Allient Inc (ALNT) 2020 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Allied Motion Technologies Third Quarter Fiscal 2020 Financial Results. (Operator Instructions) At this time, it is now my pleasure to introduce your host, Mr. Craig Mychajluk. Thank you. You may begin.

Yes, thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion. Joining me on the call are Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our third quarter 2020 results and provide an update on the company's strategic progress and outlook, after which we'll open up for Q&A.

(Operator Instructions) You should have a copy of the financial results that were released yesterday after the market closed. If not, you can find it on our website at alliedmotion.com. On the website, you'll also find slides that accompany today's discussion. If you are reviewing those slides, please turn to Slide 2 for the safe harbor statement. As you are aware, we may make some forward-looking statements on this call during the formal discussion as well as during the Q&A.

These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.

You can find these documents on our website or at sec.gov. I want to point out as well that during today's call, we'll discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides.

With that, please turn to Slide 3, and I'll turn it over to Dick to begin. Dick?

Thank you, Craig, and welcome, everyone. As you can see from our results, Allied has continued to perform well during these unusual times. Our entire Allied team is demonstrating their agility and resiliency as we build momentum to drive growth. We are structured to scale, have the right talent in the right roles. And as a group, we are generating an energy that bodes well for long-term success. I appreciate each of our team members for their outstanding efforts and ongoing commitment as they work tirelessly to support and meet the needs of our customers with superior execution. This momentum, combined with our diverse market strategy drove the solid results for the quarter. Sales increased 9% sequentially to about $95 million and was just shy size of last year's revenue level even as the pandemic impacted several of our served markets. Disciplined cash management drove solid cash generation of $8.4 million during the quarter, which enabled us to reduce total debt by more than $4 million.

We are also making capital investments to further our momentum and emerge in an even stronger position once the world returns to a more normalized state. Given our effective execution and existing availability under our credit agreement that we extended earlier this year to 2025, we have sufficient liquidity to successfully manage and navigate today's environment and a business model that will deliver expanding margins as the economy recovers. Our global operations consistently work together to ensure we rapidly respond to customer requests in this continually evolving environment. In medical, demand for our products from ventilators, respiratory equipment and medical facilities equipment remained strong, while other medical applications were somewhat muted.

Encouragingly, our vehicle market saw a nice rebound in the quarter. As expected, activity within our Industrial and A&D end markets has been challenged as a result of sustained softness in Europe and order deferrals due to COVID-19. Through all of this, we kept our sights on the long term and believe our engineering talent is core to our future success. We have retained this critical talent and are even taking advantage of the environment to increase investment in our engineering capabilities. Our advanced engineering skills that create integrated solutions for our customers is a key differentiator for us. The breadth of our product offering and our ability to provide an optimized and complete controlled, motion solution sets up apart from our competition enabling us to take market share with new customers and applications and gain more business from current customers.

We remain fully committed in executing our One Allied strategy to ensure the long-term strength and growth of our company. We will continue to focus on what we are doing, the markets we are serving, successfully progressing our product development efforts and continuing to leverage our global footfall. And partly, these all areas within our control, and we focus on them every day.

With that, let me turn it over to Mike for a more in-depth review of the financials.

Thank you, Dick. We provide an overview of our top line on Slide 4. As a reminder, our results include Dynamic Controls, which we acquired in March 2020. Total revenue of $94.7 million was solid considering the impact the COVID-19 pandemic has had on certain end markets. On a year-over-year basis, we were down only 2%. We did see a nice pickup from the sequential second quarter with a revenue increasing $8 million or 9% on strong medical market demand and a rebound in powersports within Vehicle. Sales to U.S. customers were 56% in the third quarter, down from 59% in the prior year period, with the balance of sales to customers primarily in Europe, Canada and Asia. The shift in geographic mix reflects the addition of dynamic controls.

Slide 5 shows the change in our revenue mix by market and the change in revenue by market for trailing 12 months ended September 30. The Dynamic Controls business can be found within Medical and accounts for approximately 70% of the increase in this market. Overall, broadening the scope and diversification of our various end markets has helped add some resilience to our business. The economic impact of the pandemic is reflected in the reduced demand with Industrial, A&D and particularly Vehicle prior to this last quarter.

