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Edited Transcript of AMOT earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 Allied Motion Technologies Inc Earnings Call

ENGLEWOOD May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Allied Motion Technologies Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael R. Leach

Allied Motion Technologies Inc. - CFO

* Richard S. Warzala

Allied Motion Technologies Inc. - Chairman, CEO & President

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Conference Call Participants

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* Brett Kearney

* Gregory William Palm

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* John Sturges

* Josh Goldberg

G2 Investment Partners Management LLC - Analyst

* Michael Morales

Walthausen & Co., LLC - Research Analyst

* Richard Allen Ryan

Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials

* Timothy F. Madey

White Pine Capital, LLC - Portfolio Manager

* Craig Mychajluk

Kei Advisors LLC - SVP of Operations

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Presentation

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Operator [1]

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Greetings, and welcome to the Allied Motion Technologies Inc. First Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Craig Mychajluk, Investor Relations. Please go ahead.

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Craig Mychajluk, Kei Advisors LLC - SVP of Operations [2]

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Yes. Thank you, and good morning, everyone. 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 first quarter 2019 results and provide an update on the company's strategic progress and outlook, after which, we'll open it up for Q&A.

You should have a copy of the financial results that we released yesterday after the market close. 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.

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 provided 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?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [3]

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Thank you, Craig, and welcome, everyone. We kick off the year on a healthy note as revenue grew 13% organically and 23% overall to a new record level despite FX headwinds that reduced our reported revenue by 3%. Additionally, incoming orders hit a new record at $94 million. Adjusted EBITDA was up 20%, and earnings per share were up 7% year-over-year. Earnings in the quarter were somewhat muted in relation to the revenue increase as we continued to make the necessary investments in internal resources and CapEx to support our strategical growth objectives for the future.

There were also a few atypical items that dampened profitability and resulted in our gross margin percent being unchanged. One of the items was an unexpected price increase from a supplier of electronic assemblies that decided to continue -- discontinue certain operation, and consequently, raise pricing on assemblies they produce for us. We expect to reduce this impact later in the year.

We gained market share and expanded sales in many of our served markets as well as realizing the benefit from positive secular trends around factory automation and specialized robotics. While there are some market outliers, on average, our served markets in total have historically grown in the GDP-plus range. It is our internal objective to deliver above-market growth, and organic growth rate in the quarter is a testament to solid execution by our team.

Our newest acquisition, TCI, performed as expected and resulted in a positive impact on both gross margin and EPS for the quarter. Moving forward, we will be working to maximize TCI's long-standing distributor relationships and to expand our geographic reach by utilizing the global footprint of Allied Motion. Overall, we believe there is significant potential for long-term growth from this acquisition.

And last but not least, our One Allied approach continues to gain traction as we work on leveraging our strong technical capabilities by investing in key resources at our global electronics team to further drive integration of solutions for our served markets. With the concerted commitment to focus on key strategic developments and opportunities, we believe the potential to continue growth and expand margins over time has never been better.

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

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [4]

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Thank you, Dick. We provide an overview of our top line on Slide 4. As a reminder, our results include the first full quarter of TCI, which we acquired in December 2018. We hit a record level of $94 million despite an FX headwind of $3.1 million. Demand was broad based, and growth in all of our major served markets were seen. As Dick mentioned, our organic growth was nearly 13%, excluding an unfavorable FX impact, and we saw a particularly strong organic growth within A&D and Medical during the quarter. Sales to U.S. customers edged up slightly to 54% of total sales with the balance of sales to customers primarily in Europe.

Slide 5 shows the change in our revenue mix by market and the growth of each market for the trailing 12 months ended March 31. Keep in mind that the TCI business is recognized in the industrial and distribution numbers which explains the 44% growth in distribution. Our A&D market has performed very well with 32% TTM growth and reflects higher sales across a number of submarkets, which include defense, commercial aviation and space. Also notable was the 24% growth in vehicle, fueled by the rebound in the power sports market, as well as industrial, which continues to benefit from factory automation and a lift from TCI.

Slide 6 provides detail on gross margin, which was unchanged at 29.5%. TCI was accretive to our gross margin. Though as Dick mentioned, there were notable unfavorable impact elsewhere in the business which were estimated at approximately 90 basis points. The largest [related] supplier who is discontinuing operations and subsequently increased their prices for any new orders without notice. We are working on lessening this impact as we develop and negotiate with and qualify other suppliers. At this time, we would anticipate partial relief sometime in our third quarter. The other items relate to the timing of investment into tooling and a meaningful amount of prototype samples both sold roughly at cost as part of the upcoming Vehicle markets program.

