Allient Inc (ALNT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2014 Allied Motion Technologies earnings conference call.

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

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

We shall facilitate a question-and-answer session at the end of the conference.

(Operator Instructions).

I would now like to turn the conference over Miss Sue Chiarmonte, Vice President and Treasurer.

Please proceed.

Thank you operator.

Welcome to Allied Motion's conference call to discuss the first quarter ended March 31, 2014, and thank you for joining us on the call today.

We distributed our press release earlier this week and copies are available on our website at www.AlliedMotion.com.

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

To access the Internet broadcast or replay, go to the company's website, click on the Investor Relations page, and then clicked on the Webcast icon.

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

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

Thank you Sue and welcome, everyone, to our first-quarter 2014 conference call.

Please note that our first-quarter results are the first full quarter of reporting that includes the Globe Motors results in our numbers.

Throughout 2014, we will provide combined Allied Motion and Globe Motors pro forma data for revenues, net incomes, net income, earnings-per-share and adjusted EBITDA.

Here is the plan for today's call.

I will begin with a brief level -- high-level review of the results, and will then discuss some of the key items that impacted those results.

I will then turn the call over to Rob Maida, our CFO, who will provide you with a more detailed financial review.

After Rob returns the call to me, I will provide you with some insight as to the activities and opportunities we see for the future, and we will then open the mics for questions.

Let's begin with the high-level overview of the results for the first quarter.

Our revenues for the first quarter of 2014 increased to $60.4 million compared to $25.1 million for the same period last year.

Net income was $2.1 million or $0.24 per diluted share in the quarter compared to $960,000 or $0.11 per diluted share for the same quarter of 2013.

Adjusted EBITDA, which excludes stock compensation expense and certain nonrecurring items, increased to $7 million in the quarter compared to $2.1 million for the same quarter last year.

New orders received for the quarter were $64.4 million compared to $21 million for the same quarter in 2013.

Now what I would like to do is provide you with the Allied Motion and Globe Motors combined pro forma results for the first quarter of 2013 and compare them to first quarter of 2014.

On a pro forma basis, the revenues in 2013 first quarter were $50.4 million compared to $60.4 million this year.

Net income in 2013 was $1.1 million compared to $2.1 million this year, and diluted earnings per share were $0.12 a share in 2013 compared to $0.24 per share in first quarter this year.

Adjusted EBITDA was $5.1 million last year, and $7 million this year.

Now, I'd like to turn the call over to Rob Maida, and he will provide you with a more detailed review of the financials and then I will be back to provide you with some insights as to the key activities and opportunities for 2014.

Thank you, Dick, and good morning.

As was reflected in our press release that was put out Tuesday evening, the company achieved net income of $2.148 million or $0.24 per share, diluted share, for the quarter ended March 31, 2014 compared to net income of $960,000 or $0.11 per diluted share for the same period last year.

EBITDA increased to $6.6 million in the quarter from $1.8 million for the same period last year and adjusted EBITDA, which excludes stock compensation expense as well as certain nonrecurring items, increased to $7 million in the first quarter this year compared to $2.1 million for the same period last year.

Revenues for the quarter were $60.4 million compared to $25.1 million for the quarter ended March 31, 2013.

This is an increase of 140% with 139% of the increase due to higher sales volume and 1% of that increase due to favorable currency change related to the dollar weakening against the euro.

Looking at our total sales for the quarter, 64% of our sales were two US customers compared to 51% for the same period last year with the balance of our sales to customers primarily in Europe, Sweden and Asia.

The 140% or $35.3 million increase in sales reflects higher sales at most of our TUs and is a result of a 200% or a $25.7 million increase in sales to our US customers and a 78% or $9.6 million increase in sales to customers outside the US.

Bookings for the quarter ended March 31, 2014 were $64.4 million compared with $21 million for the same period last year, or an increase of $43.4 million, resulting from the addition of Globe as well as increases in all our TUs, and it also reflects a trend of four sequential quarters of increased orders.

Backlog increased to $79.7 million at March 31, 2014 compared to $75.6 million at December 31, 2013 and compared to $28 million as of March 31, 2013.

Our gross profit margin decreased to 28% this quarter compared to 30% for the same quarter last year, and this decrease in margin primarily reflects the impact of the acquisition of Globe Motors as well as sales mix.

Total selling, general, administrative and engineering expenses were $5.9 million higher for the quarter as compared to the same period last year, and this increase is again largely due to the addition of Globe along with higher stock compensation expense and incentive compensation expense resulting from improved profitability.

Depreciation and amortization expense increased $1.3 million for the quarter from $413,000 last year to $1.7 million this year, reflecting the additional depreciation and amortization related to the acquisition.

Interest expense increased for the quarter to a total expense of $1.6 million from $9000 for the same period last year, and again reflects the additional debt associated with the acquisition.

We had $584,000 of capital expenditures during the quarter compared with $298,000 the same period last year.

The company had $9.7 million of cash on hand at March 31, 2014 compared to $10.2 million at December 31, 2013.

