Allied Motion Technologies, Inc. (NASDAQ:AMOT)
Q2 2016 Earnings Conference Call
August 4, 2016 11:00 AM ET
Deborah Pawlowski – Investor Relations
Dick Warzala – Chairman, President and Chief Executive Officer
Mike Leach – Chief Financial Officer
Greg Palm – Craig-Hallum Capital Group
Dick Ryan – Dougherty
Sam Schaefer – Global Value Research Company
Welcome to the Allied Motion Technologies Second Quarter 2016 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Allied Motion Technologies. Please go ahead.
Thank you Zubin 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 are going to review our second quarter results and then provide an update on the Company’s outlook and strategic progress. After that we will open it up for questions.
You should have a copy of the financial results that were released this morning before the market opened 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, the slides that accompany today’s discussions. If you’re viewing those slides, please turn to slide number 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 provided in the earnings release, as well as with other documents filed by the company with Securities & Exchange Commission. You can find these documents on our website or at sec.gov.
I would like to point out as well that during today’s call, we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation with additional information and isolation or the substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP comparable GAAP measures in the tables accompanying today’s earnings release.
So with that, if you could now turn to Slide 3, I will turn the call over to Dick to begin. Dick?
Thank you, Debby, and welcome everyone to our call. Let me hit on some highlights for the quarter on Slide 3. We had a solid second quarter with revenue up 9% over last year reflecting higher sales from most markets. Sales increased at double-digit rates in our medial, industrial/electronics and aerospace and defense. Growth in these markets offset lower sales in our vehicle market and some customer projects in which we are involved reached end-of-life.
Heidrive is proving to be an excellent fit with our strategy and organization and the integration is moving forward as anticipated. Heidrive’s products manufacturing and go to market strategy provide us with an excellent foundation for expanding our market share in Europe, while also providing the products and solutions to better enable Allied to sell products through the distribution channel.
It has also brought additional technical and engineering competencies that will be valuable in creating innovative motion solutions that we believe will help drive growth in the future. Our engineering and development investment demonstrate our focus on building our solutions offerings. The majority of the spend is application and customer specific for the development of higher margin, multi-product motion solutions that leverage our full technical capabilities. The investments we are making this year in our IT infrastructure, ERP implementation and our sales in technical solutions development teams will enhance performance measurement and productivity increased information assets, strengthen communication and collaboration, and improved and standardized processes company wide.
These investments advance our phase with the customer as One Allied and increase the power of our Allied Systematic Tools or AST which uses lean manufacturing concepts and processes to drive efficiencies, and make continuous improvements in quality, delivery and cost. We are gaining customer traction as a solutions provider, several multi-product fully integrated solutions are now in production. While sales to customers for new products startups can be lumpy in the long run, they do provide multiple year sales opportunities.
Our pipeline for solutions opportunities continues to strengthen with prospects for 2017 and beyond. We generated cash and reduced debt in the quarter. Mike will provide more detail on our efforts to strengthen our financial flexibility and reduce our cost of debt.
With that, let me turn over to Mike. Mike?
Thank you, Dick. Please refer to Slide 4. As Dick noted, revenue increased 9% in the 2016 second quarter, driven by strong sales in most markets. Sales to U.S. customers were 55% of total sales for the quarter compared with 64% in the same period last year, with the balance of our sales primarily to customers in Europe, as well as Canada and Asia. The increased mix in rest of world sales was from higher sales mostly in Europe from the addition of Heidrive.
Please turn to Slide 5, gross profit increased in line with sales resulting in similar gross margin with the prior year. Selling expenses were 4% of sales compared with 3.4% of sales on last year’s second quarter. The increase was due to the addition of Heidrive along with investments made to grow the One Allied sales organization.
G&A expenses benefited from an $800,000 insurance settlement related to fire last fall in a third party warehouse within Portugal. This offset growth investments made for additional personnel and infrastructure. E&D expenses increased nearly 13% to $4.2 million. As a percent of sales E&D was 6.3% compared with 6.1% in second quarter last year. As Dick noted, E&D is primarily customer and application driven.
