Allient Inc (ALNT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter year-end year-end 2006 Allied Motion Technologies Incorporated earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today, Ms. Susan Chiarmonte, Vice President, Treasurer, and Secretary. Please proceed.

Thank you, Operator. Welcome to Allied Motions conference call to discuss the quarter and year-ended December, 31, 2006. We appreciate you joining us for this call today. We distributed the press release earlier this week. If you have not received this announcement please call our corporate office at 303-799-8520 and request a copy or visit the website at www.alliedmotion.com.

Today's call is being recorded. It will be available for replay until March 7, 2007. The call back number for the replay is 1-888-286-8010 and the passcode is 29361024. This call is also being broadcast live on the Internet and will be available for replay immediately after the call for 90 days. To access the Internet broadcast and replay, go to the Company's website and click on the webcast icon. As a reminder please note that the Safe Harbor statements included in our press release also apply to all comments made on this conference call. I will now turn the call over to Dick Smith, Chief Executive Officer of Allied Motion Technologies.

Thank you, Sue, and good morning and thank you for joining us today. As usual, I have Dick Warzala our President and Chief Operating Officer on the call and he will also be making part of the presentation today. On our agenda today, I will start with some general comments followed by my review of the numbers for the quarter and the year. Dick will then discuss the operations and then I will make some brief closing statements at the end and then we will have a question session at the end.

I will start with an overview of 2006 and our accomplishments for the year. I want to say we had an excellent year in 2006. We exceeded our expectations we came into the year with and as we have reported throughout the year and as reflected in our earnings release on Monday, we made excellent progress in improving the growth and profitability of the Company. We achieved 11% increase in sales over last year, all organic growth. We achieved an improvement in net income of over $1 million, an increase of 109% over last year, fully diluted earnings per share was up 107% to $0.28 per share, gross profit margins improved to 24% from 19% for the fourth quarter and improved to 24% from 22% for the year.

EBITDA increased by 1.4 million up to 7.2 million or up 24% over last year. We also paid down our bank debt by 2.1 million for the year of which 816,000 was paid down during the fourth quarter. We continue to make progress in establishing our Chinese manufacturing and component sourcing capabilities necessary to achieve our cost reduction targets and we are now receiving completed product at an increasing ramp rate and are continuing to transfer additional products to be produced in China.

We introduced our new high speed brushless motor earlier in the year which is geared to the surgical hand tool market and we have been successful in obtaining our first production order that will begin deliveries, in 2007 and we will be introducing our new brushless platform of products in early 2007. We have procured some exciting new and growing applications that have and will continue to contribute to our growth in sales. An example is the new business we previously announced with Raytheon that began to ship at the end of the third quarter and is rapidly ramping up, and our backlog is up 12% over the end of last year. So over all, while we are achieving improvements in short-term results, we continue to take those actions that are building and strengthening our company for its long term success.

I will now briefly review the operating results for the quarter and year-ended December 31, 2006, and please keep in mind that the results this year compared to last reflect all organic growth and there's no incremental results from acquisitions.

For the year-ended December 31, 2006, we achieved net income of $1.931 million, or $0.28 per share, a 109% increase over net income of $923,000 or $0.13 per fully diluted share for 2005. Revenues increased 11% over last year to $82.7 million for 2006 up from the $74.3 million last year. Sales have increased primarily as a result of of an increase in sales from our industrial, medical, and electronics markets. We were successful in acquiring new business both from existing customers as well as new customers reflecting success from our expanded applied marketing efforts and our application design engineering capabilities.

For the quarter ended December 31, 2006, the Company achieved net income of $388,000 or $0.06 per diluted share compared to net income of $4,000 or less than $0.01 per share, per diluted share last year. Revenues for the quarter increased to $19.1 million from $18.9 million last year. The $200,000 increase in sales results from a 14% increase in sales from our higher margined industrial electronics markets partially offset by a 16% decrease in sales from our vehicle market, and this decrease in sales from our vehicle market was primarily the result of having one-time incremental sales in the fourth quarter of 2005 and not repeated in 2006, for RV's that were purchased by the government for victims of Hurricane Katrina.

