Allient Inc. (ALNT) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Allied Motion Technologies, Inc. Third Quarter 2018 Financial Results. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Craig Mychajluk.

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 2018 results and provide an update on the company's strategic progress and outlook, after which we will open it 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. On the website, you'll also 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 provided reconciliations of our 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?

Thank you, Craig, and welcome, everyone. We continue to perform well as our of One Allied approach to efficiently manage customer engagement coupled with our determined focus on delivering market-leading solutions is proving to be an effective value proposition and what has been a very strong environment for our business. Revenue increased 23% to $80.1 million, another record quarter and was driven by double-digit growth in all of our major served markets. We have certainly benefited from a strong economic environment. We are also selling into innovative and expanding markets that are servicing powerful trends, such as factory automation and robotics, which require a broad range of both platform and customers-critical motion control solutions. Our Vehicle market, which had been headwind in the recent past, achieved improved year-over-year sales for the fourth consecutive quarter. Diversifying our sources of revenue in an effort to develop a more robust base of business and increase avenues for organic growth is a key component of our long-term strategy. Distribution contracted a bit this quarter and is a small top line contributor overall, but we believe the long-term potential is attractive, and we remain very much engaged in fostering the growth of that business. Our efforts to improve operational efficiency are paying off, as we saw the leverage potential of our business model with operating margin expanding 90 basis points to 9%. Orders were $85 million in the quarter, up 17% year-over-year, and our backlog grew 24% to nearly $116 million, marking the sixth consecutive quarter of reaching a new record backlog level. With that Mike, let me turn it over to you for a more in-depth review of the financials.

Thank you, Dick. Please refer to Slide 4. Third quarter revenue was $80.1 million, up just over 23% and up over 24% when excluding the impact of unfavorable FX of $0.7 million. More than 2/3 of the growth was organic and was broad-based with strong growth in all of our major served markets, particularly within Vehicle and A&D. For the quarter, sales to U.S. customers were 55% of total sales compared with 53% in the prior year period. Slide 5 shows the change in our revenue mix by market for the trailing 12 months ended September 30, 2018. The Vehicle market continued to form very well with 33% TTM growth, fueled by the rebound in the power sports market and aided by our acquisition of the Maval OE's steering business in the first quarter. Also notable is the strength in Industrial, which continues to reflect the increasingly favorable trends in factory automation. Slide 6 provides detail on our operating performance. Third quarter gross margin was 29.7% compared with 30.1% for the third quarter of last year. Higher volume and productivity helped to somewhat offset the impact of the lower margin profile of the recent acquisition. Total operating expenses for the quarter were down 140 basis points to 20.6% of sales, while G&A expenses of 10.2% of sales were up 70 basis points, primarily due to higher incentive compensation and additional personnel to support our growth. E&D and selling expenses were reach down 90 basis points. As a result, operating income increased 37% or $2 million to $7.2 million, and our operating margin expanded 90 basis points to 9%. Interest expense for the quarter was flat at $0.6 million. The effective tax rate in the quarter reflects recent tax reform and was 26.7% compared with 33.1% from the prior year period. We anticipate the effective tax rate for fiscal 2018 to range between 24% and 26%. And we expect a lower rate in the fourth quarter, which is driving the full year estimate. If you look at Slide 7, you can see our strong bottom line results. Net income increased $1.8 million or 59% to $4.9 million and on a per diluted share basis, earnings were up $0.19 to $0.52 per share. Adjusted EBITDA increased 29% to $10.8 million and adjusted EBITDA margin expanded 60 points to 13.5% of sales. We use adjusted net income and adjusted EBITDA as an internal metric, and believe, it is useful in determining our progress in operating performance. These are non-GAAP measures, so please be advised to review our reconciliation and the related disclosures in our release and at the end of our slides. Slide 8 provides an overview of our balance sheet and cash flow. The Maval acquisition in the first quarter was funded with debt and cash, which is reflected in numbers on the slide. Debt, net of cash, was $51.1 million or 33.7% of net debt to capitalization, up from 30.1% at the end of 2017. Capital expenditures were in line with expectations at $10.6 million through the first 9 months, which included numerous investments for productivity improvement and growth initiatives. We continue to expect our fiscal 2018 CapEx to range between $13 million and $16 million, as a higher level of spending is needed to support the significant project wins that will be ramping next year. Also, as mentioned last quarter, we're in the early stages of developing our capital plans for the next generation of our off-road capabilities. Inventory turns were 4.6 in the quarter and DSO is 50 days, which was up some but expected given payment turns with certain large customers. We did increase inventory levels again in this past quarter in support of our strong sales pipeline and in part due to the tightened supply chain and inventory stocking to support customer demands in the period of extended lead times. As we mentioned last quarter, tariffs still remain very fluid, and we continue to monitor and evaluate the situation. In terms of inflation, our exposure remains fairly limited as we have protection with about half of our contracts addressing commodity cost inflation. I'll now turn the call back over to Dick.

