AMOT (2019 - Q4)

Greetings. Welcome to the Allied Motion Technologies Inc., Fourth Quarter 2019 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.I will now turn the conference over to your host, Craig Mychajluk, Investor Relations. You may begin. Craig My

Yes. Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion.Joining me on the call are Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our fourth quarter and full-year 2019 results and provide an update on our strategic progress and outlook, after which we’ll open it up for Q&A.You should have a copy of the financial results that were released yesterday after the market closed. If not, you can find it on our website at alliedmotion.com. On the website, you’ll also find slides that accompany today’s discussion. If you are reviewing those slides, please turn to Slide 2 for the Safe Harbor statement.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 discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov.I want to point out as well that during today’s call, we’ll discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides.With that, please turn to Slide 3, and I’ll turn it over to Dick to begin. Dick?

Thank you, Craig, and welcome, everyone. 2019 was a year in which we made significant progress towards achieving our long-term strategic goals and objectives. Despite the continued softness in Europe, we once again delivered above-market growth through the effective execution of our One Allied strategy.Fourth quarter revenue was up 19% overall and 10% organically, driven by strong demand in our Aerospace & Defense and Vehicle market. In A&D specifically, the advancement of our sales team has been driving these results as we further penetrate applications that require precision solutions from the ongoing electrification of defense vehicles.Full-year revenue also grew 19% to a record $371 million, and was supported by 9% organic growth. We continue to make progress towards further diversification of our business, with measurable growth in our Aerospace & Defense and Medical markets of 33% and 19%, respectively.In Medical, we are benefiting from the overall growth in our core markets and increasing our share by adding new customers and our overall content with existing customers. A further expansion and execution of our business operating system, Allied Systematic Tools, or AST, was a key component to our margin expansion in both the quarter and full-year, as we drive a higher level of continuous improvement in all areas of the company around quality, delivery, cost and innovation.Concurrently, the full-year benefit of our TCI business has strategically expanded our addressable market and was a strong contributor to both improvements in both gross margin and operating margin. As a result of the enhanced margin profile, we achieved strong bottom line results, with fourth quarter net income up 32% and the full-year reaching a record level of $17 million.Cash generation was solid during 2019, as we almost doubled the cash provided by operations compared with 2018. And we used that capital to reduce debt and fund expansion initiatives to support both current and future opportunities.Turning to Slide 4, we are also excited about our recent acquisition of Dynamic Controls Group, as we continue to build out our ability to leverage controlled motion solutions in a wide range of markets. First off, I welcome the entire Dynamic Controls’ team to Allied, and we are very excited about our bright future together.The strategic rationale for this acquisition was compelling. They have a strong and very experienced electronics and software engineering design team that significantly increases the available critical engineering resources within Allied. Their product suite solutions will further strengthen our medical market position around patient mobility and rehabilitation and enables us to further develop higher-level solutions with embedded electronics across our other major market verticals.From a financial perspective, Dynamic is expected to improve our overall gross margin profile and to be slightly accretive for the year. The integration of multiple system elements that are designed and manufactured by Allied, leverage the strength of our company, while also improving the overall value proposition for our customers. And with an expanded global marketing – manufacturing footprint, we are further enhancing the value proposition with the ability to service customers within the geographic markets that currently reside.With that, Mike, let me turn it over to you for a more in-depth review of the financials.