Moving to Slide 7, operating costs and expenses for the quarter increased 60 basis points to 21.7% of sales. While selling expenses of 4.4% of sales were up 90 basis points, primarily due to the addition of TCI, E&D was down 30 basis points and G&A was down 20 basis points.

In addition to the gross margin impact, the first quarter operating margin reflects incremental intangible asset amortization of $562,000 related to TCI, additional personnel to support growth across the global organization and accelerate investing of some director shares.

Interest expense increased by $566,000 to $1.2 million as the company took on additional debt and more expenses leverage levels to fund the acquisition.

If you look at Slide 8, you can see our bottom line results. The effective tax rate for the quarter was 27.5%, up from 26.2%. Net income increased to $4.5 million or $0.48 per diluted share compared with $4.2 million or $0.45 per diluted share in the first quarter of 2018.

We've adjusted our fiscal 2019 tax rate expectations up slightly to range between 26% and 29%, which reflects adjustment and continued clarification to the recent tax form regulation.

Adjusted EBITDA for the quarter was $11.7 million, up $2 million or 20%. As a percent of sales, adjusted EBITDA was 12.5%, a decrease of 20 basis points. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance. This is a non-GAAP measure, so please be advised to review our reconciliation and the related disclosures in our release and at the end of our slides.

Slide 9 provides an overview of our balance sheet and cash flow. Reflected in the numbers on the slide are the 2 acquisitions made in 2018 as Maval and TCI were both funded with a combination of cash and debt. As a result, at quarter end, debt, net of cash, was around $119 million or 52.7% of net debt to capitalization.

Capital expenditures were $2.5 million for the quarter and were primarily investments for productivity improvement and growth initiatives. We expect our fiscal 2019 CapEx to range between $15 million and $18 million, which reflects additional support for the significant project wins that will begin ramping by year-end, the next generation of off-road vehicle steering capabilities and incremental investments related to the addition of TCI.

First quarter inventory [turns] improved to more normal historical levels at 4.6x, as we have done a better job of balancing our strong sales pipeline along with tight supply chain.

Our DSO was 52 days, down from a height in 2018 number.

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

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [5]

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Thank you, Mike. We'll now turn to Slide 10. With continued strong demand in end markets, the first quarter orders grew 16% year-over-year and 10% sequentially to a record $94 million.

Absent unfavorable FX, orders would have been about $97 million, up 20% year-over-year.

Backlog at quarter end was at a near record level of $131 million, which included about $5.5 million from TCI. As a reminder, TCI is more of a book-to-bill type business and their typical book to ship time is measured in just days and not weeks.

About 80% of our backlog is expected to convert in the next 6 months and 95% over the next 12 months. As we have previously discussed, just a nominal amount of the $225 million in the several vehicle market awards we announced previously are included in our reported backlog numbers.

Also, as a reminder, we are currently investing in these programs and we expect to begin shipments at very low levels towards the end of this year. We will begin ramping shipments in 2020 to full weight production by the end of 2021, which will then continue for the following 6 to 7 years.

Executing our business operating system Allied Systematic Tools is key to future margin enhancement as we focus on quality, delivery, innovation and cost. While we have a strong AST team and we have enhanced those capabilities over the past year -- this past year, it is also important to note that we will continue to invest in our strategic areas of excellence, especially around electronics and software, as we further build out our integrated solution offerings.

While we may -- we remain cautious and flexible around the global economic environment, we have strong confidence in our future as we remain steadfast in the execution of our long-term growth strategy to expand our multitechnology solution opportunities and to further penetrate our target markets.

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

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Questions and Answers

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Operator [1]

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

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Yes. Nice quarter here.

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [3]

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Thank you, Greg.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [4]

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Thank you, Greg.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [5]

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So I guess starting with the organic growth rate, 13%, I mean, that's really fantastic, in my opinion, in this environment, I mean, even if I assume a few points that were driven by pushouts from Q4 to Q1. I'm just not aware of too many other industrial-related companies that are putting up this type of growth in the macro environment.

So love a little bit more color. I mean, is it new customers? Is it existing and just being attached to the right ones? Can you help us kind of understand what's going on?

