Allient Inc (ALNT) 2014 Q3 法說會逐字稿

Hello and thank you for standing by. Welcome to the Allied Motion Technologies third-quarter 2014 financial results conference call. (Operator Instructions). At this time I would like to turn the conference over to Sue Chiarmonte, Vice President and Treasurer of Allied Motion Technologies. Please go ahead.

Thank you, operator. Welcome to Allied Motion's conference call to discuss the third quarter ended September 30, 2014 and thank you for joining us on the call today. We distributed our third-quarter earnings press release yesterday and copies are available on our website at 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 or the replay go to the Company's website, click on the Investor Relations page and then click on the webcast icon.

As a reminder, please note that the Safe Harbor statement included in the press release also apply to all 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 third-quarter 2014 conference call. Please note that this quarter is the third full quarter of reporting that includes the Globe Motors results and our numbers. Here is the plan for today's call.

I will begin with a highlight of the year-to-date pro forma results and will then turn the call over to Rob Maida, our CFO, who will provide you with a complete and detailed financial review of the quarter and year-to-date results.

After Rob returns the call to me I will further elaborate on our earnings announcement press release and provide you with some additional insight as to the activities and opportunities we see for the future. Once that is complete I will then open the mic for questions. I will start now with some brief comments.

As previously indicated, we will continue to provide unaudited pro forma information throughout 2014 as a means of providing a comparison of revenue, net income and earnings per share giving effect to the acquisition as compared to the historical results for Allied Motion.

Accordingly, the Company's pro forma financial information for the nine months ended September 30, 2013, giving effect to the acquisition of Globe Motors as if it had occurred at January 1, 2013 and that compared to the actual results for the same period of 2014 are as follows.

Revenue for pro forma 2013 year-to-date was $164.6 million compared to the actual 2014 year-to-date of $187.8 million. Net income for the pro forma year-to-date 2013 was $6 million compared to the actual year-to-date 2014 of $9 million. Diluted earnings per share for the pro forma period of year-to-date 2013 is $0.67 per share compared to the actual year-to-date 2014 of $0.98 per share.

As a reminder, included in the pro forma information is the additional depreciation and amortization resulting from the valuation of amortizable tangible and intangible assets, interest on borrowings made by the Company, amortization of deferred finance cost incurred to issue the borrowings, removal of acquisition-related transaction costs, removal of certain costs for which Allied Motion would be indemnified by the seller and stock compensation expense related to shares issued to certain executives of Allied Motion as a result of the acquisition.

Now I'd like to turn the call over to Rob Maida who will provide a detailed financial review. And then I will be back to provide you with some insight as to the key activities and opportunities for 2014. Rob.

Thank you, Dick. As was reflected in our press release that was put out Wednesday evening, the Company achieved net income of $4.1 million or $0.45 per diluted share for the quarter ended September 30, 2014, compared to net income of $833,000 or $0.09 per diluted share for the same period last year.

EBITDA increased to $9.5 million for the quarter from $1.6 million for the same period last year and adjusted EBITDA, which excludes stock compensation expense as well as certain other items, increased to $9.9 million in the third quarter compared to $2.4 million for the same period last year.

Revenues for the quarter were a record $65.3 million compared to $24.9 million for the same quarter last year. This is an increase of 162% -- with 163% of the increase due to higher sales volume offset by 1% unfavorable currency change due to the dollar strengthening against the foreign currencies where we do business.

Looking at our total sales for the quarter, 68% were to US customers compared to 54% for the same period last year with the balance of our sales to customers primarily in Europe, Sweden and Asia. The 162% increase in sales reflects higher sales at most TUs and is a result of a 233% increase in sales to our US customers and an 81% increase in sales to customers outside the US.

Bookings for the quarter were $66.7 million compared to $25 million for the same period last year or an increase of $41.7 million resulting from the addition of a Globe as well as increases at most of our TUs and reflects a continuation of growth recognized in previous quarters.

Backlog was basically flat, increasing from $80.8 million to $80.9 million for the quarter. Backlog is also up when compared to $79.7 million at March 31, 2014 and compared to $27.5 million as of September 30, 2013.

Our gross profit margins increased slightly from 29% to 30% this quarter compared to the same quarter last year. Operating expenses were up $6.3 million for the quarter compared to the same time last year primarily due to the inclusion of Globe, operating expenses and increases in the Company's incentive compensation programs partially offset by reduced acquisition costs of $600,000 from the same quarter last year.

