Allied Motion Technologies Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Hello, and thank you for standing by. Welcome to the Allied Motion Technologies Inc. First Quarter 2015 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to Sue Chiarmonte, Vice President and Treasurer for Allied Motion Technologies. Please go ahead.

[Sue Chiarmonte:]

Thank you, operator. Welcome to Allied Motion’s conference call to discuss the first quarter ended March 31, 2015, and thanks to all for joining us on the call today. We distributed our press release yesterday and copies are available on our website at 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 the 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 the press release also apply to all comments made on this conference call. I will now turn the call over to Dick Warzala, Chairman, President and CEO of Allied Motion Technologies.

[Dick Warzala:]

Thank you, Sue. And welcome everyone to our first quarter 2015 conference call. Here is the plan for today’s call, I will begin with a highlight of the results and will then turn the call over to Rob Maida, our CFO, who will provide you with a more detailed financial review. After Rob returns the call to me, I will further elaborate on our press release and provide you with some additional insight as for the activities and opportunities we see for the future. Once that is complete, I will then open the mics for questions. First off, on behalf of the entire company, we would like to thank Rollie Heath, who was retired from our board for his seven plus years of service to Allied Motion and its shareholders. In addition to his vast international manufacturing experience, Rollie has a keen sense and ability to uncover the key underlying factors that drove our business. And he was truly a valuable coach for me. We would like to acknowledge Rollie’s contributions in helping make Allied Motion a better company, and we wish him well in his future endeavors. We would also like to welcome Alexis Michas to our Board of Directors, and believe that his experience serving on the Board of Directors significantly larger manufacturing based public companies including BorgWarner, where he serves as the Chairman and PerkinElmer, where we serves as the lead director will be invaluable as we continue to execute our growth strategy at Allied Motion. We are confident that Alexis will be a very valuable asset for Allied Motion and its shareholders. And on behalf of the entire Allied Motion community, we welcome him and look forward to many years of growth and prosperity together. Now for some brief comments before I turn the call over to Rob. The strengthening U.S. dollar against foreign currencies had a significant impact on our reported results and in the comparison for the first quarter of 2014. On a high level, we’re off to a good start in 2015 with our earnings increasing by 39% and after eliminating the impact of the currency exchange, our revenues are up by 6% for the quarter. While all business seem to be facing some macroeconomic challenges in the market today, we believe that our focus on executing our strategy and concentrating on factors within our control, we have the best recipe for success in the future. After Rob completes his financial review, I will then provide you with more information as to what Allied Motion is doing to improve shareholder value in the future. Rob?

[Rob Maida:]

