Allient Inc.

Good morning, and welcome to the Alliant Incorporated third quarter fiscal year 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Craig Mihalik, Investor Relations. Please go ahead.

Yeah, thank you, and good morning, everyone. We certainly appreciate your time today, as well as your interest in Alien, Inc. Joining me on the call are Dick Rosella, our Chairman, President, and CEO, and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our third quarter 2023 results, provide an update on the company's strategic progress and outlook, after which we'll open up for Q&A. You should have a copy of the financial results that were released yesterday after the market closed. If not, you can find it at our website at Alliant.com, along with the 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 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 that differ materially from what is stated on today's call. These risks, uncertainties, and other factors are discussed in the earnings release, as well as 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 will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying earnings release and slides. With that, please turn to slide three, and I'll turn it over to Dick to begin.

Dick? Thank you, Craig, and welcome, everyone. Before we jump into the quarter results, I just wanted to remind everyone that we had our inaugural investor and analyst day at the end of August where we highlighted our expanded available markets and how we plan to leverage our proven process to ensure we achieve our future goals and objectives. Please visit our investor relations website where you can view a replay of the event or the transcript. Now onto the quarter. We continue to execute our strategy and delivered solid top line results, record gross margin, and robust cash generation that enabled us to reduce our debt and make an acquisition during the quarter. Once again, our industrial markets led the way with 32% sales growth over last year's third quarter, largely driven by industrial automation projects and power quality solutions focused on the HVAC and oil and gas end markets. Also contribute to our industrial sales growth with continued improvements within the supply chain environment. which supported the shipping of some long lead projects. Our other three targeted verticals saw contraction during the quarter. Those numbers don't tell the whole story, as there are a number of positive elements within each. Aerospace and defense sales reflected program timing, largely within the space industry during the quarter. On the defense side, we've experienced a high level of quoting and activity over the last few quarters, and we secured a large defense order, which is reflected in our third quarter orders. I will talk about our orders and backlog later in the presentation. Within our vehicle markets, our automotive customers are ramping up, as expected this year, although the growth was more than offset by lower demand within agricultural vehicles given the softness in Europe, largely influenced by the Ukrainian conflict. Lastly, medical sales were nearly flat as we continued to see a return to a more normalized sales environment focused on surgical and instrumentation-related end marks. We did experience office and medical mobility, which largely reflects a reduction in the demand that we experienced during the last few years for those products. Driving higher margins continues to be a focus, and we saw a nice expansion of our gross margin during the quarter. The 32.7% gross margin rate does set a new high watermark for Alliant and largely reflects the favorable mix from the end markets I just highlighted. On the operating performance, you will notice we had a jump in business development costs of about $1 million year over year. Those expenses were in support of the recent acquisition and some limited operations rationalization to position us and drive stronger operating leverage in the future. Overall, we delivered net income per share of 41 cents, and on an adjusted basis, net income per share was 61 cents. On a year-to-date basis, we generated significant cash from operations of more than $27 million, as we have seen modestly improved inventory returns. We did utilize some of that cash to reduce our debt balance by more than $11 million and to acquire Sierra Motion at the end of the quarter. While Sierra Motion is a relatively small acquisition, it is very strategic and enhances both our application design and development efforts and our customer-facing market strategy. Sierra Motion excels at providing rapid product development, prototyping, and low volume production to improve speed of play for customers. We further believe we can leverage their team skills and capabilities to advance our integrated motion solution strategy and to expand our reach into our targeted end markets. We also see the potential to enhance their capabilities by leveraging the Alliant global manufacturing footprint in order to provide larger scale production capabilities for Sierra Motion customers. Looking ahead, we still see exciting opportunities as we expand our presence in targeted market verticals, launch innovative solutions, and further streamline our business for greater efficiency. With that, let me turn it over to Mike for a more in-depth review of the financials. Thank you, Dick. Starting on slide four, we provide some details regarding our top lines. Third quarter revenue increased 8%, or $10.9 million, to $145.3 million. The favorable impact of exchange rate fluctuations on revenue was $1.8 million in the quarter. Excluding FX, organic revenue growth was 7%. The growth rates for our four targeted markets are noted on the slide, and Dick reviewed the pertinent changes within each. The acquisition of Sierra Motion did not have a material impact on sales during the third quarter. Slide 5 shows the change in our revenue mix by market on a trailing 12-month basis and the drivers behind the change. Industrial continues to be strong and remains our largest market, making up 43% of total TPM sales. That's an increase of 500 basis points since the comparable period in 2022. The 38% growth in the industrial space