ALNT US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Amounts presented in Item 7 are in thousands, except per share data.

Overview

We are a global company that designs, manufactures and sells precision and specialty controlled motion components and systems used in a broad range of industries. Our target markets include Vehicle, Medical, Aerospace & Defense, and Industrial. We are headquartered in Amherst, NY, and have operations in the United States, Canada, Mexico, Europe and Asia-Pacific. We are known worldwide for our expertise in electro-magnetic, mechanical and electronic motion technology. We sell component and integrated controlled motion solutions to end customers and OEMs through our own direct sales force and authorized manufacturers’ representatives and distributors. Our products include brush and brushless DC motors, brushless servo and torque motors, coreless DC motors, integrated brushless motor-drives, gearmotors, gearing, modular digital servo drives, motion controllers, incremental and absolute optical encoders, active and passive filters for power quality and harmonic issues, and other controlled motion-related products.

Financial Overview

Highlights for our fiscal year ended December 31, 2020, include:

The Company’s 2020 sales were 1% lower than in the prior year. Our market position in the Medical market, combined with the acquisition of Dynamic Controls, nearly offset reductions in our other served markets, many of which were negatively impacted by the COVID-19 pandemic.

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Net income was 19.9% lower in 2020 compared to 2019, and earnings per diluted share decreased by 20.6%. These decreases reflect the impact of declines in the markets we serve and the supply chains we utilize due to market conditions impacted by the COVID-19 pandemic, along with incremental expenses from Dynamic Controls.

We remain focused on executing our strategy for growth while streamlining the organization and emphasizing continuous improvement in quality, delivery, cost and innovation as we drive the One Allied approach and expand our value proposition for our customers. Solid strides continue to be made with our multi-product, fully integrated solutions that are leading to increased business. Also, we continue to build a pipeline of exciting market-based application opportunities. Sales cycles are long and the time from being selected for the solution development to full rate production can be longer, yet we believe we continue to build a scalable foundation which can deliver strong returns on those investments.

Our Strategy

Our growth strategy is focused on becoming the controlled motion solution leader in our selected target markets by further developing our products and services platform to utilize multiple Allied Motion technologies to create increased value solutions for our customers. Our strategy further defines Allied Motion as being a “technology/know-how” driven company and to be successful, we continue to invest in our areas of excellence.

We have set growth targets for our Company and we will align and focus our resources to meet those targets. First and foremost, we invest in our people as we believe that attracting and retaining the right people is the most important element in our strategy. We will continue to invest in applied and design engineering resources.

Our strategic focus is addressing the critical issues that we believe are necessary to meet the stated long-term goals and objectives of the Company. The majority of the critical issues are focused on growth initiatives for the Company.

One of these growth initiatives includes product line platform development to meet the emerging needs of our selected target markets. Our platform development emphasizes a combination of our technologies to create increased value solutions for our customers. The emphasis with new opportunities has evolved from being an individual component provider to becoming a solutions provider whereby the new opportunities utilizemultiple Allied Motion technologies in a system solution approach. We believe this approach will allow us to provide increased value to our customers and improved margins for our Company. Our strong financial condition, along with AST continuous improvement initiatives in quality, delivery, and cost allow us to have a positive outlook for the continued long-term growth of our Company.

Outlook for 2021

During 2020, we were able to navigate a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results. Our fourth quarter 2020 performance was supported by record orders driven by favorable trends within our Medical markets, and exceptional engagement and focus on executing a significant recovery in our Vehicle market. This demand, combined with supply chain constraints, resulted in some inefficiencies and unintended costs as our teams worked hard to support and meet customer demand and schedules. We also felt the impact of tariffs given the expiration of certain exemptions during the fourth quarter. Ultimately, we believe we can mitigate these costs over time, though their impact is expected to continue over the coming quarters of 2021.

While the economic outlook for 2021 remains uncertain, we believe we are in a strong operational, financial and reputational position. Our record level of backlog, diversified end market penetration and demonstrated agility position us well to perform across varied market trends and give us confidence that we can drive further efficiency, profitable growth and enhanced free cash flow while delivering long-term value for our shareholders.

In 2021, we will continue to focus on leveraging our resources to expand our business in our served markets. In addition, we will continue to execute the ongoing critical issues as defined by our strategy, developed in 2017 and regularly updated since then.

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The critical issues from that strategy include:

1) Execute acquisition strategy to consolidate a fragmented market.

2) Pursue target (niche) markets where we can gain a leadership market position.

4) Utilize lean tools to enhance company performance.

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Allied Motion is an applied technology/know-how motion company, and to grow, we will continue to invest in the technical resources to ensure we can move forward with our mantra to “create controlled motion solutions that change the game” and to meet the emerging needs of our customers in our served market segments. We anticipate that our investment in these key resources will continue to drive our growth now and in the future. We expect to continue the shift from being a component supplier to a more complete solutions provider, along with the application of AST, to drive cost reduction.

Our global production footprint provides us with the opportunity to be a value added supplier for global companies who require support around the world. We will continue to evaluate and find areas to leverage our current manufacturing and sales footprint to drive sales and improve efficiencies.

In addition to our strategy described above, time and resources will be spent to further understand the ESG ecosystem and developments impacting stakeholder expectations. While the Company has a number of initiatives focused on individual components of ESG, we will begin to integrate ESG with our broader strategy and Enterprise Risk Management (ERM). The strategy will include looking to further enhance the Company’s ability to meet ongoing and emerging challenges, including the impacts of the COVID-19 pandemic.

Critical Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.

We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information.

The Company’s critical accounting estimates include:

Revenue Recognition

The Company considers control of most products to transfer at a single point in time when control is transferred to the customer, generally when the products are shipped in accordance with an agreement and/or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product. The Company satisfies its performance obligations under a contract with a customer by transferring goods and services generally in exchange for monetary consideration from the customer. The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgment as the contract with the customer. In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The

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Company establishes provisions for estimated returns and warranties. All contracts include a standard warranty clause to guarantee that the product complies with agreed specifications.

At December 31, 2020 and 2019, the accrual for future warranty obligations was $1,571 and $1,075, respectively. The Company’s expense (income) for warranty obligations was $34 in 2020, $210 in 2019, and ($13) in 2018, respectively. The length of the warranty period for the Company’s products is generally three months to two years and varies significantly based on the product sold. The Company calculates its warranty expense provision based on its historical warranty experience and adjustments are made periodically to reflect actual warranty expenses. If actual future sales returns and allowances are higher than the Company’s historical experience, additional accruals may be required.

