Allied Motion Technologies Inc.
Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Operator:]

Hello, and thank you for standing by. Welcome to the Allied Motion Technologies Inc. Second 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 of Allied Motion Technologies. Please go ahead.

[Susan M. Chiarmonte:]

Thank you, operator. Welcome to Allied Motion’s conference call to discuss the second quarter ended June 30, 2015, and thank you for joining us on the call today. We distributed press releases yesterday and this morning and copies are available on our Web site 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 that Internet broadcast or replay, go to the company’s Web site, click on the Investor Relations page and 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 this conference call. I will now turn the call over to Dick Warzala, Chairman, President and CEO of Allied Motion Technologies.

[Richard S. Warzala:]

Thank you, Sue, and welcome everyone to our second 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 to the activities and opportunities we see for the future. Once that is complete, I will then open the mics for questions. Now for some brief comments before I turn the call over to Rob. In our organization development press release from this morning, we announced that Rob Maida, our current CFO will be taking on a new position within the company starting Monday, August 10, as our new Vice President of Operational Excellence. The creation of this position supports our long-term strategy and demonstrates our ongoing commitment to AST within Allied Motion. Rob is a certified Lean Master and he developed a strong lean skill set while working for Danaher, Zodiac Aerospace and Allied Motion over the last 15 plus years. We are confident that with Rob’s combination of finance and lean skins, he will very capably lead the further implementation of AST, and drive a higher level of continuous improvement in all areas of the company. Also on the call today is Mike Leach, who will become the new CFO of Allied Motion concurrent with Rob moving to his new position. Mike brings vast experience in all aspects of the finance function and adds significant larger company experience specifically with fast growth companies. I firmly believe that the structural organization changes we are making strengthens our bench that will lead to continued growth in both the top and bottom line of Allied Motion in the future. With regard to our results, the strength of the U.S. dollar against foreign currencies continued to have a significant impact on our reported results and in the comparisons of the second quarter 2015 versus the second quarter of 2014. Reviewing the results on a constant currency basis, it is important to note that Allied Motion generated organic growth in revenues of 5% and organic growth in fully diluted earnings per share of 30% for the quarter. We believe that our focus on executing our strategy and concentrating on factors within our control are key to driving our growth and will continue to be instrumental to our 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. I’ll now turn the call over to Rob Maida.

[Robert P. Maida:]