was driven by the same market as the current quarter. Defense program timing contributed to substantial growth, and performance in AMD, and the 200 basis point increase in share for the TTM period. Medical growth has benefited from a more normalized sales environment, and vehicle market revenue is comparable on a trailing 12-month basis, as commercial automotive and power sports demand offset weaker agricultural demand. As highlighted on slide six, our third quarter gross margin was 32.7%, up 50 basis points from the prior year period. Higher volume, and favorable mix more than offset elevated raw material costs. Consisted with our stated objectives, you can see the progress we are making by executing our strategy in the annualized chart. Moving on to slide seven, we delivered third quarter operating income of 11.9 million or 8.2% of sales, which was down 50 basis points. Operating costs and expenses as a percent of revenue were 24.5% up 100 basis points, of which 70 basis points was attributable to higher business development costs in the quarter as we continue to rationalize our manufacturing footprint and execute our M&A strategy. On slide eight, we present GAAP net income and adjusted net income, along with our adjusted EBITDA results. Our net income and diluted EPS have been adjusted for certain items. which we believe provides a better understanding of earnings power, inclusive of adjusting for the non-cash amortization of intangible assets, which reflects the company's strategy to grow through acquisitions as well as organically. Net income increased 1% to $6.7 million, or $0.41 per diluted share, and on an adjusted basis was up 3% to $10 million, or $0.61 per diluted share. The effective tax rate was 23% in the quarter, And we adjusted our expected income tax rates to the full year 2023, balanced slightly to be approximately 23% to 25%. Adjusted EBITDA increased 5% to $20.8 million, or 14.3% of revenue. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress in operating performance. Slides 9 and 10 provide an overview of our balance sheet and cash flow. As a reminder, in the first quarter, we made a $6.25 million deferred cash payment for a prior acquisition, which was reflected during the cash transition at the end of the third quarter. Total debt was approximately $224 million, down $11.1 million from year-end 2022. Debt net of cash was about $201 million, or 48.1% of net debt capitalization. Our bank leverage ratio was 2.9 times. We generated $27.1 million of cash from operations year-to-date, a significant increase in cash usage during the prior year period. The increase reflects higher net income and improved working capital management. Based on our cash flow projections, we expect to continue to drive strong cash flows consistent with historical trends. Year-to-date capital expenditures were $7.9 million and were largely focused on new customer projects. Due to project timing and supply chain impacts, we adjusted our 2023 CapEx expectations to now range between 12 and 15 million, down from 16 to 20 million. Inventory turns improved to 3.1 times in the third quarter compared with 103 times last year. And our DSO is at 57 days, largely reflecting timing and mix of customers. With that, I'll now turn the call back over to Dick. Thank you, Mike. Slide 11. shows our orders and backlog levels. Third quarter orders of approximately 155 million resulted in a book-to-bill ratio of 1.1 times and a backlog of nearly 310 million. Order levels were up 23 percent year-over-year and 13 percent sequentially, largely due to a $31 million defense market order received during the quarter. This order is from an existing program and is expected to convert to sales over the next two years, with shipments beginning early next year. Our backlog increased 4% from the sequential second quarter of 2023, reflecting defense order and strong demand for power quality solutions, partially offset by continued improvements from the supply chain environment. This has enabled the shipping of some long-lead projects as customer order patterns return to a pre-COVID-19 environment. As a result, we do expect our backlog to decline in the near term as our book-to-bill ratio drops below one. The time to convert the majority of backlog to sales is within the next nine months. Turning the slides well, we expect our business for the remainder of the year to reflect a pre-COVID-19 environment and be consistent directionally with our fourth quarter results from prior years. This means there is a higher likelihood of seasonality for holiday shutdowns and customers managing their own inventory levels at year end. Demand is expected to continue at relatively strong levels within our industrial markets and to benefit from our increased market presence around industrial automation, material handling, and power quality solutions. Our other targeted markets are expected to exhibit puts and takes from the end markets similar to this past quarter. Driving cash conversion and paying down debt is a priority, and we will continue to focus on this area as we round out this year and move into 2024. Our debt reduction efforts are expected to support our planned M&A activities, which is a key element of our overall growth strategy. As always, we are actively grooming potential opportunities and building out our M&A pipeline. The increasing global unrest we are all experiencing has the potential to present additional challenges in our day-to-day operations, but we are confident that the Alliant team has the experience and dedication to navigate through these uncertainties while still remaining focused on executing our long-term strategy. Overall, we are excited and confident in our future, and we believe we are well-positioned to create additional value for all of our stakeholders. Lastly, for those that didn't get a chance to see our Investor Day presentation, the image on the left is what we call the House of Alley. It is a refined structure that layers on a strong vertical market focus on top of our key technology pillars of motion, controls, and power. This is the basis of how we plan to accelerate our future success. With that operator, let's open the line for questions.