Allied Motion Technologies Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings. Welcome to Allied Motion Technologies Fourth Quarter Fiscal Year 2020 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I would now like to turn the conference over to Craig Mychajluk, Investor Relations. Thank you. You may begin.

[Craig Mychajluk:]

Yes. Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion. Joining me on the call are Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our fourth quarter and full year 2020 results and provide an update on the company’s strategic progress and outlook, after which we’ll open it up for Q&A. As part of today’s Q&A, we do ask that you limit your questions to two or three in order to allow for all participants and you can certainly go back into the queue for additional follow-up.

[Dick Warzala:]

Thank you, Craig, and welcome, everyone. I guess it goes without saying and that all of us would agree that 2020 was an exceptionally unusual year. I am most proud of the resilience and agility demonstrated by our entire Allied team during these challenging times. We responded rapidly to the changing situation and worked tirelessly to create a safe work environment, while at the same time making the necessary adjustments to ensure that these of our customers are continuing to be met. At the onset of the pandemic, we qualified as an essential supplier, because our products are used to support critical industries including medical, defense and agriculture. As a result, we were able to keep all of our manufacturing facilities operational. We adjusted our staffing levels to align with production volumes to meet varying levels of demand for several of our end markets. And we successfully manage inventory levels in our facilities to maintain responsive delivery to our customers. While the pandemic significantly impacted our end markets and operations, we were able to pursue the execution of our strategy to the flexible and committed efforts of our team to position the company for long-term growth. This included a number of significant achievements. We refinanced our lending agreement and successfully closed and integrated the acquisition of Dynamic Controls.

[Mike Leach:]

Thank you, Dick. We provide an overview of our top line on Slide 4. As a reminder, our results include Dynamic Controls, which we acquired in March, 2020. Fourth quarter revenue was up $5.1 million or 6% to $93 million despite the continued impact of the pandemic on our end market. Revenue growth was driven by strong demand in Medical, including the incremental benefit of Dynamic, a 6.5% increase in Vehicle. FX impact for the quarter on revenue was a favorable $2.8 million. Revenue for the full year came in at $366.7 million, down 1%. FX fluctuations on revenue were favorable $1.8 million for the full year. Our Medical market grew 61%. Again, reflecting the addition of Dynamic and favorable impact due to COVID-19. While Vehicle has rebounded, we’re still down year-over-year given the sheer decline when the pandemic first hit earlier in the year, when many of our customers, production facilities were completely shut down. Sales to U.S customers were 53%, down from 57% in the prior year period with the balance of sales to customers primarily in Europe, Canada, and Asia. The shift in geographic mix reflects the addition of Dynamic Controls. Slide 5 shows the change in our revenue mix by market and the change in revenue by markets for the full year ended December 31. Overall, broadening the scope and diversification of our various end markets has added some resilience to our business. Again, the economic impact as the COVID-19 pandemic was reflected in the reduce demand order deferrals within Industry, Vehicle and A&D. As depicted on Slide 6, our gross margin was 27.9% for the quarter, compared with 30.1% for the 2019 fourth quarter. The change reflects an unfavorable mix the under absorption of some fixed costs in certain facilities due to declines in Industrial and A&D and nearly $800,000 of higher costs as a result of increased tariffs, duties and expedited freight charges. We believe we have managed the impact of tariffs and duties relatively well and have benefited from our efforts to strategically source components as close to our manufacturing footprint as possible. Nonetheless, there were components that began to be impacted in the fourth quarter due to the expiration of certain exemptions. Additional freight reflects the high demand in powersports combined with supply chain constraints, which resulted in some inefficiencies and unintended costs is our teams work hard to support and meet customer demand and schedules. Gross margin for the full year was 29.6%, compared with 30.3%. Our diverse markets and cost containment efforts helped to partially offset the impact of lower volumes and the higher tariffs, duties and freight.