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [6]

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Greg, I think, it's a little bit all of the above. So I think we continue to win new customers along with gaining continued share with existing customers. We've talked about some of the gains we've had in certain markets this past year, and again, I think, it's a little bit of a carryforward to that kind of how we indicated it at the year-end as well.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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And in terms on the -- go ahead.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [8]

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I would concur with what Mike just said. I mean that's exactly what it is.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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And based on the Q1 results, I mean, presumably, that makes the Q4 results, which were a little bit more disappointing, probably gives you more confidence that, that was just sort of a onetime kind of inventory adjustment kind of thing, kind of an anomaly. Is that fair to say?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [10]

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Yes. I think that we said after the year-end conference call that we gave a little more color at that point because we felt that, that was just a blip. And we expressed our, at least, our thoughts because we're so far down the road here, and with the [facts and] data we had, that it would bounce right back. And I think it just shows that, it did bounce right back. And I think you are correct. There's certain inventory adjustments and holdbacks that occurred at year-end. That did account for some of the increase in sales that we saw over year-over-year for first quarter. So I think that is correct.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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Great. In terms of gross margins, the associated drag from what you call the atypical items, I mean, I guess, should we expect sequential improvement in Q2? It sounded like maybe some improvement started in Q3, but maybe you can kind of walk us through some additional color there.

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [12]

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Sure. I think there will be a little bit of sequential improvements where we talk about the pass-through of tooling and prototypes. While we do encounter that from time to time and do see some fluctuations, that was sizable in Q1 and I don't think it will repeat [of so] that nature, again, at least in Q2. The issue we've mentioned relative to pricing from the discontinued production from a supplier, that will take a little bit of time to recover from in a sense that it was a sole source position and replacing that supplier and getting that supplier through a qualification process will take a little bit of time. So I don't think we expect to see a partial recovery from that until probably some time, I think, Q3.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Okay. That sounds like you've got your head wrapped around the near-term impact there. And to be clear, the impact from the tooling and prototype samples that you mentioned, that's related to the previously announced vehicle [when] that's ramping later this year, or is that something new?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [14]

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No, that's -- it's predominantly that.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay. Shifting gears to TCI. Kind of curious now that you've owned it for another 1.5 months since the last call, I'm curious if you can give us some more commentary on the potential growth strategy there and some of the associated revenue synergies that you're looking at.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [16]

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Sure. I think nothing much has changed in what we've discussed here in the last 1.5 months other than gaining some additional understanding of the business and some of the market opportunities for us. TCI is -- we acquired it. We are looking at a diversification strategy into some other more stable markets. Oil and gas is our major market for TCI. And I think, as we look at those markets, we also see opportunities that we're -- we can leverage other products within Allied Motion. So we're quite excited about that and we're undertaking a project now as TCI already had it on its radar and was beginning to -- its efforts to work on it that we're also looking at how can we pull along some of the other products that Allied already makes.

So I think we're very encouraged that there will be additional synergies to be realized. And we'll be active and have the opportunity to become competitive in certain areas where we hadn't been in the past. And that's [using] the footprint of Allied. As we look at the market, what's interesting in the market from a market perspective is that, TCI is primarily North America and both the European and Asian markets are bigger than the North American market for their products. So it just kind of gives you the -- it puts it in perspective what the potential opportunity is here. And we think it's substantial. We will be working on further leveraging of capabilities within both companies as we talk about the distribution channel and we talk about our global footprint. All the things that we can control internally, we will be working on here.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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And is there potential to start manufacturing and distributing their product globally at some point this year? Or is that a longer-term opportunity?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [18]

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I say it's longer term, but we are absolutely already underway and looking at that and getting product designs up to speed and identifying and addressing how we can utilize the footprint to take advantage of that. So it started pretty quickly. But we will not see an impact -- we will [not] see an impact this year, Greg.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19]

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Okay. Last one for me on TCI, and then I'll hop back in the queue. I know they've got, call it, outsized exposure to oil and gas so I'm curious what you've seen maybe, end of March, April, on the bounce of crude price. Any sort of difference in the order rates for that business?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [20]

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I would say to you that it's pretty stable right now. I mean, we -- it's interesting you can definitely see the impact. But when you look at it, first quarter, for example, we did have a slight downtick, but we ticked right back up here. So it's pretty stable right now. And I don't think we can expect much change here as we move forward in the year.

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Operator [21]

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(Operator Instructions) Our next question comes from the line of Dick Ryan with Dougherty & Company.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [22]

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Say, there's a couple on the supplier issue since they were sole source. Was this just pricing or were volumes from them impacted that may have worked its way down through your ability to deliver to your customers? Or is that a threat over the next quarter or 2?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [23]

