Allied Motion Technologies Inc.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good day, ladies and gentlemen and welcome to the Second Quarter 2013 Allied Motion Technologies Inc Earnings Conference Call. My name is Jackie and I will be your coordinator today. At this time, all participants are in a listen-only mode. Following the prepared remarks there will be a question-and-answer session. (Operator Instructions) I will now like to turn the presentation over to Ms. Sue Chiarmonte, Vice President, Secretary and Treasurer. Please proceed.

[Sue Chiarmonte:]

Thank you, Operator. Welcome to Allied Motion’s conference call to discuss the quarter ended June 30, 2013. Thank you for joining us for this call. We distributed the press release yesterday and a copy is available on our website 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 the Internet broadcast or replay, go to the company’s website click on the investor relations page and then click on the webcast icon. As a reminder, please note that the Safe Harbor statements included in our press release also apply to all comments made on the conference call. I will now turn the call over to Dick Warzala, President and CEO of Allied Motion Technologies.

[Dick Warzala:]

Thank you, Sue, and welcome everyone to our second quarter 2013 conference call. Here is the plan for today’s call. I will begin with a brief review of the results for the second quarter and year to-date 2013 and then discuss some of the key items that impacted those results. I will then turn the call over to Rob Maida, our CFO, who will provide a detailed financial review for both the quarter and the year. I will then look out into 2013 and go behind the numbers to provide you with some insight and to the activities and opportunities for the future. After that I will provide a brief summary before opening the mics for questions. Let’s begin with a high level overview of the results for the second quarter and for year to-date 2013. Sales in the quarter decreased to $25.3 million from $26.8 million in quarter two of 2012 and decreased year to-date to $50.5 million compared to $53.7 million in the same period of 2012. I would like to note that sales in the second quarter of 2013 did increase slightly when compared to sales in the first quarter of 2013. Excluding all non-recurring items adjusted net income for the quarter decreased to $1,362,000 compared to $1,595,000 in quarter two of 2012. For the year adjusted net income decreased to $2,372,000 compared to $2,931,000 last year. With regard to our bookings, I remind everyone that our past practice was to book and report all orders in the period that they were received including blanket orders, which could cover anywhere from 12 months to 24 months of demand. Beginning in 2013, we no longer include the full value of the blanket orders when received and only report them as bookings when they are released to production. Orders for the second quarter of 2013 were $23.5 million without blanket orders and $26.4 million including blanket orders. The $26.4 million in the second quarter of this year directly compares to orders of $23.7 million in the second quarter of 2012. Orders year to-date 2013 were $44.4 million without blanket orders and $51.6 million including blanket orders. The $51.6 million this year to-date directly compares to year to-date orders in 2012 of $46.7 million. So therefore on a like basis that means that orders for 2013 year to-date have increased by 10.5% over 2012 year to-date. Comparing our served markets for the second quarter 2013 and year to-date 2013 for the same periods of 2012 our industrial market was up while medical, vehicle, aerospace and defense and our electronics markets were down. Now, I would like to 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 Maida:]

