Allied Motion Technologies Inc.
Q4 2017 Earnings Call Transcript

Published: 15 Mar 2018

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Allied Motion Technologies, Inc. Fourth Quarter and Full Year 2017 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions [Operator Instructions]. I would like to turn the conference over to Deborah Pawlowski, Investor Relations for Allied Motion. Please go ahead.

[Deborah Pawlowski:]

Thank you, David, 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 Chief Executive officer and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our fourth quarter and full year 2017 results and provide an update on the Company's strategic progress and outlook. After which, we will open it up for Q&A. You should have a copy of the financial results that were released yesterday after the market closed and if not, you can find them on our Web site at www.alliedmotion.com. You will also find on the Web site, if you have not yet received them, the slides that accompany today's discussion. If you're viewing those slides, please turn to slide number two for the Safe Harbor statement. As you are aware, we may make some forward-looking statements on this call during the formal discussion, as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our Web site or at sec.gov. I want to point out as well that during today's call we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and on the slide. So with that, please turn to slide three. And I will turn the call over to Dick to begin. Dick?

[Dick Warzala:]

Thank you, Debbie, and welcome, everyone. In the final quarter of 2017, we achieved record revenue growth of 18%. And absent the onetime impact of tax reform, measurably higher core earnings. We had double-digit growth in almost all of our markets bolstered by good economic tailwinds and expanding opportunities for a wide range platform and custom critical motion control solutions. We announced some very major wins in the quarter as well in both the vehicle and aerospace and defense market on top of the quite significant awards we had already announced earlier in the year. In total, awards received for vehicle market solutions in the trailing 12 month were over $225 million and we expect revenue from those awards to begin ramping in mid-2019. In 2017, we had double-digit growth in our electronics/electronics market Industrial/Electronics market and solid expansion in our medical and aerospace and defense markets, which combined now make-up approximately 54% of our revenue mix, up from 48% in 2016. We believe our performance across markets substantiates the investments we have made to grow and diversify the business. Adding gains, greater traction in market share in many of our served market, we are creating a larger more robust base of business, which support continuous and sustainable organic growth well into the future. Also during 2017, we generated considerable cash, significantly reduced debt and made progress streamlining the organization. The recruitment of new sales partners or Allied Solution Providers, ASPs for sure, continues to go well. We have now signed 11 ASPs to-date and increased to four since our last call. This channel is currently a relatively small contributor to our total revenue mix but the growth has been impressive and we view this channel as one with the potential to significantly expand our reach and enhance our growth prospects in the future. We ended the year with strong momentum. We had a new record quarter of orders and our backlog grew substantially and set a record high for the third consecutive quarter ending at more than $100 million. I want to point out as well that we have been quite busy behind the scene addressing the acquisition component of our strategy. Our acquisition strategy is focused on finding businesses that complement our technologies, expand our market and customers, or round out our geographic presence. And we have a solid pipeline of opportunities globally that we continue to develop. The acquisition of the original equipment business for Maval Industries announced earlier this year is an excellent example of us expanding our offerings to provide more fully integrated solutions to our customers. Combining our capability to create good opportunities as we further strengthen our position as a leader in steering solutions for a variety of vehicle application. I will talk to that in more detail after Mike provides his commentary. So with that Mike, let me turn it over to you for a review of the financial.

[Mike Leach:]