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Well, we will give you a little bit more color on that. So it is a fairly significant impact on us and it came as a surprise. There was no advance warning that there was any indication that they may be considering discontinuing the operation that supplies us. And we're just basically told either pay additional money or you won't get product, and that's not an option. So we are paying additional money and it's impacting our profitability because of that. And of course, we are, as Mike mentioned, working on alternative suppliers. We're well down on the path, but you don't just -- in the markets that we serve, you don't just change suppliers and just start shipping from the new supplier. You do have to go through a qualification process. That's why it's going to be -- it's going to continue for a certain period of time. It's unusual. I mean, in all the years that I've been in business, this is a rare occurrence where something like this happens, but it just indicates that they have no intention or any desire to be serving those markets anymore. That's what we faced.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [24]

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Are you concerned on volume availability for the near term? And how readily can you bring on a new supplier? Is this something that's more of a custom sort of assembly or there are other options available?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [25]

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There are several options. This is really -- this is the assembly of the circuit board itself, okay? So we control the components and the supply chain for that, so that's good. What I have to -- as I've mentioned, though, there's still -- if you change a supplier, and even if it's just an assembly, we have to go back through a requalification process. So that's -- it's not a concern. We have other suppliers that we use and we absolutely have already the processes well down the path of being proven so forth, but it still takes qualification at the customer level. So that's really what we're working through right now.

And I'd say the -- we have very limited concern. We were -- the alternative supplier is world-class and we're moving forward and we're confident that, as we get into the third quarter, things will be transferred and everything will be fine.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [26]

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Okay great. So you talked about new customer wins and solution wins in the discussion on orders. Really, where is that occurring, either in the verticals or is it U.S versus European?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [27]

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Yes. In the verticals, I think, as Mike did mention here is when you're comparing our -- the first quarter versus the prior year. Aerospace & Defense had a nice uptick. And that was -- those were wins that we had in the volume ramping up, okay? And so most of our defense work is done in North America. We classified some other things in Aerospace & Defense, such as commercial aviation and so forth, but really the big win there, the big uptick that occurred for us was in, what we'll call, Aerospace & Defense. There's also -- we did see in Medical, and again, volume increases, new customers coming on board, but volume increases in existing customer base as well.

So I think it's a very positive sign. It's -- we talk about how we continue to invest in solutions and -- that's certainly impacting our margins, but we -- our overall operating profit when I'm -- so I'm going to say margins here in this case. But it's -- we see it as absolutely necessary. We have a -- it's a long designed-in wind cycle, but once we get in, it's solid. And we're an integrated solution and it is just pretty sticky.

So we continue to see and we'll invest as well in platform solutions that we can leverage into many areas. I did mention investments in electronics and software, that's a really big push within the company. And in the first quarter, we brought in a leader for that group. And we are a -- we're a decentralized electronics group and the management of that is a challenge. And -- but I think we're getting our hands on it and we are going to continue to invest in that area, Dick, because that is really sticky and those -- and that's what helps us come up with unique solutions and really create value for our customers.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [28]

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Yes. I think you've mentioned in the past the kind of shortage of qualified talent out there. Are you losing any to competitors? Or is it more a question of just hiring the right talent?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [29]

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Well, I think we've been pretty fortunate. Again, mentioning that we have a decentralized approach to the engineering, which create some challenges in itself, but establishing a framework that they can work within and making sure they're cooperating, so forth, and that's what new leadership is really focusing and concentrating on. And I would have to say to you, our internal resources where they actually work for us, we have used contractors in the past to fill the gap where we haven't been able to recruit fast enough, but we are not losing internal resources. And we're continuing to add and build and we're working with several universities.

We're going to continue to expand that to bring in some bright young talent. We've got a great senior team providing strong leadership and direction. And we're also supplementing that with some talent right out of school.

And -- so I think the mix is good, you're going to continue to grow there, we have not lost people in that area. So it's saying, obviously, it's a great place to work, if anyone is listening and needs a job and it's -- and I think we're very pleased and happy with the way our employees do work together here certainly in that area.

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Operator [30]

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Our next question comes from the line of Brett Kearney with GAMCO Investors.

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Brett Kearney, [31]

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Just want to ask, as you're looking to build out your electronics and software solutions, as you just discussed, started to invest in it this quarter and a bit more recently. Is that something you see yourselves doing primarily organically? Or are there also inorganic components [to effectuate] that strategy?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [32]

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Sure. Well, I would say to you this. We have actively been pursuing and looking at opportunities to acquire a base of business and talent along the way. And I would say to you that what we found is the cost of acquiring companies in that space is very expensive and has been very expensive. And while building it organically and growing it organically may take a little bit longer, we feel very comfortable that we're controlling our destiny, we're building a solid platform that meets the emerging needs of the marketplace. We're not introducing another variable to the subset or subset of products that we're building for different markets and different solutions.