[Dick Warzala:]

Thank you, Mike. As depicted on Slide 11, fourth quarter orders climb to a record level of more than $108 million up 26% compared to the fourth quarter of 2019. Full year orders grew 1% to $371 million, a very solid level given the challenging operating environment. Backlog at year-end was approximately $141 million, up 14% sequentially, and also represented a record level. The majority of our backlog is expected to convert to sales over the next three to six months. In the second quarter of 2020, we secured the nomination of another award to provide a customer specific solution for our Vehicle market, raising the total of all awards to $325 million. We begun shipments of the first award at approximately $8 million of that initial award is now currently included in our reported backlog numbers. At this time, we are expecting all of the awards to be at full rate production in 2024.

[Operator:]

Thank you. Our first question is from Dick Ryan with Colliers. Please proceed.

[Dick Ryan:]

Thank you. Hey, Dick. On the record orders in Q4, were there any specific key wins that you can point to and how does the backlog shape up? I mean, does that mirror the contributions of your various end markets or are there any variances in the strong backlog?

[Dick Warzala:]

Sure. I’d say, Dick, it mirrors the – what I’ll say the normal business mix within our markets. But I would tell you that there is an A&D contract in there that would have firm deliveries and lead times, which did – which would maybe skew it a little bit more in that area. I don’t want that to come across as if we see A&D increasing in terms of the relative sales within our markets. But I think it just saysthat we had a firm commitment with firm production dates and when we get those then we do book it into backlog. But for the most part, I’ll just tell you that it’s across the board and it’s – it mirrors the mix of our normal business.

[Dick Ryan:]

Okay. When you look at – we’re coming to the close of the first quarter, any green shoots out there when you look at the various end markets and then looking out for the rest of the year. Which market should we see some growth or hope to see some growth in?

[Dick Warzala:]

I think we’re seeing some very encouraging signs across pretty much most markets now. Our European business, obviously, we have concerns as you still hear about lockdowns and the spikes – COVID spikes and so forth, especially in Europe. But we’re seeing very positive trends. I mean, of course as the oil prices go up, we’re starting to see improvements there as well. So I think we’re quite optimistic that we’re starting to turn here and things are moving forward.

[Dick Ryan:]

Okay. One last one on the M&A side, last quarter, you’re talking about, turning that activity up and match, what’s the current environment out there. And have you had any change of thought on kind of your acquisitive efforts here in the near-term?

[Dick Warzala:]

No change in thought. And I will say to you that it’s definitely hitting up.

[Dick Ryan:]

Okay, great. Thank you.

[Operator:]

Our next question is from Greg Palm with Craig-Hallum. Please proceed.

[Greg Palm:]

Yes, thanks. Good morning everyone. I guess, just maybe starting going back to the commentary on gross margin. So if we back out that sort of $800,000 that you talked about, I’m still coming to a lower margin than expected. So just kind of curious how much of that was mixed versus something else. And you seem pretty confident that at least some of this is kind of transitory and the long-term trend is upward. So maybe just going a little bit more detail on kind of how you’re thinking about the improvement going forward.

[Dick Warzala:]

Yes, Greg. I think what I’ll do is, there’s a number of factors at play there. And so I think it’s – let’s turn this over to Mike. I mean, he’s got a good handle on where the impacts are, what we see that we can mitigate here in the future.

[Mike Leach:]

So it clearly is mixed related, Greg. I think we talked last quarter a little bit about how it mixes impacting things. So while Medical is up and Medical typically is strong from a gross margin standpoint. The nature of the products that are being sold, particularly the one COVID pandemic related or of a lower gross margin nature than our average. Certainly, the other we’ve seen surge is in Vehicle. And again, that just traditionally has carried again, bad barges at lower margins than our general average. And certainly, the absence of A&D, which I would classify is quite typically across the board, higher margin products, certainly impact us. And then from a volume perspective, while we were close to our volume last year, certainly having an entire new operation as well throughout the year, right. So I would say that, some of our fixed overhead costs are just not being absorbed as strongly as they will, when volume returns and we’ll get a lift out of that as well and then clearly, the impact of the tariffs and some duties as well. Along with, again, in certain markets, we’ve seen such a surge that it’s presented supply chain constraints and issues. And so, as I mentioned, things like expedited freight was pretty chunky in the quarter as well. Again, that’s expedited freight to get products in from our suppliers. And again, just throughout this pandemic period, there’s been those type of challenges and when the demand ramps up with it. It just made it even tighter and tougher. And our focus has been on meeting demands of the customer. So certainly, we’ve incurred some costs. There were some inefficiencies.

