Allied Motion Technologies Inc.
Q4 2015 Earnings Call Transcript

Published: 10 Mar 2016

[Operator:]

Thank you for standing by, this is the conference operator. Welcome to the Allied Motion Technologies Fourth Quarter and Full Year 2015 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Allied Motion. Please go ahead.

[Deborah Pawlowski:]

Thank you, Anastasia, and good morning, everyone. We certainly appreciate your time today, as well as your interest in Allied Motion Technologies. Joining me on the call are Dick Warzala, our Chairman, President and Chief Executive Officer; and Mike Leach, our Chief Financial Officer. Dick and Mike will review our fourth quarter full year results and provide an update on the company's outlook and strategic progress. After that we will open it up for Q&A. You should have a copy of the financial results that were released yesterday after the market closed and if not, you can find them on our website at www.alliedmotion.com. You will also find on the website if you haven't received them yet is, are the slides that accompany today's discussions. If you would, with those slides, please refer to number 2. As you are aware, we may make some forward-looking statements on this call during the formal discussion, as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the company with Securities & Exchange Commission. These documents can be found on our website or at sec.gov. So with that, if you turn to Slide 3, I will turn the call over to Dick to begin. Dick?

[Richard Warzala:]

Thank you, Debby, and welcome everyone to our fourth quarter 2015 conference call. I'm going to start by reminding you of our long-term goals and to discuss our strategy to get there. We are intent to become the motion solutions leader at our target markets and we are confident that we have the capabilities to do so. Our extensive motion technology and applications expertise combined with our broad product and solutions capabilities provides a solid foundation and paved the way for us to achieve our goals. Additionally, we focus on our defined target markets since the applications we address in those industries requires highly precise and challenging motion control solutions. We expect to grow both, organically and through acquisitions as we advanced our information technology infrastructure to work more efficiently as one allied. On acquisitions, our most recent acquisition of Heidrive in Germany is a great demonstration of gaining both, geographic and customer penetration, as well as product line expansion and strong engineering expertise. As noted on Slide 3, investment and engineering and development is a critical element for our growth as well. Our engineers have in-depth knowledge of customer applications and are creating solutions that combines our motor, gearing, feedback and driving controlled technologies to address complex motion requirements. We believe our competitive position and our margins are improved by employing lean manufacturing processes and continuous improvement practices throughout our organization. We restructured our corporate organization to further this effort in 2015 by bringing on Mike as CFO and Rob Maida moving to his new role to oversee our IT and operational excellence functions. Our business system is called Allied Systematic Tools, which we refer to as AST. Its purpose is to provide processes to improve quality and on-time delivery, eliminate waste in all areas of our business and drive growth through design and process innovation. We are a strong cash generating business, we also have the financial flexibility to find acquisitions that fit our profile and invest in organic growth through engineering and development while continuing to support our dividend program. So if you will turn to Slide 4, I will hit on some highlights for the quarter and year, and then turn it over to Mike for more in-depth review of the financials. We believe we had made significant progress in 2015 advancing our strategy. We had some critical wins that demonstrated the success of our one allied approach providing solutions base, integrated offerings to our customers. In fact, we have several new multi-product motion control solution wins that will be moving into production during 2016. We restructured our corporate operations to be more efficient as I mentioned. We're also implementing significant changes in our information technology infrastructure, both hardware and software throughout the organization to improve communications, project management and the efficiency of our entire company. While this is a several year exercise, the implementation plan gets us quite far as we move through 2016. As to revenue for the year, the impact of the economy on our customers across some of our target markets challenged our efforts to grow revenue and earnings following a record 2014. For 2015 if you exclude the impact of foreign currency translation, revenue was similar till last year as strong results in our European operations helped to offset the challenges seen in the U.S. market. We continue to evolve as a global company. About two-thirds of revenue in 2015 was from the U.S. while one-third was from outside the U.S., primarily Europe, Canada and Asia. Excluding the FX impact, revenues outside the U.S. were actually up in 2015, further demonstrating our commitment to be a global player in our industry. Looking at the fourth quarter, it came in weaker than we had anticipated. Our vehicle, industrial into aerospace and defense industries were tracking nicely through the first three quarters of the year but took a dip in our served markets in the fourth quarter. Medical electronics however, provided growth to help somewhat offset these impacts. Nonetheless, fourth quarter revenue excluding foreign currency impact was down 14%. Even on lower reported revenue, gross margin held up fairly well as product mix and our efforts with AST helped to drive margins and productivity. Overtime, we believe there is still room for margin expansion and we continue to invest in engineering and development which we believe is core to our future success. We are a strong generator of cash which helped us to pay down debt in 2015 while continuing to make investments in our business. Cash at the end of the year was $21.3 million, of which approximately 80% was in Europe. Net debt at year-end was down 23.1% or $14.2 million. Subsequent to the end of the year we used about $11 million of our cash in Europe to purchase Heidrive. We have some flexibility with our debt structure. I told you in October, and I will allow Mike to elaborate more on this topic. So, Mike let me turn it over to you for the review of our financials. Mike?

