Allied Motion Technologies Inc.
Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Operator:]

Thank you for standing by, this is the conference operator. Welcome to the Allied Motion Technologies First Quarter 2016 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 now like to turn the conference over to Deborah Pawlowski, Investor Relations for Allied Motion Technologies. Please go ahead.

[Deborah Pawlowski:]

Thanks, Ross, and good morning, everyone. We certainly appreciate your time today, as well as your interest in Allied Motion Technologies. 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 will review our first quarter results and provide an update on the company’s outlook and strategic progress. After that 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 website at www.alliedmotion.com. You will also find on the website if you haven’t received them yet, the slides that accompany today’s discussions. If you’re viewing those slides, please refer to Slide #2. 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 other documents filed by the company with Securities & Exchange Commission. You can find these documents on our website or at sec.gov. I would like 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 with additional information and isolation or the substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP comparable GAAP measures in the tables accompanying today’s earnings release. So with that, if you turn to Slide 3, I will turn the call over to Dick to begin. Dick?

[Richard Warzala:]

Thank you, Debby, and welcome everyone to our first quarter 2016 conference call. I will hit on some highlights for the quarter and the advancements we are making under our One Allied approach, and then turn it over to Mike for a more in-depth review of the financials. I will then close by providing you with insights into our 2016 strategic initiatives that are currently well underway. We kicked off the quarter with a Heidrive acquisition, a motor and drive solutions company that provides many opportunities to advance our growth strategy and which is accretive to our earnings in the first quarter. Heidrive strengthens our presence in Germany, has brought us new customers and complementary product, while also adding strong engineering and technical competencies to our team. The acquisition is proving to be an excellent fit for our organization and it’s integration is moving along nicely. We believe the combination of Heidrive’s strong technical capabilities in creating customized motor and drive solution from a standard platform of products, and our strength in motion technology, larger product suite, and multinational sales platform sets the stage for driving growth and advancing our transformation from a component producer to a solutions provider. Turning to Slide 4, revenue for the quarter was up 7% over last year with the addition of Heidrive. This helps to offset lower sales in both the vehicle and aerospace and defense markets compared with last year. I would like to note that I’m frequently asked about our applications in the vehicle category and these are quite varied. Our applications range from specialized power steering solutions, including GPS guided systems, as well as mobile HVAC, traction, motors for pumps and many more auxiliary applications. Our emphasis is on the inclusion of several of our components to provide a more complete solution for these applications for several applications within a vehicle, while meeting or exceeding key customer requirements, including system performance, on-time delivery, safety, reliability and quality. New products are a central to our growth and we continue to invest in engineering and development to add to our multi-product motion system offerings. We are also investing in our future to create a scalable organization with repeatable process. This includes investments in our IT infrastructure, our ERP implementation, and adding or redeploying our key resources, including Mike as CFO; Kevin as VP of Sales; and Rob taking on the role to lead our Allied Systematic Tools or ASP initiative. ASP employs lean manufacturing processes and continuous improvement practices throughout our company. We are making some measurable progress in our transformation to One Allied organization as well. Strategy deployment has been initiated all business units. We’ve completed the standardized of KPIs or key performance indicators, and we’ve rolled out standardized daily management and quality processes. We view these investments as essential to achieve our vision of becoming a global leader of high-value motion control solutions for our targeted markets. Looking at Slide 5, there were several favorable indicators coming out of the first quarter that we believe point to our markets beginning to stabilize. Compared with the fourth quarter of 2015, revenue was up 25%, and earnings improved about 3x. Sales from our vehicle markets turned up measurably, which is encouraging. Although I must note that sales are still below historical levels, and we continue to receive mixed signals from this market. We also had sequential growth in our medical and industrial markets. We are gaining traction as a solutions focus company with several multi-product, fully integrated solutions in production, and with several other opportunities in our sales pipeline. Kevin McNich who has joined us our VP of sales late in the quarter and his initial priorities are to continue the development of the One Allied global sales team and further develop our market channel strategy. Kevin brings more than 30 years of sales, marketing, and executive leadership in machine automation and motion control, including time with Parker Hannifin. While we use cash in the quarter, we will continue to manage the company to generate solid cash flows from our operations. Mike will provide more color on our plans to refinance our higher costs debt a little more flexible and lower costs credit facility. In turn, this should provide us with greater financial flexibility to support our acquisition strategy in the future. With that, let me turn it over to Mike for the review of our financials. Mike?