Inventories

Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory costing requires complex calculations that include assumptions for overhead absorption, scrap, sample calculations, manufacturing yield estimates, costs to sell, and the determination of which costs may be capitalized. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.

Historically, our inventory adjustment has been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our net income. As of December 31, 2020, we have $62,978 of inventory recorded on our consolidated balance sheet, representing approximately 18% of total assets. A 1% write-down of our inventory would decrease our 2020 net income by approximately $458, or $0.05 per diluted share.

Valuation of Goodwill and Other Long-Lived Assets

We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our goodwill, intangible and other long-lived assets. Goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis and whenever events or business conditions change that could indicate that the asset is impaired. Definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.

Evaluation of goodwill for impairment

We test the reporting unit’s goodwill for impairment as of October 31st of each fiscal year and between annual tests if an event occurs or circumstances change that may indicate that the fair value of the reporting unit is below its carrying value. In conducting this annual impairment testing, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value. If not, no further goodwill impairment testing is required. If it is more-likely-than-not that the reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its net book value. If the net book value of the reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

We performed a qualitative assessment of our single reporting unit as of October 31, 2020. As part of this analysis, we evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall financial performance of our reporting unit. The assessment indicated that it was more likely than not that the fair value of our reporting unit exceeded its respective carrying value, and as such, a quantitative assessment was not required.

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We do not believe that our reporting unit is at risk for impairment. However, changes to the factors considered above could affect the estimated fair value of our reporting unit and could result in a goodwill impairment charge in a future period. As of December 31, 2020, we have $61,860 of goodwill recorded on our consolidated balance sheet, representing approximately 18% of total assets. A 1% write-down of our goodwill would decrease our 2020 net income approximately $450, or $0.05 per diluted share.

Business Combinations

The Company allocates the purchase price of an acquired company, including when applicable, the acquisition date fair value of contingent consideration between tangible and intangible assets acquired and liabilities assumed from the acquired business based on their estimated fair values, with the residual of the purchase price recorded as goodwill. Third party appraisal firms and other consultants are engaged to assist management in determining the fair values of certain assets acquired and liabilities assumed. Estimating fair values requires significant judgments, estimates and assumptions, including but not limited to: discount rates, future cash flows and the economic lives of trade names, technology, customer relationships, and property, plant and equipment. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain.

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Stock-based Compensation

Compensation expense for time-based restricted stock units is measured at the grant date and recognized ratably over the vesting period. We determine the fair value of time-based and performance-based restricted stock units based on the closing market price of our common stock on the grant date. The recognition of compensation expense associated with performance-based restricted stock units requires judgment in assessing the probability of meeting the performance goals, as well as defined criteria for assessing achievement of the performance-related goals. For purposes of measuring compensation expense, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. The performance shares begin vesting only upon the achievement of the performance criteria. The achievement of the performance goals can impact the valuation and associated expense of the restricted stock units.

The assumptions used in accounting for the share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Impact of Recently Issued Accounting Pronouncements

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”) or other authoritative accounting bodies to determine the potential impact they may have on our consolidated financial statements. See Note 1, Business and Summary of Significant Accounting Policies of the notes to consolidated financial statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

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Operating Results

The following discussion is a comparison between fiscal year 2020 and fiscal year 2019 results. For a discussion of our results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on March 11, 2020.

Year 2020 compared to 2019

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ Variance

(Dollars in thousands, except per share data) 2020 2019 ​ $ % ​

Gross margin percentage ​ 29.6 % 30.3 % ​ ​

Operating costs and expenses: ​ ​ ​ ​ ​

Amortization of intangible assets ​ 5,928 ​ 5,718 ​ 210 ​ 4 %

​ ​ ​ ​ ​ ​

Effective tax rate ​ 27.3 % 28.6 % (1.3) ​ (5) %

Diluted earnings per share ​ $ 1.43 ​ $ 1.80 ​ $ (0.37) ​ (21) %

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REVENUES: During 2020, the decrease in revenues reflects growth in the Medical market, including the contribution from Dynamic Controls, offset by declines in all other markets we serve due to reduced demand as a result of the global economic impact of the COVID-19 pandemic. Our sales for 2020 were comprised of 53% to US customers and 47% to customers primarily in Europe, Canada and Asia. The overall decrease in revenue was due to a 1.7% volume decrease partially offset with a 0.5% favorable currency impact. See information included in “Non – GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of revenue to revenue excluding foreign currency impacts.

ORDER BOOKINGS AND BACKLOG: The increase in orders in 2020 compared to 2019 is due to a 0.8% increase in volume and a 0.5% favorable currency impact. The order volume increases are primarily due to increases in the Medical market, offset by reduced demand in all other markets. The increase in backlog is largely attributable to the Medical market. Included in the current backlog is approximately $8 million of the previously announced $325 million of Vehicle market awards. The Company has begun shipments for the first of four, seven-year awards, and all four awards are expected to concurrently be at full rate production in 2024.

GROSS PROFIT AND GROSS MARGIN: The 4% decrease in gross profit was largely driven by reduced volume in our served markets and additional fixed costs associated with Dynamic Controls. The 70 basis point decline in gross margin

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was due to the impact of lower revenue and higher tariffs, freight, and duties related primarily to the COVID-19 pandemic, offset partially by cost containment efforts also related to the COVID-19 pandemic.

SELLING EXPENSES: Selling expenses declined 7% during 2020 compared to last year. The addition of expenses from Dynamic Controls was offset by cost control efforts related to the COVID-19 pandemic, specifically travel restrictions. Selling expenses as a percentage of revenues were 4% for both 2020 and 2019.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 2% during 2020 compared to 2019 due to the incremental expenses from Dynamic Controls and costs associated with ensuring employee safety and making other adjustments for the COVID-19 pandemic, partially offset by reduced incentive compensation and travel costs. As a percentage of revenues, general and administrative expenses were 10% for both 2020 and 2019.

ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 10% in 2020 compared to 2019. The increase is partially due to the addition of Dynamic Controls, whose focus is electronics and software engineering, and partially due to the continued ramp up of development projects to meet the future needs of target markets, as well as supporting growing customer application development needs. As a percentage of revenues, engineering and development expenses increased to 7% for 2020 from 6% for 2019.

BUSINESS DEVELOPMENT COSTS: The Company incurred $473 of business development costs during 2020 related to the acquisition of Dynamic Controls. The Company incurred $113 of business development costs during 2019.

AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets increased 4% in 2020 compared to 2019, from $5,718 to $5,928 due to the addition of Dynamic Controls.