So I think there is -- we continue to look, but we are not waiting for or -- that right opportunity to fall in our laps. We are taking control of our destiny. We are investing and we're going to continue to invest. And if you had listened to calls, and I go back 5, 6, 7 years, we talk about a transition of the company, moving away, and you heard us say that we're not a motor company, we're not just a motor company anymore, we are really a solution provider. And that's exactly what you're seeing here. And our wins are occurring in that area. And they are sticky, and so we are going to continue to invest and it's going to be organic, may take longer, but it's, in our opinion, it's stronger and more secure. And we control all the IP and we control the continuation of the platform development and making sure all the pieces work together without introducing another variable which could take some time to figure out how to integrate. So you will see more of this in the future from us.

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Operator [33]

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Our next question comes from the line of Edison Chu with G2 Investment Partners.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [34]

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This is Josh Goldberg, for Edison. I had a questions. I guess I'll start with how much did TCI contribute in the quarter in revenue?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [35]

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Again, we don't -- we actually don't break the numbers out by individual, but I can say that, in this case here, it's consistent with what our pro forma showed for the prior year.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [36]

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Consistent in terms of it was flat year-over-year or it was up?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [37]

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Yes, it was flat.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [38]

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TCI revenue was flat. Okay. So if I look at your business then, outside of TCI as your biggest customer, your growth is very strong in the quarter. I calculated it north of 30%. Is that accurate?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [39]

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I'll let Mike answer that. Your calculator is faster than mine. 30% without TCI, you're saying? I think we are...

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [40]

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And your biggest customer.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [41]

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Oh, and our biggest customer. I don't know how you would split that out. I mean, generically speaking, I'd say that customer is relatively consistent year-over-year and their volumes maybe up a little bit. So I -- that 30% seems rich to me, Josh. I mean, I think, we talked about 13% organically without FX. I would not suggest that we saw significant decreases and/or increases out of our largest customers.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [42]

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Okay. Well, so take that one offline then. Can you talk a little bit about the growth rates that you're seeing outside of your biggest customer in vehicle? And I just want to know how much the Maval acquisition is helping you gain more design wins in that area?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [43]

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Okay. So I think you had 2 questions or is it -- if we take the last, what I heard, the Maval acquisition and whether it's helping us with design wins. I'll address that first. That was our strategy in buying Maval. And looking at that, we were -- we had the ability to take our target markets and our served markets here to provide an integrated solution. And as we've talked and discussed in the past, to start design -- the design process to win the design, to prototype and get into production is normally about a 2- to 3-year period of time. So I would say to you, we are making good progress, we are absolutely working on designs and we feel confident that, in the next few years, that we will be selected in certain programs and that we will turn it in production. But if we did not have, it's not one of those items that had an immediate impact and it's continuing to run stable, but there is no major growth occurring from there at this time. But we are on our design programs right now.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [44]

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Okay. And if it's okay, another one. Almost 4 months into the year and you guys have not given rate visibility yet into these vehicle programs that you have. Can you give us a little bit of a sense of the timing of it now? I mean, you've been very vague about it, but maybe we can get a better sense of the timing so that people aren't either too far ahead or too far behind with what you're expecting. Because I know you originally said mid- to late '19, now you're saying late '19, more modest revenue. Is there any changes in those relationships? Or what's causing changes in that time line?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [45]

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Well, okay. I think if I -- we are talking about ramping up later in the year having no really any -- very little impact on revenues, okay, and/or earnings. We will be starting here later this year, and all the activities that are going on right now to get lines in place and running off of live parts and live lines is ongoing. So we are starting to ramp.

Now there's multiple programs. So that's what I think you have to -- we have to take in consideration here that there's some -- there are multiple programs that we are ramping up and each of them will ramp up at different times. So we start this year. We will have additional programs starting to ramp next year, and as I think I've mentioned in the conference call portion of it, that we see ourselves in full production in the 2021 timeframe and then continuing for the next 6 to 7 years.

And that's $225 million in awards that we talked about that we either have received or we've been awarded. And we're working on others. We continue to work on others. But that's kind of what you can expect, is that if you talk about the ramp-up periods and it's typically a very slow process to ramp, but full production by 2021, $225 million over 6 years, there's your number.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [46]

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Okay. So the point is that by spending so much time and effort and money this year, it actually might hurt your earnings this year as you start ramping the program and then you might -- it might be accretive to your earnings next year. But right now, you're spending ahead of the ramp.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [47]

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We are spending ahead of the ramp. A lot of it is CapEx, a lot of it is...

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [48]

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Can you quantify that a little bit? Can you quantify that a little bit for us? The sense of how much you see expenses here...

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [49]

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On the CapEx?