Our cash position declined roughly $500,000 during the quarter with the major uses of cash being $1.25 million of debt repayment, $1.5 million for interest payments, and $271,000 for dividends paid.

Also we increased -- or we received $1.4 million from our former -- from the former owner of Globe Motors in association with the purchase price working capital adjustment, reducing the overall purchase price of Globe to $88.6 million.

Total outstanding bank debt at March 31, 2014 was $86.5 million compared to $87.6 million outstanding at December 31, 2013 and compared to $399,000 at March 31, 2013.

As previously mentioned, total debt repayment during the quarter was $1.25 million.

Our DSO increased to 52 days at March 31, 2014 from 49 days at December 31, 2013 and 48 days at March 31, 2013.

This increase is primarily influenced by the acquisition of Globe, and inventory turns increased to 6.1 turns from 5.1 turns at the end of 2013 and 4.4 turns at the same time last year.

Our net stockholders equity at March 31, 2014 was $50.6 million or $5.47 per share, compared to $43.1 million or $4.87 per share at the same time last year.

And finally, our Board of Directors just declared a $0.025 per share cash dividend that is payable June 10 for shareholders of record May 27.

I will now turn the meeting back over to Dick Warzala.

Thank you Rob.

What I would like to do is follow the past practice of where we discuss the press release that just came out, and then elaborate more on the statements made in that release.

So for those of you who may not have seen it, I will read the quote portion of it.

As mentioned in our press release from the fourth quarter of 2013, we expect our revenues for 2014 to more than double relative to Allied's 2013 pre-acquisition revenues, and from the Globe acquisition to be accretive to earnings.

The record results for the first quarter 2014 are in line with our expectations.

While Globe continues to operate in substantially the same manner as it was prior to the acquisition, the integration process has begun and will continue throughout 2014 as we follow a structured approach that we believe will lead to success in the process.

Additionally, we are encouraged with our first-quarter results as we experienced growth in almost all of our served markets and converted several new potential opportunities into design-in wins.

With the continued focus on the Globe Motors integration, we expect the year to be transformative and will put us in a position to leverage the capabilities of both companies to create new opportunities by designing innovative motion solutions the change the game and meet the current and emerging needs of our customers in our served market segments.

So to expand on the PR, it refers back to the comment made in the fourth-quarter press release that stated revenues in 2014 are expected to more than double relative to Allied's 2013 pre-acquisition revenues, and for the Globe acquisition to be accretive to earnings.

The record results for the first quarter 2014 are in line with our expectations.

The statement was provided really for reference purposes only, and beyond that, we will let the reported results speak for themselves.

It is our goal to manage the company to meet all of our strategic objectives, including growth and profitability.

Continuing in the PR, it stated that while Globe is operating in substantially the same manner as it was prior to the acquisition, the integration process has started and will continue through the year as we follow a structured approach that we believe will lead to success in the process.

During the first week of April, we brought together a team of 66 sales and engineering personnel from around the world to begin the process of defining and ultimately capitalizing on the competitive advantages of the combined entity.

Progress is being made, and over the next several months, we will be working on interim critical issues identified in the session as a precursor to our strategy update planned for September of this year.

The session proved to be very enlightening and encouraging, as our team engages to leverage the strengths of the combined entity.

One of the most exciting outcomes of the session for me was to gain first-hand exposure to the substantial talent we have within Allied Motion.

The talent level we now have in the company and our commitment to leverage our resources warrants our optimistic outlook for the future of our company.

The quote continued with additionally, we are encouraged with our first-quarter results as we experienced growth in almost all of our served markets and converted several new potential opportunities into design wins.

Our served markets, including medical, vehicle, electronics and aerospace and defense, posted gains in sales, while our industrial market was flat.

New design-in wins occurred in virtually all of our markets, and reflect the emphasis we continue to place on securing new business.

In addition, with the many new opportunities we are pursuing, we are experiencing an increasing number that includes multiple Allied Motion Technologies, commonly referred to internally as Motion Solutions.

The quote concludes with a continued focus on the Globe Motors integration, we expect the year to be transformative and will put us in a position to leverage the capabilities of both companies to create new opportunities by designing motion solutions that change the game and meet the current and emerging needs of our customers in our served market segments.

While I have made similar statements in the same vein previously, I will continue to emphasize that this is what this acquisition is about.

That is transforming our combined company and to position us to achieve even greater growth and success in the future.

We are an exciting and well positioned company, and we are more capable than ever to better serve our target market segments.

As we strive to improve, it is important to note that we will not ignore the elements of both companies that led to our successes.

Some of these elements include a solid reputation for high quality, an excellent on-time delivery record, innovation, and the expanded geographic reach we have now put in place.

At Globe Motors, their track record of seven years of production on one line and eight years on another of zero defect manufacturing has been a key factor in their success.

This type of track record and the methodologies utilized can be applied in other areas of our business, and can result in new doors being opened in the future.

A good measure of innovation is to evaluate a company's ability to bring game-changing solutions to their served market segments.

