Allied Motion Technologies Inc.
Q1 2013 Earnings Call Transcript

Published: 10 May 2013

[Operator:]

Good day ladies gentlemen and welcome to the Quarter One 2013 Allied Motion Technologies Earnings Conference Call. My name is Matthew and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) I will now like to turn the call over to Sue Chiarmonte, Vice President, Secretary and Treasurer. Please proceed, ma’am.

[Susan M. Chiarmonte:]

Thank you, Matthew. Welcome to Allied Motion’s conference call to discuss the quarter ended March 31, 2013. We appreciate your joining us for this call today. We distributed press release earlier this morning and a copy is available on our websites at www.alliedmotion.com. Today’s call is being broadcast live on the Internet and will be available for replay immediately after the call for 90 days. To access Internet broadcast and the replay, go to the company’s website the investor relations page and click on the webcast icon. As a reminder, please note that the Safe Harbor statements including in our press release also apply to all comments made on this conference call. I will now turn the call over Dick Warzala, President and CEO of Allied Motion Technologies.

[Richard S. Warzala:]

Thank you, Sue, and welcome everyone to our first quarter 2013 conference call. Here is the plan for today’s call. I will begin with a brief review of the results for the first quarter and then discuss some of the key items that impacted those results. I will then turn the call over Rob Maida, our CFO, who will provide a detailed financial review of the quarter. Next I will then look out into 2013 and (inaudible) provide you with some insight to absolute significant activities and opportunities for the future. After that I will provide a brief summary before opening the mics for questions. Before we start, I want to thank Joe Bagan for his service on the Allied Motion Board of Directors and wish him well as he pursues his new business ventures. I would also like to provide a special acknowledgment to Del Hock, who retired from the Allied Motion’s Board after our Board of Directors meeting yesterday. Del served in just about every capacity possible during his 16 plus years on the Allied Board and his professionalism, wisdom and insight will definitely be missed. Now on behalf of the entire company and our shareholders, we would like to thank you for your valuable contributions during your long tenure on the Allied Motion’s Board. Let’s begin with an overview of the results for the first quarter of 2013. Sales in the quarter decreased to $25.1 million from $26.8 million in the first quarter of 2012. While sales were down on a like quarter comparison, sales did increase in the prior quarter, reversing the trend of a sales decrease over the last four quarters throughout 2012. Net income for the quarter decreased to $0.11 per diluted share compared to $0.14 per diluted share in quarter one of 2012. With regard to our bookings, we mentioned in the last conference call that we are going to change the process that we used to record and report them in the future. Our past practice has been book and report all orders including blanket orders, which could cover anywhere from 12 months to 24 months of demand. Beginning in 2013, we’ll no longer include the full value of the blanket orders when received. We will only report them as bookings as they are released to production. Orders for quarter one 2013 were $21 million without the blanket orders and were $25.3 million including blanket orders, which compares to the orders in 2012 quarter one of $23 million, which does include blanket orders. We will try to quantify that a little bit for you. What that means is that in our $25.3 million that we reported as in the same way as prior period, that included $4.3 million of blanket orders. On a linked comparison basis, we are up $32.3 million over the first quarter of last year. On comparing our served markets for the first quarter 2013 to the first quarter of 2012 aerospace and defense and industrial were up while medical, vehicle and electronics were down. Now I will turn the call over to Rob Maida, who will provide a detailed review of the financial results and then I will be back for the business review and a brief summary before we open the mics for questions. Rob?

[Robert P. Maida:]