Depreciation and amortization expense increased $1.4 million for the quarter from $478,000 last year to $1.9 million this year reflecting the additional depreciation and amortization related to the Globe acquisition.

Interest expense increased for the quarter to a total expense of $1.6 million from $13,000 for the same period last year and again reflects the additional debt associated with the acquisition and we had $1.6 million of capital expenditures during the quarter compared with $885,000 for the same period last year.

For the nine months ended September 30, 2014 the Company reported net income of $8.9 million or $0.98 per diluted share compared to net income of $2.6 million or $0.30 per diluted share for the same period last year. Revenues increased 149% to $187.8 million compared to $75.4 million last year with sales to US customers up 209% and foreign sales up 82%.

Of the total 149% increase in sales, 149% is due to an increase in sales volume with less than 0.5% unfavorable currency change due to the dollar strengthening against foreign currencies where we do business.

Bookings for the first nine months of the year were $194.6 million compared to $69.5 million for the same nine months last year. And gross profit margins remained relatively flat at 29.4% for the nine months compared to 29.6% for the same period last year.

Operating expenses were up $19.4 million for the nine months compared to the same period last year primarily due to the inclusion of Globe operating expenses and increases in the Company's incentive compensation programs partially offset by reduced acquisition costs of $1.2 million from the same period last year.

Also included are higher engineering costs reflecting Allied Motions continued investment in our technical resources to better leverage the capabilities of both companies and create an increasing number of new opportunities which meet the needs of our customers.

For the year depreciation and amortization expense increased $4.1 million from $1.3 million to $5.4 million while interest expense was up $4.9 million to a total expense of $4.9 million reflecting the additional expense associated with the acquisition-related debt. Also for the nine-month period we had $3.2 million of capital expenditures compared with $2.1 million for the same period last year.

Adjusted EBITDA increased to $24.5 million for the nine months year to date compared to $7.2 million for the same period last year. Additionally, the nine-month period last year excluded $1.2 million of acquisition-related expenses and $234,000 in expenses related to the move of our corporate offices to Amherst, New York.

As Dick previously indicated, we would continue to provide unaudited pro forma information throughout 2014 as a means of providing comparison of revenue net income and earnings -- earnings per share giving effect to the acquisition as compared to the historical results of Allied Motion.

Accordingly, the Company's pro forma financial information for the nine months ended September 30, giving effect to the acquisition of Globe Motors as if it had occurred at January 1, 2013 is, as Dick mentioned, revenues of $164 million, net income of $6 million, and diluted net income per share of $0.67 per share.

Total outstanding debt at September 30, 2014 was $81.3 million compared to $87.6 million outstanding at December 31, 2013 and $1.1 million at September 30, 2013. Our cash position decreased $1.1 million for the nine months ended September 30, 2014, therefore our cash and debt position improved $5.2 million from December 31, 2013.

The Company is required to maintain $1.8 million of restricted cash as collateral in relation to its China Credit facilities outstanding with foreign bank. As of September 30, 2014 the Company is in process of refinancing its China Credit facilities with the foreign branch of its primary debtor bank. And restrictions on cash will be released when the refinancing is completed which is expected to be done during the fourth quarter.

Our DSO increased to 50 days at September 30, 2014 from 45 days at September 30, 2013 and is slightly up from 49 days at the end of 2013. Higher levels of sales with extended payment terms up to 90 days -- up to 90-day payment terms are continuing -- are contributing to this overall increase. These extended terms are customary in the market segment served.

Inventory turns increased to 6.1 turns at September 30, 2014 compared to 4.1 at the same period last year. And up from 5.1 at the end of 2013. The largest contributors to this increase are better overall inventory management and certain high-volume applications where inventory inherently turns more quickly.

Our net stockholders' equity at September 30, 2014 was $54 million or $5.85 per share compared to $45.5 million or $5.14 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 December 5 for shareholders of record as of November 24. I will now turn the meeting back over to Dick Warzala.

Thank you, Rob. As was past practice, what I would like to do is read the quote portion of our press release to you just in case you hadn't had a chance to see it and then we will elaborate more on that quote later.