Thank you, Mike. We'll now turn to Slide 9. With continued strong demand in end markets, third quarter orders grew 17% to $85.1 million. Absent unfavorable FX, this level was relatively close to the record order level we hit in the sequential second quarter. We did end the third quarter with a record level of backlog of nearly $116 million, up 4% over the sequential second quarter. The $225 million in Vehicle market awards, we previously announced, are not included in our reported backlog numbers. We expect revenue from those awards to begin ramping in mid- to late 2019. Importantly, we are creating a larger base of business that enhances our ability to realize continuous and sustainable organic growth well into the future. Looking at our outlook slide, we made excellent progress during 2018, as we focused on executing our strategy to ensure we achieve our strategic goals and objectives on a long-term basis. Adding new sales partners, or ASPs, to expand our distribution channel reach remains a priority, and we are on target to reach our goal of 20 by year-end with 17 signed on at this point. As previously mentioned, onboarding ASPs is a long and involved process, as new partners have a lot to digest in terms of understanding how to market our products and our integrated solutions. Building up distribution will be a multiyear effort that we believe has the potential to significantly expand our reach and is well worth the effort. To put it in perspective, our competitors in the space generating as much as 50% of their revenue through this type of channel, and while we do not expect to reach that high of a rate, we are in a very early stages at around 2%. AST, or Allied Systematic Tools, is an integral element of our culture and is contributing to our performance as we emphasize continuous improvements in quality, delivery, cost and innovation. The consolidation of our individual North American motor units into 1 unit, North American Motors continues and is going well. In addition, integration of the Maval OE steering business continues to make progress, as we combined our technologies to further strengthen our capabilities in steering solutions. We expect the Maval acquisition to be neutral to slightly accretive to earnings in 2018. During the year, we've experienced solid organic growth, and we have a strong backlog heading into the future. While fostering organic growth is an emphasis, strategic acquisitions are an equally important element of our overall strategy. We continue to develop acquisition opportunities, and we remain consistent in our approach to ensure, they are a good strategic fit and that the economics work as well. Lastly, we mentioned our long-term goals, which is to continue the rate of growth we have demonstrated over the last several years from a combination of acquisitions and organic expansion. And importantly over time, we believe, we can enhance our margin profile as we further our strategy and expand our multi-technology solution opportunities and further penetrate desired markets. With that, operator, let's open the line for questions.

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

Dick, I would love just to, kind of, get your thoughts on the overall macro, you seem to be somewhat insulated based on the results and order backlog versus what some other Industrials are talking about. So maybe just a brief minute on what you're seeing here in from customers? And can you remind us -- I don't think you have really much exposure to trying out to Asia-Pac, but can you just remind us what your exposure is there?

Sure. Let's start with the China side, first. And I would agree with you that we don't have a great deal of exposure there, but we do, obviously, use China supply chain for many of our products and in that tariffs that we're seeing and right now the way tariffs are being handled by all, if not most, companies are -- is that it's a pass-through cost and it's one that we will deal with and hopefully, in the short term something will get resolved -- in the near term something will get resolved there. In terms of the macroeconomics, I can say that as we -- we're watching it very closely, because we do see a little bit of uncertainty in some markets, and I think just to remind everyone that we work off of framed contracts in many cases, short lead times and in some cases, it's a delivery within 24 hours, some cases we get a 2-week window, 3-week window, depending on the relationship we build with the end customers. So you see a little bit of fluctuation going on. Nothing major, you see some fluctuation in demand.