Thank you, Dick. Please refer to slide four. Fourth quarter revenue was $65.4 million, up 18.1% and still up an impressive 13.5% when excluding the impact of favorable FX. That growth was broad based and driven by each of our served markets as rebounding strength in the vehicle market. Full year revenue came in at a record $252 million, up 2.5%. We saw strong year-over-year demand in the industrial/electronics, medical, and A&D markets. Though from a small base, we also achieved a significant increase in distribution sales. These gains were partially offset by a single digit decline in the vehicle market. For the year, sales to U.S. customers were 53% of total sales compared with 54% in 2016. Slide five shows the change in our revenue mix by market for the full year. As you can see, the headwinds in the vehicle market have reduced that market's revenue contribution, while we have seen considerable growth in the industrial/electronics, as well as medical and A&D. This has helped diversify the revenue base and more than offset the vehicle market gap. Encouragingly, as mentioned, we're beginning to see signs of improvement in the vehicle market as we realize measurable growth in the fourth quarter. Within the other category is our distribution business. It is currently small but growing and we will break it out in the separate market once it gets to a more substantial piece of our overall market mix. Slide six provides detail on our operating performance. Fourth quarter gross profit was $20.6 million or 31.4% of revenue compared with $16.7 million or 30.2% for the fourth quarter of last year. The 120 basis point margin improvement was due to both higher volume and a more favorable product mix. G&A expenses were $6.9 million or 10.6% of sales compared with 12.3% in the prior year period. E&D was 7% of sales and selling expense was 4.4% of sales, down 20 and 10 basis points respectively. Operating income for the quarter doubled over the prior year period to $5.2 million and our operating margin expanded 320 basis points to 7.9%. Operating costs for the year were $2.8 million or 5% to $57 million, primarily due to increased investments in the sales and engineering organizations. As a result, operating income was down slightly from the prior period -- prior year period. Slide seven represents our net income and adjusted EBITDA. As previously discussed, our new debt facility completed in the fourth quarter last year has considerably reduced interest expense. Given the lower cost of debt with this new credit facility and lower debt levels, interest expense decreased to $677,000 from $1.8 million in the prior year period. Interest expense for all of 2017 was $2.5 million, down about $4 million compared to 2016. The effective tax rate in the fourth quarter was 97.9% compared with 24.5% in last year’s fourth quarter. The higher rate reflects an estimated transition tax of $3.1 million on the deemed repatriation of foreign exchange, resulting from the U.S. Tax Cuts and Jobs Act. This one-time expense is recorded taxes in the fourth quarter and negatively impacted EPS by $0.35. The tax act contained other provisions that did not materially impact the company, including the revaluation of deferred tax balances. Given the ramifications of the tax act, the effective tax rate for 2017 was 50.2% and net income was $8 million or $0.87 per diluted share. Company anticipates that the effective tax rate for 2018 to range between 22% and 26%. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance. This is a non-GAAP measure. But please be advised to review our reconciliation and related disclosures in our release and at the end of our slides. For the fourth quarter, adjusted EBITDA was up 48% to $8.6 million or 13.1% of sales, which compares with 10.5% last year. For the full year, adjusted EBITDA was $31.1 million or 12.3% of sales, down 10 basis points. Slide eight provides an overview of our balance sheet and cash flow. Cash generated from operations was $10.1 million in the fourth quarter and more than $25 million in 2017. We used our strong cash generation to reduce debt $18.3 million. Debt net of cash was $37.6 million or 30.1% of net debt to capitalization, down from 43.6% at the end of 2016. We ended the year with a cash balance of $15.6 million, effectively the same as year-end 2016. Capital expenditures in 2017 were $6.2 million and were focused IT infrastructure, productivity and growth initiatives. We expect our 2018 full-year CapEx to range between $13 million and $16 million as a higher level of need to support the significant project wins announced over the last year. Inventory turns improved to 4.9 times compared with 4.3 times in 2016. Our DSO was 47 days, up from 44 in 2016. Some of the increase had to do with the timing of the specific customer repayment where the DSO level was as expected given payment terms with certain large customers. I'll now turn the call back over to you, Dick.

[Dick Warzala:]