INTEREST EXPENSE: Interest expense decreased by 28% in 2020 compared to 2019 as the increase in our outstanding debt was offset by lower interest rates.

INCOME TAXES: The effective income tax rate as a percentage of income before income taxes was 27.3% and 28.6% for the year ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2019, the effective tax rate included a discrete tax provision of 1.8% related to settlement of a tax audit in a foreign jurisdiction. The effective rate before discrete items varies from the statutory rate primarily due to differences in state taxes, the impact of international tax provisions in the US, the difference in US and foreign tax rates and the mix of foreign and domestic income, section 162(m) compensation limits, and the benefit from the R&D tax credit. Refer to Note 9, Income Taxes, of the notes to consolidated financial statements for a reconciliation of statutory rates to tax provision rates.

NET INCOME AND ADJUSTED NET INCOME: Net income decreased during 2020 compared to the same period in 2019 reflecting lower revenue resulting from the COVID-19 pandemic’s impact on volume and the resulting impact to margins along with increased operating expenses resulting from the Dynamic Controls acquisition.

Adjusted net income for the years ended December 31, 2020, and 2019 was $14,315 and $17,999, respectively. Adjusted diluted earnings per share for 2020 and 2019 were $1.50 and $1.90, respectively. Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. Adjusted net income for 2020 excludes $1,035 ($752 net of tax) and for 2019 excludes $111 ($79 net of tax) of foreign currency losses. Adjusted net income for 2020 excludes a non-income based tax assessment gain of $424. Adjusted net income for 2019 excludes the non-income based tax assessment of $384 and the income tax charge of $433 related to a tax assessment in a foreign jurisdiction. Adjusted net income for 2020 excludes $473 ($344 net of tax) and for 2019 excludes $113 ($81 net of tax) of business development costs. See information included in “Non–GAAP Measures” below for a discussion of the non-GAAP measure and reconciliation of net income to Adjusted net income and diluted earnings per share to Adjusted diluted earnings per share.

EBITDA AND ADJUSTED EBITDA: EBITDA was $38,477 for 2020 compared to $43,832 for 2019. Adjusted EBITDA was $43,111 and $47,643 for 2020 and 2019, respectively. EBITDA and Adjusted EBITDA are non-GAAP measures. EBITDA consists of income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA also excludes stock compensation expense, foreign currency gain/loss and certain other items. Refer to information included in “Non-GAAP Measures” below for a discussion of the non-GAAP measure and a reconciliation of net income to EBITDA and Adjusted EBITDA.

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Non-GAAP Measures

Revenue excluding foreign currency exchange impacts, EBITDA and Adjusted EBITDA are provided for information purposes only and are not measures of financial performance under GAAP.

Management believes the presentation of these financial measures reflecting non-GAAP adjustments provides important supplemental information in evaluating the operating results of the Company as distinct from results that include items that are not indicative of ongoing operating results; in particular, those charges and credits that are not directly related to operating unit performance, and that are not a helpful measure of the performance of our underlying business particularly in light of their unpredictable nature. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for revenue and net income determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. In addition, supplemental presentation should not be construed as an inference that the Company’s future results will be unaffected by similar adjustments to net income determined in accordance with GAAP.

The Company believes that revenue excluding foreign currency exchange impacts is a useful measure in analyzing organic sales results. The Company excludes the effect of currency translation from revenue for this measure because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The portion of revenue attributable to currency translation is calculated as the difference between the current period revenue and the current period revenue after applying foreign exchange rates from the prior period.

The Company believes EBITDA is often a useful measure of the Company’s operating performance and is a significant basis used by the Company’s management to measure the operating performance of the Company’s business because EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our debt financings, as well as our provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry.

The Company also believes that Adjusted EBITDA provides helpful information about the operating performance of its business. Adjusted EBITDA excludes stock compensation expense, foreign currency gain/loss as well as certain income or expenses which are not indicative of the ongoing performance of the Company. EBITDA and Adjusted EBITDA do not represent and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure for determining operating performance or liquidity that is calculated in accordance with GAAP.

The Company’s calculation of revenues excluding foreign currency exchange impacts for 2020 and 2019 is as follows (in thousands):

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​ ​ ​ ​ ​ ​ ​

​ For the year ended December 31,

Currency impact (favorable) unfavorable ​ (1,811) ​ 7,845

Revenue excluding foreign currency exchange impacts ​ $ 364,883 ​ $ 378,929

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The Company’s calculation of EBITDA and Adjusted EBITDA for 2020 and 2019 is as follows:

​ ​ ​ ​ ​ ​ ​

​ Year ended

​ ​ December 31,

Stock compensation expense ​ 3,550 ​ 3,203

Business development costs ​ 473 ​ 113

Foreign currency loss ​ ​ 1,035 ​ ​ 111

Non income-based tax (refund) assessment ​ (424) ​ 384

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Allied Motion’s management uses Adjusted net income and Adjusted diluted earnings per share to assess the Company’s consolidated financial and operating performance. Adjusted net income and Adjusted diluted earnings per share are provided for informational purposes only and are not a measure of financial performance under GAAP. These measures help management make decisions that are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. Adjusted net income provides management with a measure of financial performance of the Company based on operational factors as it removes the impact of certain non-routine items from the Company’s operating results. Adjusted diluted earnings per share provides management with an indication of how Adjusted net income would be reflected on a per share basis for comparison to the GAAP diluted earnings per share measure. Adjusted net income is a key metric used by senior management and the Company’s board of directors to review the consolidated financial performance of the business. This measure adjusts net income determined in accordance with GAAP to reflect changes in financial results associated with the highlighted charges and income items.

The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2020 and 2019 is as follows:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the year ended

​ ​ December 31,

​ ​ ​ Per diluted ​ ​ Per diluted

Non-GAAP adjustments, net of tax ​ ​ ​ ​

Non-income based tax assessment ​ (424) ​ (0.04) ​ 384 ​ 0.04

Income tax provision charge ​ — ​ ​ — ​ 433 ​ 0.05

Business development costs - net ​ 344 ​ 0.04 ​ 81 ​ 0.01

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Liquidity and Capital Resources

The Company’s liquidity position as measured by cash and cash equivalents increased by $9,715 to a balance of $23,131 at December 31, 2020 from 2019.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash provided by operating activities ​ $ 24,838 ​ $ 34,530 ​ $ (9,692)

Net cash used in investing activities ​ ​ (24,099) ​ (14,882) ​ (9,217)

Effect of foreign exchange rates on cash ​ ​ 1,487 ​ (128) ​ 1,615

Net increase in cash and cash equivalents ​ $ 9,715 ​ $ 4,743 ​ $ 4,972

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Of the $23,131 cash and cash equivalents on hand at December 31, 2020, $21,371 was located at our foreign entities and may be subject to withholding tax if repatriated back to the U.S.

