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, 2021, include:

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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 a leading global controlled motion solution provider in our selected target markets by further developing our products and services platform to utilize multiple Allied Motion technologies which 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 significantly 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 and profitability initiatives for the Company.

One of these initiatives includes product line platform development to meet the emerging needs of our 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, and are demonstrated in our acquisitions completed in the fourth quarter of 2021. 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 2022

During 2021, we continued to navigate a difficult environment related to the COVID-19 pandemic, while advancing our strategic priorities and delivering solid results. We experienced record orders during 2021 reflecting increases in our Vehicle and Industrial markets. 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.

While the economic outlook for 2022 remains uncertain and we expect continued upward pressure on material and labor costs, 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 2022, 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 board approved strategy.

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The critical issues from that strategy include:

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

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 have been spent during 2021 to further understand the ESG ecosystem and developments impacting stakeholder expectations and assess our performance. The Company has a number of initiatives focused on individual components of ESG, and, under the oversight of the board of directors is continuing 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 Policies and 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.

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

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-downs or expense a greater amount of overhead costs, which would negatively impact our net income. As of December 31, 2021, we have $89,733 of inventory recorded on our consolidated balance sheet, representing approximately 19% of total assets. A 1% write-down of our inventory would decrease our 2021 net income by approximately $627, or $0.04 per diluted share.

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 test, 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 we determine that it is not more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, 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 carrying amount. If the carrying amount 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, 2021. 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 carrying amount, and as such, a quantitative assessment was not perfomed.

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, 2021, we have $106,633 of goodwill recorded on our consolidated balance sheet, representing approximately 23% of total assets. A 1% write-down of our goodwill would decrease our 2021 net income approximately $745, or $0.05 per diluted share.

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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.

During the year ended December 31, 2021, we completed three business combinations for an aggregate purchase price of $102,169. We identified and assigned value to identifiable intangible assets of customer lists, technology, and trade names, and estimated the useful lives over which these intangible assets would be amortized. The estimates of fair values of these identifiable intangible assets were based upon discounted cash flow models, which include assumptions such as forecasted cash flows, customer attrition rates, discount rates, and royalty rates. The fair value estimates resulted in identifiable intangible assets, in the aggregate, of $45,000. The resulting goodwill, in the aggregate, from these three acquisitions was $46,431.

The contingent consideration fair value measurement, in connection with the acquisition of ALIO Industries (“ALIO”), of $4,900 is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The Company determines the initial fair value of contingent consideration liabilities using a Monte Carlo valuation model, which involves a simulation of future earnings generated by ALIO during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.

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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 2021 and fiscal year 2020 results. For a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, 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, 2020, which was filed with the SEC on March 10, 2021.

Year 2021 compared to 2020

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ Variance

(Dollars in thousands, except per share data) 2021 2020 ​ $ % ​

Gross margin percentage ​ 30.0 % 29.6 % ​ ​

Operating costs and expenses: ​ ​ ​ ​ ​

Amortization of intangible assets ​ 6,245 ​ 5,928 ​ 317 ​ 5 %

​ ​ ​ ​ ​ ​

Effective tax rate ​ (4.2) % 27.3 % ​ ​ ​ ​ ​

Diluted earnings per share ​ $ 1.66 ​ $ 0.95 ​ $ 0.71 ​ 75 %

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REVENUES: The increase in revenues in 2021 reflects improved sales in certain markets we serve, specifically Vehicle and Industrial. The increase reflects the economic recovery and the increases in demand from many of our served markets, as certain markets were negatively affected in the prior year period due to the economic environment brought on by the COVID-19 pandemic. Our sales for 2021 were comprised of 54% to U.S. customers and 46% to customers primarily in Europe, Canada and Asia-Pacific. The overall increase in revenue was due to an 8% volume increase and a 2% 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. Incremental revenues for 2022 from the three acquisitions completed in the fourth quarter of 2021, collectively, are forecasted to be approximately $60,000.

