Allient Inc (ALNT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Allied Motion Technologies earnings call.

My name is Danielle and I will be your operator for today.

At this time all participants are in listen-only mode.

And later, we will conduct a question-and-answer session.

(Operator Instructions).

I would now like to turn the conference over to your host for today, Ms.

Sue Chiarmonte, Vice President, Secretary, and Treasurer.

Please proceed.

Thank you, Operator.

Welcome to Allied Motion's conference call to discuss the quarter and nine months ended September 30, 2010.

We appreciate you joining us for this call.

We distributed the press release earlier today, and a copy is available on our website at www.AlliedMotion.com.

Today's call is being broadcast live on the Internet and will be available for replay immediately after the call for 90 days.

To access the Internet broadcast and replay, go to the Company's website and click on the website icon.

As a reminder, please note that the Safe Harbor statements included in our press release also apply to all comments made on this conference call.

I will now turn the call over to Dick Warzala, President and CEO of Allied Motion Technologies.

Thank you, Sue, and welcome, everyone, to our third-quarter 2010 conference call.

Here's the plan for today's call.

I'll review the Q3 results and then provide an outlook and look at the opportunity for the Company.

I'll then turn it over to Dick Smith for a financial review, and then I'll provide you with a brief summary and we'll open up the call for some questions.

Let's start with the results of Q3.

As you've seen by the press release that went out this morning, it was obviously a very good quarter, a record quarter in earnings for the Company, and sales were up 47% over the third quarter of 2009.

The record earnings reflect the earnings per share of $0.14 per fully diluted share versus $0.04 the prior year.

When you look at the earnings, the impact that the restructuring had that started late in 2009 and was completed early this year, certainly did have an impact on the earnings this year.

And also, our commitment that is never ending to our Allied Systematic Tools, or AST for short, which is our lean implementation sweep for continuous improvement in the Company.

You also will see the gross profit increased year to date from 20% to 28% when you compare the last year's third quarter -- for year to date, and when you compare it to third quarter last year, it went up from 25% to 30%.

An impact on that was the Company is very conscious in ensuring that we're looking at good quality business that allows us to improve gross margin, but also it's the impact of selling systems and having Agile on board this year in the third quarter.

Now we do believe system sales, meaning the addition of electronics or motion controllers to our component devices will allow us to add more value and sell our products at higher profits in the future.

The cash flow was good once again.

And right now, we have more than $7 million in cash on hand and no debt.

First half of -- we're looking at order input now in comparing our bookings for the first half of 2010, we had record bookings of $54 million.

If you look at the third-quarter order input, you saw that that was at $19.2 million, which is up 22.5% from 2009.

That means year to date, we're at $73.5 million.

You go back and look historically because we continue to say, obviously, that orders certainly lead shipments.

In 2008, for the year -- our order input, our bookings were $78.5 million.

The first half of that year, we had $46 million and that compares to the $54 million we had in the first half of this year.

If you go back further and look at 2007, 2007, we booked $87 million for the year.

Then we followed in 2008 with record shipments of $86 million.

The first half of 2007 was $43 million, the second half was $44 million.

So you'd see there that the business levels had established a certain pace and they were pretty consistent throughout the year.

What we did see and we did caution in last quarter's conference call about the bookings is that we did expect the bookings in the second half of the year to drop off because we felt that what was occurring in the first half, customers were replenishing inventories, filling their pipeline, and with the longer lead times we were experiencing in materials, therefore deliveries, we think that orders were a little bit accelerated over what they might have been in the past.

So therefore, we say, quarter three was a correction -- you'll still note that quarter three bookings at $19.2 million was a pretty good quarter.

We look at our markets for the third quarter of this year compared to the third quarter of 2009 all markets, and we looked at medical, vehicle, industrial, electronics, aerospace and defense, all of them were up.

If we compare our third quarter of this year to the second quarter of this year, this is for shipments, all markets again are up.

