Allied Motion Technologies Inc.
Q3 2016 Earnings Call Transcript

Published: 6 Nov 2016

[Operator:]

Thank you for standing by. This is a conference operator. And welcome to the Allied Motion Technologies Third Quarter 2016 Financial Results Conference Call. As a reminder, all participants are in 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, Moderator and Investor Relations for Allied Motion Technologies. Please go ahead.

[Deborah Pawlowski:]

Thank you, John. 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 be reviewing our third quarter results and provide an update on the company’s strategic progress and outlook. After that we will open it up for Q&A. You should have a copy of the financial release -- results that were released this -- yesterday after the market closed before, and if not, you can find them on our website at www.alliedmotion.com. If you have not yet received the slides that accompany our discussion today will also find them on our website. If you’re viewing those slides, if you will turn to the second page 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 Securities and 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 to comparable GAAP measures in the tables accompanying today’s earnings release. So, with that, if you turn to slide three, I will turn the call over to Dick to begin. Dick?

[Dick Warzala:]

Thank you, Debby, and welcome everyone to our call. Third quarter revenue was relative similar to last year as growth in our Aerospace and Defense and Medical markets driven by the addition of Heidrive offset the impact from lower sales in our Vehicle market. As a reminder, our remainder Vehicle has a diverse set of submarkets and applications, some of which are proven challenging while others have reached end of life in the program. We continue to maintain the competitive position, as well as having success, developing new applications for the future. The integration of Heidrive, which we acquired at the beginning of the year is moving along well. Heidrive was definitely additive in terms of products, solutions, engineering capability and technologies that support our ability to develop innovative motion solutions and increase market share in Europe and beyond. It is proving to be an excellent addition to Allied Motion. We believe it is a special to our future to continue making investments in engineering and design, IT infrastructure, ERP implementation and our sales in technical solutions development teams. The additional investments we are making in people and infrastructure, enhance performance measurement, productivity, collaboration and communication, an improved and standardize processes across the company. These investments also further our One Allied approach from both an internal and customer facing perspective, while increasing the power of our Allied Systematic Tools or AST. E&D expenses are running at about $4 million for quarter, up from an average of $3.6 million last year. The increase is because of opportunities we have for market based applications, as well as customer projects with multi-product solutions that leverage our large motion products portfolio and full technical capabilities. We continue to make progress toward becoming more of a solutions provider. The infrastructure and capabilities to support this transformation is a multi-year project and we will continue and working on that well into the future. Ultimately, we believe our One Allied present the unique value proportion for our customers and will lead the significant sales opportunities that will drive revenue growth, margin expansion and higher earnings. As we have mentioned before there are several multi-product fully-integrated solutions now in production. We also have several others that are expected to move through product development and into production during the later part of 2017, into 2018 and beyond. We continue to reduce debt in the quarter, which was down just over $8 million from the end of the first quarter. Higher debt and cash usage at the beginning of the year was due to the Heidrive acquisition. We just completed the refinancing of our debt that significantly reduces our interest expense going forward and provides us greater financial flexibility to fund future growth initiatives and acquisitions through an expanded credit facility. We are very pleased with the outcome of the refinancing and Mike will provide more detail in his discussion. With that, let me turn over to Mike for the review of our financials. Mike?

[Mike Leach:]