As noted on Slide 6, our gross margin for the quarter was 29.7% as the lower volume and an unfavorable mix more than offset our efforts on the cost containment side when comparing year-over-year. Expanding on the mix comment, while we had a nice pickup in our Medical market, the majority of those sales were component or mechanical in nature, which carried lower margin profiles than our average margin on complete system sales.

One other area of noted tariffs and their potential impact going forward. We believe we have managed those relatively well and have benefited from our efforts to strategically source components as close to our manufacturing footprint as possible. Nonetheless, there are certain components that are still being impacted as exemptions that were allowed on certain products have begun to expire. We do our best to pass costs along. Given today's competitive environment, there could be a potential headwind to contend with.

Moving on to Slide 7. Our operating income for the third quarter was $6.5 million or 6.8% of total sales compared with 9.1% in the prior year period. Our margin did increase 100 basis points sequentially. The year-over-year variance reflects an increase of operating expenses as a percent of revenue to 22.9%, largely due to the overall revenue combined, the lower overall revenue combined with incremental expenses related to the addition of Dynamic Controls. As Dick mentioned, we acquired and are maintaining key engineering capabilities, which we consider vital to drive future growth and continue to gain market share.

Turning to Slide 8. You can see our bottom line and adjusted EBITDA results. GAAP net income for the quarter was $4 million or $0.42 per diluted share. On a sequential basis, GAAP net income significantly increased from $2.9 million or $0.30 per diluted share. The third quarter effective tax rate was 25.4%, and we continue to anticipate the effective tax rate for full fiscal 2020 to range between 27% to 29%. Adjusted EBITDA for the quarter was $11.2 million and as a percent of sales was 11.8%. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.

Slides 9 and 10 provide an overview of our balance sheet and cash flow. Our disciplined cost management efforts are reflected once again in the strong operational cash generation of $8.4 million in the quarter and $15 million for the year-to-date period. This allowed us to pay down debt by $4.4 million in the third quarter and further improved an already solid capital structure as cash and cash equivalents were more than $20 million, up nearly $7 million from the end of 2019. Total debt when compared with year-end 2019 was up primarily due to the Dynamic Controls acquisition; however, given our debt reduction efforts, we have already paid off nearly half the debt that we took on to acquire the company.

Debt, net of cash, was $104.2 million or 43.7% of net debt to capitalization. Our bank leverage ratio was 2.78x at quarter end. While we are comfortable at this level, we continue to focus on paying down debt due to heightened uncertainty surrounding the COVID-19 pandemic. As a reminder, our maximum leverage covenant ratio of debt-to-EBITDA is 3.5x, reflecting solid financial flexibility.

Year-to-date capital expenditures were $6.6 million. As a result of the decision -- delayed certain projects, we've revised our fiscal 2020 CapEx range to be between $9 million to $11 million from the previous range of $10 million to $12 million. This level continues to enable all key projects to move forward while deferring lower priority activities. Third quarter inventory turns were 3.8x, down from 4.1x at year-end, but up sequentially from 3.5. As a reminder, there are a number of critical components that have substantial lead times providing sourcing challenges, particularly within the pandemic environment. This, combined with the ramp-up of new customer programs, is leading to temporarily elevated inventory levels.

Our DSO was at 50 days, driven by increasing Vehicle market activity and the extended terms associated with customers in that market.

Before I turn it back over to Dick, I'd like to highlight again our demonstrated cash-generating capabilities. Given our current cash and available liquidity as well as our ability to rapidly adjust to changes in the economy, we believe that we have the financial strength to successfully navigate through uncertain operating environments, but more importantly, be in a position of strength when we emerge from the pandemic.

With that, I'll now turn the call back over to Dick.