Thank you, Dick, and good morning everyone. As was reflected in our press release that was put out Wednesday evening, the company achieved net income of $2.9764 million or $0.32 per diluted share for the quarter ended March 31 compared to net income of $2.148 million or $0.24 per diluted share for the same period last year. EBITDA increased to $7.7 million in the quarter from $6.6 million for the same period last year and adjusted EBITDA, which excludes stock compensation expense as well as certain non-recurring items increased to $8.1 million in the first quarter compared to $7 million for the same period last year. Revenues for the quarter were $59.6 million, compared to $60.4 million for the quarter ended March 31, 2014, this is a decrease of 1% including 6% increase due to higher sales volume while currency in fact reduced sales by 7% due to the dollar strengthening against the Euro. Looking at our total sales for the quarter, 67% were to U.S. customers compared with 64% for the same period last year, with the balance of our sales to customers primarily in Europe, Sweden and Asia. The 1.4% decrease in sales reflects higher sales from our U.S. TUs offset by lower sales from our foreign TUs, and is a result of a 2.7% increase in sales to our U.S. customers, offset by an 8.7% decrease in sales to customers outside of the U.S. Bookings for the quarter were $58.1 million compared to $64.4 million for the same period last year, or a decrease of 10%. Much of this decline is a result of the strengthening U.S. dollar and the ultimate translation of foreign currency to U.S. dollar where 7% of the decrease is currency related and 3% is volume related. Backlog decreased to $71.3 million at March 31, 2015 compared with $75 million at December 31, 2014 and compared to $79.7 million as of March 31, 2014. Our gross profit margins increased to 29% this quarter compared to 28% for the same period last year. The increase is primarily due to favorable product mix at most TUs partially offset by declines at our foreign TUs reflecting the cost pressure exerted by a strengthening U.S. dollar. Total selling, G&A and engineering expenses were $636,000 lower for the quarter as compared to the same period last year. And the decrease is primarily due to reserves made in 2014 related to our pricing dispute which was settled in the fourth quarter of 2014 where all reserves were reversed. Depreciation and amortization expense increased to $119,000 for the quarter from $1.7 million last year to $1.8 million this year. And interest expense decreased for the quarter to a total expense of $1.5 million from $1.6 million for the same period last year, this is due to our reduced debt balance. We had $1.4 million of capital expenditures during the quarter compared to $584,000 for the same period last year. And the company had $11 million of cash on hand at March 31, 2015 compared to $13.1 million at December 31, 2014. Our cash positioned declined $2.1 million during the quarter with major uses of cash being debt and interest payments, payments of incentive compensation, dividend payments. And the decrease also reflects a $1.1 million impact due to the effect of foreign exchange rate changes. Total outstanding bank debt at March 31, 2015 was $73.7 million compared to $74.8 million outstanding at December 31, 2014 and $86.5 million at March 31, 2014. Net debt repayments during the quarter, was $1.2 million. Our DSO remained consistent at 44 days at March 31, 2015 and at December 31, 2014 and it decreased from 52 days at March 31, 2014. Inventory turns decreased to 5.9 from 6.0 at the end of 2014 and 6.1 at the same time last year, and is primarily impacted by lower sales turnover. Our net stockholders equity at March 31, 2015 was $55.7 million or $5.99 per share compared to $50.6 million or $5.47 per share for the same time last year. And finally, our Board of Directors just declared a $0.25 per share cash dividend that is payable June 4 for shareholders of record May 21. With that, I will now turn the meeting back over to Dick Warzala.

[Dick Warzala:]

Thank you, Rob. In the press release posted last evening, I made the following statement. Although the strengthening of the U.S. dollar posed a significant hurdle and a good start to 2015 with net income increasing 39% and gross margin improving by 1.1% when compared to the same quarter of 2014. For the quarter, we experienced growth on our Aerospace and Defense, Medical and Electronics markets. Our vehicle in industrial markets, were flat while our distribution market was down. Our pipeline of new opportunities continues to expand nicely with an increasing number offered as multi-product solutions driven through our solution centers. As we move forward into the future, we believe the long-term success of our company will be further enhanced by executing our strategy and leveraging our full capabilities to design innovative motion solutions that change the game and meet the current and emerging needs of our customers in our served market segments. I’d like to expand on that a little more here this morning. And with regard to the currency exchange rate impact, in the PR I only commented on the impact as it relates to earnings and revenues. I also feel it is important to highlight the exchange impact as well as other key elements that affected our cash position during the quarter. Following a year of excellent results, it is normal for Allied to consume cash in the first quarter of our year. As we reported, our cash position did decrease from $13.1 million at December 31, 2014 to $11 million at March 31, 2015. The decrease includes negative impact due to the effect of foreign exchange rate changes of $1.1 million, debt and interest payments of $2.6 million, record performance compensation payout of $3.7 million, capital expenditures of $1.4 million and a reduction in our total outstanding debt by $1.2 million. I’d say the takeaway from this quick summary is that we view our cash generation capability as a, strength within our company. The press release went on to state that for the quarter, we experienced growth in our Aerospace and Defense, Medical and Electronics market. Our vehicle industrial markets were flat while our distribution market was down. Our pipeline of new opportunities continues to expand nicely with increasing number offered in small-time product solutions driven through our solution centers. While it is difficult to draw any conclusion on our market specific performance relative to the overall market, I would emphasize that our market in application, diversification serves us well and we will continue to emphasize this balance as we look for additional opportunities in the future. Our pipeline of new opportunities is made up of a mix of opportunities from all of our served market segments. And we focused on ensuring that we are offering as much of the complete motion solution as possible. Our solution centers are an essential element to drive multi-product solutions from the concept stage through realization to the production phase. We feel this approach better serves our customers’ needs and through the integration of products into a solution, we believe it creates additional value for both our customers and Allied Motion. We continue to make progress on the development of our solution centers and we believe the investments we’re making today will have a positive impact on growing revenues and gross margin in the future. Press release further stated, as we move into the future, we believe the long-term success of our company will be further enhanced by executing our strategy and leveraging our full capabilities to design innovative motion solutions that change the game and meet the current and emerging needs of our customers at our served market segments. At Allied we have consciously taken a long-term outlook to our business and we are firmly committed to developing and executing our strategy to ensure we achieve our long-term strategic goals and objectives. During our end of the year conference call, I highlighted the critical issues we are working on and you can, rest assured that our commitment to execution is unwavering. The market promotion control equipment is quite large, and it is expected to exhibit modest growth over the next three to five years. Our ability to capture additional market share and to grow faster than our competitors will require us to fully utilize the resources we have already assembled and to ensure we effectively leverage the capabilities of these resources to drive our growth in the future. We believe that resource leveraging is an area of opportunity within our company and it will be a major emphasis as we continue through 2015, and into 2016. Allied Systematic Tools or AST for short is our means to continuously improve efficiencies and eliminate ways throughout our company, with constant focus on improving quality, delivery, cost and innovation, AST is critical too and helps create the path to success in all aspects of our business and in all regions of the world. While we have defined several critical issues that will enhance our long-term success, we believe that AST is one of the enduring and key elements to ensure we maximize our success in the future. And with that operator, we’ll now open the mics for questions.

