Nov 12, 2015
Operator
Hello and thank you for standing by. Welcome to the Allied Motion Technologies Inc.
Third Quarter 2015 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded.
[Operator Instructions] At this time, I would like to turn the conference over to Sue Chiarmonte, Vice President and Treasurer of Allied Motion Technologies. Please go ahead.
Susan Chiarmonte
Thank you, operator. And thank you all for joining us on the call today.
We distributed our earnings press releases last week and copies are available on our website at www.alliedmotion.com. Today’s call is being broadcast live on the Internet and will be available for replay immediately after the call for 90 days.
To access the Internet broadcast or replay, go to the company’s website, click on the Investor Relations page and then click on the webcast icon. As a reminder, please note that the Safe Harbor statements included in the press release dated November 4, also apply to all comments made on this conference call.
I will now turn the call over to Dick Warzala, Chairman, President and CEO of Allied Motion Technologies.
Richard Warzala
Thank you, Sue, and welcome everyone to our third quarter 2015 conference call. Here is the plan for today’s call.
I will begin with the highlight of the results and will then turn the call over to Mike Leach, our CFO, who will provide you with a more detailed financial review. After Rob returns the call to me, I will further elaborate on our press release and provide you with some additional insight as to the activities and opportunities we see for the future.
Once that is complete, I will then open the mics for questions. Now for some brief comments before I turn the call over to Mike.
Rather than waiting for questions, let’s start by answering the one question we have received as to why the conference call is being held approximately one week after the earnings release, the simple answer is that we have a relatively small corporate team and based on business activities and travel schedules, it was a logistics issues and nothing more. With regard to our results, the strength of the U.S.
dollar against foreign currencies continues to have an impact on our reported results when comparing the third quarter and the year 2015 versus the third quarter and the year 2014. Reviewing the results on a constant currency basis Allied Motion revenues were flat for the quarter and up 4% for the year.
Fully diluted earnings per share were up 11% for the quarter and 26% for the year. We believe that the U.S.
dollar will remain strong in the short term and therefore we must continue to execute our long term strategy and focus on factors within our control to improve operational efficiency and generate real growth in the future. After Mike completes his financial review, I will then provide you with more information as to what Allied Motion is doing to improve shareholder value in the future.
Mike, I will now turn the call over to you.
Mike Leach
Thank you, Dick. As was reflected in our press release that was posted on November 5, the company achieved net income of $4.3 million or $0.46 per diluted share for the quarter ended September 30, 2015 compared to net income of $4.1 million or $0.45 per diluted share for the same period last year.
EBITDA decreased to $9 million in the quarter from $9.5 million for the same period last year and adjusted EBITDA, which excludes stock compensation expense, decreased to $9.4 million in the third quarter compared to $9.9 million for the same period last year. Revenues for the quarter were $61.5 million compared to $65.3 million for the quarter ended September 30, 2014.
This is a decrease of 6%, which is primarily due to the currency impact of the U.S. dollar strengthening against the euro and Swedish Krona.
Looking at our total sales for the quarter, 66% were to U.S. customers, a 2% decline from 68% in the same period last year with the balance of our sales to customers primarily in Europe and Asia.
The 6% decrease in revenue reflects lower sales from both our U.S. TUs and our foreign TUs.
Bookings for the quarter ended September 30, 2015 were $55.1 million compared to $66.7 million for the same period last year or a decrease of 17%. Of the total decrease in bookings of $11.6 million, $8 million is due to volume decreases and $3.6 million is due to the strengthening U.S.
dollar and the ultimate translation of foreign currency to U.S.D. Backlog decreased $7.8 million to $67.8 million at September 30, 2015 compared to $75.6 million at June 30, 2015 and backlog is down $13.1 million from $80.9 million at September 30, 2014.
Our gross profit margins increased 1% to 31% remained compared to the same quarter last year and are up 1% when compared to the quarter ended June 30, 2015. The increase in margin is primarily due to changes in seismic [ph] and improved operational effect.
Total selling, G&A and engineering expenses were $0.4 million for the quarter as compared to the same prior last year. This decrease is primarily due to the reserves made in 2014 related to a pricing dispute, which was settled in the fourth quarter of 2014, along with lower incentive compensation, legal and consultant cost.
Depreciation and amortization expense of $1.09 million was consistent with the same period last year. Interest expense decreased for the quarter to $1.5 million from $1.6 million for the third quarter of 2014.