Thank you, Dick and good morning. As is reflected in our press release that we put out this morning, the company achieved net income of $960,000 or $0.11 per diluted share for the first quarter ended March 31, 2013, compared to net income of $1.158 million or $0.14 per diluted share for the same period last year. Revenues for the quarter were $25.1 million compared to $26.8 million for the same period last year. This is a decrease of 6.3% with 7.3% of the decrease due to lower sales volume offset by 1% due to the dollar weakening against the euro and Swedish krona. The 6.3% decrease in revenues reflects lower sales at nearly all our (inaudible) and reflects 11.6% decrease in sales to U.S. customers and sales to customers outside the U.S. primarily Europe, Sweden and Asia being flat. As Dick previously mentioned, beginning in 2013, we are no longer reporting the full value of blanket purchase orders when received from customers and will only report them as bookings when they are released to production. To ensure an accurate comparison, we will also present bookings and backlog throughout 2013 in the same manner as prior year. Bookings for the quarter ended March 31, 2013 were $25.3 million compared to last year’s bookings of $23.0 million using our prior methodology and $21.0 million using our new methodology. Backlog as of March 31, 2013 was $28.0 million using the new methodology and was $31.4 million using the prior methodology, all compared to $40.9 million as of March 31, 2012. Our gross profit margins were up in the quarter with 30% this year compared to 28% the same quarter last year. The increase in margin primarily reflects sales mix and a one time charge of $238,000 recorded in Q1 2012 because of the estimated cost of replacing products in the field due to an incorrect component used by our one of our suppliers. Total selling, general and administrative expenses were 2.8% higher or $167,000 higher for the quarter as compared to the same period last year. This increase is largely due to higher compensation expense resulting primarily the hiring of additional engineering personnel, partially offset by lower incentive compensation. Depreciation and amortization expense decreased $76,000 for the quarter from $489,000 last year to $413,000 this year. Interest expense increased slightly for the quarter to a total expense of $9,000 from $7,000 for the same period of last year. EBITDA decreased 13% for the current quarter to $1.8 million from $2.1 million for the same period last year. And adjusted EBITDA, which exclude stock compensation expense and non-recurring items such as the $238,000 charge to replace the incorrect electronic components, decreased 17% for 2013 to $2.1million compared to $2.5 million last year. We had $298,000 of CapEx or capital expenditures during the quarter compared to $586,000 for the same period last year. The company used $1.3 million of cash during the first quarter and ended the quarter with over $8.4 million in cash and $399,000 in bank debt or net cash and debt position of $8 million, which compares to a net cash and debt position of $4.4 million at March 31, 2012. This increase of $3.6 million is primarily due to cash generated from our operations over the last year. Our strong cash position along with a variable rate of credit puts us in a good position to support our growth strategy in the future. Our DSO was 48 days at March 31, 2013, up from 43 days at both December 31, 2012 and March 31, 2012. This increase is primarily influenced by not being level loaded in our shipments during the quarter. Inventory turns increased to 4.4 turns from 4.1 at the end of 2012 and was down from 4.6 at the same time last year. Our net stockholder’s equity at March 31, 2013 is $43.1 million or $4.87 per share compared to $38.4 million or $4.44 per share at the same time last year. Our Board of Directors just declared a $0.025 per share cash dividend that is paid on May 30 for shareholders of record May 20. And with regard to our ERP implementation, we went live with our first implementation in late 2012 and are expecting two additional implementations in 2013; one in Europe and one in North America. With that, I will now turn the meeting back over to Dick Warzala.

[Richard S. Warzala:]

