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Allied Motion Technologies Inc (NASDAQ:AMOT)
Q3 2020 Earnings Call
Nov 6, 2020, 10:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome. Allied Motion Technologies 3rd Quarter Fiscal 2020 Financial Results. [Operator Instructions]

It is now my pleasure to give your host Mr Craig Mychajluk. Thank you. You may begin.

Craig Mychajluk -- Investor Relations

Yeah, 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 CEOand Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our third quarter 2020 results and provide an update on the company's strategic progress and outlook, after which we'll open it up for Q&A. As part of today's Q&A, we do ask that you limit your questions to two or three in order to allow all participants and you can go back into the queue for additional follow up, You should have a copy of the financial results that were released yesterday after market closed. 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 two for the safe harbor statement. As you are aware, we may make some forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as the 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've provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides.

With that, please turn to slide three, and I'll turn it over to Dick to begin. Dick?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Thank you, Craig, and welcome everyone. As you can see from our results, ally has continued to perform well. During these unusual times. Our entire allied team is demonstrating their agility and resiliency as we build momentum to drive growth. We are structured to have the right talents in the right roles. And as a group, we are generating an energy that bodes well for long term success. I appreciate each of our team members for their outstanding efforts and ongoing fitness and they work tirelessly to support and meet the needs of our customers with superior execution. This momentum combined with our diverse market strategy drove the solid results for the quarter. sales increased 9% sequentially to about 95 million. And we just say of last year's revenue level, even as the pandemic impacted several of our serve markets. disappointing cash benefits real solid cash generation of 8.4 million during the quarter, which enabled us to reduce total debt by more than 4 million. We are also making capital investments to further our momentum and emerge in an even stronger position once the world returns to a more normalized state. Given our effective execution, and existing availability under our credit agreements that we extended earlier this year to 2025. We have sufficient liquidity to successfully manage and navigate today's environment and a business model that will deliver expanding margins as the economy recovers. Our global operations consistently worked together to ensure we rapidly respond to customer requests in this continually evolving environment. Medical demand for our products and ventilators, respiratory equipment and medical facilities equipment remains strong while other medical applications were somewhat muted.

Concurrently, our vehicle market nicely bound in the quarter as expected activity within our industrial and AMD markets has been challenged as a result of sustained softness in Europe. And order deferrals due to COVID-19 kept their sights on the long term, and believe our engineering talent is core to our future success. We have retained this critical talent and are even taking advantage of the environment to free investment in our engineering capabilities. Our advanced engineering skills that create integrated solutions for our customers is a key differentiator for us. Our product offerings and our ability to provide an optimized and complete control motion solution. Apart from our competition, enabling us to take market share with new customers and applications and gain more business from our customers. We remain fully committed to executing our one Li strategy to ensure the long term strength and growth of our company. We will continue to focus on what we are doing, the markets we are serving, only progressing our product development efforts and continuing to leverage our global. Importantly, these are all areas within our control, and we focus on them every day.

With that, let me turn it over to Mike for a more in depth review of the financials.

Michael R. Leach -- Chief Financial Officer

Thank you dick. To provide an overview of our top line on slide four. As a reminder, our results include dynamic controls, which we acquired in March 2020, a total revenue of 94 point 7 billion with solid considering the impact the covid 19 pandemic has had on certain end markets. On a year over year basis, we were down only 2%. We did see a nice pickup from the sequential second quarter with the revenue increasing 8 million or 9%. On strong medical market demand and a rebound in power sports within vehicle. Delta us customers were 56% in the third quarter, down from 59% in the prior year period, the balance of sales to customers primarily in Europe, Canada, and Asia. The shift in geographic mix reflects the addition of dynamic controls. Slide five shows the change in our revenue mix by market and the change in revenue by markets. Trailing 12 months ended September 30. That event dynamic goals that is to be found within medical and accounts for approximately 70% of the increase in this market. Overall, broadening the scope and diversification of our various markets has helped add some resilience to our business. The economic impact of the pandemic is reflected in the reduced demand with industrial ad and particularly vehicle fire to this last quarter. As noted on slide six, our gross margin for the quarter was 29.7%. As the lower volume and unfavorable mix more than offset our efforts on the cost containment side when comparing year over year. Expanding on the mix comment. While we had a nice pickup in our medical market. The majority of those sales were are mechanical in nature, which carry lower margin profiles on our average margin on complete system sales. One other area of note is tariffs and their potential impact going forward. We believe we have managed those relatively well and have benefited from our efforts to strategically source components as close to our manufacturing footprint as possible.