Thank you, Dick. Please refer to slide four. Dick touched on the changes that affected our, we did see a shift in geographic mix given those changes. Sales to U.S. customers were 56% of total sales for the quarter, compared with 66% in the same period last year, with the balance of our sales primarily to customers in Europe, as well as Canada and Asia. The increase mix in rest of world sales, which was mostly in Europe came from the addition of Heidrive. I should note that the impact of exchange rates was not significant. Please turn to slide five, gross profit decrease at lower volume, a less favorable product mix and under absorption of costs in certain production facilities. The increase in operating expenses was primarily due to the addition of Heidrive and growth driving investments in sales and technical resources, systems and E&D. Selling expenses were 4% of sales compared with 3.2% in last year’s third quarter, with the increase due to the addition of Heidrive along with investments made to grow the One Allied sales organization. G&A expenses as a percent of revenue improved by 110 basis points to 8.6% primarily due to lower incentive compensation expense. E&D expenses increased 18% to $4 million and as a percent of sales was 6.5%, up a 110 basis points. As Dick noted, E&D was primarily customer and application driven. Looking to slide six, net income was $2.5 million, our low operating income and a higher effective tax rate of 29.9%, which was up from 24.2% in the prior year quarter. Earnings per diluted share were $0.27 compared with $0.46 last year. The lower tax rate in last year’s third quarter reflect the mix of foreign tax rates and the benefit of tax valuation allowance reversal associated with one of Allied Motion’s international operations. For 2016, we expect an effective tax rate of approximately 32%. 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. So as Deb mentioned please review our reconciliation and related disclosure in our release and at the end of the slides. For the third quarter adjusted EBITDA was $8.1 million or 14.2% of sales, compared with $9.4 million or 15.3% last year’s third quarter. Turn to slide seven for an overview of our balance sheet and cash generation. We ended the quarter with a cash balance of $12.5 million, up $2.2 million from the end of the sequential second quarter. Cash balances were down from year end because we use cash to fund approximately half of the Heidrive acquisition from cash on hand in our European operations. Year-to-date cash generated from operations was $10 million and for the trailing months was $16.3 million. Capital expenditures were consistent at $3.7 million for the first nine months of the year. Total debt was approximately $69 million at quarter end. We reduce the debt balance $4.4 million from the end of June, and as Dick mentioned, our debt balance is down nearly $8 million from the end of first quarter, when it was elevated for the Heidrive acquisition. Debt net of cash was $56.7 million or 43% of net debt to total capitalization. Inventory turns were 4.9 times at the end of the third quarter, which is consistent with 2015. Our DSO was 43 days at September 30, 2016, compared with 44 days at year end. On slide eight the highlights of our recently completed debt refinancing, which going forward significantly reduces our interest expense and increases our financial flexibility. We obtained a new senior secured revolving credit facility of $125 million that replaces our $30 million revolver and $50 million term loan facility. We use the initial proceeds to redeem our $30 million, 14.5% interest senior subordinated due notes that will due 2019, which allow for prepayment in October [ph] 2017 (10

[Dick Warzala:]

Thank you, Mike. We'll now turn to slide nine, which shows our orders and backlog. Orders for the quarter were $59.1 million. This represents a decrease of about 14% from the second quarter, so up about 7% over the prior year quarter. On a year-to-date basis, orders were up 9% to $194 million. Backlog of $77.7 million was down about $3 million from the end of June was up about $10 million from the 2015 third quarter end. Year-over-year, higher orders and backlog primarily reflect the addition of Heidrive. On a sequential basis lower backlog of orders reflects the market softness I spoke to earlier. We expect these challenges to continue in the fourth quarter and going into 2017. We are looking at new products and applications to gain new customers and expand our reach with existing customers. Due to the long development lead times of solutions projects, we will continue to see some new design wins coming on board through 2017, while several of our market base and customer specific opportunities are on track for 2018 and beyond. On the slide 10, our One Allied approach is design to drive organic growth building a more integrated and collaborative organization that provides a stronger value proportion for our customers. We offer a one stop solution for the design, engineering and manufacture of precision motion control solutions. We continue to advance that strategy and over the last few quarters have worked to further integrate the sales organization with the goal to simplify the sales process for our customers and drive greater global recognition of the Allied brand. While we have been impacted by softness in some of our vehicle submarkets, we are having success with a variety of other vehicle applications that will be realized as new products and solutions role out the over next couple of years. We are pleased with the gains we are making in the Aerospace, Defense and Medical markets, where we are achieving measurable result and our growth prospects are strong. We also continue to invest in our extensive motion products portfolio. This supports our effort to develop new applications to support market based end customer solutions are also providing more near-terms sales opportunities for our solutions. We continue to look for acquisitions that expand our capacities, extend our geographic reach and/or add to -- and diversify our customer base. In pursuing acquisitions, we remain discipline and targeted our approach for both up pricing and strategic [ph] bid (14

[Operator:]

Thank you. [Operator Instructions] The first question today comes from Dick Ryan from Dougherty. Please go ahead.

[Dick Ryan:]

Hey. Thank you. Dick, I am just trying triangulate some of the comments, I think, on last call, you talk about markets being in a non-growth mode and then in your slide it says challenges in Q4 in 2017. What sort of visibility, how far in the 2017 does this stretch and maybe can you address, I mean, are the markets continuing to get worst or are they stabilizing and just not seeing an uptick, can you kind of give us a little more perspective on what you are seeing in the order pipeline.

