Thank you for standing by. This is the conference operator. Welcome to the Allied Motion Technologies Second Quarter 2017 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Craig Mychajluk, Investor Relations for Allied Motion Technologies. Please go ahead, Sir.

Thank you. And good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion Technologies. Joining me on the call are Dick Warzala, our Chairman, President and CEO and Mike Leach, our CFO. Dick and Mike will review our second quarter results and provide an update on the company's strategic progress and outlook. After that, we will open it up for Q&A. You should have a copy of the financial results that were released yesterday after the market closed. And if not, you can find them on our website at alliedmotion.com. You will also find on the website, if you have not received them yet, the slides that accompany today's discussion. If you are viewing those slides, please turn to slide 2 for the Safe Harbor statement. 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 would like to point out as well that during today's call we will 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 today's earnings release. So with that, if you turn to slide 3, I will turn the call over to Dick to begin.

Thanks, Craig. And welcome, everyone, to the call. The second quarter results were generally in line with our expectations. As a company, we are making very good progress organizationally as we continue to align ourselves to better support our target markets and customers. Additionally, we are actively recruiting new sales partners which we have appropriately names Allied Solutions Providers, or ASP, to reflect the major role they will play in providing additional technical and application support as we develop new opportunities. We have signed two new ASPs to date and we have plans to add 5 more by yearend. While this channel is a relatively small contributor to our current revenues, we do view this channel as a vehicle that can significantly expand our reach and enhance our growth prospects in the future. We are seeing a strong response to our solutions for factory automation which drove notable growth within our industrial and electronics market in the quarter. Unfortunately, continued softness in our served vehicle markets from both off-road and automotive masked those gains. On the positive side, new projects will ultimately fill this temporary void as evidenced by the major contract award we announced last quarter. Over the last 12 months, our Medical, Industrial/Electronics, and Aerospace & Defense markets have experienced considerable growth and now make up more than 50% of our revenue mix, up from 44% at last year's corresponding period. We continued to demonstrate our ability to generate cash in the quarter and utilized it to invest in productivity and growth initiatives as well as to further reduce our debt level. Although revenue was slightly down, we had a solid quarter of orders and our backlog was at a record high level of $85 million. In our earnings release, we announced our plan to reorganize and realign…

Thank you, Dick. Please refer to Slide 4. Revenue was $60.3 million, down 8% in the quarter compared with the prior period. Excluding $1 million of unfavorable FX impact, revenue was down less than 7%. Sales were down $1 million or 2% in the trailing first quarter. As Dick mentioned, we had a strong quarter of sales to the Industrial/Electronics market as well as a significant increase in distribution sales. Those gains were offset by the continued sluggish demand in the Vehicle market, particularly the off-road business and also the timing of some Aerospace sales. Sales to U.S. customers were 54% of total sales for the quarter compared with 55% in the same period last year. Slide 5 shows the change in our revenue mix by market. These values are on a trailing 12-month basis compared with the corresponding prior year period. As you can see, the headwinds in the Vehicle market have significantly reduced that market's revenue contribution, while we have seen considerable growth in Medical, Industrial/Electronics, and Aerospace & Defense helping to pick up that gap. Note that within the other category is our Distribution business. It is currently small, but growing nicely and we will break it out as a separate market once it gets to be a more substantial piece of our overall market mix. Gross profit was $17.9 million or 29.6% of revenue compared with $19.9 million or 30.2% for the second quarter last year. The modest decline in margin was due to the lower volumes. Slide 6 provides details on our operating performance. Operating income was down $2.2 million and operating margin was 6.6% for the quarter compared with 7.5% last year. Our operating costs increased $244,000 or 2%, mainly driven by increased growth focused investments including E&D and technical and sales resources. E&D…

Thank you, Mike. We'll now turn to Slide 9. We had solid orders of $63.4 million in the quarter, which was a nice step-up from the trailing first quarter and the low at yearend 2016. Similar to the trailing 12-month trends in sales by market, our Medical, Industrial/Electronics and A&D market drove higher orders, helping to offset the softness we have been discussing in our served Vehicle market. We also saw modest increase in demand through our distributors. As I mentioned, we are at a record level of backlog which was up nearly 6% over the prior year period and a more substantial 9% since the end of the sequential 2017 first quarter. As a reminder, the time to convert the majority of our backlog to sales is approximately 3 to 6 months, although the recent incremental increase in backlog is slightly more long-term than typical. And as a result, we do not expect to see the full benefit of the increase until 2018. As we look to the remainder of 2017, we are working on several new multiproduct motion-control solution wins, many of which will ramp into production into the next year and beyond. We also received several development contracts that will lead to additional new opportunities going forward. The acquisition pipeline is fairly full with opportunities. But as has been our practice, we want to uncover the right strategic fit to expand our capabilities, extend our geographic reach, and add new customers. While we have sufficient financial flexibility, we will not stray from our consistent and prudent approach to any future acquisitions. Of course, a focus area going forward is furthering our North America reorganization. We believe this new structure will change the game for achieving improved organic growth and consider this transformative in organizing and executing our strategy. This is about positioning ourselves for long-term growth by better aligning the organization to enable us to win at our target customers and our target markets and to readily create scale. We are confident that our new structure will better enable us to leverage our custom engineered motion solutions to create value for our customers and ultimately our shareholders. With that, Operator, let's open the line for questions.