Nonetheless, there are certain components that are still being impacted as exemptions that were allowed on certain products have begun to expire. We do our best to pass cat costs along. Given today's competitive environment, there could be a potential headwind to contend with. Moving on to slide seven, our operating income for the third quarter was 6.5 million, or 6.8% of total sales, compared with 9.1%. In the prior year period. Our margin did increase 100 basis points sequentially. The year will be your variance reflects an increase of operating expenses as a percent of revenue to 22.9%. Largely due to the overall revenue combined. The lower overall revenue combined with incremental expense related to the addition of dynamic controls. As dick mentioned, we acquired and are maintaining key engineering capabilities, which we consider vital to drive future growth and continue to gain market share. Turning to slide eight, you can see our bottom line and adjusted iva results. gap that income for the quarter was 4 million or 42 cents per diluted share. On a sequential basis gap net income significantly increased from 2.9 million or 30 cents per diluted share. The third quarter effective tax rate was 25.4%. And when we continued to anticipate the effective tax rate for full fiscal 2022 range between 27 to 29%. adjusted EBIT up for the quarter was 11.2 million, and as a percent of sales was 11.8%. We use adjusted EBIT as an internal metric and believe it is useful in determining our progress and operating performance. By 910 provide an overview of our balance sheet and cash flow. disciplined cost management efforts are reflected once again in the strong operational cash generation of 8.4 million in the quarter and 15 million for the year to date period. This allowed us to pay down debt by 4.4 million in third quarter, and further improvement already solid capital structure as cash and cash equivalents for more than 20 million up nearly seven millions in the end of 2019. total debt when compared with year end, 2019 was up primarily due to the dynamic skills acquisition.

However, given our debt reduction efforts, we have already paid off nearly half the debt that we took on to acquire the company. That negative cash was too hard and 4.2 million, or 43.7% of net debt to capitalization. Our bank leverage ratio was 2.78 times a quarter and while we are comfortable at this level, we continue to focus on paying down debt due to heightened uncertainty surrounding the covid 19 pandemic. As a reminder, our maximum leverage covenant ratio of debt to EBITDA is 3.5 times reflecting solid financial flexibility. Year to date capital expenditures were 6.6 million. As a result of division delayed certain project we've revised our fiscal 2020 capex range to be between nine to $11 million from the previous range of 10 million to 12 million. This level continues to enable all key projects to move forward, while deferring lower priority activities. Third quarter inventory turns for 3.8 times down from 4.1 times a year end but up sequentially from 3.5. As a reminder, there are a number of critical components that have central lead times providing sourcing challenges, particularly within the pandemic environment. This combined with the ramp up of new customer programs, is leading to temporarily elevated inventory levels. Are DSO was at 50 days driven by increasing vehicle market activity in the extended terms associated with customers in that market. Before I turn it back over to dick, I'd like to highlight it again our demonstrated cash generating capabilities. Given our current cash and available liquidity, as well as our ability to rapidly adjust to changes in the economy. We believe that we had the financial strength to successfully navigate through uncertain operating environments, but more importantly, be in a position of strength when we emerge from the pandemic.

With that, I'll now turn the call back over to dick.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Thank you, Mike. as depicted on slide 11, we saw orders increased sequentially, and we're near record levels, which was encouraging. backlog at quarter end was approximately 124 million, with the majority to convert to sales over the next three to six months. As a reminder, in the second quarter of this year, we secured the nomination of another award to provide a customer specific solution for our vehicle market. In total, we now have 325 million of awards. And just a nominal amount of that is currently included in our reported backlog numbers. Call the 19 pandemic has slowed the production ramp up for these projects. And at this time, we are anticipating the first four words to begin to gain traction in 2021 or the other awards each coming online about six to nine months thereafter. Looking ahead, while there are signs that our business is steadily returning to a more normal state in most of our markets remain crashes due to the heightened uncertainty surrounding increasing infection rates around the world as well as an uneven economic recovery in certain markets. We expect demand from our medical market to moderate the equipment that was aided by the initial outbreak of the virus is on hand with our customers. we're mindful that our fourth quarter has exhibited some seasonality in the past, and we do expect to see some of the same this year as well. As the crisis has really been about focusing on what we can control.