Looking to Slide 6, we use adjusted EBITDA as an internal metric and believe it is useful in determining our progress in operating performance. This is a non-GAAP measure, so as Deb mentioned please review our reconciliation and related disclosure in our release and at the end of the slides. The second quarter of 2016 adjusted EBITDA increased by 4.1% to $8.4 million from $8.1 million mostly from higher D&A. This excludes the benefit of the aforementioned insurance proceeds.
Pretax income in the quarter was up $260,000 or 6%. However net income declined approximately $200,000 to $2.9 million because of higher effective tax rate of 34.7% compared with 26.4% in prior year quarter. On a diluted per share basis earnings were $0.31 a share compared to $0.34 last year. Last year’s second quarter benefited from the reversal of a tax valuation allowance associated with one of Allied Motion’s international operations. For 2016, we expect an effective tax rate of approximately 32%. The fourth quarter rate is expected to benefit from adjustments for stock-based compensation and divesting of stock awards similar to the first quarter.
Turning to Slide 7 for an overview of our balance sheet and cash generation. We ended the quarter with a cash balance of $10.4 million compared with $6.3 million at the end of the trailing first quarter and $21.3 million at the end of 2015. Cash balances were reduced from year end because we use cash to fund approximately half of the Heidrive acquisition from our cash on hand in European operations. During the second quarter, we increased cash by just over $4 million.
Inventory turns were 5.3 times at the second quarter end compared with 4.9 times at year end and 5.7 times at last year’s second quarter end. Our DSO was 41 days at June 30, 2016, consistent with 41 days at the 2016 first quarter end and compared to 47 days at the 2015 second quarter end. Cash generated from operations in the quarter was $8.6 million. Capital expenditures in the quarter was $1.4 million. You'll note the consideration paid for Heidrive net of cash was reduced by approximately $1 million based on a reduction in the sales price from post closing adjustment. The changes reflected in a reduction of goodwill on the balance sheet.
Total debt was $73.6 million at the end of June, down from $77 million at the end of March. We paid down approximately $3.3 million in the quarter. Debt net of cash was $63.2 million or 47% of net debt to debt total capitalization at quarter end. We expect to continue reducing debt during the remainder of 2016 and we continue to evaluate the options presented for refinancing our $30 million, 14.5% senior subordinated note that allows for early payment in October. The lead bank has been selected to assist us with this effort. With the refinancing, we believe we will be able to substantially lower our cost of debt while also increasing our financial flexibility for future growth.
I'll now turn the meeting back over to Dick.
Thank you, Mike. We'll turn to Slide 8, which shows our orders and backlog trends. Orders for the quarter were $68.3 million trending upwards since the fourth quarter. They're up about 3% from the trailing first quarter and up about 6% over last year's second quarter. Backlog was now modestly from the end of March but it's been trending fairly well since the third quarter of last year. While the global economy remains in slow growth mode, we view our expanding pipeline of custom solutions for prospective and current customers in several markets to be a positive sign for the future. Note that in addition to offering custom solutions, we continue to invest in our core product platforms to provide us with a competitive advantage in our served markets.
Now on to Slide 9, we are making progress with a move toward a more comprehensive, integrated organization and we expect to drive organic growth through our One Allied approach. Our Solutions Centre and Technology units provide a collaborative environment to create innovative and customized precision motion solutions that leverage all of our technical competencies and address our customer's needs. We will also leverage our global manufacturing footprint for production and manufacturing efficiencies. As we evolve our sales organization into this model we expect to simplify our processes for our customers and drive greater global brand recognition.
We're actively looking for acquisitions that expand our capabilities, extend our geographic reach and or add to our customer base. While acquisitions are a very important element of our growth strategy, we remain disciplined in our approach to ensure that the acquired company fits with our long-term strategy.
On Slide 10, Mike also discussed our refinancing plans earlier, which is targeted on improving our earnings power and providing greater financial flexibility. We're also making progress with our IT infrastructure and ERP system implementation. We need a robust IT infrastructure to improve communications within the organization. So we can better serve our customers and simplify their interaction with our company.