[Michael Leach:]

Thank you Dick. Please refer to Slide 5, revenue declined 7% in 2015 which reflects lower demand across a number of end-markets. Improving economy in Europe and stronger demand from our medical and electronics partially offset this. The effects of foreign currency exchange rate, which had a $15.4 million negative effect on the revenue for the year will mask these improvements. Sales to U.S. customers were 66% of the total sales for the year, which remain unchanged last year to the balance of our sales in Europe, Canada and Asia. While we had expected the fourth quarter decline in the vehicle market, the slowdown for the Industrial and Aerospace and Defense markets was heavier than anticipated. As Dick mentioned we had some bright spots in the medical and electronics market. For the quarter 65% of the sales were to U.S. customers compared with 67% in the same period last year. With the balance of our sales to international customers again primarily in Europe, Canada and Asia. Looking at Slide 6, full year operating income was $20.9 million or 9% of sales. Compared to $24.2 million or 9.7% of sales in 2014. Helping to partially offset the market pressure, was a continued shift to more solution oriented sales and increased efficiencies tied to the applications of AST. E&D expenses as a percent of sales was 6.1% in 2015 compared with 5.6% in 2014. Reflecting our continued commitment to investing in new product and solutions development for customer applications. SG&A expenses for 2015 decreased to $2.3 million compared with 2014. The decrease is primarily due to the reserves made in 2014 related to a pricing dispute which was settled in the fourth quarter of 2014. Along with reduced incentive compensation and consulting expenses. For the quarter operating income was $2.5 million and included $0.6 million in acquisition related costs. Excluding those costs operating income was 6.1% of revenue in the quarter. We will now move on to Slide 7 where we will look at adjusted EBITDA and EBITDA margins to gain our performance. We use adjusted EBITDA because we believe it is a good measure of operating performance. These are non-GAAP measures so please review our reconciliation and related disclosure in our release and at the end of the slides. For 2015, adjusted EBITDA decreased to $31.2 million from $33.9 million last year. Since 2013, adjusted EBITDA has more than doubled and looking back at 2011 the compounded annual growth rate has nearly 30% which underscores the strength and earnings power of the company. As expected, interest expense was down for the quarter in four year period due to lower debt balances. The company achieved net income of $0.7 million or $0.07 per diluted share compared with net income of $4.9 million or $0.53 per diluted share for the same period last years. Full year net income was $11.1 million or $1.20 per diluted share compared $13.9 million or $1.51 per diluted share in 2014. We are at a strong position to support growth as depicted on Slide 8. We generated cash from operations of $20.1 million in 2015 which supported organic initiatives including $4.7 million in capital expenditures that allowed us to reduce debt by $6 million in 2015. Debt net of cash was $47.5 million or 42% of net debt capitalization for year-end. We expect to continue paying down debts through 2016. We are also currently evaluating a number of approaches to further strengthen our balance sheet with respect to our $30 million senior subordinated notes which allow for early payment come October this year. We are talking to a number of banks and expect that we will be able to substantially lower our costs and debt at that time. We ended the year with a cash balance of $23.8 million up $8.2 million from year-end 2014. Subsequent to the end of the year of January 12, 2016, we completed the Heidrive acquisition and funded half of the EUR 20 million transactions with existing cash on hand in our European operation. Our DSO remained at 44 days at December 31, 2015 compared with 44 days at the end of 2014. Our Board of Directors recently declared a 2.5 per share cash dividend that is payable March 29, 2016 for shareholders of record March 16, 2016. Bookings for 2015, fourth quarter were $54.2 million or $56.6 million when excluding unfavorable FX compared with $56.9 million from the same period last year. Full year bookings excluding FX were $247.4 million compared with $251.5 million last year. While backlog was down about 5% year-over-year when the $4 million unfavorable effect of FX is excluded backlog at the end of 2016 was relatively consistent at the end of prior year. I will now turn the meeting back over to Dick.