[Greg Palm:]

Got it. So it sounds like a lot of, sort of one-timers that as things progress here through this year should start to improve.

[Dick Warzala:]

Sure. That’s being tariffs. Who knows how long and where those are going as well. So we keep – we have a large number of mitigation efforts to put those behind us as well. Those things are taking time to potentially develop. But that’s the one I would point to that certainly in Q1 we would expect to see some continued impact.

[Greg Palm:]

Yes. Makes sense. The $8 million of the Vehicle award that’s now in backlog, I know you said full run rate in 2024. How should we be thinking about the progression of the ramp up of that award from now until then?

[Dick Warzala:]

Yes, I think what you’re going to see is, each of the awards are now coming on. Starting up as planned, so there’s varying times. And as we mentioned, the first is now moving into ramp up in full rate of production. And I think what we’ll see – well, I know what you’ll see as long as they stay on the plan that we’ve been provided is that we’ll ramp up each of the programs here in the next couple of years and that’s why we said full rate of production in 2024. So there’ll be coming on – each be coming onboard, each one ramping in this year and next year and the following year.

[Greg Palm:]

Okay, good. And then last one, I know, you don’t guide, but looking at seasonality between Q4 and Q1 and given the backlog, any reason why Q1 revenue won’t be higher than what you just saw in Q4. Just kind of curious how activity is treading quarter-to-date, it seems like things are pretty positive overall.

[Dick Warzala:]

I’m not going to argue with what you said, while not concurring 100%. I’m thinking that, I’ve mentioned that things are improving and we were encouraged by what we’re seeing here. So I think what your statement was a fair statement. Of course, last year, very – obviously, very unusual year, certain markets were performing extremely well at the end of the year. And as we say, our fourth quarter December in particular is always a challenge for us. We don’t know which way it’s going to turn. And it was, I won’t say positive, given everything else that occurred last year, but I think in general, your statement is consistent with what we’re seeing.

[Greg Palm:]

Okay. All right. Thanks. Best of luck going forward.

[Dick Warzala:]

Thank you, Greg.

[Operator:]

Our next question is from Gerry Sweeney with ROTH Capital. Please proceed.

[Gerry Sweeney:]

Hi, good morning. Thanks for taking my questions.

[Dick Warzala:]

Good morning.

[Mike Leach:]

Good morning, Gerry.

[Gerry Sweeney:]

I wanted to stick on the revenue side a little bit specifically in the Vehicle segment to start off with a little bit of talk about ship shortages, and I think even that may be more auto related, but curious one that can would impact powersports as well. I know there’s been some talk about some supply chain issues and powersports of it in the short-term. And does that sort of figure into any of your – you’ve mentioned a little bit of mismatch on legacy going down and new products and new business auto once going up.

[Dick Warzala:]

