Allied Motion Technologies, Inc.

Good day and welcome to the Allied Motion Technology Second Quarter Fiscal Year 2023 Financial Results Conference Call. All participants will be in a 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 touchtone phone. And 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 Mr. Craig Mihalik, Investor Relations. Please go ahead, sir.

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 second quarter 2023 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 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 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, uncertainties, and other factors are discussed in the earnings relief 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 sbc.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 have 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? Thank you, Craig, and welcome, everyone. You know, I'd like to start the call with some off-script comments as I have something I would like to relay to everyone. Sadly, Dick Smith, our former CFO, CEO, and Chairman of the Board, passed away this past Sunday after a brief illness. Dick, was the person that brought me into Allied at that time halfway 22 years ago, and for that I will forever be grateful. Dick was a great friend, partner, and he exhibited the highest levels of honesty, integrity, and willingness to do what was right for the company. Beyond that, Dick was a family man, and family always came first. My thoughts and prayers will go out to Dick and his family. Rest in peace, Dick. We will miss you, but you will not be forgotten. Now I'll start with the script as we have written here. First off, we continue to successfully execute our strategy by delivering record sales, double-digit organic growth, and strong operating leverage, which translated into a measurably improved bottom line and solid cash generation. Our 20% top-line growth reflected strength in each of our four targeted markets, highlighted by continued strong demand with our industrial markets, which increased 39% over last year's second quarter. What drove our industrial strength was industrial automation projects, power quality solutions for oil and gas and HVAC, and continued demand for material and vehicle handling systems. We also benefited by shipping some of the long lead projects that were in our backlog. Aerospace and defense markets grew 11% during the quarter due to incremental contributions from acquisitions and defense program timing. Vehicle market sales increased 7% due to continued ramping of commercial automotive programs, partially offset by lower agricultural vehicle demand in Europe. Lastly, medical markets were up 3% overall. Driving higher margins continues to be a focus, and while we saw some contraction in gross margin for the quarter, which was largely impacted by mix, we are seeing the leverage play out in our operating performance as we delivered record operating income of $12 million with a margin of 8.2%, which was up 210 basis points. Given the improved operating performance, net income per share increased 45 percent to 42 cents per share. On an adjusted basis, net income per share was up to 58 cents per share. We generated significant cash from operations of 13.7 million and reduced our debt balance by 9.4 million during the quarter. Our orders were up sequentially, further emphasizing demand in the market while our backlog was down since the first quarter due to continued improvements within the supply chain. I will talk about this performance later in the presentation. The first half of 2023 has positioned us for a strong year. Our entire team is energized by the continued growth and operational successes throughout the company, and we expect to continue executing our strategy well into the future. 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 second quarter of 2022. Starting on slide four, we provide some details regarding our top line. Second quarter revenue increased 20 percent, or $24 million, to a record $146.8 million. The unfavorable impact of exchange rate fluctuations on revenue was $0.4 million in the quarter. Organic revenue growth was 17%. Dick touched on the quarterly sales highlights for our targeted markets and end market demand. One other sales channel, which is still a small component of our total, is distribution, which has continued to see solid growth and was up 17% in the quarter. Slide 5 shows the change in our revenue mix by market on a trailing 12-month basis and the drivers behind that change. industrial continues to be strong and remains our largest market, making up 41% of our total TTM sales. The 40% growth in the industrial space was driven by the specific markets identified. A significant portion of our backlog reduction occurred with customers in our industrial markets as well. Solid organic growth, defense program timing, and contributions from acquisitions contributed to substantial growth and performance in A&D. Medical growth has benefited from the gains in the medical mobility market, and vehicle market revenue was up slightly on a trailing 12-month basis as commercial automotive, power sports, and truck demand more than offset weaker agricultural demand in Eastern Europe driven by current geopolitical events. As highlighted on slide six, our second quarter gross margin was 31.3%. down 110 basis points from the prior year period. Higher volume was more than offset by unfavorable mix and remaining global supply chain disruptions. Consistent with our stated objectives, you can see the progress we are making by executing our strategy in the annualized chart on the right of slide six. Moving on to slide seven, you can see the results of our strong revenue growth and the leverage inherent in our operations of second quarter operating income increased 60% to a record 12 million, or 8.2% of sales, which was up 210 basis points. Operating costs and expenses as a percent of revenue were 23.2%, down 310 basis points. On slide eight, we present GAAP net income and adjusted net income, along with our adjusted EBITDA results. Our net income and fully diluted EPS have been adjusted for certain items, which we believe provides a better understanding of our earning 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 48% to $6.8 million, or $0.42 per diluted share. And on an adjusted basis, net income was $9.5 million, or $0.58 per diluted share, up 21%. The effective tax rate was 23.9% in the quarter due to discrete tax benefits and geographic mix. We adjusted our expected income tax rate for the full year 2023 down slightly to be approximately 24 to 26%. Adjusted EBITDA increased 26% to $20.4 million, or 13.9% of revenue, which was up 70 basis points from the second quarter of 2022. We use adjusted EBIT as an internal metric and believe it is useful in determining our progress and 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 our prior acquisition, which was reflected in our cash position at the end of the second quarter. Total debt was approximately $228 million, down $8.3 million from year-end 2022. debt net of cash was about $203 million, or 46.2% of net debt capitalization. Our bank leverage ratio was 3.06 times. We generated $17.3 million of cash from operations year to date, a significant increase from cash usage during the prior year period. The increase reflects higher net income and improved working capital due to stronger inventory turns. Based on our cash flow projections, we expect to continue to drive strong cash flow this year consistent with historical trends. Year-to-date capital expenditures were $6.1 million and were largely focused on new customer projects. Due to project timing, we adjusted our 2023 CapEx expectations to now range between $16 million and $20 million, down from $18 to $23 million. Inventory turns improved to 3.3 times in the second quarter compared with under three times last year. Our DSO was stable at 55 days, largely reflecting timing and mix of customers. With that, I'll now turn the call back over to Dick. Thank you, Mike. Turning to slide 11 shows that our orders and backlog levels in the second quarter orders of approximately $137 million resulted in a book-to-bill ratio of 0.9x and a backlog of nearly $300 million. Though there continues to be some near-term challenges with some pockets of weaknesses in Europe, we still see excellent long-term opportunities for growth and value creation across our global platform. Our backlog decreased 3% from the sequential first quarter of 2023, reflecting continued improvements in the supply chain as we reduce our lead times and accelerate shipments of several long-lead products. As we mentioned last quarter, we expect our backlog to decline slightly over the coming quarters 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 to slide 12, demand is expected to continue at relatively strong levels within our industrial markets, which should continue to benefit from our increased market presence around industrial automation material handling, and power quality solutions. On the defense side, we are experiencing a significant increase in queries with the ability to leverage our comprehensive product portfolio to develop solutions for several new and emerging applications. Our medical markets have returned to a more normalized sales environment focused on surgical and instrumentation-related end markets. And lastly, we are still anticipating modest growth within our vehicle markets, as the supply chain continues to improve and demand schedules from our customers ramp up this year and beyond. As we demonstrated this quarter, driving cash conversion and paying down debt is a focus. We will continue to focus these efforts as debt reduction will support our planned M&A activities. On that note, we are actively grooming potential opportunities as we build out our M&A pipeline, a key element of our overall growth strategy. While uncertainty remains in the global markets, we have confidence that we can continue to successfully execute our proven strategy well into the future. Before we open up for Q&A, just a reminder for those of you that are interested. We will be hosting our inaugural Investor and Analyst Day at the NASDAQ on Wednesday, August 23rd. The event will kick off at 11 a.m. Eastern and will culminate with us ringing the NASDAQ closing bell. The Investor Day will be a great opportunity for you to hear more about our company and the actions we are taking to, number one, expand our available markets, two, further strengthen and grow our market share, three, leverage our global manufacturing and engineering capabilities to ensure we achieve our goals and objectives, and last but not least, help you gain a better understanding of how we plan to leverage our success in the past and continue to execute our proven process well into the future. Please visit our investor relations website for more details on the event. With that operator, let's open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Greg Palm with Craig Hallam Capital Group. Please go ahead.