Thank you, Dick. As was reflected in our press release that was posted Wednesday evening, the company achieved net income of 3.1 million or $0.34 per diluted share for the second quarter ended June 30, 2015 compared to net income of 2.7 million or $0.29 per diluted share for the same period last year. EBITDA increased to 7.6 million in the quarter from 7.2 million for the same period last year and adjusted EBITDA, which excludes stock compensation expense, increased to 8.1 million in the second quarter compared to 7.6 million for the same period last year. Revenues for the quarter were 60.5 million compared to 62.1 million for the quarter ended June 30, 2014. This is a decrease of 3%, which includes a 5% increase due to higher sales volume, while currency impact reduced sales by 8% due to the dollar strengthening against the euro and Swedish Krona. Looking at our total sales for the quarter, 64% were to U.S. customers, which remains unchanged from the same period last year with the balance of our sales to customers primarily in Europe, Sweden and Asia. The 3% decrease in sales reflects lower sales from both our U.S. TUs and our foreign TUs. Bookings for the quarter ended June 30, 2015 were 64.5 million compared to 63.5 million for the same period last year or an increase of 2%. Of the total increase in bookings of $1 million, 6.4 million is due to volume increase offset by unfavorable currency impact of 5.4 million, again due to the strengthening of the U.S. dollar and the ultimate translation of foreign currency to U.S. dollar. Backlog increased 4.3 million to 75.6 million at June 30, 2015 compared to 71.3 million at March 31, 2015 and backlog is down 5.2 million from 80.8 million at June 30, 2014. Our gross profit margins of 30% remained unchanged compared to the same quarter last year and are up 1% when compared to the quarter ended March 31, 2015. Total selling, G&A and engineering expenses were down 0.8 million for the quarter as compared to the same period last year. This decrease is primarily due to the reserves made in 2014 related to a pricing dispute, which was ultimately settled in the fourth quarter of 2014, along with lower incentive compensation-related expenses. Depreciation and amortization expense increased 0.1 million for the quarter from 1.8 million last year to 1.9 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. We had $1.3 million of capital expenditures during the quarter compared to 1 million for the same period last year. For the six months ended June 30, 2015, the company reported net income of 6.1 million or $0.66 per diluted share compared to net income of 4.8 million or $0.53 per diluted share for the same period last year. Adjusted EBITDA increased to 16.2 million for the six months year-to-date compared to 14.6 million for the same period last year. Revenues decreased 2% to 120.1 million compared to 122.5 million last year with sales to U.S. customers flat and foreign sales down 6% compared to the same period last year. Of this 2% decrease in sales, 6% is due to an increase in volume offset by an unfavorable currency change of 8% due again to the dollar strengthening against the euro and Swedish Krona. Bookings for the first six months of this year were down 5.2 million to 122.7 million compared to 127.9 million for the same six months last year. The total decrease in bookings is comprised of again increased volumes of 4.4 million offset by unfavorable currency change of 9.6 million. Gross profit margin achieved was 30% for the six months compared to 29% last year, which primarily reflects sales mix. Selling, general and administrative and engineering costs decreased by 1.5 million. This decrease, as mentioned earlier, is primarily due to the reserves made in 2014 related to a pricing dispute, which was ultimately settled in the fourth quarter of 2014. For the six months, depreciation and amortization expense increased $0.2 million from $3.5 million to $3.7 million while interest expense was down $0.3 million to a total expense of $3 million due to lower debt balances. Also for the six-month period, we had 2.7 million of capital expenditures compared with 1.6 million for the same period last year. The company had 11.3 million of cash on hand at June 30, 2015 compared to 11 million at March 31, 2015 and 13.1 million at December 31, 2014. During the quarter, our cash position increased 0.3 million and cash from operations generated $2.9 million. Major uses of cash for the quarter were debt and interest payments of 1.8 million and capital expenditures of 1.3 million. Total outstanding bank debt at June 30, 2015 was 73.3 million compared to 73.7 million at March 31, 2015 and 74.8 million outstanding at December 31, 2014. Net debt repayments were 0.4 million during the quarter and 1.6 million during the first six months. Debt net of cash position increased 0.2 million during the first six months of 2015. Our DSO decreased to 47 days at June 30, 2015 from 49 days at June 30, 2014 due to the resolution of a pricing dispute in the prior year, as previously mentioned, and its related past due balance in the prior year, and is up from 44 days at the end of 2014 due to higher volume in certain market segments, which traditionally carry longer payment terms. Inventory turns decreased to 5.7 turns at June 30, 2015 compared to 6 turns at June 30, 2014 and the same at the end of 2014. Our net stockholders’ equity at June 30, 2015 was $59.2 million or $6.37 per share compared to $52.8 million or $5.72 per share at the same time last year. Finally, our Board of Directors just declared a $0.025 per share cash dividend that is payable September 1 for shareholders of record August 19. With that, I’ll now turn the meeting back over to Dick Warzala.

[Richard S. Warzala:]