Globe and Allied have demonstrated the ability to do such through the development and sale of leading-edge power steering solutions in several types of vehicles, and through high-performance motor/gearing solutions used in several cutting-edge medical applications.

This type of creativity is supported by a company culture that constantly challenges its team to provide solutions with the most compact, differentiated products or systems that change the game, and add value to our customers' products.

Geographically, we now have strategic manufacturing capabilities in Europe, Asia and North America, including lower-cost production facilities in Portugal, China and Mexico.

While many companies utilize low-cost regions to realize the benefits of low cost labor, the Allied/Globe facilities in these countries are different.

They are state-of-the-art factories that took on the challenge to raise the bar and utilize technology to provide production capabilities that will endure well into the future, even when the labor cost advantage begins to slip away.

In addition to manufacturing capabilities, Allied Motion supports customers through its combination of solution centers, a direct sales force, manufacturers' representatives and distributors directly within our target geographical regions.

Global companies want and need global support.

And Allied Motion can clearly demonstrate that we are making the investment to ensure that their needs are being satisfied.

And last but not least, you can count on us to continue to utilize Allied Systematic Tools, or AST for short, to improve efficiencies and eliminate waste throughout our company to improve quality, delivery, cost, and innovation.

AST is critical to and helps create the path to success in all aspects of our business and in all regions of the world.

We have significant talent, and by applying the same AST lean principles that are such an integral part of our current company culture, we can define and shape our global sales and support organization and securely position ourselves for long-term sustainable growth in the future.

The challenge to accomplish this objective lies in the minds and hands of our employees, and I for one am confident that we can and will rise to the occasion and exceed even our own internal expectations.

With that, operator, I will now open the mics for questions.

(Operator Instructions).

While we are waiting, as we've done in the past here for questions, we did receive some -- a few -- fewer this time than in the past -- emailed in.

I guess that reflects the type of performance we have had.

But I do have just -- I'll start with one and then if there's anybody else that has a question, we will jump back to it.

One question that came in, and I'll turn this over to Rob, can you further explain the net working capital adjustment that was made as you reported in your press release?

So Rob, can you maybe elaborate on that a little bit?

Sure Dick, thank you.

The working capital adjustment that was put into the press release was about $1.4 million.

And what it reflects is an adjustment to the purchase price of our acquired company, Globe Motors.

It is not in the results, if I'm reading this question correctly, it is not included in the operating results of the company in the quarter.

It is an adjustment to the purchase pricing; it is a balance sheet adjustment only.

So hopefully that answers the question.

Yes, so what you're basically saying is it doesn't have any impact on net income, earnings per share, but strictly reduces the purchase price and we receive cash.

That is correct.

Okay.

Operator, are there any questions before we go on to these others here?

JD Padgett, ALMAK Capital.

Good morning guys.

Great quarter, that's probably why there's not a lot of questions but a few things I want ask about would be in the past you've broken out any kind of one-time issues associated with the acquisition or integration.

There's nothing on the P&L this time, so I'm guessing maybe there is no material one-time items to call out?

That is correct.

This quarter, there were really no one-time items of significance to call out.

Okay, perfect.

There is some minor cleanup of some legal bills but it was really minor that we wouldn't even consider as an adjustment at this point.

And the only major item I think Rob just talked about was the net working capital adjustment.

Okay.

And then the other question was just sort of high-level, now that you've had a chance to really dig into Globe a little bit deeper, you mentioned a meeting you had in April.

What areas do you think you are most excited about now in terms of ability to drive synergy going forward, and what do you think would be the timeline around some of those initiatives?

The timeline is now.

So, I'd say let's answer about what's most exciting.

What we did is we approached the integration process first from what the customer will see from a sales and, let's say, engineering design approach.

And that's why we brought that team together.

In addition to the sales and engineering personnel, there were other disciplines represented in the company.

And one of the things that we really wanted to focus on is what are our competitive advantages?

And we really had an opportunity -- every person there, I would say -- I shouldn't say every person, there might've been two or three that was in that session actually got up and made a presentation to the group.

If you are in sales and you had a territory, you talked about your top customers and your top prospects.

So there was quite a bit of information sharing, and that was one of the goals of the meeting is to share some information and then to generate some ideas of how we could work together in the future to become a stronger entity.

And the ideas that came out of it were extremely encouraging.

The talent pool that we have in place is extremely encouraging.

We -- from the PhDs who got up there and got down in the bowels and the depth of motion theory, to the practical approach to how are we going to look at how we come to market and service our customers better, all of those were addressed.

And based on that, what we did in the process is we took separate working groups, the general management team, the engineering team and the sales team, and we had them work on the ways or identify the ways that they thought they could work together that would be the most beneficial to the company in the future.

And then we also looked at -- again, this is in their own disciplinary -- and then on a companywide basis, what were those areas that really could have major impact for growth in the future.

And a very, very good team, very engaged team, I think the cultures that we see from the existing Allied operations and now to the new Allied operations, including Globe, very similar, a similar focus on satisfying customer needs.

And the breadth of technology that now gets added and the ability to leverage that technology so we have additional resources.