On a year-to-date basis, we see all of our markets except aerospace and defense being up.

That from our perspective is based on when we transferred our California operation to Tulsa, there was some aerospace and defense shipments which were pushed into the second and third quarters.

Also in the second -- we talked about the Agile acquisition that we completed in the second quarter.

In the third quarter, we did realize benefits of sales, margin improvement, and most importantly as the Company moves forward here, the system sales opportunities that the Agile product line provides for the Company in the future.

Again, when I talk about system sales, we mean more than just a motor, more than just a component, we're talking about motion control systems.

So we're pretty excited about that.

In addition to Agile, a few years ago, we started our own internal development of systems or electronics and that is progressing very well, and we do expect that to have an impact in the future.

We'll talk more about that later.

We mentioned last quarter that we had established another production line in our Asian facility and that line was up and running in the second quarter.

It certainly paid dividends in the third quarter as it helped us keep pace with the demand from -- the increased demand from our customers.

Looking at new project activity during the quarter, it continues to remain very strong.

The quality of the applications and, again, the systems opportunities they bring us continue to improve.

And quality measured by the opportunity for us to add more value to the solution for our customers.

So a quick summary of third quarter.

Record profits, significant gross margin improvement, continued new project development activities, positive cash flow resulting in a net cash position in excess of $7 million with no debt.

As we look out into the rest of the year, one more quarter, what do we see currently?

Again as we've mentioned orders, lead shipments, record bookings of $73.5 million year to date, compared to the $46 million in the year-to-date Q3.

Now we do see the market adjusting and leveling off.

What that means is that we've had some pretty significant and fast-paced growth.

We do expect that the market will start to stabilize.

What that means, without giving you any specific numbers, is that we do believe that we are approaching and beginning to approach our 2008 levels in terms of sales and that will occur through next year.

Now when you look at that and you say the profits that we are generating there certainly have been cost adjustments that have been made in the Company through our restructuring and also through our process improvements.

And given the same level of sales, we certainly are -- or less level or lower sales, we certainly do expect that our profits will continue to be pretty good.

The yearend -- one thing that we are seeing it's a little bit of anomaly that we hadn't seen in the past is going into the fourth quarter here, we are getting requests for some quick -- what we'll call quick response request shipments.

It's happening in various markets.

We look at it and say, well if it was aerospace and defense, or military, or people trying to work budgets that would be one thing, but we're seeing it in multiple areas.

And if we can respond we get the orders.

So we're doing the best we can to handle these quick request shipments and hopefully we'll see more of those if we do respond.

The material shortages that we experienced in the first half of the year which were causing lead time problems, delivery problems.

The supply chain is catching up.

So there is a few isolated cases now where we're still working on multiple sources of supply, but for the most part, supply chain is catching up and lead times, once again, is beginning to normalize.

If we just can repeat about the effect that we saw in the first half of the year going into the later half of the year because of those lead time extensions, we do believe that the order rate was higher and, again, it is adjusting and correcting for that.

So what opportunities do we see for Allied?

Our cash position certainly provides us with opportunities for growth and we are continually looking to take advantage of those opportunities.

We talked about acquisitions in the past and we'll state again that we won't do an acquisition for acquisition sake.

It has to add to our strategic portfolio and it must also not impact our earnings.

Cash -- investing in our own Company, we will continue to do that.

We've done that in the electronics area and we will continue to expand in that area.

We expect the inquiry in new project activity to continue to be strong.

Our website has been modified, the Agile acquisition, our developments over the last couple of years.

The word is getting out, our sales team is beginning to promote it, is system solutions.

And again, we are gaining traction here and we are excited about the potential it brings to the Company and certainly when you look at the gross profit levels.

Our sales are pretty diversified geographically.

We have 60% of our sales in the US and 40% in the rest of the world, primarily Europe.

We also feel that Asia lags, but it provides an opportunity for us and we continue to work with some of our key customers for expansion into that region.