Backlog at December 31, 2006, increased over 12% to $28.2 million compared to $25.2 million at the end of 2005. EBITDA for 2006 increased 24% to $7.2 million from $5.8 million for 2005. We had $1.4 million of capital expenditures during 2006 compared with $2.1 million last year which included the addition of equipment for our contract manufacturing facility in China. As I previously stated, our gross profit margins improved for both the quarter and year. This improvement reflects the increase in sales of our industrial and electronics markets which provide a higher gross margin from their sales. The cost reductions we continued to realize from product being produced at our contract manufacturing facility in China and the continuous improvement in our efficiencies and productivity from implementation of our Allied Systematic Tools or AST that we currently utilize.

Selling, general, and administrative engineering cost as a percentage of sales for the quarter were up to 19.5% this year from 17.6 last year and up slightly to 17.9% for this year compared to 17.2% for last year. These increases reflect additional audit and medical costs incurred this year as well as incremental employee performance bonuses.

Depreciation and amortization expense was $843,000 for the quarter, an increase of $25,000 over the fourth quarter last year and was $3.283 million, for the year-ended December 31, an increase of $54,000 over the year 2005. For the quarter and year, interest expense was down $34,000 to $227,000 and down $92,000 to $983,000 respectively from the same period last year. The Company ended the quarter with $669,000 in cash, $9.8 million in bank debt and over $5.3 available to borrow on our lines of credit both here in the United States and in Europe. Our net stockholders equity at December 31, 2006, was 29.5 million or $4.52 per share. And as I've previously stated our bank debt was paid down $2.1 million reflecting excellent cash flow for the year. Now I would like to ask Dick to discuss our operations. Dick?

Yes, thank you, Dick. Consistent with our past practice, Dick Smith has already provided the detailed financial results and I will focus on reporting the key operating activities that drove the results. Both of us discussed various strategic aspects of our business and as a year-end summary I will report on the progress we've made since completing our first formalized strategy session in the Fall of 2002. For the quarter and year, our operations provided sales and earnings growth reflecting our focus on new customer development, new product development, quality system improvements, implementing AST, that is Allied Systematic Tools, and low cost region ramp up.

The focus areas are all aligned with the Corporate strategy and the critical issues initially developed in late 2002 when Allied Motion became a pure play motion company with the sale of the power and process business and the acquisition of motor products. This strategy was further updated in 2005 after the acquisitions of both Stature Electric and Premotec. It is the continued emphasis on executing our strategy that keeps us focused on developing the Company for the long term and overcoming any obstacles we may face in the short-term. To reflect on a critical turning point for our company, I compliment the Board of Directors for having the courage to accept a recommendation to make a dramatic change in the direction of the business in 2002. While it was a major decision at the time, the positive results from changing how Hathaway Corporation operated then to how we operate Allied Motion today is significant.

As I have stated many times the transformation began when the strategy was developed and the results are being realized through the strategy execution today. The improvement in results through December 2006 using June 30, 2002 as the benchmark from an operations perspective and December 2002 as a benchmark from a financial and market valuation perspective are as follows--Sales. Increased from $15.7 million in July 2002 to $82.7 million at the end of 2006, a 39% compounded annual growth rate. By the way, these are all in U.S. dollars.

Pre-tax income increased from a slight loss in 2002 to a positive $2.9 million at the end of 2006 representing a 122% compounded annual growth rate. Net income increased from a small loss in 2002 to a positive $1.93 million at the end of 2006 and 125% compounded annual growth rate. Stock price, a 288% increase overall from $1.77 per share in December 2002 to $6.87 per share at the end of 2006 representing a 40% compounded annual growth rate and we are aware that stock is now fluctuating and recalculate that number as I'm just reporting how the results were at the end of the year. Market cap, a 424% increase overall from 8.6 million at year-end 2002 to $44.9 million year-end 2006, representing a 51% compounded annual growth rate.