[Michael Leach:]

Thank you, Dick. Please refer to Slide 6. As Dick noted, revenue increased 7% in the 2016 first quarter, primarily from the Heidrive acquisition. Sales to U.S. customers were 55% of total sales for the quarter compared with 67% in the same period last year, with the balance of our sales to customers, primarily in Europe, Canada, and Asia, improved sales to Europe were from the addition of Heidrive and the better European economy. Looking at Slide 7, operating income for the quarter declined on a less favorable product mix and higher investments in E&D, helping to partially offset margin pressure with a continued shift to more solutions oriented sales with an increase in efficiencies tied to the application of the ASP. E&D expenses as a percent of sales was 6.4% in the quarter, up from 5.8% in the first quarter last year. While there was additional E&D from Heidrive, organic investments, both in dollars and a percent of sales were higher. SG&A expenses increased to $1.1 million, or 13.8% from the prior year quarter. The increase was primarily due to the addition of Heidrive’s expenses, the build out of key corporate resources, and investments in technology system. We’ll now move on to Slide 8, where we’ll look at adjusted EBITDA and EBITDA margins to gauge our performance. We use adjusted EBITDA, because we believe it’s a good measure of our operating performance. It is also an internal metric. These are non-GAAP measures. So, as Debb mentioned, please review our reconciliation and related disclosure in our release and at the end of the slides. For the first quarter 2016, adjusted EBITDA decreased to $7.4 million from $8.1 million last year, reflecting the significant investments we are making to shift the business to a greater share of higher margin solutions work and to realign our organizational structure to drive future earnings power. As Dick said earlier, these costs come with our initiatives to scale our sales and drive operating performance. As we make this transition, we expect it to be and reflected in EBITDA and earnings for the short-term. Net income was $2.1 million, or $0.23 per diluted share in the quarter compared with net income of $3 million, $0.32 per diluted share for the first quarter 2015. Turning to Slide 9, for an overview of our balance sheet. We ended the quarter with a cash balance of $6.3 million compared with $21.3 million at year end 2015. Lower cash balances reflect the purchase of Heidrive. We funded the acquisition with cash on hand in our European operation and approximately $11 million of debt from an expanded credit facility in Europe. Inventory turns were 5.0 in the first quarter compared with 4.9 at year end and 6.0 in last year’s first quarter. Our DSO was 41 at March 31, 2015, compared with 44 days at year end and the 2015 first quarter. Changes in working capital, as well as the payment of certain assumed liabilities from the Heidrive acquisition resulted in 6.9 million in net cash used in operations in the quarter compared with net cash provided by operations at $0.7 million in the first quarter 2015. First quarter capital expenditures were $1 million, down from $1.4 million in the 2015 first quarter. We now expect capital expenditures for 2016 to be slightly higher than 2015. We expect capital investments at a range of approximately $5 million to $7 million, which will be a combination of growth and maintenance capital. The increase of total debt to $77 million was a result of the portion of the Heidrive transactions funded with debt. Debt, net of cash was $70.7 million, or 50% of net debt to capitalization at quarter end. We expect to reduce debt during the remainder of 2016. We’re also currently evaluating options regarding our $30 million, 14.5% senior subordinated note that allows for early payment in October this year. We’re talking to a number of banks and expect that will be able to both substantially lower our cost of debt, while also providing greater flexibility for future growth. Bookings of the 2016 first quarter were $66.4 million, an increase of $8.3 million, or 14.2% from $58.1 million, the same period last year. Backlog at the end of 2016 first quarter was $81.7 million, an increase of $10.7 million, or 15.1% from $71 million at 2015 year end. The growth in bookings and backlog was primarily due to the Heidrive acquisition. I’ll now turn the meeting back over to Dick.

[Richard Warzala:]

Thank you, Mike. As you can see on Slide 10, we expect that 2016 will be a year of transition and transformation, as we advance our strategy to make Allied, the global leader in motion solution in our target market, which include vehicle, medical, aerospace and defense, electronics and industrial. Some of our strategic initiatives for the year include advancing our One Allied approach to drive continuous opportunities for organic sales gross – growth to higher value-added motion control solution. Leveraging our solution centers and technology units in Europe, North America and Asia is designed custom engineered and motion control solutions that create game changing value for our customers. Leveraging our global manufacturing footprint for production and distribution efficiencies that benefits the company and our customers, building Allied Motion’s recognition in the motion control market worldwide by capitalizing on the strength of our growing brand portfolio. Enhancing our IT infrastructure to improve communication, project management, and efficiency, company wide. As noted on Slide 11, acquisitions are a key component of our growth goals, and we will continue to be selective and disciplined in our approach to opportunity. We will continue to strengthen our balance sheet by further reducing the amount and cost of our debt. And last, but not least, the unwavering commitment to AST throughout the company to drive continuous improvement in quality, delivery, cost, and growth. Looking at Slide 12, we defined our vision to become the motion solutions leader in our target markets. While we have made significant progress in growing our company in the past, I can assure you that the entire team at Allied is focused and is working hard to drive a continuation of our performance in the future. With that, let’s open the line for your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Greg Palm of Craig-Hallum Capital Group. Please go ahead.