Electronic motion control, new growth opportunities, it adds value in many new applications.

The key to that is investing in the people and technology, and we have done that and we'll continue to do that.

Agile acquisition and, again, the investments we made internally, not only accelerates the process for us to grow faster and more profitably in the future.

Our focus will remain on gross margin.

We have plenty of opportunities.

We are in a pretty fortunate position here and we'll use our resources wisely to focus on those opportunities that give us the best chance for improving profitability in the future.

Our new product development is going to continue to leverage the Company capability.

What that means is we are not just going to be developing components, we are looking at how we utilize all of our technologies to provide a higher level or higher value-add solution, and we're going to continue to raise the bar through investing in our areas of excellence -- that being engineering, engineering, engineering.

Okay?

Our Company-wide one team sales team is in place.

It's expanding.

It's strengthening.

It's gaining focus on target markets and system solution sales.

We are also expanding and improving our support for customer base by strengthening our internal teams.

We do that through people and through the tools that we use.

We have a strategic selling goal that we're establishing internally for the Company.

With our expanded product offering capabilities, we are going to go tap back into our existing customer base and sell more value add there.

That's our goal.

That's our focus.

And that's what we're going to be doing here in the future.

So in addition to the new opportunities with new customers and new markets, we feel we have a fairly good opportunity to expand our sales into our existing customer base.

Now what I would like to do is turn the call over to Dick Smith to review the financial results for the quarter.

I'm sure he'll be pleased to do that.

And then after Dick completes that, I'll be back for a brief summary before we open it up for questions.

Dick?

Thank you, Dick.

As Dick has just indicated and as was reflected in our press release that we put out this morning, we did achieve record profits for the third quarter.

And the profit that we did achieve is the highest profit that we have achieved in the history of the Company since we restructured the Company back in 2002.

For the third quarter, just to run through the numbers very quickly here, the Company did achieve $1.129 million of net income or $0.14 per diluted share and that compares to net income of $279,000 or $0.04 per diluted share last year.

The net profit, I'm sorry, the revenues for the quarter increased 47%, as Dick indicated, to $22 million from $15 million last year.

Now the 47% increase in revenues in our third quarter reflects a pickup in almost all of our major markets to varying degrees.

62% of our sales for the quarter were to US customers with a balance of our sales to customers, primarily in Europe, Canada, and a little bit in Asia.

Sales to our US customers were up 64% for the quarter, while sales to customers outside of the US were up 26% for the quarter.

Now of the 47% increase in sales, 51% is due to an increase in sales volume and that's partially offset by a 4% reduction due to the effect from the strengthening of the dollar against the euro this period.

Now for the nine months ended September 30, the Company achieved net income of $2.6 million or $0.33 per diluted share and that compares to a net loss of $12.566 million or $1.67 per diluted share last year.

Revenues for the nine months increased 34.5% to just under $60 million as compared to $44 million last year.

Now the prior year loss of $12.5 million includes a pretax asset impairment charge of just under $16 million which is about $11 million after tax and some inventory adjustments we took last year of $600,000 and that equates to about a $400,000 after-tax charge, and that was primarily from excess and obsolete inventories.

Now if you exclude the impairment charge and the inventory adjustments that we would have had a net loss for the nine months last year of $1.044 million.

So to compare that to the current year, we have achieved an improvement of $3.6 million in profit before those one-time charges, which is about 349% improvement in profitability.

And earnings per share for the trailing 12 months now is at $0.35 per share.

Backlog at September 30 was $35.7 million, which reflects a 38% increase from the same time last year, which means we have almost $10 million more in backlog going into the fourth quarter than we did last year.

Backlog did decrease just under 3% from the beginning of the quarter, but has increased 70% from the beginning of the year.

Now for the quarter, bookings were $19.2 million and that was an increase of 22% over last year.

And for the nine months bookings were $73.2 million and that was an increase of just under 60% from last year.