Without spending any additional time on past results, I would like to emphasize that we will continue to remain focused on executing our strategy and we will do our absolute best to keep the Company moving forward in this positive direction in the future. We will remain focused on implementing our strategic critical issues which include new product development, AST implementation, continued development of our Applied sales and marketing capabilities, and last but not least, the continued emphasis on adding the best talent possible in our design, sales, and manufacturing engineering areas.

Consistent with our strategy, our emphasis in 2007 will be on improving our operating margins, generating internal growth, investigating acquisition opportunities that are strategically aligned and the continuing development of new products that raise the bar and meet the current and emerging needs of our served market segments.

Moving to the market side, over the last 12 months, our medical, electronics, and industrial markets all experienced double digit growth while our aerospace and defense and vehicle markets including trucks, off road, recreational vehicle, and marine vehicles are down slightly. I will now turn this back over to Dick Smith for his closing remarks and comments.

Thank you, Dick. As Dick and I have discussed today, we have made excellent progress in improving the financial results of the Company, but more important, we continue to build the foundation necessary to achieve continued growth in sales and profitability, including development of new products that are opening up new applications in both existing and new markets, expanded utilization of our low cost manufacturing capability in China which will improve margins and/or will open up new applications where we were previously not cost competitive, and improvement in our operating efficiencies in the U.S. and Europe.

Our China manufacturing capability also provides us the opportunity to supply product at some of our customers who are starting to manufacture product in China for both export and for sale within China. As we have stated before, our strategy is to grow our business through both internal growth and strategic acquisitions. Our main focus during 2006 was to improve the operations, but we are continually looking for and having discussions with companies that are complementary and fit our strategic goals. While no acquisition is imminent, we will continue to look at, in 2007 for the next strategic acquisition. To help facilitate an acquisition and reduce our cost of borrowing, we are currently in the process of finalizing a global bank facility with a major international bank that will replace our current bank facility that expires on May 7, 2007.

While we have made significant progress in improving profitability and increasing shareholder value, our shareholders can be assured that we will continue to strive for continuous improvement in operating results and to make progress towards achieving our long term goal of increasing shareholder value through growth in sales and profitability. That concludes our prepared remarks and Operator, we are now ready for questions.

[OPERATOR INSTRUCTIONS] There are no questions at this time. Pardon me, we do have a question from the line of [Tim Griffin] with Griffin Portfolio Management.

I just had a couple quick questions regarding order trends if you can give me a sense, you guys have had nice sequential uptick in orders in Q4 over Q3. Was that attributable to like a small number of large orders or was it instead due to more broadly based demand and maybe a large number of smaller orders?

Well, the -- this is Dick Warzala, we have our order basis, sometimes it can't be predicted because we do get large blanket orders and the timing of those can vary quarter to quarter, so as we will get many times we'll go out and sign a yearly blanket order, sometimes that we find it moving into a previous quarter or moving out a quarter, so overall, it's pretty generally across-the-board, pretty much generally across-the-board that we're receiving the orders and it's not going to be impacted by one blanket order coming in one quarter or not.

Well, okay, I mean for the full year you had good order growth but it was lumpy throughout the year?

And that's normal for our business.

So you expect that to continue, that trend to continue?

As we look at our trends, there's certainly some quarters that appear over time to have an increased order rate versus others, but I would say there's nothing to indicate that that's going to change.

Could you give a sense of how many active customers you had say for the full year just in the fourth quarter?

Active customers?

Yes. In other words, how many customers did you actually deliver orders to? For the full year or, I'm just trying to get a sense of how broad your customer base actually is.

Let me say the customer base is very broad as we have five different operating companies and Dick, maybe you have a feel for this, but I'd be hard pressed to tell you how many active customers we have in quarter four. I mean, I could go back and get the data but it's a large number. I'd say somewhere, and maybe Dick you can correct me if you think that there's a different number, but it's probably close to a thousand.