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During 2020, the decrease in cash provided by operating activities as compared to 2019 was equally impacted by net income, accrued liabilities, and inventories. Moreover, inventories in 2020 increased due to the push out of orders related to the COVID-19 pandemic, building inventory for new product launches and purchasing additional inventory in order to secure supply. Accrued expenses in 2020 decreased based on timing of income tax payments and reduced amounts of incentive compensation.

The significant cash used in investing activities in 2020 reflects the acquisition of Dynamic Controls for $14,728 net of cash acquired. Purchases of property and equipment were $9,371 in 2020 compared to $14,882 during 2019 reflecting cash preservation efforts during the COVID-19 pandemic.

The increase in cash provided by financing activities reflects the Amended Revolving Facility borrowing for the acquisition of Dynamic Controls for approximately $26,000 in the first quarter of 2020. Subsequent to the acquisition, we have made payments of $16,897 on the Amended Revolving Facility. During 2019, the Company utilized revolver borrowings to fund working capital needed to support growth, and for the payment of normal year-end accruals. At December 31, 2020, we had $120,656 of obligations under the Amended Revolving Facility, excluding deferred financing costs.

The Amended Credit Agreement contains certain financial covenants related to minimum interest coverage and total leverage ratio at the end of each quarter. The Amended Credit Agreement also includes other covenants and restrictions, including limits on the amount of additional indebtedness, and restrictions on the ability to merge, consolidate or sell all or substantially all our assets. We were in compliance with all covenants at December 31, 2020.

As of December 31, 2020, the unused Amended Revolving Facility was $104,344. The amount available to borrow may be lower and may vary from period to period based upon our debt and EBITDA levels, which impacts our covenant calculations. The Amended Credit Agreement matures in February 2025.

There were no borrowings for the China Facility balance during 2020 or 2019.

The Company declared dividends of $0.03 per share during each quarter of 2020 and 2019. The Company’s working capital, capital expenditure and dividend requirements are expected to be funded from cash provided by operations and amounts available under the Amended Credit Agreement (refer to Note 7, Debt Obligations, of the notes to consolidated financial statements for definition and terms).

Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our diverse market channel strategy and the steps we have taken to strengthen our balance sheet, such as retaining cash to support shorter term needs and extending the maturity of our revolving credit facility leaves us well-positioned to manage our business through the crisis as it continues to unfold. Based on our analysis, we believe our existing balances of cash, the flexibility of our Amended Credit Agreement and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

Contractual Obligations

The following table summarizes contractual obligations and borrowings as of December 31, 2020 and the timing and effect that such commitments are expected to have on our liquidity and capital requirements in future periods. We expect to fund other commitments primarily with operating cash flows generated in the normal course of business. At December 31, 2020, our long-term contractual obligations were limited to debt and leases.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Payments Due by Period

​ ​ ​ Less Than 1 ​ ​ ​ ​ More Than 5

​ ​ Total ​ Year ​ 1 - 3 Years ​ 3 - 5 Years ​ Years

(1) Amounts represent our debt obligations as of December 31, 2020.

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(2) Amounts represent the estimated interest payments based on the balances as of December 31, 2020 and applicable interest rates under the Amended Revolving Facility.

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Item 7A. Qualitative and Quantitative Disclosures about Market Risk

Foreign Currency

We have international operations in The Netherlands, Sweden, Germany, China, Portugal, Canada, Czech Republic, Mexico, the United Kingdom and New Zealand which expose us to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swedish Krona, Chinese Renminbi, Canadian dollar, Czech Krona, Mexican pesos, British Pound Sterling, and New Zealand dollar, respectively. We continuously evaluate our foreign currency risk and we take action from time to time in order to best mitigate these risks. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $15,200 on our 2020 sales. This amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on cost of sales and operating expenses in those currencies. We estimate that foreign currency exchange rate fluctuations increased sales in 2020 compared to 2019 by approximately $1,800.

We translate all assets and liabilities of foreign operations, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translate sales and expenses at the average exchange rates in effect during the period. The net effect of these translation adjustments is recorded in the consolidated financial statements as comprehensive income. The translation adjustment was a gain of $8,410 for 2020 and a loss of $680 for 2019. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency net assets would have had an impact of approximately $10,000 and $7,000 on our foreign net assets as of December 31, 2020 and 2019, respectively.

To the extent that our monetary assets and liabilities, including short-term and long-term intercompany loans, are recorded in a currency other than the functional currency of the subsidiary, these amounts are remeasured each period at the period-end exchange rate, with the resulting gain or loss recorded in other expense, net in the consolidated statement of income and comprehensive income. Net foreign currency transaction gains and losses included in total other expense, net amounted to losses of $1,035 and $111 in 2020 and 2019, respectively. In the first quarter of 2021, the Company began a hedging program to help mitigate these foreign currency transaction gains and losses. Accordingly, we expect these gains and losses to be lower in the future.

Interest Rates

Interest rates on our Amended Credit Agreement are based on the LIBOR plus a margin of 1.00% to 1.75% (1.625% at December 31, 2020) or the Prime Rate plus a margin of 0% to 0.75% (0.625% at December 31, 2020), in each case depending on the Company’s ratio of total funded indebtedness to Consolidated EBITDA. We use interest rate derivatives to add stability to interest expense and to manage our exposure to interest rate movements. We primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In February 2017, we entered into three interest rate swaps with a combined notional amount of $40,000 that matures in February 2022. In March 2020, the Company entered into two additional interest rate swaps with a combined notional amount of $20,000 that increases to $60,000 in March 2022 and matures in December 2024.

As of December 31, 2020, we had $120,656 outstanding under the Amended Revolving Facility (excluding deferred financing fees), of which $60,000 is currently being hedged. Refer to Note 7, Debt Obligations, of the notes to consolidated financial statements for additional information about our outstanding debt. A hypothetical one percentage point (100 basis points) change in the Base Rate on the $60,656 of unhedged floating rate debt outstanding at December 31, 2020 would have an impact of approximately $607 on our interest expense for 2020. A hypothetical one percentage point (100 basis points) change in the Base Rate on the $70,085 of unhedged floating rate debt outstanding at December 31, 2019 would have had an impact of approximately $701 on our interest expense for 2019.