Thank you, Dick. As was reflected in our press release that was put out last evening, the company achieved net income of $819,000 or $0.09 per diluted share for the quarter ended June 30, 2013, compared to net income of $1,817,000 or $0.21 per diluted share for the same period last year. The results for the quarter include $234,000 or $159,000 net of tax of relocation expense to move our corporate office and key employees from Denver, Colorado to Amherst, New York and $565,000 or $384,000 net of tax of new business development expenses in conjunction with a potential acquisition which the company is continuing to pursue. Additionally net income for the quarter ended June 30, 2012 included $301,000 or $222,000 net of tax received as a concession payment from a former landlord for early termination of a building lease at one of our T use. So the results were both the quarter ended June 30 and year to-date for both years will be presented as adjusted for these non-recurring charges to provide a better indication of performance associated with operating results. Before these non-recurring charges the company achieved adjusted net income for the quarter of $1,362,000 or $0.15 per diluted share compared to $1,595,000 or $0.18 per diluted share for the same period last year. Revenues were $25.4 million compared to $26.8 million for the same period last year and this is a decrease of 5.5% with 7.3 percentage points of the decrease due to lower sales volume offset by 1.8 percentage points due to favorable currency change with the dollar weakened against both the euro and Swedish krona. The 5.5% decrease in revenues reflects lower sales at all of our U.S units offset by higher sales at our foreign units and reflects an 11.6% decrease in sales to U.S customers and a 2.7% increase in sales to customers outside of the U.S primarily Europe, Sweden and Asia. As discussed last quarter beginning in 2013, we no longer include the full value of blanket purchase orders when received from customers and 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 the prior year. Bookings for the quarter ended June 30, 2013 were $26.4 million compared to last year's bookings of $23.7 million using the prior methodology and $23.5 million using the current methodology. Backlog as of June 30, 2013 was $26.9 million using new methodology and was $35.4 million using the prior methodology compared to $36.7 million as of June 30, 2012. Gross profit margin remained at 30% this quarter compared to the same period last year and reduce sales of $1.5 million reflecting our continues efforts to reduce costs and sell more value added system solutions and custom engineered products that typically carry a higher margin. Selling, general and administrative and engineering costs net of relocation and new business development as a percent of sales were 22% for both the second quarter of 2013 and 2012. These cost decreased by $244,000 or 4% and primarily reflect a decrease in compensation expense mostly notably incentive bonuses. Adjusted EBITDA which excludes stock compensation expense and non-recurring items such as the relocation and new business development expenses and the lease termination gain decreased 6% to $2,689,000 for the quarter from $2,863,000 for the same period last year. We had $872,000 of capital expenditures during the second quarter of 2013 compared with $946,000 for the same period last year. For the six months ended June 30, 2013 the company reported net income of $1,779,000 or $0.20 per diluted share compared to net income of $2,975,000 or $0.35 per diluted share for the same period last year. Revenues decreased 5.9% to $50.5 million compared to $53.7 million last year with foreign sales up 1.2% and sales to U.S customers down a 11.6%. Of the 5.9% decrease in sales 6.6 percentage point is due to decreased sales volume partially offset by a 0.7 percentage point increase or favorable currency change with a dollar weakening against both the Euro and Swedish Krona. As previously mentioned the results for the six months ended June 30, 2013 also include $234,000 or $159,000 net of tax of relocation expense to move our corporate office and key employees from Denver to Amherst and $638,000 or $434, 000 net of tax of new business development expenses in conjunction with a potential acquisition. Additionally, net income for the six months ended June 30, 2012 included the $301,000 or $222,000 net of tax received as a concession payment from a landlord for early termination of a building lease. And in addition to the $301,000 gain, the results for the six months ended June 30, 2012, also included a pretax charge of $238,000 or $178,000 net of tax that was recorded in the first quarter of 2012 to cover the expected costs of replacing certain products in the field due to an incorrect electronic component in printed circuit board supplied by one of the company's sub-contract suppliers. Excluding these non-recurring items, adjusted net income for the six months of 2013 would have been $2,372,000 or $0.27 per diluted share, compared to $2,931,000 or $0.34 per diluted share for the same six months of last year. Bookings for the first six months of this year were $44.4 million compared to $46.7 million for the same six months last year and as previously mentioned, we no longer include the full value of blanket purchase orders when received from customers and only report them as bookings when released to production. Bookings for the six months ended June 30, 2013 were $51.6 million compared to last year's bookings of $46.7 million using the prior methodology and $44.4 million using the new methodology. As Dick has mentioned previously on a like basis orders have increased 10.5% compared to the same period last year. Gross profit margin increased to 30% from 29% compared to the same period last year. The overall increase in margin was in part caused by the pretax charge of $238,000 recorded in Q1 of 2012 to cover the expected cost of placing those certain products in the field due to an incorrect component in the printed circuit boards. This charge had the effect of reducing the company’s overall gross margin by 1% for the six months ended June 30, 2012 and excluding such charge the margin would have been 30% or the same as this year. Selling, general and administrative and engineering cost net of relocation and new business development decreased by $129,000 or 1.1% and again reflects a decrease in compensation expense most notably incentive bonuses slightly offset by engineering additional engineering expenses as we continue to invest more in our technical resources. For the year, depreciation and amortization expense decreased to $150,000 from $980,000 to $830,000 while interest expense was up $7,000 to a total expense of $17,000 reflecting an increase in the debt outstanding. Adjusted EBITDA decreased 9.8% to $4.8 million from $5.3 million for the same period last year we had $1,170,000 of capital expenditures during the first six months of 2013 and this compares to $1,532,000 for the same period last year. The company generated $1.5 million of cash for the six months ended June 30, 2013 of which $2.7 million was generated from operating activities. The company ended the period with over a $11.2 million in cash and $567,000 in bank debt or a net cash in debt position of $10.7 million which compares to a net cash in debt position of $9.3 million at December 31 2012 or an improvement of $1.4 million for the six month period. Our net stockholder’s equity at June 30, 2013 was $43.9 million or $4.96 per share and our tangible net book value is $36 million or $4.06 per share and the total shares outstanding at June 30, 2013 are $8,844,971 shares. Our Board of Directors just declared a $0.025 per share cash dividend that is payable August 22 for shareholders of record August 12. With that, I will now turn the meeting back over to Dick Warzala.

