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Edited Transcript of AMOT earnings conference call or presentation 1-Nov-19 2:00pm GMT

Q3 2019 Allied Motion Technologies Inc Earnings Call

ENGLEWOOD Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Allied Motion Technologies Inc earnings conference call or presentation Friday, November 1, 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

Morgan Group Holding Co. - Research Analyst

* Gregory William Palm

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

* John Krulock;Millrace Asset Group;Analyst

* Richard Allen Ryan

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

* Scott Benjamin Blumenthal

Emerald Research - Senior Research Analyst

* 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. Third Quarter 2019 Financial Results. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations for Allied Motion Technologies. Thank you, Mr. Mychajluk. You may begin.

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

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Yes, thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion. Joining me on the call are Dick Warzala, our Chairman, President and CEO, and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our third quarter 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 were released yesterday after the market closed. If not, you can find it on our website at alliedmotion.com. On the website, you'll also find the slides that accompany today's discussion. If you are 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 have 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. Welcome, everyone. The effective execution of our One Allied strategy was evident in our strong third quarter operating results. We are also benefiting from the significant investments being made in engineering and developing market-based solutions to not only secure existing business, but to also address the emerging needs of our served markets.

Revenue was up 21% to a record $96.9 million (sic) [$96.6 million] driven by strong demand and market share gains in our Medical and Aerospace & Defense markets. We achieved solid organic growth of nearly 10% despite the continued softness in Europe as our sales, solution centers, technology units and production centers have continued to leverage our full capabilities.

Other highlights were around our margin enhancement, which reflected the impact of higher volumes and the effectiveness of our Allied Systematic Tools to improve performance in all areas of our business.

Gross margin expanded 140 basis points to 31.1%, and operating income grew 22% to $8.8 million with a margin of 9.1%. We have been expanding our lean initiatives by adding additional resources to help drive the process, both in Europe and North America, and by focusing on several areas of the business to drive continuous and sustainable improvements.

And although our bottom line was impacted by 8% per diluted share from foreign tax assessments that Mike will touch on, our operating results validate that our business is capable of generating strengthened earnings as we continue to grow.

From a market perspective, we continue to enhance our competitive position and improve our market diversification. While we were seeing increased spending in A&D, which drives higher demand for programs that we are already on, we have also taken some market share and we are winning new programs.

As far as Medical, it's more about winning new programs and our continued investment in engineering as we work on longer-term solutions. Given the long design cycle times, we are benefiting from our engineer-to-engineer approach to get in early on the product design process. These are exciting times for Allied as we continue to gain traction on becoming a global leader of application-focused solutions in the controlled motion industry.

With that, let me turn it over to Mike 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 TCI, which we acquired in December 2018. As Dick noted, revenue increased 21% or $16.5 million to a record of $96.6 million. Absent the FX headwinds of $1.6 million, revenue would have been up 23%.

Growth in the quarter was centered in Medical and A&D. Our Vehicle market was up a few points, primarily reflecting the legacy commercial automotive programs in Europe that, while winding down, are performing better than expected.

Our industrial and distribution channels were up, primarily due to the contributions of TCI. We saw continued domestic growth far outpace the general industrial softness in Europe, which was reflected in the increase of sales to U.S. customers of 59% of total sales.

Slide 5 shows change in our revenue mix by market and the growth of each market for the trailing 12 months ended September 30. The TCI acquisition can be found in industrial and distribution and accounts for the 171% growth in distribution. Over the last 12 months, our A&D and Medical markets had experienced considerable growth as we continue to gain market share with our precision engineered solutions.

As we've talked about in the past, growing these markets are an important element of our strategy to broaden the scope and diversification of the business.

Our margin expansion was certainly another highlight of the quarter. As depicted on Slide 6, our gross margin improved 140 basis points to 31.1%. This significant increase over the prior year period largely reflects higher volume as well as a favorable mix across a number of served markets, including the contributions from TCI.

The previously disclosed supplier issue remains a headwind that is still expected to impact us to the end of 2019, given the lead times on certain components. We estimate that the third quarter impact on gross margins to be approximately 60 basis points. We are on track with certification of the new supplier. So even once fully ramped in the third quarter of 2020, we only expect to claw back around half of the negative margin impact, given the new pricing terms.