Thank you, Mike. As depicted on Slide 11, we saw orders increase sequentially and were near pre-COVID levels, which was encouraging. Backlog at quarter end was approximately $124 million, with the majority to convert to sales over the next 3 to 6 months. As a reminder, in the second quarter of this year, we secured the nomination of another award to provide a customer-specific solution for our Vehicle market. In total, we now have $325 million of awards and just the nominal amount of that is currently included in our reported backlog numbers. The COVID-19 pandemic has slowed the production ramp-up for these projects. And at this time, we are anticipating the first of 4 awards to begin to gain traction in 2021, with the other awards each coming online about 6 to 9 months thereafter.

Looking ahead, there are signs that our business is steadily returning to a more normal state in most of our served markets. We remain cautious due to the heightened uncertainty surrounding increasing infection rates around the world as well as an uneven economic recovery in certain end markets. We expect demand from our Medical market to moderate as the equipment that was needed for the initial outbreak of the virus is on hand with our customers. We are also mindful that our fourth quarter has exhibited some seasonality in the past, and we do expect to see some of the same this year as well. Our emphasis through the crisis has really been about focusing on what we can control.

We are firmly committed to optimally meeting the requirements of some exciting new project opportunities, effectively supporting our customers as they ramp up their own development efforts and utilizing our AST toolkit to drive continuous improvement in all areas of our business. We have also identified certain long-term market opportunities, and we have embarked on investing and developing products to meet those emerging needs as we transition from one-off specific customer solutions to more market-based solutions. By focusing on and thoroughly understanding our served markets, we believe our ability to leverage our broad base of technologies to develop market-relevant products will continue to provide us with additional competitive advantages well into the future.

In the Medical market, for example, there are several prospective customers looking to localize their supply chain to not only meet increased demands, but also to have more certainty of supply as well. Given that there is a long certification and qualification process, our efforts during this pandemic should strengthen our ability to win additional business in the future. Overall, we believe we are engaging in some exciting areas that can be the growth drivers for the future. And our ability to create more efficient and more cost effective, controlled motion solutions for a wide variety of applications has never been brighter.

With that, operator, let's open the line for questions.

(Operator Instructions) Our first question comes from the line of Greg Palm with Craig-Hallum.

yes. Great. I guess to start, I mean, pretty meaningful increase sequentially in Vehicle segment, which looks like it was led primarily by your largest customer there. So I mean, curious if the segment sales was more broad-based than that? Was it a -- was the rebound more isolated within powersports, specifically? What are your thoughts there?

Yes. Thanks, Greg. You're correct in that there was a strong rebound in the powersports market, but we also saw a sequential rebound in other vehicle markets as well.

Got it. And sticking with Vehicle specifically, you made some comments about the previously announced Vehicle award, I mean, from an end market standpoint, it seems like demand for passenger cars globally has increased quite a bit here over the last few months. So I mean, have there been any changes to how you're viewing those contracts and how they'll ramp over the sort of the next year or so?

No, I'd have to say you're correct. I think the -- it's encouraging to see that the automotive side of the business on a global basis is coming back. I think the numbers we're seeing is that we'll be down year-over-year quite significantly, but then there's a good bounce back year that started and it will continue to increase going into next year, although probably below 2019 levels. So basically, most of the programs were delayed, as you know, is the automotive was actually shut down for several months, and it is ticking back up. And we think that all of that has pushed the delivery of those products out to a little bit into the future. So no long-term impact, but yes, there has definitely been a short-term impact on the ramp-up.

Yes, makes sense. And then I guess just thinking more broadly about supply chains in this sort of environment. I mean, given your own capabilities, the resources, I mean, all of these investments you've been making over the last few years, I mean, can you give us any sense on whether that's resulting in market share gains? I mean, how's the pipeline looked for new customer activity? Just kind of curious to get your broad thoughts.

Yes, I think it looked quite good for us. I mean, we've been expanding our reach into certain markets and really focused in targeting our efforts at the applications that we have been successful at in the past and that we think there's more opportunity in the future. So as I had mentioned in my prepared remarks that we are more focused on market-based solutions versus one-off customer-specific solutions. And I think that allows us to basically create this platform, which we then look at universe of available customers that could utilize that solution. So we are working in the areas that we have had strengthened in the past. We see continued success in the future. And we are launching new products into those markets that we think help keep us on the leading edge and providing our customers with a more competitive solution.