And while each of the individual companies may have been working on solutions for meeting customers' needs in markets, they are now able to sit there and meet the people firsthand who can assist in those efforts, and we don't need to duplicate.

So we can eliminate some redundancy certainly in development, and we can really come up with and use the expertise that we have drought the company.

I'll again summarize.

It started.

It's just beginning.

We are already working on solutions for major opportunities that we feel can leverage the technologies and the products that we currently have.

So it's leading, as I mentioned, just to be clear, interim critical issues, critical issues are usually the outcome of our strategy session, which says all right, you've defined where you are today, you've defined where you want to be tomorrow, you know, what are the steps that you need to take to get you where you want to be in the future.

And that's really the outcome of a strategy session.

And we are going to do an update.

We'll call it a fairly major update now.

Obviously as the company has transformed and is more than double the size that it was pre-acquisition of Globe, we will come up with, again, a set that says, okay, what are our goals now?

What are the objectives we are establishing?

They're going to be far-reaching, and they are going to be aggressive, and we're going to define those steps to get there.

In the meantime we've already identified and are working towards with action plans to prepare us for what we're going to be up against here in the new strategy in September.

What about a couple of different tangents on that, just in terms of sourcing out your bigger company and potentially -- I don't know if rationalizing is the right word, but some of the manufacturing or delivery or administrative footprint?

I think all of those are certainly areas that we will address over time and we will want to become stronger.

And I think this is part of the strategy update process, because that's where you identify what the highest impact areas are, those that give you the best opportunity to succeed.

And that's really what we will focus on first.

And I think the reason we selected the sales and engineering area and the customer interface is that's where we feel focusing on the growth objectives, that's what it provides us.

But certainly, as we continue to grow and expand and start to look at where else can we become more effective in the utilization of resources, we will do that.

Okay.

And does this all culminate at some point with you maybe presenting some sort of quantified synergy targets or anything like that, or is it just kind of more gradual and manifests itself in just continued improvement in margins and that kind of stuff?

The latter.

Okay.

Keep up the good work.

Thank you very much.

Jeff Geygan, Milwaukee Private Wealth Management.

Good morning.

Nice quarter.

I thought you said on a pro forma basis you revenues this year were $60 million versus last year, $50.4 million.

Correct.

Did I hear that correctly?

Again, look at last year, Allied Motion standalone was about $25 million, I believe.

(technical difficulty) the growth would've been $25 million.

Of your $60 million this quarter, how do those revs break out in terms of the two divisions?

I guess you're taking another shot at getting us to segment the company and report as we talked last week or last quarter.

We are not going to do that.

We are going to report as one entity, and there's several reasons for doing that.

We don't want to we versus they or we and us attitude created, so we are working hard towards one company and we're going to report to the market as one company.

All I can say is you could read into and say, all right, this is what one element did versus the other element.

We gave you the combined numbers.

I will tell you, and this is as far as I will go, that growth occurred in both areas.

If that's fair.

Fair enough.

Yes, as a manager, I would appreciate you would want to have a unified vision, but as a shareholder, I think everyone on the phone or your current base will be a little curious about where the delta in revenue is coming from to assess the veracity of your statements about Globe Motors and it's been accretive and so on.

But fair enough.

The gross margin you said contracted from 30% to 28%, round numbers.

Was that correct?

Correct.

And I thought in that statement you said there's 2 basis points of acquisition cost and the rest of the delta was revenue mix.

Can you elaborate a little further on the 200 basis point contraction and what we might look at or at least what you would expect on a forward basis in terms of gross margin?

Sure.

I think I'll let Rob speak to this, but first off, I don't believe I heard 2 percentage points of acquisition cost in there.

I do think Rob talked about sales mix and the mix --.

Pardon me, I thought you said 2 basis points.

So it's a de minimis amount, but there was some reference to it I thought.

Rob, is that right?

Jeff, you're correct.

What I did say is that most of that decrease was attributable to the acquisition.

You are correct in that statement.

There is sales mix involved, but the majority of that gross margin impact is due to incorporating Globe into the consolidated figures, yes.

Oh, then do I understand was it in fact 2 basis points, or 200 basis points, which that would account for nearly 100% of your contraction.

The latter.

I see, all right.

Your SG&A was up a little bit.

Is that normal, is that your normal run rate now?

Yes, I would say it is our normal run rate.

There was nothing unusual in our SG&A, so yes.

That's true.

Dick and I are just confirming here.

It's not unusual, but in the first quarter, it is up a little bit due to increased profitability led to increased incentive compensation, I'll say.

What happens, Jeff, is, as you may be aware, we've talked in the past about how our compensation program is structured with a fixed element and a variable element, and the variable element is performance-based.

And as the performance of the company goes up, you will see an increase in those costs compared to what you would have saw last year certainly.

Okay.

So that element is reflecting the increased profitability of the company, and the increased accruals for incentive compensation primarily.

Appreciate it.

Your CapEx is relatively small, but I'm just curious about the amount of that CapEx that's maintenance versus other.

Primarily I would say to you in the first quarter.