I will note that this is a multi-year project implementation that we view as a high priority to support the needs of our company now and into the future. Companywide we are totally committed to AST as the best way to drive continuous improvement in quality, delivery, cost and growth. Ultimately, this benefits our financial performance and improves our ability to meet or exceed the needs and expectations of our customers. The initiatives we have discussed and the investments we're making this year supports our goal to be a leader in precision motion solutions that changed the game.
On Slide 11, we highlight the major elements of our plan that will allow us to achieve our growth and profitability goals. We must grow both organically and through disciplined strategic acquisitions. We will use AST to continuously improve our operations and execution and we will drive margin expansion through value added solutions. We have a solid track record and have made significant progress in growing the company in the past. We are confident that the actions and investments we're making in 2016 will continue to drive our success in the future.
With that operator, let's open the line for question.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Greg Palm with Craig-Hallum Capital Group. Please go ahead.
Good morning, everyone. Thanks for taking my questions.
Good morning, Greg.
I was hoping you could start by giving us a little bit more color on kind of what you're seeing from the different verticals and maybe geography as well. Jut typically what type of end markets or applications are you guys most excited about maybe either because of industry growth rates or your ability to take share going forward.
Got it. I’ll take that Greg. I think first up we can say that the market themselves are really a little bit flat. And in order for us to grow it requires us to win new customers, new applications going forward here. And I think we've talked about our pipeline several times and the integrated motion solutions that we're focused on. The major driver of that is consistent with our past. We’ve talked about vehicle being our largest market. And we continue to see good opportunities in the vehicle market with electrification a major driver there. And remember when I talk about vehicle, we have off road, on road, utility, recreational and automotive as well as marine vehicles, trucks, buses. So we lump all of that together and that's our vehicle market. So we're serving a wide range of applications.
Automotive is one that I think we've seen that, that’s a little bit flat. And that the other vehicle markets depending on the industries they're in, there's we don't see any fast growth there either. So I think what we're seeing in market trends right now although stable there's uncertainty. And that's – something that we're watching very closely. The expectation was for in all the surveys that we saw and that we followed that the second half was going to be the increasing demand. And I'm not so sure we're going to see that increasing demand based on what we're seeing today.
Other application areas that we're quite excited about and we have some good design-in wins already and additional ones planned for the remainder of this year and into next year our medical and we do have several exciting applications in the aerospace and defense area Greg?
Got it. Yes. That's helpful. Given the some of these headwinds in vehicle and sort of just overall kind of softness are sort of changing that’s maybe you're not as comfortable as used to be with organic growth for this year. Is that still sort of depending on the ramp up of some of the newer awards that are fully launching right now.
Organic growth when you look at the market itself and I think Greg, you've seen some of the information on the markets like for example, last year 2015, our markets were down 3% to 4%. And yet, we were able to show organic growth if you net out the currency impact and you go look at end of life on a couple projects and then look at our numbers we were able to generate organic growth. And I think it's offset by I think the key statement I have made here is that we do have end of life on a couple of projects which are – we have to overcome those with organic growth and our pipeline is very strong and we are winning.
So the balance of all of that you have a market that's relatively soft or else I'll call it there's not in growth mode. You have some end of life of projects and in order to overcome that we do have to have wins to generate organic growth within the company when you factor those out. And we do have a solid pipeline of activities.
Got you. And I guess just shifting gears to M&A which I know is the top priority. Any update there, what are you seeing out there in terms of potential acquisitions.
There's several that we're looking at. I can say that. And obviously we will never announce anything until it’s done because it’s never done and until it is done. If that makes sense to you that’s you never know, but we are active in our filter is fairly strong. So we don't just run off and look at everything. And so I think just to say that we continue to work on things. And hopefully we’ll be able to bring you some news in the future here.
Great. Looking forward to it. Thanks.
Thank you, Greg.
The next question comes from Dick Ryan with Dougherty. Please go ahead.