So I mentioned that I felt that our efforts through the whole pandemic to keep our team fully employed, to keep working and stay focused on, doing our part to get products developed and launched has really helped us here. And I think it's going to -- given that many of our customers did have layoffs or furloughs in their engineering departments. When they have come back, we were already there and ready for them to start working on some future product generation. So I think we feel the pipeline is good. And we feel our focus is better and better. Our integrated solutions, as far as the opportunities, continues to grow. And it's been exciting to see the transition from the past to the current where when we look at these top opportunities, that we call top opportunities, that we're working on, more and more of them are really for multi-technology solutions, which we do believe gives us a competitive advantage.

Our next question comes from the line of Gerry Sweeney with ROTH Capital.

I wanted to follow-up a little bit on the auto slide -- I'm sorry not auto, Vehicle, apologies, and powersports, it's -- in particular. I did a little bit of work, and it felt like maybe there was some backlog pending in the powersports market. And not sure if that was part of the upside in that market. And wondering if you could give us a little bit of visibility as to sort of demand supply and maybe if there was any catch-up involved in some of the revenue?

Okay. So your questions are really about powersports. And if there's any backlog there? If there's demand pending?

Yes. My sense was some of the manufacturing was shut down for a while earlier this year. There was demand for products. And maybe curious if there was a little bit of catch-up going on in the third quarter and any visibility as to -- did that occur and run rate for the rest of the year?

Okay. Fair enough. So the -- first off, I would say there's definitely some catch-up that was occurring. There was some demand that was there, and there were some disruptions in some of our end customers and their ability to produce products as they were dealing with the pandemic as well. So definitely, dealer inventories, I think we've heard have been -- that were pretty much depleted. So anything that they could ship was being sold. So I still think there is some catch-up occurring in terms of getting inventory into the hands of dealers. The demand has been trending up, as you can imagine since it dipped out, and then it has been trending up. And going out into the fourth quarter, we see a continuation in the demand, we don't see a drop-off. So I would tell you that, that's -- so clearly filling the pipeline to a certain extent and then the increased demand that's in the marketplace today being built as well.

Got it. And then I think on Q2, you gave us the amount that Dynamic materials was in the quarter. Any chance that you could provide any -- provide us what the impact in Q3 was?

Well, I don't remember giving you the revenue impact in Q2. But typically, we don't do that. I would tell you that -- but I will give you, in relative terms, that Q3 was softer than Q2. We saw a -- quite a surge in Q2. When I say surge, again, that's the first full quarter that we actually own the business. And in addition to products that they make were the patient rehab and mobility markets, they also make some electronics for oxygen regulators. And that business had, as part of the COVID crisis, had actually ticked up. And I think as we're seeing in some of the other medical markets, the supply is into the market now, and we do expect to see some decrease in demand there. But I would tell you that the patient mobility markets, given the COVID crisis and who the -- the market is, has seen a decrease, right? So quarter-over-quarter, we did see a decrease in volume.

Our next question comes from the line of Dick Ryan with Colliers.

Dick, last quarter, you said you didn't see any cancellations, but some pushes in backlog? I know you kind of talked about the backlog here earlier on the Vehicle side, but what have you seen in backlog? If there's been any changes from last quarter?

No. I think, Dick, it's still consistent. I mean, in certain markets where the demand, industrial -- in certain markets for us, industrial, aerospace and defense, we have seen not cancellations, but we have seen push-outs and delays, and it's still consistent with that. We have not seen any cancellations. Now I would tell you that in the Medical equipment, where there were COVID-specific devices, it was something that the demands that we were seeing and the inquiries we were seeing for certain volumes were quite high, and we believe were duplicated coming from different areas, people fighting to get a share of that business. And we were very cautious when we were looking at some of these things and say that there's -- it's not real. That market is not as big as if you added everything up coming from every customer, there's definitely some overlap there. And we have seen now that the market has seemed to have caught up. With the equipment requirements in Medical, we have seen some orders now being pushed out into next year.