We are firmly committed to optimally meeting the requirements of some exciting new project opportunities, effectively supporting our customers as they ramp up their own development efforts and utilizing our ASC toolkit to drive continuous improvement in all areas of our business. We have also identified certain long term market opportunities. And we have embarked on investing and developing products because emerging needs as we transition from one specific customer solutions to more market based solutions. Focusing on and so really understanding our serve markets. We believe our ability to leverage our broad base of technologies to develop market relevant products. will continue to provide us with additional competitive advantages well into the future. In the medical market for example, there are several prospective customers looking to localize their supply chain to not only meet increased demand, but also to have more certainty of supply as well. Given that there is a long certification and qualification process, our efforts during this pandemic should strengthen our ability to win additional business in the future. We believe we are engaging in some exciting areas that can be the growth drivers for the future. And our ability to create more efficient and more cost effective, controlled motion solutions for a wide variety of applications has never been brighter.

With that operator, let's open the line for questions.

Questions and Answers:

Operator

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

Greg Palm -- Craig-Hallum -- Analyst

Great. Thanks, Morning, everyone, I guess to start pretty meaningful increase sequentially in vehicle segment, which, you know, looks like it was led primarily by your largest customer there. So I mean, curious if the segment sales was was more broad based and that was it? Was the rebound more isolated within power sports specifically, what what are your thoughts there?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Yeah, thanks, Greg. You're correct, in that there was a strong rebound in the power sports market. But we also saw a sequential rebound in other vehicle markets as well. Got it. And in, you know, sticking with vehicle specifically, you made some comments about the previously announced vehicle award. I mean, from an end market standpoint, it seems like demand for passenger cars, you know, globally has increased quite a bit here over the last few months. So, I mean, have there been any changes to how you're viewing those contracts? And how they'll ramp over the sort of the next year or so? No, I'd have to say, you're correct. I think the you know, it's encouraging to see that the automotive side of the business on a global basis is coming back, I think the the numbers we're seeing is that we'll be down year over year, like significantly, but then there's a, there's a good bounce back here that started and it will continue to increase going into next year, although probably below 2019 levels. So basically, the most of the programs were delayed is that you know, is the automotive was actually shut down for several months. And it is picking back up. And we think that all it's done is pushed the delivery of those products out a little bit into the future. So no long term impact. But yes, there has definitely been a short term impact on this.

Greg Palm -- Craig-Hallum -- Analyst

Yep, makes sense. I guess just thinking more broadly, about supply chains in this sort of environment. I mean, you know, given your own capabilities, the resources, I mean, all of these investments you've been making over the last few years. I mean, can you give us any sense on on whether that's, you know, resulting in market share gains? I mean, how's the pipeline look for new customer activity? We just kind of curious to get your broad thoughts.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Yeah, I think it looked quite, quite good for us. I mean, we've been expanding our reach into certain markets, I'm really focused and targeting our efforts, that applications that we have been successful at, you know, in the past, and that we think that there's more opportunity in the future. So as I had mentioned, in my prepared remarks that we are more focused on market based solutions, versus one off customer specific solutions. And I think that allows us to basically create this platform, which we then look at the universe or only available customers that could utilize that solution. So we are working, you know, in the areas that we have had strength in the past, we see continued success in the future and we're launching, you know, new products and into those markets that we think about Keep us on the leading edge of in providing our customers with a more competitive solution. So, you know, I mentioned that I felt that our efforts through the whole pandemic to keep our team fully employed to keep working and stay focused on doing our part to get products developed and launched, has really helped us here. And I think it's gonna give them that many of our customers didn't have layoffs or furloughs in their engineering departments to when they come back, we're already there and ready for them to, you know, start working on some future product generation. So So I think we do the pipeline's good. And we do our focuses, better and better. Our integrated solutions are integrated solutions, as far as the opportunities continues to grow. And it's been exciting to see the transition from the past that occurred, where when we look at these top opportunities that we call top opportunities that we're working on, more and more of them are really for multi technology solutions, which we do believe gives us a competitive advantage.

Greg Palm -- Craig-Hallum -- Analyst

All right, I think I'll leave it there. That's like going forward.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Gerry Sweeney with ROTH Capital. Please proceed with your question.

Gerry Sweeney -- ROTH Capital -- Analyst

Hi, good morning, thank you Mike, thanks for taking my call.

Michael R. Leach -- Chief Financial Officer

Good morning.

