Allient Inc (ALNT) 2020 Q4 法說會逐字稿

Greetings. Welcome to Allied Motion Technologies Fourth Quarter Fiscal Year 2020 Financial Results. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to Craig Mychajluk, Investor Relations. 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 fourth quarter and full year 2020 results and provide an update on the company's strategic progress and outlook. After which, we will open it 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're 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. I guess it goes without saying and that all of us would agree that 2020 was an exceptionally unusual year. I am most proud of the resilience and agility demonstrated by our entire Allied team during these challenging times. We responded rapidly to the changing situation. And worked tirelessly to create a safe work environment, while at the same time, making the necessary adjustments to ensure the needs of our customers were continuing to be met.

At the onset of the pandemic, we qualified as an essential supplier because our products are used to support critical industries, including medical, defense and agriculture. As a result, we are able to keep all of our manufacturing facilities operational. We adjusted our staffing levels to align with production volumes to meet varying levels of demand for several of our end markets. And we successfully managed inventory levels in our facilities to maintain responsive delivery to our customers.

While the pandemic significantly impacted our end markets and operations, we were able to pursue the execution of our strategy to flexible and committed efforts of our team to position the company for long-term growth. This included a number of significant achievements. We refinanced our lending agreement and successfully closed and integrated the acquisition of Dynamic Controls. The acquisition significantly increased our available critical engineering resources, further strengthen our Medical market position around patient mobility and rehabilitation, and provides a platform to further develop higher-level solutions and leverage the economic -- electronic products across our other vertical markets.

We also realized several wins with new and existing customers by providing innovative solutions, which provides key revenue streams for the next several years. Our focused and disciplined approach allowed us to navigate this environment while advancing our strategic priorities and ending a challenging year with solid financial results, including record levels of orders and backlog. Fourth quarter revenue increased 6% to $93 million, even as the pandemic continued to impact several of our served markets. This increase was driven by our Medical markets and exceptional engagement and focus on executing a significant recovery in powersports within our Vehicle market. Driven largely by Dynamic Controls, we saw an increase of 69% in Medical compared with the 2019 fourth quarter, and for the year, Medical was up 61%. This market performance almost offset the decline in all other markets, as revenue was down by only 1% in 2020.

For the full year, we achieved a gross margin of 29.6%, as our diverse market strategy and disciplined cost management efforts to help mostly offset COVID-related headwinds. Our fourth quarter gross margin, in particular, had some atypical impacts that Mike will detail. Our effective execution and disciplined cash management drove solid cash generation of $9.8 million during the quarter, which enabled us to reduce total debt by almost $5 million. For the year, we paid down almost $17 million of debt, while generating nearly $25 million of cash flow from operations.

At the same time, we have been making strategic capital investments to further our momentum and emerge in an even stronger position once the economy returns to a more normalized state. We are confident in our initiatives and the strength of our business model. And we will remain vigilant and continue to implement the measures required to ensure the health and safety of all of our employees and their safety -- families.

Before I turn it over to Mike, yesterday, we announced our standard quarter dividend and also announced that the Board of Directors approved a 3-for-2 stock split that will take effect on April 30 for stockholders of record at the close of business on April 16. This action reflects our outlook for continued growth and our confidence in driving long-term shareholder value. We also believe this will provide greater liquidity of the company's shares and assist in expanding our investor base.

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. Fourth quarter revenue was up $5.1 million or 6% to $93 million, despite the continued impact of the pandemic on our end market. Revenue growth was driven by strong demand in Medical, including the incremental benefit of Dynamic and a 6.5% increase in Vehicle. FX impact for the quarter on revenue was a favorable $2.8 million.

Revenue for the full year came in at $366.7 million, down 1%. FX fluctuations on revenue were favorable $1.8 million for the full year. Our Medical market grew 61%, again, reflecting the addition of Dynamic and favorable impact due to COVID-19. While Vehicle has rebounded, we are still down year-over-year, given the sheer decline when the pandemic first hit earlier in the year, when many of our customers' production facilities were completely shut down.

Sales to U.S. customers were 53%, down from 57% 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 the full year ended December 31. Overall, broadening the scope and diversification of our various end markets has added some resilience to our business. Again, the economic impact of the COVID-19 pandemic was reflected in the reduced demand for order deferrals within Industry, Vehicle and A&D.

