Greetings and welcome to the Allied Motion Technologies' Inc., Third Quarter 2019 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations for Allied Motion Technologies. Thank you, Mr. Mychajluk. You may begin.

Yes. Thank you, and good morning, everyone. I certainly appreciate your time today as well as your interest in Allied Motion.Joining me on the call are Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our third quarter 2019 results and provide an update on the company’s strategic progress and outlook, after which we’ll open it up for Q&A.You should have a copy of the financial results that were released yesterday after the market close. If not, you can find it on our website at alliedmotion.com. On the website, you’ll also find 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 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, welcome, everyone.The effective execution of our One Allied strategy was evident in our strong third quarter operating results. We are also benefiting from the significant investments being made in engineering and developing market based solutions to not only secure existing business but to also address the emerging needs of our serve markets.Revenue was up 21% to a record $96.9 million driven by strong demand and market share gains in our medical and aerospace and defense markets. We achieved solid organic growth of nearly 10% despite the continued softness in Europe as our sales solution centers, technology units and production centers have continued to leverage our full capabilities.Other highlights were around our margin enhancements which reflect the impact of higher volumes and the effectiveness of our allied systematic tools to improve performance in all areas of our business. Gross margin expanded 140 basis points to 31.1% and operating income grew 22% to $8.8 million with a margin of 9.1%.We have been expanding our lead initiatives by adding additional resources to help drive the process both in Europe and North America and by focusing on several areas of the business to drive continuous and sustainable improvements. And although our bottom line was impacted by 8% per diluted share from foreign tax assessments that Mike will touch on our operating results validate that our business is capable of generating strengthened earnings as we continue to grow.From a market perspective, we continue to enhance our competitive position and improve our market diversification. While we're seeing increased spending in A&D which drives higher demand for programs that we are already on, we have also taken some market share and we are winning new programs. As far as Medical, its more about winning new programs and our continued investment in engineering as we work on longer-term solutions.Given the long designed cycle times we are benefiting from our engineer-to-engineer approach to get in early on the product design process. These are exciting times for Allied as we continue to gain traction on becoming a global leader of application focused solutions in the control motion industry.With that, let me turn it over to Mike for a more in-depth review of the financial.

Thank you, Dick.We provide an overview of our top-line on Slide 4, as a reminder, our results include TCI, which we acquired in December 2018. As Dick noted, revenue increased 21% or $16.5 million to a record of $96.6 million. Absent to FX headwinds of $1.6 million revenue would have been up 23%.Growth in the quarter was centered in Medical and A&D. Our vehicle market was up 2 points primarily reflecting the legacy commercial automotive programs in Europe that while winding down are performing better than expected. Our industrial distribution channels were up primarily due to the contributions of TCI. We saw continued domestic growth far outpace the general softness in Europe which is reflected in the increase sales to US customers of 59% total sales.Slide 5 shows change in our revenue mix by market, and the growth of each market for the trailing 12 months ended September 30. The TCI acquisition can be found in industrial and distribution, and accounts for the 171% growth within distribution.Over the last 12 months, our A&D and Medical markets have experienced considerable growth as we continue to gain market share with our precision and engineered solutions. As we’ve talked about in the past, growing these markets are an important element of our strategy to broaden the scope and diversification of the business. Our margin expansion was certainly another highlight of the quarter.As depicted on Slide 6, our gross margin improved 140 basis points to 31.1%. This significant increase over the prior year period largely reflects higher volume, as well as the favorable mix across a number of served markets including the contributions from TCI.The previously disclosed supplier remains a headwinds that is still expected to impact us till the end of 2019 given the lead times on certain key components. We estimate that…

Thank you, Mike.As depicted on Slide 11 third quarter orders grew 7% year over year to $91 million. Absent unfavorable FX, orders would have been over $92 million, a solid level given the softness in Europe.Backlog at quarter end was nearly $126 million up 9% year over year. About 80% of our backlog is expected to convert in the next six months an approximately 92% over the next 12 months. As a reminder just a nominal amount of the $225 million in the several vehicle market awards we previously announced are included in our reported backlog numbers.We are currently going through the appropriate approval processes for the first of three program awards and expect to begin shipments at very low levels at the end of this year. We are still on track to begin ramping shipments in 2020 to full rate production by the end of 2021 which would then continue for the following six to seven years. As we look out we are cognizant of the potential macro challenges, so we believe we are well-positioned and confident and we continue to advance our strategy over the long term.Specifically looking to the fourth quarter of this year as history has demonstrated we do expect to see some seasonal weakness especially given the actions of many of our customers in previous years. We have a strong ASD team and we have enhanced those capabilities over the past year which over the long term to continue to yield results as we focus on operational efficiencies and improving our margin profile.It is important to note that we have and will continue to invest in our strategic areas of excellence especially around electronics and software as we further build-out our integrated solution offerings. As you know strategic acquisitions are an equally important element of our overall strategy.We continue to develop acquisition opportunities and we remain consistent in our disciplined approach to ensure they are a good strategic fit with solid economics. Our strong increasingly diversified revenue should continue to enhance our competitive position and create a more robust foundation of business, which we believe will help foster continuous and sustainable organic growth well into the future.With that, operator, let's open the line for questions.