[Operator:]

[Operator Instructions].

[Dick Warzala:]

Okay operator, while people are thinking of their questions to ask here, we did have a couple of questions that came in. And we will respond to those, I’ll take the first one and I’ll pass the second one that came in over to Rob. The first one was regarding the volatility of our stock over the last several weeks, and they wanted us to discuss if we could explain the reasons why it was sharply up and sharply down? And I think our comments in response to that is, we really don’t talk about our stock price, we don’t feel that we can impact the market one way or another other than by generating earnings. And that’s really what our focus is. So, we believe the market will, sometimes we can’t explain what it does and hopefully there are others out there that can do a better job at it. But again, our focus is on improving the efficiencies within the company, generating earnings and growing the company. So, that’s about all we can comment with regard to that. The second question was about the Apex impacting our future quarters, I’m going to turn that over to Rob so he can answer that.

[Rob Maida:]

Sure, thanks Dick. We do not provide guidance therefore giving insight as such in the future quarters is a little bit difficult here. However, I think it was mentioned earlier by Dick that we believe that our focus on executing our strategy and concentrating on factors that are within our control, certainly the best recipe for success in the future, so probably as far as we’d like to go with addressing any future impact.

[Dick Warzala:]

Operator, do we have any questions, public questions?

[Operator:]

We do. We have one question on the phone line. It comes from the line of Jim Gentrup of Val Vista Capital Management. Please go ahead.

[Jim Gentrup:]

Good morning, gentlemen how are you?

[Rob Maida:]

Good.

[Dick Warzala:]

Good morning, Jim.

[Jim Gentrup:]

I missed part of your prepared remarks I apologize so far I’m redundant here with some of these questions. Just if you could comment on the, if you - if I read correctly on a constant currency basis, what would your revenue growth have been during the quarter, 6% is that what we’re seeing here?

[Rob Maida:]

Correct 6% Jim.

[Jim Gentrup:]

Okay, so that’s on - so you would have had modest growth on a constant currency basis, okay. And then also, the U.S. growth I think was domestic growth was 3% if I remember right?

[Dick Warzala:]

That’s correct.

[Jim Gentrup:]

Now, was that something you expected or was that lower or higher than expected looking back at the quarter?

[Rob Maida:]

I would say, I think things probably align with our expectations. Nothing was really out of the norm. Certainly, additionally to on, the currency situation, we were fully expecting I think as everybody was on a macroeconomic standpoint seeing some strengthening in the U.S. dollar and what that would represent in the quarter. So, from that standpoint Jim, I think that it was certainly within our expectation.