Moving on to Slide 7. Operating costs and expenses for the quarter increased 140 basis points to 22% of sales, largely due to higher selling costs related to the additional personnel and incremental intangible asset amortization related to the TCI acquisition.

G&A expenses were up 10 basis points to 10.3% of sales, while E&D remained unchanged at 5.9% of sales. On the E&D line specifically, we've been able to hold that rate despite significant additions to the engineering group to support the company's growth and our ongoing investments in electronics and software, as we've become -- you see using less consultants and even subcontractors, given our enhanced internal resources.

Solid gross margin and cost management led to the 22% increase in operating income to $8.8 million, with operating margin expanding 10 basis points to 9.1%. The bulk of our operating structure is in place. However, we do plan to continue investments in our growth at a level that will provide for operating leverage. Interest expense increased to $1.4 million on higher debt balances that funded the TCI acquisition.

Turning to Slide 8, you can see our bottom line results. As Dick mentioned, we recognized 2 atypical charges in the quarter related to tax assessments in a foreign jurisdiction for a previous acquisition. These assessments resulted from the outcomes of the tax audit that disallowed certain deductions and identified a dividend prior to our owning the company. The withholding tax related to the dividend was for $384,000 and was recorded in other expense. We're exploring options to potentially recover this specific charge. The other audit adjustment resulted in a higher tax provision of $433,000, which elevated the tax rate for the quarter. As a result, net income was $4.6 million or $0.49 per diluted share. We do not expect these items to repeat and have provided adjusted net income and EPS so that you can get a feel for the core performance and better compare our results.

Adjusted net income was up 12% to $5.4 million or $0.57 per diluted share. 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.

Given the additional tax provisions, we've adjusted our fiscal 2019 tax rate expectations up to a range between 29% and 32% from a previous range of 28% to 30%. Adjusted EBITDA for the quarter was $13.6 million, up 26%, and as a percent of sales increased 60 basis points to 14.1%. We use adjusted EBITDA as an internal metric. We believe it is useful in determining our progress and operating performance. This, too, is a non-GAAP measure, so please review our reconciliation and the related disclosures.

Slides 9 and 10 provide an overview of our balance sheet and cash flow. At quarter end, total debt was $116.5 million, down $6 million from year-end 2018. Debt, net of cash, was approximately $108 million or 48.7% of net debt to net capitalization.

We generated strong cash from operations of $8.2 million in the third quarter, resulting in the year-to-date amount of $17 million. That's up 51% from last year's comparable period. Year-to-date, capital expenditures were $9.3 million and we're primarily investing for productivity improvement and growth initiatives. Due to the timing of certain projects, we adjusted our fiscal CapEx projection for '19 to a range between $13 million and $15 million, down from $15 million to $18 million.

Third quarter inventory turns were 4.6x, an improvement from last year as we have done a better job balancing our strong sales pipeline along with the tight supply chain.

And our DSO was at 53 days, slightly up from the sequential second quarter but down from 2018. Our capital allocation strategy is straightforward and has not changed. Our primary focus is advancing internal and organic growth initiatives as well as paying down debt to reload for future acquisitions.

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. As depicted on Slide 11, third quarter orders grew 7% year-over-year to $91 million. Absent unfavorable FX, orders would have been over $92 million, a solid level given the softness in Europe.

Backlog at quarter end was nearly $126 million, up 9% year-over-year. About 80% of our backlog is expected to convert in the next 6 months and approximately 92% over the next 12 months.

As a reminder, just a nominal amount of the $225 million in the several Vehicle market awards we previously announced are included in our reported backlog numbers. We are currently going through the appropriate approval processes for the first of 3 program awards and expect to begin shipments at very low levels at the end of this year.

We are still on track to begin ramping shipments in 2020 to full-rate production by the end of 2021, which would then continue for the following 6 to 7 years. As we look out, we are cognizant of the potential macro challenges, and we believe we are well positioned and confident that we continue to advance our strategy over the long term.