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [50]

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CapEx or OpEx, whatever you have.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [51]

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Mike, do you want to jump in on that?

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [52]

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Again, I think CapEx last year was in the $15 million range, we're expecting it to be in the similar range this year. I would tell you that how -- I'm looking here. 50% of that spend is probably associated with these vehicle market wins. Again, let's be careful too when we talk about vehicles, right? Our offer of ATV-type vehicles are -- we're investing in it as well for next generation, but you're right, that doesn't relate to the commercial automotive contract wins.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [53]

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Got it. Last one for me, obviously, consistent with what Greg Palm brought up before. Going to these conferences you'll hear that the industrial space is having a difficult -- more difficult '19 than '18. I think some of the industry forecast are growing mid-single-digits and you guys have outperformed that so far. And I just want to get a little more color in terms of do you see that continuing? Is -- or are you happy with how March and April played out? It sounds like there's a bounce back in January. But is there a good cadence to your orders now? And does the pipeline look strong?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [54]

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Right. I think, as we talked about 6 weeks ago or so, we mentioned that we felt good about the way the year was starting off and continuing, and we felt confident about the first quarter. In terms of the run rates that we were seeing and the volumes we were seeing, and then I think it is continuing. But again, we're only 4 months into the year, and we're 1 month or 6 weeks past when we talked to you before, but it is continuing. And it is encouraging. And I think Greg did ask the questions about which markets and so forth we talked about it's -- Aerospace & Defense has been strong for us. Medical has been strong for us. And those are markets that take a long time to get design wins and -- but then they're pretty stable for a long period of time too. So that is very encouraging.

I would tell you, and I think you may have said this when you first started the -- your question or series of questions about our largest customer and so forth. There -- even though the volumes, okay, may increase in there, there is a continued pressure on price. So I would caution us to think about, if you -- even if you hear those volumes are going up, we've been very innovative in working on next-generation products so that we could retain the business, but when there are price backs that are -- get backs that are in pricing that we had seen. So you may -- we may look at it's flat from a revenue standpoint, but the unit volume will actually have gone up and margin protection is certainly "yes by design". We have to work on that. And this contract manufacturing issue that we had has absolutely impacted that need. And that's one of the areas here that we -- as we mentioned, we feel that within third quarter and so forth will be behind us.

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [55]

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And I'm just going to add to that, I think, the statement in the Q, when we talk about customer concentration, I think, which is probably what you're driving your math from, Josh, is, I think, it's more about the diversification away from that customer with the addition of TCI that is driving that number than anything.

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Josh Goldberg, G2 Investment Partners Management LLC - Analyst [56]

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Yes. I mean, I would just add in terms of following the company for a couple of years, you know the fact that when you bought Globe Motors, that was big, big customer of yours, the vehicle market was so important and now you've been able to diversify away with one Allied approach to really kind of become more of a global supplier of motors. And I think that, that's something, I think, is little bit underappreciated by people who follow the company.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [57]

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It's a very, very, very good point. And again, I'm going to stress it again. The investments we're making in electronics and software we believe is going to pay big dividends down the road, and that's the path of margin improvement.

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Operator [58]

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Our next question comes from the line of Mike Morales with Walthausen & Co.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [59]

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In the slide deck you called out 90 basis points of the gross margin impact from the atypical events. Could you break that down between the supplier impact and the tooling impact to give us a sense of how this progresses through the year if that works out?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [60]

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Yes. I think the supplier impact is about 2/3 of that.

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Michael Morales, Walthausen & Co., LLC - Research Analyst [61]

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Okay, okay. And then shifting gears maybe a little bit. It's been on the headlines a little bit more, the USMCA. I'm curious on how you guys are thinking about that impacting the vehicle side of your business, if that would be a headwind or a tailwind for you guys and how's that's going into planning the business looking forward?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [62]

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Well, I think there's a couple of factors that come into play there. And one, we absolutely see as a positive if North American content requirements go up, that I think it plays right into helping us. So that's one area. I mean -- and again, we have a -- we're in a situation where if we can provide benefit to our customers who have to work to meet those content requirements then, I think, that absolutely plays into our hands. Other than that, Mike, if vehicle sales and all the other things get impacted by it, we will be also.

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Operator [63]

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Our next question comes from the line of Tim Madey with White Pine Capital.