As depicted on Slide 6, our gross margin was 27.9% for the quarter compared with 30.1% for the 2019 fourth quarter. The change reflects an unfavorable mix, the under absorption of some fixed costs in certain facilities due to declines in Industrial and A&D and nearly $800,000 of higher cost as a result of increased tariffs, duties and expedited freight charges. We believe we have managed the impact of tariffs and duties relatively well and have benefited from our efforts to strategically source components as close to our manufacturing footprint as possible. Nonetheless, there were components that began to be impacted in the fourth quarter due to the expiration of certain exemptions.

The additional freight reflects the high demand in powersports, combined with supply chain constraints, which resulted in some inefficiencies and unintended costs as our teams worked hard to support and meet customer demand and schedules. Gross margin for the full year was 29.6% compared with 30.3%. Our diverse markets and cost containment efforts helped to partially offset the impact of lower volume and the higher tariff duties and freight.

Moving on to Slide 7. Our operating income for the fourth quarter was $4.8 million or 5.1% of total sales compared with $5.7 million or 6.5% in the prior year period. We managed to drive down operating cost as a percent of revenue by 90 basis points to 22.8% and the higher revenue and cost control partially offset incremental expenses related to Dynamic Controls. However, the flow-through impacts from the gross margin decline more than offset that upside.

For the full year, operating margin declined 160 basis points to 6.3%, reflecting a 90 basis point increase of operating costs and expenses as a percent of revenue to 23.3%. This was largely driven again by the addition of Dynamic Controls, higher business development costs and our cautious decision to maintain 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. It is important to note that during the fourth quarter, we incurred a foreign currency loss of $500,000 on the revaluation of short-term assets and liabilities as a result of expanded global production and the weakening of the U.S. dollar. That amount was offset by a return of a $400,000 withholding tax that have been charged to Allied in the third quarter of 2019 due to tax assessments in a foreign jurisdiction for our previous acquisition. These 2 items are netted within our other expense line.

Net income for the quarter was $2.7 million or $0.28 per diluted share. The effective tax rate was 26.2% and 27.3% for the fourth quarter and full year 2020, respectively. Net income for the full year was $13.6 million or $1.43 per diluted share. Excluding the tax item and other atypical items, adjusted net income for the year was $14.3 million or $1.50 per diluted share compared with $18 million and $1.90 per diluted share in 2019. Accordingly, I encourage you to review our non-GAAP disclosures and reconciliation tables that are provided in the release and slides. We anticipate the effective tax rate for fiscal 2021 to range between 27% and 29%.

Adjusted EBITDA for the quarter was $9.9 million or 10.7% of sales. Full year adjusted EBITDA was $43.1 million and 11.8% of sales. 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. At year-end, total debt was $120.1 million, up $10.3 million from 2019, reflecting funds used to acquire Dynamic Controls. In the quarter, we paid down $4.6 million of debt, nearly $17 million for the full year period. Debt, net of cash was approximately $97 million or 40.4% net debt to net capitalization. It is noteworthy that on a net basis, the debt associated with the Dynamic Controls acquisition has essentially been paid off.

Our bank leverage ratio was 2.78x at year-end. While we are comfortable at this level, we continue to focus on paying down debt. As a reminder, in February last year, we expanded our borrowing capacity and reduced our cost of debt with a new $225 million senior revolving credit facility, which also included in the accordion feature, allowing the expansion up to $300 million. Additionally, we enhanced our flexibility by increasing the leverage coverage ratio of debt to EBITDA to 3.5x.

We generated strong cash flow from operations of $9.8 million in the fourth quarter, bringing the 2020 total to $24.8 million. This was used in part to fund our annual capital expenditures of $9.4 million, which were largely focused on new customer projects, advancing the large previously announced vehicle market project wins and next-generation off-road vehicle steering capabilities.

We expect our fiscal 2021 CapEx to range between $12 million and $15 million, which consists of some capital projects that have been deferred from 2020 as well as investments for new customer projects. Inventory turns were 3.8x, down from 4.1x at the end of 2019. As a reminder, there were a number of critical components that had substantial lead times providing sourcing challenges, particularly in the pandemic environment. This, combined with the ramp-up of new customer programs, is leading to temporary elevated inventory levels. Our DSO was at 47 days, relatively consistent with 2019.