Okay. So let me – I’ll clarify your second statement first about the mismatch. The mismatch is that a legacy programs and automotive that are ramping down and the timing, if we had kept it that the awards that we had were ramping as we had originally planned, we would not have seen the – we were seeing it ramp up before all there’s a ramp down. So given that they were delayed, the progress were delayed. The ramp downs continued while the ramp ups were delayed. So that’s all related to those Vehicle new awards. All right, so that specific to those. With regard to electronics, I mean we are absolutely seeing the challenges, feeling the challenges and it’s as electronics have become a important element of in many markets for us and solutions that we provide. It’s a constant battle. So we – as soon as you solve one another one’s popping up and its passives as well as active components. We’re also seeing it in plastics. Plastics has been a fairly significant challenge. And today, we’ve been able to work through these issues. And I hope you can continue, but there’s been tremendous amount of requalification and new suppliers and new components. I mean it’s obviously been quite a challenge that I think it’ll continue to be for the short-term, especially as these lead times are ramping out or going out. And one of the things we have to watch for here and having gone through cycles before, when lead times start to extend, do you start to see some double ordering just to make sure people are in the queues and so forth. And so we just – we’re working to make sure that we’re getting commitments back from our customers and if they’re accelerating demand or increasing demand to ensure that we don’t get stuck with the parts that we can use for a longer period of time. So the clearly challenges, and it’s because of the electronics and because of, as I said, plastics also magnets also bearings lead times are extending and it’s causing us to react and to work very hard on the alternative supply and also think of sure we can continue to supply even in the short-term.

[Gerry Sweeney:]

Are any of those costs – are you able to pass any of those costs through over if they stay elevated for an extended period of time or is that just something…

[Dick Warzala:]

Certainly, when there’s increased demands and extended lead times, so we certainly work toward getting reimbursed. I’m not going to say, we get reimbursed for everything, we do have contracts that we get protection on cost increases in our longer-term, larger contracts, all of them have that protection on them. So the commodity prices increase. We can pass them on. It’s these short-term bursts or supplier notifies you that lead times being pushed from 12 to 30 weeks and you may have to expedite materials, and it’s not every time can we pass it on, but we certainly do and have been working on passing those costs on. And many times Gerry what happens is you just incur the cost now, and then you to keep the supply chain go and keep the customer satisfied, and then you go back later and work on getting reimbursed.

[Gerry Sweeney:]

Yes, got it. So it’s a little bit there’s a delay there, got it. Okay. That’s it for me. I appreciate it. Thank you.

[Dick Warzala:]

Thank you, Gerry.

[Operator:]

Our next question is from Brett Kearney with Gabelli Funds. Please proceed.

[Brett Kearney:]

Hi guys, good morning.

[Dick Warzala:]

Good morning.

[Mike Leach:]

Good morning, Brett.

[Brett Kearney:]

Good morning. So Dick, you guys obviously took really good care of your team last year, not all companies undertook as thoughtful comprehensive approach as you did, but are hearing from some folks out there not just on the supply side, which we covered, but labor and staffing challenges and as you think about some of your markets coming back, as well as the new wins you have ramping up just generally curious how you’re thinking about the workforce side of meeting some of the production ramp up going forward.

[Dick Warzala:]

Sure. The production ramp up, if you started talking about the large Vehicle awards, I mean couple of things that we’ve done there. Number one is that we’ve improved the level of automation, so that the other, as we move forward here and the new contracts and future product launches step to the automation that we’re implementing to produce the product to decreases the need for additional labor also, yes, so having protected the workforce, we do feel that there’s certainly some loyalty there. We haven’t seen losses of people that and maybe it’s because of that and maybe it’s because of who knows what the job market is out there right now. So I do think we will as productions ramping in certain other areas too, and in certain pockets, I think we will have challenges. The – but it’s something that we’ve been actively working on for a while here now and anticipating as we see demand to be look out there as far as the recruiting efforts that we need to do. And I’d say that through the process here, we’ve also been doing some selective recruiting and some key areas, primarily in the engineering and material supply areas, I would tell you, I’ll call them key strategic areas to ensure that, we’re positioned as we come out of this, that we’re going to grow even a better position long-term.

[Brett Kearney:]

Terrific. Thank you so much.

[Dick Warzala:]

You’re welcome.

[Operator:]

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

[Dick Warzala:]

Thank you, everyone for joining us on today’s call and for your interest in Allied Motion. As always, please feel free to reach out to us at any time. And we look forward to talking with all of you again after our first quarter 2021 results. Thank you for your participation. Stay safe and have a great day. Now conclude the call operator.

[Operator:]

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.