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

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

Sure, Greg. I think a couple of comments there. Number one as we did - you talked about medical standing out and yes, we grew in the trailing 12 months, over 25% in the medical market. And we also - and I think what's even more encouraging about it is with that growth, we continue to be to work on new and future designs for programs that are - will be coming in the next several years and we continue to have success on those areas.So it's a combination of our focus in the market, the technology we bring and the product sets that we bring and also our strong performance with certain customers in those market segments that you know we've had over the last several years.So I think you are correct, the motion market did not grow by the percentage we show, we believe that overall based on numbers we've seen it's in the 2% to 2.5% range and yet we’re able to again outperform or outpace that market growth.A&D was also strong for us. It actually grew at a higher percentage than the Medical slightly, by Medical, so again certain programs that have got that accelerated there and I will tell you that we have - and it’s another market area that we've been working out some long term projects and we are excited about the potential for continued future growth in that area. Industrial as Mike had mentioned you know we've got a strong lift from the TCI acquisition in Industrial, so again it showed some significant growth.So overall we're quite pleased, you know even vehicle grew for us over the trailing 12 months and I think, with all the publicity out there about what's happening in the markets and especially you know our significant level of business that we have in Europe I think it's quite encouraging.

Now, I’ll let go got that pretty impressive outperformance. Good to see that we're still expecting initial shipments of the previously announced vehicle awards to commence shortly. You mentioned full run rate by the end of 2021 so just trying to think between now and then, how should we be thinking about the ramp, I mean is it going to be kind of a steady build out or is it going to be you know - is it going to be more back half weighted towards 2021 rather than 2020 maybe you can just kind of help us from a modeling standpoint?

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

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

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

Yes. I think we’ve talked in the past quarters too about certain either tooling revenues or non-recurring engineering revenues that were residual margin, so you’ve seen some of that in the mix coming back, and then certainly a portion of our engineering population and manufacturing population is dedicated to these efforts and the costs associated with that. I think the thought is though - that costs will continue to be there as we continue to grow with new programs in the future as well though.

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

Yes. I think we've talked in the past is that - for those who may not know the history, we became a part of this business or all our business became a part of us I should say is that we had some programs that we acquired Globe back in 2013, and during the acquisition, we knew that we were going to be - going to end of life in the near future and what we also saw during the process is that there really wasn't enough in the pipeline of future opportunities that would backfill for those that were going to be going into life. So we saw a decrease in the going to be going in the life. So we saw a decrease in the level of shipments in this area.But what has been encouraging and the reason why we announced these orders is that we have talked about significant efforts being made to develop the business and that sense of such a long term process before you realize the benefit of the shipments, we felt it was necessary to let our shareholders know that you know there are some encouraging results out there that we wanted to report although they would not be realized in the bottom line and so in the future.So as part of that process, we clearly make decisions that this is not going to be you know win one and then sit quiet for a while, it was a continuous and never ending and that's an effort that we worked and it’s just stop by waiting one wanted and focusing on just that, and that we’re going to continue looking at additional new opportunities and reach out to - into the market to you know let's call it diversify ourselves even more.So while it’s - you know when you look at it, as a percentage of our overall business, it's not particularly large. We see it as an important part of our business, because it does give us critical mass, the business core unit volume and we're able to leverage off that critical mass and core unit volume into some of the other markets that we're serving and we feel gives us a better competitive position. So it's certainly a part of our business going forward, one that we continue to focus on and we absolutely have you know other programs that we're working on and that we hope to secure - in the near future and on an ongoing basis.