Gerry Sweeney -- ROTH Capital -- Analyst

I wanted to follow up a little bit on the autos, or sorry, not auto vehicle policies and the power sports, in particular, did a little bit of work and I felt like maybe there was some backlog pending in the power sports power sports market and not sure if that was part of the you know, upside in that market. And wondering if you could give us a little bit of visibility as to sort of demand supply and maybe if there was any ketchup involved in some of the revenue.

Craig Mychajluk -- Investor Relations

Okay, so your questions are really about power sports? And if there's any backlog there, if there's

Gerry Sweeney -- ROTH Capital -- Analyst

Yeah, I was just wondering. Yeah, I my sense was some of the manufacturing was shut down for a while earlier this year, there was demand for products and maybe curious if there was a little bit of ketchup going on in the third quarter. And any, any visibility as to, you know, did that occur and, and fundraise for the rest of the year?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Okay. So the, I would say, there's definitely, you know, some ketchup that was occurring, there was some demand that was there. And, you know, there were some disruptions in some of our end customers and their ability to produce products as they were dealing with the pandemic as well. So definitely, dealer inventories, in order to have been, you know, that we're pretty much depleted, or anything that they could ship was being sold, I still think there is some ketchup occurring in terms of getting inventory into the hands of dealers. The ban has been trending up, as you can imagine, since it dipped down and then it has been trending up and going out into the fourth quarter, we see a continuation in the demand, we don't see a drop off. So I can tell you that that's that's so poorly filling the pipeline to a certain extent, and then the increased demand in the marketplace today being filled as well.

Gerry Sweeney -- ROTH Capital -- Analyst

Got it. And then I think Q2 gave us the the amount that dynamic materials was in the quarter. Any chance that you could provide any provide us with that their impact in Q3 was?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Well, I don't remember given you the, you know, the revenue impact in Q2, but typically, we don't do that. I would tell you that, but I will, I will give you in relative terms that three was softer than Q2, we saw a quite surge in Q2, when I think search again, that's the first quarter that we actually own the business. And in addition to products that they make for the patient rehab, and mobility markets, they also make sense and electronics for oxygen, oxygen regulators, and that business had as part of the COVID crisis that Apple actually picked up and I think, as we're seeing in some of the other medical markets, you know, that supplies into the end of the market now and we do expect to see some decrease in demands there. And I will tell you that the patient mobility markets, given the global crisis and who the market is has seen a decrease. quarter-over-quarter we did see a decrease in volume.

Gerry Sweeney -- ROTH Capital -- Analyst

Got it? Perfect. I appreciate it. I'll jump back into queue. Thank you.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Thank you, Gerry.

Operator

Thank you. Our next question comes from the line of Dick Ryan with Colliers. Please proceed with your question.

Dick Ryan -- Colliers -- Analyst

Thank you. They did last quarter, you said you didn't see any cancellations, but some pushes in backlog. I know you kind of talked about the backlog here earlier on the vehicle side. But what have you seen in backlog if there's been any, any changes from last quarter?

Craig Mychajluk -- Investor Relations

No, I think dick is still consistent. I mean, in certain markets where the demand industrial, some in certain markets for us industrial, aerospace and defense, we have seen not cancellations. But we have seen push outs and delays and, and it's still consistent with that we have not seen any cancellations. Now, I would tell you that in the medical equipment, where they were COVID specific devices, was something that the demands that we were seeing the inquiries we're seeing for certain volumes were quite high. And we believe were duplicated. coming from different areas, people fighting to get a share of that business. And we were very cautious when we were looking at some of these things and say that there's it's not real, that market is not as big as if you added everything up. It's coming from every customer. There's definitely some overlap there. And we have seen now that the market seemed to have caught up with the equipment requirements and medical, we have seen some orders now being in the next year.

Dick Ryan -- Colliers -- Analyst

Okay. Obviously, chaos generation, the ability to pay down debt. What are you doing on M&A? You know, it seems like coal is kind of limited some of that activity, but what's kind of going on in the industry that you may or may not be able to take advantage of?