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

​

To the stockholders and the Board of Directors of Allied Motion Technologies Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Allied Motion Technologies Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2021 expressed an unqualified opinion on the Company's internal control over financial reporting.

Change in Accounting Principle

​

In fiscal 2019, the Company changed its method of accounting for leases due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), as amended, using the option to not restate comparative periods and apply the standard as of the date of initial application.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

​

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

​

Critical Audit Matter

​

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Inventories – Refer to Note 1 to the financial statements

Critical Audit Matter Description

Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. The valuation of inventory requires the Company to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality. The Company’s estimate of the appropriate amount of obsolete or excess inventory, as well as inventory that is not of saleable quality, uses certain inputs and involves judgment. Such inputs include data associated with historic trends, the demand forecast for inventory on-hand which includes customer purchase order data, and item-specific estimates about the timing or level of demand for a specific part. Inventories at December 31, 2020 totaled $63 million.

​

We identified the estimate of obsolete or excess inventory, as well as inventory that is not of saleable quality, as a critical audit matter because of the significant amount of judgment required by management when evaluating demand forecasts and assumptions for item-specific estimates about the timing or level of demand for a specific part. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of the demand forecast for inventory on-hand and item-specific estimates about the timing or level of demand for a specific part.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the valuation of obsolete or excess inventory, as well as inventory that is not of saleable quality, included the following, among others:

​

/s/ Deloitte & Touche LLP ​

​ ​

Williamsville, New York ​

​

We have served as the Company’s auditor since 2018.

​

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ALLIED MOTION TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

​

​ ​ ​ ​ ​ ​ ​

​ ​ December 31,

Assets ​ ​ ​ ​ ​ ​

Current assets: ​ ​ ​ ​ ​ ​

Prepaid expenses and other assets ​ 8,728 ​ 4,413

Property, plant and equipment, net ​ 55,428 ​ 53,008

Deferred income taxes ​ 330 ​ 490

Liabilities and Stockholders’ Equity ​ ​ ​ ​ ​ ​

Current liabilities: ​ ​ ​ ​ ​ ​

Pension and post-retirement obligations ​ 5,340 ​ 5,139

Other long-term liabilities ​ ​ 8,558 ​ ​ 7,975

Commitments and contingencies (Note 11) ​ ​ ​ ​ ​ ​

Stockholders’ Equity: ​ ​ ​ ​ ​ ​

Accumulated other comprehensive loss ​ (3,287) ​ (10,531)

Total Liabilities and Stockholders’ Equity ​ $ 349,197 ​ $ 305,828

​

See accompanying notes to consolidated financial statements.

​

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ALLIED MOTION TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In thousands, except per share data)

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the year ended

​ ​ December 31, ​ December 31, ​ December 31,

Operating costs and expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​

Other expense, net: ​ ​ ​ ​ ​ ​ ​ ​ ​

Other expense (income), net ​ 502 ​ 468 ​ (153)

Basic earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​

Diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​

Diluted weighted average common shares ​ 9,555 ​ 9,461 ​ 9,370

Foreign currency translation adjustment ​ ​ 8,410 ​ ​ (680) ​ ​ (3,109)

Change in accumulated income (loss) on derivatives ​ ​ (1,161) ​ ​ (711) ​ ​ 238

Pension adjustments ​ ​ (5) ​ ​ (622) ​ ​ (61)

​

See accompanying notes to consolidated financial statements.

​

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ALLIED MOTION TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Common Stock ​ Accumulated Other Comprehensive Income (Loss) ​

​ ​ ​ ​ ​ ​ Unamortized ​ ​ ​ Foreign Currency ​ Accumulated ​ ​ ​ Total

Stock compensation expense ​ ​ ​ ​ ​ ​ 2,115 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2,115

Tax effect ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (132) ​ 2 ​ (130)

Net income ​ ​ ​ ​ ​ ​ ​ ​ ​ 15,925 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 15,925

Stock compensation expense ​ ​ ​ ​ ​ ​ 2,851 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2,851

Comprehensive loss ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (680) ​ (929) ​ (808) ​ (2,417)

Tax effect ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 218 ​ 186 ​ 404

Net income ​ ​ ​ ​ ​ ​ ​ ​ ​ 17,022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 17,022

Stock compensation expense ​ ​ ​ ​ ​ ​ ​ 3,550 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3,550

Tax effect ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 365 ​ ​ ​ ​ 365

Net income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13,643 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 13,643

​

See accompanying notes to consolidated financial statements.

​

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ALLIED MOTION TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the year ended

​ ​ December 31, ​ December 31, ​ December 31,

Cash Flows From Operating Activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Deferred income taxes ​ (519) ​ (112) ​ (76)

Loss on sale of assets ​ ​ 97 ​ ​ 247 ​ ​ 19

Provision for doubtful accounts ​ ​ 91 ​ ​ (5) ​ ​ 192

Provision for excess and obsolete inventory ​ 1,106 ​ 408 ​ 682

Provision for warranty ​ ​ 34 ​ ​ 210 ​ ​ (13)

Prepaid expenses and other assets ​ (2,264) ​ (517) ​ (835)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash Flows From Investing Activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Purchase of property and equipment ​ ​ (9,371) ​ ​ (14,882) ​ ​ (14,333)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash Flows From Financing Activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Repayments on lines of credit ​ ​ — ​ ​ — ​ ​ (454)

Payment of debt issuance costs ​ (401) ​ — ​ (72)

Sale of restricted stock ​ ​ — ​ ​ — ​ ​ 1,076

Net cash provided by (used in) financing activities ​ 7,489 ​ (14,777) ​ 67,777

Effect of foreign exchange rate changes on cash ​ 1,487 ​ (128) ​ (400)

Net increase (decrease) in cash and cash equivalents ​ 9,715 ​ 4,743 ​ (6,917)

Cash and cash equivalents at beginning of period ​ 13,416 ​ 8,673 ​ 15,590

Cash and cash equivalents at end of period ​ $ 23,131 ​ $ 13,416 ​ $ 8,673

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Supplemental disclosure of cash flow information: ​ ​ ​ ​ ​ ​ ​ ​ ​

​

See accompanying notes to consolidated financial statements.

​

​

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Allied Motion Technologies Inc. (“Allied Motion” or the “Company”) is engaged in the business of designing, manufacturing and selling precision and specialty controlled motion components and systems, which include integrated system solutions as well as individual controlled motion products, to a broad spectrum of customers throughout the world primarily for the vehicle, medical, aerospace and defense, and industrial markets.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

For business combinations, we record net assets acquired and liabilities assumed at their estimated fair values.