Thank you, Dick. We provide an overview of our top line on Slide 5. As a reminder, our results include TCI, which we acquired in December 2018. Fourth quarter revenue was up 19% to $87.9 million, despite an FX headwind and reflected double-digit growth in A&D and Vehicle. Dick touched on the specific drivers for A&D.Our Vehicle market was also solid in the quarter, as we saw higher demand in power sports and continued to benefit from a legacy commercial automotive program in Europe. We achieved organic growth of 10% in the quarter, reflecting new customers and applications, as well as strong macroeconomic drivers in the United States.2019 revenue reached a record $371 million, up 19% and it was supported by 9% organic growth. Demand was broad-based with growth in all of our major served markets and we saw a particular strength within A&D and Medical. Domestic growth also continued to far outpace the general industrial softness in Europe, which is reflected in the increase of sales to U.S. customers to 57% of total sale.Slide 6 shows the change in our revenue mix by market for the full-year, as well as each market’s annual growth. As we’ve talked about in the past, growing our A&D and Medical markets are an important element of our strategy to broaden the scope and diversification of the business.Keep in mind that the TCI business can be found in industrial and distribution and accounts for the 157% growth in distribution. TCI has performed as expected, as headwinds in the oil and gas market have been offset with nice growth in the water treatment and HVAC market.New product introductions have also been encouraging, including the recently introduced PQconnect, our software communications interface that can receive command and status data for industrial devices remotely.As depicted on Slide 7, our gross margin expanded 90 basis points for the quarter and year to 30.1% to 30.3%, respectively. These increases largely reflect our continued productivity initiative, higher volume and enhanced mix.As we have discussed on previous calls, the supplier issue that impacted us during the full-year 2019 remained a headwind as expected. We estimate the fourth quarter impact on gross margin to be approximately 40 basis points, as we were still working through the remaining inventory. There’ll be some lingering impact into the beginning of 2020 and we expect to exhaust the remaining inventory in the first quarter. As a reminder, we only expect to get back around half of that negative impact, given the pricing terms with the new supplier.Moving on to Slide 8, you can see the impact of our strong operating leverage, past investments and our infrastructure are now supporting higher volume. Operating costs as a percentage of sales declined to 100 basis points to 23.6% for the quarter. You can see the added leverage demonstrated the G&A and E&D expense summaries.And while operating costs and expenses did increase 50 basis points to 22.4% of sales for the year, those were largely related to additional personnel to support our growth and incremental intangible asset amortization related to the TCI acquisition. Most importantly, investments in our growth are at levels that can support and provide for expanded operating leverage in the future. Interest expense increased to $1.2 million in the quarter and totaled $5.1 million for the year, as we took on debt that funded the TCI acquisition.Turning to Slide 9, you can see our bottom line results. Net income increased 32% to $3.5 million, or $0.37 per diluted share in the fourth quarter, and was supported by a lower effective tax rate, due primarily to additional R&D tax credit.The effective tax rate for the year did increase to 28.6%, which reflects the $433,000 increase in the income tax provision in the third quarter of 2019 related to a tax assessment in a foreign jurisdiction for a previous acquisition. Despite that, our 2019 net income increased 7% to a record $17 million, or $1.80 per diluted share.Excluding the tax item and other atypical costs, adjusted net income for the year was $17.9 million, up 10%, or $1.89 per diluted share. Accordingly, I encourage you to review our non-GAAP disclosures and reconciliation tables that are provided in the release and slides. We anticipate the effective tax rates for fiscal 2020 to range between 27% and 29%.Adjusted EBITDA for the quarter was $10 million, or 11.4% of sales. Full-year adjusted EBITDA increased 24% to $47.5 million, while adjusted EBIT margin increased 40 basis points to 12.8%. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.Slide 10 and 11 provides an overview of our balance sheet and cash flow. At year-end, total debt was $109.8 million, down $12.8 million from year-end 2018. Debt, net of cash, was approximately $96 million, or 44.7% net debt to net capitalization.We generated outstanding cash flow from operations of $17.5 million in the fourth quarter, bringing the 2019 total to $34.5 million. This was used in part to fund our annual capital expenditures of $14.9 million.We expect our fiscal 2020 CapEx to range between $15 million and $18 million, which primarily consists of investments for new customer projects, next-generation off-road vehicle steering capabilities and completion of manufacturing lines in our China facility to support the Vehicle market project wins.2019 inventory turns were 4.1 times, an improvement from last year as we’ve done a better job balancing our strong sales pipeline with a tight supply chain. And our DSO was at 46 days, a 10-day improvement from 2018.I’d like to add that we announced in February that we secured a new $225 million senior secured revolving credit facility with an accordion feature allowing expansion up to $300 million. This refinancing expanded our borrowing capacity nearly 30%, reduces cost of debt and enhances flexibility to continue to drive our growth strategy.We will, however, continue to prudently manage our balance sheet, as our capital allocation strategy has not changed. Our primary focus is advancing internal and organic growth initiatives, as well as paying down debt to reload for future acquisitions.The Dynamic Controls purchase price was $15 million plus cash acquired, it was funded with borrowings under our revolving credit facility.I’ll now turn the call back over to Dick.