From a certain end market standpoint, anything that jumps out at you as, sort of, outsized strength here in Q3, what stands out to you?

Actually, as we mentioned, everything was quite strong. So nothing really jumps out. And again, looks -- it's our end market, so there could be things happening in the general industrial market out there that we're not impacted by. But I can say that there's nothing that jumps out. It's -- it continue to be fairly strong across-the-board.

That's great. As it relate to gross margins, I think it's the first time, I've seen in the deck, sort of -- I know you've talked about it before, but an outlook for a longer term, low to mid-30s, where we've been running high '20s, I would say, most for the last few years. So I'm just curious, how you get there? How much of this is volume depended versus mix, some of these multi-solution type products?

We'll leave that to our IR for the answers since they put it in there. No, I think, Greg just to answer your question here directly, if -- we've stated, I think, continuously that we believe that there is margin expansion opportunity, remind everyone, when we did the acquisition, that it was going to have an impact in a negative way on our gross margin. So I think if we were to eliminate that in the calculation, you will see that we are making progress there. We also talk about leveraging the footprint that we have. We're starting to see that take effect. So we're confident that we'll continue to see growth in the gross margin line as long as the volume stays up. Of course, it's -- the volume has to stay up to leverage those -- the overheads and -- but as long as it stays up and continues to grow, and we continue to implement ASTs throughout the company, we're confident that it's going to -- that it will continue to expand. And as we also mentioned, the multi-technology solutions, they do have a positive impact on the overall gross margins. So you can blame the IR people but they're correct in what they say.

It's a good thing to have in there. I mean, likewise on the operating EBITDA margin front where that was nice expansion, I think, by my math, largest quarterly, and since, I don't know, Q2 or Q3, '16. So I mean, I guess, going forward, assuming you get to a low to mid-30s gross margin, I don't know, if you have a 3-year or 5-year kind of operating margin target, but what sort of structure should we be kind of thinking out longer term for the company?

You're talking about business structure itself or you're talking about ...?

Like either operating margin, I'm just kind of thinking about the cost structure and what sort of operating margin targets or EBITDA margin targets that you maybe strive for going out 3 to 5 years?

Sure. I'll turn it over to Mike, that's a tough one.

Well, as we've talked about in the past, Greg, we do expect to see continued expansion there. I think, the leverage capability in that area is particularly strong. As we've talked, we have and again we'll continue to invest engineering heavily. So I think where you'll see the opportunity to leverage is on administrative and the selling. That said, I think we'll continue to invest in those areas as well as we continue to grow. We need to have an organization to support our future growth plans. However, again my full expectation is that there is the potential -- assuming continued increase in revenues that there is significant leverage capability there.

Okay. I guess, last one for me. M&A landscape, I'm just kind of curious to get your thoughts. I didn't really hear anything mentioned, but how is the pipeline and does the current environment make you more enthusiastic about going after acquisitions and any commentary and sort of where valuations are, on a relative basis to maybe last quarter or beginning of the year, would be great?

Sure. Well, I think, Greg, we've talked about it all along and many times we say that we're very disciplined in what we do. We can grow the company organically and provide good results certainly, and I think we've demonstrated that. But as I stated in the conference call, we still see that as a very important part of our overall strategy. And we're careful with what we pick, we see an awful lot, and we pass on most. So I will say to you again, if and when we do an acquisition, I believe, you can feel confident that we've done our homework, and our due diligence and it's the right strategic fit and it's the right fit from a cost standpoint to make sure that our model continues to work in the future. So pipeline is there, companies are popping up, we're doing our work to evaluate, and we'll just keep plugging along here and we'll make sure when the right one occurs that it will happen.

[Operator Instructions]. Our next question comes from the line of Dick Ryan from Dougherty & Company.

Dick, on the slide deck you mentioned new customer and Solution wins, I don't think, you addressed it in your commentary. Can you give us a little perspective what you're referencing there?

Well, I think we have several new customers we're working on Solution wins. So I think I do have to be a little bit careful, and I should -- probably should have added some commentary on that. When we call it a win, we got a designing win but the time to actually going to production and see it in shipments takes a little bit longer. But we are continuously seeing and experiencing opportunities for our multi-technology solutions and when we get a win, we call it a win that we've been selected and we're designed in. Now of course, we're at the mercy of whether or not their end product takes off and whether or not -- and how quickly that they can ramp up in the production. So it's just an ongoing reminder that it is a focus of the company and that we continue to have wins in that space.