That's good enough.

Okay.

Yes, and I would concur with that. I was just looking at one of our operations the detailed sales and it was 254 customers, so it might be a little bit higher than a thousand but it's in that range.

And you didn't have any 10% customers for the year did you?

No.

And it seems as though you have a developing seasonal trend that would indicate Q1 is your strongest quarter in terms of orders?

If we go back and look at that over time, it's quite interesting because Q1 '04 was heavy. Q1 '06 exceeded Q1 '04, while Q1 '05, it's a continuing uptick, an uptrend in our orders, but those two quarters stand out above everything else.

Well, yes. I mean last year's first quarter was a blowout quarter in terms of orders?

Yes, right.

And I was really just looking at the quarters say in the past three years since you, when did you make the Premotec acquisition and the other? Was that in '04?

2004. Yes.

Okay.

Well, what we do is we have pro forma data that essentially shows that our order rates on a trend line basis are up about 4 million per quarter over beginning of 2003.

Okay. On a pro forma basis?

Correct.

Okay. Well, would you expect to have a similarly strong uptick in Q1 orders over Q4 in the current quarter? Or let me ask the question differently so I don't have to put you on the spot here. Would it be reasonable for me on the outside to expect an uptick in Q1 orders over Q4?

I don't think we've ever really forecasted for anything whether it's order rates or earnings, so I think we'll have to decline comment on that, Tim.

Well, there's a first time for everything.

I know, good try.

I'm just kidding you. Let me ask the question a little bit differently. You guys, I mean it looks like you guys are starting to, not starting, it looks like you're positioned to do some good things in the future and I guess from the outside what I'm trying to get at is, is it reasonable you guys don't give guidance? That's okay.

Well, I would say to you this. The order activity and customer activity we see and new application activity continues to remain strong.

Yes. Would it be reasonable to expect top line growth this year?

Is it reasonable for us to give an answer, Dick?

Yes, I think we can say that overall, I think in 2007 we expect growth.

You should.

And we're not going to tell you how much but I think we can tell you that.

Good. Okay, good. And what do you view as your key challenges for this year?

I think the continuation of our cost activities, we're not satisfied with our gross margins, so we'll remain focused in improving those gross margins internally and I think as you can tell, the cash flow is pretty good and a good possibility that a strategic acquisition will pop-up here that will take some of our attention, but I'd say to you that continued focus on internal growth and margin improvement are -- those are going to be the key factors for the coming year.

Acquisition wise what size in terms of revenue are are you focusing? What kind of range?

Again, that's a difficult question, if it's a good bolt-on acquisition that can strengthen an existing operation, then the size isn't really relevant, but on the other hand, we will be looking for companies that are at least 20 million in size. That's kind of the goal we're looking for because as you know, operating smaller companies is difficult and the depth of management is difficult so we'll look for something in that range and bigger if possible, but it's hard to say that you're going to do one or the other. What I would say to you is that a larger acquisition or merger would make more sense for us versus something smaller unless it was a good bolt-on to something we already had.

Can you give some sense, just one last question, can you give a sense of what the break down may be of your three or four largest end markets as a percentage of revenue might be ?

Yes, we can do that. The largest markets we have and let me just give you them as a whole and then tell you how they reflect the overall sales of the Company, our largest market is medical.

Yes.

Next largest industrial tools, and what we would call pumps and then bus and recreational vehicles and to combine those markets would be, let me just add it up quickly, about 35% of our overall sales. We're well diversified, and that's one nice thing about the Company today versus what it used to be years ago. We had a hiccup in the semiconductor market years ago that used to put us on our backs, today we're very very very well diversified.

How much does semi represent today about? Do you know?

Much smaller. It's down in the range of, I'd say 5%.

Oh, okay, so maybe not even in the top 10, or 15?

You're right.

Or 15 end markets. Okay, good. Well, I'll open it up for anybody else to ask questions. Thanks for the help.

Thank you, Tim.