[Jim Gentrup:]

Okay. So, but I mean, that had something to do with your domestic growth you’re saying, the currency change or I’m not understanding that at all.

[Rob Maida:]

No, no, no, I’m not saying that had anything to do with our domestic growth. All I really represented there is that your question is, our growth from our U.S. TUs or to our U.S. customers, that was certainly within our expectation.

[Jim Gentrup:]

Okay, all right. And that, in the markets in the U.S. the verticals are, was it a weakness or strength I should say, either way in the U.S. I guess, what I’m saying is in the vertical, among the verticals that you have, the major verticals, does the U.S. have at a certain strength or weakness in any one of those?

[Dick Warzala:]

We did report that both in the press release and the conference call Jim with regard to our markets. And as we reported the markets that we saw that increased for our Aerospace and Defense, Medical and Electronics, while our vehicle, in our industrial market were flat and we did see a decrease in our distribution sale.

[Jim Gentrup:]

And just to clarify to your international sales, I thought were about 27% to 30% of total revenues, is that correct?

[Rob Maida:]

That figure sounds correct, Jim.

[Jim Gentrup:]

Okay. So, I guess the overall impact of foreign exchange must have been, I mean, 27% to 30% is still a relatively small number of this kind of, I guess, a little surprised by the severity of the impact to foreign exchange. So you don’t do any hedging I imagine then?

[Rob Maida:]

No, we do not Jim. We traditionally have not done any hedging on our currencies.

[Jim Gentrup:]

And other than just a quantitative impact, was there any kind of psychological, do you think any way of customers may be holding back or maybe just kind of the shock of the change, did that hold up any orders do you think or is that any kind of valid?

[Dick Warzala:]

All right, what I can say to you is that we monitor that fairly closely. And we are dealing with new customers who will place the blanket order with us or delivery over time. And we did see some adjusting in it. What I would say was it major, like we’ve seen in downturns in the past? The answer is no. We saw some minor shipping outs and some ins. But the effect of that we don’t think was at normally high.

[Jim Gentrup:]

Okay. And I know you guys are very clear about the guidance issue but, as you look into the rest of 2015, if we stay at these levels, the currency levels stay here, I mean, that’s all we can really do, right, is say okay, the currency stays here at these levels. It appears as though you would have quarters, year-over-year anyway that would be similar unless somehow you make it up and buy them down the road. And is there some seasonality to Q1 that we should now with the combined companies is there, I’m just talking about a revenue standpoint for now?

[Dick Warzala:]

Yes. Well, I think the seasonality of the business that we’re certainly with the Acquisition of Globe happening in October of 2013, and we were going through now our first repeat year with Globe part of the combined results. I think for us to comment on seasonality by quarter, do we expect that seasonality to be as it was in 2014, it’s a little too early for us to make that statement. I would say to you that we have and building internally and looking at what we expect to occur here, we’re not making any significant changes in the currency as we currently see it, so that we’re comfortable with that, our performance will continue. And that’s I think, it’s with the currency impact that we’ve seen, I think I would emphasize that even though sales were modest growth, 6% growth in the first quarter. We did show a fairly significant earnings increase in the first quarter. So, again, will seasonality come into play? Well we’ll have a better feel for that after the end of 2015 to have couple of years under our belt of what the total seasonality impact is of our business. That’s really the best we can do right now.

[Jim Gentrup:]

And then, and on the operating earnings, yes, it is very good, very nice growth in earnings. And I guess I missed this, but I’m assuming that the same impact of foreign exchange helped your operating - expenses as well lowered them. But I’m not sure about that, so can you just confirm with me that what happened on the operating expense side, how much of your expenses are also denominated in foreign currency?

[Rob Maida:]

Well, Jim, let me feel that one is, as you stated, the expenses into translation would also be impacted similarly to the revenues. So at the end of the day, the earnings or the impact of foreign currency on the earnings based on translation should be somewhat minimal. So from our standpoint, when we looked at the - when we see the growth in earnings, a lot of that is true flow-through and true growth in earnings based on efficiencies garnered year-over-year.