Specifically, looking to the fourth quarter of this year, as history has demonstrated, we do expect to see some seasonal weakness, especially given the actions of many of our customers in previous years.

We have a strong AST team, and we have enhanced those capabilities over the past year, which over the long term, should continue to yield results as we focus on operational efficiencies and improving our margin profile. It is important to note that we have and we'll continue to invest in our strategic areas of excellence, especially around electronics and software as we further build out our integrated solution offerings.

As you know, strategic acquisitions are an equally important element of our overall strategy. We continue to develop acquisition opportunities, and we remain consistent in our disciplined approach to ensure they are a good strategic fit with solid economics.

Our efforts to increasingly diversify revenue should continue to enhance our competitive position and create a more robust foundation of business, which we believe will help foster continuous and sustainable organic growth well into the future.

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)

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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Wow, record results in this environment. Nice job, pretty impressive stuff here.

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

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Thank you, Greg.

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

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Thank you.

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

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It would be helpful to get some additional commentary just on the end markets, given the really positive commentary. Obviously, looks like we had growth across all segments. Medical really stood out to us, I mean the motion control market itself, I don't think is growing 10% at this point. So a little bit more commentary on what you're doing right would be really helpful.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [6]

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Sure, Greg. I think a couple of comments there. Number one is we did -- you're talking about Medical standing out. And yes, we grew in the trailing 12 months, over 25% in the Medical market. And we also -- and I think what's even more encouraging about it is, with that growth, we continued to be -- to work on new and future designs for programs that are -- will be coming in the next several years. And we continue to have success on those areas. So it's a combination of our focus in the market, the technology we bring and the product set that we bring, and also our strong performance with certain customers in those market segments that we've had over the last several years. So I think you are correct, the motion market did not grow by a percentage we show. We believe that overall, based on the numbers we've seen, it's in the 2% to 2.5% range, and yet, we're able to, again, outperform or outpace that market growth.

A&D was also strong for us. It actually grew at a higher percentage than the Medical slightly -- by Medical. So again, certain programs that have -- that accelerated there. And I will tell you that we -- and it's another market area that we've been working on some long-term projects, and we are excited about the potential for continued future growth in that area.

Industrial, as Mike had mentioned, we got a strong lift from the TCI acquisition in Industrial. So again, it showed some significant growth. So overall, we're quite pleased. Even Vehicle grew for us over the trailing 12 months. And I think with all the publicity out there about what's happening in the markets, and especially our significant level of business that we have in Europe, I think it's quite encouraging.

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

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Yes, I'll echo that. Pretty impressive outperformance. Good to see that we're still expecting initial shipments of the previously announced Vehicle awards to commence shortly. You mentioned full run rate by the end of '21. So just trying to think between now and then, how should we be thinking about the ramp? I mean is it going to be kind of a steady build out? Is it going to be -- is it going to be more back half weighted towards '21 rather than '20? Maybe you can just kind of help us from a modeling standpoint.

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

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Yes. This year, we're really starting up a low rate continued -- our production lines have been installed. We're running live parts off the lines, okay? But that's typically the process. It's a step function. So as each program begins to ramp, additional product will be shipped off the line, validated, tested, ensuring that everything that had been submitted before continues in the same manner. So you'll see a step function as each program begins to ramp up. I will tell you that in 2020 -- mid-2020, you might -- you'll see the first step. You'll see the next step early 2021, then mid-2021, you'll see another step. And then -- and as we said, by the end of 2021, those programs will be in full production, and we'll start realizing the levels that we have currently on an annualized basis in the backlog, as well as our hope is we're going to have more.

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

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Well, that's good. But before we get to that, have you been in -- I'm assuming you have been incurring some level of costs this past quarter, maybe this entire year in Q4 without obviously recognizing any revenue associated with that. I mean has that been sizable? How much of a sort of a headwind has that been?

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

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Well, you'll see it in the CapEx primarily. And also, there are some direct expenses, but then some of it is capitalized into the line start-ups and so forth. But yes, we've had to go out and make some significant investments in the equipment and the lines that were being installed. And again, we don't start to see payback until later. Mike, maybe you want to add something to that?