Thank you [Operator Instructions]. Your first question is from Dick Ryan with Dougherty. Please go ahead.

Dick, on the reorganization, it sounds like that's just another step in the One Allied strategy and approach. Or was there performance or productivity issues that is driving this reorg?

Yes, I think Dick, good morning to you and I think absolutely it is a continued step forward in our One Allied approach and that we do feel there are opportunities to improve productivity and to better align our resources. As you know, we've been made up of many small companies through acquisition and it's a continued work in progress to get everyone aligned to ensure that we're leveraging our resources. Whether it's sales resources, whether it's engineering resources, whether it's production capability, whether it's materials, to develop those synergies both from a selling and from a cost standpoint.

I think you mentioned retirements also. Is there a bunch of retirements coming through or is this just kind of normal course?

I'd say it's, I hate to call it normal course, but I would say that there have been several and I think it is a part of the process here as we move forward to position the company to scale it for future growth. So I think it's a combination of aligning our operations and also in the timing, in fact it does align with certain individuals that are in the organization today.

On the backlog, is there any additional color you can provide as far as how that will flow through in 2018? And are there any specific end markets that are stretching the deliveries of the backlog out at all?

Typically when you get into, as you know, I guess I can discuss and repeat it for those who may not be aware of what we put in our backlog. We only enter orders into our backlog that have firm shipping dates. So in many cases we work off of frame orders or blanket orders and off of a forecasted demand that customers are supplying. And then as it gets closer to the actual shipping date, we will then get a firm commitment and we will enter them as firm orders into our backlog. What happens is that some of them are fairly short term. We've got customers that they can drop an order in and we ship the next day and anywhere up to 6 or 8 weeks off of frame orders. We have others, and especially in Europe it's a little bit more frequent, where we can get an order that will spell out specific deliveries over a longer period of time. And that's essentially what we see here is that we have received a few orders that are stretching out with firm commitments for quantities and delivery dates. So that's what's put in our backlog. In the past, we used to book all the orders. As I mentioned, we do have another set of orders that are really not booked and are only booked when firm dates are provided.

Just a clarification, the distribution channel that you talked about increases, that's the Allied Solution Providers that you're seeking, right?

Correct. Now we do have some. In reality, our rep/distributor force today, we call agents. Europe, they're agents. But we see with the platformation efforts that we've had here in the last several years and particularly the addition of the Heidrive, the acquisition of Heidrive and their product portfolio, that we're better positioned today to serve the distribution channel or what we do call ASP. So yes, it's now putting many more feet on the street for us from a selling standpoint. But also, we're very careful in selecting these organizations to ensure that they enhance our application and overall solution design capability and not really just be a catalog sales organization. That's not what we're looking for. They're really technical resources that compliment what we have and enhance what we have.

The next question is from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Hey, good morning. How are you guys? So wanted to start with the Vehicle segment. Maybe what are you seeing there? Seems like there's still a lot of inventory floating around, so wanted to get your updated thoughts and maybe your outlook for that segment.

Sure. Two things. Let's, as we mentioned, a vehicle for us is a broad representation of the market. Anything that's driven, manned or unmanned, we would call a vehicle. So we have a small portion, relatively small portion I'd say, let's say relatively automotive, and the rest would be other Vehicle. In the automotive, we have talked about that in the past where we've seen contract and end of life, we've been driving towards end of life. And as we drive towards end of life, demand or quantity usually goes down and ultimately will end. We did announce last quarter a major order and that will come onstream here 2019 and beyond. But in addition to that, we have several others that are currently in the works and we are fairly confident that we will be awarded those here in the near future. So that's the automotive. In terms of the other vehicle, there is still some softness, but we are starting to see some encouraging signs that maybe it's at the bottom and maybe it might be picking back upwards here. So that's good for us. As you know, and to make everyone aware, that vehicle is our largest segment, so that's good signs for us.

Got it. In terms of these longer term, more significant awards, if you were to receive another one, should we assume that revenue recognition is more of a 2019/2020 beyond? Or is there potential for more of a near-term rev rec associated with some of these awards that you're still working on?