Our next question comes from the line of [Joseph Levy] with LLG Equities. Please proceed.

Yes. I know you broke out the depreciation expense but do you have a figure for the selling G&A expenses? Just that category?

Selling and G&A is for the year is about just a little bit, let's see, it's about $11 million.

And getting back to the previous caller who was asking about the sales and growth, if you look at the last three years, the sales grew by 59% in 2004, then the year-over-year growth was 18% and then last year was 11%, so it definitely has been trending down. You say you're forecasting growth but do you have an idea as to what type of rate we're talking about?

Well, we do, something we should clarify is that 2004 we did two acquisitions so the growth you're seeing is acquisitive growth and some of that then showed up in 2005 and in 2006 growth was all organic. So as Dick said, we will, we expect to grow this year. That's about as far as we're going to go with the guidance I guess.

And from using the backlog figures and everything, it seems like the last quarter your bookings were about 22 million which was below the first quarter but better than the second and third quarters. Now, the 25 million in the first quarter 2006 was higher than any other period. Was that an aberration or are we looking more in line with something in the low 20s that's quarterly bookings?

We'll let you know.

Okay. That's it. That's all I have.

Okay, thanks.

Our next question comes from the line of [Larry Brooks] with [Maloney Securities]. Please proceed.

Yes, hi, good morning.

Good morning.

Yes, a couple things. You indicated the markets, particularly the medical area being strong and in the past, of course, the trucks and RV market have been flat as you've said. Are those continuing to decline or are they flat or what are they actually doing at this point as far as the truck and RV market? In other words have they stabilized from the last quarter?

When we say they're flat, they're flat for us and a slight decline, and that's not the market itself. It's our customer base so there is a slight decline in that and one customer in particular which was low margin business that we chose not to pursue. So even though the market for us is down slightly, we don't see that market crashing at this point. We don't have any indications it's going to crash.

Okay.

It is very competitive.

And you'd rather devote your focus more on the medical and industrial stuff, if they're higher margins there it sounds like?

Those are growing nicely.

Yes. You were focused a lot, it seems like with the Raytheon stuff. How is that business progressing?

Very nicely. The shipments have started and it's on a ramp up at this point and we should be fully ramped up here this quarter for what their demands are and there appears to be some follow-on business.

The Stature progress you were talking about, that continues to be a turnaround in the past, how is that doing?

Again, I would say substantial progress has been made in the foundation at Stature. We continue to be focused on meeting customer demand and getting the quality levels up where we want them as a Company and delivery rates up. We've made significant improvements internally. Our management team has grown nicely and has been stabilized, so I think from that standpoint, that's where it all starts and we're in a good path to success there.

So it sounds like there's still room to improve that?

Yes.

It seems like your focus has always been looking for better margins. When I look back, you've always said that. What's some of the key elements to improve better margins? What do you see as doing that as probably the easiest things to do to make margins up?

Well, first off, it's selecting the right market segments and customers within those segments that will pay for products that are delivering high performance solutions and what we're looking at and when I say high performance solutions, it doesn't necessarily mean that in terms of overall performance of the product is much higher but it could be the entire system that you're putting in place, and I'll say for example, if we have a customer in the U.S. who does most of their design work in the U.S. and they have production facilities around the world, the ability to build product in LCR in a low cost region and deliver directly to their factories through pulling from a combine type system working off a forecast and meeting 24 hour deliveries, that's all part of the value proposition, so it's critical to ensure that you're lining yourself up with those customers who recognize the value that you're providing and that is as much a part of it as driving down the cost side.

Right.

And we are very focused on that. For example, many customers as we're increasing our output in the China facility which we expect to double our output this year over last year in the unit production, are asking for us to produce product for them in the LCR, and it all starts right back at the beginning and saying well, what's the value in doing this and there's a cost associated with each one of those, so we're being very careful and very selective as we go through this process to make sure that we're partnering with the right customers and bringing product out of China which is a savings for them and hopefully some improvement for us. At the same time, going into the right market segments and developing the products that really do provide our customers a competitive edge and that's our focus on our development efforts which we're succeeding at and getting paid for those.