This quarter and nine months results do include the Agile Systems acquisition that Dick mentioned and we have changed the Agile name to Allied Motion Canada effective on June 15.

And for the quarter, Canada's revenues contributed just over 4% of the total revenues that were achieved by the Company.

Our gross profit margins did improve for both the quarter and the nine months.

They improved 5% for the quarter, from 25% last year to 30% this year, and improved by 8% for the nine months from 20% last year to 28% this year.

Now the 8% increase in margin for the nine months was due primarily to several factors.

One is as Dick mentioned, we are getting more higher margin business in some of our systems business and other -- some of our new product development sales.

4.4% was due to an improvement in variable margin reflecting lower material and variable overhead costs, resulting from our cost-reduction efforts and increased manufacturing from our China operations.

And 3.3% resulted from the improvement in the percent that our fixed manufacturing overhead cost are to the increased sales.

So we just have a better absorption of our fixed overhead because of the increased sales.

Selling, general and administrative and engineering cost as a percent of sales for the third quarter and for the year decreased as a percent of sales.

However, the total operating cost and expenses for the quarter and nine months, excluding the fire-related expenses and amortization and impairment charges did increase by $1.4 million, or a 44% increase and $2.7 million for the nine months which is 26% against the same time last year.

Now of that, administrative cost increased over a little over $1 million or 72% for the quarter and $2.1 million or 44% for the first nine months last year, and this is primarily as a result of increased compensation expense including incentive bonuses and stock compensation, the incremental cost of adding the Allied Motion Canada acquisition, and business development expenses.

Engineering costs were up 12.5% for the quarter and 3% for the nine months reflecting the incremental cost of the Allied Canada acquisition and expansion of our electronics engineering resources.

Selling expenses were up 30% for the quarter and 20% for the nine months reflecting higher sales commissions and increased sales activities.

Now depreciation and amortization expense decreased for both the quarter and the nine months.

For the quarter it decreased $138,000 and for the nine months it decreased $981,000, down to a total amount of $1.4 million for the nine months for the year.

Also interest expense was down for the quarter.

It dropped $39,000 to a total expense of $3,000 reflecting basically as paying off the debt and lower borrowing cost.

Now EBITDA before these non-recurring transition costs in moving the encoder operation, and the fire insurance recovery and impairment charges increased to $4.885 million for the nine months from $210,000 for the first nine months of last year.

We had $855,000 of capital expenditures during the first nine months and that compares with $726,000 last year.

And the Company generated $2.6 million of cash during the first nine months of 2010, of which $3.970 million was generated from operating activities.

The Company did end the quarter was $7.1 million in cash, no bank debt, or a net cash and debt position of $7.1 million which compares to a net cash and debt position of $2 million at the same time last year or a $5.1 million improvement in our net cash and debt position from the same time last year.

Our stockholders' equity at September 30, 2010 was just under $28 million or $3.51 per share and our tangible net book value is $27 million or $3.40 per share.

Okay, I will now turn the meeting back over to Dick.

Thank you, Dick.

So to provide you with a quick summary for our conference call here today, record earnings, cash on hand in excess of $7 million, no debt.

Strong year to date incoming orders.

Agile, helps us with system solutions, generating higher gross profit, more value add per customer.

Our one-team sales is in place to leverage all our product capabilities and grow as a company, not as just individual business units.

We continue to make investments in our engineering and sales teams, which gives us the ability to grow or capability to grow organically.

Have a balance sheet that's strong and we are able to fund acquisitions for growth in the future.

Our Asian production capabilities has been expanded and it's not just there to help us on the cost side, it's also to help us on the market side in Asia.

And last but not least, we will continue to implement AST to continuously improve all operations and that will never be -- and that will never end.

So at this point, Operator, I'd like to open it up for questions.

(Operator Instructions).

It's actually a nice compliment to us if we don't have any questions.