Thank you, Rob. In the earnings press release posted last evening, I made the following statements. The continued strength of the U.S. dollar poses a challenge in comparing our reported results on a true comparative basis to reflect the real change year-over-year. Without the strengthening of the U.S. dollar, revenues for the second quarter of 2015 would have increased 5% and fully diluted earnings per share would have increased 30% compared to the same quarter in 2014, as measured in constant currency. Year-to-date, revenues would have increased 6% and fully diluted earnings per share would have increased 39% as compared to the same period in 2014. With regard to our markets for the quarter, we experienced growth in our Aerospace and Defense, Medical and Electronics markets. Our Vehicle market were flat, while our Industrial and Distribution markets were down. As we move forward into the future, we will focus on improving internal operations efficiencies through the utilization of our Allied Systematic Tools and we will strive to enhance our growth opportunities through strategic acquisitions. We also 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’ll now provide more color on that PR and expand on the comments I made within the PR. First off, with regard to the currency exchange rate impact, I commented on the impact as it relates to our organic growth and earnings and revenues on a constant currency basis for both the second quarter and for the year. The important takeaway is that while the reported results do not reflect growth in the top line, on a constant currency basis Allied Motion is truly growing its revenues as well as improving the bottom line. We expect that the U.S. dollar will continue to remain strong through the remainder of the year and we are formulating our internal action plans accordingly. The PR went on to state that for the quarter, we experienced growth in our Aerospace and Defense, Medical and Electronics markets. Our Vehicle market was flat while our Industrial and Distribution markets were down. Once again, I would emphasize that we believe that our market and application diversification serves us well, and that we will continue to emphasize this balance as we look for additional opportunities in the future. In addition to the personnel developments we have now in our corporate office, we continue to make investments in people and in our technology units to drive growth in our target market segments. On the personnel side, we’ve added two program managers to provide focus and coordination of key projects for the increasing number of multi-technology unit projects that are currently active. We have also further strengthened our bench in the electronic design area with the addition of multiple new engineers to accelerate our new product platform introductions. During the second quarter of this year, we completed the first phase of a very extensive project to better understand what is necessary for Allied Motion to create benchmarked competitive advantages within our industry. Starting in the third quarter, we began making the necessary internal adjustments to ensure we position ourselves to realize the gains as identified in competitive advantage process. We will continue to work on the implementation phase into 2016 and we believe we are better focused and aligned to truly realize benefits on the investment we have made in this process. In the current quarter, we are diving more deeply into our design activities specifically in lean design and innovation to ensure we are both technologically and cost competitive to support our markets and customers and to ensure we achieve our strategic growth goals. The key takeaway on this is that while Allied Motion is driving continuous improvement to improve our bottom line, we are also investing heavily to improve our growth prospects in the future. As we move forward in the future, we will focus on improving internal operations efficiencies through the utilization of our Allied systematic tools and we’ll strive to enhance our growth opportunities through strategic acquisitions. I can’t emphasize enough that the investment in critical resources, for example, the creation of the Vice President of Operational Excellence position within Allied Motion demonstrates our commitment to accelerate internal improvements and strengthens our bench to allow us to continue our acquisition efforts and accelerate our growth in the future. In conclusion, the press release stated, we also 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. As mentioned several times in the past, in Allied Motion we believe that success is driven by having a sound long-term strategy supported by a strong focus on ensuring that the strategy is effectively executed and deployed. In addition to our strategy, we continue to develop and promote our culture defined by the acronym VIA, which in short stands for value, integrity and AST. Value creation, maintaining the highest level of integrity and utilizing Allied systematic tools to drive continuous improvements in quality, delivery, cost and innovation is a common link throughout Allied Motion worldwide. With that, I will now open the mics for your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Michael McCroskey of Princor Securities. Please go ahead.

[Michael McCroskey:]

Good morning, gentlemen.

[Richard S. Warzala:]

Good morning, Michael.

[Robert P. Maida:]

Good morning, Michael.

[Michael McCroskey:]

Congratulations, Rob. That’s an interesting development. Look forward to seeing how that develops going forward.

[Robert P. Maida:]

Thank you, Michael. I’m extremely excited and I appreciate the opportunity and I appreciate you saying that.

[Michael McCroskey:]

Obviously we had selling, G&A down; engineering up slightly; sales up slightly; a little better trend lines in the first quarter, so all that seems to be heading in the right direction. And diving through the release and the quarterly, there was some discussion, if I caught it right, that in Europe that’s what’s driving a little bit of the increase in the engineering. Can you throw a little color on that? Is that something that’s in development, that’s something that’s got to do with current backlog? Is there any take away from that?

[Richard S. Warzala:]

Sure. As I mentioned, we’ve added several new engineers and we have employed some consulting support in development of a next-generation product line that we see is critical to not only retaining existing customer base but attracting new customers in the future. And we expect that that investment, which was built into our plan here for this past year is going to be somewhere in the range of 1.2 million, 1.3 million in expenditures this year. Now some of that again, as I mentioned, is we’re utilizing some outside resources and it won’t repeat but we’ve also supplemented that to ensure that we can carry on and support what our efforts are in the future. It’s in the Vehicle area and it’s in an area of strength for the company, but we feel that we’re utilizing the technology that we have within the company to build a complete solution, and in addition to that looking at, as we talk about innovation, new ways to increase performance and meet the needs of our markets. So they’re pretty exciting. The market opportunities are quite substantial relative to our sales and we feel they’re quite substantial and that’s always a relative measure. And that’s one of the areas where we’re really excited about and will continue to invest in. So if you see the numbers, what the numbers do include is that investment that we’re making already, which are incremental above the prior year.