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Timothy F. Madey, White Pine Capital, LLC - Portfolio Manager [64]

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As you know, I'm pretty new to the story, so I might have some rudimentary questions here that you've already answered or can't. But on the $225 million in new business, could you just characterize that a little bit? What business type is that and kind of how it ramps over time and then how the margin profile kind of looks as you ramp that out to [round up] maybe corporate growth or EBITDA?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [65]

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Sure. Yes. And no problem, I think it's probably a good time to refresh everyone's memory on what those project wins were. If you go back to when we acquired Globe, we talked about end of life of contracts. That was something we were certainly aware of when we acquired Globe that they had certain contracts and certain customers that were going to run out to completion of the contracts. And there was a gap in replacing those contracts to sustain the revenue stream. I can say that when we can get enough volume into what we'll call our automotive-type facilities, that is, from an operating profit standpoint, it's consistent with the operating profit that we see in other operations. When it's running at a lower level, it certainly has an impact. It's -- it will have a gross margin impact, so the gross margin is lower. But again, from an operating profit standpoint, we can leverage that, the high volume, the higher volumes we have there, and it will be consistent with an operating profit level.

The ramp-up of these wins, you get the win, you get the contract for it. And there's several deliverables that have to occur after you get notification of that. There is a -- they're time-phased, and that's basically what you go through and getting the equipment in place and shipping product off of production equipment, getting it into the field test and so forth. So there's a -- the timing that it takes to ramp it up is [barely] significant, and that's really what you're seeing here. So we announced the wins, we don't include it in our backlog, and that's the important other note. And the reason we don't is, the only things that we include in our backlog. Even though we have the orders unless we have a firm production date, we do not put them into our backlog numbers. So that's the one thing. We also roll in the backlog and they'll be considered an order when we get firm production dates.

So this year, we start -- okay, later in the year, we start -- we're delivering off the first, let's call it, the first award. And then, in next year we'll begin delivering off of other awards into full rate of production 2021. And as we mentioned, $225 million, and we say that's going to run over 6 to 7 years. So that's what I just said earlier. You can kind of do the math on that. But I'd also tell you that it's -- that's not all we were working on. We have others that we're working on, and we would expect to gain more as time goes on here, too.

The other important item to mention is that we have diversified geographically also. We strongly believe that our footprint gives us a unique competitive advantage in the marketplace and to service the local economies. And what we call local economies, let's say, North America, Asia and Europe. That's really what our footprint is allowing us to do and we're getting better and better at leveraging those and smarter in how we utilize the local supply chain and so forth to satisfy those customers that were competitive. And that gets rid of some tariff issues, gets rid of this -- the logistics issues, the transportation issues and so forth.

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Timothy F. Madey, White Pine Capital, LLC - Portfolio Manager [66]

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So over time, you could see another $20 million roughly added to backlog when you start to get more of the full production ramp?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [67]

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Yes, yes. I'll say to you, yes, at some point when we have visibility on what the actual releases will be and production dates will be, it will rolling into the backlog, so you're correct.

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Timothy F. Madey, White Pine Capital, LLC - Portfolio Manager [68]

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That's kind -- it get segues into the next kind of question. Looking at your organic growth and I know it's a -- the macro environment is changing all the time. But how do you think about organic growth kind of going forward over the next few years, especially with this type of unrecognized backlog, if you will, already present there in the model? That's a tough one, I know. Maybe you guys don't...

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [69]

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Well, I was trying to -- I'm trying to make sure I'm answering your question. So how do we...

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Timothy F. Madey, White Pine Capital, LLC - Portfolio Manager [70]

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How's organic growth going to look like [in May] over the next 12 months versus the next couple of years? How do you think about the organic side of the business?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [71]

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Well, all I could say to you is that we watch it very closely here and we pay close attention to what the macro market is doing and what the impact it could have on us. We have an internal target that we set for ourselves that -- and if you look at our industry, and again, and giving you some color about what this industry has done historically. We've seen 3% to 4% growth rates historically. And we had exceeded that. And that's -- we work very hard to ensure that we're developing the next-generation products/platforms that -- for the markets that we're serving and to continue to have above-market growth rates.

So I mean, that's our goal. I can't sit here and tell you that, that's absolutely guarantee we're going to do that, but I think it's -- we have a track record and that is our internal goal and we focus hard on it, and we will continue to focus on it.

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [72]

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But to your point, certainly, those contract wins in the vehicle market will provide a tailwind to that organic growth rate.