We had $1 million of capital expenditures during the quarter compared to $1.6 million for the same period last year. For the nine months ended September 30, 2015, the company reported net income of $10.4 million or $1.12 per diluted share compared to net income of $9 million or $0.98 per diluted share for the same period last year.
Adjusted EBITDA increased to $25.7 million for the nine months year-to-date compared to $24.5 million for the same period last year. Revenues decreased 3% to $181.6 million compared to $187.8 million last year with sales to U.S.
customers down 3% compared and foreign sales down 4%. Of the total 3% decrease in sales, 7% is due to the dollar strengthening against the euro and Swedish Krona, partially offset by a 4% increase in sales volume.
Bookings for the nine months year-to-date were down $16.8 million to $177.8 million compared to $194.6 million for the same nine months last year. The total decrease in bookings is comprised of decreased volumes of $3.6 million combined with an unfavorable currency impact of $13.2 million.
Gross profit margin achieved was 30% for the nine months compared to 29% last year, which primarily reflects sales mix. Selling, general and administrative and engineering costs decreased by $1.9 million compared to the prior year-to-date.
This decrease, as mentioned earlier, is primarily due to the reserves made in 2014 related to a pricing dispute, which was settled in the fourth quarter of that year, along with reduced incentive compensation and consulting expenses. For the nine months, depreciation and amortization expense increased $0.2 million from $5.4 million to $5.6 million while interest expense was down $0.4 million to a total expense of $4.5 million due to lower debt balances.
Also for the nine-month period, we had $3.7 million of capital expenditures compared with $3.2 million for the same period last year. The company had $17.9 million of cash on hand at September 30, 2015 compared to $11.3 million at June 30, 2015 and $13.1 million at December 31, 2014.
During the quarter, our cash position increased $6.6 million and cash from operations generated $10.1 million. Major uses of cash for the quarter were debt and interest payment and capital expenditures.
Total outstanding bank debt at September 30, 2015 was $70.7 million compared to $73.3 million at June 30, 2015 and $74.8 million outstanding at December 31, 2014. Net debt repayments were $2.5 million during the quarter and $4.1 million during the first nine months.
Our debt net of cash position decreased $8.9 million during the first nine months of 2015. Our DSO decreased to 44 days at September 30, 2015 from 50 days at September 30, 2014 due to the resolution of a pricing dispute in the prior year, and its related due balance and is comparable to 44 days at the end of 2014.
Inventory turns decreased to 6.0 turns at September 30, 2015 compared to 6.1 turns at September 30, 2014 and were comparable to 6.0 turns at the end of 2014. Our net stockholders’ equity at September 30, 2015 was $63.9 million or $6.88 per share compared to $54 million or $5.85 per share at the same time last year.
And finally, our Board of Directors declared a $0.025 per share cash dividend that is payable December 2 for shareholders of record as of November 18. I will now turn the meeting back over to Dick Warzala.
Richard Warzala
Thank you, Mike. In the earnings press release posted last week, I made the following statements.
The strength of the U.S. dollar continues to require a more detailed explanation when comparing our reported results to reflect the real change year-over-year.
Measured in constant currency, revenues for the third quarter of 2015 would have been on par with the prior year and fully diluted earnings per share would have increased 11% compared to the same quarter in 2014. Year-to-date, revenues would have increased 4% and fully diluted earnings per share would have increased 26% as compared to the same period in 2014.
For the quarter, we experienced growth in our electronics and medical markets while our aerospace and defense, industrial and vehicle markets were down. While the overall market has not met our improvement expectations during the year, we continue to focus on improving internal operational efficiencies through the utilization of our Allied Systematic tools.
With strong cash flows and a continually improving debt position, we believe we have the required resources to enhance our growth opportunity through strategic acquisitions in the future. The long term success of our company will be further enhanced by executing our strategy and leveraging our full capabilities to design innovative motion solution that changed the game and meet the current and emerging needs of our customers and our served market segments.
I’ll now provide more color and expand on the comments I made in the earnings press release. As stated on a constant currency basis, year-to-date revenues would have increased 4% and fully diluted earnings per share would have increased 26% compared to the same period in 2014.
We believe the constant currency method is a good means to help our shareholders better understand our performance. As noted, the constant currency method demonstrates the real growth in both revenues and earnings which has occurred at Allied Motion.
With regard to our markets for the quarter, we experienced growth in our electronics and medical markets when our aerospace and defense, industrial and vehicle markets were down. We are very well diversified in our served market and we plan to continue our diversification strategy to mitigate the ups and downs of our served markets in the future.