[Greg Palm:]

Good morning, everyone, and congrats on the nice rebound, the results there in Q1.

[Richard Warzala:]

Thank you, Greg.

[Michael Leach:]

Thank you, Greg.

[Greg Palm:]

First, I wanted to get your thoughts on some of these multi-product motion control solutions that are moving into production in the quarter. Can you say whether these are new customers and then just directionally, how should we be thinking about the impact, the benefit in terms of revenue and margins as more of these new solutions move into production this year?

[Richard Warzala:]

Well, to answer your question, the first question is, whether they’re new customers, the answer is, yes. We do have new customers, in addition to working on the applications with existing customers and expanding the component – our component solutions into a more complete motion solution. So we’re doing both. The question about the impact on our revenues and our margins for the year, as we stated all along the margins that we are generating on these new multi-product solutions are typically higher than what you see from a component standpoint. So that’s our goal to improving margins. In terms of revenues, we have a – obviously constant as we mentioned several times here our goal is to grow organically and through acquisition, so our goal is to grow organically as well.

[Greg Palm:]

And is it safe to assume the incremental benefits will increase as we go throughout the year. I mean, how much of an impact was it in Q1?

[Richard Warzala:]

I have to say that it’s not safe to assume anything with the markets that we see today. And sometimes also, Greg, I think the challenge here is that when there were new products being launched and our customers sometimes, we’re at their mercy, and we are at the mercy with their market. So sometimes there we see very well and accelerate and sometimes not as fast as what it’s been forecasted. So I don’t think it’s fair for us to make any forecast based upon what’s going to happen here – through the year with these new projects.

[Greg Palm:]

Okay, makes sense. Shifting gears to Heidrive, you said it was a creed of nice – obviously benefit on the top line, you bounded for almost four months now. What are the biggest opportunities there in terms of new customers, new markets, et cetera?

[Richard Warzala:]

Yes, new customers is – certainly they have a strong basic customers as we’ve mentioned several times. They are primarily in Europe, they do have some business in Asia, and the customer base that they do have is a blue-chip listed customers. The opportunities that we see and I’ll mention it again is that they had – they designed their product line from a platform approach of standard products with configuration to order, the opportunity, which gives a millions of different end items that they can create based on a limited number of standard subassemblies. We setup their line, where they have multiple production lines. They have a production line that were higher volume runners. They little longer setup time, but a little bit faster cycle time or drop off rates on that line. So if the volume goes up, they have segregated the higher volume production line from what they also have, which is the ability to do a lot size upon with zero setup time, or assembling, let’s call it a standard product with – that’s configure to order based upon options. They’re well advanced in that area. Products are high-performing in terms of – they define it by high dynamic line, which is higher dynamic performance in lower voltages and then their premium line, which is – higher voltages, which expand our capabilities and also have the ability to achieve different levels of performance than the dynamic line. So there is – they address both markets and typically these are enclosed with server system. So we see that opportunity for us to take that product line and really generate additional revenues through our channels around the world. And I’d say also their technical expertise is very good. We’re working together and already working together with the other Allied operations on several projects. And they have a sales force that’s in the German market, which we certainly are going to work on as I talked about a one team approach to sales works underway to help best to integrate the sales efforts in Europe also. So we’re very encouraged by it.

[Greg Palm:]

Great, it’s in terms of M&A in general, what’s your appetite going forward? And how do you view kind of most significant criteria when you think about acquisitions? Is it new customers, new technologies, new geographies, any color that would be helpful?

[Richard Warzala:]

Strategic fit, I think that’s sums it all up here and we have a well defined strategy and we basically what we’ll do is reverse engineer the company very quickly in our minds and on paper to make sure that is a good strategic fit. And there’s several of those factors that come into play. So I can’t say there’s just one, or what’s the higher priority other, but it certainly we know from our past experience it’s not good strategic fit, it doesn’t fit into our long-term strategy, it doesn’t get through our strategic filter well, it’s probably not for us.