Craig Mychajluk -- Investor Relations

Sure, I think you're absolutely correct. I mean, we were quite active. And it's quite interesting. You're asking the question here, the meeting that meeting we had yesterday, which was reviewing our M&A activity and our progress to date on it. And you know, what happened? Where are we now how active was our pipeline, we we reviewed all of that yesterday. And what we found is that, you know, the, we had customers, I mean, potential sellers, and so forth. In many cases here. You know, as we've mentioned, in the past, we've grown these opportunities, we don't necessarily wait for them to show up on the market. And so that's a lot of what our activity was about was grooming for the future potential acquisitions. And we think the timing is right to restart those activities. So I mean, so we've, we've postponed them mutually postponed discussions with a number of different opportunities. And now I believe that the timing is right to restart those efforts, which is what I'll call, you know, our internal targeting for potential opportunities. Here, we have seen a bit of a pickup in potential companies coming to market. And we'll get as we got in the past, we're pretty disciplined and making sure that they they fit in a complimentary and get a good strategic need. And I can tell you that we are going to actively pursue. So there's a little bit of an uptick challenge in this market is going to be valuations of those that the COVID had a positive impact on are going to want to be valued based upon that, in fact, whether it's valid going forward or not, and those that got impacted or negative sensor got a look at the past. So it's a times are a little bit unique. And I think the challenge will be valuations for all of us here and how do we view these businesses, but I would tell you that we're starting to see an uptick in in activity.

Dick Ryan -- Colliers -- Analyst

Okay, great. Thank you.

Craig Mychajluk -- Investor Relations

Thank you.

Operator

Thank you. Our next question comes from a lot of Brett Carney with Civilian Companies. Please proceed to the question.

Brett Carney -- Civilian Companies -- Analyst

Hi, guys. Good morning. Thanks for taking my question. I think you mentioned in your comments, seeing an ability I guess, to take advantage in this environment to capture you know, talent and resources That might otherwise not be available. I was wondering if that was, you know, specifically related to the additional talent you got from the dynamic controls acquisition, or if you're thinking is more broad, able to bring some folks that would otherwise be a lot more competitive to get it, we'll bring them in house and continue to build out, I guess both your electrical and software capabilities from the workforce.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Sure, I'd like to answer your question here. First, let's look at the internal resources, as we mentioned, we kept everyone fully employed. So they're from an engineering standpoint, I mean, we, we felt that it was important for us to retain our talents, I mean, times before COVID, it was very difficult to go out and recruit and get talent. So we didn't want to be caught with making the short term response to the cut, and the difficulty in retaining when we came out of this. So that was the as part of the culture of the company. But also, I think we demonstrated that that we really do respect the resources are the talent that we have on board. So that was our first goal, retaining the talent that we have to ensure that we kept them actively and fully employed and fully engaged and that when we came out, we we'd be stronger and better than ever, with the opportunities. Second thing is you mentioned dynamic, and that's correct. That came on, right during we came on board right during the start of the pandemic. And what we've seen is a tremendous cooperation and integration of those efforts, through teams meetings, and conference calls, and so forth, to look at how the product offerings that dynamic has, can be combined with the product operational offerings that already existed with an ally, and to utilize those resources for Korea create, I would say to your future opportunities and markets that we've targeted. And we're multi technology solutions with that bringing the control side and extensive capabilities, they're on board. So that is definitely, you know, and again, they were all fully engaged and fully employed. And I think we've made some significant progress and looking at some future product offerings that are combined, and integrated technology, as well. As far as the, you know, recruiting additional talents. I mean, we're still, you know, moving forward very cautiously in terms of hiring, but when we have had the opportunity to find talent, that for whatever reason, either they no longer were engaged or actively employed or had been circumstances of a different environment. You know, we certainly have entertained and looked at that talent in words made sense. We brought it on board, I will tell you that. I think our dentists demonstrated actions here will play well in the future for us to be able to attract and retain talent.

Brett Carney -- Civilian Companies -- Analyst

Yep. Thanks so much.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Jeff Dugan with Global Value Investment Corp. Please proceed with your question.

Jeff Dugan -- Global Value Investment Corp -- Analyst

Good morning, gentlemen. Thanks for your time today. And you continued investor deck, which we find to be quite informative.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Morning Jeff, thanks

Jeff Dugan -- Global Value Investment Corp -- Analyst

Could you take just a moment and tell us a little bit about dynamics control since you've acquired it, how it's performed versus your expectation?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Sure, I think, again, coming right out of the chute. I mean, the dynamic exceeded our performance expectations. As I mentioned earlier, some of the products that were that they produce were in higher demand. What we've seen now we look at it a total year basis. We it'll be right in line with what we thought the performance, you know, would be for dynamic control. So as I had mentioned, in Jerry's question, relative to quarter to quarter three had a sell off. And but overall for our our pro forma that we put in place for the year we expect them to be right in line.