Thank you, Mike. We will now turn to slide nine. Fourth quarter orders grew 29% to a new record $72.7 million, while full year 2017 orders grew 8.6% over 2016 or a record $272 million. Backlog grew to a record level of $100.7 million, up nearly 8% over the previous record levels set at the end of the sequential third quarter. The year-over-year increase in orders and backlog reflect strength across all of our served markets. And it is important to note that the $225 million in vehicle market awards that we announced over the last year are not included in this backlog number. Moving on to the last slide. Our focus remains consistent as we are beginning to see results of what we believe has been a successful execution of our strategic critical issues. We are building momentum and we entered 2018 with a stronger foundation, which includes an improved diversification of the business, recent significant project wins and a record backlog. We continue to see a very fertile ground of opportunities across all of our served markets, which in addition to the backlog levels, provides us with a good deal of confidence as we continue to move forward on our strategy. Although, our distribution channel is still quite small, it continues to grow and we have been steadily adding new ASPs with a goal to have 20 by year end. Unification of all of our individual North American motor units into a One Allied Team Motion North American motors unit has made good performance in design building. We are working to strengthen our One Allied approach and to drive organic sales growth by making it easier for our customers to do business with us while also improving our internal efficiency. Our investments in information technology continue as we focus on leveraging our IT infrastructure to better support our business need. Further, we remain focused on continuing to enhance and develop the operational effectiveness team and ASP to drive continuous improvement in all business areas. We are pleased with the original equipment steering business we recently acquired from Maval. With this acquisition, we have internally created the North American Mechatronics unit, which consolidates all North American non-motor operations into one unit, similar in fashion to what we were doing with North American Motors. Maval's capabilities and products are a great fit and excellent complement to our portfolio as we can now provide a complete integrated steering solution to our customers. Additionally, we are gaining some very talented people or a welcome addition to Allied Motion. As many of you know, this is a carve-out so it will take some work to cleanly strip the business out of its current environment and into a standalone operation, and we are working diligently to complete this process as quickly as possible. Currently, the acquisition pipeline remains fairly robust with opportunities as we work to uncover businesses and align with our strategy. And as we have mentioned in the past even though we are well positioned financially, we will not stray from our consistent and prudent approach to any future acquisitions. With that operator, let's open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

[Greg Palm:]

Maybe we can just start off with the some of the quarterly highlights. Obviously, results were well ahead of our expectations. Can you talk about more specifically the end markets or applications that outperformed versus your expectations? And power sports market up on a year-over-year basis. When was the last time that happened?

[Dick Warzala:]

We will be happy to address those, and I think we covered some of that as we talked about market, but I will go back over again. I mean, if we look at the year, a full year 2016 versus 2017, our medical market was up. So our vehicle market is actually down. And while you mentioned power sports, our power sport market year-over-year was down. So I think that’s one of the things we’re talking about is you have to be careful when you look at power sports and any market of ours is that it’s our serve segment and sometimes it doesn’t reflect the total market in itself, especially vehicle, where we have a broad range of applications there. Our industrial is up double-digits, our electronics are up double-digit, our distribution business almost models up double-digits, aerospace and defense is up low single-digits. And I think that’s on a trailing 12 months. Now, in the comparison of 2016 Q4 versus 2017 Q4, I guess I would caution you that 2016 Q4 was really a trough. So our results look very impressive against 2017 Q4 versus 2016 Q4. And I think we rely more on what the total year looks like is that I think it’s a better representation. But to give you the feel for that, you just look at those quarters, medical is up double-digits, vehicles up double-digits, industrial is up double-digits, electronics is up double-digits, distributions is up double-digits, aerospace and defense is again is now mid single digits. So I will be cautious about those number, because again what happened in 2016 Q4 where things started to really taper off.

[Greg Palm:]

So is it maybe more fair to assume that the growth in power sports, specifically in Q4, was just because of a low comp. I mean what are the expectations? I mean, the commentary suggests that things have stabilized. I think you feel a lot better now. Should we just assume a flattish environment there going forward with growth coming from other segments? Or how do you look at that?

[Dick Warzala:]

I think the answer of your question is that, we were power sport, the increase there was at a trough. And if you looked at power sports for the entire year, you would Q4 was actually slightly down from the run rate for the year, but not much. So I think it does look like it’s stabilized. It does look like we’re at a level here that would most likely continue out into the future.

[Greg Palm:]

The orders activity and backlog levels are really truly remarkable compared to where we were four to five quarters ago. So I’m just curious whether there is a big chunk in there that's maybe more long-term in nature. I know most of the backlog is usually shipped within three to six months, but just curious if there is anything else in there. And can you remind us the $7 million A&D order that I think your press released in October. Was that part of any backlog as does September 30th or was that not booked until Q4?