[Jim Gentrup:]

Okay. So, then if we assume, if we assume that you continue to grow despite 5% to 7% band, would you think you have leverage, increasing leverage in the rest of your income statement then?

[Rob Maida:]

I guess, I would say that’s a fair statement to say. Where we sit we would probably have a similar expectation. And hopefully that answers the question. I don’t want to go too far.

[Dick Warzala:]

Yes, one of the things that I think if you look at what we reported here is, there is a 1.1% gross margin improvement. So that certainly had an impact also.

[Jim Gentrup:]

Yes, and I was just going to touch on that. And that was a pleasant surprise. Was there any, was that just efficiencies?

[Rob Maida:]

I think it was the combination of certainly some product mix as well as some efficiencies gained. But so, I would say it’s a fair combination of both Jim.

[Jim Gentrup:]

I guess what I’m trying to get here is that, I’m sorry.

[Dick Warzala:]

Yes, it is a focus, we’re clearly focused on that internally and to driving up our gross margins.

[Jim Gentrup:]

Excellent. Actually I’m going to let somebody else jump in. So thanks guys.

[Dick Warzala:]

Okay, thank you.

[Rob Maida:]

Thank you.

[Operator:]

[Operator Instructions].

[Dick Warzala:]

I see operator, there are no other questions, so Jim if you want to jump in, well, hang on there is another question.

[Operator:]

There is another question.

[Dick Warzala:]

Okay, go ahead.

[Operator:]

Yes, we have a question from Michael McCroskey of Princor Securities. Please go ahead.

[Dick Warzala:]

Okay.

[Michael McCroskey:]

Good morning gentlemen.

[Rob Maida:]

Good morning.

[Dick Warzala:]

Good morning, Michael.

[Michael McCroskey:]

Are you still on track, we’ve still got that 30 million notes, we’re in a position to do something with in October of ‘16, correct?

[Dick Warzala:]

Correct.

[Michael McCroskey:]

And do you feel still that and not realized there is seasonality to the cash flow but we’re still feeling fairly confident that that would be able to be rearranged either through payoff or refinance. Do you all still feel you’re on track on that I guess the short-story?

[Dick Warzala:]

The answer is yes, and we are well aware. Obviously the impact of that note, the NASDAQ to on our financial statements and our performance, and we certainly are going to be addressing that. And we will most likely be starting that fairly soon here. So we’re well prepared for it when it’s due.

[Michael McCroskey:]

Excellent. On the revenue side, obviously you’re coming off of rather hefty acquisition. And I believe you’ve alluded in the past I would assume there is a lot of integration, I mean, you were working on that prior to the acquisition of course of being that total solution that obviously the new acquisition would with Globe, greatly expands that. The timeline we’ve talked about in the past is usually about a year as you start putting together some of those more total solutions. And I assume Globe being the same size you were, there is a lot more that’s on the table. So, we’ve got some of the old stuff but, would it be safe to say that that’s got the kind of, that’s got to be put out there, it’s got to be sold, is that your timeframe if I’m asking this correctly, do you see what I’m getting at. I mean, are we still kind of on that year timeframe of getting that integration solution out there and then the sales team being able to present that in a proper way and then that translating into bookings. The year is still a fair…?

[Dick Warzala:]

Well, I think, let’s think, I think we’ll separate couple of things that you mentioned here, number one is you mentioned Globe, so just so we’re not confused about the integration of Globe within Allied Motion as being one potential question. And the second question being as we look at our product portfolio, as we discussed about integrated motion solution and that certainly a focus within the company, we do believe that that does add value for our customers and also improves value for us. So, when you start to process let’s say we had a new opportunity come in today, typically the design and phase will take anywhere from one to two years for that project to get completed. This doesn’t mean the small sales, the prototype sales, the preproduction sales and so forth, those will be happening during that timeline. But before the customer gets us designed into their product and they release their product to market and we start seeing production volumes on that, we’re looking at anywhere from could be at the start of the year and as long as two years or more before we start to realize production depending on the application and depending on approvals. We work in the medical market, we work in the aviation market, aerospace market and military and defense applications. So you can imagine that some of the approval process, as you go through there are quite long. And that’s really what we’re impacted by. So, that’s the product integration and solutions and to answer your question, yes, the companies are working together on selected applications where we can leverage our resources. And it’s not just necessarily the product resources, it’s the people resources, it’s the capital resources, it’s our footprint resources. There is more work to be done there. And certainly just to reemphasize my statements earlier that we will be focused on the leveraging throughout 2015 and into 2016, and we do believe there are several opportunities ahead for us there.