Okay. On the M&A side, you have a nice, obviously, cash generation ability to pay down debt. What are you doing on M&A? It seems like COVID kind of limited some of that activity, but what's kind of going on in the industry that you may or may not be able to take advantage of?

Sure. I think you're absolutely correct. I mean, we were quite active. And it's quite interesting you're asking the question here. The meeting we had yesterday, which was reviewing our M&A activity and our progress to date on it and what happened? Where are we? How active was our pipeline? We reviewed all of that yesterday. And what we found is that the -- we had customers, I mean, potential sellers and so forth. In many cases, here, as we mentioned in the past, we've groom these opportunities. We don't necessarily wait for them to show up on the market. And so that's a lot of what our activity was about, was grooming for the future potential acquisitions. And we think the timing is right to restart those activities. I mean, so we've postponed them. Mutually postponed discussions with a number of different opportunities.

And we now believe that the timing is right to restart those efforts, which is what I'll call our internal targeting for potential opportunities here. We have seen a little bit of a pickup in potential companies coming to market. And again, as we've done in the past, we're pretty disciplined in making sure that they fit and they're complementary and get a good strategic need. And I can tell you that we're going to actively pursue. So there's a little bit of an uptick. A challenge in this market is going to be valuations. Those that the COVID had a positive impact on, they're going to want to be valued based upon that impact. Whether it's valid going forward or not and those that got impacted in a negative sense are going to want to look at the past. So it's -- the times are a little bit unique, and I think the challenge will be valuations for all of us here and how do we view these businesses. But I would tell you that we're starting to see an uptick in activity.

Our next question comes from the line of Brett Kearney with Gabelli & Company.

Dick, I think you mentioned in your comments, seeing an ability, I guess, to take advantage in this environment to capture talent and resources that might otherwise not be available. I was wondering if that was specifically related to the additional talent you got from the Dynamic Controls acquisition? Or if your thinking is more broad, able to bring some folks that would otherwise be a lot more competitive to get, able to bring them in-house and continue to build-out, I guess, both your electrical and software capabilities from the workforce side?

Sure. Well, I think to answer your question here. First, let's look at the internal resources. As we mentioned, we kept everyone fully employed. So they're -- from an engineering standpoint, I mean, we felt that it was important for us to retain our talent. I mean, times before COVID, it was very difficult to go out and recruit and get talent. So we didn't want to be caught with making the short-term response to cut and then have difficulty in retaining when we came out of this. So that was the -- as part of the culture of the company, but also, I think we demonstrated that, that we really do respect the resources or the talent that we have on board. So that was our first goal, retain the talent that we have to ensure that we kept them actively employed and fully engaged and that when we came out, we would be stronger and better than ever with the opportunities.

Second thing, as you mentioned, Dynamic, and that's correct. That came on right during -- we came onboard right during the start-up of the pandemic. And what we've seen is a tremendous cooperation and integration of those efforts through teams meetings and conference calls and so forth to look at how the product offerings that Dynamic has and be combined with the product offerings that already existed within Allied and to utilize those resources for -- to create, I would say, to your future opportunities in markets that we've targeted and where multi technology solutions with them bringing the control side and extensive capability there onboard. So that is definitely -- and again, they were all fully engaged and fully employed. And I think we've made some significant progress in looking at some future product offerings that are combined and integrated technology as well.

As far as the recruiting additional talent, I mean, we're still moving forward very cautiously in terms of hiring, but when we have had the opportunity to find talent that, for whatever reason, either they no longer were engaged or actively employed or had been circumstances of a different environment, we certainly have entertained and looked at that talent and where it's made sense. We brought it on board. I will tell you that. I think our demonstrated actions here will play well in the future for us to be able to attract and retain talent.

(Operator Instructions) Our next question comes from the line of Jeff Geygan with Global Value Investment Corp.

Dick, could you take just a moment and tell us a little bit about Dynamics Control since you've acquired it, how it's performed versus your expectation?