In the press release on November -- released yesterday, November 12, I made the following statement. We are very pleased with the record results for the third quarter 2014 as they once again validate our previous comments that we expected our revenues for 2014 to more than double relative to Allied's 2013 pre-acquisition revenues and for the Globe acquisition to be accretive to earnings.

When comparing the actual results of Allied and Globe for the nine months ended September 30, 2014 and pro forma results of Allied and Globe for the same period of 2013 our revenues increased $187.8 million from a pro forma of $164.6 million and our earnings increased to $0.98 a share from a pro forma of $0.67 a share.

Also on a year-to-date basis we experienced growth at our served markets of aerospace and defense, medical and vehicle while our industrial and electronics markets were flat.

With the acquisition of Globe Motors in late 2013 the current year has truly been transformative for Allied Motion. And in late September we updated our long-term strategy and set new goals and objectives to continuously grow and improve our profitability in the future.

In addition, we defined the critical issues or action items that we will be focusing on for the next three plus years in support of our new growth and profitability objectives.

As we move forward into the future the long-term success of our Company will be further enhanced by executing our strategy and leveraging our full capabilities to design innovative motion solutions that change the game and meet the current and emerging needs of our customers at our served market segments.

I think the theme that you can -- you are getting from the press release and the quote is that the strategy update for us is a very critical element that we see as necessary to move forward in the future. But what I'm going to do is spend a little time as we go through and talking about it is a little bit about our process and more about what the content is. Because we truly believe that that's what will allow us to be successful as we move forward in the future.

So to expand on the PR, we are referring back to the revenues in 2014 that we expected to more than double and for Globe to be accretive. The statement was provided for reference purposes only and beyond that reported results for 2014 with year-to-date revenues of $187.8 million and year-to-date EPS of $0.98 per share do demonstrate that we're on track to meet the numbers that we presented earlier in the year.

The quote continued with: Also on a year-to-date basis we experienced growth in our served markets of aerospace and defense, medical and vehicle while our industrial and electronic markets were flat. It is important to note that the comparison reflects the actual growth experienced by the combined entity of Globe and Allied Motion in 2014 over the actual data from Allied Motion for the prior year.

Continuing with the quote it stated, with the acquisition of Globe Motors in late 2013 the current year has truly been transformative for Allied Motion and in late September we updated our long-term strategy and set new goals and objectives to continuously grow and improve our profitability in the future.

In addition, we defined the critical issues or action items that we will be focusing on for the next three plus years in support of our new growth and profitability objectives. The strategy update that I mentioned previously was planned several months ago and it was planned to ensure that we aligned our team to define and then execute the items most critical to achieve success in the future.

While executing our critical issues is the means that we define to move us from where we are today to where we want to be in the future, our internal success will be measured through the achievement of the revenue and profitability goals we set for ourselves during the process.

Consistent with past practice, we do not provide guidance and therefore we will not relay the specifics of the goals and objectives that were agreed upon during the meeting. Suffice it to say that our team did meet my expectations by establishing a new set of goals that will be both challenging and rewarding and will lead the Company to greater heights and change the game in all aspects of our business in the future.

The quote concludes with: As we move forward into the future the long-term success of our Company will be further enhanced by executing our strategy and leveraging our full capabilities to design innovative motion solutions that change the game and meet the current and emerging needs of our customers in our served market segments.

The success that we have enjoyed in the past can in a large part be attributed to our commitment to creating and executing a well-defined long-term strategy. While our Company has evolved over the last several years so has our strategy. And with each iteration or update of our strategy the goals and objectives we set for ourselves have become continuously more challenging.

Given that we have completed a major strategy update that now includes Globe Motors as a part of Allied Motion, I thought it would be helpful to tell you a little more about the key elements that are included in our strategic profile.

Also please note that we don't measure the value of our strategy by the size of the output document and in fact we were able to define our strategic profile in only a handful of very meaningful pages.

One of the subtle changes we made to our strategic profile this time was our decision to adopt and formalize a zero defect mentality statement within our business concept. The business concept acts as our guiding light and is a short and very concise statement that provides a high-level picture of who we are and how we plan to achieve success in the future.

Given such it is important to note that even a small or subtle change to the business concept can have a major impact on how we will act as a Company.

To complete our strategic profile we further defined products, the industries and target market segments, the customers and the geographic markets that we will place either more or less emphasis on in the future. We defined the strategic capabilities that we will need to be successful with this new strategy.