Right now, it's probably 75% maintenance and 25% growth.

I think we'll see more of the growth capital coming through in the rest of the year here, but there is -- when I say growth capital, for example, we replace an existing piece of a test equipment with a newer model that gives us more capabilities and so forth, do you call that maintenance or do you call it growth?

We are reaching into other areas where it needs to be -- you have to have more precise measurements to ensure that you're meeting the needs of the application.

So it's a hard one to really say in that area.

Now, when it's clearly related to the product expansion or new product expansion, yes, we can split that out and we have a good feel.

But I will say to you, in the first quarter, we can characterize the type of CapEx that came through as really more maintenance than growth.

And I have to also say that we made some substantial investments in growth capital last year and in the previous few years at Globe, they made substantial investments in growth capital for new applications in new markets.

Is -- have you provided any reference on a forward basis in terms of what your CapEx budget looks like for 2014 and 2015?

We do have some guidance in some limits, if you will, on what the CapEx -- what we can spend on CapEx due to the financing agreements and arrangements that are in place.

For the coming year, we are bound by agreements under those financing arrangements to limit ourselves to approximately, I'll say approximately $6 million of CapEx for this year, for 2014.

You know, from a planning perspective, what I can tell you is that certainly we have a robust plan for investment this year, albeit less than that roof of $6 billion.

But we do have a pretty substantial CapEx plan for the year.

Good enough.

Primarily expansion and growth based on new opportunities that we are looking at.

So presumably the bank kind of hasn't clarified how much of this CapEx is maintenance versus growth, and I could look at the document myself but maybe you can save me (technical difficulty) what is the cap they put on the bank or the covenant puts on you for CapEx in 2015?

In 2015?

Yes.

Did I understand that correctly?

Yes you did.

Okay.

The cap in 2015 I think increases to roughly $7 million I believe it is approximately.

Is that comfortable for you?

I think for us to shareholders we feel like the bank is hamstringing us with the combined $15 million of CapEx over the next two years.

I don't believe so at all.

I think we have more than adequate space here for customer-facing or growth type capital expenditures as well as maintenance.

I don't believe at all that that's a limiting factor.

As Dick mentioned previously, there was significant amount of investment made over the past two years in both our Allied group and Globe group over the past two years, most of that being customer facing and growth.

But I don't believe that we feel that we have been limited or pinned the by that arrangement at this point.

And also I would add to that, if we felt that there was a significant opportunity that we needed to pursue, and that we had these limits that we might bump up against, then we are certainly free to go to our financing partners and discuss the opportunity, what the paybacks are and so forth, and to increase those limits.

So they are built in, but everything in that agreement is subject to discussion and negotiation at a later date if circumstances change.

And the growth scenario, a new opportunity scenario I think is one that would certainly welcome.

As long as we continue to deliver results and do what we said we're going to do, the more willing they are going to be to help us as we go forward here.

Yes, fair enough.

My last question relates really to your debt and the subject of CapEx and the bank.

So you're sitting around the board table and people are having conversations about your new cap structure where you have a significant amount of debt, you've got a little bit of cash, you're paying a dividend and have some potential CapEx opportunity.

What is that conversation like in terms of what's your hurdle rate for our (technical difficulty) on any investment you might make, how much cash do you really need and how aggressive do you want to be in trying to reduce the debt outstanding?

You've got a lot of questions there.

That's my last question.

I promise.

Okay, that's the last one, okay.

A quick question for you.

You are really breaking up here as you're coming through.

It's garbled.

I don't know if that's happening -- are we okay, are we clear with you?

Yes, I can hear you fine, thank you.

Okay, I just wanted to make sure because I just didn't know if the whole line was a bad connection or if it was just as you're coming through to us.

But if anyone else comes on, if they have any other issues, I'd like to hear about it.

But anyways, let's talk about, try to take these one at a time here.

We, at the board meeting, and specifically Rob, does provide an update to the board as to where we are in terms to our debt, our financing activities, and what the outlook goes.

And he actually goes out and projects two to three years out and says, okay, what's it going to look like two years from now, three years from now.

One of the major items that we have in the debt structure -- and obviously it's public information -- is some fairly high cost mezzanine funding or debt.

And that's, we are paying interest only on that, and there becomes a point in time where there's a cliff when we have to pay this off.

So we don't have to pay off the mezzanine debt.

We can continue to pay it but we are not -- we are paying interest only now and not any principal.

So I think the first thing that we are focused on is that's high cost to us.

All of our interest costs, when you take a look at the combined interest costs, the bulk of that is really -- we have -- of the $70 million or $86 million or $87 million of debt outstanding, $30 million of that is mezz and that's $1.1 million or $1.2 million in interest payments.

And the other $36 million is either term or revolver, senior or revolver, and that's $400,000.

So, I would tell you that, from a good practice standpoint, what we want to do is we would want to get our interest rate -- and mezz was necessary to get the deal done and we have a great partner and they have been very cooperative with us here as we go forward, but that is certainly an area that we are going to want address down the road.