Jeff Dugan -- Global Value Investment Corp -- Analyst

Great good to hear you prove yourselves adept at making an integrated acquisitions in the past. So glad to hear that. You mentioned in particularly on slide seven, your continued capital investment and acquiring engineering capabilities. Can you describe a little bit more about what that capex looks like, and specifically, what type of engineering capabilities you're acquiring?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Yeah, I'll address the engineering capabilities. And then I'll let Mike talk some more about the catbacks. The equipment itself, the capabilities we're talking about, and that is in the Catholic side. And it's not about just adding more people and heading to solve the problems, it's about giving them the tools necessary, so that we can be much more efficient and effective. And that's really, some of the investments we've been making. Our global engineering team, which we you'd heard me in the past talk about global electronics things that we're expanding the acronym to ensure that we have focus on an integrated solution, or much better focus on an integrated solution with electronics being a key element of that, you know, much of that work in the past was done by trial and error, and I'll call it brute force. That expanded capability. Now you're seeing this moving more and more to simulation tools, model based design, and utilizing that to accelerate the design process. And as that's wrapped up, it's making us a heck of a lot more effective and efficient. So that's the capital investment on the engineering support side of it, that we talked about there. And I'll let Mike talk about the capital and investments we're making in the other areas.

Michael R. Leach -- Chief Financial Officer

Good morning Jeff from an M&A perspective on FX, I would, you know, I think, describe our program is highly growth focused or cost savings focused that, you know, to the extent that we have maintenance capex spend expenditures, I would say it's probably limited to maybe 20 to 30% of our overall spend, analyze basis. So most of what you see is supporting new growth programs, either next generation products that are well established with well established customers, and or lines and equipment to support some of the new contracts that we've announced, in particular, late last year, this year, and probably into next year, some of the the automotive wins that we've announced as those ramp up, you know, we've had significant significant expenditures over the last 18 months in preparation of that ramp up.

Jeff Dugan -- Global Value Investment Corp -- Analyst

Great, and just following up on that 70 to 80% effect annually. What type of return on investment expectation do you have? Or how do you think about the ROI on that?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Oviously have a lot of competing priorities for capital with this focus, we are on external growth right with through M&A. So, you know, in diverting it internally, it obviously has to have, you know, similar returns, what we typically do is we'll build a business case model from the ground up when we entertain some of these newer contracts. And they need to be in line, if you will, from performance that we inline or exceed the performance that we demonstrate with our current product set for us to really undertake those things. So, again, a business case would have been built for the new automotive contracts and the capital investment required, they're making sure that they were delivering, again, without getting specific about a percentage return that would meet our shareholders expectations that would meet or exceed what we've delivered in the past. And in a timeframe that was acceptable, especially when we have the opportunity to divert some of that other growth objectives like external, our M&A activity.

Jeff Dugan -- Global Value Investment Corp -- Analyst

Sure, appreciate it. Yeah, I'll ask question...

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Jeff, just have a little bit too, I think, is Mike's talking about there and he started about growth. And he's talking about efficiency improvement. And there are many, I shouldn't say many, but there are several cases where we looked at the make versus buy the traditional make versus buy. And I think he understanding that you want control of supply chain and where do you have to where the supply is coming from and how you become competitive and so forth, as we've talked about local sourcing, as being a key element of our strategy and continue to be a key element of our strategy out into the future. So, you know, we've challenged our team to take the opportunity for certainly for industrial equipment today to look at how can we arrive at a better pace Back on, you know, call it a make versus buy by negotiating better pricing, more favorable pricing on capital equipment that, you know, we might be able to employ internally. So I'd say, we've been doing that as well. And we see some very positive signs there, it gives us it's not that we want to be totally, totally vertically integrated, there's times when it makes a heck of a lot more sense to outsource. But there today, you know, we we see some opportunities there to invest in certain capital equipment that gives us a more competitive advantage, and gives us certainty of supply as well. So that's another area that we're looking at or that we're evaluating. And that's typically a straight payback, you know, an analysis I make versus buy analysis OK.