[Greg Palm:]

Okay, thanks for all the color and good luck going forward.

[Richard Warzala:]

Thank you, Greg.

[Operator:]

[Operator Instructions] Our next question is from Jeff Geygan of Global Value Investment Corp. Please go ahead.

[Jeffrey Geygan:]

Good morning and thank you for taking my call.

[Richard Warzala:]

Good morning, Jeff.

[Jeffrey Geygan:]

You mentioned throughout your prepared comments various goals. Can you describe in greater detail your margin goal?

[Richard Warzala:]

Higher than what we have today. There’s – as we talked about, there is various factors that come in to play and our mix, we have – we talked about the different markets that we service there, vehicle that we do serve, vehicle, medical, aerospace, and defense et cetera. So we can be impacted at any particular quarter based upon the mix. And so from a margin standpoint from a – we talk about our gross margins. You have to look at these markets different in some you have an opportunity to generate higher gross margins, while others they’re much more competitive and there are higher volume opportunities, but the margins will be lower. So it’s really the combination and for us to sit here and say based upon what we’re doing today, based upon the new opportunities that we’ve talked about that are coming to fruition and others in the pipeline. We would expect the margin to increase, but I wouldn’t give you a firm number today.

[Jeffrey Geygan:]

Fair enough, so clearly it’s a function of mix that will ultimately determine your gross margin?

[Richard Warzala:]

Correct.

[Jeffrey Geygan:]

Okay, thank you. With respect to the refinancing of your higher cost debt, can you discuss the terms that you would assume; you will be able to lock into as well as related that the amount that you might refinance it almost sounded as though the number may be different than the debt outstanding?

[Richard Warzala:]

I think what I’ll do is, and Mike has done a significant amount of work on this and we’ve rolled down the path here looking at our options. So I think as you can appreciate, we’re probably don’t want to keep those options open as we’re receiving feedback from the market here

[Michael Leach:]

Yes, just generically speaking, again I think our objective is strategically relative to our credit facility is to create a facility that’s on the right size and shape to accommodate our future inquisitive goals, while minimizing our risk and creating flexibility. So we were – as Dick suggests, it was strolling down that path with the number of conversations with the large group of banks. I think you can – I think it’s safe to assume that you were looking at a facility larger than our current structure simply again to have the flexibility going forward to be inquisitive. The bank market is strong right now I believe, particularly in the pro rata term A type of market. So I think pricing is solid. So wouldn’t deviate terribly from what you’ve seen in prior pricing if you will from a term perspective. And I think there’s lots of options available to us in terms of structure with larger revolvers delay draw, according features again structure that will support future growth and I think those opportunities are in front of us.

[Jeffrey Geygan:]

Very interesting. Thank you. That’s good to know. And finally for me, with respect to the use of your balance sheet and I think you’ve been quite astute with that over the last few years. Your cash levels at a relatively low level, what would be complex of your balance sheet have to look like in order for you to contemplate another acquisition?

[Michael Leach:]

I think our balance sheet is strong enough and in certain state to consider acquisitions, or even multiple acquisitions, frankly. Again I think the credit facility will provide us that flexibility. We’re not – we think certainly our free cash flow is strong enough to support the additional amount of leverage on the company and we generate frankly a strong cash flow in all geographic markets if you will to be creative with that structure as well.

[Deborah Pawlowski:]

And with the lower cost of capital of course that we were churned on in that capital, that’s greater too.

[Jeffrey Geygan:]

Understood, today you’ve been very judicious in with the use of the equity financing, would your current structure with an acquisition or size imply that you might issue equity?

[Michael Leach:]

I don’t think that we’ve addressed that in the short-term here, but we certainly discussed it internally about at what point and if we would utilize equity to acquire someone and it really depends on size and number of other market factors that come in to play, certainly the price of our stock, the size of the acquisitions, debt risk that we would have to take on, so forth. So we’re not against it given the right opportunity. And we typically encourage a small amount of equity when we’re buying private companies and/or even for management to get engaged and be a part of the long-term success for them to realize their success also. So it’s certainly an option for us going forward. As you know we haven’t utilized it in the past much other than a small amount with a few of the acquisitions that we done and if something comes along that makes sense for us down the road, we’re certainly not against looking at it.

[Jeffrey Geygan:]

Great as a current equity holder of course my preference would be not to non-dilutive acquisition…

[Michael Leach:]

Of course.