And Rob does give an update to the board.

He forecasts out based upon what the retirement of debt is, and he could give you an update and some update on that and so forth.

With regard to new projects, and when we look at -- we will talk about internal items that don't reach the board.

The board approves an overall CapEx plan at the beginning of the year.

We go in, each of the operating units comes back with what their needs are and there requirements are going to be.

We scrub that down.

We present it to the board, and typically -- and it depends.

It's hard to say that there's a hard, fast number, but typically we see paybacks in the two- to three-year range.

It could be shorter.

We do see some in a year or less and those are no-brainers.

But if you get into a big project where you're looking at a new market opportunity, it can take you a little longer than that.

So it depends on how long of a range you want to take a look at your capital plans.

But I'll say to you, a typical payback, and you start to say is similar in a two- to three-year range on our capital expenditures.

I don't know if you want more.

Rob, he can kind of step you through the debt if that's of interest to you, or if we've satisfied your question, we will just move on.

Really the board's attitude about how aggressive do you want to be in paying this down, given that you are paying gross about $5 million of your debt down annually at the 1.25% debt reduction quarterly rate.

Yes, okay.

I would say -- right now we are comfortable in -- as we mentioned, this is our first full quarter of combined results.

First quarter is a little bit of an anomaly for us when you start looking at cash and cash flow because that is incentive compensations paid out in the first quarter.

So we usually have a little bit -- we usually use cash in the first quarter, so I think as we progress here, a lot of factors come into play.

We may have another acquisition we might want to look at.

And we need to determine where the money is coming for that and how major of an acquisition it is.

So in addition to capital, we may have acquisitions, bolt-ons that we may be looking at, in addition something more significant over time.

So all of it comes into play.

And I don't think -- we can only -- we can provide the scenario that if we stay as we are, and I can almost guarantee you that for three years we're probably not going to stay as we are, we're going to be changing over time, we're going to have growth ambitions and goals that we're going to go after.

But if we stay after over time, in the next 2.5 years to three-year area where we now start paying principal on the mezz financing and so forth, we're going to want to do something at that point in time to restructure, recapitalize, to move out the high cost of the debt piece of it in some way.

And we are looking at many alternatives.

And I think the board is very supportive.

We stepped into this and we are looking at debt net of cash now a position of about $77 million for a company that did $60 million in revenues and $2.4 million of net income and $7 million of adjusted EBITDA in the first quarter.

So, it's not an uncomfortable position, but we will keep working towards it to reduce it and/or if we find another major opportunity, we will figure out a way to get it funded.

And they are supportive.

Thank you for the added color, your time, and the very nice work that you're doing.

Bill [Selby], Gabelli.

Hi, thanks.

If you could just comment on the change in sales mix that led to the lower gross margin, and then what the sales trends look like in each of your segments currently.

Thank you.

Okay.

Well, the markets, as we talked about, we mentioned what markets were up and/or flat, so I mentioned that our medical market was up.

Our vehicle market is up.

Our industrial market is flat.

Our electronics market is up.

We didn't talk about distribution.

It's a small segment, but that's up.

Aerospace and defense is up.

So, the trends, I guess if we start saying about trends, it gets into guidance and so forth and the forecast, and we've never provided that.

So, I guess I'm not prepared to tell you right now how I would see that these markets are going to -- what they're going to do.

If you're looking at the growth, the additive growth that came on with the acquisition, you will see it in the vehicle market, you see it in the aerospace and defense, you'll see it in industrial and some medical.

And so the combined entities, both entities, as I mentioned, grew.

And we expect that to occur, continue to stay focused on growing all elements of our business in the future.

So --

Is the 28% then a framework to use for the balance of the year, or --?

It's probably a fairly good framework to use based upon the mix that we can expect for the rest of the year.

Yes, to answer your question.

All right, thank you.

And just on your last answer, it sounds to me like you might already be looking at another acquisition.

And I'm just curious.

With the debt almost 3 times EBITDA, would you finance it then sort of with a strategic partner, or -- I'm just a little surprised.

It sounds to me like you are already looking at something.

If you could just comment on that.

Sure.

When you start we say looking at something, acquisitions take a long period of time.

And what I can say to you that when we acquired Globe, we had other prospects that we were looking at at the same time.

So, that whole pipeline of acquisitions, you process that, you get it started, and they are ongoing.

And others may come in after the fact, and we look at them in several different ways.

So I think it depends on the magnitude.

We are cautious, we are careful right now, and I would tell you I think if I went to the board and said we've got another acquisition of the size that we would like to do tomorrow, they might say we might want to wait a while to do that.

On the other hand, there are acquisitions out there and things that we've looked at that we've turned down, other things we are continuing to pursue because the timing is such that I'm sure you're aware it takes time.

It takes time to groom them, and typically we don't get into auctions.

Typically, we groom relationships.

And if you go look at all of our acquisitions, really most of them are done through a relationship that we've built over time and not necessarily an auction.

And Globe was not really something that we groomed over time.

There was an auction process out there, but we came in.

At the end we were able to come up with the right solution, right package and management supported it.