Cash and Cash Equivalents

Cash and cash equivalents include instruments which are readily convertible into cash (original maturities of three months or less) and which are not subject to significant risk of changes in interest rates.

Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The provision for credit losses is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional provisions in the future. Activity in the provision for credit losses for 2020 and 2019 was as follows (in thousands):

​

​ ​ ​ ​ ​ ​ ​

Beginning balance ​ $ 405 ​ $ 530

Additional reserves ​ 91 ​ (5)

Effect of foreign currency translation ​ ​ 9 ​ ​ 12

​

Inventories

Inventories include costs of materials, direct labor and manufacturing overhead, and are stated at the lower of cost (first-in, first-out basis) or net realizable value, as follows (in thousands):

​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

​

​

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Property, Plant and Equipment

Property, plant and equipment is classified as follows (in thousands):

​

​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, December 31,

Machinery, equipment, tools and dies 3 - 15 years ​ 79,738 ​ 58,358

Construction work in progress ​ ​ ​ ​ 6,821 ​ ​ 15,536

Less accumulated depreciation ​ ​ ​ (62,612) ​ (51,026)

Property, plant and equipment, net ​ ​ ​ $ 55,428 ​ $ 53,008

​

Depreciation expense is provided using the straight-line method over the estimated useful lives of the assets. Amortization of building improvements is provided using the straight-line method over the life of the lease term or the life of the asset, whichever is shorter. Maintenance and repair costs are charged to operations as incurred. Major additions and improvements are capitalized. The cost and related accumulated depreciation of retired or sold property are removed from the accounts and the resulting gain or loss, if any, is reflected in earnings.

Depreciation expense was $10,057, $9,139 and $7,921 in 2020, 2019 and 2018, respectively.

Intangible Assets

Intangible assets, other than goodwill, are recorded at cost and are amortized over their estimated useful lives using an accelerated or straight-line method which approximates the pattern of expected cash flows over the remaining useful lives of the intangible assets.

Impairment of Long-Lived Assets

The Company reviews the carrying values of its long-lived assets, including property, plant and equipment and intangible assets, on an annual basis and whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Long-lived assets are carried at historical cost if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering interest. If projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair value. Considerable judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived assets. The Company did not record any impairment charges for the years ended December 31, 2020, 2019 and 2018.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination.

Goodwill is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators arise. The Company has defined one reporting unit that is the same as its operating segment. Goodwill is evaluated for impairment by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. If it is determined, based on qualitative factors, that the fair value of the reporting unit may be more likely than not less than carrying amount, or if significant adverse changes in the Company’s future financial performance occur that could materially impact fair value, a quantitative goodwill impairment test would be required. Additionally, the Company can

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

elect to forgo the qualitative assessment and perform the quantitative test. If the qualitative assessment indicates that the quantitative analysis should be performed, or if management elects to bypass a qualitative assessment, the Company then evaluates goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount, including goodwill.

At October 31, 2020, we performed our annual goodwill impairment test and determined, after performing a qualitative test of the reporting unit, that it is more likely than not that the fair value of the reporting unit exceeds its carrying amount. Accordingly, there was no indication of impairment and the quantitative impairment test was not performed. The Company did not record any impairment charges for the years ended December 31, 2020, 2019 or 2018.

Other Long-Term Assets

Other long-term assets include securities that the Company has purchased with the intent of funding the deferred compensation arrangements for certain executives of the Company. These items are accounted for at fair value on a recurring basis. Any changes in value are included in net income in the Company’s consolidated statements of income and comprehensive income.

Warranty

The Company offers warranty coverage for its products. The length of the warranty period for its products is generally three months to two years and varies significantly based on the product sold. The Company estimates the costs of repairing products under warranty based on the historical average cost of the repairs. The assumptions used to estimate warranty accruals are re-evaluated periodically in light of actual experience and, when appropriate, the accruals are adjusted. Estimated warranty costs are recorded at the time of sale of the related product, and are considered a cost of goods sold.

Changes in the Company’s reserve for product warranty claims during 2020, 2019 and 2018 were as follows (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31, ​ December 31,

Warranty reserve at beginning of the year ​ $ 1,075 ​ $ 971 ​ $ 922

Warranty reserves acquired ​ 465 ​ — ​ 117

Warranty expenditures ​ (97) ​ (101) ​ (34)

Effect of foreign currency translation ​ 94 ​ (5) ​ (21)

Warranty reserve at end of year ​ $ 1,571 ​ $ 1,075 ​ $ 971

​

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31,

Compensation and fringe benefits ​ $ 11,184 ​ $ 12,967

Right of use liabilities ​ ​ 4,666 ​ ​ 3,203

​

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Foreign Currency Translation

The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using end of period exchange rates. Changes in reported amounts of assets and liabilities of foreign subsidiaries that occur as a result of changes in exchange rates between foreign subsidiaries’ functional currencies and the U.S. dollar are included in foreign currency translation adjustment. Foreign currency translation adjustment is included in accumulated other comprehensive loss, a component of stockholders’ equity in the accompanying consolidated statements of stockholders’ equity. Revenue and expense transactions use an average rate prevailing during the month of the related transaction. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency of each of the operating locations are included in the results of operations as incurred.

Revenue Recognition

Refer to Note 3, Revenue Recognition, for description of the Company’s policies regarding revenue recognition.

Engineering and Development Costs

The Company is engaged in a variety of engineering and design activities as well as basic research and development activities directed to the substantial improvement or new application of the Company’s existing technologies. Engineering and design as well as research and development costs are expensed as incurred.

Basic and Diluted Income per Share

Basic income per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding. Diluted income per share is determined by dividing the net income by the sum of (1) the weighted average number of common shares outstanding and (2) if not anti-dilutive, the effect of stock awards determined utilizing the treasury stock method.

Basic and diluted weighted-average shares outstanding are as follows (in thousands):

​

​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

​ ​ Year ended December 31,

Dilutive effect of equity awards 60 63 105

Diluted weighted average shares outstanding 9,555 9,461 9,370

​

For 2020, 2019 and 2018, the anti-dilutive common shares excluded from the calculation of diluted income per share were immaterial.

Comprehensive Income

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to stockholders.

Fair Value Accounting

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The guidance establishes a framework for measuring fair value, which utilizes observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. Preference is given to observable inputs. These two types of inputs create the following three-level fair value hierarchy:

Level 1: Quoted prices for identical assets or liabilities in active markets.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3: Significant inputs to the valuation model that are unobservable.