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Timothy F. Madey, White Pine Capital, LLC - Portfolio Manager [73]

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And just the last thing on the -- building out the platform with software, electronics, et cetera, how do you think about the right capital structure for the company? Your acquisitions, do you think going forward are mostly tuck-ins? Or are they as large as your most recent one? And you use a combination of debt or stock or cash, or generally, I know you can't show your hand too much, but generally, how do you think about the capital structure in these acquisitions?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [74]

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Yes. I'll speak and then I'll let Mike add to whatever I miss here. But I think we have the shelf in place, which gives us quite a bit of flexibility going forward in the future. And I think that should indicate that we intend to continue to grow and we'll access whatever markets are necessary, the capital markets necessary to facilitate the growth. And I think our key here is pay the right price, don't get seduced with the wrong acquisitions. I said the wrong acquisitions, those are going to be -- put the company at risk or the price is just too high without any strategic -- no strategic benefit to justify it. And we're going to stay disciplined in doing that. And we are fortunate that we have -- we feel capital market is available to us to go ahead and continue to support the growth necessary.

So Mike, you might want to add something to that.

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [75]

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Yes. Just -- I would just add that our continued growth in size and strength certainly helps us with increasing flexibility, even as it relates to the debt markets above and beyond what Dick talked about in the equity markets. So again, I think, there's some continued flexibility there, hopefully in the future. Again, we have other tools, as Dick just mentioned, that we chase to fund future growth as well. And that's not to say that we haven't used stock in the past as well. I would just add that it hasn't been a major component of deals, but we always like to use a small component of stock in the deals we do, whether that's to retain talent or to create organizational buy-in with key stakeholders and things to. So I think it's more just a continuation of that mentality from capital structure standpoint.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [76]

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I gave you some more color too as we talked about in the previous question too about are we going to continue investing in electronics engineering and software engineering, and the answer is yes. It's a key element. It integrates everything that we do as the company here and it gives us the opportunity to provide some fairly unique solutions for our customers. It increases reliability, it drives down costs. It's -- there's so many positive sides to that.

In addition to that, when we look at companies in that space, the multiples that they were commanding and they were getting were not multiples we felt comfortable with. And I'm talking 15, 16x EBITDA. And that's not something we feel comfortable playing in. We felt more comfortable that we're here -- we're long-term people. We have a long-term strategy. We're going to invest in our people and in our strategy. And that's better for our shareholders, and that's really the approach we've taken.

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Timothy F. Madey, White Pine Capital, LLC - Portfolio Manager [77]

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With the EBITDA running last year around $40 million or maybe close to $50 million this year, I mean, what kind of long-term -- how do you think about the long-term debt returns on EBITDA that you would be able to take?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [78]

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Go ahead, Mike.

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [79]

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I mean our current facility keeps us within 3.5 terms with an acquisition [holiday] . Like I said. I think, as we continue to grow in shape and size, that there may be some more flexibility allowed us, at least, that's my thinking, in that regard. And certainly as we approach $50 million EBITDA and above, there's potentially other debt market avenues that we can start thinking about depending on our future trajectory as well.

So again, I think it's about flexibility, I think we have tools or arrows in the quiver that we haven't used in the past, and I think our continued growth is going to continue to add to that in terms of our flexibility.

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Operator [80]

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Our next question comes from the line of John Sturges with Oppenheimer & Co.

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John Sturges, [81]

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Roughly 4 years ago, you'd start -- is my understanding, you started down the solution path. And I'm just curious what percentage changes have you seen in terms of your revenue stream?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [82]

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Sure, it's a good question. I would say to you, John, we started talking about it 4 years ago, but we actually started doing it well before then in different levels where -- when Allied was formed as what we know as Allied Motion today, go back 16, 17 years ago now, it really was a motor company. And we acquired additional motor companies and then we added some gearing capability, we added some feedback capability, we added some -- and along the way we've added some electronics capabilities by small acquisitions and a small acquisition, in particular, internal development that we started as well as getting pieces of it with a number -- small pieces of it with a number of acquisitions. So that's developed before -- it started before sooner than 4 years ago. But I would say to you in the last 3 to 4 years is where it's really starting to take some traction and the integrated solutions are taking hold and the thing -- and the items that we're working on for the future business level, for the future business is greater than 50%. So that's -- it's quite encouraging. It's -- and it's going to go on. It's absolutely going to go up, and I think the value of the company when you look at it from the stickiness in the applications in the software and electronic side of it that is integrating piece that we use here and our commitment to continue to invest is what's key.

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Operator [83]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [84]

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Well, thank you everyone for very lively call with many questions. I think it's probably a record this time. So we thank you for your interest in Allied Motion.

For those of you who are interested, we will be attending the Craig-Hallum Conference in Minneapolis on May 29 and the KeyBanc Industrial Conference in Boston on May 30. And new for us, we're going to go international, at the ROTH Conference in London, England on June 18 to 19. We hope you can join us there.

As always, please feel free to reach out to us at any time, and we look forward to talking to you all again after our second quarter results. Thank you for your participation, and have a great day.

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Operator [85]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.