I think we got the lead position in it because of that.

So let's just say that we are looking at -- we always look, we are always paying attention, we are looking, and with bolt-ons and technology plays and market expansion, and as we get closer to maybe finalizing something, then it becomes an issue of if the timing were not right.

But we've been doing this for several, many years now, and we will be careful as we always have.

Our track record has been good in acquisitions and we expect it to continue.

So we are not going to go out there and buy for buys sake.

Okay?

Thank you.

(Operator Instructions).

Scott [Biden], Investor.

I just have one question that already hasn't been answered.

Congratulations, by the way, on the nice quarter.

The outlook for Europe and China, I was wondering what you felt was going to happen there.

Europe is extensively coming out of a recession.

China looks like they are slowing down.

Can you tell me what your prospects look like for those areas for sales?

And then for this most recent quarter, can you tell us about what percentage of sales did come from China and what percentage from Europe?

Okay.

Let's talk about the qualitative side of it first, and I think you assessed it as we see it also quite well, that Europe seems to be coming out of the recession and that China might be slowing down.

Europe is a much bigger factor.

The US market is the largest percentage of our business, and Europe follows a strong second and Asia is a distant third.

And we'll give you some numbers based on what we see impact and so forth.

But the Asian market for us, if we look at that, when we established our operation through an acquisition that's in Changzhou, China right now, and we are capitalizing and investing in that, motor line it's over there, several motor lines but one in particular that we made a fairly substantial investment in was to satisfy our existing base of customers who have significant operations in China.

So, for us to compete by building product in North America and shipping to China, it became -- or it continues to be quite difficult.

By the same token, produce these product in China and shipping back to North America or Europe, we are seeing the competitive edges that China may have are starting to erode.

So our approach has been that we are in China for the China market.

And since our market in China is fairly small, the growth opportunity we have there is fairly substantial.

We are putting in -- we're manufacturing and selling really competitive products against Chinese companies, and I think that's going to be our success.

So, we will see growth in China or in Asia, and it won't impact our business because we have a minimal amount of business in that region.

In Europe, you are correct.

We are seeing some positive signs in Europe, in North America also.

So Rob, maybe you can add a little more color to that as far as numbers.

Sure.

Scott, I think you had asked how significant were the sales out of Asia if I heard your question correctly.

You did.

And what I can say is for the quarter is that in Asia it's relatively small from a sales perspective.

It's 1% of sales is what we're looking at, so relatively small, and relatively at this point minor.

But as Dick said, the growth that we are looking for in the China market is going to be relatively significant.

It starts with where that product is being produced in China, and shipped to North America, for example, where it's transitioning, where it's produced in China and shipped directly in China or in Asia.

And that's where --and it's an existing base of customers.

We have the timeframe and the plan for that and so forth through the year.

So that's why even the products we produce there, it's being shipped there or to Europe and that's where the sales recorded in North America or Europe which will transition some of that into directly to China with an existing base of customers as well as new applications we are now working on in China.

So, I hope you get a feel for that.

It's not a major impact for us.

It's a growth opportunity.

I get it.

And the percent of the sales that are actually made in Europe, roughly, do you know -- do you have that information?

Yes we do.

I think in Europe, I think we are talking about -- I'll give you rough magnitude here.

If we look at -- total sales.

You got it Rob?

I do.

Okay, he'll give it to you right now.

He's going to --

Scott, your question is again how much of the sales are related to foreign operations, I believe.

Are you talking foreign operations or sales in Europe?

Well, yes.

-- sales in North America?

Yes, right, however you want to break it out.

It said that your domestic sales were up about 200% and then foreign sales were up 78%.

So, I guess I was wondering.

Of the $60 million in revenue, about what percentage is in Europe and what percentage from China?

You said 1% roughly from China, okay.

So what from Europe?

Sales from Europe is roughly -- or sales into Europe, I should say, is roughly around 35% of the total sales.

Hopefully that --

Okay, all right.

That's good.

Thank you very much.

I appreciate it.

And continued good luck to you guys in the future.

Michael [McCroskey], TriCor Securities.

How are you doing, gentlemen?

I'm sorry I'm late to the conference call, so if you've hit on this I apologize.

Is it safe to say on the backlog and the bookings, looking at those numbers -- and I'm also going back to the January release on the pro formas -- it's safe to say -- is that an acceleration off your expectations as opposed to -- I mean you mentioned that the sales are up, of course, across the board -- that were you expecting this?

And I'm trying to get a feel for -- are synergies already showing for that or it's just now that we got the two operating elements that we're bringing together, but both saw growth.

Good question.

We are smiling over here, because when we went out on a limb in the last conference call, I guess I'd say our revenues were more than double.

And someone pinned us down to $220 million.

Were we expecting the quarter we had?

The answer is yes.

We did.

Okay.

It wasn't a surprise to us.

Based on our planning process and our forecasting process, we were not surprised by the quarter internally.

Again, you know we don't give guidance, but anyways, it didn't catch us off guard.

Okay.

And can you help me a little bit?