Thank you, Rob. I will now expand on our press release, provide an outlook for 2013 and discuss some of the key activities and actions that we will focus on to drive growth for the company in the future. As stated in our press release, sales in the first quarter of 2013 were down 6.3% compared to the first quarter of 2012 with sales in Europe flat and sales in the U.S. down a 11.6%. Sales in the quarter were up in industrial and aerospace and defense and were down in medical, vehicle and electronics compared to the same quarter last year. On the positive side, the quarter-to-quarter downward sales trend we experienced throughout 2012 was reversed in the first quarter of this year with sales increasing 4.9% in the first quarter of 2013 compared to the fourth quarter of 2012. I further commented that during the remainder of 2013, we will continue to closely monitor our served markets as we expect them to stabilize and provide growth as we move through the year. Our balance sheet is strong, which puts us in a good position to execute our growth strategy in the future. To further support our growth, our platform product development efforts continually create new opportunities for our company by designing innovative motion solutions that change the game and meet the current and emerging needs of customers in our served market segments. An important takeaway from the press release is that while sales are down in quarter one of 2013 compared to quarter one of 2012, the quarter-by-quarter downward trend in sales has been stopped as we did exit the growth in quarter one of 2013 over quarter four 2012. We further expressed that our markets have stabilized and we’ll provide growth as we move through the year. With regard to our served markets, while some of our markets are down, we also see positive sign and some of our served markets are once again exhibiting growth. It is important to note that as a company, we are very well diversified and not tied to anyone specific market. With regard to incoming orders, the increase in 2013 Q1 bookings compared to Q1 2012 is another indicator that our served markets are once again moving in a positive direction. The press release further stated that we have a strong balance sheet, which puts us in a good position to provide growth for the company. This growth can come from both organic growth and via acquisition and we continue to work on all aspects on a continuing and ongoing basis. Internally, we have a strong pipeline of new projects and based on the feedback we are receiving from our customers, we do expect improvement in realization of these projects in 2013 when compared to 2012. We view this expected realization as increased confidence in the growth opportunities of our served markets. And last but not least, the press release stated that our product platform development efforts continually create new opportunities for our company by designing innovative motion solutions that change the game and meet the current and emerging needs of customers in our served market segments. In keeping with past practice, we like to briefly discuss our long-term strategy to provide a prospective on the long-term direction of the company for our share holders. We view our strategy as a growth strategy and that is how we focus our resources for the long-term growth. A growth strategy means that we set aggressive growth targets for our company and we will align and focus our resources to ensure we meet those targets. First and foremost, we invest in our people as we believe that attracting and retaining the right people is the most important element in our strategy. With the right people, they will lead us to the right markets, the right customers, the right technologies, the right solutions and the right products. Secondly, we will continue to pursue growth through acquisitions, sales channel development, internal product development and through the application of our technology/know-how, customized solutions for our customers. With regard to China, we mentioned last quarter that we signed a lease for a new expanded and modern facility and we are moving forward with our capital investments to install production lines that changed the game and are capable of meeting the demands of our existing customers and new potential customers within China as well. We believe that the best opportunity for increasing sales in China will be best met by having a strong presence directly in the country. The new facility will be operational in the second quarter of this year and we expect the new production line to be up and running in the third quarter. Our goal in China and Asia over the next two to three years will be to build a new opportunity pipeline similar to the strong pipelines we currently have in both North America and Europe. At the end of June, our office in Englewood, Colorado will be closed and all functions will be relocated to our facility in Amherst, New York, which currently houses our North American Solution Center and our North American Electronics Development Team. Our CFO, Rob Maida is already located in Amherst and most of the remaining financial team will be relocated to Amherst by the end of June. We have been preparing for this move over the last six months and we feel we’re well prepared to make it as seamless as possible. The move allows us to establish a core in one location and to make further infrastructure improvements in the future. And last but not least, we will continuously utilize Allied Systematic Tools or AST for short to improve efficiencies and eliminate waste throughout the company. AST is critical to and helps create the path of success in all regions of the world. Okay. With that, I will now just take a few minutes to summarize the call before we move on to your questions. To summarize, sales for the quarter decreased 6.3% in 2013 quarter one, compared to the same quarter of 2012. Geographically, sales for the quarter were down in the U.S. and were flat in the rest of the world. Diluted earnings per share for the quarter were $0.11 per share compared to $0.14 a share in 2012. Moving forward, we expect market conditions to improve throughout the year and to gain strength during the second half of 2013. Our balance sheet is strong and we’ll utilize the strength to strategically grow our company in the future. We are actively pursuing acquisitions and continue to invest in product and market development to drive organic wealth as well. A makeup of our top new opportunities continues to evolve from individual component solutions in the past to majority of the new opportunities now utilizing multiple Allied Motion Technologies. We believe this approach will allow us to provide increased value to our customers and improve margins for our company. We are focused on improving our margins by both increasing the value of our sales and by improving our cost structure by utilizing our AST toolkit to affect the changes necessary in all aspects of our business. In summary, we will act prudently to changing marketing conditions while we remain focused on our growth strategy to ensure a long-term success and growth of the company. And with that operator, we will open the mics for questions.

[Operator:]

Thank you. (Operator Instructions)

[Richard S. Warzala:]

While people are waiting for their questions here operator, we did have some questions that came in to us in the office over the internet. And what I’ll do is I’ll start with those and if anything else comes up from there then we will proceed to those. So to start with the first question said in the press release it mentions that your strong balance sheet puts Allied in a good position to support future growth. As part of that growth, can we expect an acquisition in the near-future? Good question. As mentioned last quarter, we continue to work on acquisitions and I guess to elaborate a little bit further here, we will do an acquisition if the conditions are right meaning that it must be aligned strategically and that the terms of the deal must make sense for us as a company. And we are very confident about our internal growth capabilities and therefore, we are not required to just go out and do an acquisition for the sake of increasing the top line. It’s got to make good sense, financial sense and if it does, we will aggressively pursue it as part of our overall growth strategy. So we are working on some acquisitions and if it’s right, we will complete it. If it’s not right, we will move on. Second question that we had was regarding, let’s see – IT system implementations, so please provide an update on your new IT system implementation including the cost impact on the operating results. What I would like to do is turn this over to Rob, so he can respond to this.

[Robert P. Maida:]

Okay, thanks, Dick. I think I’ve touched on this in a little earlier, but that with regard to our implementation, to reiterate, we went live with our first implementation in late 2012. And we’re expecting two additional implementations in 2013. I think, as I mentioned, one in Europe and one North America. As a brief update, we certainly continue to work through what we would consider small and normal post implantation issues such as report generation and so on. And with regard to the cost incurred during Q1, I will reiterate it, I think the total cost that I reported last quarter, cost incurred for the implementation have been about $1.5 million and that would split between licensing fees and implementation fees approximately $250,000 and $1.15 million respectively. As far as cost in Q1, we did capitalize an amount equal to about $52,000 and the expense recognized in this quarter’s 10-Q was approximately $110,000, still between amortization and period expenses such as hosting and report writing expenses. That’s pretty much a summary of where we stand with our ERP implementation.

