Q4 2020 Allied Motion Technologies Inc Earnings Call
[music].
Greetings and welcome to the Allied motion technologies fourth quarter fiscal year, 2020 and financial results. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero and your telephone keypad.
Please note. This conference is being recorded I would now like to turn the conference over to Craig Mihalik Investor Relations. Thank you you may begin.
Thank you and good morning, everyone. We certainly appreciate your time today as well as your interest in the Allied motion joining me on the call our debt Rosella, our chairman President and CEO and Mike Leach, Our Chief Financial Officer, Dave and.
And Mike are going to review, our fourth quarter and full year 2020 of results and provide an update on the company's strategic progress and outlook after which we will open it up for Q&A.
As part of today's Q&A, we do have the you limit your questions. The two or three in order to allow for all participants and you can certainly go back into the queue for additional follow ups you.
You should have a copy of the financial results that were released yesterday. After the market close if not you can find it on our website at Allied motion Dotcom and.
And the website, you'll also find slides that accompany today's discussion if you're already doing those slides. Please turn to slide two for the Safe Harbor statement.
And as you are aware of we may make some forward looking statements on this call during the formal discussion as well as during the Q&A. Please.
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.
And I want to point out as well that during today's call will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance you.
You should not consider the presentation of this additional information and isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to comparable GAAP measures and the tables accompanying the earnings release and slides with that please turn to slide three and I'll turn it over to debt to begin.
Okay.
Thank you Craig and welcome everyone.
I guess, it goes without saying and that all of US would agree the 'twenty 'twenty was an exceptionally unusual year.
And most proud of the resilience and agility demonstrated by our entire allied team.
During these challenging times.
We responded rapidly to the changing situations and worked tirelessly to create a safe work environment while.
While at the same time, making the necessary adjustments to ensure the needs of our customers while continuing to be met.
At the onset of the pandemic, we qualified as an essential supplier because of our products are used to support critical industries, including medical defense and agriculture.
As a result, we were 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 manage inventory levels and 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 two of the 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 for.
The strength of our medical market position around the patient mobility and rehabilitation.
And provides the platform to further develop higher level solutions and leverage the economics of electronic products across our other vertical markets.
Yeah.
Yeah.
We also realized several wins with new and existing customers.
The innovation innovative solutions.
Which provides key revenue streams for the next several years.
Okay.
And our focused and disciplined approached.
I would us to navigate this environment, while advancing our strategic priorities and ending a challenging year, which sounded financial results, including record levels of orders and backlogs.
Fourth quarter revenue increased 6% and $93 million, even as the pandemic continues 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 and power sports within our vehicle market.
Driven largely by the amick dynamic controls, we saw an increase of 69% and medical compared with 2019 fourth quarter and for the year medical was up 61%.
Yeah.
And this market performance almost offset the declining and all other markets as revenue was down by only 1% and 2020.
For the full year, we achieved the gross margin of 29, 6% as our diverse market strategy and disciplined cost management efforts to help mostly offset COVID-19 related headwinds.
Our fourth quarter gross margin of 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.
Yeah.
At the same time, we have been making strategic capital investments to further our momentum and emerge and an even stronger position once the economy returns to a more normalized state.
We are confident and 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 for the families.
Before I turn it over to Mike yesterday, we announced our standard quarter dividend.
And also announced that the board of directors approved of three for two stock split that will take effect on April 30th for stockholders of record at the close of business on April 16th.
And it's actually reflects our outlook for continued growth and our competence and driving long term shareholder value.
We also believe this will provide greater liquidity of the company shares and assist and 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.
And we provided an overview of our top line on slide four.
As a reminder, our results include dynamic controls, which we acquired in March 2020.
Fourth quarter revenue was up $5 1 million or six per cent to 93 million. Despite the continued impact of the pandemic on her and Mark.
The revenue growth was driven by strong demand and medical including the incremental benefit of dynamic and the $6 five per cent increase and vehicle.
The impact for the quarter on revenue was the favorable $2 8 million.
Yeah.
Revenue for the full year came in at $366 7 million.
Down 1%.
FX fluctuations on revenue of favorable $1 8 million for the full year.