I would tell you in the vehicle market, clearly longer term. Once you are awarded a production contract, you've gone through a significant process already to get there. You've got a commitment in design and a commitment in production and typically the customers will support that. But they are longer term. We have others that, and we've discussed this Greg together, we talk about it internally about when do we and what level of orders do we discuss here as new orders or new significant orders for the Company? In other markets, typically they are much faster. We receive the production order, typically it's within a lead time that we quoted, and many times unfortunately we see them get stretched out in terms of the timing of when they place it, but they still expect us to deliver within a certain time frame. So I would say to you the larger automotive type are typically longer term. And as we have some smaller contracts that we would let's say receive in Aerospace & Defense or project based or Medical, those would typically turn faster. But that's not something that we've been reporting. There's several that we have that we're working on, smaller in scale, but significant for us.

What about the growth in Medical and Industrial/Electronics? I was hoping you could expand upon that. Specifically, what are you seeing in those markets? Maybe what areas within those segments or specific applications are driving the growth there?

Sure. Medical, part of our growth year-over-year has been the addition of Heidrive. They had a fairly sizable Medical business and so that has been added. But in addition, we are seeing growth in the Medical markets and we have secured some nice business here, call it a nice business that we believe will continue to grow into the future. In the other side, the Industrial/Electronics, Industrial right now is going very strong. We see an increase in automation and we've talked again about this in the past about our products are used in automation of all types, and I think as everyone is driving towards consistent quality and driving costs out of the process, then you see our products being utilized there. So there has been a nice uptick in that market and we do expect that to continue especially in we'll call it customized robotics.

Then on the distribution side of things, I've always thought that would make a lot of sense to expand that. What's the right kind of product or solution for that channel? Or I guess said another way, what kinds of application or end markets are you targeting through that distribution?

I will say to you that essentially all of our markets with the exception of automotive, because that's usually high volume, very customized one-offs that you'd be working on there, will experience gains from the distribution channel. The distribution channel varies from buying a component, which let's call a component a motor or encoder or feedback element, gearbox, a gearhead, up to a complete solution. Now when you offer complete solutions, what we talk about there are electronics combined with let's call it a Servo motor. And that's really where we see some significant opportunities is that in the system sale, you need to do your homework here and make sure that it's very user friendly and it works. And our job has been to make sure that we integrate the solution with multi-technology, multi-products into one package. So we see opportunities in multiple areas. The Platformation work we've done to standardize, to allow us to build, to allow us to do quick customization, software work that we've done in our electronics to allow again customization specific, market specify or application specific customization. So it's all products and it's components as well as system solutions. And we're really focusing on we want to sell more system solutions where we integrate it for the customer and simplify their supply source.

In terms of adding these solution providers, you said I think you added two. What kind of base was that before? Were these the first two? And I guess how does that ramp kind of look like? You said you might add five more by yearend, but what's sort of the optimal point here at some point in the future?

I can tell you this. We're working off, I announced that Kevin McNicholas is going to focus on this, because we do see a great opportunity in this area. And Kevin has a great deal of experience and background in these channels. He has a very extensive list of companies that he's worked with in the past and also some companies that he hasn't necessarily worked with, but meet the profile of what we're looking to do here. I will tell you that the process to get started, it will definitely accelerate into 2018. What we have to be careful of is making sure that we don't overextend ourselves. We have to build the support structure in place, we have to have training in place to ensure that when they get the call they're able to support it and not just pass it onto us. So it's a process that we've defined and planned quite well. We started relatively small here with a couple so that we can work out the bugs. In doing this, in dealing with this channel, orders are going to come into Amhurst, into the solution center and be processed there and they're dealing with really the frontend or one entity within Allied Motion and not have to deal with several. So I think quite a bit of the legwork has been done, but we will be walking a little slowly here to start. Once we get everything ramped up and running, we'll be adding at a much faster pace. And it's a big channel, it's a big market opportunity for us.

Yes, seems like it. Last one for me. I know Dick, you mentioned some cost pressures in the near term associated with this reorg. How should we be thinking about those? Do you want to expand upon what you meant there?

Cost pressures in the near term with regard to the reorg you said? What I mentioned is, I believe in the conference call here, was that most of the costs associated with the reorg would be expensed and we don't see any significant impact on our P&L during the year for these reorgs because we do have some retirements and reductions in costs which are offsetting some of the one-time costs. So just while going forward we're going to see some definite benefit from it, I think this year what we're lining up for you is that I wouldn't expect a lot this year. I would expect it to be neutral. Whatever the cost is that we're incurring, are going to be offset by savings. But we are really looking forward to this. Maybe it's been a long time in coming, but again, there's a significant amount of work that needs to be done when you want to integrate several small companies that you've acquired with unique systems and unique products and unique talent. I feel our team has done a very nice job of getting that backbone in place and it's time for us to move forward and really leverage what we have available to us. We've talked in the past about leveraging sales. We need to go beyond that and we are going beyond that.

The next question is from James Geygan with Milwaukee Institutional Asset Management.