Great. Thank you. See Dick, in your solutions offering you mentioned in one of the slides kind of the positive trends, pipeline and diverse markets, can you talk a little bit more specifically about what you may be seeing there. And may be in particular some of the newer markets such as may be able to bring the solutions at to.
Well. I think a couple of things. Number one is we see an increasing number of applications in the vehicle market. And if you look at your car, you look at trucks, you look at buses, I mean you know the green energy, we have applications going in that area. If you look at electrification and accessories that you get in if you would see in vehicles all types of vehicles, automated guided vehicles. So I would say to you that we do see a strong pipeline of applications in that area and an increasing number.
And that's because first half Electronic Motion Control technology is more cost effective today. And that it was years ago, so and then also looking at replacing technologies, hydraulic technologies or electro hydraulic technologies with Electronic Motion Control. And then when you start adding automated guided vehicles or automated handling devices, those are now which some what of them were manual in the past are now moving to automation or motion solutions being added to those devices.
So I will tell you that the vehicle – what we call vehicle it has been very strong. And we are in the medical markets also very strong. We have some high performance motors. We're good custom solution providers. And we get called upon for those types of applications and that's what we like. And medical again is a market that worldwide is growing. The aging population trends the automation of tests and even in medical, which I guess you would have to look at and say is the automation that occurs in a hospital environment or care environment with patient beds and handling and cars for delivery and automated medicine dispensing all of that that continues to expand and grow.
And I would have to tell you that with our combined entity, we are actively involved in many aerospace and defense projects. And I would again say to you our ability to customize take a standard platform customize and meet high performance application requirements is what brings us in. Now there's others that in other areas but I would tell you that this is our focus there. There are our focus markets and we are seeing there are good opportunities for growth in those.
You mentioned medical it's looks like Heidrive got you a little bit deeper into that market, was there organic growth in medical and along the same lines one of the advantages I think of Heidrive was to leverage their manufacturing flexibility in the six months or eight months since you've had it because you’ve seen benefits starting to appear with that strategy.
Sure. The timing of the question is very good in fact. We have our team together from around the globe working on our updated strategic plans and our plans going into next year. And clearly one of the high priority items for us is to launch that product line globally. Because they do have great flexibility, they have a solid platform, it's cost effective, it's high performance, its everything we wanted it to be. And now what we need to do is we have our marketing team and sales team together along with our general managers. And while we're on this call, they're working on that.
So I would say you know there's been a learning process about what is it – what do we have and making sure that we fully understand it. And now getting on the fast track here to launch that product line around the world.
Okay. And – excuse me, Mike it looks like there was a nominal FX impact in the second quarter. Any perspective of which you might be thinking about for the second half.
You are correct. There was a nominal impact in the second quarter. I think it’s going to be relatively – I think the normal outlook is pretty, look forward to be relatively stable in the second half the year as well.
Just a – we kind of have a natural hedge in place. Where we're selling in foreign currencies were also buying in the same foreign currencies. So while we see impact potentially with big swings and sales and bookings like our bottom line doesn't become terribly impacted by even with larger swings.
Great. Thank you.
Thank you, Dick.
[Operator Instruction] Our next question comes from Sam Schaefer from Global Value Research Company. Please go ahead.
Thank you for taking my question guys. Just continuing with Heidrive for a minute, you’ve had it now for about six months to eight months. When do you expect that acquisition to be fully integrated?
Well, fully integrated could mean many different things, Sam. And I think our – what we've emphasized in the past making sure that we leverage the capabilities to grow. In that meaning the products the engineering, the technology. So full integration from a financial standpoint we are already integrated in terms of reporting and so forth. But I think there is larger steps that need to be taken that we’ll be working on into the future.
And again I mentioned earlier that the team is here. We are working on many of those plans right now. And with a plan of accelerating but our focus is going to be on really effectively taking advantage of that product line, getting it launched around the world, getting Heidrive integrated and actually helping and assisting in the sales channel development in Europe where there are strong and have the German presence that we feel is a big plus for us.