[Dick Warzala:]

Sure. I think, Dick, as we have mentioned and we continue to mention is that we talk about markets, we talk about our specific served segments of those markets. So in Vehicle we have many applications across the broad range of Vehicle applications off-road, agricultural, construction, automotive, marine, et cetera. So what we have seen is that in our served segments, let say, for example, automotive, there has been a downturn in demand and do we expect that downturn in demand for our served segment to continue into the future based upon orders we are seeing in the pipeline today, is that, we are seeing it stable and we don’t see a major uptick there, but so I would say to you, that’s one area that we have an impact. The other thing that affected us this year too was on these programs typically there is a define period that they run and for automotive you might be looking at six, seven, eight years in the program and we did mention that we went end of life on a programs, which means the program ran out. We are working on additional programs to replace as we talk about these customers applications and coming online, but we have got to find dates and volumes, and so forth, with those. So we get -- we have some good visibility, but there is a gap there from when we have had a few run end of life into one we will see new projects or new programs kick in. In many of our other markets, we are not -- we are seeing stable and we are seeing modest growth, and we mention aerospace and defense, we mentioned medical, industrial, that’s what we are seeing and we are also expanding our reach into those markets by leveraging some of the capabilities that have been brought in by Heidrive along with other products within Allied Motion and again that -- there has been work behind scenes to get that ready for launch and we believe we will accelerate growth in the industrial segment, as well as help support in some of the other service segments. What I was going to say, oh, major projects and market solutions, we are working on those quite actively. We have identified where we feel there are some significant opportunities for the company in the future and we are making a significant investment now to realize those. Our programs and projects, they can go anywhere from 18 months to three years before you actually get them launch into production. So we continue to mention that we have had developing pipeline of activities, of multi-product solutions, that is correct and it’s not by selling something off the self, customer calls today and they place an order and you are buying goes up immediately, we’ll also designing lead time and it’s -- and then there’s an acceptance of their products in the marketplace and then development of production. So, I would say, because that kind of gives you an overall picture of what we are seeing.

[Dick Ryan:]

Sure. In Aerospace and Defense in particular, I mean, you’ve got the dynamic that the OEMs have multiple year backlogs, you’ve got a flattish wide body sort of market when you look at orders and near-term deliveries, that you got ramping narrow body fleet coming at you. How do you guys playing in the E&D side and is it more new builds, is there, any benefit from the retrofit side or after-market side of the Aerospace cycle?

[Dick Warzala:]

We are playing in all those segments, so it is impacting us, I mean, when you see the downturn in spending in Aerospace and Defense that we’ve had in -- we definitely get impacted by, but we are working on all phases of it. So we are in aftermarket, we are in replacement, we are in new projects and new products come into fruition so for. So we see that as an important segment for us and its one that we are placing a great deal of emphasis on.

[Dick Ryan:]

Okay. And Mike is there any effects -- impact to speak over that you thinking of for the rest of this year?

[Mike Leach:]

No, Dick. It’s been relatively flat and had a minimal impact to both topline and bottomline of the P&L.

[Dick Ryan:]

And taxes, how should we view those?

[Mike Leach:]

Well, I think, we’ve said that we believe taxes for the full year falling around 32%.

[Dick Ryan:]

Okay. So at that level. Okay. Great. Thank you.

[Dick Warzala:]

Thank you, Dick.

[Operator:]

The next question is from Greg Palm with Craig-Hallum Capital Group. Please go ahead.

[Greg Palm:]

Good morning and thanks for taking my questions.

[Dick Warzala:]

Good morning, Greg.

[Mike Leach:]

Good morning, Greg.

[Greg Palm:]

Just sort of curious going on back to earlier question, I mean, how should we be thinking about kind of this ramp up of new awards versus the run-off of some of your end of life business that you’ve been talking about it, is it sort of an offset or is there some other dynamics that we should be thinking about?

[Dick Warzala:]

Well, I mean, the life is, I mean, obviously, much easier to predict based upon having contracts in hand and having had them over several years. And so we do have good visibility on that. The only caution I give on new projects and new programs is it, we’ve learned anything over the years, they have a tendency to stretch out unfortunately, I mean, we start out with dates that were given and then -- and it is not unusual to see them stretch out. But I would tell you that depending on the segments that we are working in -- in the markets that we are working in, some of it is much more stable than others where you know it’s a multi-year program and what the demand, I mean, at least the forecast demands going to be, as far as, an offset goes, we believe that, the new programs that we are working on and have worked on over time were more than offset the programs that have been going end of life or they are schedule to go end of life. And then, I would caution there is, is that, if we were to look at it today and you are asking me, well, when do they, do they overlap and do they replace, while it may look that way today it had -- it could change in the future and we’ve experienced teaches with anything it will change.