In both your deck and your Q you mentioned investing in your sales organizations, in the deck specifically, new sales management and personnel. Can you elaborate on this please?

Sure. We've announced the reorganization that I mentioned in the conference call here that Bill Jesse has been named Vice President of Sales for North America. And that Kevin McNicholas has a role of developing the ASP channel, very focused on developing the ASP channel. In addition to that, as we've acquired companies over time, all of these companies add one or two sales people or individuals and we need to and we have been bringing this organization together, getting the sales team trained on all of our products. We add a new company, there's obviously a training program that's required to do that. In addition, the solution center plays quite heavily in this in providing an opportunity for us to evaluate new opportunities on a corporate-wide basis, not necessarily just on an individual unit basis. So I think fairly significant changes. And as I mentioned earlier here with Greg is, in order to support that in a proper way, you really have to build your backbone and you have to invest early on in order to get the resources in place and trained.

Okay. We're familiar with your shift to a more solutions based sales organization. In your deck, you do mention a growing pipeline of motion solution opportunities, specifically under the line item of B&D expenses being up. Can you talk about that a little bit more please?

Sure. There's a couple of things here, James, that we work on. Let's separate from what we'll call a corporate initiative to go after a target market. So we've identified I'll say 4 major opportunities for us that we see as major opportunities where a significant market opportunity exists and that we need to develop the solution for that market and really on an integrated approach. And sometimes that's a game changer for the organizations we're dealing with and sometimes it takes longer for them to really adopt. Ultimately though, we feel strongly that as we integrate, and our platform development is about integrating our technologies across multiple technology units into a single solution, that we're improving the quality, we're improving from a customer perspective point of contact, we're simplifying their supplier base, and in many cases there's other benefits in terms of performance and/or footprint/weight in their equipment. In addition to that, we get projects, I'll call them projects, that are custom engineered for specific customers. So I'll separate our work in a market where we're developing multi-technology solutions for a market approach and then into customer specific solutions where for a particular OEM, or maybe a group of OEMs, they're looking for something that we have to offer and it's not readily available off the shelf. And therefore, they have specific requirements in terms of size, weight, performance, etc., that we will custom engineer. And typically, we will receive NRE for that, nonrecurring engineering charges, which will support the project development. So we have both and I think that's good. Our approach to general market, picking our battles there of which ones we feel that we have the best opportunities to succeed. And ultimately also custom engineered perfects for major OEM applications. The Solution Center, a little bit of change that has occurred here in the last 6 months or so is that all opportunities come in through the Solution Center and need to be reviewed there because it allows us to look at it from a strategic standpoint, from a corporate strategic standpoint, again, to make sure that we can assess whether or not what we're being asked to do has a good chance to succeed in the market. Not just invest the resources and find that we've invested them and that the market really isn't there. So we're doing a much better job at that and we're really ensuring that we're leveraging the key technical resources that we have throughout the company.

Thank you. Both your orders and backlog have increased nicely since the end of the year and you touched on that a few times in this call. But it strikes me that the shift from a three to six-month fulfillment window to a 12-month fulfillment window might indicate that you're approaching the sales process a little bit differently. What's going on here and what are you doing differently?

It's not really different. When I say it's not really different, what I did mention is that I would tell you that our new organization, the newest acquisition in Europe, does have an impact on that. And that, when Europe is increasing, we're seeing that have an impact. But what happens there is that unlike most of our other operations where they work off of frame order or blanket orders, they're getting firm orders and they're getting them for a longer period of time that what we would see as the norm in North America. And even in Europe. But our newest acquisition has really added to that and it's nice because it allows you to effectively plan. And they will take the product that they commit to. It's not just a frame order that's based on a forecast, it's a real commitment. So that's what you're really seeing. So we're able to have the benefit of that and it's in our backlog. Now to be clear, the frame orders that we receive that might be for one year to 18 months or potentially even longer, we don't book those and put them in our backlog until we get a firm release to production. As the firm releases to production, the market demands are driving that lead time down. They want to have, our customers and our markets want to have more flexibility and less lead time. So we're being dinged on one side because we're having to address that and satisfy that requirement, while we've seen the Europe orders increase that do have fixed dates, delivery dates and quantities for a longer period of time.

Excellent. Well it is some very nice backlog growth and we look forward to seeing how that progresses over time. Appreciate your time today.

[Operator Instructions] There are no further questions registered at this time. I would like to turn the conference back over to the management for any closing remarks.

Thank you, Claudia. Thank you, everyone, for joining us on today's call and for your interest in Allied Motion. Please feel free to reach out to us at any time and we look forward to talking to you all again after our third quarter results. For those in the Chicago area, we will be presenting and available for investor meetings at the Ideas Midwest Conference at the end of August. Again, thank you for participating and have a nice day. Operator, we'll end the call.