Thank you, Mike. As depicted on Slide 12, full-year orders grew 9% to $366 million. And absent unfavorable FX, orders would have been nearly $373 million, a very solid level given the softness in Europe. Backlog at year-end was approximately $125 million. About 80% of our backlog is expected to convert in the next six months and most of the remaining over the next 12 months.As a reminder, just a nominal amount of the $225 million in the several vehicle market awards we previously announced are included in our reported backlog numbers. We have begun shipments at very low levels for the first of three seven-year awards and we expect production for these projects to ramp up this year and through 2021.It is worth noting, like many others, we are paying close attention to development relating to the coronavirus. First and foremost, we are focused on the health and safety of our employees. And we are pleased to report that at this time, all of our employees and families are safe and healthy.Our facility in Changzhou, China was closed for Spring Festival when the outbreak in China occurred. While we were delayed from reopening for a couple of weeks, the facility is now fully operating. I would also note that our new facility in Suzhou, China, that came along with the Dynamic Controls acquisition, also experienced the same type of delays in reopening.From a supply chain perspective, while we have not yet seen any significant impact, we are anticipating some challenges as we move through our second quarter. Encouragingly, the supply chain within China has gradually come back and appears to be operating at or near normal levels at this time.As of now, the potential impact to our first quarter is relatively small, and we will continue to closely monitor this evolving situation, as we move forward through the year. Most importantly, the fundamentals of our business remain strong. And while there will be some headwinds to contend with, we believe we are well-positioned and confident that we can continue to advance our strategy over the long-term.With that, operator, let’s open the line for questions.

Sure. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question is from Greg Palm from Craig-Hallum. Please proceed with your question.

Great, thanks. Really nice way to end a pretty successful 2019. It’s good to have at least a little bit of good news this morning in wake of all the negativity out there. So congrats on a good quarter.

Thanks, Greg.

So I guess, starting with the actual results, I mean, I feel like I ask this question almost every quarter. But organic growth of 10%, I mean, it’s impressive. It’s clearly much higher than end market. So, I mean, where are you seeing the most success right now? Is it products? Is it end markets? I’m assuming it’s a combination of share gains, new customers, but maybe you can elaborate a little bit on that?

Yes. I think, Greg, it’s a combination of several different things. First off, I mean, as you look at the market – markets themselves that we’ve talked about, we’re experiencing gains that are above the overall market increases. And I think, you’ve heard us talk about for many years about working on new projects that were in the pipeline that have a gestation period that takes time for them to come to actual production and get delivered.So I think it’s a combination of those items that have been worked on for several years and, again, taking some market share. And certain customers and I’ll say, in particular, I won’t get into the details of the customers, but we’re supplying a particular product, let’s say, a motor. We’ve had some success in supplying additional components that we have on our product portfolio.So that to us is – continues to be a strong opportunity for growth in the future, because we can gain more share in current applications just by adding more of our technology to the solution.And as we’ve also said in the past that while there are challenges with that, getting customers sometimes to accept that they’re relying more and more upon you or, in this case, upon Allied to provide the solution, it also – the tighter integration has proven to improve quality, reduce size and hopefully overall, reduce the cost for the customer. So that’s our emphasis and focus, and we think that that’s certainly driving our success across the broad range of markets.

Yes, that’s helpful. I mean, what inning are we in, in that sort of transition to more of, call it, a full solutions provider? I mean, I don’t know if you can give any commentary on percentage of customers that have made the switch or what the potential opportunity is? Just trying to get a sense for – is it still early days and there’s still a lot of potential opportunities out there?