When building our plant for 2015, we had forecasted a relatively flat first half and modest growth beginning in the second half of the year. As reflected in our bookings our served markets have not responded in the expected manner as demand continues to be relatively flat and our customers are balancing their actual demand by adjusting their delivery schedules to reflect the slower than anticipated economic growth we are currently experiencing.
The impact on Allied Motion is that instead of seeing new replenishment orders, some existing orders have been stretched out to cover the current real demand of our markets. Also, as evidenced by historical data, quarterly bookings can be impacted by the timing of when blanket or frame orders are actually placed by our customers and a longer term view is a more accurate reflection of real market demand.
Once again it is important to understand the real increase or decrease as reflected on a constant currency basis. Therefore, looking at our bookings on a constant currency basis, bookings are actually down by 1.8% or $3.6 million year-to-date 2015 versus year-to-date 2014.
We continue with strong cash flows and a continually improving debt position we believe we have the required resources to enhance our growth opportunities through strategic acquisitions in the future. As we reported for the quarter, cash from operations generated $10.1 million and our cash position improved by $6.6 million to $17.9 million of cash on hand at the end of the quarter.
Year-to-date our cash net of debt has improved by $8.9 million. A 1% improvement we reported in our gross margin is a result of sales mix and a conscious effort to increase the value of sales by emphasizing system sales whenever possible.
With our strong cash flows and our continually improving debt position, we believe that Allied Motion is in an excellent position to execute our strategy and enhance our growth through strategic acquisitions in the future. In conclusion, the press release stated the long term success of our company will be further enhanced by executing our strategy and leveraging our full capabilities to design innovative motion solution that changed the game and meet the current and emerging needs of our customers and our served market segments.
As mentioned several times in the past, at Allied Motion we believe that success is driven by having a sound long term strategy supported by a strong focus on ensuring that the strategy is effectively executed and deployed. And as always we will utilize Allied systematic tools to drive continuous improvement in quality, delivery, cost and innovation throughout Allied Motion worldwide.
And with that, I will now open the mic for your questions.
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions] .We will pause as callers join the queue.
Unidentified Analyst
What I can do. We do have some questions as usual that have been emailed in and I can start that process up with that and then we can go to any questions that are in the queue.
So let me start by one of the question that came in. Can you please example why you continue to discuss a result on a constant currency basis?
And how long do you intent, continue doing so into the future?
Richard Warzala
I think this is best answered by providing an example of the currency impact on our revenues and we'll do so with approximate, not exact numbers, just simplify the process. With approximately one-third of our sales year to-date coming from Europe, our currency impact on our European sales has had a significant effect on our reported sales throughout the year.
We should note that 2014 began with the U.S. dollar at a $1.37 versus the euro.
The euro then peaked relative to the dollar at $1.39 in March of 2014 and gradually decline to a $1.22 at the end of the year. Currently, we're at US$1.07 to the euro.
Now to keep it simple, if we increased our sales in Europe by the decline in the value of the euro that what we'd refer to as a constant currency basis than 2015 year to-date sales in Europe would be $72 million instead of $60 million we've reported due to the exchange rate differential. Now therefore, instead of reporting $181 million of revenues in 2015 year to-date which is decrease of 3% on a constant currency basis, we would have reported $193 million in revenues year to-date, which is an increase of 3%.
Overall, that would represent a 6% swing in a numbers due to the currency impact of our sales in Europe. So I think that shows you that it does have a major impact and that we would expect at the end of this year it will have stabilized and the differential between 2016 and 2015 will probably not be as great and we would probably discontinue the process of announcing or reporting additional numbers on a constant currency basis.
So I hope that answers the question. If doesn't than please come out back in, and operator, I'll turn it back over to you to see if there's any questions
Operator
Thank you, sir. We have a question from Sam Schaefer of Global Value Research Company.
Please go ahead.
Sam Schaefer
Thank you for talking my call today. Dick, can you just elaborate with respect to the change in FX particularly the euro.
How are you hedging that unknown?
Richard Warzala
Okay. Mike, do you want to share that one.
Michael Leach
Currently we are not hedging that exposure, although we're always looking or analyzing when or if it is a right approach to take. Relative to, I guess, that's most relative to non-cash transactions.
If certainly, if we have significant cash movement to the U.S. dollar or back in forth, we certainly take the opportunity to hedge those activities.
Sam Schaefer
Thank you. Second question, with respect to the $30 million in sub debt, is at a relative high rate.
