Q3 2020 Allied Motion Technologies Inc Earnings Call

Seven eight times at quarter end.

While we're 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.

Debt to EBITDA is 3.5 times, reflecting solid financial flexibility.

Year to date capital expenditures were $6.6 million.

As a result of decisions 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 3.8 times down from 4.1 times 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 environment, but more importantly, being a position of strength when we emerge from the pandemic.

With that ill now turn to turn the call back over to Dick.

Thank you Mike.

As depicted on slide 11, we saw orders increased sequentially and were at near record levels, which was encouraging.

Backlog at quarter end was approximately $124 million with the majority to convert to sales over the next three to six months as a reminder, in the second quarter. 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 a nominal amount of that is currently included in our reported backlog numbers.

Oh, but 19 pandemic has slowed the production ramp up for these projects and at this time, we are anticipating the first four awards and began to gain traction in 2021 or the other awards each coming online about six to nine months thereafter.

Looking ahead, while 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 production 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 aided by 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 with 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 ASV tool kit 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 pick those emerging needs as we transition from one off specific customer solutions to more market based solutions.

By focusing on and so really understanding our served markets we.

We believe our ability to leverage our broad based technologies developed 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.

Let's turn to spend Demicks 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.

Motion solutions for a wide variety of applications has never been brighter.

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

Thank you, ladies and gentlemen, if youd like to ask a question. Please press star one on your telephone keypad.

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Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

As a reminder, we do ask that you please limit yourself to two questions before placing yourself back in the Q1.

One moment. Please so we poll for questions.

Our first question comes from the line of Greg Palm with Craig Hallum. Please proceed with your question.

Yeah, great. Thanks, Good morning, everyone 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'm just curious if the segment sales was was more broad based and that was it or was the rebound.

The weighted within power sports specifically what are your thoughts there.

Yes, Thanks, Greg.

You're correct in that there was a strong rebound in the power sports market, but we also saw a sequential rebound.

Other vehicle markets as well.

Got it and then.

Sticking with vehicle specifically you made some comments about the previously announced.

Vehicle Awards, 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 youre 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.

Global basis is just.

Just coming back I think the.

The numbers, we are seeing is that will be down year over year quite significantly, but then that there is a there is a good bounce back year that started and 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 essentially shutdown for.

Several months.

And it is ticking back up and we think that all is done is push the dose.

Delivery of those products out a little bit as to the future John.

Long term impact, but yes, there has definitely better short term impact on just 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 look for.

For new customer activity would just kind of curious to get your broad thoughts.

Yes, I think.

Hey look quite quite good for us I mean, we've been.

Expanding our reach into certain markets and really focus and targeting our effort that.

Applications that we have been successful at.

In the past and that we think that 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.

It allows us to basically create this platform.

Which we then look at the universe or a layer of available customers that could utilize that solution. So we are working in the areas that we have and strengthen the past we see continued success in the future and we are launching.

New products and into those markets that we think to help keep us on the leading edge.

And providing our customers with a more competitive solution. So.

I mentioned that I felt that the ER.

Efforts through the whole pandemic to keep our team fully employed to keep working and stay focused on.

And 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 Len.

When they have come back then we were already there and ready for them do.

Start working on some future product generations. So so I think.

We feel the pipeline is good.

And we feel our focus is better and better.

Our integrated solutions are integrated solutions as far as the opportunities continues to grow.

And it's been exciting to see the transition from.

The past that occurred 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.

And competitive advantage.

Good all right I think I'll leave it there best of luck going forward.

Thank you.

Thank you. Our next question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.

Good morning, Thank you Mike Thanks for taking my call.

Morning Party here.

I wanted to follow up a little bit on the auto side I'm, sorry, not on a vehicle apologies on power sports.

In particular.

Got a little bit of work in it felt like.

Maybe there was some backlog pending in the power sports power sports market.

I'm 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.

The pie and maybe if there was any catch up involved in and some of the revenue.

Okay. So your questions are really about power sports and if there is any backlog there if there's yeah I wouldn't add anything yet.

My sense with 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.