And the reference to factory automation and robotics within the Industrial segment. Can you give us a sense of how significant of a contribution that segment is, or, kind of, how is that moving the needle within the Industrial segment?

Yes. If you look Industrial I think that's maybe our largest single opportunity in the future for growth in the industrial market. And it's -- and when we call it factory automation or you call it industrial automation, I would prefer to call it industrial automation at this point, because think of all the warehousing applications, and you wouldn't consider that factory automation, but it certainly is the handling of packages and materials and so forth. Really fast ramp-up and it's global. And we've recently taken even a harder look at this, because we find that we're addressing opportunities all over the globe. And we've put together our quality hit team internally to go after this very -- using our platform of products that we have to build around, to really go after this hard and in an integrated manner and a solution that we can provide globally. So I would say to you, it is definitely an exciting market, it's definitely a fast-growing market, will continue to grow, you see shortage of labor. If that moves into automation then we can play in that space and it's going to be our speed of play and how quickly we can pull together the elements that we have into a long-term cost-effective value proposition for our customers. So it's a good one.

Okay. How does the bid pipeline look currently versus last quarter or 6 months ago, whatever perspective you can give us?

There's -- I wouldn't say there's much change there, Dick. I'd say that you don't see a drastic change quarter to quarter. And so it's continuing .I mean, it's -- again, I think what we're seeing is the pipeline continues to expand in terms of multi-technology solution opportunities. But the -- we are in a position where companies do come to us, and we have some recognized leadership in certain market segments, and we do see that occurring. So fortunately, what we see is we're in the early stages of design that's where you need to be to win in this business.

Last question maybe on the gross margin, forward-looking gross margin, kind of, on the organic side, you're knocking on that door, if you will, to lower end of that 30% range. Key part, you've talked about is M&A. In your short list of targets out there, is the gross margin profile of those targets -- are they above Allied's core gross margin or once you get them in -- under your umbrella then it's the One Allied approach that brings those margins up?

As we're looking out, that's one of the areas we're looking at is the acquisitions that have attractive gross margins, and I would say that's one of our criteria looking at companies. Now again, I say that, I reminded in the prior question not from you but from Greg, is that we did acquire a company where the gross margins were significantly below what we see as an average with the idea that, that would become a part of our overall system solution to bring it into the company and then bring the margins up, but I would say to you, that our focus really is on expansion of gross margin, both through acquisition and organic. So we will focus on those that can provide that.

Okay. One more from me. Employee retention, is that becoming an issue or how are you handling that?

At this point, we've done a, I would say, a very good job. Remind you that we do have smaller companies, we're made up of a number of smaller companies around the globe, and I think each of the companies have done an excellent job of retaining their talent. We've also -- recognizing that the market is tight and the market is tough, I mean for us, the people is critical for us and that's, I'm sure, why you're asking the question. And even on our bonus program coming into the year, we've recognized that we might have had to make some improvements there in order to retain talent, because we sell people when they come into the company, want you to bet on yourselves, there is a variable side of your compensation that when you do well you can do better than market and that's exactly what's happening. So I think our retention will be fine. We are constantly aware as we're recruiting people, recruiting people in current market rates and so forth, that it's critical, and we will stay on top of it but it's been good for us. We haven't had many issues there.

Our next question comes from the line of Josh Goldberg from G2 Investment Partners.

I guess, I'll start off Dick, if you can talk a little bit about just the opportunity you have to increase your content, whether it's in Vehicles or in Industrial because of some of the changes in NAFTA?

Sure. And a good question. It's -- obviously, we talk about in -- we know that our Vehicle market is strong and the change that has occurred in NAFTA is that the North American content went from 62.5% -- the requirement for North American continent from 62.5% to 75%. So obviously, that's good for us, and I do know that it's a challenge for the vehicle companies to meet that -- to meet the 62.5% was a challenge, a 75% is going to be even more so. So we're looking at it on a very proactive basis and again, leveraging our footprints that's there and finding ways where we can help our partners, our customers to increase North American content to help them meet that new requirements. So when I say looking at ways of what can we do to resource some materials and/or components that we're bringing in from offshore on to -- into the North America and we are being proactive, we are working with our customers and that just says that there's a greater need for a company like ours to be a partner with them to ensure that they can meet it. So it's a positive.