Well, let’s talk about it a little bit. We’ll throw in the acquisition here that we just made and bring that to light here, because you’ve heard us talk about expanding our engineering resources, especially around electronics and software. So, internally, over the last few years, we’ve made significant investments in that area that we recognize that the electronics and software and communications are all a very important part of being able to provide that total solution.With the acquisition of Dynamic Controls, it gives us significant core unit volume, which drives costs, as well as doubles our engineering capacity and what we see is a very important electronics and software strategy.So, I will say to you that we’re in early innings, because this is evolving – the company is evolving. And where we have now a strong core base of volume in that – what you can classify as somewhat standard product that we can leverage, I think that’s going to be key to our continued success.And while Dynamic Controls was focused, in particular, the medical mobility and rehabilitation market, the core technology they have, we’re very excited about, because it engages other aspects that we can apply in markets we’re currently serving and accelerate our opportunity to penetrate those markets. In addition, given that they’re full electronics, they didn’t sell electromagnetic, they didn’t sell gearing, so they didn’t have that.Well, I think it’s not hard to figure out that, if we say we want to add more value to the overall solution that we have a strong platform of motors, gearing, and so forth, that we feel can also be applied in the medical and rehabilitation – mobility and rehabilitation markets as well.So I think early innings is how I would classify it, let’s call it third inning. And if that helps you at all, and I think it’s just the continued evolution of the company that will keep doing driving towards generating higher-value solutions or integrated solutions, leveraging our footprint around the globe. And certainly, the integrated solutions are a key element of that.

That’s great. Given your – I mean, switching gears here, you’re one of the later reporters here. So I feel like you’ve maybe got a little bit better idea on what’s going on out there from an end market demand standpoint. I mean, you gave a little bit of color around some near-term impacts, supply chain and factory start-ups. But what’s your sense of how that impacts kind of the near-term revenue results? I mean, what are you – what exactly are you seeing out there from an end market standpoint?

Yes, there’s two things that I think I’d like to point out. First off, we’re not going to be immune. As everyone sees what’s unfolding in the global markets today, there’s – certainly demand is going to be driven down as – and I think, we’re being realistic about it. They – we’re not going to be immune from that. We’ve seen a little bit of the impact. And I’ll say, it’s a little bit for first quarter, a little bit qualified 3% to 5%, let’s call it on top line, unless something really crashes here in the next couple of weeks.But the – when you look longer-term, there’s a couple of things we see. Supply chain appears to have returned to a pretty much normal state, with the exception that we may start to see certain electronic component parts shortages. And it’s too early for us to call that right now, but that certainly is something that could happen.Secondly, what I would caution us on is that, while we may see strength in our bookings numbers, we have to be very careful and look at that to say, are people popping in orders today to secure supply for the future. And when you get into the early stages, that’s not uncommon, where people are wanting to secure their source of supply.So while we see encouraging signs here, we’re talking about things we don’t normally talk about. But I’m saying, it’s their unique circumstances. We’re going to watch it closely to make sure that it’s not double ordering and things of that nature. But I would suffice it to say, we said minimal impact in the first quarter, there will be some impact. And as we are building our forecast right now, further out in the year, we’re not predicting a major impact.But I think that’s subject to change and it’s going to be a very dynamic situation that I would not want to really go on a limb right now and say, I think, you and everyone else could probably get better guidance on maybe what’s going to happen here in the world markets, given the conditions that we’re facing.So – but if it was steady state, I would be on the phone very upbeat, very positive, very encouraging, because we’re going to continue. And Allied, in the past, when faced with situations of global markets and weakness in global markets and challenging circumstances, we weathered them very well. And we will not lose focus. We will maintain our course, too, and we’re not going to do anything drastic.We’re going to continue to get some great developments in the pipeline, some great projects we’re working on, and we’re going to look at this on a long-term basis. And so even if the short-term does have some glitches, you’re not going to see us overreact to them.

Yes. Okay. that’s a good message. I think I’ll leave it there for now. Best of luck here in the future.