ORDER BOOKINGS AND BACKLOG: The 26% increase in orders in 2021 compared to 2020 is due to a 24% increase in volume and a 2% favorable currency impact. The increase in bookings during 2021 compared to 2020 is largely due to increases in our Vehicle and Industrial markets reflecting improvements in the general economy along with growth in our core businesses. The increase in backlog as of December 31, 2021, compared to December 31, 2020 was related to these factors as well as incremental backlog of $47,934 from the three acquisitions that were completed during the fourth quarter 2021.

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GROSS PROFIT AND GROSS MARGIN: Gross margins improved to 30.0% for 2021, compared to 29.6% for 2020. The increase in gross margin percentage was largely driven by volume increases of higher margin products in our Industrial and Vehicle markets compared to lower volumes of pandemic related Medical market products with lower margins. The margin expansion was muted by higher material and labor costs as well as costs associated with addressing the challenging global supply chain environment to meet the needs of our customers.

SELLING EXPENSES: Selling expenses increased 12% during 2021 compared to 2020 primarily due to higher incentive compensation which is tied to improved revenue and profitability. Cost control efforts related to the COVID-19 pandemic in 2020, specifically travel restrictions, resulted in lower than normal expense levels compared to 2021. Selling expenses as a percentage of revenues were comparable at 4% during 2021 and 2020.

GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses increased by 11% during 2021 compared to 2020 due primarily to increased costs associated with incentive compensation programs which are aligned with our revenue and profit growth. Also, 2020 was favorably impacted by significant COVID-19 cost containment efforts. As a percentage of revenues, general and administrative expenses were 11% and 10% in 2021 and 2020, respectively.

ENGINEERING AND DEVELOPMENT EXPENSES: Engineering and development expenses increased by 9% in 2021 compared to 2020. The increase is primarily 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 and higher incentive compensation which is tied to improved revenue and profitability. As a percentage of revenues, engineering and development expenses were comparable at 7% for the year ended December 31, 2021 and 2020.

BUSINESS DEVELOPMENT COSTS: The increase in business development costs in 2021 compared to 2020 is due to additional acquisition related costs due to increased merger and acquisition activity, as well as $545 of costs in 2021 related to the Twinsburg plant consolidation.

AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets increased 5% in 2021 compared to 2020, due to the inclusion of Dynamic Controls for the full year 2021 and the incremental amortization from the 2021 acquisitions.

INTEREST EXPENSE: Interest expense decreased by 13% in 2021 compared to 2020 primarily due to a 27 basis point decrease in average interest rates paid during 2021 due to lower leverage, which decreases the Company’s margin under its credit facility, and the lower interest rate environment. Additionally, interest expense declined due to lower average debt levels in 2021 compared to 2020 .

INCOME TAXES: For 2021 and 2020, the effective income tax rate was (4.2%) and 27.3%, respectively. The effective tax rate for 2021 includes a tax benefit of 32.3% related to the recognition of net operating loss carryforwards primarily resulting from tax legislation enacted in New Zealand and 5.6% related to investment tax credits recorded in 2021. The effective rate for 2021 is partially offset by a 7.2% discrete tax provision related to a valuation allowance recorded on a foreign subsidiary’s deferred tax assets. The Company expects its income tax rate for the full year 2022 to be approximately 24% to 26%.

NET INCOME AND ADJUSTED NET INCOME: Net income increased during 2021 compared to 2020 reflecting the impact of increased revenue, as well as the effect of a $7,373 discrete income tax benefit in the first quarter of 2021.

Adjusted net income for the years ended December 31, 2021 and 2020 was $18,238 and $14,315, respectively. Adjusted diluted earnings per share for 2021 and 2020 were $1.26 and $1.00, respectively. Adjusted net income and adjusted diluted earnings per share are non-GAAP measures. 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 $44,456 for 2021 compared to $38,477 for 2020. Adjusted EBITDA was $49,937 and $43,111 for 2021 and 2020, 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-based compensation expense, foreign currency gain/loss and

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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.

Non-GAAP Measures

Revenue excluding foreign currency exchange impacts, EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted diluted earnings per share 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 to investors and other users of our financial statements 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 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 a 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, acquisitions, 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-based compensation expense, as well as business development costs, foreign currency gains/losses on short-term assets and liabilities, and other items that are not indicative of the Company’s core operating performance. 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.

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 expense and income items.