What are your plans or intensions to try to distinguish that debt?
Michael Leach
Distinguish the debt or extinguish the debt?
Sam Schaefer
Extinguish the debt?
Michael Leach
Yes. Okay.
Our plan to at this point, if we're looking at it today based upon our cash generation in the lines of credit that we have available to us, we won't tend to fully pay at all. I think we've mentioned this in the past that we're obligated to pay the interest on that through the October 18th of 2016, so there's really no advantage for us to pay it off.
We're going to pay the interest whether we keep the debt on books or not. So, our plan would be looking at October 16th of or 18th of next year we would then proceed to pay it down -- pay it all.
It’s a heavy impact.
Sam Schaefer
Yes, understood. Is your cash build in part in anticipation of having some amount of that debt paid in cash, some amount refinance or is it conceivable, you'll simply go back to your senior lender and try to repackage all of your debt include the remaining part of that $30 million?
Richard Warzala
Yes. Even when the line of credit placed, we're already talking to our senior lenders and they were already talking to us about taking that out to when it came to the appropriate time in 2016.
Now, I would say that if we come to that point in time, we never done anything else with our cash, okay, than we maybe incline to pay that down using cash. We also have to remember some of our cash that's sitting in Europe.
We really don't want to repatriate it to and get expose to the taxes on that when we believe we'll have uses for the cash in Europe in the future. So, we will definitely either recapitalized and/or pay it down if we have adequate funds and the line of credit available to do so.
Sam Schaefer
Thanks. And last question, I have segway nicely.
If you're talking about strategic acquisitions presumably based on your comment some of those maybe European based. Can you give us any additional color in terms of what that pipeline looks like potential size, potential impact and I would complement you on the Globe acquisition, I think you've done a beautiful job with the integration of that?
Richard Warzala
Well, thank you very much. I guess I slipped a little bit and the cash was there and that's what we were doing.
Now, we're actually – we have several acquisitions that we're looking at currently. And again, those are hard for me to say you that how definite the completion of those are going to occur, where they going to occur.
But I can tell you that we're looking around the world and we're looking for – and we have identified strategic areas that we feel it will be a good set for us. So it's fair to say that yes, Europe is one of our target market and we'll continue to look in Europe, as well as North America and Asia.
Sam Schaefer
All right. You mentioned about a third of your sales are European, rough numbers, all the foreign sales that you're reporting on your – in your filings amount to about a third.
Should I think about all of your foreign sales is coming from Europe or is that just around or in that dominant amount or some amount of foreign sales come from other parts of the world?
Richard Warzala
There are sales from Asia, but the dominant part is definitely coming from Europe. And what I'd mentioned and there are also sales in the Canada, so I don't want to just represent that.
And if you referring to the example, I kind of did to simplify the process, Mike had given you the exact numbers of the sales, the foreign sales versus the U.S. sales.
So mine was to put it in perspective in terms of what the magnitude of the currency exchange rate impact is on our reported number, but fair to say, that the bulk of the sales are from Europe.
Sam Schaefer
Appreciate. And I just trying to understand a little bit more about the FX exposure you have.
Is euro, is it Renminbi, is it yen, is it Canada dollar, which would bear little bit differently just in terms of that the impact. So appreciate it.
Thank you. And good luck.
Richard Warzala
Okay. Thank you very much.
Michael Leach
Thank you.
Operator
[Operator Instructions] Our next question comes from Michael McCroskey of Princor Securities. Please go ahead.
Michael McCroskey
Good morning, gentlemen.
Richard Warzala
Good morning, Michael.
Michael McCroskey
Once again the internal as far as the management, excellent margin expansion, everything internal good, the booking change in momentum stands well [ph] and I know you've address that somewhat, but can urge you to go a little deeper to where you give us a better feel of, look, this is just overall market, we don't know, I mean we had expectations to see some expansion at this time period. Can you give us any sort of feel, has any of this got to do, one things that’s often mentioned and all of this is China, how should ramp situation there?
Let me stop there and…
Michael Leach
Okay. Let's go back with your China ramp question.
We – that's going on very well. I think as we've mentioned here, what I think, it is going on very well.
We transferred production from a subcontract manufacturer to our own manufacturing facility in China. And we ramped and I'm not going to say that, it's been 100% perfect.
We've had some challenges along the way, but most important thing along the way has been making sure our customers don't get hurt and effectively done. Now we are almost fully ramped up to our expected production output.