[Dick Warzala:]

Thank you, Rob. I will now take some time to expand on the press release that went out yesterday provide an outlook for 2013 and then discuss some of the key activities in actions that we will focus on to drive growth for the company. As stated in our PR in our press release and I quote sales in the second quarter of 2013 were up slightly from the first quarter of the year with our served markets in medical, vehicle and aerospace and defense down while our electronics and industrial markets were up. During the remainder of 2013 we will continue to closely monitor our served markets as we believe they have stabilized in other than for the normal summer season business downturns in Europe we do expect modest growth as we move through the year. As previously mentioned we did incur new business development expenses in conjunction with the potential acquisition which the company is continuing to pursue. Our balance sheet is strong and our cash net of debt position increased by $2,668,000 in the second quarter to $10,689,000 which puts us in a good position to support our growth strategy in the future. To further support our growth, our 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 our customers in our served market segments. As noted in the press release we did have a slight increase in sales in 2013 quarter two when compared to the first quarter of 2013. We further expressed that we feel our markets have stabilized and that we expect modest growth as we move through the year. With regard to our served markets we see mixed signals in that some of our markets are down or some of our segments are exhibiting growth. Overall when compared on a like basis our year to-date bookings in 2013 were 10.5% higher than in the same period of 2012. It is important to note that as a company we are very well diversified and not tied to anyone specific market. I also briefly mentioned that we incurred new business development cost as a result of working on a potential acquisition. I’m sure you would like additional information regarding the potential acquisition. I will state that we are positive about the potential but as is normal with all acquisitions there is inherit risk to closure. Therefore we will not disclose additional details regarding the acquisition at this time. The press release further stated that we are generating positive cash flow and have a strong balance sheet which puts us in a good position to provide growth for the company. Our growth will come from both organic growth and via acquisition and we continue to work on all aspects on a continuing in our 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 market segments. 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. We believe it is our job to continually innovate and to support our customers by creating value for their products. This value potential is realized by us defining, designing, developing and investing in platform products that will meet the needs of the emerging needs of their served market segments. In keeping with past practice, I’d like to briefly discuss our strategy and provide a prospective on the long-term direction of the company. We view our strategy as a growth strategy and that is how we focus our resources for the long-term. 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 to provide platform as well as customized solutions for our customers and our served market segments. With regard to China, we have moved into our new facility and we will install a new state-of-the-art production line in the third quarter of this year that will change the game and meet the demands of our existing customers and new potential customers within China as well. We believe that the opportunity to increase sales in China will be best met by having a strong presence directly in the country. As stated previously 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 corporate financial office in Colorado was relocated to our facility in Amherst, New York, which also houses our North American Solution Center and our North American Electronics Development team. All move cost were recorded in the second quarter and the key members of the financial team have relocated and are now in Amherst. The move provides us with a core team in one location and with the opportunity 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 our company. AST is critical to and helps create the path of success in all regions of the world. With that, I will now take a few minutes to summarize the call before we move on to your questions. To summarize, sales for the quarter decreased 5.5% in 2013 quarter two, compared to the same quarter of 2012. Geographically, sales for the quarter were down in the U.S. and were up in the rest of the world. Moving forward, we do expect market conditions to improve modestly throughout the year. Adjusted net income for the quarter decreased 14.6% compared to the second quarter of 2012 and decreased 19.1% compared to year to-date 2012. One time cost expense during the quarter included $234,000 in relocation cost and moved the corporate office to Amherst, New York and $565,000 in business development cost in conjunction with a potential acquisition. On a like basis, bookings year to-date 2013 have improved by 10.5% compared to year to-date 2012. We continue to generate positive cash flow and our balance sheet is strong we will utilize our financial strength to strategically grow our company in the future through organic growth and through acquisitions. And with that operator, we will open the mics for questions.

[Operator:]

Ladies and gentlemen, we are now ready to open the lines for your questions. (Operator Instructions) And your first question comes from the line of Chris Brown with Aristides Capital. Please proceed.

[Chris Brown:]

Yeah, good morning gentlemen. I have a quick questions for you. Do you think you are still suffering any negative consequences either in terms of revenue or in terms of orders from the missed happened in 1Q 2012 of last year with the missed labeled resistor?

[Dick Warzala:]

No, I think that we’ve recovered from that.

[Chris Brown:]

Okay. Fantastic. Second question can you say either what percent of revenue or what percent of new orders is coming from new products, products introduced in the last year, the last two years?