​

The Company’s financial assets and liabilities include cash and cash equivalents, accounts receivable, debt obligations, accounts payable, and accrued liabilities. The carrying amounts reported in the consolidated balance sheets for these assets approximate fair value because of the immediate or short-term maturities of these financial instruments.

The following table presents the Company’s financial assets that are accounted for at fair value on a recurring basis as of December 31, 2020 and 2019, respectively, by level within the fair value hierarchy (in thousands):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Level 1 Level 2 Level 3

Assets (liabilities) ​ ​ ​ ​ ​ ​ ​ ​ ​

Pension plan assets ​ $ 6,347 ​ $ — ​ $ —

Deferred compensation plan assets ​ 5,386 ​ — ​ —

Interest rate swaps ​ — ​ (1,889) ​ —

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Level 1 Level 2 Level 3

Assets (liabilities) ​ ​ ​ ​ ​ ​ ​ ​ ​

Pension plan assets ​ $ 6,099 ​ $ — ​ $ —

Deferred compensation plan assets ​ 4,690 ​ — ​ —

Interest rate swaps ​ — ​ (363) ​ —

​

Derivative Financial Instruments

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") No. 815, Derivatives and Hedging ("ASC 815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting.

Income Taxes

The current provision for income taxes represents actual or estimated amounts payable or refundable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. A valuation allowance may be provided to the extent management deems it is more likely than not that deferred tax assets will not be realized. The ultimate realization of net deferred tax assets is dependent upon the generation of future taxable income, in the appropriate taxing jurisdictions, during the periods in which temporary differences, net operating losses and tax credits become realizable. Management believes that it is more likely than not that the Company will realize the benefits of these temporary differences and operating loss and tax credit carryforwards, net of valuation allowances.

It is the Company's policy to include interest and penalties related to income tax liabilities in income tax expense on the consolidated statements of income and comprehensive Income. In addition, the Company records uncertain tax positions in accordance with ASC 740, Income Taxes, ("ASC 740"). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. There were no uncertain tax benefits for the years ended December 31, 2020, 2019 and 2018 and no amounts were recorded for interest and penalties related to unrecognized tax positions for the years ended December 31, 2020, 2019, and 2018.

Pension and Postretirement Welfare Plans

The Company records the service cost component of net benefit costs in Cost of goods sold, Selling, and General and administrative expenses. The interest cost component of net benefit costs is recorded in Interest expense and the remaining components of net benefit costs, amortization of net losses and expected return on plan assets is recorded in Other expense, net.

Concentration of Credit Risk

Trade receivables subject the Company to the potential for credit risk. To reduce this risk, the Company performs evaluations of its customers’ financial condition and creditworthiness at the time of sale, and updates those evaluations when necessary. See Note 13, Segment Information, for additional information regarding customer concentration.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Recently adopted accounting pronouncements

In June 2016, FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019. The Company adopted this ASU on January 1, 2020 applying the modified retrospective approach and the adoption did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance in ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted this standard on January 1, 2020 on a prospective basis and the adoption did not have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). The ASU is effective for public entities for fiscal years beginning after December 15, 2019. The Company has not historically had any transfers between Level 1 and Level 2 or assets or liabilities measured at fair value under Level 3. The Company adopted this ASU on January 1, 2020 on a prospective basis and the adoption did not have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides relief for impacted areas as it relates to impending reference rate reform and contains optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other areas or transactions, subject to meeting certain criteria, that are impacted by reference rate reform. This ASU is effective upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance. The Company adopted this ASU effective January 1, 2020 on a prospective basis, and the Company has elected the expedients related to the probability of hedged interest payments, regardless of any expected future modification in terms related to reference rate reform, as well as the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Should the Company elect further optional expedients as it relates to reference rate reform, disclosure of those elections will be done in the fiscal period in which the elections are made. The adoption did not have a material impact on its consolidated financial statements.

​

2. ACQUISITIONS

Dynamic Controls

On March 7, 2020, the Company acquired 100% of the issued and outstanding share capital of the Dynamic Controls Group (“Dynamic Controls”), a wholly owned subsidiary of Invacare Corporation, a market-leading designer and manufacturer of equipment for the medical mobility and rehabilitation markets. The purchase price was funded using borrowings under the Amended Revolving Facility (Note 7). The purchase price was subject to adjustments based on a determination of closing net working capital.

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Dynamic Controls brings strong leadership and a very experienced electronics and software engineering design team, providing market leading electronic control solutions and products that will further strengthen the Company’s medical market position, as well as enable it to further develop higher level solutions with embedded electronics across our other major served markets.

The Company incurred $473 of transaction costs related to the acquisition of Dynamic Controls in 2020, which are included in business development expenses on the consolidated statements of income and comprehensive income. The Company accounted for the acquisition pursuant to FASB ASC 805, Business Combinations.

The allocation of the purchase price paid for Dynamic Controls is based on estimated fair values of the assets acquired and liabilities assumed of Dynamic Controls as of March 7, 2020 and is as follows (in thousands):

​

​ ​ ​ ​

Cash and cash equivalents $ 11,437

Accounts receivable ​ ​ 4,129

Other assets, net ​ 769

Property, plant and equipment ​ 1,185

Right of use assets ​ ​ 2,735

Intangible assets ​ ​ 7,800

Current liabilities ​ ​ (7,354)

Lease liabilities ​ ​ (2,739)

Net deferred income tax liabilities ​ ​ (1,755)

Net purchase price ​ $ 26,165

​

During the second quarter of 2020, measurement period adjustments primarily related to deferred income taxes and the true-up of closing net working capital were recognized, which resulted in a reduction of goodwill by $268. During the third quarter of 2020, measurement period adjustments related primarily to tax liabilities were recognized, which resulted in an increase of goodwill by $77. The allocation of the purchase price was finalized during the fourth quarter of 2020.

The intangible assets acquired consist of customer lists of $4,400, technology of $1,900 and a trade name of $1,500, which are being amortized over 16, 13 and 18 years, respectively. Goodwill generated in the acquisition is related to the assembled workforce, synergies between Allied Motion’s other operations and Dynamic Controls that are expected to occur as a result of the combined engineering knowledge, the ability of each of the operations to integrate each other’s products into more fully integrated system solutions and Allied Motion’s ability to utilize Dynamic Controls’ management knowledge in providing complementary product offerings to the Company’s customers.

The operating results of this acquisition are included in our consolidated financial statements beginning on the date of the acquisition. Included within the consolidated statement of income and comprehensive income for the year ended December 31, 2020, revenues and earnings related to Dynamic Controls were $24,124 and $945, respectively.