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The Company’s calculation of revenue excluding foreign currency exchange impacts for 2021 is as follows (in thousands):

​ ​ ​ ​

​ Year ended

Revenue as reported ​ $ 403,516

Currency impact (favorable) unfavorable ​ (8,332)

Revenue excluding foreign currency exchange impacts ​ $ 395,184

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The Company’s calculation of EBITDA and Adjusted EBITDA for 2021 and 2020 is as follows (in thousands):

​

​ ​ ​ ​ ​ ​ ​

​ Year ended

​ ​ December 31,

Income tax (benefit) provision ​ (981) ​ 5,133

Stock-based compensation expense ​ 4,161 ​ 3,550

Business development costs ​ 1,299 ​ 473

Foreign currency loss ​ ​ 21 ​ ​ 1,035

Non income-based tax refund ​ — ​ (424)

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The Company’s calculation of Adjusted net income and Adjusted diluted earnings per share for years ended December 31, 2021 and 2020 is as follows (in thousands, except per share data):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the year ended

​ ​ December 31,

​ ​ ​ Per diluted ​ ​ Per diluted

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

Discrete income tax benefit ​ (7,373) ​ (0.51) ​ — ​ —

Non income-based tax refund ​ — ​ — ​ (424) ​ (0.03)

Income tax valuation allowance ​ 506 ​ ​ 0.03 ​ — ​ —

Foreign currency loss - net ​ 16 ​ — ​ 752 ​ 0.05

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Liquidity and Capital Resources

The Company’s liquidity position as measured by cash and cash equivalents decreased by $668 to a balance of $22,463 at December 31, 2021 from 2020.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net cash provided by operating activities ​ $ 25,402 ​ $ 24,838 ​ $ 564

Effect of foreign exchange rates on cash ​ ​ (932) ​ 1,487 ​ (2,419)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Of the $22,463 cash and cash equivalents on hand at December 31, 2021, $15,943 was located at our foreign subsidiaries and may be subject to withholding tax if repatriated back to the U.S.

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During 2021, the cash provided by operating activities remained consistent with 2020 due to increased net income adjusted for non-cash items, offset by cash used for working capital (primarily inventory) required to support our customer base in the current supply chain environment.

The increased cash used in investing activities in 2021 relates to the $47,254 net cash consideration paid for the ORMEC, ALIO and Spectrum Controls acquisitions in the fourth quarter. Purchases of property and equipment were $13,716 during the 2021 compared to $9,371 during the year ended December 31, 2020 reflecting continued commitments to projects supporting growth initiatives. Cash used in investing activities in the prior year period included a $14,728 outflow related to the acquisition of Dynamic Controls. The Company expects 2022 capital expenditures to be approximately $15,000 to $20,000.

The increase in cash provided by financing activities in 2021 from 2020 includes Amended Revolving Facility borrowings of $50,500 to fund the three acquisitions in the fourth quarter of 2021. Debt payments of $12,248 were made during 2021. The cash provided by financing activities in 2020 reflects the Amended Revolving Facility borrowing for the acquisition of Dynamic Controls for approximately $26,000 in the first quarter of 2020, net of payments of $16,897 during the year. At December 31, 2021, we had $159,395 of obligations under the Amended Revolving Facility, excluding deferred financing costs.

The Amended Credit Agreement contains certain financial covenants related to minimum interest coverage, total leverage ratio, and non-material subsidiaries assets to consolidated total assets 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, of our assets. Under the provisions of the Amended Credit Agreement, we may elect to increase our Leverage Ratio to a 4.0 to 1.0 ratio (a “Leverage Increase”) during the fiscal quarter in which a Material Acquisition (as defined in the Amended Credit Agreement) takes place and for the next three fiscal quarters. If the Material Acquisition occurs within the last 45 days of any fiscal quarter, the Leverage Increase is applicable for the following four fiscal quarters. We qualified for and elected the Leverage Increase as a result of the Spectrum Controls acquisition. We were in compliance with all covenants at December 31, 2021.

As of December 31, 2021, the unused Amended Revolving Facility was $65,605. 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 under the China Facility during 2021 or 2020.