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [11]

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Yes. I think we've talked in the past quarters too, about certain either tooling revenues or nonrecurring engineering revenues that were at 0 margin. So you've seen some of that in the mix. And then certainly, a portion of our engineering population and manufacturing population is dedicated to these efforts and there's cost associated with that. I think the thought is, though, that cost will continue to be there as we continue to grow with new programs in the future as well, though.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [12]

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Yes. Okay. And then so, Dick, just following up on that last comment you made, maybe you alluded to potential for additional awards. I don't know if that's incremental platforms here, if that's additional customers, but are you expecting more activity in this space over the coming years?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [13]

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Yes. I think we've talked in the past is that for those who may not know the history of, we became a part of this business -- or Allied became a part of us, I should say, is that we are -- we had some programs that when we acquired Globe back in 2013, during the acquisition, we knew that we were going to be going to end-of-life in the near future. And what we also saw during the process is that there really wasn't enough in the pipeline of future opportunities that would backfill for those that were going to be going end-of-life. So we saw a decrease in the level of shipments in this area. But what has been encouraging, and the reason why we announced these orders, is that we had talked about significant efforts being made to develop the business, and that since it's such a long-term process before you realize the benefit of the shipments, we felt it was necessary to let our shareholders know that there are some encouraging results out there that we wanted to report, although they would not be realized in the bottom line until the future.

So as part of that process, we clearly made decisions that this is not going to be win one and then sit quiet for a while. It was a continuous and never ending, and that's an effort that we weren't going to just stop by winning one and focus on just that, but we were going to continue looking at additional new opportunities and reach out into the market to, let's call it, diversify ourselves even more.

So while it's -- when you look at it as a percentage of our overall business, it's not particularly large. We see it as an important part of our business because it does give us critical mass, it gives us core unit volume, and we're able to leverage off that critical mass and core unit volume into some of the other markets that we're serving and we feel gives us a better competitive position. So it's certainly a part of our business going forward, one that we continue to focus on, and we absolutely have other programs that we're working on and that we hope to secure in the near future and in an ongoing basis.

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Gregory William Palm, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [14]

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Understood. Last one from me. The CapEx related directly to the -- what's called in the release off-road vehicle steering capabilities. I know you've talked about this a little bit in the past to some extent. But care to expand on what this exactly means and what you're working on here?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [15]

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Sure. So let's -- and I'll have Mike maybe expand a little bit more after -- I'll just start and let him jump in at some point here. When we talk about the CapEx and the total CapEx that's in our numbers here that we're revising our spend rates, we do 2 things. They're program related and -- which we get some contributions from our customers for both tooling and some cost in the capital equipment, but also we are making investments in our core technology as we move through to the next generations of our products. We work very closely with our customers to identify opportunities to improve pricing performance in the future, of course, getting their inputs and their cooperation to ensure that as we develop these new capabilities that they are part of the process. And they have to approve it and they have to go through significant testing to make -- to confirm that they are receiving what we say we're going to be giving them and that there is obviously a positive benefit to them as well.

So we're constantly looking at our core technology. And we're making investments to keep that ahead of the game and leading it -- leading that, so we're looking 2 to 3 years out as we make the investment. We start out by establishing a design, testing it and we look at what we are -- projected volumes are going to be and what other opportunities there are. And then we'll put the line in place and then leverage that for the years to come before we start working on the next one. So it's a continuous process. So I will tell you that the capital investments that we are making are both internal or core products that we see that it will give us a competitive edge in the future as well as project-based.

So Mike, maybe you want to add to that a little bit, or?

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [16]

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Yes. I don't know that there's that much to add to that. I think it's a good indication that the key customers that we work with in those markets continue to have faith in us. If we're not investing for the next generation of products, which is what those represent and the generation beyond that, then -- obviously, then it would be more of a cost concern for us.