[Richard Warzala:]

Thank you, Mike. We will continue to invest in technical resources and engineering and development to ensure we move forward successfully with our shift from a component supplier to a more complete solutions provider. We have three solution centers, North America, Europe and Asia that are providing the support required to sell multi-technology solutions. And we plan further development and promotion of our parent brand Allied Motion in 2016. For 2016, it would appear after the decline of orders for the fourth quarter, the quarters are beginning to return to a more normalized level. We think that while the U.S. industrial economy has not strengthened it does appear to be stabilized. The demand push out within our vehicle market at the end of the year appears to be subsiding and if it continues we could project a return to normal levels later in 2016 and we are encouraged with Europe's recovery. While moderate it is a healthier environment. Our January acquisition of Heidrive, a motor and motor systems solution provider based in Germany will contribute to revenue and earnings beginning the first quarter. Heidrive had revenue in 2015 of roughly $32 million. Our global production footprint also enhances our value proposition as a supplier for multi-national companies who require support around the world. We will continue to evaluate and find areas to leverage our current manufacturing and sales footprint to drive sales and improve efficiencies. Collectively, these initiatives all tie into our global structure and our one allied approach. We expect the multi-product Motion Control Solution wins I mentioned earlier to contribute to 2016 sales and to continue for the life of the customer product life which can span many years. We also have a very active pipeline of new opportunities where we believe our integrated solution capability provides us with a competitive advantage. These solutions command higher margins because of the incremental value for the application and design engineering expertise. As Mike mentioned, we expect to reduce our cost of debt during the year and have sufficient flexibility to support organic and inquisitive growth. 2016 will be a year of transformation as we execute our initiatives to integrate sales, organize our solution centers and implement systems and processes to improve communications and information flow. We have aggressive action plans to make these changes even as we work to grow sales and identify acquisitions. I have a great deal of confidence in our team to take these challenges head-on. With that let's open the line for your questions.

[Operator:]

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

[Sam Schaefer:]

Hey, good morning gentleman. I appreciate your time today.

[Richard Warzala:]

Good morning.

[Sam Schaefer:]

Just a couple of questions, can you describe the full financing of Heidrive which I thought by the way was an excellent acquisition, but you've only discussed the cash. How did you pay for the rest of that?

[Richard Warzala:]

I'll let Mike go ahead and answer that.

[Michael Leach:]

Sure. We just pretty much did a simple amendment to our revolving credit facility. We've expanded the facility sufficiently to accommodate the balance of the acquisition.

[Sam Schaefer:]

I see. That's what I gathered. So 50% is on your revolver at this time?

[Michael Leach:]

That is correct.

[Sam Schaefer:]

Nice. What type of terms would you expect after refinancing that sub-debt today?

[Michael Leach:]

Well certainly sufficiently improved from where we currently stand. Again, we continue to explore this. The market is a little dynamic with respect to that. Again I think without getting into specifics I think the parameters of both the term A and term B market are pretty well known facts in the market place.

[Sam Schaefer:]

All right. Regarding your, obviously the ECB announcement this morning has consequences for the Euro. We recently talked about FX issues for you. How do you process the environment that you're looking at for the foreseeable future in Europe?

[Richard Warzala:]

I mean, for us as we mentioned, 35% of our business is outside the U.S. and Europe is the significant portion of that, and of course for the acquisition of Heidrive it increases a percentage of our sales in the European market. I think, company standpoint, we have somewhat of a built-in hedge and that with revenues being, let's call it 40% plus outside the U.S. and 60% within the U.S. And I think that plays into our, and that was a conscious effort on our part to insure that we were a global player. So I think that's the best way we can look at it, and hopefully that answers your question.

[Sam Schaefer:]

I appreciate that. On slide 90, talk about more normalized revenue levels. How would you define normalized for you at this point? So $60 million a quarter was your steady state the last four or five quarters, $50 million's a little low but you got Heidrive, does that another seven to it or eight, so is $68 million to $70 million a steady state quarterly rev number to look at then?

[Richard Warzala:]

Yes, go ahead Deb.