One last thing on the bank facility. I mean, is this something where you expect to increase it significantly for possible acquisitions or what do you have going there?

Well, it's got the capability. It's got an accordion function or capability to increase it quite a bit above what we have right now, and then obviously we have the opportunity to increase it should an acquisition come along but it's one of the major changes from what we had before. It's a global facility in that we can borrow based upon the total resources and profitability of the Company whereas before, we had a U.S. facility and we had a European facility which separated those two into two different collateral bases and it somewhat restricted the total amount we could have borrowed so we are pulling all of that together in a global facility and at the same time we're reducing the cost of borrowing substantially.

Okay. Good. Well, thank you.

Thank you, Larry.

Our next question comes from the line of [Bruce Depalma], a Private Investor. Please proceed.

Good morning.

Good morning, Bruce.

Can you just give me a break down in terms of what percentage of 2006 sales was from new products and what that percentage will be in 2007?

Well, as in the past, Bruce, it's a difficult number for us because many of our products, our modifications are adaptations from previous designs. So if we're looking at purely products that are developed from scratch and new product platforms, that's one way to look at it and on the other hand our business is custom engineered products so it's a difficult number to come up with in satisfying what you're looking for. Are you really looking for strictly brand new designs or are you looking for those that are improvements upon past products and specific for applications?

I guess brand new designs I was thinking of.

Well, I would say to you 2006 we would have seen a number of product platforms or portfolios being released and we can name some of those for you which were our torque motors with air bearing designs, our packaged or housed torque motors, we have our high speed hand tool motors which were released last year or 2006 are now being designed in and coming in play. We have our electronics platform for our larger motors that we plan or developed last year are being released this year. We also have an integrated speed control electronics with our brushless motor platform which is being released in the first quarter here, so I will say to you that the amount, if brand new products we all, and also I don't want to leave this one out is that a fully integrated blower motor system that includes a fan and the motor which is another product platform that we are releasing, so as you can see, much of the development effort that was under way is now truly being released and being designed in, so although the number may not be significant for 2006, it's going to grow tremendously in 2007.

Okay, great. Thank you. Also you said you're doubling your output in China?

Right. Our unit output.

Unit output. So what would that represent in terms of sales then in 2006 versus 2007?

Well, the output that's being produced in China is really a transfer.

Okay. In terms of R&D, what percentage of the sales do you expect to spend in R&D, is it comparable to 2006?

I'd say as a percentage-wise, yes, but there will be a slight uptick in the resources available. We are hiring additional resources in those areas.

Okay. And finally, do you at some point, do you intend to seek some analyst coverage for the stock? I mean, it's a great story.

I'll leave that up to Dick Smith.

So that you can get more institutional ownership of the stock because the institutional ownership is still fairly low. It's like people don't -- it's a great story and it seems to be--?

Nobody's hearing it, is that what your saying? Well, maybe Dick will comment on that one.

Well we're always interested if there's analysts out there that are interested following the Company, we would definitely encourage that. I would say in the past we haven't really actively gone out and sought that out and of course we had the step back in profitability in 2005 which created an issue for us, but I think if we get through 2007 with another nice improvement in profitability, I think that would be a good time to start seeking out some analyst coverage.

We feel that the stock in the Company has been recognized. People with the capabilities of the Internet and all of the other electronic capabilities in today's environment, they call us up and say, we found you. We found you because you popped up on our computer screen, so we are being found and I think our stock price has reflected the improvement in profitability, so what we would gain from that is a question, but I think it's something that we will definitely entertain this coming year.

Terrific. Thank you very much and continued success. It's a great story.

Thanks, Bruce.

There are no additional questions at this time.

Okay, well, I guess it doesn't sound like there's any more questions, so I would like to thank you for joining us today and we look forward to talking to you again after the next quarter, and this concludes the conference call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.