[Greg Palm:]

Got you. I mean, anyway to quantify sort of the impact of some of that end of life business, I am just trying to bridge kind of your Q3 revenue results compared to Q2, how much of the difference there was, was a result of additional end of life business versus maybe incremental weakness that you are seeing in the markets?

[Dick Warzala:]

Yeah. Well, I would tell you this that end of life weakness is not the majority or even a significant portion of that. It is a portion of it. What we do have is that I know you are well aware of certain segments that we do service in markets that we are servicing. They’ve had some challenges and then, of course, it flows down to us. So I would tell that the end of life is known. We could plan for it, where market conditions impacted our ability to do to increase revenues where we thought going into the year, we would be able do that. There are some factors that were just beyond our control that we couldn’t do anything about. So, again, I continue to say, we tell you the segments we are servicing. If you pay attention to what’s going on in those, you’ll have a good handle on how they will impact us in the future too.

[Greg Palm:]

Make sense and then going back to the kind of this pipeline building for kind of later ‘17 and the ‘18, should we assume those sort of new awards are for existing served markets, are there new customers there, any other clarity or details would be helpful.

[Dick Warzala:]

Yeah. The answer is both. We are working on with existing customers, the next-generations, we are working with several new customers or new solutions and expanding our reach into the solution offerings that we already have. So I’d say the answer really is both.

[Greg Palm:]

Okay. Then just a couple more from me. Congrats on the refi and the new credit facility. You know sort of sounds like M&A. It’s becoming a top priority. So what opportunities are you seeing out there currently when you think about M&A, is your strategy to grow through smaller bolt-on deals or is there still an appetite for another one of these kind of large transformative deals like Globe?

[Dick Warzala:]

I think we are clearly very interested in a large -- larger deals. So bolt-ons are also in play for us that when we look at a bolt-on we want to make sure truly is a bolt-on as we get larger and larger, we also feel that our acquisitions can become larger. So we are actively looking and we are not afraid to look at acquisitions of better decent size and I think our credit facility here puts us in a position where we’ve got good certainty going in, and knowing what’s behind us and in the past for us with the credit lines we would have to go back and we would have to get approval and we you do an acquisitions, the certainty of closing is one of the first questions you can ask. So I think it puts us in a very strong position and we will look and continue to look both. We have identified targets where we are initiating the action and we are also in -- on the list of several investment bankers, so that one things do come to market, we are part of the process. So, we do both.

[Greg Palm:]

In terms of…

[Dick Warzala:]

Primarily a larger -- primarily larger ones would be our emphasis and our focus.

[Greg Palm:]

Okay. And just in terms of timeline, could we see something another one this year, is that a first half 2017, I mean, I know there’s no really crystal ball clear answer. But what sort of the environment looking like out there?

[Dick Warzala:]

Well, if somebody, what we have seen if someone decides that they want to sell for whatever reason then typically they want to move really quickly that’s the environment we are seeing. They want a long contracted drawn out process. They want to move quickly. That I just related back the Heidrive acquisition last year when we got engaged in that in October, we were basically done in December, able to close right after the first of the year. So, I think, what we’ve seen is, in most cases there is a desire to accelerate not drag out the process, I mean, Globe took much longer, but that was for different reasons. So is it possible, yes, is it likely, I mean, I can’t say to you, if I say to you, no, Greg, it’s likely and then something pops that happens then the day and things that we are working on where someone wants it quickly and they say, well, you guys talking about taking a longer approach to this thing. So I said, I rather not go on record and say, it’s going to happen this year or early next year, let’s just say, we are going to do what it takes when we find the right opportunity to get it close as quickly as possible bringing into our portfolio.

[Greg Palm:]

But it’s probably correct to say that M&A in general is a top priority going forward, right?

[Dick Warzala:]

It is correct.

[Greg Palm:]

Got it. Last one from me, just on OpEx, really nice job containing cost in the quarter, it was down pretty significantly compared to your kind of first half run rate and a lot lower than what I was expecting, anything unusual going on there in the quarter, is this sort of a good run rate going forward?