Before I turn it back over to Dick, let me reiterate that our primary focus is advancing internal and organic growth initiatives as well as paying down debt to reload for future acquisitions. Given our demonstrated cash generating capabilities and current liquidity as well as our ability to rapidly adjust the changes in the economy, we believe we have sufficient liquidity and are in a strong financial shape to weather any near-term uncertainties and will be in a position of strength when we emerge from this pandemic.

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

Thank you, Mike. As depicted on Slide 11, fourth quarter orders climbed to a record level of more than $108 million, up 26% compared to the fourth quarter of 2019. Full year orders grew 1% to $371 million, a very solid level given the challenging operating environment. Backlog at year-end was approximately $141 million, up 14% sequentially and also represented a record level. The majority of our backlog is expected to convert to sales over the next 3 to 6 months.

In the second quarter of 2020, we secured the nomination of another award to provide a customer-specific solution for our Vehicle market, raising the total of all awards to $325 million. We've begun shipments of the first award and approximately $8 million of that initial award is now currently included in our reported backlog numbers. At this time, we are expecting all of the awards to be at full rate production in 2024.

While the economic outlook for 2021 remains uncertain, we believe we are in a strong operational and financial position and that the actions we have taken will allow our organization to continue to advance our strategy and drive growth through organic and inorganic opportunities. We will continue to focus on the areas of our business that we can control, and that includes utilizing our AST toolkit to drive continuous improvement in all areas of our business, as we work to create the right operational environment through leadership and team building.

From a market perspective, we are optimistic that the various vaccines working their way around the world will continue to keep us on a path back to normalcy. While we expect demand from our Medical market to moderate, especially as we now lap the Dynamic Controls acquisition, we have and will continue to identify long-term market opportunities to leverage our broad base of technologies and develop market-based solutions that drive profitable growth.

Within our Vehicle markets, there are a few dynamics at play as we look to the first quarter. Powersports demand continues to be strong and the automotive markets continue to progress in returning to previous levels of demand. As expected, we are seeing the run-off of some legacy programs that may not perfectly line up with the ramp of the new large award programs that we have previously announced. We are still taking a cautious approach with our Industrial and A&D markets as we are seeing some pockets beginning to perform better, while others are still being impacted by the pandemic and near-term uncertainty.

Ultimately, our record level of backlog, diversified end market penetration, thorough understanding of our served markets and demonstrated agility positions us well to perform across varied market trends. This also gives us confidence that we can drive further efficiency, profitable growth and enhanced free cash flow over the long term. Importantly, given our diversified business model and ability to create more efficient and cost-effective controlled motion solutions for a wide variety of applications, we believe we will deliver expanding margins as the economy recovers.

We have established an internal goal to drive an annual gross margin increase of 1 percentage point per year that can only be achieved through the continuing strong commitment and alignment on executing our long-term strategy.

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

(Operator Instructions) Our first question is from Dick Ryan with Colliers.

So, Dick, on the record orders in Q4, were there any specific key wins that you can point to? And how does the backlog shape up? I mean, does that mirror the contributions of your various end markets? Or are there any variances in the strong backlog?

Sure. I'd say, Dick, that it mirrors the -- what I'll say, the normal business mix within our markets, but I would tell you that there is an A&D contract in there that would had firm deliveries and lead times, which did -- which would maybe skew it a little bit more in that area. I don't want that to come across as if we see A&D increasing in terms of the relative sales within our markets. But I think it just says that we had a firm commitment with firm production dates. And when we get those, then we do book it into backlog. But for the most part, I'll just tell you that it's across the board and it mirrors the mix of our normal business.

Okay. When you look at -- you're coming to the close of the first quarter, any green shoots out there when you look at the various end markets and then looking out for the rest of the year, which market should we see some growth or hope to see some growth in?

Yes. Well, I think we're seeing some very encouraging signs across pretty much most markets now. Our European business, obviously, we have concerns as you still hear about lockdowns and the spikes -- and COVID spikes and so forth, especially in Europe. But we're seeing very positive trends. I mean, of course, as the oil prices go up, we're starting to see improvements there as well. So I think we're quite optimistic that we're starting to turn here and things are moving forward.