We updated our strategic filter to ensure we stay aligned and focused. We established the internal goals and objectives that we will use to measure the success for our Company. And last but not least, we created a list of critical issues that we will execute to move us from where we are today to where we want to be in the future.

While we move forward in our journey and begin executing our new strategy one element has been consistent and unwavering from the first strategy we created in 2002 and on through -- in every strategy update, including our most recent update this year. The element I'm referring to is Allied Systematic Tools, or AST for short, to continuously improve efficiencies and eliminate waste throughout our Company.

In doing such we constantly focus on improving quality, delivery, cost and innovation. AST is critical too and helps create the path of success in all aspects of our business and in all regions of the world. While we have defined several critical issues that will enhance our long-term success, we believe that AST will be one of the key elements to maximize this success in the future. And with that, operator, I will now open the mics for questions.

(Operator Instructions). Jon Braatz, Kansas City Capital.

Sort of a newbie here to start looking at your Company. But when I look at the pro forma sales numbers that you gave for the six months -- I mean for the nine months, can you give me a sense as to -- it looks like the growth has been about 14%. How much of that growth might be coming from the organic piece of business that you had or is it all coming from the growth at the acquisition -- from the acquisition you made?

It's coming from both, Jon.

Okay, okay. And then secondly, when you talk about some of the strategic changes you are making or strategic actions you are taking, I know you want to be a little bit -- you don't want to be too candid.

But in terms of measuring the performance of the Company and how well it is doing it, is there something that you are -- some financial program, economic value added or something like that that you are considering or you are using to evaluate the performance and how well the Company is doing against those measurements?

Sure. We actually do use EVA as the bonus program within the majority of the Company. And I say the majority because, as Globe was added this past year, they had a structure that was already in place. And when we acquired Globe we made a commitment that we would not change anything for at least one year until we had a chance to truly understand the business better and not make any critical mistakes and rush too quickly.

As I have said before, Globe wasn't broken and we don't buy broken companies. Therefore we weren't in a position where we had to rush in and start to make changes and I think in fact it has proven to be the correct decision.

So we do use EVA and when we create our strategy there are goals and objectives that we set for return on sales, for growth objectives, for our target market segments. And again, I don't have to be specific about those or what those are, but we continuously look to ratchet those up and prove over time.

So, yes, there are, and yes, EVA is a critical element that we feel enhances the value for our shareholders by -- we are measured on it and if we meet the metrics as dictated by EVA we will get a bonus, if we don't we won't. And I like to say that we look -- the only people we have to look at at that point is ourselves, look in a mirror, as it's in our hands.

Okay. Is there any piece of your compensation expense associated with the performance of the stock price? I ask that because obviously the stock has gone up a little bit here and might go up to more. I'm concerned -- I'm wondering if there might be some under accrual that might hit the fourth quarter.

No. We don't -- there is nothing in there for the stock price.

Okay, all right, thank you very much.

Thank you for attending the call.

(Operator Instructions). Bill Selby, Gabelli.

One question on the cost side and one on the revenue side. So it looks like the EBITDA margin went from 12% to over 14% and it seems like the acquisition is something -- is there something more going on here than just the acquisition and moving expenses? That was one question. And the second question is on the top-line growth, are you gaining share? And if -- so sort of who are you gaining share from or how is that happening? Thanks.

Hey, Bill, I will let Rob tackle the cost question, he may ask for clarification. But go-ahead, Rob.

Good morning, Bill. You had asked the question as to whether there is something more going on in the movement of EBITDA. And the answer to that really is no. It really is a volume-related move here. So nothing additional going on with EBITDA.

All right, thank you. And then just on the top-line growth. Just some factors that are contributing to it. How are you gaining share? How are you -- just can you give us a little color on that?

Sure. Well, there are certain areas where new programs have kicked in, which has increased the revenue for the Company, and also I would say to you that we do measure, as Rob talks about and I think in the Q you will see more information about sales domestically and internationally.

What we have seen is that the US economy has grown, but I would say certainly a factor there is the economic growth based on the -- growth based on the economy.

And secondly, we have and we continuously work on -- in past conference calls we have talked about our pipeline of new projects and opportunities. We have seen several new opportunities kick in this year.

And when I say kick in, just to remind everyone, our design in cycle time ranges anywhere from on the low side a year, year and a half to up to three to four years before you start to realize production volumes. And we did have several significant wins this year that are just emerging.