I'm hearing two different things on the gross margins and I think that's significant to the price action are seeing on the stock, although short-term.

I'm not that worried.

But the 28% to 30%, I heard at the one point you are saying 28% is a good number to plug in going forward.

But at the same time, it was exit acquisition costs that were kind of pulling is back from the 30%.

You would assume those would dissipate over time.

Can you help give a little color as to where we are heading on our expectations for gross margin in that line?

Sure.

Let's get the acquisition cost out of it entirely.

So if there's any thinking out there that acquisition costs are affecting gross margin, the answer is no, no impact from acquisition costs on gross margin.

The gross margin is a combined mix of all the sales from all the different companies and all the different markets that we are servicing.

And when you asked about -- if we relate it back together, were we caught off guard and by surprise?

No.

We knew the mix and the mix, because of sales in particular market segments which is generate lower gross profit but more potential on the top end but the overall gross profit in that market may be on a percentage basis lower but on an opportunity basis it's still good, it does drive the overall gross profit percentage down to where we said 28% is not a bad number to use going forward.

Now, over time, we would expect to continue to improve that based upon the new opportunities we are working on, but if you're asking and we were asked for what do we see for the rest of the year, that's not a bad number.

What do we see going forward?

That number is going to improve.

Does that help answer that?

That helps quite a bit.

And I guess this goes to that question.

Your pro forma net income for the full year combined is pretty much on track at $8.4 million and we are over $2.1 million for this quarter.

Now you did mention -- have we pretty well squeezed all the seasonality out of the situation, or do you think -- or is there any sort of factor in that in trying to look forward?

You know what?

It's a good I guess way to put it, that we squeezed out the seasonality.

There is still some seasonality in certain markets, but I think we do have the diversification.

It does squeeze it out a little bit better.

We are not impacted as we could have been in the past by as a smaller company and certainly specific markets, but there will still be a certain amount of seasonality.

But it is not huge.

Overall, it's not huge.

What could have an impact on it is in the markets were selling into and the gross profits of those particular markets, that can change a bit.

Okay, but is it safe to say -- and I know you don't like projections, but is it safe to say that $8.4 million from the pro forma combined is not a number that we would expect to hold going forward into this year?

Is that a fair statement?

You made a statement, and I guess I'm not going to sit here and confirm or deny what your statement is.

You looked at the first quarter and said $2.1 million and came back and said is it $8.4 million for the year?

If I responded to that, I would be giving you a forecast and guidance.

So, I mean the pro forma helps you, I believe.

If you look at the pro formas, they will help you.

And compare now -- we gave you the pro forma information for two years.

We gave you the pro forma information comparing this first quarter, so I think that will help give you a little bit of guidance and some comfort if that's what you're looking for.

It's a matter of the revenues obviously we are looking at increases on, but the net income at the moment, and that's why I was trying to get at the gross margins so well.

You're looking at $208 million in pro forma sales from January's numbers.

And obviously we are looking at fairly higher numbers than that, and just trying to translate that back into what your expectations are going forward as opposed to kind trying to pin you down to a number per se.

But we will let that stand.

You've always reported out EBITDA and adjusted EBITDA, and the numbers are in there.

And I guess it's licensed, but you all have always reported that out.

Is that revenue discontinued going forward?

I noticed that was missing from this report.

No, we reported it.

My bad.

On the (multiple speakers)

Yes, we reported it.

The adjusted EBITDA for the quarter was $7 million.

And I'll just -- for the adjusted EBITDA, it's $7 million for this year 2014 quarter one compared to our reported number of $2.1 million in the same quarter of last year versus the pro forma of $5.1 million for the first quarter of last year.

Okay?

And so adjusted first quarter this year, $7 million, pro forma first quarter of last year of $5.1 million.

And the actual reported from last year adjusted of $2.1 million.

Appreciate that clarification.

Appreciate everything that's going on.

It sounds like the stuff with growth is coming together very well.

And it's quite exciting to see that happen on such a large acquisition on such a relatively short time frame.

(multiple speakers)

We are excited about it too.

So I'm glad.

And as we talked about transformative, we really believe it is transformative, and it really puts us in a position for the future to continue.

We are getting critical mass and size here, and global customers or global companies like global suppliers, and really this is where we are very excited about where our footprint is, our technology, what we've added here, the quality of the teams that we have together.

I don't know if you missed maybe the part where we talked about the session where we brought a group of people together from around the world, the talent level we have, it's very impressive.

And I'm excited about the future, that's for sure.

That's what makes the difference in the long haul one way or the other, so -- well-positioned.

Thanks Michael.

At this time, I'm showing no further questions in queue.

I would like to turn the call back over to Mr. Dick Warzala for any closing remarks.

I thank everyone for attending the call, and I guess I really appreciate the questions.

And we did have other questions that came in through the web but I believe most of those were all of those were covered.

If we didn't cover your question, don't hesitate to send it back in and/or place a call and we will respond to you.

But we appreciate your continued confidence and support, and we will talk to you again in the next quarter.

That'll do it, operator.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.