So just so I'm clear though, you haven't seen any aspects of this yet because it hasn't been gone through the congress or...?

Well, no. I mean, everybody is already gearing up that it's going to happen. I mean, it's not like, they're sitting back and say, let's not do anything. I mean, we've been -- we've addressed before the change because as I said, they were already having struggles in meeting the content at 62.5% and now going to 75%, it's even a greater challenge. So it's not that people are sitting back, and our customers are sitting back and saying, "Well, let's see if it happens first before we do anything." No. They are talking to you and saying, "Hey, what can you do to help us here."

Do you think it's likely Dick, that, that single event can probably increase your growth rate next year? I know you talked about motion control being double-digit market, and you want to outperform it, both organically and inorganically. Do you think that where you guys are positioned that might even help even further?

Well again, what happens here is that as we're talking about when you get an opportunity being on the early side, it typically takes a good 2 to 3 years from design win to full production. So I would tell you that it will take time because companies aren't going to be able to just resource and select you unless it's really critical. They will have to pay the penalty potentially for a short period of time, but they will be working in the longer term to make sure it goes away. So I wouldn't look at it and say, this is a 2019 all of a sudden big jump because of that, but I would tell you that beyond that, there is an opportunity, certainly.

Okay. Two other quick questions. I guess, one for Mike and then another one for Dick. And, by the way, just a really great job so far this year building this business and making great acquisitions. Talk a little bit about the inventory situation. It looks like in the 10-Q that some of the inventory was actually finished goods. Was it a sign that maybe you still had more business that maybe you just push down to the fourth quarter?

Well, as Dick mentioned earlier, we operate in some of the framed contracts where calling windows can range from 24 hours, many times, 2 to 3 weeks. So we can see some fluctuations quarter to quarter where we would have a build and things could get pushed out in a window that would result in inventory. So I think that's a portion of it. Again, there's been some strategic build...

Not concerning that you overbuilt it anyway for expecting more demand than what you thought in the third quarter, that's not the case?

Correct.

Okay.

If I can add to it as well is that we've opened a new manufacturing facility in China that's transitioning from the older building that we used to operate in. So I think there's some strategic inventory build there to accommodate that transition as well.

Okay. Is it fair to say that because you're still positive, November 1, that some of the tariff issues are trouble ordering that you're seeing from other component companies have not really affected you guys yet?

Again, there's an impact that the tariffs have on us. I think we've described in the past that it's not overly material, and as Dick mentioned, that there's -- we intend to -- there is a pass-through component where we're -- that it's been pretty well accepted in the marketplace to pass those costs on to the customers. So the net impact to us is minimal.

Okay. Regarding the acquisition roar in the year, I know you talked about it on your fourth quarter call that the hope would be that as you combine your product with the Maval product that there is an opportunity for integrated solution on the Vehicle side. And let's say it doesn't happen right away, you have to get the design wins and has to grow but are you seeing wins in the integrated steering solution because of this acquisition?

Let me -- that's again a good question and address it more fully for you here is that, Maval was working with a very similar customer base that Allied was already working with and basically our two separate suppliers supplying to that customer base. And then the customer would buy the product or purchase the product and then would have to do the integration and sell it themselves. And when you do individual components versus an integrated design, you typically see the interface and the couplings that have to occur between those add extra parts and extra cost and extra labor. So the push two ways, number one is potentially change the type of technology they want to use in their devices, which would expand into our integrated solution offering and secondly, saying, "Hey, we would like to buy 1 part from the supplier that incorporates both -- in the single supplier who takes responsibility for higher level systems. That's really what we're seeing. So the answer is, yes, we were already working in parallel. We were working together even before the acquisition on Solutions and it just made sense for when we did it, knowing that the trend is more in that direction that it became a part of our portfolio.

Okay. Last one for me. Obviously, you've made a great few acquisitions here, even if you go back 10 years, the Globe acquisition was a really changing point in your company and I know you've talked about this -- the acquisition this year as being really positive and few other acquisitions. I mean, Dick, the way your being able to integrate them into the One Allied, you must be looking for something pretty big immediate right now to buy as well?