[Richard S. Warzala:]

Operator, before we go back, we do have another question here. but let’s see if there’s any questions from the mic.

[Operator:]

Okay. We do have a question here and it comes from the line of Jeff Geygan from Milwaukee Private Wealth Management. Please proceed.

[Jeff R. Geygan:]

Good morning gentlemen.

[Robert P. Maida:]

Good morning, Jeff.

[Jeff R. Geygan:]

In your comments about long-term strategy, you indicate that investment in people is the most important part of your long-term strategy. Can you let us know how effective you’ve been in implementing that strategy over the last couple of quarter and/or on a forward basis, what do you have in the pipeline with respect to people?

[Richard S. Warzala:]

Okay. Sure, we’re happy to do that. The people, when we look at what resources would we like to hire as a company, we follow our strategy. Our strategy is a formalized process that we’ve gone through and continue to update. And that states that since we are a technology/know-how company in order to succeed with that strategy that you need to add the critical resources in the areas of engineering; that’s design engineering, applied engineering, sales engineering, production engineering and so on. So the emphasis is engineering, engineering, engineering. That doesn’t mean the other resources aren’t critical to our success. They’re all critical to our success, but a technology/know-how company clearly must have the areas of excellence that I just talked about engineering that are better than our competition, and that’s really how we focus. So in the last couple of quarters, we have gone out and we’ve added a couple of individuals and we do it – I hate to say opportunistically, but if some one does come to us and they have the right background that we feel can enhance our capability in the future, we’ll certainly look at it. But more importantly, we define our products, product platforms that we talked about in the strategic markets that we are going after, and we define characteristics of that type of individual that can really help us in that regard. In the last couple of quarters, we have added some people in those critical areas. So we do walk the talk and we continue to not just bring people in, but provide them the tools that they need, we’re talking about design tools, software tools so forth, simulation tools, that equipment that’s required to make sure that we can design and develop the best products in the marketplace. (Inaudible) question, Jeff?

[Jeff R. Geygan:]

Yeah, in a way, but can you qualify the skill set of these individuals bring to the company and how should we think about the monetization of those skills over time?

[Richard S. Warzala:]

When you say qualify the skill set, typically from – let’s talk about design engineering. We would look for people who have magnetics experience, motor design experience and electronics development whether it’s power electronics or control and software development. So if you think about how Allied Motion has evolved here and that this evolution has occurred by following our strategy, we were a motor company. We had several companies that made motors. We looked at it and said the motion market and our customers could best be served if we can provide more complete solutions. So we invested internally and went out and hired experienced electronics and that electronics, both power and control software and motion theory basically to help develop internally the product line that could then link everything together. So I think qualitatively that’s really what’s occurred and the full benefit to that has not been realized yet. And if you look at the other areas that we bring to the solution set, gearing and electronic feedback encoders, we again, have gone out and hired resources. So we’ve mentioned in – that we are looking at solutions to provide more value to our customers and improve our margins and that in fact has what happened, the new opportunities coming into the company. As we view them and mature the solution centers, they are there to link together all the technologies and what we see with that as you bring more value, the sales price of the – the unit sales price goes up, but also we are able to increase our gross margin and that is the plan. We’re not abandoning our component technologies. As matter of fact, they’re expected to continue to improve and find new ways to become better in higher performance that are most cost effective. But then we do the investment in the evolution has been to put – bring it all together and I’ll sell it as a solution. So I hope that answers your questions. And the impact it will have on us is more value in each sale, higher unit price and higher overall gross margins for the company.

[Jeff R. Geygan:]

Yeah, Dick, actually that makes great sense, and can you provide any color with respect to the evolution of the company and what that might look like quantitatively at a gross margin level at some point in the future when you feel that you’re achieving what the company is capable of with these human assets?

[Richard S. Warzala:]

Sure. When we take our pricing model internally is pretty straightforward. We look at it on a variable cost basis and only because gross margins as you know could be impacted heavily by volume and you have those fixed costs in the fixed overhead areas, fixed manufacturing overhead areas that can impact that gross margin. So volume was up, it looks better; volume goes down and looks worse. So we do all of our pricing based upon a variable cost model and if I can tell you that and again, we don’t normally break out individual operations and we haven’t done that in the past, so much has been something significant that that we felt was important to report. But our quotations on the projects that we’re working under the pipeline, and I mentioned the pipeline, I really hadn’t quantified that, but I can tell you that it’s an excess of our annual sales. And weighed average, we wait those on incoming basis, the weighted average of our success and also our margin improvement. And we expect to see a continual improvement as we bring more value in the systems to – I would tell you that in the next two to three years, looking at a 5% to 6% percentage point improvement in gross margin is not unrealistic.