[Jeffrey Geygan:]

But of course I believe you.

[Michael Leach:]

We understand that and I think one of the – when we talk about mostly as I’ve heard that right from the day I started working for this company several years ago is that that’s the preference of the equity holders, it’s non-dilutive and the only thing – my only comment back to that is, is although our number of shares have increased, our market cap is increased. And if we look at the value, the two value of your holdings versus the percent of holdings. I think that’s the way we would look at it, make sure that value to you as a shareholder to all shareholders actually will increase. And I know you look at percents, but it’s truly the value.

[Jeffrey Geygan:]

Fair enough. Final question, your prior call, it was quite a bit of commentary on the FX, I didn’t recall as much on this call and obviously now you have your – additional European assets, would you care to comment it on the FX circumstance?

[Michael Leach:]

Yes, the FX had minimal impact in the quarter. We’ve gone through the full-year of FX increases, things have swung a little bit. So quarter-over-quarter, the FX rates were very similar and the bottom line impact was minimal.

[Jeffrey Geygan:]

Great. Thank you for taking my and best of luck.

[Richard Warzala:]

Thank you, Jeffrey.

[Operator:]

The next question is from Michael McCroskey of Principle [ph] Securities. Please go ahead.

[Michael McCroskey:]

How is everybody doing?

[Richard Warzala:]

Good, Michael. Yourself?

[Michael McCroskey:]

Steady at the moment, steady at the moment. Quickly, I saw the report came out from Craig-Hallum that – just to clarify that relationship is completely independent at this point, correct?

[Deborah Pawlowski:]

Yes.

[Richard Warzala:]

Yes.

[Michael McCroskey:]

Okay.

[Richard Warzala:]

And by the way, Greg, who was asking the questions from start, he is from Craig-Hallum.

[Michael McCroskey:]

Yep, I notice, they were on Board, we welcome him, just wanted to – just want to make sure I understood the relationship.

[Richard Warzala:]

Okay.

[Michael McCroskey:]

Others comment new and the presentation, the slides everything, great job really, really stepped up the bar on that side whatnot being closed, I appreciate it.

[Richard Warzala:]

Thank you.

[Michael McCroskey:]

The improvement in Europe is obvious and got to do with the acquisition. But that’s a fair bump down on the U.S. side, can you give a little more of a feel there if any concern or just a bit of an item on the...?

[Richard Warzala:]

I think…

[Michael McCroskey:]

[Multiple speakers]

[Richard Warzala:]

Sure. If we talk about, I mean, if we focus on what happened in the fourth quarter compared to where we were in the first quarter, okay, we’ve actually said, it’s – we’ve seen it now returning, it’s not at historical levels, but it is returning to a more, I’ll call it, I don’t want to call normal is, but I don’t know what normal is sometimes in the markets here. But we have a variety of markets, and we are – we’ve seen some improvement here from fourth quarter to first quarter of this year.

[Michael McCroskey:]

Okay. So you’re feeling good with the trend line there. And maybe I’m misunderstanding, I’m referencing Slide 5 and 6 on the commentary on the vehicle market. Slide 5 is obviously very optimistic about that you’re on the vehicle market. But now on Slide 6, you talked about lower vehicle market sales, am I missing something there or…?

[Richard Warzala:]

Well, Slide 5 talks about a positive trend. So the trend again over Q4 of 2015 is positive.

[Michael McCroskey:]

Okay.

[Richard Warzala:]

So what is [Multiple Speakers] okay.

[Michael McCroskey:]

….between Q1 last year and Q4?

[Richard Warzala:]

Correct.

[Michael Leach:]

Correct.

[Michael McCroskey:]

Perfectly understand. That’s it. More solid movement, guys. I appreciate everything how you are doing.

[Richard Warzala:]

Thank you, Michael. And we appreciate that you’ve been on a long time. We appreciate that.

[Michael Leach:]

Thank you, Michael.

[Michael McCroskey:]

[Multiple Speakers] anywhere…

[Richard Warzala:]

Oh, great. There are no further questions at this time. I would like to turn the conference back over to Mr. Warzala for any closing remarks.

[Richard Warzala:]

Thank you, everyone, for joining us on today’s call and your interest in Allied Motion. For those of you in the New York City area, we’re going to be attending the Houlihan Lokey Conference on May 19. So let us know if you are interested in meeting with us at the conference. And again, thanks for participating and have a great day and we’ll talk to you next quarter.

[Operator:]

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