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Operator [17]

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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 [18]

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So Dick, can you talk a little bit on TCI? I know a good portion of their business is oil and gas related. And what are you seeing there? And has that impacted TCI's results from you initially had projected when you made the acquisition?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [19]

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Sure, Dick. Yes, you're absolutely correct that oil and gas has -- we've had an impact with oil and gas this past year. And I will tell you that TCI is performing on a bottom line basis, as we expected, okay? As we built into our forecast. So they're doing a -- there's absolutely no change there. There has been -- on the top line, there has been an impact, but I would say to you, as a credit to that management team, they've been able to manage the business in a way that has protected the bottom line of the business. And they are working actively on diversifying the markets that they're serving. And with some new products and technology that they've introduced here in the last year, they're making very significant progress.

So oil and gas is an important part of that business. It's sometimes hard to predict. But if you look at oil prices, if they're down, you could expect our business to be down. As they go up, it seems to go up as well. But I will tell you that we're not discouraged at the drop, although it's -- let's -- I'll say to you it's in the 12% to 15% range of that market for oil and gas. We have offset that in some other markets with some new technologies that TCI has brought to the marketplace.

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Richard Allen Ryan, Dougherty & Company LLC, Research Division - VP & Senior Research Analyst of Industrials [20]

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That's good to hear. And the Medical side, you talked about, driven mostly by new projects. Is that with an existing group of customer base? Or is that customer base expanding? And maybe the same to comment in the Aerospace & Defense side?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [21]

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Yes. And on the same answer on both sides. Okay. The existing customer base in -- obviously, you're excited about getting new customers and new applications, and absolutely part of our strategy is to do that. But more importantly, I will tell you that we've developed long-term relationships with many customers, and we remain focused on retaining those customers and ensuring that we're going to get in on their next platforms as well. So strong performance, we're partners to them, and we want to be seen as a partner for them. So we're winning future projects with existing customers, and we're winning new projects with new customers, both -- in both areas.

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

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Okay. And on the supplier issue, getting through the certification process. Is this going to be a sole source? Or will this be several suppliers that you'll be working with going forward?

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

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You had to ask that question. No, really, what it is, is it's a contract manufacturing business, okay? So the -- typically, when you look at the volumes associated with certain applications and it's a contract manufacturer, I will tell you, we did a much better job this time around with selecting a contract manufacturer that's -- it's their business. That is their business. Previous supplier had some technical expertise in the areas that we needed support on, and they had a small subcontract business. Unfortunately, they had been a long-term supplier, but the contract manufacturing business there, where we were a significant customer of, I'm not so sure that it was capable of supporting the entire company that they had, which also utilize -- had an engineering capability that we had utilized as well. Is -- after Allied acquired Globe, Allied brought to bear a significant amount of new resources that could be utilized on future projects, and we did do that.

So I think our strategic decision by the supplier before that contract business maybe not be core for them in the future and we understand it. But there are many, many good contract manufacturers out there. And the key for us was to select one that's been in the business for a long time, is absolutely solid financially and will be sustainable for years to come. So typically, you don't split your production of board assemblies on different lines because you lose the leverage of volume, but I'd say to you it's a much more careful decision that was made in selecting the right supplier in that business, okay. So I'm not saying this in a way to say that it's bad that we have a sole source contract manufacturer. We do. That sole source contract manufacturer -- we have multiple contract manufacturers, but the selection of this one was a solid supplier that's been in the business for a long time and is financially sound.

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

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And congratulations on a good quarter, guys.

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

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Thank you very much, Dick.

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Operator [26]

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

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Brett Kearney, Morgan Group Holding Co. - Research Analyst [27]

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Congratulations, continue to see the results from work you've been doing for years. First question, Aerospace & Defense, terrific to see the progress there, executing on your diversification strategy. I was wondering, even at a high level, the solutions you're bringing to that market, could you provide any more color? I guess the specific, any detail on the unique offering you're able to bring to customers there?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [28]

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Sure. I would -- again, the ability that we have today, I mean, is if you go back in time and you look at the history of the A&D business within Allied and the companies that we acquired, most of it was component sales -- and I'd say most of it, more than 50% was component sales. And there was another amount that would have been from solution or actuator offerings. What we are seeing today is that more of the requested solutions are for actuator type solutions, meaning that they're leveraging technology that we have in several areas to come up with a solution. So we see that as what's generated some new business for us and the opportunities we have in the future to continue to grow there. I won't -- I don't downplay when I say a component business, for example, saying a high-performance motor-only sale in certain systems because we will continue certainly to do that. But it is the actuation systems that we have seen some fairly good growth in and opportunities for additional growth in the future.