Sure. I think again, coming right out of the chutes, I mean, Dynamic exceeded our performance expectations. As I mentioned earlier, some of the products that we're -- they produce, were in higher demand. What we've seen now, we look at it on a total year basis. It will be right in line with what we thought the performance would be for Dynamic Control. So as I had mentioned in Gerry's question, relative to quarter 2, quarter 3 had a (inaudible). And overall, our pro forma that we put in place for the year, we expect them to be right in line.

Great. Good to hear. You proved yourselves adept at making and integrating acquisitions in the past, so glad to hear that. You mentioned, and particularly on Slide 7, your continued capital investment and acquiring engineering capabilities. Can you describe a little bit more about what that CapEx looks like? And specifically, what type of engineering capabilities you're acquiring?

Yes. I'll address the engineering capabilities, and then I'll let Mike talk some more about the CapEx, the equipment itself. The capabilities we're talking about, and that is in the CapEx side is -- it's not about just adding more people. And adding -- to solve the problems. It's about giving them the tools necessary so that we can be much more efficient and effective. And that's really some of the investments we've been making. Our global engineering team, which we -- you'd heard me in the past talk about global electronics team that we were expanding the acronym to ensure that we have focus on an integrated solution, a much better focus on an integrated solution with electronics being a key element of that. Much of that work in the past was done by trial and error, and I'll call it brute force.

That expanded capability now, you're seeing us moving more and more to simulation tools, model-based design, and utilizing that to accelerate the design process. And as that's ramped up, it's making us a heck of a lot more effective and efficient. So that's the capital investment on the engineering support side of it that we talked about there. And I'll let Mike talk about the capital investments we're making in the other areas.

From an M&E perspective on CapEx, I would -- I think describe our program as highly growth focused or cost-savings focused, that to the extent that we have maintenance CapEx expenditures, I would say, it's probably limited to maybe 20% to 30% of our overall spend on an annualized basis. So most of what you see is supporting new growth programs, either next-generation products that are well-established with well-established customers and/or lines and equipment to support some of the new contracts that we've announced, in particular, late last year, this year and probably into next year. Some of the automotive wins that we've announced as those ramp up, we've had significant expenditures over the last 18 months in preparation of that ramp-up.

Great. And just following up on that. The 70% to 80% of your CapEx annually, the growth, what type of return on investment expectation do you have? Or how do you think about the ROI on that?

Well, obviously, we have a lot of competing priorities for our capital with the focus as we are on external growth, right, through M&A. So diverting it internally, it obviously has to have similar returns. What we typically do is, we'll build a business case model from the ground up when we entertain some of these newer contracts. And they need to be in line, if you will, from the performance that we -- in line or exceed the performance that we demonstrated with our current product set for us to really undertake those things.

So again, a business case would have built for the new automotive contracts and the capital investment required there and making sure that they were delivering, again, without getting specific about percentage return that would meet our shareholders' expectations, that would meet or exceed what we've delivered in the past and in a time frame that was acceptable, especially when we have the opportunity to divert some of that other growth objectives like external or M&A activity.

Sure. Appreciate it. Last question.

Jeff, let me just add a little bit too. I think as Mike is talking about there, he's talking about growth and he's talking about efficiency improvement. And there are many -- I shouldn't say many, but there are several cases where we look at the make versus buy, the traditional make versus buy. And I think understanding that you want control of supply chain and where do you have to -- where the supply is coming from and how you going to become competitive and so forth. As we've talked about local sourcing as being a key element of our strategy and continue to be a key element of our strategy out into the future.

So we're challenging our team to take the opportunity for -- certainly for industrial equipment today to look at how can we arrive at some better paybacks on, I'll call it, a make versus a buy, by negotiating better pricing, more favorable pricing on capital equipment that we might be able to employ internally. So I'd say, we've been doing that as well. And we see some very positive signs there. It gives us -- it's not that we want to be totally vertically integrated. There's times, and it makes a heck of a lot more sense to outsource. But today, we see some opportunities there to invest in certain capital equipment that gives us a more competitive advantage and gives us certainty of supply as well. So that's another area that we're looking at or that we're evaluating and that's strictly a straight payback, an analysis I make versus by analysis, okay?