All right, thank you.

(Operator Instructions). Mike Hughes, SGF Capital.

Good morning. A couple of questions for you, just a follow-up from the last caller. Just the revenue was up roughly $3 million sequentially but G&A was down sequentially as were engineering and development expenses. So was there one-time stuff in the prior quarter? If not how sustainable are the expenses at these levels?

Jon, good morning -- Mike, I'm sorry good morning. I will try to answer your question here. Is the G&A -- the movement in the G&A is really related to the movement of additional compensation associated with the growth in revenues.

Dick talked earlier a little bit about EVA, but you also asked about R&D expenses and you mentioned that R&D expenses are also down sequentially. Not -- there is nothing that I can really comment on there that would point to a conscious reduction in R&D.

Okay. So just thinking about the G&A number, it fell out at $6.2 million this quarter. If you were to replicate this level of revenue in the December quarter, would the G&A fall out around $6.2 million or are we going to bounce back to the $6.7 million that we saw in the June quarter?

Well, Mike, I think you can appreciate that we really don't provide any guidance, so I'm very careful about answering those type of questions.

Okay, that's fine. One more question for you. Just looking at the pro forma numbers, obviously you provided the first nine months and then in the June press release you provided the first six months so we can back into the current quarter.

So the pro forma revenue growth for the current quarter was 7.9%, for the first half it was 17.6%. So just kind of any comments on the implied little bit slower growth in the third quarter versus the first half?

Well, I think it's -- yes, you did a good job in analyzing those and it is a good question. I would have to say we look at it and we say that we have had revenue growth in each successive quarter. So I guess I didn't look at it from the first half of the year versus our first half and then this quarter versus the third quarter of last year.

But typically I would tell you that we've had questions before about seasonality in the business and we do have some seasonality in our business and it is changing with the addition of Globe. In the past I would tell you that we would have seen seasonality and we were affected by -- third quarter would be a normal impact, would be down because of our large percentage of sales into Europe.

And as you can see now where we are close to 45% to 50% sales in Europe, we are down in the 31% to 32% range. So I would say we don't have a real good answer for you. Do we see anything in particular occurring as to why the quarters over quarters? I think we need to get some more data, a little more history behind us before we can actually come back and say we really understand exactly what is happening here.

There is seasonality, there is certain customers that take more product at sometimes versus the others. So that is -- I think the best we can do to answer it right now.

Okay, that's fair. Let me ask it a little bit differently. How do you feel about the demand environment today versus let's say six months ago? And maybe if you can address that from a North America perspective and then Europe too, that would be great, thanks.

Sure. Rob, do you want to talk about the -- maybe the bookings, I think that is probably a good way to --

Yes.

-- from a demand perspective.

Yes, I think to answer your question, Mike, if you take a look at the bookings over the last -- over the nine-month period and the six-month period that you talked about, the bookings for this quarter represented a record high bookings for us, so at $66.7 million or $66.8 million of bookings for the quarter.

So I think to reiterate, I think that we are seeing some seasonality in the business, but bookings were truly strong in the third quarter. They were strong in the second quarter as well. But I do think that we do need a little bit more of the data to understand how that is going to impact -- how that is going to impact us from a quarter-over-quarter basis on an ongoing basis.

And we did make a change, just I think it's important to highlight is that we did make a change which kind of skews the information for us. Last year we made a change, instead of booking blanket orders in their entirety, what we would do, which was previous practice, what we are doing now is to say that is -- the more accurate representation of bookings is to look at it as the actual order is released to production.

So that also doesn't -- from that standpoint we have got one year's worth of data to compare against, we don't have several years of data to compare it against because of the change that we did make. We would have violent swings in orders in the past where we believe the approach we're now taking is a more accurate representation of what we should expect.

And it it's better for us for comparative purposes in the future and we're not going to experience those wild swings like we had in the past. One big blanket order that we booked in the past that could last for one year to 18 months would skew the look for us.

And now I think we will be able to, as we move down the road in the future here, have a couple years worth of data and have a more -- a better feel for what we can expect from our markets.

Okay. Appreciate your thoughts very much. Thank you.

Jon Preizler, RH Capital.

Congratulations on a nice quarter. I was hoping to get a little more information maybe qualitatively about the secular drivers in your end markets that are spurring demand. And was wondering if there is an increased content need of your products? I have a couple of follow-up questions as well.