[Dick Warzala:]

Yeah, that’s - we actually don’t track that exactly and the reason for that is the way our company was built was through several acquisitions would have, which do have different IT systems. I can give you a general feel for it sure I can tell you that’s what we do track is for future opportunities whether it’s new technology and/or additional technology and one of the things that we do see that’s positive is that in the past where we did sell individual components as a solution we are now selling more systems meaning one or more of our components do what we will call a Motion System and what we see now is that in excess of 50% of the new product development or new projects include more than one product and I would tell you that if you go back three years ago that number would have been 90% offering just one product. So what we are seeing is more value in the future being added by selling and applying more of our technology and not to just focusing on individual component sales that has.

[Chris Brown:]

Okay.

[Dick Warzala:]

That’s been that’s caused by two things solution center in place that can apply all products and a sales team which now is strained in all products.

[Chris Brown:]

Okay. Fantastic. My last question would you comment at all on whether the size of the acquisition you are thinking about would require you taking on some debts at this point?

[Dick Warzala:]

Sure it will. It will require.

[Chris Brown:]

Okay. And can you speak in very general terms in terms of what your goals are for an acquisition is it a certain amount of synergy or return on invested capital. Just in broad terms what are you looking at financially?

[Dick Warzala:]

Sure. Well there was another question that did come in that was emailed with regard actually there were several questions with regard to the acquisition because we didn’t give you any information. So and maybe it’s and I think it’s in the same tone as yours looking for a similar type of answers and what the question was, was well I realize you maybe reluctant to provide additional information about the acquisition. Can you at least provide us with your underlying strategy with regard to acquisitions? Is that similar to what you are asking.

[Chris Brown:]

I think that sounds like a very fair way of phrasing it.

[Dick Warzala:]

Okay. Well first off we start with looking at the strategy and you hear us talk about strategy and over the years we’ve refined our strategy but fundamentally it’s very similar to the strategy that we put in place in 2002 when I first join the company. The elements of the strategy that we look at is what we call is a business concept and that defines who we are every word mean something. So that business concept is looked at and we translate that into what’s called a strategic filter and those are the elements that whether you are looking at an acquisition or you are looking at a new business opportunity in terms of customer applications or markets. You go through this filter there it’s a check list that keeps you grounded and guided as to whether or not you should be taking this on. So the first thing we do is we look at the potential acquisitions. We try to determine is it a good strategic fit will reverse engineer the company and we’ll build a business concept to see how well does it really fit with us. We’ll then go through our strategic filter, go through the check list and in that filter there are several items in there. Our concept not only talks about who we are but it actually gives you growth, profit objectives and return objectives. It talks about markets and whether or not you can actually succeed in the market and how you would succeed in the market. So it’s important to say are you getting the yes boxes check but if you see two many nos and if you are finding out that is not in the right area where you are focused through your strategy that you are developing your companies to succeed then red flags go up. So we go through that process we reverse engineer any acquisition we develop a business concept and we take it through our strategic filter. We also look at the opportunities our markets in motion control is huge. We tend to look at a market and we talk about segments. We really sub-segment our markets and look at particular applications where we have something special to offer. So when we look at that as we’ve grown through the years here we’ve always looked to complementary companies who can either expand our products and or provide us with some market diversification both geographic and through the target markets we’ve talked about. We also then look at if its strategically well aligned, do we have the ability to leverage capabilities of both companies to grow them faster or better than what’s happened in the past. So that’s another area that we look at. We’ve recognized too that its - as I mentioned earlier that it’s a very large market that we’re serving and so we do sub-segment but in order to penetrate it, in order to be effective, if you’re going after these target markets you need to certainly create some critical mass which then would improve our ability to better serve our customers and drive shareholder value. There are two sides of that, the critical mass being you get core unit volume which drives down cost, gives you more leverage, leveraging of your purchasing capabilities and makes it more cost effective in the overall solution. Therefore if you’re competitive and you provide your customer with a product that’s competitive, this is how we talk about creating value. And then critical mass also on the top-line and bottom line to drive shareholder value. So my experience as I’ve gone through and developed a couple motion companies its certainly the value of the company goes up as this size of the company goes up. Of course you have to execute and deliver the shareholder returns with that but there is clearly a value creation through developing larger footprint and size. And last but not least its we’ve always established that any acquisition has to be accretive to our earnings and that’s the kind of what we go through, the process we go through is quite extensive for all the due diligence and all but underlying our strategy towards acquisitions is what I’ve just laid out for you there.

[Chris Brown:]

Okay, great. Thank you very much.

[Dick Warzala:]

Alright. Thank you, Chris.