Thank you, Greg.

Thank you, Greg.

Thank you. [Operator Instructions] Our next question is from Brett Kearney from GAMCO Investors, Inc. Please proceed with your question.

Hi, guys, good morning. Thanks for taking my question.

Good morning.

Good morning.

In the vehicle market, it sounds like it’s starting to get underway, the beginning of shipments and the new awards you secured in the past few years. What’s your sense at this stage talking to customers? Are they still pretty firm on the date and the production schedules that have been laid out? Or some variability there might be reevaluated could potentially see the timing maybe move a little bit from what’s originally kind of contemplated?

Sure. Well, let’s – again, I have to put it in perspective and say that, we have deadlines, timelines that we’re working towards to ramp up and deliver in low volume levels here for production through – and through 2021. So if global market demand goes down, for us in the short-term, we’re not going to see much impact based upon our expectations, because we didn’t have much built in. And if anything, demands not going to go away, it will – it may get delayed.But again, in – if it gets delayed as the ramp up quickly, we’re positioned to keep the deadlines and timelines that we’ve committed to. And all – there’s no delay in our ramping up and no delay in the launch that we see at this time. But I certainly can – would expect that if global market demand went down, things may get pushed out a bit.But again, the impact on us this year, I don’t see it and the impact, because we didn’t have much built in, that’s the reason. And next year, it’s a little too early to call that. But – so fortunately, we weren’t in full production, where all of a sudden it came to a crashing halt or something, and it’s – so that’s not built into our plans for this year.

Perfect. And then if I could sneak in one more, just want to ask with Dynamic Controls completed now with acquisition funnel at this point, could we see – expected to be more business as usual for Allied or we see the company maybe lean in even more heavily if evaluations become more favorable and some opportunities you will have been tracking become a lot more actionable, say, in the coming months?

That’s very possible. And I think from the standpoint of – we’ve always, I shouldn’t say always. I think that in the past, we maintain a strong balance sheet, so that – and we had taken actions in advance here of getting our new credit facility in place, strong cash generation this past year, some internal improvement projects that are well underway. So I would say to you that we’re very well-positioned that if the opportunities do accelerate, we’re going to be there.

Terrific. Thanks so much.

Thank you, Brett.

And our next question is from Dick Ryan from Dougherty & Company. Please proceed with your question.

Thank you. Say, Dick, you mentioned Aerospace & Defense and Vehicles for Q4 previous couple of quarters, Medical was a highlight and obviously did well for the full-year. But did anything go on in the medical side in Q4?

No, anything in particular, I’d say to you that out of the ordinary what we experienced for the full-year, the answer is no. I mean, we’ve had some – I can just say to you that we’ve had some very exciting wins during the year. We’ve seen volume increase on, mostly existing projects that we have been designed in the past several years and we continue to get designed in on new projects that we haven’t even seen the results from yet.

Okay.

We’re very bullish on that on medical increasing, and we’re bullish on the medical market, I think, acquiring Dynamic Controls, which is really medical, all medical, again, reinforces that our commitment to that market. And I just can’t emphasize enough that what I believe this brings to our technology base and resources that are now available to us to really work hard to penetrate even a greater level.

Great. Thank you. Say, on TCI, with the recent turmoil in the oil market, maybe it’s too soon. But what could be the impact there or what are you starting to see if anything on the oil and gas impact?

Sure. Well, again, we – as you know, we’ve only owned TCI for a little over a year now. But TCI has experienced in the past, as a company, impacts the oil and gas market when things have fallen. So we’ve looked at that. We are aware of the impact that they’ve encountered in the past and what it could do. And I would tell you that it’s fairly significant to TCI. If oil stays with a depressed level, it will certainly have an impact on their business.For now, we’re protected through the first-half of the year that’s about the best I can tell you is that, we should not see any impacts based upon what’s already in the pipeline and in our backlog. And depending what happened, I mean, it can turnaround very quickly. But we are looking at thing that if it stays at a depressed level, it will definitely have an impact and we are going to have to respond in some way. But right now, I would say, we’re good through the first-half of the year.