So let's say when it's complete I'm not sure it's ever complete but I think it's ongoing here. They're engaged in our product development. They have a very talented engineering team. They're assisting in other areas. They're learning about the other products that Allied Motion has. So that if they work with customers that other application needs. We can certainly provide point them in the right direction within the rest of Allied to make sure that they come up with the solution they may not have had in the past. But it's active, it's ongoing. And I think it's going to take a while for what we say everything to come together.
And you had mentioned some of the cross selling opportunities within Heidrive. Do you still see those opportunities as strong as you did say a quarter ago?
Well, yes, I do. Matter of fact as I mentioned, we're all quite excited about it. And we're actually working on those plans right now. And the other area of integration I think I should mention to you that we've taken out a fairly significant project. We haven't really talked about it at all in the past, but we're getting close to launching that. As you're aware we have done acquisitions over time and they are all autonomous independent companies, so separate ERP systems and so forth.
And so that there's been some work putting – pulling that together, but in addition we work on getting a common database to understand our number of suppliers that we have, what our purchases are, right down to the end item and date. And now looking at how we can leverage by commodity let's call it and the strength of our purchasing capability with all companies and Heidrive has been pulled into that is as well as all of our other European operations and North American and Asia.
So I think that's going to come over time and that's another area we're looking at is what can we do to take advantage of the critical mass we have, which quite frankly we haven't been able to do in the past given the IT system and structures that we had in place, but it's getting close to getting launched.
And then the synergies and really the cost of benefit of all of these initiatives and the ERP once we expect to see these really what is the size that we should expect to see.
I would hesitate to give you number right now. I think it would be unfair to us and unfair to you. I think again I said we are in the early stages of launching that. And but we'll keep you abreast in the future how it's going and any progress that we're having on it. But it will take a little bit of time and I'd have to caution everyone including internally here not to get carried away because we are a custom solution provider. And in many cases, we're controlled right down to the [indiscernible] level and making changes. So we'll be looking at items that we have an opportunity to leverage, but it won’t be everything. So I think as I said there's been substantial amount of work that's gone into this. It was presented to all of the operating units here few days ago. And it was great excitement here that we're going to move forward with it, but it will take some time.
Okay. And then [indiscernible] debt that is restructured here in the second half of 2016. Can you provide a little bit more detail on the scope of this restructuring as well as the effect that we should see on the bottom line?
Sure. We can talk a little bit about that. It’s certainly a work in progress and I will caution you with anything that I say that we certainly open and subject to market risks until it’s completed. But we are expecting the facility to be of a larger size than it currently is, we – in fact it will have additional capacity that we can tack on for future growth above and beyond that. We think it's going to have a more flexible structure than we are currently have. And we think you'll see some nice changes in favorable covenant.
We've talked a lot about retiring the senior subordinated debt and the interest rate that we will see from that but we also think there exits a strong possibility that we’ll be able to lower our interest rates on our base borrowing as well. So I don't really want to get into specifics on exact amounts, but certainly our current credit facility is detailed in our statements. And we can improve of how we see there even at a base level.
That’s a good clarity. Thank you. And you have mentioned multiple times in this call and in the past about the acquisitions and the growth that you have seen from these acquisitions. Is it fair to assume that we wouldn’t see another acquisition until after that debt is restructured?
I wouldn't say anything fair to assume. But I would say if you look at the timing of when the debt is being we're working on that right now. Our goal is to accelerate it before the senior note, it’s actually due if we can, that's our plan. As we are still close to it now anyways October 18, is the date. But I think you're looking now in beginning of August to where we are today. I wouldn’t say no. But it is – who knows.
Okay, great. Thank you guys, and good luck in the next quarter.
There are no more questions at this time and this concludes the question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.
Thank you, everyone for joining us on today's call and your interest in Allied Motion. I likely to note that we're going to be presenting at Dougherty Institutional Investor Conference in Minneapolis on September 28. So for those of you are attending the conference located there or in the area for the Ryder Cup that week, let us know if you're interested in meeting with us at the conference. Again thanks for participating and have a great day.
This concludes today's conference call. You may now disconnect your lines. Thank you everybody for participating and do have a pleasant day.
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