[Operator:]

(Operator Instructions). And your next question comes from the line of Charles Neuhauser with Mainwall Investment Management. Please proceed.

[Charles Neuhauser:]

Hi good morning. I’m sure we all read the same newspapers and when I think of general economic picture, the United States is doing better than the rest of the world and certain industries, housing, and especially automotive are clearly doing a lot better now than they had been over the last 12, 24 months. And so I ask myself it just doesn’t seem to hang together than for revenue and the United States was down I believe versus the rest of the world and I’m rather certain that you must be asking yourselves the same question. Is there something wrong with Allied Motion, are we missing something or is that what we’re reading in the papers wrong and or what you’re seeing over the next six or 12 months. Does that sort of answer the question that again as I say you must ask yourselves, I’m just curious what’s your (indiscernible)?

[Dick Warzala:]

Sure, fair question. I think first of Charles you stated right in the beginning here where are the strength areas are in the U.S. economy, housing, automotive and either of which we service. We service off-road vehicles, we call the vehicle other construction equipment and so forth and I think if you were to look specifically at those markets you would see that they are not up. Housing we have little impact on us. There is a – the impact that we would see in housing is we do service some of the industrial market that produces equipment for new construction. And as new construction starts and especially commercial construction then we will see an uptake there. So yeah I read the same papers, I get asked the same questions, U.S. economy is doing well, housing is booming, automotive is better, how come we are not seeing the impacts, its not there, really not our served markets. When our served markets kick in and saying that housing part of Europe is yes we’ve seen, Europe rebounding and that’s different than what you’re reading in the newspapers. And again we are getting asked the questions, well what’s happening there. So we look at again the markets that we’re servicing in Europe and in North America and where do we see the strength and where do we not see the strength. And as I mentioned earlier we sub-segment the heck out of the market so that they are application specific. So I think that’s really the answer. And there is and if you look at that, that’s why the general economy weren’t a consumer base side of it looks like its very – going very well whereas we haven’t really seen the uptake yet in terms of our business, although bookings are 10.5% higher this year than they were last year which is a sign of the future for us.

[Charles Neuhauser:]

Right, okay, alright. Well, thank very much.

[Dick Warzala:]

You’re welcome.

[Operator:]

At this time we have no further questions. Mr. Dick Warzala, you may proceed.

[Dick Warzala:]

I will. There are a few more questions operator that we’ll email then I’ll answer those before and see if there is anything else after that. Again a couple more questions with regard to the acquisition. The second question was based on where you are today in the acquisition process. When do you expect the acquisition to be completed and you expected to be accretive. As far as the timing goes – we’re going to take the safe road here and not to provide an exact date or an indication as to when it will be complete. Although I will say that we are pretty far along in the process with regard to the whether or not its going to be accretive I did mention that one of the elements that we look at in any acquisition is to ensure that it will be accretive and our past practice has been to only pursue acquisitions which are accretive to earnings and I would say that we don’t expect this one to be an exception. The other question which was quite I don’t know if its similar but it asked about what synergistic opportunities thus the acquisition bring to Allied Motion? And again I think I’ll have to refer back to the answer I already provided with regard to the question explaining our strategy for acquisitions without getting specific here as to synergistic opportunities at this particular acquisition. We mentioned that complementary to expand product and market diversification ability to leverage capabilities of both companies, create critical mass, be consistent with our business concept, and all those are a factor in this acquisition. So I can tell you that we are confident that this acquisition does meet the requirements as previously outlined. And I’ll get to the last question here and then just if there are no other ones I’ll just open it back up again but the last question that was emailed in there were two parts of it is the move of the corporate office complete and all costs of the move been recorded, the answer is yes to that, it is complete and all costs have been recorded. Did you lose any employees because of the move and the answer is no, we did not, we’re fortunate enough to be able to have the employees relocate to Amherst. And again as we mentioned earlier that we feel that getting the team together gives us an opportunity to leverage the capabilities and give us some potential for cost improvements in the future. So I would say Rob do you have anything to add to that or you – I will…

[Rob Maida:]

No.

[Dick Warzala:]

Okay. So, I would say that that’s it for the e-mail questions and so we’ll open it back up if there are any others and if not then I will disclose the call. So any other questions, operator?

[Operator:]

At this time, we have no questions on the audio.

[Dick Warzala:]

Okay, alright. Well I’d like to thank everyone for attending this conference call and hopefully we’ll have some information back to you very soon. I’m sure the questions that are still in your mind and if we didn’t answer very well here but hopefully we can get those answered very soon for you and we can continue to grow in the future. So thanks again for your support and we look forward to talking to you soon.

[Operator:]

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.