Greetings, and welcome to the Allied Motion Technologies Second Quarter 2018 Earnings Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Deb Pawlowski, Investor Relations for Allied Motion Technologies. Thank you. You may begin.

Thank you, Melissa, 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 second quarter 2018 results and provide an update on the company's strategic progress and outlook, after which 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. If not, you can find them on our website at www.alliedmotion.com. You will also find on the website 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 wanted 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 our non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. So with that, please turn to Slide 3, and I will turn it over to Dick to begin. Dick?

Thank you, Debbie, and welcome, everyone. The positive momentum from last year and the recent first quarter continued, further validating the strength of our position with our customers and the market-leading custom solutions and quality products we offer. Revenues increased 33% to a record $80 million, and net income nearly doubled to $4.2 million. We have talked quite a bit about our investments, both in people and infrastructure, to drive growth and improve operational efficiency. Although much work remains, we are seeing the impact of operational leverage in our results. This quarter's operating margin expanded 120 basis points to 7.8% despite increased investments and higher incentive-based compensation. Orders increased 33% to $86.2 million, and backlog grew 30% to $111.2 million, marking the fifth consecutive quarter of reaching a new record level. Regarding the top line, all of our major served markets achieved strong double-digit year-over-year growth, which was certainly aided by a strong economic environment. In addition, much of our businesses tie to innovative markets that we are expanding and offering widening solutions for a broad range of both platform and custom critical motion control solutions. Notably, our Vehicle market achieved improved year-over-year sales for the third consecutive quarter. As previously mentioned, our efforts to increasingly diversify revenue, which is a key component of our long-term growth strategy, should provide a larger and stronger foundation of business, which we believe will help foster continuous and sustainable organic growth well into the future. During the quarter, distribution contracted a bit after an extended period of impressive growth. Once again, distribution is still a small contributor overall, but we believe the long-term potential is attractive, and remain encouraged by the results we have seen. Adding new sales partners or Allied solution providers remains a priority, and is going well. We are on target to reach our goal of 20 by year-end. And as previously mentioned, onboarding ASP takes time, as they have a lot to digest in terms of understanding how to market our products and our integrated solutions. We believe this channel has the potential to significantly expand our reach, and is well worth the effort. With that, Mike, let me turn it over to you for a review of the financials.

Thank you, Dick. Please refer to Slide 4. Second quarter revenue was $80 million, up nearly 33% and still up an impressive 29% when excluding the impact of favorable FX. Almost 2/3 of the growth was organic, and it was broad-based with strong growth in all our 4 key markets. For the quarter, sales to U.S. customers were 52% of total sales compared with 54% in the prior year period. Slide 5 shows the change in our revenue mix by market for the trailing 12 months ended June 30, 2018. At 21% TTM growth, the Vehicle market finally appears to have turned the corner, and is providing a nice lift to our sales. As a reminder, Maval is included in our Vehicle market results. Also notable is the strength in Industrial, which picked up a couple of points of share within a group that has experienced strong growth across the board. Slide 6 provides detail on our operating performance. Second quarter gross margin was 29.4% compared to 29.6% for the second quarter of last year. The 20 basis point decline was due to the lower margin contribution from the recent acquisition. I would like to add, though, as we have discussed previously, we do expect to see some gross margin leverage over time as we further our strategy and expand our multi technology solution opportunities and further penetrate desired markets. Total operating expenses for the quarter were down 140 basis points to 21.6% of sales, while G&A expenses of 10.4% of sales were up 50 basis points, primarily due to a higher incentive compensation and additional personnel to support our growth. E&D and selling expenses were down 110 and 80 basis points, respectively. As a result, operating income for the quarter increased 56% or $2.2 million to $6.2 million, and…

Thank you, Mike. We'll now turn to Slide 9. With strong demand in end markets and favorable FX, second quarter orders grew 31% to a record $86.2 million. We ended the second quarter with a record level of backlog of more than $111 million, up 4% over the sequential first quarter. It is important to note that the $225 million in Vehicle market awards we announced over the last year or so are not included in our reported backlog numbers. We expect revenue from those awards to begin ramping at mid-2019. While we continue to see acceleration of deliveries and demand on the opposite side of that, we are seeing some risks associated with extended lead times for key materials and components. This ties in with Mike's commentary on increased inventory levels. Overall, we believe we are managing this relatively well. Moving onto the last slide. Our focus remains consistent. We have great momentum building off an increasingly diversified business foundation. The consolidation of our individual North American motor units into one unit, North American motors, continues and is going well. We are supplementing our sales and marketing resources with the addition of market and application-specific personnel to continue growth in our areas of our strength. In addition, we are working to optimize our non-motor North American operations into our newly formed North American mechatronics unit, the goal of which is to align sales, engineering and manufacturing with our target markets to increase market penetration. We'll continue to invest prudently in our business to support our planned growth, just as we have been doing over the last several years. Further, we are enhancing and developing operational efficiency and driving continuous improvement in all areas of business through the implementation of AST, and it remains an important focus. As always, we have used strategic acquisitions as an important element of our overall strategy, and we continue to pursue various opportunities. As widely known, multiples are relatively high in today's environment. So while we are positioned well financially to execute on beneficial M&A, we will not stray from our consistent and prudent approach to any future acquisition. We remain steadfast in the execution of our growth strategy, and our goal is to continue the rate of growth we have demonstrated over the last several years from a combination of acquisitions and organic expansion. With that, operator, let's open the line for questions.