[Mike Leach:]

Again, I think relatively nimble, Greg, as our organization is trying to respond, again, with volume being down. I think earlier as you point out the organization did a good job, be very cost conscious and real things, in terms piece of that is incentive compensation expense being down as a result of profitability down as well. So, I think, to the extent that results are similar going forward, it should reflect that, to the extent that things swing favorably, we will adjust as we unusually do.

[Greg Palm:]

Okay. Thanks for the color and good luck.

[Dick Warzala:]

Thank you.

[Operator:]

[Operator Instructions] The next question is from Sam Schaefer with Global Value Research Company. Please go ahead.

[Sam Schaefer:]

Thank you for taking my questions this morning.

[Dick Warzala:]

Hi, Sam.

[Sam Schaefer:]

And looking at the backlog, how do your characterize have changed in backlog and how should we think about this as a performance measure?

[Dick Warzala:]

Well, I think, when you’re looking at, the changes in backlog, I think, you’ll see in there the impact from the end of last year to first quarter of this year the addition of Heidrive.

[Sam Schaefer:]

Okay.

[Dick Warzala:]

I think you are also seeing that the backlog has, it stayed relatively stable, orders were down in third quarter this year, but I think you compared the orders last year in third quarter, they were also down and knowing that our backlog, if the way we actually, well, we call backlog and if you back a number of years, we made an announcement that we are going to change the way we accept or we record orders and put them in backlog. And what we did is, in the past, I’ll go back a couple of years, we used to get blanket orders, where customers were committing to a firm amount for 12 months or 18 months delivery and we would book that as an order and put it into our backlog. We went through a year transition period where we decided that that cause some great spikes in orders and it was not really reflective of the way the business was going to flow that these blanket orders that we would receive would be called off on a pretty equal basis to the life of the order. So we stopped doing that and we only record orders in our backlog that we have firm production releases for or a -- I call a short-term forecast that’s required for planning purposes. In total, we also track what additional orders that have we received in the context of a frame order, okay, and some companies may report that in their backlog, we choose to take more conservative approach to smooth out the orders and the shipments and to only put them in there when we get a firm call out from the production releases or as I said for a planning purposes or a forecasted demand on a short-term basis usually less than three months.

[Sam Schaefer:]

That’s great addition insight into build out on that, can you provide any additional color on the size of the pipeline for new opportunities and awards?

[Dick Warzala:]

We are constantly working on a pipeline that is well in excess of our current backlog, let me just put it that way, a combined opportunities pipeline.

[Sam Schaefer:]

Okay. And then, recently you hired a new VP of Sales, stated objective to be in charge of the broader market channel strategy.

[Dick Warzala:]

Correct.

[Sam Schaefer:]

What exactly does this look like and how effective is this been to-date?

[Dick Warzala:]

Great question. We talk about channel strategy and we recognized very quickly with the addition of Heidrive that gave us a product line and the platform of products that we can leverage through a channel that has been typically under utilized by us. And that -- the distribution channels we call it and distribution channel, I want to clarify that in today’s motion market you are looking for the distributors who have the technical capabilities to support the lower volume OEM and end user business typically with more products or more of the solution that they would offer. So we have -- when working hard to identify who those potential adds to the market to our channel would be, as well as working internally to make sure that we put what we will call packages together to simplify the process once you decide to take that -- to march down that path of the distribution channel. We think it has significant growth opportunities, and as I said, its new to use and there is data out there that we see that’s published that would tell you that up to 50% of the sales in the motion market are through that channel. So I was hoping up a new opportunity for us and we are developing it. It takes some investment upfront to do that. We are developing in terms of identification of could be want in the channel, and secondly, giving our products and portfolio, our website and everything internally ready to go to support that when we do it, when we have an effective launch when it -- when we are ready.

[Sam Schaefer:]

I look forward to the benefit this will provide. Thank you for taking my question and good look with Q4.

[Dick Warzala:]

Thank you very much, Sam.

[Mike Leach:]

Thanks, Sam.

[Operator:]

This concludes the question-and-answer session. I would now like to turn the conference over to Mr. Warzala for any closing remarks.

[Dick Warzala:]

Hi, everyone. Well, thank you again for taking the time to be with us -- spend -- take the time to spend with us here and we appreciate your continued interest in the company. We will -- look forward to talking to you early next year. Thanks again and that will conclude the call operator.

[Operator:]

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