Okay. One last one on the M&A side. Last quarter, you're talking about turning that activity up a notch. What's the current environment out there? And have you had any change of thought on kind of your acquisitive efforts here in the near term?

No change in thought, and I would say to you that it's definitely heating up.

Our next question is from Greg Palm with Craig-Hallum.

I guess just maybe starting -- going back to the commentary on gross margin. So if we back out that sort of $800,000 that you talked about, still coming to a lower margin than expected. So just kind of curious how much of that was mix versus something else? And you seem pretty confident that at least some of this is kind of transitory and the long-term trend is upwards. So maybe just go in a little bit more detail on kind of how you're thinking about the improvement going forward.

Yes, Greg, I think what I'll do is there's a number of factors that play there. And so I think it's -- let's turn this over to Mike. I mean, he's got a good handle on where the impacts are and what we see that we can mitigate here in the future.

Yes. So it clearly is mix related, Greg. I think we talked last quarter a little bit about how mix is impacting things. So while Medical is up and Medical typically is strong from a gross margin standpoint, the nature of the products that are being sold, particularly the ones, COVID-pandemic related, are of a lower gross margin nature than our average. Certainly, the other area we've seen a surge is in Vehicle. And again, that just traditionally has carried, again, not bad margins, but lower margins than our general average. And certainly, the absence of A&D, which I would classify as quite typically across the board, higher-margin products certainly impact us.

And then from a volume perspective, while we were close to our volume last year, certainly, we had an entire new operation added as well throughout the year, right? So I would say that some of our fixed overhead costs are just not being absorbed as strongly as they will when volume returns, and we'll get a lift out of that as well. And then clearly, the impact of the tariffs and some duties along with, again, in certain markets, we've seen such a surge that it's presented supply chain constraints and issues.

And so as I mentioned, things like expedited freight was pretty chunky in the quarter as well. Again, that's expedited freight to get products in from our suppliers. And again, just throughout this pandemic period, there's been those type of challenges. And when the demand ramps up with it, it just made it even tighter and tougher. And our focus has been on meeting demands of the customer. So certainly, we've incurred some costs there or some inefficiencies.

Got it. So it sounds like a lot of sort of one-timers that as things progress here through this year should start to improve?

Sure. The exception being tariffs, who knows how long and where those are going as well. So we keep -- we have a large number of mitigation efforts to put those behind us as well. Those things are taking time to potentially develop. But that's the one I would point to, that certainly in Q1, we would expect to see some continued impact.

Yes, makes sense. The $8 million of the Vehicle award that's now in backlog. I know you said full run rate in 2024. How should we be thinking about the progression of the ramp-up of that award from now until then?

Yes. I think what you're going to see is each of the awards are now coming on, starting up as planned. So there's varying times. And as we mentioned, the first is now moving into ramp-up in full rate of production. And I think what we'll see -- well, I know what you'll see as long as they stay on the plan that we've been provided is that we'll ramp up each of the programs here in the next couple of years, and that's why we said full rate of production in 2024. So they'll be coming on -- each will be coming on board, each one ramping in this year and next year and the following year.

Okay. Good. And then last one, I know you don't guide, but looking at seasonality between Q4 and Q1 and given the backlog, any reason why Q1 revenue won't be higher than what you just saw in Q4? Just kind of curious how activity is trending quarter-to-date. It seems like things are pretty positive overall.

I'm not going to argue with what you said, while not concurring 100%. I'm thinking that I've mentioned that things are improving, and we're encouraged by what we're seeing here. So I think what you stated was a fair statement. Of course, last year, very -- obviously, very unusual year. Certain markets were performing extremely well at the end of the year. And as we say, our fourth quarter, December, in particular, is always a challenge for us. We don't know which way it's going to turn. And it was, I would say, positive, given everything else that occurred last year. But I think, in general, your statement is consistent with what we're seeing.

Our next question is from Gerry Sweeney with ROTH Capital.

I wanted to stick on the revenue side a little bit, specifically in the Vehicle segment to start off with. A little bit of talk about ship shortages, and I think even that may be more auto related. But curious, one, if that can -- would impact powersports as well? I know there's been some talk about some supply chain issues in powersports, at least in the short term. And does that sort of figure into any of your -- you mentioned a little bit of mismatch on legacy going down and new products than new business, auto wins going up?