[Operator Instructions] Our first question comes from the line of Greg Palm with Craig-Hallum.

Starting off with the macro, lots of tariff-related noise out there, as you mentioned. Obviously, your results, the order activity backlog, it really doesn't indicate that you're seeing any change in the demand environment. Is that a fair assessment? What are you hearing from customers?

While I heard you, it doesn't -- you don't really -- we're not seeing a change over the last several quarters. I think we've already seen, we've mentioned in past conference calls, that the supply side is tight. We do think that customers are being careful here in getting their orders, and because they want to be in line for shipments. But as far as the tariffs having an impact on that, I mean, that's, I think, another subject.

From an end market standpoint, where are you seeing the most upside compared to what your previous expectations might have been?

Across the board. What we've said there and say, what's our previous expectations, I mean, we were confident internally that we've been working on several new programs in various areas. So I will say across the board. And I think it shows in our results. All of the markets are up.

Yes, that's the way it looks. I guess, in terms of the project win that you're expected to ramp up next year in the Vehicle market, any sort of greater sense for the timing and magnitude at this point? I think you've been pretty consistent in saying at some point mid-2019, I'm assuming those will sort of start off fairly slowly, but at what point do those get layered into the backlog?

Yes, you're correct. Not everything starts off in 2019, but some do start to ramp up in midyear 2019. Correct me if I'm wrong, Mike, but I think we're probably in full swing by 2022, 2021.

Yes, that's correct. Full rates won't be seen until then. And it will be a slow crescendo really in -- or late '19, Greg.

Got it. And at what point do those hit the backlog? I'm assuming that some points when you get the firm release. Is that how that works?

Correct.

Yes.

Last one. You briefly touched upon the M&A environment. I just was hoping to get an update on the pipeline. Maybe valuations, I don't know if they've changed all that much, but just can you just simply give -- could give an update there? Thanks.

Sure. I think you may have noticed the slight change in how I've described the pipeline of opportunities. I think there's plenty of opportunities out there, and I think we're being very careful and selective. We're passing on more than we're pursuing. We believe very strongly in the organic growth potential of the company, and we're committed to not disrupt that by doing what you may consider a bad acquisition. So trust me, we are working on acquisitions, and that we have a number of them we're currently pursuing. But we will be cautious and apply sound business judgment to ensure that it really doesn't impact the growth potential that we've developed in the company itself.

Got. Thanks then. I'll hop back in the queue. Congrats again and good luck going forward.

Thank you Greg.

Thank you. [Operator Instructions] Our next question comes from the line of Dick Ryan with Dougherty & Company. Please proceed with your question.

Thank you. Say, Dick, when you -- you mentioned something about extended lead times. And given the very strong first half performance, is there any read we should take away from that on what to expect during the second half of this year?

Well, I think, Dick -- yes, I think it really has become critical out there in certain areas. I mean, we've had our management team together here discussing the impact of extended lead times. And we're seeing it in certain critical components that it's going out to 2 years in some areas. And it's almost impossible for customers and for us to plan something, where you've got to make commitments for a material, especially electronic components, that are 2 years in the future. That's -- so I think the challenges will continue there. We're doing everything we can do to protect our positions, and to ensure that we keep our customers satisfied. And I think you'll notice that inventories have increased, and that's really there to make sure we support our customers because you have to be able to deliver. And demand is -- continues to be strong. So it's something we are -- we have to watch very closely, and we are watching closely. But there's -- when you have discrete electronic components designed into your products, and it's not -- there aren't really alternatives out there, you have to make sure you lock those key components down in order to satisfy the customer demands So that's certainly a risk going forward.

Okay. Can you give us perspective on how we should look at the second half of the year?

No.

Maybe versus first half? Well, I thought I'd try.

Nice try, Dick. Yes, of course. Nice try.

How does the tightness in the market impacted your ability to hire or keep critical staff? Has that created any stresses?

Yes, a very good question. Yes, the unemployment rates, as we know, are low. And that's around the world. So I think we -- going into the year, we recognize some things that we needed to do in order to retain, and also to recruit additional personnel. And I could tell you, we've added several new people to the organization in our key strategic growth areas. So we are having success in both retaining and in recruiting the personnel we believe we need to continue our growth. So it's a tight market. You have to be sure that you are compensating fairly, that you're rewarding fairly. And I think we talked about the increased incentive compensation that we show in our results. And that's one area that we definitely made a change that, coming into the year, with support from our Board of Directors that we recognize a need to do that to ensure that we retain our people. We've invested a lot, and we're, they're critical to our success. So we, they need to be rewarded when we do well, too. And that's, you see that in our results.

Okay. And in the new orders and the strong pipeline that remains, is there any gross margin changes that you're seeing in that pricing pressures? Anything of that sort?

I think we were constantly fighting pricing pressure. I think that's just natural to the industry. However, as we've talked before, we continue to sell a larger portion of our sales, our solution sales. That helps drive margins in a positive way, and continued penetration in key market niches like A&D and Medical, where we're having success and help with that as well. And we touched on in the discussion the leasing acquisition being a little dilutive to the margin. So it's kind of, it's a balance between the two in the short term. But certainly, there are positive things, as I just discussed, that are driving that percentage above 30%.

Mr. Warzala, there are no further questions at this time. I'll turn the floor back to you for any final comments

Well, thank you, operator. We, once again, like to thank everyone for participating in the call, and we look forward to talking to you again in the near future. And everyone, have a great day. Thank you.

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