[Jeff R. Geygan:]

All right, thanks and just two quick follow-ups. Have you disclosed your CapEx for China?

[Richard S. Warzala:]

No, we have not. Well, we have to sort of extend – as we talked about our CapEx on a quarter-by-quarter basis and I would tell you that and it’s not a secret, but when we finish the first production line here, our investment in that line will be about $1 million of new equipment and there’s other equipment that we have, that we put in service that’s utilized else where in the company.

[Jeff R. Geygan:]

And with regard to new opportunity pipeline in China, what markets do you intend to serve?

[Richard S. Warzala:]

Well, it’s interesting that the markets that we currently serve, our customers, they then have set up operations in China, particularly in the vehicle markets, the off-road truck, construction equipment and agricultural equipment market. So that’s one of our first emphases there. And also I think it’s important to note that why we’re excited about the opportunity is that our current customers enjoy approximately 15% of the China market, which means there’s 85% is still out there for us that’s not been in service by our current customers and we’re quite excited about that. Another market that we service in China already and servicing it by shipping products from North America and Europe is medical and we see that as a fast growing market in China. They are investing a ton of engineering and equipment and we see that as a great opportunity for us in the future too.

[Jeff R. Geygan:]

Great and final question, what is the cost benefit of moving your corporate to mingle with (inaudible)?

[Richard S. Warzala:]

Nothing this quarter, nothing next quarter. Actually that cost to us but there is an overall stating in that – the team that’s coming together and I would day if you take a look at it from a soft side, it’s that we work aside by the team. We have people working on a different location and we think we did a fairly good job of managing that. But as we move forward I the future, our plans are, we talked about infrastructure development and improvement and we think that’s what a real opportunity is. And I really don’t want to get in to some of that right now, but I think it will become prepared down the road that we feel by getting core team in one location working closely together, the solutions center, electronic development, which is the item that we mentioned that links everything together and now the administrative and an HR side, pulling altogether and have that team function together is going to be very beneficial to us. On the straight cost basis, when you look, other than people cost and – we are moving from Colorado and moved to Amherst New York and take (inaudible) what we did, as Dick said, entirety at the end of March. I would Dick pass the – and approximately you can see that his salary, he was compensated at a rate higher than a normal CFO would be compensated, given the history. We have – now moving forward that will be corrected. and I think as we add additional resources here and look at some of the efficiencies, that’s when a real savings will occur.

[Jeff R. Geygan:]

All right, I appreciate your time. Thank you and good luck.

[Richard S. Warzala:]

Thank you, Jeff.

[Operator:]

Thanks for your question. You have no more questions on the audio.

[Richard S. Warzala:]

And we have one last question that is coming to us here and I’ll take that one and it’s what is your outlook for the motion market in the future? We did talk about that a little bit in the press release and through the conference call here and we mentioned that we feel that the markets have stabilized and we are encouraged that we have seen the turnaround from four consecutive down quarters in revenues to now an increase in revenues. And I will say to you that we don’t expect dramatic growth from the base business. We expect modest growth from the base business for the remainder of the year. Our side is going to be enhanced by this pipeline we talked about in converting those into businesses as we move through the year. And typically, what we see is that as the market becomes unsure, our customers, their projects are delayed and a typical gestation period for start to end of new projects to be anywhere from one to two three years. And when markets are down, they have a tendency to slow down and when things start to look more positive, all of sudden they get very aggressive and are looking for you to respond quickly. So we’re all positioned to do that. We have seen some encouraging signs there. We are – a number of items that we’re work on are starting to transitioning into growth opportunities this year and that’s where we see that we will increase our market share as well as build up a modest increase, a very modest increase in the base business in the future. So that’s it for the questions that were e-mailed to us and if there are we’ll go back to the mic and see if there’s any other questions now.

[Operator:]

You have no more questions.

[Richard S. Warzala:]

Okay, operator. Then, we’d like to thank everyone. We’ll end the call here, we’d like to thank everyone for attending and we look forward to talking to you next quarter. Thank you.

[Operator:]

Okay. Thank you for your participation in today’s conference ladies and gentlemen. This concludes presentation. You may now disconnect, have a very good day.