At this time, we put the plan together and we're very, very close and continuing to remain encourage there. As far as booking, I'll move on, Michael, unless you have question about what I just said there.
So I'll stop there and see if there’s any additional questions you have.
Michael McCroskey
No. That's the great update on China and that's exactly what I was looking for.
Michael Leach
Okay. With regard to bookings I did state in call here.
What we've seen – our expectation when we put our plan together was that we're going to see the economy starting to improve, relatively modest improvement coming into the second half. I will tell you that when you look at the bookings number, we're 1.8% down.
That's impacted quite heavily on blanket orders or frame orders as we call them, because if the demand – customer put their demands in a year in advance and if the demand that they are seeing is not up with that than what we'll see is that as it gets later in the frame order they will be pushing the schedule out. So we've seen some of that, and I can't say it's across the board, but we are diversified at our market that we've seen some of that.
So there has been I call them mild push outs where reschedule, not cancellation, reschedule out the future date and we're working with our customers. We also see -- unfortunately in the fourth quarter the customers typically when we look back about historically companies will push their demand pass the end of the year into the first week of the next year, so they are not carrying inventory especially large public company.
So that has an impact on us too. So instead of getting new orders, replenishment orders we've seen some extending of schedule to a certain extent, right.
We are – what we are working on and I think and maybe I'll blend into it is, for example, some of the bookings that are coming in now and some of the projects we've been working on, they are very encouraging, encouraging from the standpoint that you've seen the gross margin expansion of slight one, it’s a conscious effort on our part to sell more value at more elements of our solutions into this sale and we believe that adds additional available value for our customers. Our integrated solutions save our customers time and money and the installation process and it's really with them relying upon us for so-so situation.
So, I think we've seen some very encouraging signs of long term projects that are coming to fruition and those will drive gross margin improvement or should continue to drive gross margin improvement into the future that somewhat offset by the long term contract that we have and those long term contracts in some instances not a lot, but some instances that price down in this future. So in addition we do have to work on the improving cost situations to maintain margins, but the price downs also have an impact on our booking.
So that will be reflected as the years move on in those contracts and the price down starts to hit up we will see a decrease in bookings. We are not discouraged at all.
I would tell you that we were very encourage by projects that we're working on, some significant projects in all areas of the world, in our served areas, Geographic Region, Asia, North America and Europe. So we're very encouraged by what we see.
And we're optimistic that the company will continue to show growth in the future. So, please go ahead, if there's any there I didn't answer I'll try to add a little bit more to that in case you're looking for some additional reasons.
Michael McCroskey
No. That's pretty what in a shorter version, what I guess I'm looking at is our – if we call them headwinds are more macro as opposed to your positioning peer-to-peer with your competition is still where you want it to be as far as [Indiscernible]?
Michael Leach
Always we want more, so never satisfy and pushing to make sure that we drive it further. But I would say within our expectations, but we're going to push harder to accelerate the growth of the company.
Michael McCroskey
Sure. Last question real quick, your cash position were about 17.9 just on pure cash line.
How much of that is foreign versus U.S.?
Richard Warzala
Good question. Mike, do you want to take that one.
Michael Leach
In real rough numbers, it’s probably 60% to 70% foreign, the balance is the U.S.
Michael McCroskey
Interesting. Okay.
Richard Warzala
And the impact to that as you can imagine if you're doing like cash comparison and the FX impact on what we consolidate back into on top of that, so, but Mike's numbers are right in line where they are and I would say here that, again, if we had a constant currency basis since last year you could increase that a quite a bit.
Michael McCroskey
Totally understood. That supports little higher than I thought it was, so, totally understood.
Richard Warzala
Okay. Well, we can explain that a little bit of why that occurs, is that our debt or U.S.
debt. So all the cash that we generate in U.S.
pays off the interest, pays off that's make debt payment, whereas cash in Europe sits there, cash in China or Canada sits there. And unless we have a need we don't bring it back because this going to cost us money to bring it back.
Michael Leach
We have always found a good way to use that money, so you just go [Indiscernible]. Hope you will.
Michael McCroskey
Thanks, Michael.
Richard Warzala
Okay. Thanks again Michael.
Operator
There are no further phone questions at this time.
Richard Warzala
Okay. Thank you, operator and thanks very one for participating in the call.
We appreciate it. And we will be talking to you soon.
That will conclude the call on our side.
Operator
Thank you. This concludes today's conference call.
You may now disconnect your line. Thank you for participating and have a pleasant day.