Allied Motion Technologies, Inc.

and welcome to the Allied Motion Technologies fourth quarter and fiscal year 2022 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Craig Mihalik of Investor Relations. Thank you. You may begin.

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 Rosella, our Chairman, President, and CEO, and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our fourth quarter and full year 2022 results and 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 on our website at alliedmotion.com. along with the slides that accompany today's discussion. If you're 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 to differ materially from what is stated on today's call. These risks, uncertainties, and other factors are discussed in the arranged 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 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 reconciliation of non-GAAP two comparable gap 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.

Thank you, Craig, and welcome, everyone. The fourth quarter capped off a record year for Allied as we continue to execute our strategy, leverage our diversified and market mix, and further develop our one Allied global platform. I'm incredibly proud of the teamwork and dedication of the entire Ally team as their consistent and focused efforts advanced our strategic priorities both organically and inorganically while navigating macro headwinds. There were a number of highlights during the fourth quarter as revenue grew 35% due to higher demand across each of our target markets, which included incremental sales from acquisitions and impressive organic growth of 18% during the quarter. Equally important was the strengthening of our margin profile, in spite of the overall inefficiencies created by the global supply chain and labor constraints. Both operating income and net income doubled over last year's fourth quarter, and on an adjusted basis, our earnings per share were 43 cents, up from 30 cents last year. For the year, we reached a milestone as our revenue grew 25% across the $500 million level. We achieved solid annual organic growth of 12% on a constant currency basis, which reflected strong demand within our industrial and aerospace and defense markets. We believe our performance across markets substantiates the investments we have made to grow, diversify, and strengthen our businesses. As you know, strategic acquisitions are a key component of our growth strategy. We completed three acquisitions in the fourth quarter of 2021 and another three in the second quarter of 2022. Collectively, they enhanced our value proposition with new technology offerings, strengthened our competitive position, and improved our overall margin profile. The integrations have progressed well, and our teams are working hard to maximize opportunities and realize the full potential of these businesses. Overall, we achieved our stated goal of gross margin expansion, reaching a record 31.3% for the year, which was up 130 basis points. We have not yet fully leveraged these acquisition costs, we still delivered annual net income of $17.4 million, or $1.09 per diluted share, and on an adjusted basis, net income per share of $1.88, which was up 18% for the year. With that, let me turn it over to Mike for a more in-depth review of the financials. Thank you, Dick. As a reminder, our results include the acquisitions completed during the fourth quarter of 2021, and the second quarter of 2022. Starting on slide five, we provide some detail regarding our top line. As expected, we did see some minor seasonality creeping back into the business during the fourth quarter, particularly in December, due primarily to the typical holiday shutdowns and customer inventory adjustments associated with general business conditions normalizing. Nevertheless, fourth quarter revenue increased 35% to $131 million, which reflected higher demand across each of our target markets and incremental sales from acquisitions. The unfavorable impact of exchange rate fluctuations on revenue was $6.7 million in the quarter. Excluding FX, revenue was up 42% and organic revenue growth was 18.3%. Revenue in the aerospace and defense market grew 197% from organic growth, program timing, and incremental acquisition demand. Industrial market sales growth was 46%, reflecting strong end market demand in industrial automation, material handling, and electronics. We saw 8% sales growth within our vehicle market, largely from commercial automotive, trucks, and power sports demand. While medical markets benefited from surgical-related markets and medical pumps, they were offsetting pressures due to lower pandemic-related sales. The distribution market, while a small component of our total revenue, increased 22% during the quarter. As Dick highlighted, our full-year results are also strong, with revenue growth of 25%. On a constant currency basis, Revenue was up 30% for the year, which included 12% organic growth. Sales to U.S. customers were 58% of our total compared with 54% for 2021, with the balance of sales to customers primarily in Europe, Canada, and Asia Pacific. The shift in mix continues to reflect the impact of our recent acquisitions that largely sell to the U.S. market. Slide 6 shows the change in our revenue mix by market for the full year period, along with the 2022 growth rate for each market and the drivers behind the change. Sales to industrial markets were up 43%, driven by the verticals noted on the slide. Industrial has seen nice growth over the last year and continues to be our largest market, making up 38% of our total sales. Vehicle grew slightly as strong truck and commercial vehicle demand offset lower sales in construction and power sports. Medical market revenue was nearly flat on a full year basis, reflecting similar impacts in the fourth quarter. While acquisitions contributed to the aerospace and defense growth, we were also driving solid organic growth and benefiting from defense market program timing. As highlighted on slide seven, our fourth quarter growth margin was 31.1%. up 240 basis points from the year-ago period, higher volume, margin accretive acquisitions, and pricing more than offset continued global supply chain disruptions and rising material and labor costs. Consistent with our stated objectives, you can see the progress we are making by executing our strategy in the annualized chart on the right as we achieved a record annual gross margin level of 31.3%. While our recent M&A activity is certainly helping, we also equate this performance to our global teams that continue to drive higher margin solution-based sales. Moving on to slide eight, fourth quarter operating income more than doubled to 8.2 million, or 6.2% of sales, which was up 210 basis points. Operating costs and expenses as a percent of revenue were 24.8%, up a modest 30 basis points, largely attributable to our second quarter M&A activity. Operating costs for the full year were also elevated due to M&A activity, which resulted in higher engineering and R&D costs, intangible amortization expense, and business development costs. Over time, we expect to fully leverage those expenses with continued sales growth. On slide 9, 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 our earnings power, inclusive of adjusting for non-cash amortization of intangible assets, which reflects the company's strategy to grow through acquisitions as well as organically. Fourth quarter adjusted net income was $6.9 million, or $0.43 per diluted share, up 43% from the adjusted $0.30 per diluted share in the prior year period. The effective tax rate was 27.7% compared with 53.9%, as the prior period included a $0.5 million valuation allowance of a deferred tax asset in a foreign jurisdiction. We expect our income tax rate for the full year 2023 to be approximately 25% to 27%. Adjusted EBITDA increased 47% to $16.6 million, or 12.7% of revenue. which was up 100 basis points from the fourth quarter in 2021. For the full year, adjusted EBITDA was up 31% to 65.5 million, and as a percent of sales, was 13% up 60 basis points.