​

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The following unaudited pro forma financial information presents the combined results of operations if the Dynamic Controls acquisition had occurred as of January 1, 2019 (in thousands):

​

​ ​ ​ ​ ​ ​ ​

​ ​ For the year ended

​ ​ December 31,

Earnings per share - basic ​ $ 1.50 ​ $ 1.89

Earnings per share - diluted ​ $ 1.49 ​ $ 1.88

​

The pro forma information includes certain adjustments, including depreciation and amortization expense, interest expense, and certain other adjustments, together with related income tax effects. The pro forma amounts do not reflect adjustments for anticipated operating efficiencies that the Company expects to achieve as a result of this acquisition. The pro forma financial information is for informational purposes only and does not purport to present what the Company’s results would have been had these transactions actually occurred on the date presented or to project the combined company’s results of operations or financial position for any future period.

The goodwill resulting from the Dynamic Controls acquisition is not tax deductible.

3. REVENUE RECOGNITION

Performance Obligations

Performance Obligations Satisfied at a Point in Time

The Company considers control of most products to transfer at a single point in time when control is transferred to the customer, generally when the products are shipped in accordance with an agreement and/or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product.

The Company satisfies its performance obligations under a contract with a customer by transferring goods and services in exchange for generally monetary consideration from the customer. The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgment as the contract with the customer. For some customers, control, and a sale, is transferred at a point in time when the product is delivered to a customer.

Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.

Nature of Goods and Services

The Company sells component and integrated controlled motion solutions to end customers and original equipment manufacturers (“OEM’s”) through the Company’s own direct sales force and authorized manufacturers’ representatives and distributors. The Company’s products include brushed and brushless DC motors, brushless servo and torque motors, coreless DC motors, integrated brushless motor-drives, gearmotors, gearing, modular digital servo drives, motion controllers, incremental and absolute optical encoders, active and passive filters for power quality and harmonic issues, and other controlled motion-related products. The Company’s target markets include Vehicle, Medical, Aerospace & Defense and Industrial.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Determining the Transaction Price

The majority of the Company’s contracts have an original duration of less than one year. For these contracts, the Company applies the practical expedient and therefore does not consider the effects of the time value of money. For multiyear contracts, the Company uses judgment to determine whether there is a significant financing component. These contracts are generally those in which the customer has made an up-front payment. Contracts that management determines to include a significant financing component are discounted at the Company’s incremental borrowing rate. The Company incurs interest expense and accrues a contract liability. As the Company satisfies performance obligations and recognizes revenue from these contracts, interest expense is recognized simultaneously. Management does not have any contracts that include a significant financing component as of December 31, 2020.

Disaggregation of Revenue

The Company disaggregates revenue from contracts with customers into geographical regions and target markets. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. As noted in Note 13, Segment Information, the Company’s business consists of one reportable segment. The revenues by geography in the table below are revenues derived from the Company’s foreign subsidiaries as provided in Note 13. A reconciliation of disaggregated revenue to segment revenue as well as revenue by geographical regions is provided in Note 13. The Company’s disaggregated revenues are as follows (in thousands):

​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

​ ​ Year ended December 31,

​

​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

​ ​ Year ended December 31,

​

Contract Balances

When the timing of the Company’s delivery of product is different from the timing of the payments made by customers, the Company recognizes either a contract asset (performance precedes customer payment) or a contract liability (customer payment precedes performance). Typically, contracts are paid in arrears and are recognized as receivables after the Company considers whether a significant financing component exists.

The opening and closing balances of the Company’s contract liability are as follows (in thousands):

​ ​ ​ ​ ​ ​ ​

​ December 31, December 31,

Contract liabilities in accrued liabilities ​ $ 898 ​ $ 454

Contract liabilities in other long-term liabilities ​ ​ 262 ​ ​ -

​

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The difference between the opening and closing balances of the Company’s contract liabilities primarily results from the timing difference between the Company’s performance and the customer’s payment.

Significant Payment Terms

The Company’s contracts with its customers state the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payments are typically due in full within 30-60 days of delivery. Since the customer agrees to a stated rate and price in the contract that do not vary over the contract, the majority of contracts do not contain variable consideration.

Returns, Refunds, and Warranties

In the normal course of business, the Company does not accept product returns unless the item is defective as manufactured. The Company establishes provisions for estimated returns and warranties. All contracts include a standard warranty clause to guarantee that the product complies with agreed specifications.

Practical Expedients

Incremental costs of obtaining a contract - the Company elected to expense the incremental costs of obtaining a contract when the amortization period for such contracts would have been one year or less.

Remaining performance obligations - the Company elected not to disclose the aggregate amount of the transaction price allocated to remaining performance obligations for its contracts that are one year or less, as the revenue is expected to be recognized within the next year.

Time value of money - the Company elected not to adjust the promised amount of consideration for the effects of the time value of money for contracts in which the anticipated period between when the Company transfers the goods or services to the customer and when the customer pays is equal to one year or less.

​

4. GOODWILL

The change in the carrying amount of goodwill for 2020 and 2019 is as follows (in thousands):

​

​ ​ ​ ​ ​ ​ ​

Goodwill acquired (Note 2) ​ 6,629 ​ ​ 614 ​

Effect of foreign currency translation 2,296 ​ (318) ​

​

The purchase price allocation was finalized for the Dynamic Controls acquisition during the fourth quarter of 2020.

​

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

5. INTANGIBLE ASSETS

Intangible assets on the Company’s consolidated balance sheets consist of the following (in thousands):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Gross Accumulated Net Book Gross Accumulated Net Book

​ ​ Life ​ Amount ​ amortization ​ Value ​ Amount ​ amortization ​ Value

​

Intangible assets resulting from the acquisition of Dynamic Controls were approximately $7,800 (Note 2). The intangible assets acquired consist of customer lists, technology, and a trade name.

Total amortization expense for intangible assets for the years 2020, 2019 and 2018 was $5,928, $5,718 and $3,655, respectively.

Estimated amortization expense for intangible assets is as follows (in thousands):

​

​ ​ ​ ​

​ ​ Estimated

​ Amortization Expense

Total estimated amortization expense ​ $ 65,859

​

​

6. STOCK-BASED COMPENSATION PLANS

Stock Incentive Plans

The Company’s Stock Incentive Plans provide for the granting of stock awards, including stock options, stock appreciation rights, and restricted stock, to employees and non-employees, including directors of the Company.

As of December 31, 2020, the Company had 753,187 shares of common stock available for grant under stock incentive plans.

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)