Jeff Dugan -- Global Value Investment Corp -- Analyst

Yeah, thanks. It's really helpful. And last question, and I'll turn it back. And you piqued my curiosity here with your discussion around tariffs, I'm wondering if you can tell us a little bit more about the the tariffs that have experienced that type of product or sourcing, that that's impacted whether raw material or ponents, or finished goods. And then adding to that you mentioned, some of your medical prospects are looking to localize their sourcing. And I'm wondering if you can comment on where the localization is coming from, whether it's Asia, Europe, South America, etc?

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Sure, I'll pick easy one. And I'll turn it over to Mike, the localization that we're talking about is, there's, there's a couple ways to go about that. I mean, some of that's being driven by the terrorists, OK. And the additional part of that, what we're doing is we started a localization strategy several years ago, and with the idea that, if we have the right global suppliers, we can localize supply chains, we can get more certainty, where again, if you're, if you're bringing everything in from, let's just say Asia, and you run into a demand increase in customers typically schedule tight, you may have issues, you may have issues of supply, you may have the air freight product, and that's, that's an old age old problem that hasn't gone away, you got potential doc strikes, strikes, and then and then those have happened. And then you know, you add to that, no tariffs that may impact that. So I think what, what it's really showing us is that if you look at the true cost of acquiring a competitive product, or apart, it has to look at the life of the supply chain, the amount of inventory you're carrying in the supply chain, the delivery lead times the risk factors. So lining up, when we talk about strategic sourcing with global suppliers, they have the ability to produce in more than one region is really focused that we've had.

And by doing that we get, we can obviously negotiate a pricing on a global basis. But we can also shorten the supply lead time in the supply chain, and leverage that capability. So that we can we can build multiple locations based upon where the end product is going to end up. Okay, so that's the strategic sourcing. And what we seen is, especially in medical products here in which COVID is sidelight, it is that if there's a critical component coming in from, you know, a North American supply base, or and I'll say non European supply base, there seems to be an urgency to position them themselves in the future to have a North American or European based supply chain. And those are the opportunities that, you know, they don't show up immediately, because there's a long design in cycle, global process that those that those are started. And those are things that we're working on, we feel we have an opportunity to take market share because of our global footprint. So that's all called easy piece. And that'll let Mike talk about the tariffs and so forth and the impact it's had on us.

Michael R. Leach -- Chief Financial Officer

Sure, so Jeff, I would I would describe the tariffs. Again, it's Chinese source components, which, again, this goes into the discussion about localizing those efforts and not having to deal with this but certainly in motion control, you know, a fair amount of product is sourced overseas, particularly in China. And again, it's broad based. So, you could be talking about electrical components, you could be talking about ball bearings, you could be talking about, you know, mechanical components, so I wouldn't point to any one specific issue. We've worked very closely with our customers, since those tariffs were initiated, and we've been quite successful in passing those cat costs along. In that process, we've also applied for exemptions. And again, trying to be good partners with our customers and what we've received those exemptions we've passed the lack of those tariffs or the savings back to the customer. And my point to my comments, David, simply that some of those tariffs, exemptions are just being rolled off. And I would describe that as rather arbitrary and how that occurs and having to go back and forth with your customer and and have navigate that with the inflow or the past along those tears, it's difficult and strategic in nature. There's examples where we've strategically chosen not to pass along some of those costs, because of just the relationships with the customers or the sense of price sensitivity on certain products. So again, I highlighted as potential not saying that we will have to absorb these things. It's just it's just continued variability. I guess I would describe it as the what we're having to deal with here, given the situation.

Jeff Dugan -- Global Value Investment Corp -- Analyst

Your answers are very informative. Thank you. Keep up the good work.

Operator

Thank you. We have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Thank you, everyone, for joining us on today's call and for your interest in Allied motion. Those of you interested, we will be participating in two upcoming virtual conferences. Baird global industrial conference will be on Thursday, November 12, followed by the Craig-hallum conference on Tuesday, November 17. As always, please feel free to reach out to us at any time. And we look forward to talking with all of you again in the new year after our fourth quarter results. Thank you for your participation. Stay safe, and have a great day.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Craig Mychajluk -- Investor Relations

Richard S. Warzala -- Chairman, President and Chief Executive Officer

Michael R. Leach -- Chief Financial Officer

Greg Palm -- Craig-Hallum -- Analyst

Gerry Sweeney -- ROTH Capital -- Analyst

Dick Ryan -- Colliers -- Analyst

Brett Carney -- Civilian Companies -- Analyst

Jeff Dugan -- Global Value Investment Corp -- Analyst

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