Well, we have. Okay. And again, I think we continue to look, and we are confident in our abilities to integrate acquisitions and confident that together with the -- as long as we have the talent coming in, and of course, that's part of our criteria, into the acquisition that we can develop the culture together with Allied and acquired company, and will find ways to leverage the capabilities to build additional values. So Josh, I think that is -- thank you for the compliment in that regard. I do say, our team has become more experienced and even better at it. Our AST toolkit is a great way to bring companies together in terms of culture and so forth, and that we really do strive to find an ability to leverage. Sometimes it takes a little bit longer, but I do say, I'm very comfortable and confident that we will find ways, we continue to find ways, and we stress it every day. So thanks again for your compliment there, and I think that's what you can expected.

Yes. I think you guys are on the verge of something pretty big. Especially, if you have the ability that NAFTA working for you, you buy a couple other companies that need to get scale and be the size of you guys and sell it into your customer base and this company can be quite bigger in a couple of years, and I know there's not a lot of analysts covering the company yes but this is...

But two very good ones, Dick and Greg, of course.

Greg has had a great call and Dick, obviously, knows the company for a long time so I don't disagree. Don't get anymore a analyst coverage, I'm not telling you should do that but I think you guys have very good opportunity to grow double digits, grow high double digits for next couple of years.

Our next question comes from the line of Michael McCroskey from Principal Securities.

It's great to see the interest that we've got. We'll pick the analyst up as I come, but we're drawing more folks in probably at the right time. Appreciate everything you all are doing. Couple of questions. The receivables and payables seem to jump a little bit more than my first blush made me think they should be. Can you help me with any color on those two?

Well, certainly the receivables, I think, it's driven by some key terms with some key large customers. I would suggest to you that particularly in the vehicle market you see extended terms. So is that vehicle market -- grows for us. It's going to have a natural impact, if you will on the DSO as well. Then from a payable standpoint, I think, the payables probably are in the line with the inventory build that you're seeing. And again, a lot of that is fueled by the growth, adjusting with the Maval acquisition and then again, it's -- we've seen extremely tight supply chain for components and there's been some strategic build, if you will, both for the inventory, which obviously has gone through the AP as well.

Makes sense. You touched on China before. If I can press a little further on that, I know there's some internal geopolitical issues on the tech transfer. Is that touching you guys at all? Can you talk a little bit about having the plan internal versus just supply chaining out? Can you get that?

Sure, absolutely. Well, there's definitely a couple of things, obviously, more than a couple of things that are occurring with that. And to remind anyone that's new to the call or whatever or to people who were on the call before and to also update people who are new, we can't say that our move into China, although, at first we were sourcing parts and bringing back in our longer-term plan was really to have beyond the ground in China to supply China as it continue to expand and grow. And that's really what our emphasis has been. So the move to a new facility, which was very close to the old one and it has already occurred and it was seamless and a credit to the team in China, they did a great job, was to prepare for some additional business in China. And, so it was a recertification, qualification at a higher level, and we think it gives us the opportunity to expand our base of business in China. Recognizing that as time continues to go on here, and we see more of these issues cropping up, that the supply that the Asian region, we will need to be on the ground in Asia. And we are investing -- continue to invest there. Now some of the areas that we talked about earlier, the question about the increased content in Vehicles, we already talked about that, if it's not clear, I can answer some more. We're also seeing in the defense area where certain components are now being -- China is no more a qualified source of supply, and you're going to have to use non-China parts or components in there and magnets in particular, for defense type applications and that's going to cause the need to find other sources and go back to some qualification. So it's easy to say, they're no longer can be utilized but now you've got a couple of these things that have been designed in and qualified in aircraft and vehicles and all kinds of defense systems that don't happen overnight. They went through some qualification procedures or processes. So that's occurring now, we don't know if that's short-term, long-term, or how long it will continue but that will certainly have an impact. Again, you can expect that China grew their business, because they were fairly cost-effective and it probably will be a little more expensive now for those same components but there is no choice. And that's about standard-wise other than what we talked about tariffs.

Okay. So this one...