Okay. And on the legacy vehicle in Europe, that program that’s kind of contributed the last couple of quarters. What’s the longevity of that contribution?

Well, I want to qualify the longevity of the contribution and the term contribution. It is a legacy program that we acquired, along with a Globe acquisition. And I will tell you that while it has top line benefit, it has very little bottom line benefits. So it – and for us, it’s a matter of satisfying a contract we had signed. And for customer, we see a continued demand in that area. But for us, sooner that gets converted out, the new stuff gets converted into better, it’s going to be for our bottom line.

Okay, great. Thank you.

[Operator Instructions] And we now have Michael McCroskey from Principal Financial. Please proceed with your question.

Good morning, gentlemen.

Good morning, Michael.

Another good, steady quarter. Congratulations. Couple of things and I apologize. I’m late to the conference call and you may have covered this. With the Dynamic Controls purchase, the only financials that were really addressed was some positives to gross margin and slightly accretive. Is there a reason we’re not talking about what our top line acquisition is their costs? What’s the – help me understand the financial of that acquisition?

Yes. We – again, we just wanted to be consistent with how we’ve handled reporting of acquisition previous to Dynamic Controls. In that, if they’re not material overall, then we don’t – we really don’t put in the press release the financial terms. So – and we’re just being consistent in that manner now. I have no issue. Mike did talk about our purchase price to be in $15 million and top line revenues would be – should be double that.

Oh, my apologies.

We didn’t – you’re okay. He did mention the $15 billion. I don’t think we did mention anything on top line, but I have no problem with saying, it’s about $30 million in top line. And as we said, it will be slightly accretive to our earnings this year.

It sounds like [Multiple Speakers]

Yes. The one factor there is that, and maybe you did mention – miss this But for us, it’s really not just the top line and maybe accretive piece of it, it is really the technology and the resources that are coming along with the acquisition that we feel and accelerate the leveraging of electronics and software into our other markets as well.In addition to that, leveraging our existing product portfolio with an Allied Motion electromagnetic gearing piece of it and so forth mechanical into the market that Dynamic Controls services. So it is really a great marriage. It’s consistent with our past strategy of looking for complementary technology, complementary markets, a focus and an emphasis on continue to expand our Medical and Aerospace & Defense pieces.So I think some of this was talked about. But asking the question, I would like to reemphasize to us, this is a – an excellent win and I think it helps position us well into the future as far as adding to critical resources. It doubles the size of our electronics and software technical group, so it’s a big one.

And can – and you’ve touched on this in the past and just for open sight, the fourth quarter – and I don’t even – I know they call it necessarily seasonality. But can you touch on or throw a little more color into that lumpiness that fourth quarter seems to present us still? I know as we’re moving towards more of an even quarter-to-quarter expectation, but is there a way to expand on that just a little bit?

Sure. It’s time for Mike to talk.

Yes. So it is not, by any means, atypical of us to have a lower revenues in the fourth quarter. You’re exactly right. I would agree with your terms. There is some seasonality to our business.I would point predominantly towards the power sports market as the prominent driver to that seasonality. It’s – they’re going through inventory destocking and model year changes. And it’s just not unusual for them, again, to take less product in Q4. So that’s the primary driver between that business seasonality that you see on an annual basis.

I also would add to what Mike said there is that this year, we did see Europe soften in the fourth quarter, and particularly in December, but bounced right back in January to normal – near or at normal levels.

Well, again, thank y’all for – on behalf of my crew. I mean, you all are just so consistent and it’s really appreciated, impressive. Thank you.

Thank you. Good to hear from you, Michael.

And we have reached the end of our question-and-answer session. And I will call – turn the call over to management.

Well, thank you, everyone, for joining us on today’s call and for your interest in Allied Motion. As always, please feel free to reach out to us at any time, and we look forward to talking with all of you, again, after our first quarter results. Thank you for your participation, and have a great day. Operator, that will end our call. Thank you.

And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.