Well, we think there is definitely an increased demand for motion type products. I mean, you are seeing motors and automation being included in almost anything today. We are servicing the medical markets, as we have talked about, you do have an aging population, you've got medical mobility, you've got medical instrumentation, you have diagnostic equipment, you have surgical equipment.

If you start looking at the role that we play in vehicles, again you start looking about -- as vehicles move to more electric that certainly plays right into our hands. Look at emissions control, you look at efficiency. All of those types of items certainly indicate that it is a growing market and increasing demand.

So material handling, the automation that you are seeing that is going on out there for -- into what we will call robotic material handling devices. So that we see increasing. It's in factories, it's in hospitals, it's almost everywhere today.

So I will tell you that we are certainly encouraged by there doesn't seem to be an end to the applications and the growth possibilities. And we believe that we are positioned in a good way here to take advantage of some of that in the future.

Is there a theme where there is -- instead of maybe in the past one motor needed now there is multiple motors needed in your products?

Sure, that is -- rather than looking at it from a one motor needed and several motors needed, I think based on the makeup of our Company today and the way we have been positioning ourselves and investing for the future, has been to capture more of the sale with regard to that one motor.

The motor by itself is just one element, there is other elements that get packaged around the motor, the electronics to control/drive it, interface to the environment, the potential gearing to make it -- to give it more power or to run in a different manner. The feedback elements for as far as precision of control.

So you hear us talk about becoming a solution provider, and that when we developed our strategy, I will share with you that one of the elements there that comes out and it smacks you right in the face is solution, solution, solution. It is get more value for each of the axes that is in the application and that value is the other elements I just discussed with you. So I would look at it that way.

To answer your question, there are also certainly more motors being applied in equipment because of the effect of the cost and so forth and it comes down to where electronics used to be a very high-priced item. And now as they have come in line you see more motors being used and if you look at a, for example, patient handling today and how many motors might be on the patient handling bed, before it might just be one, now it is multiple. So you are correct, it is both.

But our emphasis is on and our strategy really points that out is that we believe we have put the elements together to take advantage of multiple items around the motor that enhance the value of that single -- single axis sale.

Terrific. Thank you for going into detail on that. I was wondering -- I know on the past call or two you spoke about evaluating on the cross-selling opportunities. And I wondered if you have been adding to your sales force or changing in the way you go to market or if there has been any changes to the sales channel?

Very good question, because our sales force is probably listening and wants to know the answer to that. We have looked at certain opportunities and I say internally here, if we look at it in a different manner, is have we leveraged any of the synergies within the Company. And the focus has been let's look at the growth opportunities or synergies first.

So you will see and we have seen where, we call them technology units or TUs as Rob mentioned in his section, that are reaching out to each other to look at can we meet the needs of certain applications in a better way. And the sales team is certainly very aggressive when it comes to that. If they have a requirement they want to know if there is something else in the Company that can satisfy that.

So the sales team, although the structure to date has not changed, there will be improvements that will be made as we move forward in the future to leverage it in a better manner. And leveraging that in a better manner means providing them with a toolkit or the bag of products, let's call it that, that might meet the needs -- better meet the needs of our customers.

So solution centers come into play there, we have applications now where it is not just a one product solution. We can offer multiple solutions whether it is a brush motor, a brushless motor with a drive, without a drive, added control, feedback -- and I think that is the piece that we've got to focus on.

I also mentioned that in March of this year we did bring together a sales and engineering force from around the world and put them in a room together and started talking about what some of those opportunities are. And it is very exciting and did accelerate the communication between the different companies.

So that is where we are seeing at least the salespeople reach out. And if they are on this call, which we won't allow them to be of course, they would be asking for more. And we will provide that in the future. So, very good question.

And lastly just on capital allocation, you guys continue to pay down some debt. Just wondering how you are balancing use of free cash and what would be the right leverage ratio before you perhaps, if you so choose, reengage in M&A?

I will let Rob answer the question about the right amount and then I can talk about the M&A.

All right. Jon, yes, the use of cash and pay down of debt, we are very conscious of where we stand and how we are levered currently. And certainly we are trying to actually utilize the appropriate levels of cash to pay down the debt, the debt we have at the senior level is fairly cost-effective for us while we have obviously some mezzanine debt that we don't have any prepayment opportunities, which is relatively higher -- higher cost.