The Company declared dividends, in total, of $0.095 and $0.08 per share during 2021 and 2020, respectively. 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 ongoing uncertainty related to the anticipated impact of COVID-19 and variants on our future results, we believe our diverse markets, our strong market position in many of our businesses, 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 in early 2020 leaves us well-positioned to manage our business through the crisis as it continues to unfold. We continually assess our liquidity and cash positions and have assessed the impact of COVID-19 on our Company. 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 more than sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months.

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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

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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 $16,500 on our 2021 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 2021 compared to 2020 by approximately $8,332.

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 loss of $7,193 for 2021 and a gain of $8,410 for 2020. 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 $11,000 and $10,000 on our foreign net assets as of December 31, 2021 and 2020, respectively.

Beginning in the first quarter of 2021, we began entering into contracts to hedge our short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $13,500 at December 31, 2021. The foreign currency contracts are recorded in the consolidated balance sheets at fair value and resulting gains or losses are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income. During the year ended December 31, 2021, we recorded a loss of $170 on foreign currency contracts which is included in other (income) expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other (income) expense, net. Net foreign currency transaction gains and losses included in total other expense, net amounted to losses of $21 and $1,035 in 2021 and 2020, respectively.

Interest Rates

Interest rates on our Amended Credit Agreement are based on the LIBOR or EURIBOR plus a margin of 1.00% to 1.75% (1.375% at December 31, 2021) or the Prime Rate plus a margin of 0% to 0.75% (0.375% at December 31, 2021), 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, 2021, we had $159,395 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 $99,395 of unhedged floating rate debt outstanding at December 31, 2021 would have an impact of approximately $994 on our interest expense for 2021. 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.

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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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 9, 2022 expressed an unqualified opinion on the Company's internal control over financial reporting.

​

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 matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

​

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

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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 orders, and item specific estimates about the timing or level of demand for a specific part. Inventories at December 31, 2021 totaled approximately $89.7 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 the demand forecast for inventory on-hand 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:

​

Acquisitions — Spectrum Controls, Inc. — Customer Lists Intangible Asset — Refer to Note 2 to the financial statements

Critical Audit Matter Description

The Company completed the acquisition of Spectrum Controls, Inc. for approximately $68.7 million on December 30, 2021. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including a customer lists intangible asset of approximately $21.0 million. The fair value determination of the customer lists intangible asset required management to make significant estimates and assumptions related to the selection of the discount rate.

We identified the selection of the discount rate used in the valuation of the customer lists intangible asset as a critical audit matter because of the significant estimates and assumptions used by the Company to determine the fair value of this asset. Auditing the estimates and assumptions related to the customer lists intangible asset required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s selection of the discount rate for the customer lists intangible asset.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the selection of the discount rate for the customer lists intangible asset included the following, among others:

​

/s/ Deloitte & Touche LLP

​

Williamsville, New York

March 9, 2022

​

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 ​ 12,522 ​ 8,728

Property, plant and equipment, net ​ 56,983 ​ 55,428

Liabilities and Stockholders’ Equity ​ ​ ​ ​ ​ ​

Current liabilities: ​ ​ ​ ​ ​ ​

Pension and post-retirement obligations ​ 3,932 ​ 5,340

Other long-term liabilities ​ ​ 23,929 ​ ​ 8,558

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

Stockholders’ Equity: ​ ​ ​ ​ ​ ​

Accumulated other comprehensive loss ​ (8,092) ​ (3,287)

Total Liabilities and Stockholders’ Equity ​ $ 470,785 ​ $ 349,197

​

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 (income) expense, net ​ (323) ​ 502 ​ 468

Income tax benefit (provision) ​ 981 ​ (5,133) ​ (6,819)

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

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

Foreign currency translation adjustment ​ ​ (7,193) ​ ​ 8,410 ​ ​ (680)

Pension adjustments ​ ​ 770 ​ ​ (5) ​ ​ (622)

​

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

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

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

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

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

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

Tax effect ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (492) ​ ​ (227) ​ (719)

Net income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 24,094 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 24,094

​

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: ​ ​ ​ ​ ​ ​ ​ ​ ​

Provision for excess and obsolete inventory ​ 534 ​ 1,106 ​ 408

Provision for warranty ​ ​ 543 ​ ​ 34 ​ ​ 210

Prepaid expenses and other assets ​ (3,670) ​ (2,264) ​ (517)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