Okay. So let me -- I'll clarify your second statement first about the mismatch. The mismatch is that the legacy programs in automotive that are ramping down. And the timing, if we had kept the awards that we had were ramping as we had originally planned, we would not have seen the -- we were seeing it ramp up before all those have ramped down. So given that they were delayed -- the programs were delayed, the ramp-downs continued while the ramp-ups were delayed. So that's all related to those Vehicle awards. All right? So that's specific to those.

With regard to electronics, I mean, we are absolutely seeing the challenges, feeling the challenges, and it's -- as electronics have become an important element of -- in many markets for us and solutions that we provide, it's a constant battle. So we -- as soon as we solve one, another one is popping up and it's passives as well as active components. We're also seeing it in plastics. Plastics has been a fairly significant challenge. And to date, we've been able to work through these issues. And I hope we can continue, but there's been tremendous amount of requalification and new suppliers and new components. I mean it's, obviously, been quite a challenge. And I think it will continue to be for the short term, especially as these lead times are ramping out -- are going out.

And one of the things we have to watch for here and having gone through cycles before, when lead times start to extend, you start to see some double ordering just to make sure people are in the queues and so forth. And so we just -- we're working to make sure that we're getting commitments back from our customers when -- and if they're accelerating demand or increasing demand to ensure that we don't get stuck with parts that we can use for a longer period of time. So it clearly challenges. And it's because of the electronics and because of, as I said, plastics also, magnets also, bearings, lead times are extending. And it's causing us to react and to work very hard on the alternative supply and also making sure we can continue to supply even in the short term.

Are any of those costs -- are you able to pass any of those costs through over, if they stay elevated for an extended period of time? Or is that just something you're at...

Certainly, when there's increased demands and extended lead times, so we certainly work toward getting reimbursed. I'm not going to say we get reimbursed for everything. We do have contracts that we get protection on cost increases. Our longer term larger contracts, all of them have that protection in them. So if the commodity prices increase, we can pass them on. It's the short-term burst or a supplier notifies you that lead times being pushed from 12 to 30 weeks, and you may have to expedite materials and it's not every -- not every time can we pass it on. But we certainly do and have been working on passing those costs on. And many times, Gerry, what happens is you just incur the cost now and then you -- to keep the supply chain go and to keep the customer satisfied and then you go back later and work on getting reimbursed.

Yes. Got it. So it's a little bit -- there's a delay there. Got it. Okay.

Yes.

(Operator Instructions) Our next question is from Brett Kearney with Gabelli Funds.

So Dick, you guys obviously took really good care of your team last year. Not all companies undertook as thoughtful comprehensive approach as you did. But we're hearing from some folks out there, not just on the supply side which we covered, but labor and staffing challenges. And as you think about some of your markets coming back as well as the new wins you have ramping up, just generally, curious how you're thinking about the workforce side of meeting some of the production ramp-up going forward?

Sure. The production ramp-up in -- if you're -- you start talking about the large vehicle awards, I mean, there's a couple of things that we've done there. Number one is that we've improved the level of automation so that, as we move forward here, the new contracts and future product launches that the automation that we're implementing to produce the product decreases the need for additional labor. Also -- so having protected the workforce, we do feel that there's certainly some loyalty there. We haven't seen losses of people that -- and maybe it's because of that and maybe it's because who knows what the job market is out there right now.

So I do think we will and as production is ramping in certain other areas, too, and in certain pockets, I think we will have challenges. The -- but it's something that we've been actively working on for a while here now and anticipating as we see demand, and we look out there as far as the recruiting efforts that we need to do. And I say that through the process here, we've also been doing some selective recruiting in some key areas, primarily in the engineering and material supply areas, I would tell you. I'll call them key strategic areas to ensure that we're positioned, as we come out of this, that we're in even a better position long term.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Well, thank you, everyone, for joining us on today's call and for your interest in Allied Motion. As always, please feel free to reach out to us at any time, and we look forward to talking with all of you again after our first quarter 2021 results.

Thank you for your participation. Stay safe, and have a great day. That will conclude the call, operator.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.