Let me just -- Michael, let me just expand one other thing too. Because I do think what's important here is to recognize that our footprint. As we had invested in developing the footprint globally in Europe, in North America and in Asia, we fully expected that longer term the need to produce more closely to the customer was going to give us an advantage. So we suffered a little bit in caring some overhead and investing, and we do see ourselves in a position where now we can start leveraging, and we can make intelligent decisions about where to produce and developing sources of supply that are close geographically to our customer base. So I do want to emphasize, I do see that as a strength of our company.

So just to clarify for those who may be newer, the China footprint from what I'm hearing is, all along has been that was not necessarily a cheaper source for coming back over here, it was specifically for that area and so...

That's correct.

So the geopolitical is downplayed with your situation because you're not depending on pulling that as a source for components for other markets?

Yes. That's correct. And it's correct in that strategy and again, if you look at what we did and where how we invested in that plant in China and automation we put in years ago was fully expecting that at some point in time, even in China labor situation is tight for people working in factories, and we would need to have a higher level of automation in the future, and that's what we invested in our facility in China. What I'm also talking about is that we're servicing global customers and they have these in all geographic regions, and while we can't duplicate everything everywhere, where it makes sense, the volume make sense -- to do so, we do have, and we are producing in, whether it's Europe or whether it's North America, whether it's Asia, to satisfy that demand and I think that's what it was beyond just China. It's more globally than that, and we're making good progress there and that footprint is now beginning to be better utilized.

And one final fine tune from again the geopolitical specifically to China. I'm not hearing any undue concerns as far as governmental pressures on tech. You see where I'm getting that?

Sure. I mean, I really -- I don't know -- maybe Mike you have a view on that. I, certainly we have to be cognizant of the fact that there's a strain and a stress point there, but you're right, we don't -- based on what we already have on the ground and recognizing that there's good technical talent in China, we're growing in that area to. Now I would not say that we have any overreaching concerns there.

Good. Changing gears, the sales expense seemed a little bit of an outlier, not a big deal, but sales expense were actually flat into the increasing year-over-year sales compared to the other G&A. Anything there to discuss?

No, I wouldn't say, I think, there's really anything there. I mean again, there's a couple of reasons for that. As we -- certainly, as you see the growth go up the way it has, and we've added some people in what I will call more sales/ -- or marketing/sales position to be target market focused and to help us penetrate those better. But we had a -- our base of sales team was primarily in place. And it will continue to expand as necessary, but I wouldn't be reading anything into that at this point in time.

It's coming down as a percent of sales too so -- it's not growing at the same rate as the sales are.

That is subject to certain things. I mean, there are product mix considerations with commissionable sales. I don't think there's anything to read into that.

Okay. Can you talk a little bit on organic versus acquisition growth on this year-to-year growth? Help to color that out a little bit?

Sure. I think, we were asked in the past, we did not disclose much with regard to the acquisition, but I think you can -- with everyone on the line here and public disclosure, about 2/3 of our growth is organic.

Wow. Excellent. It answers that. Last one comment. New board members, seemed an interesting appointment, not much to the release and certainly an interesting addition comments?

You're talking about Linda?

Yes.

Linda is a very practical, a very bright person, and I think, she's going to be a great addition to the board. Certainly, as we know that we've always, always looked at somebody that's added to even complementary to the team that we have and we feel very good about Linda. As she does add diversity, which is certainly something that we were lacking that we have to continue to stay in front of us here that that's a requirement going forward and become more and more of a requirement. So we feel very good about Linda. Again, spent quite a bit of time with her already, and I think she's going to be an excellent contributor. She is supportive and her demeanor and style is very good so culturally I think she fits extremely well with the board, which is important and brings a different perspective to certain things, which always will continue to challenge us. And so I think it's a good add, very good add for us..

From the outside, it looked like an unbelievably excellent addition. It was extremely interesting.

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

Well, thank you, everyone, for joining us on today's call, and your interest in Allied Motion. We will be attending 2 upcoming investor conferences. For those in the New York City area, we will be at The Craig-Hallum Alpha Select Conference on November 15 and then on December 5, we will be at West Coast in LA at the LD Micro Conferrence. In the meantime, please feel free to reach out to us at any time, and we look forward to talking with you all again after our fourth quarter results. Again, thank you for your participation and have a great day. Over to you operator.

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