[Michael McCroskey:]

What I was talking, and where that was coming from was the wording of our top line as new opportunities continues to expand massively.

[Dick Warzala:]

Correct.

[Michael McCroskey:]

And that’s what I was trying to get at, was, we’re still in that process of the cross things between Globe and the old Allied, original Allied leveraging that up and us. So, I’m correct in, that has a lot to do with that statement there.

[Dick Warzala:]

Yes. That has a lot to do with it but in addition to that, I mean, you’re correct in your first statement that you heard in the part that let’s say the core Allied or the old Allied was already moving in the direction of integrated solutions and that is correct. And we are realizing wins in for those solutions. And what’s even more encouraging when we talk about gross margin improvement is we know internally that it does add more value, the integrated solution does add more value for our customers. And we realized more value also that the number of applications we are working at our reintegrated solutions is increased, which is good for the future for us.

[Michael McCroskey:]

Would you add anything, has there been as for as customer lift, there is a little bit alluded to in the expanded report. Are you seeing any sort of mix change as far as being dependent on fewer customers or about the same, how is your spread from that standpoint on that?

[Dick Warzala:]

No, it’s about the same. We are looking at the existing customer base and as we work on their next generation product, certainly we’re working to apply more of our products as part of the solution. But I would say it’s about the same.

[Michael McCroskey:]

Sure. And finally, and I realized very limited what you can say in this area. But the acquisition trial I assume is still very much a part of your long-term planning. Is there any color at all you can throw in that direction?

[Dick Warzala:]

I can comment and confirm what you stated, that is very much a part of our future growth strategy. And we are working in that area. And we believe that’s an essential part to help for us to meet the strategic goals to double our company over the next three to four years.

[Michael McCroskey:]

But, and you have been extremely successful in this area obviously over the past few years. Are the type of deals that are coming to you, are you getting any feel for it’s getting a lot tougher, it’s - we’re getting some NOS up, so it’s just a matter of negotiation, any sort of change in the field so to speak that you can allude to?

[Dick Warzala:]

Well, I think one of the things that we’ve seen is, if you take a look at the cost of the deals like whole market itself we’ve seen an increase in the valuation. I mean, there is a lot of factors that go into that of course if you’re writing off slow steady growth in the market, and cost of capital is still quite low. We’re not going into a lot of detail about what we believe our formula for success is. And I know you mentioned that we’ve been very successful in executing these deals. We will continue in the direction we’ve taken in the past. We’re not auction guys. We really believe that we are very well focused on what makes sense for us. And we’re not big on overlapping with the current products that we currently have and creating internal competition we feel that there is quite a bit of growth left out there for complimentary products and expanding that. I would say to you, it’s one of the things that you wanted to specifically say well, how are you going to do? What’s next up on your radar list? Is, I mean, we’re looking electronic software as the critical element for us to continue our growth in the future and again expand those margins. So, same approach as the past, we’ll develop relationships. We look for those that are complimentary. We look for those that are in excellent strategic fit that the value of the two entities together is greater than individually. And we will continue to move down that path.

[Michael McCroskey:]

I appreciate it. And I’ll finish up the way I always do. On behalf of my group, we really, really appreciate your focus on the long-run. That’s what we’re in here for. Thank you.

[Dick Warzala:]

Well, thank you Michael. We appreciate you and your group.

[Operator:]

[Operator Instructions].

[Dick Warzala:]

Okay, operator. If there are no more questions then we will end the conference call. And we certainly want to thank everyone for participating again. And we look forward to talking to you at the end of our second quarter results.

[Operator:]

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