Purchase of property and equipment ​ ​ (13,716) ​ ​ (9,371) ​ ​ (14,882)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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

Net cash provided by (used in) financing activities ​ 35,832 ​ 7,489 ​ (14,777)

Effect of foreign exchange rate changes on cash ​ (932) ​ 1,487 ​ (128)

Net (decrease) increase in cash and cash equivalents ​ (668) ​ 9,715 ​ 4,743

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

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Supplemental non-cash investing and financing activities: ​ ​ ​ ​ ​ ​ ​ ​ ​

Accrued consideration for acquisitions ​ $ 24,364 ​ $ — ​ $ —

Stock issued for acquisitions ​ $ 23,496 ​ $ — ​ $ —

Contingent consideration for acquisition ​ $ 4,900 ​ $ — ​ $ —

​

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, net assets acquired and liabilities assumed are recorded 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 2021 and 2020 was as follows (in thousands):

​

​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31,

Beginning balance ​ $ 382 ​ $ 405

Additional reserves ​ 174 ​ 91

Effect of foreign currency translation ​ ​ (6) ​ ​ 9

​ ​ ​ ​ ​ ​ ​

​

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):

​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31,

​

​

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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 ​ 82,898 ​ 79,738

Construction work in progress ​ ​ ​ ​ 9,582 ​ ​ 6,821

Less accumulated depreciation ​ ​ ​ (72,668) ​ (62,612)

Property, plant and equipment, net ​ ​ ​ $ 56,983 ​ $ 55,428

​

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 $11,862, $10,057 and $9,139 in 2021, 2020 and 2019, respectively.

Intangible Assets

Intangible assets, other than goodwill, are initially recorded at fair value 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 recorded at their carrying amounts 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. 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, 2021, 2020 or 2019.

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 its 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

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

Company can 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, 2021, the Company performed its 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, 2021, 2020 or 2019.

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 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 2021, 2020 and 2019 were as follows (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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

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

Warranty reserves acquired ​ 15 ​ 465 ​ —

Warranty expenditures ​ (204) ​ (97) ​ (101)

Effect of foreign currency translation ​ (56) ​ 94 ​ (5)

Warranty reserve at end of year ​ $ 1,869 ​ $ 1,571 ​ $ 1,075

​

Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31,

Compensation and fringe benefits ​ $ 14,666 ​ $ 11,184

Accrued business acquisition consideration (Note 2) ​ ​ 12,388 ​ ​ —

Right of use liabilities ​ ​ 4,532 ​ ​ 4,666

Income taxes payable ​ ​ 970 ​ ​ 1,459

​

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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 other (income) expense, net 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 Earning per Share

Basic earnings per share is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding. Diluted earnings 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 potential common shares 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 potential common shares 104 90 95

​

For 2021, 2020 and 2019, 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, 2021 and 2020, respectively, by level within the fair value hierarchy (in thousands):

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Level 1 Level 2 Level 3

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

Pension plan assets ​ $ 6,899 ​ $ — ​ $ —

Deferred compensation plan assets ​ 4,636 ​ — ​ —

Foreign currency hedge contracts ​ — ​ 39 ​ —

Interest rate swaps, net ​ — ​ 220 ​ —

Contingent consideration (Note 2) ​ — ​ — ​ (4,900)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Level 1 Level 2 Level 3

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

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

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

Interest rate swaps ​ — ​ (1,889) ​ —

​

The contingent consideration fair value measurement in connection with the acquisition of ALIO Industries (“ALIO”) is based on significant inputs not observable in the market and therefore constitute Level 3 inputs within the fair value hierarchy. The Company determines the initial fair value of contingent consideration liabilities using a Monte Carlo valuation model, which involves a simulation of future earnings generated during the earn out-period using management’s best estimates, or a probability-weighted discounted cash flow analysis.

​

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

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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 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").

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

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock Split

​

On March 10, 2021, the Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on April 16, 2021. The additional shares were issued on April 30, 2021. In lieu of fractional shares, shareholders received a cash payment based on the closing share price of the common stock on the record date. All share and per share information presented in the consolidated financial statements have been adjusted to reflect the stock split on a retrospective basis for all periods presented.