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

Sure. So let's - I have Mike, maybe he will expand a little bit more after. I'll just start. Let him jump in at some point here. When we talk about the CapEx and the total CapEx that's in our numbers here that we're revising our spend rates. We do two things. There are the program related at which we get some contributions from customers for both pulling and some amortize - some, some cost of capital equipment, but also we are making an investments in our core technology as we move through to the next generations of our products.We work very closely with our customers to identify opportunities to improve price and performance in the future. Of course getting their input and their cooperation to ensure that as we develop these new capabilities that they are part of the process and because they have to prove it and they have to go through it a significant testing to make to - to confirm that they are receiving what we say we're going to be giving them.And that there is obviously a positive benefit to them as well. So we're constantly looking at our core technology and we're making investments to keep that ahead of the game and leading a - leading that.So we're looking two to three years out as we make the investment, we start out by establishing a design, testing it and we look at what we are - were the projected volumes are going to be and what other opportunities there are. And then we'll - we'll put the line in place. And then leverage that for the years to come before we start working on the next one.So it's a continuous process, so I will tell you that the capital investments that we are making are both internal for core products that we see core products and we see that it will give us a competitive edge in the future as well as project based. So Mike maybe you want to add to that a little bit or …

Yes. I don’t have that much to add to that, I think it’s - it's a good indication from that key customers that we work with in those markets continue to have faith and so if we're not investing for the next generation of products which is what those present and the generation beyond that and obviously it will be more of a cost in certain price.

Our next question comes from the line of Dick Ryan with Dougherty & Company. Please proceed with the question.

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

Sure Dick and good morning to you.

Good morning.

Yes. You're absolutely correct that oil and gas has - we’ve had an impact with oil and gas this past year. And I will tell you that TCI is performing on a bottom-line basis as we expected, okay, as we build into our forecast, so they’re doing - there are absolutely no change there. There has been - on the top-line there has been an impact, but I would take you as a credit to that management team they've been able to manage the business in a way that has protected the bottom-line of the business.And they are working actively on diversifying the markets that they're serving and with some new products and technology that they've introduced here in the last year they're making very significant progress.So oil and gas is an important part of that business. It's sometimes hard to predict. But if you look at oil prices, if they're down, you can expect our business to be down. As they go up, it seems to go up as well.And I will tell you that you know we're not discouraged at the drop although it's - let’s - I'll say to you it’s in the 12% to 15% range of that market for oil and gas. We have offset that in some other markets with some new technologies that TCI has brought to the marketplace.

In the Medical side you talked about driven mostly by new projects, is that - is that within existing group of customer base or is that customer base expanding? Or maybe the same comment in the Aerospace and Defense side?

Yes, and I’ll on the same answer at both sides.

Okay.

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

And on the supplier issue getting through the certification process, is this going to be a sole source or will this be several supplier that should be working with going forward?

You had asked that question.

No.

It really what it is, is that the contract manufacturing business, okay. So the typically when you look at the bias associated with certain applications and that’s a contract manufacturer. I will tell you if we did a much better job this time around with selecting a contract manufacturer that's it’s their business that is their business.The previous supplier had some technical expertise in the areas that we needed support on and they had a small subcontract business. Unfortunately they had a long-term supplier, but the contract manufacturing business there where we were a significant customer of, I'm not so sure that it was capable of supporting the entire company that they had which also utilize - had some engineering capability that we had utilized as well.After Allied acquired Globe, Allied brought to bear a significant amount of new resources that could be utilized on future projects and we did do that. So, I think a strategic decision by the supplier before that that contract business maybe not be core for them in the future, we understand that. But there are many, many good contract manufacturers out there and the key for us was to select one that's been in the business for a long time is absolutely solid financially and will be sustainable for years to come.So typically you don't split your production of board assemblies on different lines because you lose the leverage volume, but I'd say he has a much more careful decision that was made in selecting the right supplier in that business.

Okay.

So, I’m not saying this sort of a way to say that it's bad that we have a sole source contract manufacturer. We do that sole source contract manufacturer. We have multiple contract manufacturers, but the selection of this one was a solid supplier that's been in the business for a long time and it is financially sound.