Our medical market grew 61% again, reflecting the addition of dynamic and the favorable impact due to COVID-19.
While the vehicle has rebounded.
Still down year over year, given the sheer define when the pandemic first hit earlier and the year.
When many of our customers' production facilities were completely shut down.
Sales to U S customers for 53% down from 57% from the prior year period with the balance of sales to customers, primarily in Europe, Canada and Asia.
The shift and geographic mix reflects the addition of dynamic controls.
Slide five shows the change and our revenue mix by market.
And the change and 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 of our business.
Again, the economic impact of the COVID-19, pandemic was reflected and the reduced demand for order deferrals within industry vehicle and A&D.
As depicted on slide six our gross margin was 27 nine per cent for the quarter compared with 31 per cent for the 2019 fourth quarter.
The change reflects an unfavorable mix the <unk>.
Under absorption of some fixed cost and certain facilities due to declines in industrial and the A&D and the.
Nearly $800000.
Of higher costs as a result of increased tariffs duties and expedited freight charges.
We believe we have manage the impact of tariffs and duties relatively well and benefited from our efforts to strategically source components as close to our manufacturing footprint as possible. Nonetheless.
Nonetheless, there are components that began to be impacted and the fourth quarter due to the expiration of certain exemptions.
The additional freight reflects the high demand and power sports and combined with supply chain constraints.
Which resulted in some inefficiencies and the unintended causes our teams worked hard to support and meet customer demand and schedules.
Gross margin for the full year was 29, 6% compared with 33 per cent.
Our diverse markets and cost containment efforts helped to partially offset the impact of lower volume and the higher tariffs duties and freight.
Moving on to slide seven and our operating income for the fourth quarter was $4 8 million for five 1% of total sales compared with $5 7 million of six 5% and the prior year period.
We managed to drive down operating costs as a percent of revenue by 90 basis points to 22 eight per cent.
And the higher revenue and cost control, partially offset incremental expenses related to the dynamic controls.
However.
The flow through impact from the gross margin decline more than offset that upside.
For the full year operating margin declined 160 basis points to six 3%, reflecting a 90 basis point increase of operating costs and expenses as a percent of revenue to 23 three per cent.
This was largely driven again by the addition of the dynamics trolls higher business development costs, and our conscious decision to maintain key engineering capabilities, which we consider vital to drive future growth and continue to gain market share.
Turning to slide eight 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 500000.
And 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 and was offset by a return of the $400000 withholding tax that had been charged the allied and the third quarter of 2019 due to tax assessments and of foreign jurisdiction for a previous acquisition.
These two items are netted within our other expense line.
Net income for the quarter was $2 7 million for 28 cents per diluted share the <unk>.
The tax rate was 26, 2% and 27 and 373% for.
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 for $1 50 per diluted share compared with 18 million and.
Dollar and 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 and an internal metric and believe it is useful and determining our progress and operating performance.
Slides nine and 10 and provide an overview of our balance sheet and cash flow.
A year and total debt was $120 1 million up $10 3 million from 2019, reflecting funds used to acquire dynamic controls.
And the quarter, we paid down for 6 million of debt nearly $17 million for the full year period debt net of cash was approximately $97 million for 44% net debt the net capitalization.
It is noteworthy that on a net basis the <unk>.
Net associated with the dynamic controls acquisition has essentially been paid off.
Our bank leverage ratio was two 2.78 times of year and.
While we were comfortable at this level, we continue to focus on paying down debt.
As a reminder, and February last year, we expanded our borrowing capacity and reduced our cost of debt with the new 225 million senior revolving credit facility, which also included an accordion feature, allowing the expansion of up to $300 million.
Additionally, we enhanced our flexibility by increasing the leverage coverage ratio of debt to EBITDA to three and a half times.
We generated strong cash flow from operations of $9 8 million and in the fourth quarter, bringing into 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 2020, one capex to range between 12 million and $15 million, which consists of some capital projects that had been deferred from 2020 as well as the investments for new customer projects.
Inventory turns were three eight times down from for part one at the end of 2019.
As a reminder, there were a number of critical components that have substantial lead times, providing sourcing challenges, particularly in the pandemic environment.