[Deborah Pawlowski:]

I was going to just jump in and say it seem we don't really give guidance and we have a lot of moving parts that are happening within the industry. But, yes, what we're saying is that the $50 million was a major step down, obviously, from where we had been running before. Heidrive does come in the first quarter, so you can kind of figure them in on leveled basis based on what we had said they do annually.

[Sam Schaefer:]

I appreciate you don't give guidance but you did talk about a normal level. I just wanted to understand what you meant by that.

[Richard Warzala:]

We said normal -- I think that normalized and again we can only use the past to normalize and of course when you look at FX impacts too, I mean that has the tendency to change things for us. And as we can tell, as many U.S. based companies felt the effects of that over the last year, so...

[Sam Schaefer:]

Yes, I completely appreciate it. Last question and then I'll jump back in the queue here. You talked about potential gross margin expansion. What's an acceptable gross margin going forward given the AST and initiatives that you have?

[Richard Warzala:]

Well, again, it's incremental improvements and also as new winds come on board that are generating, we watched it very closely, I think we've talked about this in the past that we're looking at the new projects and we certainly are focusing on those allow us to drive margin improvement. So I think looking at it incrementally and we do feel that there is room for us to continue to improve in that area.

[Sam Schaefer:]

Great. Thank you and good luck.

[Richard Warzala:]

Thank you, Sam.

[Sam Schaefer:]

Thank you.

[Operator:]

[Operator Instruction] The next question is from Rahul Sheshan from Voltara Capital. Please go ahead.

[Rahul Sheshan:]

Hi, guys. You talked a little bit about the Heidrive acquisition being accretive. Can you give us some color on either EBITDA margins or gross margins toward that business?

[Richard Warzala:]

They're comparable to the rest of the company. So -- yes, go ahead.

[Rahul Sheshan:]

Sorry, go ahead.

[Richard Warzala:]

No, just as I was saying it's comparable to they're right on par with what we see with the existing company.

[Rahul Sheshan:]

And in terms of the end markets that that business serve, is it primarily the vehicle industry?

[Richard Warzala:]

No. Actually it does give us some diversification there outside of the vehicle industry. So, they're medical, there is a medical applications, there is automation, industrial automation. Primarily I will call it industrial applications but there is also a significant portion of medical.

[Rahul Sheshan:]

Is there any way you can provide us maybe a high level breakdown in terms of, obviously you had some weakness in vehicle in the most recent quarter? Is there any way you can provide us a breakdown in terms of how much of your end market in terms of revenue in vehicles versus aerospace defense versus medical, electronic, industrial?

[Richard Warzala:]

We can do that Raul, and I think, you got to remember when we talk about markets and we've mentioned this in the past and just for those who may haven't heard this is that we are very specific in the way we look at markets. So it's important to know that when we say vehicle, and I'll give you some color on that of what we mean by vehicle. And even when I give you some of the end markets that we're looking at and that we're serving in vehicle, sometimes it's very application specific within those markets. So we sub-segment to the lowest possible level where we feel it gives us the best opportunity to win, and then once we do win to apply that win in the same applications in the same market. But for example, what we call vehicle includes trucks, it includes we say off-road equipment and something that we talked about off-road equipment can be construction equipment and agricultural. In this case, equipment larger vehicles, we have material handling which all types of material handling, whether it's automated guided vehicle, material handling, lift trucks, anything that is involved in motion and moving material. We talked internally, bus and RV, we put those two together, marine vehicles. So you can see how expansive it is, automotive. We have an automotive segment, all-terrain vehicles, utility vehicles and even rail. So I think if you get a flavor for that, that's what we classify as vehicle and it represents roughly 50% of our business.

[Rahul Sheshan:]

And your next largest?

[Richard Warzala:]

Now you're getting too specific.

[Rahul Sheshan:]

Okay.

[Richard Warzala:]

But let's say it's, we talk about, I gave you more information I've ever given you in the past about vehicle by the way. But we breakdown and we talk about, our segments we say vehicle, we say medical, we say industrial, we say electronics, we say aerospace and defense, and let's just say that those are all pretty comparable in size. That's why, the question that came up about diversification with Heidrive as you can see it does add business in some of these other segments which again is good from a market diversification standpoint in case we see major swings in one area or another.

[Rahul Sheshan:]

Thank you. That's great color. I guess in terms of just trying to understand where that weakness that you talked about in the vehicle sector. I don't know if you can give us a little bit more color on where are you actually seeing that. I mean you talked about a number of applications and a number of specific end market. Where are you particularly seeing that weakness and what gives you the confidence that things are going to get better going forward?