Any any visibility as to yes did that occur in and run rate for the rest of the year.

Okay fair enough so.

The first off I would say there are definitely some catch up that was occurring there were some demand that was there and then.

There were some disruptions.

And 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 heard to.

Ben Yes they.

We're 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 dip down and then it has been trending up and going out into the fourth quarter, we see a continuation and the demand we don't see a drop off.

So I would tell you that that's that's so early filling the pipeline to a certain extent and then.

Increased demand in the marketplace today being built as well.

Got it.

And then I think Q2, you gave us the the amount that.

Dynamic materials was in the quarter.

Any chance that you could provide any provide a split there.

The impact in Q3 was.

Well I don't remember, giving you the.

The revenue impact in Q2, but typically we don't do that I would tell you that but I will I will give you in relative terms that.

Q3 was softer than Q2, we saw a quite surge in Q2, when I say search again.

Yes, the first full quarter that we actually own the business.

And in addition to products that they make where the patient rehab.

And mobility markets. They also make so some electronics for oxygen oxygen regulators and that business had.

That's part of the global crisis at EQT actually ticked up and I think as we're seeing in some of the other.

Medical markets that supply is into the 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 goal the crisis and the.

Mark It is.

Has seen a decrease.

So quarter over quarter, we did see a decrease in volume.

Got it perfect I appreciate it ill jump back in queue. Thank you.

Thank you Gerry.

Thank you. Our next question comes from the line of Brian Collier. Please proceed with your question.

Thank you Hey, Dave last quarter, you said, you didn't see any cancellations, but some pushes us.

In backlog I know you kind of talked about the backlog here earlier on the vehicle side, but.

What if you are seeing in backlog if theres been any.

Any changes from last quarter.

No I think Dick it's a it's still consistent I mean in certain markets, where the demand industrious and certain mark.

Markets for Us industrial aerospace and defense.

We have seen not cancellations, but we have seen push outs and delays and and it's still consistent with that we have not seen any cancellations now.

I would tell you that.

In the medical equipment.

Were they recorded specific devices.

You know something that.

The demands that we were seeing inquiries 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 is it's not real that market is not as big as if you add everything up comics and every customer there's definitely some overlap there and we have seen now that the market seems to have caught.

It up.

Is the equipment requirements in medical we have seen some.

Some orders now being pushed out.

Into next year.

Okay.

I mean, how many side again.

A nice obviously cash generation ability to pay down debt.

What do you are doing.

It seems like.

There are corporate 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 Thats quite interesting you're asking the question here.

The meeting that meeting we had yesterday, which was reviewing our.

M&A activity and our progress to date on it and what happened where are we now.

That was our pipeline we reviewed all that yesterday and Thats, what we found is that the.

We had customers I mean, the potential sellers and so forth in many cases here as we mentioned in the past we grew in 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 we postponed them mutually postpone discussions with.

A number of different opportunities then 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.

Little bit of the pick up in.

Potential companies coming to market and again as we've had in the past, we're pretty disciplined and making sure that they may fit in a complimentary instead of good strategic need and I can tell you that we are.

Going to actively pursue.

So theres a little bit of an uptick.

Challenge in this market is going to be valuations.

Of those that.

The cobot had a positive impact on are going to want to be valued based upon that impact whether it's valid going forward or not and those that got impacted a negative sense are going to want to look at the past. So it's a good 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.

Okay, great. Thank you.

Thank you Dick.

Thank you. Our next question comes from the line of Bret Carney with Gabelli and company. Please proceed with your question.

Hi, guys. Good morning, Thanks for taking my question.

Morning Margaret.

Hey, guys.

Dick I think you mentioned in your comments.

Seeing an ability I guess.

To take advantage in this environment.

To capture.

Talented 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.

Your thinking is more broad able to bring some folks that.

It would otherwise be a lot more competitive to get.

It will bring them in house and continue to build out I guess, both your electrical and software.

Capabilities.

From the workforce.

Sure well I think.

Thanks.

To answer your question here first let's look at the internal resources as we mentioned.

We kept.