This combined with the ramp up of new customer programs is leading the 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 sooner and capabilities and.
And current liquidity as well as our ability to rapidly adjust the changes in the economy. We believe we have sufficient liquidity and a strong financial shape to weather any near term uncertainties and we'll 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 of 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.
[laughter].
The majority of our backlog is expected to convert to sales over the next three to six months.
And 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 of awards of $325 million.
We began 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 and 'twenty 'twenty four.
While the economic outlook for 2020. One remains uncertain. We believe we are and a strong operational and financial position.
And at 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 ASD toolkit to drive continuous improvement and all areas of our business as we work to create the right operational environment through leadership and team building.
From a market perspective, we were optimistic that the various vaccines working their way around the world.
And we'll continue to keep us on a path back to normalcy.
While we expect demand from our medical market the moderate, especially as we now lap the dynamic controls acquisition, we have and will continue to identify and long term market opportunities.
Leverage our broad base of technologies and developed 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.
Our sports demand continues to be strong and the automotive markets continue to progress and returning to previous levels of demand.
As expected we are seeing the run off of some legacy programs and it may not perfectly lineup with the ramp of the new large award programs and we have previously announced.
We are still taking a cautious approach with our industrial and A&D markets and 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 and 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 control of motion solutions for a wide variety of applications.
We believe we will deliver expanding margins and as the economy recovers.
We have an established and internal growth goal to drive and annual gross margin increase of one percentage point per year and can <unk>.
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.
Yeah.
Thank you and he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate and license and the question. Kim You May Press star two if he would like to remove the question for the Q and for participants using speaker equipment and may be necessary to pick up the handset before pressing the star.
Our first question is from Dick Ryan with <unk>. Please proceed.
Thank you.
They did on the.
Record orders in Q4 were there any specific key wins that you can point to and how does the backlog.
Shape, I mean does that mirror the contributions of the your various end markets are there any variances.
Ah <unk>.
Strong backlog.
Oh sure I'd say, the tea addict and it mirrors the.
And the what I'll say, the normal business mix within our markets, but I would tell you that.
There is a and A&D contract and their debt.
Oh, we had firm deliveries and lead times, which did.
Which would maybe skewed a little bit more of that area I don't want that to come across as if we see a and b.
Increasing in terms of the.
The relative sales within our markets, but I think it just says that we had a firm commitment.
Firm production dates and when we get those and we do book and in the backlog.
But for the most part I will just tell you there and it's across the board and its.
And it mirrors the mix of our normal business.
Okay. When you look at it.
And our.
Coming to the close of the first quarter any green shoots out there when you look at the various end markets and and you know looking out for the rest of the year, which markets should we see some growth there and <unk>.
To see some growth and.
Yeah, well I think and we're seeing some very encouraging signs.
Across pretty much most markets now.
Our European business, Yeah, obviously.
We have concerns as you still hear about the lockdowns and the spikes and COVID-19 spikes and so forth and especially in Europe.
But we're seeing very positive trends and of course as the.
And oil prices go up.
And we're starting to see improvements there as well so I think.
And we were.
Quite optimistic that we're starting to turn here and things are moving forward.
Okay. One last one on the M&A side, you know of last quarter, you're talking about.
Turning net activity up a notch, what's the current environment out there and have you had any change of the thought on it.
And kind of your the.
Acquisitive efforts here and the near term.
No change and thought and I would say to you that its definitely heating up.
Okay.
Great. Thank you.
Okay.
Our next question is from Greg Palm with Craig Hallum. Please proceed.
Yeah. Thanks morning, everyone and I guess, just maybe starting going back to the commentary on gross margin you know so if we if we back out the sort of 800000 net that you talked about you know I'm still come into a lower margin than expected. So just kind of curious how much of that was mix versus something.
Else and and you seem pretty confident that at least some of this is kind of transitory and the the long term trend is upwards. So maybe just going a little bit more detail on kind of how you're thinking about the the improvement going forward.
Yes, Greg I think what I'll do is you know theres a number of factors at play there and so I think it's.
Let's turn this over to Mike and he's got a good handle on where the impacts are and you know what's the C that we can mitigate here and the future.