[Richard Warzala:]

I won't get into specifics of the vehicle markets that we talked about here as far as which ones. I think that's best to just leave it alone and just say the vehicle. And the confidence level, it's all related in, we have many long-term blanket contracts, so as we look at call-offs that are occurring several months in advance. Now, I will mentioned that those are good and they do give you some guidance and ability to internally forecast what demand might be, there are terms that allow changes that creates, and especially the fourth quarter last year we saw some significant fluctuations in that demand and the push outs we talked about and some of that we believe is you got end of the year inventory reductions by public companies and you also have the situation where if the end market demand wasn't there then we will feel the impacts as it pushes down to us. So let's just if we can leave it at that and say at that we do work off a blanket contracts for a large part of our business and we are able to look at a forecast although short term fluctuations can occur whether inventory balancing or just based on market demands. And also what happens here, is one other piece of color for you is that all companies are attempting to drive down lead time and as you drive down lead time they want more flexibility in the shipping window for example let's call it that where in the past you might get firm commitments for 12 weeks or 8 weeks or 6 weeks that's being reduced across the board.

[Rahul Seshan:]

Okay, great. One last question, you talk a little bit about acquisition opportunity. You have done one big one and one small one. I guess how are, you looking at the market right now. What are you seeing in terms of the acquisition opportunities? Are you looking to continue to diversify ways from cost of vehicle and marketing, Heidrive being something, a way to the respite away from lot of different end markets? I don't know if you can talk a little bit about what you are seeing and types of acquisition opportunities you are looking for?

[Richard Warzala:]

Sure, I want to be careful that I don't give the impression that we don't like the vehicle market because we do. Vehicles provide, and especially if you see the broad base of vehicles, you listen to how we define that, this vehicle and all types of vehicle applications. There is a continuing electrification of vehicles and it's a growing market segment for us. So, it's not just we get into a vehicle as you know, you look at the number of motors that's in vehicles of all types. And certainly the ones we have talked about here. That continues to drive significant opportunities for us and we are well focused and we have lead positions in some of those segments. So we are clearly not interested in saying that, or we can say to you the vehicle market is not something we want to serve, we absolutely want to serve it and we see a continued growth there. So, diversification comes from where there's an opportunity, whether its geographic or other market opportunities where we feel it gives us the ability to enhance our system solutions, we are well in tune with that and that's what we are looking for. So I say to you, there are opportunities out there. We will look at continuing to expand all segments of our business and we can't necessarily decide that just because we want to do that that the market's there for us. But if we see market softness we remain in a good cash flow position, we feel that opportunities are going to present themselves to us and as we have done in the past I think we stay focused we don't get carried away, get excited over anything or any acquisition and we will be prepared to walk if it doesn't fit our strategic mold so, they are happening and we are working on them. I am not going to sit here and tell you that something's going to happen next week or a month or three months from now but we will continue. We think there are opportunities that will, and hopefully we are going to use that as an avenue to grow our business.

[Rahul Seshan:]

Great, thanks for your time.

[Richard Warzala:]

No problem, thank you.

[Operator:]

[Operator Instructions] We have a follow-up question from Sam Schaefer of Global Value Research Company. Please go ahead.

[Sam Schaefer:]

Dick, thanks. I really appreciate the added color on your market breakdown, Vehicle med etcetera. With that in mind, as I think about vehicles I am thinking that you are doing something in the assembly or manufacturing so you are selling solutions that facilitate the improved efficiency at the production level, is that correct?

[Richard Warzala:]

Primarily, end item. Although we do, our vehicle market, when we talk about vehicle it's really end item, end-use. And if we are going to talk about being involved in the process solutions that would fall under a different market segment for us. So, the answer to your question is when we talk about vehicle, its used products will be used in vehicles, not to produce vehicles.

[Sam Schaefer:]

Ah, interesting, so then in the world I live in, I think of vehicles as auto, truck and off-road. Can you give us any color in terms of where that softness was you experienced in Q4?

[Richard Warzala:]

Same question Riley asked. [Crosstalk].

[Sam Schaefer:]

Well, I ask because auto sales have been pretty robust, I think trucks have been quite weak and the off-road mining etcetera has been weak so just want to understand where that softness was and gauge in our minds where you might see it pick up in the future? That's the only reason I am begging the question.

