. 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 23% in Q3 and 81% for the nine months compared to the prior year. This growth is primarily driven by the inclusion of Motor Products (acquired July 2002), which was only partially included in the prior year's results. On a pro forma basis, revenues were slightly lower (3% in Q3, 2% in 9 months) than the prior year.
• Profitability: The Company returned to profitability from continuing operations, reporting net income of $403,000 in Q3 2003 compared to a loss of $52,000 in Q3 2002. This improvement is attributed to the Motor Products acquisition, lean manufacturing initiatives, and a $298,000 tax benefit from a prior year state income tax refund.
• Margins: Gross margin percentage decreased to 23% in Q3 2003 from 25% in Q3 2002. Management attributes this to the lower historical margins of the Motor Products segment compared to the Company's legacy sectors.
• Discontinued Operations: Income from discontinued operations was zero in 2003, compared to $243,000 in Q3 2002. The prior year included a $1,007,000 gain on the sale of the Power and Process Business, partially offset by an operating loss and a $1,429,000 litigation settlement charge.
• Restructuring: The Company recorded $140,000 in restructuring charges for the nine months ended September 30, 2003, primarily for workforce reductions. No such charges were recorded in the comparable 2002 period.

Guidance, Outlook, and Risks

• Outlook: The sales order backlog increased 19% year-over-year to $14,078,000 as of September 30, 2003. Management expects restructuring activities to reduce facilities to three by year-end and anticipates continued productivity improvements from lean manufacturing and offshore sourcing.
• Acquisitions: The Company is in active discussions regarding strategic acquisitions to support external growth and technology expansion.
• Liquidity: Cash and cash equivalents decreased by $465,000 during the nine-month period. The Company maintains a line of credit with Silicon Valley Bank maturing February 28, 2004, with $1,423,000 available as of September 30, 2003. Management believes current resources are sufficient for the next 12 months.
• Risks: Key risks include the ability to sustain growth, customer viability, competition, and the potential for future goodwill impairments. The Company is exposed to interest rate risk on its variable-rate debt and foreign currency risk related to its UK subsidiary, though it does not currently hedge these exposures.

Investor Verification Checklist

• Pro Forma Comparability: Verify the pro forma revenue and margin figures to understand organic growth trends, as the reported revenue increase is heavily influenced by the timing of the Motor Products acquisition.
• Tax Benefit Sustainability: Confirm the nature of the $298,000 state income tax refund benefit to assess if it is a one-time item impacting the effective tax rate.
• Restructuring Progress: Monitor the completion of facility consolidation and the associated cost savings versus the $140,000 in charges already incurred.
• Debt Covenants: Review compliance with the Silicon Valley Bank line of credit covenants (tangible net worth and debt service coverage) given the upcoming maturity in February 2004.
• Goodwill Valuation: Assess the $5,214,000 goodwill balance for potential impairment risks, particularly given the volatility in the motion control market.