So to answer your question, I think that we have tried to keep our -- tried to keep our cash intact for the time being to leverage some potential opportunities that Dick is going to mention a little bit about our M&A activities while keeping the debt to a reasonable level. And where we are today, we are levered only to about 2.5 times EBITDA, so a little bit more than 2.5 times EBITDA.

So we're not truly feeling as though we are highly levered. And again, to balance that, we don't really have a great opportunity at this point to pay down the debt, the more expensive debt that we have. So we are trying to maintain as much liquidity as we can to capture some opportunities that may come along.

Thank you.

Yes. And Rob did mentioned that we're about 2.5 times, a little more than 2.5 times EBITDA, our debt ratio. So -- and we do feel that we will continue to generate some good cash flows. And we did have a modification to the loan agreement, which was not in there originally which does give us some flexibility without having to go back for approval at certain levels of acquisition.

So we are continuously looking and I would tell you that we have been focusing on certain bolt-ons that make sense for us as a Company and potentially some technology items that might make sense for us as a Company. But we will reengage very quickly here the idea of looking at other acquisitions that can help us in the future.

So we haven't forgotten about them we -- our list is intact and the process is -- we are in process and we will continue to look at that is an opportunity to enhance our growth again in the future.

Great. Thanks for answering the questions. Look forward to your success.

Thank you very much.

There are no more questions at this time.

Okay, operator. Well, thank you very much, everyone, for attending the conference call. We do appreciate you taking the time. I will give you a chance to see if there is -- one more time if there's anybody else out there and if not I will close it. But operator, is there anyone else?

Yes. There is a question from Michael McCroskey with Princor Securities.

Excellent quarter, gentlemen.

Thank you, Michael.

Can you help me a little bit -- and you touched on that. The mezzanine financing represents rough numbers around $0.40 a share on the interest. Is the intent with some of this cash to be in a position to pay that off on the three years? Or can you give some sort of a feel for how aggressive you are going to be on that part of it?

Well, I would tell you this, Michael, that we cannot prepay for three years and we are when you're into it. So in two more years where our interest is about $5 million a year, and so that is what we incurred so far this year and will incur it again for an additional two years.

Our goal and our plan certainly is to reduce that or eliminate that at the end of the period. And we've had a great partner there, there is no questions, they were there, they helped us get through it, make -- got the acquisition done for us. And I think we have proven with our ratios right now that we certainly were in a position to take on more senior debt and less mezzanine.

Hindsight is great and I'd rather be in that position now saying it is the other way around. But I think we certainly will look at taking that piece out at the right time in the future and we can't do anything for two more years. I mean, we can do it but we're still going to pay the fees.

Well, I guess to put it a different way. Do you feel you are on track with where you want to be? Obviously that was some pretty rich financing, but do you feel you are on track at this point one year into the situation of where you thought you would be at this time so to speak?

Yes.

That is simple enough. And one last follow-up, 30% margin, with the mix that you've got industrial is flat, you've got these others up. I know you don't like breaking those out, but are you seeing a mix in there that you feel like that 30% could hold, should improve upon? Any color you can give to that number?

I would say to you we do feel that we had a favorable mix here in the third quarter. And looking at how the sales unfolded it was definitely a favorable mix. And there are certain markets -- I guess it's no surprise to anyone that certain markets, the gross profit numbers are higher than others.

So the 30%, if you took a look through the year, we are ranging 29%, 30%, in that range, so it hasn't varied much. The kick up in sales here certainly at a 30% gross profit generated. As we cross that breakeven line we are not -- profits are being produced at a variable margin level, not a gross profit level.

So to answer your question, we are going to -- we don't see anything that is going to change dramatically from what you've seen so far this year. That's going to take some time, it is going to take the increased solution selling that we talked about, adding more value to each axis and, again, looking at the different market segments and how we can penetrate those with higher gross profit margins. But not much -- I wouldn't expect much change.

And last the comment again, greatly appreciate your all's concentration on the long-term. It is really gratifying to see as long-term shareholders -- to see this continually pay off and for you to continually stay focused as well as you do on the long run. Thank you.

Thank you very much, we appreciate your sticking with us in the long run too. Operator, I will again ask if there is anyone out there with a question.

There are no more questions at this time.

Okay. Well, thank you, everyone, again for attending and we look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.