[Richard Warzala:]

Sure, I understand the question and I can appreciate you asking it and I hope you can appreciate that for competitive reasons we try to stay, keep things fairly close to the vest there. And we will continue to do so, but I will say to you that in the applications that we have, we have several new opportunities in the vehicle markets and vehicles tend to be larger, volume opportunities for us. So we have several there that we are excited about. And not necessarily in the traditional definition that you have what those vehicles are okay. But there are so many applications in vehicles and they are growing. Whether its emissions, whether it's steering, whether it's working with auxiliary equipment, whether its agriculture equipment to control precisely metering, whether its guidance in vehicles, all of those traction, so, I think, we are very excited about the future opportunities and we did hit a little snag and I will say to you that go back to my comments about demand adjustment, end of year inventory, being careful about end of year inventories and it comes down to our target market segments. As I said, I really don't want to get into any more detail on that, more for competitive reasons that anything else.

[Sam Schaefer:]

Fair enough, appreciate it. Just to anecdote the inventory we followed the sales data and particularly auto sales inventories have picked up towards the end of year so that might just be seasonal type of inventory management, but I am curious about the question about Heidrive, you said the end markets would fairly similar. This is a German company, the Germans make a couple of cars so, that I would think would really have some opportunity but it's only a $30 million business. Can Heidrive be something significantly larger than $30 million in the future?

[Richard Warzala:]

Yes, I believe so. One of the major benefits of Heidrive and we are really excited about, is that the product line design that has gone on for the last five or six years at Heidrive and we are getting the benefit now, you hear us talk quite a bit about quick shift and the ability to be first in a solution and Heidrive did a ground up design of that product line where in their production facility is near that design of the product, is where they have a production line, which has a zero change over time to build a unit volume of one. And with the design that has gone into it, the concepts and so forth and the structure, they have the ability to come up with a million items basically configured to order. So, if you can envision this for us as we are serving the global market and we are looking for being first and providing the quick solution. There is a discussion immediately that's occurred between the Allied Technology units to discuss how can, we leverage that capability in a global market place. Heidrive sales into the industrial automation market place. And they, do that because of this capability, to configure to order and run a unit volume of one which we will call a typical production run 500-1000 units at a time. So we believe this gives significant flexibility, opportunity to get in first and win and truly offer a configurable product in the servo motor control area. So, that comes across, I can't stress enough, when we talk about solution centers, that first point of contact getting the right solution in the customers hand and winning quickly and it really does facilitate that now. They are already doing that, they are primarily focused on the German market but we hope that we can help expand that to a global market. And you said automotive, they have some small, I will call it a low volume in the specialty automotive segment but there's opportunities there too. They carry a great brand, they have been recognized to be high performance and customer engineered and so they are gaining great traction in the market and I think we have got them at the right time here so. And we can help in the global expansion.

[Sam Schaefer:]

That's interesting, I appreciate it. It strikes me with the weak Euro and now we have manufacturing capacity, it sounds to be quite efficient in Europe today. I wonder how much of a U.S. or non-European production could be located to Germany to take advantage of their production and weak Euro to export to other parts of the world, if at all?

[Richard Warzala:]

Well, let me expand on that. They have their primary volume production facility for, they will call it legacy products and so forth but as they get into volume in the Czech Republic so they have a nice operation in the Czech Republic so I think they have done a great job. If you take a look at the German facility, they have an ability to customize very quickly, they have great machining equipment. They actually have die-cast equipment, they have a prototype lab and a development lab that can respond quickly to customer demands and they have these production lines as I mentioned. Set up time to zero, let me not exaggerate, 30 seconds where 30 seconds to change over to build one model from next and next to it is a higher volume line which is set up for running volume production so it doesn't disrupt that. So a really nice combination that utilizes the Czech Republic and it is within a couple of hours drive and utilizing the German operation for its quick run, prototype and even via production for servo model production.

[Sam Schaefer:]

Very interesting, again thanks for the added color on your marketplace. That's very helpful as a shareholder.

[Richard Warzala:]

You are welcome Sam.

[Operator:]

We have a follow-up question from Rahul Sheshan of Voltara Capital. Please go ahead. I am sorry this is actually Michael McCroskey of Princor Securities. I apologize.

[MichaelMcCroskey:]

No problem, I hope everyone is well.