We did exhibit at the RV show in Washington, D.C. And we feel very confident that some -- based on the contacts that we made at the show that there's additional opportunities for us. So again, more and more in the solution set offering, which is what Allied has been able to bring by creating solution centers and having the ability to tie the components together into a more solution-based for -- applications for our customers.

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Brett Kearney, Morgan Group Holding Co. - Research Analyst [29]

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Terrific. And then if I could ask one more. On the new Vehicle market awards, I know they start to diversify you customer base-wide. Could you provide anything broadly application end market there, commercial truck, off-highway? And I know there's some flexibility in terms of actual program launches and ramps. You seem pretty confident in your production schedule. But what are you hearing in terms of, I guess, the customers sticking to production schedules at this point?

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [30]

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Well, I think they vary. It's just -- we're clear about some of the applications we're in because we certainly hear an awful lot about automated guided vehicles, autonomous vehicles, electric vehicles and so forth. And the types of applications where in the majority, it doesn't matter whether the type of vehicle it is, and I think because the electrification actually helps us. So we have seen programs, both get pushed out a bit, decreased in volume. But we've seen in other areas where we've seen some increases. Rare to see accelerations because the long approval process, long design and cycle time approval process you go through. But -- so I'd say it's a combination. As Mike mentioned, even in Europe, where we saw our automotive type business actually performed a little better than we expected, it's -- we're such a small part of that market. And we are really application specific. I will caution everyone that when you see the automotive market is going up or going down, because of the niches that we play in, it may not necessarily impact us in a positive or negative manner. And so -- again, very well focused. We see electrification as a positive for us, not as a negative. We're used in all types of vehicles. And programs have been delayed in some cases, quantities have gone down, but we've also seen some where we've seen an increased volume demand.

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Operator [31]

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(Operator Instructions) Our next question comes from the line of Scott Blumenthal with Emerald Advisers.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [32]

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Congratulations on the quarter.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [33]

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Thank you, Scott.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [34]

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Mike, you talked about a little bit of oil and gas that comes with TCI. And when you do your breakdown by market, end market revenue, would we find that in Industrial?

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [35]

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Yes, the answer is yes. You may also find it in distributions. It's a little bit of a mixed bag, depending on how it goes to market, whether it's direct to an OEM or -- there's a number of paths. So it's a little tough to say it's in one bucket, but it's clearly either distribution or Industrial.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [36]

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Okay. That's helpful. Dick, can you -- you did mention the engineering and software resources and how you've been growing those over the past year, 18 months or so. Can you kind of compare for us or give us an idea as to the magnitude of how you're staffed right now compared to where you were last year? And I guess that kind of gives us an idea as to your ability to continue to work on some of the upfront project work that needs to go into some of these new programs that you're working on for your customers?

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

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Sure. Very good question. I will tell you that beginning of this year, we added a resource to manage our global electronics team, which we internally call GET, global electronics team. And prior to that, you would have seen -- and let's say, a year ago today, you would have seen several smaller teams operating, I'll say, loosely in a coordinated manner. But also, we had a more heavy use of outside consultants to supplement what we felt were certain current demands in order to meet the requirements of the project time factor. So we made a conscious decision that what we would do is that while it was -- when we were looking at the projects, 3, 4, 5 years ago and estimating what the demands would be, requirements on resources and that once we completed the projects, those demands would go away, what we realized is that they were never going away. They were just going to be redeployed on new projects and new opportunities. And as we were accelerating the utilization of electronics and software into our solution offerings, that it was necessary to start staffing at appropriate manner internally and to retain that capability and know-how. So that's essentially what we did. We began adding critical resources. And we're a decentralized group and that's a little bit more difficult to manage.