And I think, again, what we've talked about is that we've had a nice quarter here, to say the least, and we're certainly very confident of our ability to continue our growth in the future.

So what I'd -- if we'll give one more chance, if there are no other questions we will end the call, but let's give one more chance to see if there's any questions.

[Michael Markoski, Springforth Securities].

That was close, Michael Markoski but I'll take it.

Michael.

I've actually got several questions, but since nobody else queued up, we might take these one at time if you don't mind, gentlemen.

Go ahead.

Let's start with an easy one.

On the gross margins the outlooks continue to be positive and maybe you went over it and I missed it, but we're at 30%, I mean do you all have a feel, is there a target where you feel like you're going to level out there for but you've done an excellent job, obviously, of expanding that, or do you feel like you've even got more room to grow that percentage?

Yes, we do.

We have more room to grow and as we talked about several times, or as I mentioned several times, and Dick Smith mentioned also, is that we do feel that the electronics capabilities that we've added in selling higher value-added solutions does give us that ability.

So we do feel there is room for growth.

Is there a target, and I realize that could change but is it -- do you all have any sort of an internal thing that we'd like to see this at 33%, we'd like to see this at 35%, we'd like this at 31.5%.

I mean is there any sort of a benchmark that you've set for yourself that you can share?

Well, let's just say that we'd like to see it improve every quarter here and that we feel we do have room for growth and, as we mentioned, it's going to depend upon how we package our solutions in the marketplace.

The more value add we have, meaning more motion solutions, the better those gross margins are going to become.

There's other activities we can undertake to improve though, so I would tell you, we are not satisfied where we are, we will continue to expand that.

Okay.

Any concern on -- your sales are growing pretty fast, it's been a really nice rebound, you all positioned yourself well, any concerns at all on the receivable front?

No.

No, actually the receivables have gone up.

W, we have very few collection issues, Michael, our write-off history and it continues to be very good.

And our increase in receivables is strictly due to volume.

Our days sales outstanding has been right around the mid-40s and that's been pretty consistent over the last say, four quarters, five quarters.

But not only that -- but you're not seeing any sort of deterioration with collection problems at all.

No.

I mean your history has been excellent and that's why I even ask is if you're seeing any sort of an uptick as these folks are hitting you pretty quick for turnaround.

So --

We watch that fairly closely.

So the answer, as Dick has said already, is no.

You've done an excellent job with that too as well, gentlemen.

I can't complain.

Long-term debt obviously there's none anymore so on our long-term obligation, those are strictly leases -- capital leases, I'm going to assume, correct?

There are primarily two things.

One is the pension expense that we have up at our Michigan operation, as well as the post-retirement benefits.

That's what makes up the bulk of the long-term liabilities.

Okay, and obviously no -- I mean that's stayed pretty steady in that amount that we're sitting on now, so no funding issues there, everything seems to be right where it needs to be, no pressure that that number is going to move around much on us as far as we can tell, right?

Yes, that's right.

Okay.

Did you touch capital equipment needs?

I mean right now your depreciation is pretty well covering to where your profits are going straight to cash flow.

Your income is your income literally.

Is there any sort of capital needs, barring obviously an acquisition or something extraordinary but as far as what's on the time horizon right now, can you comment on capital equipment?

Yes, we can.

We do receive capital equipment plans from all of our operations and we review those on a monthly basis as we develop cash flows, and we do have the plans developed for the remainder of the year and for next year and we will have no issue funding those.

Okay, but as far as the levels that you've been at my --

It will increase slightly.

We have a couple items that we are expecting in 2011, but it's not going to be a dramatic increase.

Okay, and so what I'm assuming in here is that, again, your profit is pretty well mirroring your free cash flow.

Barring an acquisition or an outside event, is it safe to say that should continue?

Yes.

Okay.

Now the last one is probably the -- while not necessarily the toughest one, but you know me, we've had conversations on this.

I'm back and forth to China, and they've got an extreme thirst in trying to upgrade their technology and they seem to have the capital budgets to do it.