[Richard Warzala:]

Hello, Michael. How are you?

[MichaelMcCroskey:]

Doing well. Quick question, I guess it's much a comment but I am interested in the fact that you all are seeing it the same way. From the balance sheet through these acquisitions and everything else, I assume you feel very much on track from where you want to be. Notice there was a draw down on receivables. Is it there anything on the balance sheet side that seems to be going in a very good direction? Any comments there?

[Richard Warzala:]

I think you just suggested, everything is directionally the way we would have anticipated and we will certainly take the opportunity to continuously improve our working capital, there is a blip if you see on the balance sheet, and maybe the inventory is a little higher given where the revenue was in the fourth quarter. Given, there was an anomalous event that led to that but again, by no means the significant change, just directionally compared to other items in the working capital to the opposite direction.

[MichaelMcCroskey:]

I actually took that as a positive considering the push outs since you probably get caught with more inventory than you apparently did so.

[Richard Warzala:]

Well, that's exactly right. That's the major driver of that.

[MichaelMcCroskey:]

And I guess I am coming at it from a different angle, so don't shoot me for trying. Would you say that the oil spike down had an effect on your vehicles?

[Richard Warzala:]

Yes, well I am not going to say if that had an effect on our vehicles but it did have an effect on, we didn't talk about oil and gas as a segment reserve and it was down. I think you have seen that across the board with any company that oil and gas has had major impacts on some companies. And it did have an impact on us in fourth quarter answer to your actually.

[MichaelMcCroskey:]

But on the vehicle side, obviously looking at electric vehicles, probably not, I am hearing not so much?

[Richard Warzala:]

No. I don't think it had an impact.

[MichaelMcCroskey:]

Do appreciate it.

[Richard Warzala:]

Thank you Michael

[Operator:]

Next question is from Rahul Sheshan of Voltara Capital. Please go ahead.

[Rahul Sheshan:]

Hi, I just wanted to touch base in terms of capital allocation. You generate a lot of cash. You're up for a re-financing of your debt in October. There is obviously some acquisition opportunities out there. And you pay dividends, I mean how are you thinking of capital allocations? Do you buy back stock obviously it's taken a big hit today? Is that something you guys look at and how do you think about that and how do you think about trying to use pre cash flow that you are going to raise?

[Richard Warzala:]

Sure, good question. Well, we always discuss capital utilization and what's the best way to do that. We always do that frequently. It is a topic that comes up frequently about buy backs and so forth, we think that, obviously we are in a great position when Heidrive came along. We had cash sitting in Europe. It was primarily a U.S. credit line that that we had to pay in U.S. dollars and even with the re-structuring the amendment to this agreement now gave us a revolver, increase the revolver in Europe. So, we are generating cash in Europe and we were in a position to utilize our cash and to complete the transaction very quickly. Our banks, our lenders were supportive of us to increase the revolver and to increase the line in Europe and we think that we like that for the cash generation to put us in the position if the market stays down for any extended period of time. Typically, we have done a pretty good job of managing our cash, managing the company so that we are there and able to take an advantage of it and I think we will continue to do that, so a stock buyback, unless the stock went really far down, I am not so sure that that would be best utilization of our cash today or capital today. And we have new programs coming on that we are supporting internally to, in the numbers we have talked about engineering and development and to add further color to that, we have spent significantly on investments that we are making for future opportunities that we feel very confident about and that give us a good road path in the future. So our capital expenditures have been, as you have seen, running at a pretty constant level and we are investing, we see into opportunity, we invest into opportunity to save money, we have money to do that. And also, we have the cash to pull the trigger on a deal that and didn't have to repatriate the cash to buy the European company.

[Rahul Sheshan:]

Great, thank you.

[Richard Warzala:]

You're welcome

[Operator:]

There are no questions at this time and I would like to turn the call over to Richard Warzala for closing remarks.

[Richard Warzala:]

Thank you everybody for participating. It's a lively call and we appreciate your sticking with us here through this. So anyway, thank you. Long term we are confident that our strategy for Allied Motion will enhance our value proposition and prove to be a significant differentiator. We expect that this will ultimately grow our market penetration, expand our margins and strengthen our earnings power. Thank you for your time today. We certainly appreciate your continued interest and support and goodbye.

[Operator:]

This concludes today's conference call. You may now disconnect your line. Thank you for participating and have a pleasant day.