[Michael McCroskey:]

Okay, excellent. And my usual question, we still feel we’re online as far as your cash debt position going into the exploration of the short-term note next October. You all feel very good about your positioning where you want it to be and where you are. I realize the stronger dollar has thrown a little bit of a curve in here, but --?

[Richard S. Warzala:]

Yes. We still look at our cash flow as a strength for the company and we really don’t have any concerns about it whatsoever. If you take a look at the debt as a multiple of EBITDA, we’re still at a very good position. We feel we have opportunities to utilize our balance sheet even more.

[Michael McCroskey:]

As always, I appreciate the consistency gentlemen.

[Richard S. Warzala:]

Thank you. We appreciate you following us and continuing to be there for us in support.

[Robert P. Maida:]

Thanks, Michael.

[Richard S. Warzala:]

And while the next question may be coming up here, I do want to elaborate what Michael had mentioned and congratulated Rob. We do see this and we’ve been working towards this for a while, and we are very excited about it that it does place the focus on where our strategy says it should and the opportunities that lie. And I think the other thing it points out in the organization announcement was that IT will report to Rob, which again gives it a very strong focus. The addition of Mike Leach who’s here with us and he’ll be on the call the next time handling the financials. So his background is very strong in the financing area and working in international companies with multiple divisions, and we feel that again that strength that we’ve gained here really gives us the opportunity to move forward and accelerate our growth in the future. So I think it’s the combination. And Rob has real passion for lean and we’re all confident and looking forward to him devoting his full time efforts in that area.

[Operator:]

[Operator Instructions].

[Richard S. Warzala:]

We do have a question here that were emailed into us, there’s a couple of questions we have and I guess the one that says, how do you see FX impacting future quarters? Let’s put Rob on the hot seat and let him answer that one?

[Robert P. Maida:]

Sure, Dick. Future quarters, let’s make sure that we don’t provide guidance on anything, therefore, we will not or cannot provide too much insight. However, I think from an overall FX standpoint and hedging perspective, I’ll say, we continue to enhance our comprehensive hedging strategy and we will continue to execute the appropriate hedges when certain factors meet our parameters. With that said, as to the translation risk that we’ve encountered in the first two quarters, we currently don’t believe that hedging this non-cash risk with cash is the appropriate course of action. But again, in response to that question I just want to make sure that everybody is well aware that we continue to enhance our overall hedging strategy in the organization as a whole, and certainly will execute upon the appropriate hedges when the opportunities are such that we trigger those certain criteria. So hopefully that answers the question.

[Richard S. Warzala:]

There was one more question that was sent in and I’ll address that one. It says, are the corporate moves announced today an indication that you’re looking at more acquisitions in the near future? Carrying out a little bit of the discussion we had to address the questions that Michael had, I think the answer is yes. That we can clearly say. We stated in the past that we continue to look at acquisitions and strategic acquisitions, and we’re certainly doing that and strengthening our bench not only as I said for continuous improvement entirely but to put us in a position where we can actually really seriously look at some acquisitions or good strategic acquisitions in the future, not a bad one of course. So, anyways, the answer is it’s a continuing process and we are looking and we will continue to do so in the future. Okay. So, operator, that’s it for the questions that we’ve had emailed to us. So what we’ll do is if there are no more questions, and we’ll give it one more chance, and if not then we will wrap up the call. So could you please check once more?

[Operator:]

Okay. [Operator Instructions]. And there appear to be no further questions. I’ll hand it back to Mr. Warzala for closing remarks.

[Richard S. Warzala:]

Okay. Well, thank you very much, operator, and to everyone for attending our second quarter conference call. We certainly look forward to talking to you again at the end of the third quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for joining the conference call. This concludes the call. You may disconnect your lines. Have a pleasant day.