But on the other hand, it gives us access to resources in many areas around the world rather than to be in just stuck in one location. And as we know, engineering resources, they've been -- it's a tight supply chain out there right now for availability. And so I think we've done a very good job of getting organization around the teams, getting a coordinated effort, getting them really working closely together and managing to the project schedules that we've committed to. And now the cost that we have, we have more resources available to us today than we had a year ago at a similar cost because we've been able to bring the resources internally that, again, we'll retain for the long term. So it's been very encouraging. And we don't see an end to it. We see that this will continue to be a need into the future, and we're certainly looking at how we can best utilize the -- our global presence to enhance that as we go on down the road here in the future.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [38]

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Okay. That's really helpful. Would you say that you have now 25% more resources, 35%, 50% or...

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

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(inaudible) No. I'd say reality, 15% to 20%, the max. Again, we still do when necessary, call upon the outside consultants if they bring a specific area of knowledge that, again, we're going to use it at a one-off basis and it gets us there faster, but the reality is the cost savings of bringing them internally versus having the external consultants, and it's really the loss of knowledge that you'll have once they leave. So I'd say to you a fair number is, let's just say, it's 15%.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [40]

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Okay. That's helpful. And I guess my last one, since I think I'm going to see you very soon. Mike, can you give us an idea as to how you see this very large, what I'd call, shadow backlog kind of moving into backlog over the course of time?

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Michael R. Leach, Allied Motion Technologies Inc. - CFO [41]

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Yes, well, I think Dick did a good job describing how it was going to come into production from a full rate standpoint. And I think the backlog will follow in a similar way with perhaps I'd suggest a 3 to maybe a 6-month advance window to that ramp-up in production. I think it will very much match that with again, I think as we've talked in the past, most of our backlog will be shipped in that time frame, a 3- to 6-month time line. So depending on how we work with these customers in identifying firm releases, it will flow in that way.

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Richard S. Warzala, Allied Motion Technologies Inc. - Chairman, CEO & President [42]

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Yes. And I think a little -- maybe a little -- add to that a little bit. Because of the way we actually put orders into our backlog, and given that we will have a steady run rate for that 6- to 7-year period, if you look at the magnitude of it and say, okay, it's $225 million, and let's just use, for an example we're going to do it over 7 years, take $30 million a year, that will move in and out of backlog, okay? And possibly, as we release it to the backlog based upon a firm production ship date, you might see, and this is not going to increase our backlog to any great extent because we're going to be moving this product through on a regular basis, which is good because our inventory turns are going to be high and so forth. So you might see our backlog increase, let's call it, in 2021 by $10 million to $15 million and -- but that would be steady state. That won't continue to increase. We'll just be moving it in and out.

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Operator [43]

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Our next question comes from the line of John Krulock with Millrace.

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John Krulock;Millrace Asset Group;Analyst, [44]

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Congrats on a great quarter.

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

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Thank you, John.

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John Krulock;Millrace Asset Group;Analyst, [46]

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Just in light of the strong results this quarter, can you just talk a little bit more about what you're seeing in Europe? And you had mentioned that you are winding down, I guess, projects there. Just little bit more color there with respect to the near term, I guess, making up for projects that are winding down?

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

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Well, [John], I don't know where we said we are winding projects down in Europe. I mean end-of-life on automotive contracts that we had we announced about in prior years, and those being replaced by these new contracts that we had. That's basically the wind down and the ramp-up of these new contracts, okay? So that's -- and that's not a specific area.

With regard to everything else in the market, I wouldn't say a winding down of any manner in any of our projects. I would say to you that there's always some ebbs and flows within certain markets and projects, one generation coming to end and a new generation occurring. So then you always have some decisions that you're making on your product transitions and so forth. So that's a normal part of the business. But I would say to you, just like in North America, Europe is very active on new programs and new projects that we're confident it's going to generate continued growth in the future.

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Operator [48]

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There are no further questions in queue. I'd like to hand the call back to management for closing remarks.

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

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Okay. Thank you, everyone, for joining us on today's call and for your interest in Allied Motion. For those of you interested, we will be attending the Baird Global Industrial conference in Chicago on November 5. As always, please feel free to reach out to us at any time, and we look forward to talking with all of you again after our fourth quarter results. Thank you for your participation, and have a great day.

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Operator [50]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.