Yeah. So.
It clearly is mix.
Mix related Greg.
I think we talked last quarter of a little bit about how the mix is impacting things so.
And while medical is up and medical typically the strong from a gross margin standpoint, the nature of the products that are being sold you know, particularly the ones Covid pandemic related.
Our of a lower gross margin in nature than our average you know certainly the other we've seen surges and vehicle and.
And again that just traditionally has carried a.
And then not bad barges, but lower margins than other than our general average and certain of the absence of.
And D, which I would classify as quite typically across the board of higher margin products, certainly impact impact us and then you know.
From a volume perspective, you know, while we were close to our volume last year, certainly entered the entire new operation out of as well throughout the year right. So I would say that.
Some of our fixed overhead costs of just not being absorbed as strongly as they will when volume returns and will get a lift out of that as well and then clearly.
The impact of the tariffs.
And some duties as along with again and for certain markets, we've seen such of search.
And that it's presented the supply chain constraints and issues and so as I mentioned, you know things like expedited freight was pretty chunky and the quarter as well.
And again, that's expedited freight to get products and from our suppliers and.
And again just throughout the pandemic period raised theres been those type of challenges and when the demand ramps up with it.
And just made it even tighter and tougher and our focus has been on meeting the demands of the customer. So certainly we've incurred some costs there was some inefficiencies.
Got it so so it sounds like so it sounds like a lot of sort of one timers that you know as as things progress here through this year should should start to improve.
Sure.
And being you know tariffs, who knows how long and where those are going as well. So we keep we of a large number of mitigation efforts to to put those behind us as well of those things for taking time to.
The potentially develop but.
Yeah, that's the one I would point to that certainly in Q1, we would expect to see some continued impact.
It makes sense the 8 million of the vehicle award that's now and in backlog I know you said full run rate in 2020 four how should we be thinking about the progression of the ramp up of that award from from now until then.
Yes, I think what youre going to see as each of the words and now coming on them.
Starting up as planned so there's varying times and.
As we mentioned the first is the is now moving into.
Ramp up and full rate of production and I think what we'll see well and know what you'll see and as long as they stay on the.
The plan that we've been provided as debt will ramp up.
Each of the programs here and the next couple of years and that's why we said full rate of production and 2024, so that would be coming out of each be coming onboard each one.
And it ramping and this year and next year and the following year.
Okay. Good and then last one I know you don't guide, but you know looking at seasonality between Q4, and Q1 and given the backlog any reason why Q1 revenue would be higher than what you just saw and Q4 just kind of curious how activity is trending towards a day. It seems like things are pretty positive overall.
Yeah.
Yeah.
I'm not going to argue with what you said.
Well, not concurring and 100% I'm thinking that.
And I've mentioned that things are and.
Improving and we were encouraged by what we're seeing here. So I think what you're what you stated was a fair statement of course last year.
Very honestly very unusual year of certain markets were performing extremely well the end of the year of and as we say our fourth quarter and December in particular was always.
The challenge for US, we don't know, which way, it's going to turn and.
And it.
I would say positive given everything else that occurred last year, but I think in general and your statement is consistent with what we're seeing.
Okay, Alright, thanks best of luck going forward. Thank.
Thank you Greg.
Our next question is from Gerry Sweeney with Roth Capital. Please proceed.
Good morning, Dick and Mike Thanks for taking my questions.
Good morning, Jerry.
I wanted to stick on the revenue side a little bit.
Specifically.
And the vehicle segment to start off with a little bit of talk about chip shortages and I think even that may be more auto related but I'm curious one if the.
Ken would impact.
Power sports as well I know, there's been some talk about some supply chain issues and power and power sports and at least in the short term and does that sort of figure into it and any of your you mentioned a little bit of a mismatch and.
Like I see going down and new products and new business, the auto ones going up.
And so let me clarify.
Your second.
The statement first about the mismatch and the mismatches debt.
The legacy programs and automotive that are ramping down.
And the timing if we had you know.
And Kevin.
The award so we had we're ramping as we had originally planned.
We would not have seen you know the.
We were seeing and ramp up before all.