Can you comment a little more on -- that just seems like such a tremendous opportunity specifically for what you all do.

Is there any -- because I know you are involved in defense and aerospace, and I know there's some restrictions still in place, I believe, I don't know.

Can you comment a little more specifically on -- am I overblowing that opportunity, but it just seems like the sales opportunities if you can get a good strong sales foothold literally in mainland China and in Taiwan, in all of Southeast Asia really, and since you have the plant, it's operating so well, surely there's quite a bit of discussion on penetration of that market.

Well, we can comment on it.

I think it's early -- in my comments what I said was that our sales are strong in North America and strong in Europe, and that we recognize that Asia can help us expand our growth.

We are very familiar as a company with the markets in Asia.

We're very familiar with our customers who had established strongholds or production capabilities and are tapping into that Asian market and we do know that it's going to continue to grow in the future.

Now, there's two ways to look at it.

Number one is the competitiveness of products being shipped into China, let's say in particular, is more severe than you would see in North America.

As our customers begin producing equipment there, we've noticed that they've continued to differentiate with products that they're shipping into that market compared to products that are being shipped into North America and Europe.

So it's going to be vital for us to have that production capability so we can meet the targets for those product lines in Asia.

When we set up that capability and we recognized the next level of growth for us was to establish a sales and support capability in Asia because that -- it wasn't just for cost, it was to penetrate the market and to serve our customers, who many have plants around the world.

So you can expect from us in the future that we will expand in that area.

And I can tell you we do have plans in the works, so we're working on it.

We can't report anything to you yet, but we are working on it and it's an item that is at the forefront for us.

Well, I don't think you're missing it.

The opportunity is there -- the opportunity as I said, there's a second level or second tier of products, and I don't mean to say that from a quality standpoint because our China factory produces at quality rates that are just as good as our North American and European plants.

And we do believe that the market is being set up to the point of where it's going to mirror our markets in North America and Europe, meaning that it's not just going to be beat you up for price, lowest cost.

It is going to be that supplier who can come up with a value-added solution, get it to them fast, make sure it works, highest quality, and establish that reputation to win.

There is a thirst for quality products because there still is a recognition that some of the products produced by the manufacturers in that region aren't necessarily the highest quality producers on a consistent basis.

Not that they can't, but I'm saying to you the key word there is consistent basis.

And that's how we're going to establish ourselves.

While especially in the medical area, I can say, due to a couple of relationships that I've made, whether it's dental or surgical, they're well aware that there is a strong capital need and a change over there, and I know that's one very specific area that there just seems to be an awful lot of discussion that I wasn't hearing eight years ago at all.

It didn't even seem to be on their radar screens and all of a sudden it is.

It's moving quickly, we see that also.

And we've been flattered a number of times by seeing our products getting copied over there and that's one thing we do want to protect.

That's the other problem.

And yes, that still exists.

No question about it.

Well, I appreciate the fact that you all even mentioned the Asia.

Hopefully it will get to be a number.

As soon as you can quantitate that, it would be interesting to follow if that's appropriate.

It's always been North America, Canada, and Europe.

If there is a split out for Asia and it starts to become a number that's reportable I think that would help us track as well.

We will do that.

Gentlemen, I can't thank you enough on behalf of the folks I represent -- in these days of -- I will say this because I think it needs to be said, in these days when Management seems to go from quarter to quarter, you guys years ago said we've got a path we're trying to get on and we're not going to get swayed.

And a lot of things have happened in the last five, six years, as everybody knows.

And you guys have stayed extremely focused, and to see it paying off like this for you, it's very satisfying for all of us sitting out here.

And I just want to say thank you.

Well, thank you.

We appreciate your support also.

And there are no more questions in queue.

Okay, operator.

Once again, everyone, we're going to go ahead and end the call.

We want to thank everyone for being on the call and we look forward to another good quarter here and getting back to you soon.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.