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

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

Sure. I would again, the ability that we have today I mean is if you go back in time and when you look at the history of the A&D business within Allied and the companies that we have acquired. Most of it was component sales and I think most of that more than 50% was component sales.And there was another amount that would have been from solution or actuator offerings. What we're seeing today is that more of the requested solutions are for actuator type solutions meaning that they're leveraging technology that we have in several areas to come up with a solution.So we see that as what's generated as a new business for us and the opportunities we have for the future to continue to grow there. I won’t - I don't downplay when I say a component business for example saying a high performance motor only sale in certain systems because you know we will continue certainly to do that. But it is the actuation systems that we have seen some fairly good growth in - and opportunities for additional growth in the future.We did exhibit at the RV show in Washington, D.C., and we feel very confident that some - based on the context that we're - we made at the show that there’s additional opportunities for us. So again more and more in the solutions and offering which is what Allied has been able to bring by creating solutions that are having the ability to tie the components together into a more solution-based applications for our customers.

And then if I could ask one more. On the new vehicle market awards, I know they you know serve to diversify you a customer base wise, do you provide anything broadly you know application and market their commercial truck off highway? And I know there's some flexibility in terms of you know actual program launches and ramps, seem pretty competent in your production schedule. But what are you hearing in terms of I guess the customers are sticking to production schedules at this point?

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

[Operator Instructions] Our next question comes from the line of Scott Blumenthal with Emerald Advisors. Please proceed with your question.

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

The answer is yes. You may also find it in distribution. It's just a little bit of a mixed bag, depending on how it goes to market, whether it’s direct to a - an OEM or if there's a number of that, so it's a little tough to say, it's in one bucket but it's clearly either distribution or industrial.

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

Sure. A very good question. I will tell you that in the beginning of this year, we added a resource to manage our Global Electronics Team, which we internally call GET, Global Electronics Team and prior to that, you would have seen, let’s say a year ago today, you would have seen several smaller teams operating say loosely in a coordinated manner. But also we had a more heavy use of outside consultants to supplement what we felt were certain current demands in order to meet the requirements of the project time factor.So we made a conscious decision that what we would do is that while I was - when we were looking at the projects three, four or five years ago and estimating what the demands would be or requirements on resources and that once we completed the projects those demands will go away, what we realized is that there were never going away.They were just going to be redeployed on new projects and new opportunities. And as we were accelerating the utilization of electronics and software into our solution offerings that it was necessary to start staffing at appropriate manner internally and to retain that capability and knowhow. So that's essentially what we did. We began adding critical resources and we're a decentralized group. And you know that's a little bit more difficult to manage.But on the other hand, it gives us access to resources in many areas around the world where rather than being just stuck in one location and as we know engineering resources they've been - it's a tight supply chain out there right now for availability.And so I think we've got a very good job of getting organization around the teams, getting a coordinated effort, getting they’re really working closely together and managing to the project schedules that we've committed to and now it's a cost that we have more resources available to us today than we had a year ago at a similar cost because we've been able to bring the resources internally that again will retain for the long-term.So it's been very encouraging and we don't see an end to it. We see that this will continue to be a deed into the future, and we're certainly looking at how we can best utilize the - our global presence to enhance that as we go down the road here in the future.

Would you say that you have now 25% more resources, 35%, 50%, or…

Not actually. I’d say, in reality 15% to 20% the max. Again, we still do when necessary coupon, the outside consultants if they bring a specific area of knowledge that, again we got to use it on a one-off basis and it gets us there faster. But the reality is the cost savings of bringing them internally versus having the external consultant in, it’s really the loss of knowledge that you'll have once they leave. So I’d say to you a fair number is, what you said, at 15%.

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

Well, I think Dick did a good job describing how it was going to come into production from a full rate standpoint. And I think the backlog will follow in a similar way with perhaps just three to maybe a six month advanced window to that ramp up in production. I think, I think it will very much match, match that with again - I was talked in the past, most of our backlog will be shifted in that timeframe, three to six months’ timeframe - timeline. So depending on how we work with these customers and identifying firm releases, it will flow in that way.

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

Our next question comes from the line of John Kurlak with Millrace. Please proceed with your questions.

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

John, I would - I don't know where we said we are winding projects down in Europe. I mean you know end of life on automotive contracts that we had, we had announced about in prior years and those being replaced by these new contracts that we had that's basically the wind down and the ramp up of these new contracts, okay.So that's on a specific area. With regard to everything else in the market I wouldn't say a winding down of any matter in any of our projects. I would say to you that you know there's always - there's always some ebbs and flows within certain markets and you know projects one generation coming to an end and a new generation occurring. So when you always have some decisions that you're making on your product transitions and so forth, so that's a normal part of the business. But I would say to you just like in North America Europe is very active on new programs and new projects that we’re confident is going to generate continued growth in the future.

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

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

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