Allied Motion Technologies Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed March 13, 2017. The filing identifies the registrant as Allied Motion Technologies Inc. (Nasdaq: AMOT), despite the request metadata naming Allient Inc. Unless noted otherwise, financial amounts are in thousands of dollars.
Business context
The company designs, manufactures and sells precision motion-control components and integrated systems for vehicle, medical, aerospace and defense, electronics, and industrial markets. It operates as one reportable segment. Heidrive GmbH, acquired January 12, 2016, expanded its European operations and product capabilities; Heidrive contributed approximately 13% of 2016 net sales.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $245,893 | $232,434 | +6% |
| Gross profit / margin | $73,004 / 29.7% | $68,772 / 29.6% | Profit +6%; margin +0.1 percentage point |
| Operating income / margin | $18,883 / 7.7% | $20,930 / 9.0% | −10% |
| Net income | $9,078 | $11,074 | −18% |
| Diluted EPS | $1.00 | $1.20 | −17% |
| Cash from operations | $14,303 | $20,073 | −$5,770 |
| Cash and cash equivalents, year-end | $15,483 | $21,278 | −$5,795 |
| Total debt, year-end | $71,419 | $67,378 | +$4,041 |
| Working capital / current ratio | $50,987 / 3.1 | $39,931 / 2.2 | Improved |
Net debt was $55,936, up $9,836 from 2015; net debt to capitalization was 44%, versus 42%. Investing cash outflow was $21,393, including $16,205 net cash paid for Heidrive and $5,188 of capital expenditures. The company paid $0.10 per share in dividends during 2016.
Bookings rose 8% to $250,369 and year-end backlog increased 11% to $78,602. The company cautions that backlog, most of which converts in three to four months, is not a reliable indicator of future sales.
Material changes and unusual items
- Revenue growth was attributed largely to Heidrive and growth in medical, electronics, and aerospace and defense markets; vehicle-market softness partly offset growth. U.S. customers accounted for 54% of sales, down from 66% in 2015.
- Operating expenses increased 13%, led by acquisition-related costs, higher engineering and development spending, and continued investment in the “One Allied” organization. Engineering and development expense rose 14% to $16,170.
- On October 28, 2016, the company entered a new $125 million secured revolving credit facility. It used the facility to repay $30 million of 14.5% subordinated notes and amounts under its prior revolver and term loan. Year-end revolver borrowings were $71,203; the company reported compliance with covenants.
- 2016 adjusted net income, a non-GAAP measure, was $8,809, compared with GAAP net income of $9,078. Adjustments included $291 after tax of business-development costs and removal of $560 after-tax insurance-recovery income related to a fire. Adjusted EBITDA was $30,499 versus $31,223 in 2015.
- The company corrected an intercompany cost-of-sales accounting error in its 2016 quarterly figures. It said the error was not material to any quarter and did not amend the quarterly filings. The correction reduced fourth-quarter 2016 net income from $1,489 as recorded to $709; revised quarterly results were presented.
Outlook, risks and contingencies
Management provided no specific 2017 revenue or earnings guidance. It expects to continue investing in engineering, integrated motion solutions, operational improvements, and its ERP implementation, which was estimated to be completed in 2018. Management cited new solution wins expected to ramp during 2017 and plans to evaluate strategic acquisitions, while expressing confidence in its longer-term growth strategy.
Key risks include customer and market concentration, cyclical and vehicle-market demand, pricing and raw-material pressures, acquisition integration and realization of synergies, foreign exchange exposure, variable-rate debt and covenant requirements, ERP implementation and cybersecurity, product quality and warranty exposure, and the ability to attract technical personnel. Five customers represented approximately 35% of 2016 revenue; one customer alone represented 19%. Management said ordinary-course legal actions were not expected to have a significant adverse effect. No goodwill impairment was recorded; the annual test indicated fair value exceeded carrying value by more than 25%.
Management and the auditor reported effective internal control over financial reporting, but Heidrive was excluded from the company’s internal-control assessment and the auditor’s control audit because it was acquired during 2016. The financial-statement audit received an unqualified opinion.
Important facts for investors to verify
- How much of 2016 sales growth and future growth reflects Heidrive versus organic demand, particularly given vehicle-market weakness.
- Whether higher operating costs and acquisition-related expenses translate into improved operating margins and returns on invested capital.
- Cash conversion and working-capital trends, including Heidrive receivables and inventory, alongside the increase in net debt.
- Revolver availability, interest-rate exposure, covenant headroom, and the company’s ability to refinance or repay debt as required.
- The customer concentration and backlog disclosures, and the effect of the quarterly intercompany accounting correction on comparability.
- Progress integrating Heidrive and implementing the ERP system; Heidrive was excluded from the 2016 internal-control assessment.