Yes. That's really helpful. And last question, then I'll turn it back. You peaked my curiosity here with your discussion around tariffs. I'm wondering if you can tell us a little bit more about the tariffs that you've experienced? The type of product or sourcing that, that's impacted, whether it's raw material or components or finished goods? And then adding to that, you mentioned some of your Medical prospects are looking to localize or sourcing. And I'm wondering if you can comment on where the localization is coming from, whether it's Asia, Europe, South America, et cetera?

Sure. I'll take the easy one. And I'll turn the hard one over to Mike. The localization that we're talking about is, there's a couple of ways going about that. I mean some of that's being driven by the tariffs, okay? And the additional part of that, what we're doing is we started our localization strategy several years ago. And with the idea that if we have the right global suppliers, we can localize supply chains, we can get more certainty. We -- again, if you're bringing everything in from let's just say Asia, and you run into a demand increase and customers typically schedule type, you may have issues. You may have issues of supply. You may have the airfreight product. And that's an age-old problem that hasn't gone away. You've got potential doc strikes, and then -- and those have happened.

And then you add to that tariffs that may impact that. So I think what it's really shown us is that if you look at the true cost of acquiring a component or a product or a part. It has to look at the length of the supply chain, the amount of inventory you're carrying in the supply chain, the delivery, lead times, the risk factors. So lining up -- and we talk about strategic sourcing with global suppliers who may have the ability to produce in more than one region is really a focus that we've had and by doing that, we get -- we can obviously negotiate a pricing on a global basis, but we can also shorten the supply lead time and the supply chain and leverage that capability so that we can build in multiple locations based upon where the end product is going to end up, okay? So that's the strategic sourcing.

And what we've seen is, especially in Medical products here in which COVID has highlighted is that if there's a critical component coming in from a non-North American supply base or, I'll say, non-European supply base, there seems to be an urgency to position themselves in the future to have a North American or a European-based supply chain. And those are the opportunities that they don't show up immediately because there's a long design in cycle and controllable process, but those are started. And those are things that we're working on that we feel we have an opportunity to take market share because of our global footprint. So that's -- I'll call it easy piece, and then I'll let Mike talk about the tariffs and so forth and the impacts it's had on us.

Sure. So Jeff, I would describe the tariffs, again, it's Chinese-sourced components, which, again, this goes into the discussion about localizing those efforts and not having to deal with this. But certainly in motion control, a fair amount of product is sourced overseas, particularly in China. And again, it's broad-based. So you could be talking about electrical components, you could be talking about ball bearings, you could be talking about mechanical component. So I wouldn't point to any one specific issue. We've worked very closely with our customers since those tariffs were initiated, and we've been quite successful passing those costs along.

In that process, we've also applied for exemptions, again, trying to be good partners with our customers and when we received those exemptions, we've passed the lack of those tariffs, of those savings back to the customer. And my point to my comments today is simply that some of those tariff exemptions are just being rolled off. And I would describe that as rather arbitrary in how that occurs. And having to go back and forth with your customer and have navigate that with the inflow or the path along of those tariffs, it's difficult and it's strategic in nature. There's examples where we've strategically chosen not to pass along some of those costs because of just the relationships with the customers or the sense -- price sensitivity on certain products. So again, I highlighted as potential, not saying that we will have to absorb these things. It's just -- it's just continued variability, I guess, I would -- how I would describe it as is what we're having to deal with here, given the situation.

Ladies and gentlemen, at this time, we have no further questions. I would like turn the floor back to the management for closing comments.

Thank you, everyone, for joining us on today's call and for your interest in Allied Motion. For those of you interested, we will be participating in 2 upcoming virtual conferences. The Baird Global Industrial Conference will be on Thursday, November 12, followed by the Craig-Hallum Conference on Tuesday, November 17. As always, please feel free to reach out to us at any time, and we look forward to talking with all of you again in the New Year after our fourth quarter results. Thank you for your participation. Stay safe, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.