[Dick Warzala:]

That is in our backlog, and that's to find shipping rates over the next, correct me Mike, 18 months?

[Mike Leach:]

Three years.

[Dick Warzala:]

Over three years with defined shipping dates, so that was -- that's a split up, that’s correct. So $7 million over the three year period and that is in the backlog.

[Greg Palm:]

As of September or was it, I guess my question is was that as of September 30th backlog or was that a new order in Q4 that's now in there?

[Dick Warzala:]

I believe it was in the third quarter. I think you have to go back and confirm what we announced in that, but I am pretty sure the third quarter, Greg, I think it was late third quarter. And so it wasn't backlog in the third quarter and we've actually already started shipping that.

[Greg Palm:]

So other than that one, are there any awards in there that are more longer term in nature or is that the big one is it stretches out a few years here?

[Dick Warzala:]

Nothing out of the ordinary that -- when I say nothing out of the ordinary, our European businesses operate a little bit differently and they get long term contracts with fixed shipping dates that are commitments to those dates and when we get that and this is the norm for some of the customers. And we're consistent with the way we're handling those today from the way we did in the past. But I would tell you nothing out of the ordinary, that’s the aerospace and defense jumps out to be the big one.

[Mike Leach:]

And even the European commitments are contained within -- typically within a 12 month period. So I would characterize the backlog as being similar to as we have in the past with the exception of the longer defense order and just an elevation, if you will, of European orders that tend to stretch a little longer than what I would see in North America.

[Greg Palm:]

As it relates to Maval, can you give us any color on the revenue, the P&L impact, what’s your expect is. And I mean just generally, what type of revenue synergies do you see from that going forward?

[Dick Warzala:]

I think in our press release that we put out announcing a Maval deal, I mean we complied with all the necessary FDC reporting requirements. And I think we're going to leave as that. And for competitive reasons and I think it's safe -- it's better for us to do that. And you can -- if you understand what those requirements are, you could pretty quickly figure out if you want to dig into at what level it is or under, because at an over-served level, we would have to report those levels, which we didn't have to do. So turning to the synergies and revenue synergies, what it really gains for us is that it sets us apart from our competition and that we are now able to design together with the mechanical team and the electromagnetic and electronics team, existent solutions which means that our customers are now going to receive a complete integrated system rather than getting parts from multiple suppliers, and that having to assemble themselves. And the ability to do that typically, which we’re able to do is remove some costs of the integration of the interface between the different types of systems and establish additional reliability. So advantages, integrated system, increased reliability, reduced components, ultimately you would think that that would make it more cost effective. And it has more value for the end customer, because they have less work to do, they buy one system and they could get a complete system coming in and install and don’t have to bolt together multiple systems, align things and check things and so forth, that's really what it does. We obviously improved revenues overtime. I think Maval was already very strong in similar markets with us. And one of the reasons we wanted to do the deal was because we were already working them and partnering with them on some applications. And it just made sense for us to become just one team and being guided one direction and making sure both had the same level of priority on the project and not one having a higher level of [indiscernible] not being consistent with that. So our customers are certainly happy and express their pleasure as that deal was completed. And they further remark that if Allied does with Mavel what they did with Globe, meaning what they saw is a more customer friendly attitude, a better future product roadmap laid out for the future. And so overall level of customer support, engineering capability that they would be extremely pleased that we have acquired Mavle.

[Operator:]

[Operator Instructions] There is no more questions on Q&A session. I would like to turn the conference back over to the management for any closing remarks.

[Dick Warzala:]

Thank you, operator. I guess we discussed the recipe here for how to reduce the questions, just have great quarter. So we’ll attempt to continue that in the future. So thank you everyone for joining us on today’s call and for your interest in Allied Motion. For those in the New York area, we will be presenting and available for investor meetings at the Sidoti conference on March 29th. In the meantime, please feel free to reach out to us at any time and we look forward to talking with you all again after our first quarter results. Again, thank you for participating, and have a nice day.

[Operator:]

This concludes today’s conference call. You may disconnect your line. Thank you for participating. And have a pleasant day.