Twinsburg Consolidation

​

In September 2021, the Company announced its plans to consolidate its manufacturing facility in Twinsburg, Ohio with its Watertown, New York and Reynosa, Mexico facilities in 2022. Costs of $545 are included in business development on the consolidated statement of income and comprehensive income for the year ended December 31, 2021 related to the consolidation of the Twinsburg facility. Costs incurred include accelerated lease costs, severance and other payroll related costs, and accelerated depreciation.

​

Recently adopted accounting pronouncements

In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, and clarifies existing guidance to improve consistent application. This guidance is effective for fiscal years beginning after December 15, 2020. The Company adopted this ASU on January 1, 2021 on a prospective basis, as there were no relevant matters impacting the Company for which retrospective application was required, and the adoption did not have a material impact on its consolidated financial statements.

​

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company early adopted this ASU in the fourth quarter of 2021. The adoption did not have a material impact on its consolidated financial statements.

​

2. ACQUISITIONS

2021 Acquisitions

Spectrum Controls

​

On December 30, 2021, the Company acquired Spectrum Controls, Inc. (“Spectrum Controls”), a Washington headquartered innovator and manufacturer of industrial Input/Output (“I/O”) and universal communications gateway products. Spectrum Controls designs and manufactures a wide range of highly sophisticated I/O modules, marquee displays, and industrial gateways for broad industrial controls applications through partnerships with programmable logic controller (“PLC”) manufacturers and distributors. This acquisition provides the Company with the opportunity to enhance its position as a value-added solutions supplier to the industrial automation and industrial controls market.

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

The purchase price was $68,711, consisting of $44,046 paid at closing, $26,076 in cash funded through borrowings under the Amended Revolving Facility and $17,970 in Company stock (502,512 shares at $35.76 closing stock price on December 29, 2021). The remaining $24,665 of purchase price represents the acquisition date fair value of two remaining payments of $12,500 each to be paid in two equal installments no later than December 31, 2022 and December 31, 2023, respectively, comprised of 50% cash and 50% in Company stock. As of December 31, 2021, $12,388 is included in accrued liabilities and $12,277 is included in other long-term liabilities on the consolidated balance sheet. The purchase price allocation is subject to adjustments based on a determination of closing net working capital and certain tax matters.

The Company incurred $93 of transaction costs related to the acquisition of Spectrum Controls in 2021, which are included in business development on the consolidated statements of income and comprehensive income.

The preliminary allocation of the purchase price paid for Spectrum Controls is based on estimated fair values of the assets acquired and liabilities assumed of Spectrum Controls as of December 30, 2021 and is as follows (in thousands):

​

​ ​ ​ ​

Cash and cash equivalents $ 96

Trade receivables ​ ​ 3,612

Inventories ​ ​ 4,127

Other assets, net ​ 560

Property, plant and equipment ​ 278

Intangible assets ​ ​ 34,800

Current liabilities ​ ​ (1,215)

Net purchase price ​ $ 68,711

​

The intangible assets acquired consist of customer lists of $21,000, technology of $13,500, and a trade name of $300, which are being amortized over 18, 10 and 10 years, respectively. Goodwill generated in the acquisition is related to the assembled workforce, synergies between Allied Motion’s other operations and Spectrum 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 Spectrum Controls’ management knowledge in providing complementary product offerings to the Company’s customers.

​

The operating results of this acquisition are included in the consolidated financial statements beginning on the date of the acquisition. Revenue and earnings related to Spectrum Controls included within the consolidated statement of income and comprehensive income for the year ended December 31, 2021 were inconsequential.

​

The goodwill resulting from the Spectrum Controls acquisition is tax deductible.

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ORMEC & ALIO

On November 2, 2021, the Company acquired 100% of the outstanding stock of ORMEC Systems Corp. (“ORMEC”), a New York headquartered developer and manufacturer of mission critical electro-mechanical automation solutions and motion control products including multi-axis controls, electronic drives and actuators for the automation and aerospace industries. In addition to its products, ORMEC designs and manufactures complete electro-mechanical and software solutions for custom automation applications. ORMEC strengthens the Company’s technical expertise and adds a higher level of precision motion control systems and solutions to its offerings.