The ramp down and so given that they were delayed the programs were delayed the ramp downs continued while the ramp ups for delayed so that's all related to those vehicle awards.
And so that's specific to those with regard to electronics I mean, we are absolutely seeing the challenges for you.
And the challenges and it's.
And it's the electronics had become the important element.
And many markets for us and solutions that we provide.
You know and it's a constant battle.
So we.
As soon as you saw one of the other ones popping up and its passengers as well as the active.
The active components, we're also seeing it in and plastics plastics has been Oh.
The fairly significant challenge and.
To date, we've been able to work through these issues and I hope, we could continue but theres been tremendous amount of.
Re qualification and new suppliers and yes.
The new components and I mean, it's obviously.
And then quite a challenge it I think and it'll continue to be for the short term, especially as the lead times and ramping out of.
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 and you're starting to see some day.
Double ordering just to make sure people are and the Qs and so forth and so.
So we just do we you know we're working to make sure that we're getting commitments back from our customers.
And when and if they are accelerating demand and are increasing demand to ensure that we don't get stuck with the.
The parts that we can use for a longer period of time.
The <unk>.
The challenges and and it's it's.
Because of the electronics and because of that as I said plastics also of magnets also bearings.
And the lead times are extending and and.
And it's.
Causing us to react and to work very hard on the alternative and supply and also making sure. We can continue to supply even in the short term.
Are any of those costs are you able it'll pass for any of those costs through over if they stay elevated for an extended period of time or.
And that just something youre at the certainly certainly when you know there is a increased demands and extended lead times. So we certainly work toward.
Getting reimbursed and I'm not going to say.
Where we get reimbursed for everything we do have contracts that we get protection.
Our cost increases and of our longer term larger contracts all of them have that protection and I'm. So sorry.
Commodity prices increase and you can pass them on.
Short term burst or a supplier notifies you that lead times being pushed from 12 to 30 weeks and.
And they have to expedite materials of and it's not every channel not every time can we pass it on but we certainly do and.
And I've been working on the passing those costs on and many times.
Jerry what happens is you just incur the costs now and the new.
To keep the supply chain go and keep the customer satisfied and then you go back later and and work on getting reimbursed.
Yeah got it so it's a little bit there's a delay there got it okay got.
And that's it for me I appreciate it thank you.
Thank you Jerry.
Yeah.
As a reminder, if you would like to ask a question of the star one on your telephone keypad. Our next question and from Brett Kearney with Gabelli funds. Please proceed.
Hey, guys good morning.
Good morning morning, Brett.
Good morning.
So Dick you guys obviously.
Took really good care of your team last year, you know not a.
And all companies undertook.
You know as thoughtful and comprehensive approach as you did or hearing from some folks out there not just on the supply side, which we covered but and labor and staffing challenges and as you think about some of your markets coming back as well as the new wins you have ramping.
And just generally curious how youre thinking about.
And the work force side of meeting some of the production ramp up going forward.
Sure.
And the production ramp up and.
And if you're if you start talking about the the.
The the large vehicle awards I mean.
A couple of things that we've done there and number one is that we've improved.
Improved for the level of automation.
So that the other.
As we move forward here and the new contracts and future.
Product launches that are the.
The automation that we're implementing to produce the product.
Decreases the.
And the need for additional labor.
And also.
And so having protected the work force, we do feel that Theres certainly some loyalty there.
We haven't seen.
The losses of the people that are and and maybe it's because of that and you know maybe it's because of who knows what the job market is out there right now so I do think we will.
And yes, the production's ramping and certain other areas too and in certain pockets I think we will have challenges.
And the.
And 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 and as far as the recruiting efforts that we need to do and I They say debt.
Through the process here, we've also been doing some selective recruiting and some key areas primarily in the engineering and material supply areas and I would tell you.
Paul and key strategic areas to ensure that we're positioned as the.
As we come out of this that we're in and even a better position long term.
Terrific. Thank you so much.
Youre welcome.
We have reached the end of our question and answer session and 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 and Allied motion.
And 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 the first quarter 2021 results.
Thank you for your participation and stay safe and have a great day.
To 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.
Yeah.