On November 4, 2021, the Company acquired 100% of ALIO Industries (“ALIO”), a Colorado headquartered innovator and manufacturer of advanced linear and rotary motion systems for nano-precision applications. ALIO designs, engineers, and manufactures nano technology motion systems for state-of-the-art applications in silicon photonics, micro

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

assembly, digital pathology, genome sequencing, laser processing and microelectronics. ALIO is well recognized for their technology and expertise in nanometer level positioning. This expertise in high precision positioning and robotic technology solutions is expected to enhance the Company’s portfolio of motion solution offerings.

The purchase price, collectively, for ORMEC and ALIO was $33,458, comprised of $23,333 in cash funded through borrowings under the Amended Revolving Credit Facility, $5,526 in Company stock (150,038 shares at a weighted average stock price of $36.83), and the fair value of contingent consideration of $4,900, offset by a $301 estimated working capital provision. These purchase price allocations are subject to adjustments based on a determination of closing net working capital and certain tax matters.

The Company incurred $409 of transaction costs related to these acquisitions in 2021, which is included in business development on the consolidated statements of income and comprehensive income.

The preliminary allocation of the purchase price paid is based on estimated fair values of the assets acquired and liabilities assumed as of November 2, 2021 for ORMEC and November 4, 2021 for ALIO and is, collectively, as follows (in thousands):

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Cash and cash equivalents $ 2,059

Trade receivables ​ ​ 1,416

Inventories ​ ​ 2,802

Other assets, net ​ 50

Property, plant and equipment ​ 699

Right of use assets ​ ​ 1,005

Intangible assets ​ ​ 10,200

Other current liabilities ​ ​ (1,028)

Deferred revenue ​ ​ (2,063)

Lease liabilities ​ ​ (1,005)

Net deferred income tax liabilities ​ ​ (655)

Net purchase price ​ $ 33,458

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The intangible assets acquired consist of technology of $5,700, customer lists of $4,000, and trade names of $500, which are being amortized over weighted average useful lives of 11, 6 and 10 years, respectively. Goodwill generated in these acquisitions is related to the assembled workforce, synergies with Allied Motion’s other operations that are expected to occur as a result of the combined engineering knowledge, the ability of the operations to integrate products into more fully integrated system solutions and Allied Motion’s ability to utilize ORMEC and ALIO’s management knowledge in providing complementary product offerings to the Company’s customers.

The operating results of these acquisitions are included in the consolidated financial statements beginning on the date of the acquisition. Revenue included within the consolidated statement of income and comprehensive income for the year ended December 31, 2021, related to ORMEC and ALIO, collectively, was $2,063 and earnings were not material. As of December 31, 2021, the fair value of contingent consideration of $4,900 is included in other long-term liabilities on the consolidated balance sheet. The contingent consideration represents the estimated fair value of the Company’s obligations, under a purchase agreement, to make additional payments if certain earnings goals are met through 2024. There were no changes to the contingent consideration fair value during 2021.

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The goodwill resulting from the ORMEC acquisition is not tax deductible. The goodwill resulting from the ALIO acquisition is tax deductible.

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

2020 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. The purchase price was subject to adjustments based on a determination of closing net working capital.

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 on the consolidated statements of income and comprehensive income.

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

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Cash and cash equivalents $ 11,437

Trade receivables ​ ​ 4,129

Inventories ​ ​ 3,329

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

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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 the 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)

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

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Pro Forma Financial Information

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Unaudited pro forma revenue is $443,010 and $415,577 for 2021 and 2020, respectively. Unaudited pro forma earnings for 2021 and 2020 is not materially different from reported earnings, primarily due to incremental amortization and interest expense. The unaudited pro forma financial information represents the combined results of operations if the Dynamic Controls acquisition had occurred as of January 1, 2019 and the ORMEC, ALIO and Spectrum Controls acquisitions had occurred as of January 1, 2020.

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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 these acquisitions. 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.

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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.

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

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ALLIED MOTION TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

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, 2021.

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.

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