Thanks. Morning, everyone. Sorry to hear the news about Dick. So condolences to his family and all of you. So I guess... Maybe we can just start by kind of just recapping what you're, you know, seeing out there. You know, it sounds like maybe a little bit of softening in certain, you know, verticals or geographic areas. So maybe just a little bit more color on kind of real time what you're seeing, and then we can go from there.

Sure. I would say to you that overall, I mean, we were certainly well prepared that The order intake over the last couple years here was somewhat inflated, and as the supply chain started to normalize, that we would expect to see some adjustments to schedules and so forth, and that probably incoming orders would decrease. We have experienced some of that, but on the other hand, I think as noted by our 20% increase in revenues, We seem to be pretty well positioned, and we're really not very concerned going into the future. What we probably will see, Greg, is that there will be some ups and downs in markets. I think we've covered those markets where we have some concerns, and Mike mentioned them and some geopolitical concerns and so forth. But on the other hand, we still see some very strong opportunities here for us to continue at the levels that we've delivered here in the past. We may see less volatility quarter to quarter as we've diversified our portfolio more than what we had experienced in the past. But overall, you know, I think the numbers we put up here for the quarter were quite strong and exhibited very strong growth. And as we said during the conference call, we feel confident that we can continue doing so into the future.

And I know you've talked about some of that elevated order activity, you know, in the past quarters or past few years. Do you have a sense of what kind of inventory levels are? I mean, is that a concern, you know, at customers or some customers or do you feel like, you know, they're in a position where it's just more of a real-time demand thing?

It varies by customer. I mean, some customers were more conservative than others and, placed demand for longer periods of time just to ensure they were in the pipeline. And we were seeing some adjustments based upon that. But I would just say to you that we have a really excellent communication with our blanket customers. And there's some reshuffling, but it's something we would have expected, quite frankly. So there's no concern on our part that business is going away or there's a major drop off into the future. We're just not seeing that. And so I could say to you that, you know, as expected, when we come out of these things, this is the normal historical trends of, you know, supply chain shortages and longer lead times and, you know, orders being entered much earlier based upon forecast. You know, we have experienced the same thing, but I would also have to say that it's, Certainly not as drastic as we had seen in some past adjustments.

Understood.

But it's customer by customer, and really each of them manages their business a little bit differently, and it really depends on them.

Yeah, okay. Operationally, another good quarter where you saw solid margins, good operating leverage. I know you've talked about gross margin expansion on an annual basis. I think you've targeted 100 basis points. Are you still comfortable with that in light of some of your comments on a more muted sort of demand volume outlook? Or do you still think there's ways that you can take some costs out? And I'm just curious, are you still... seeing or incurring some of the elevated supply chain costs that we've been talking about over the past year, or have those basically ended at this point?

No, I think, well, okay, a couple of questions here. First off, let's, you know, we stated that our goal was to increase gross margin, and I think we've come back and stated as well that you've got to consider as part of the gross margin overall operating margin. So that's really, what we will focus on in the future is that the combination of gross margin and operating margin improvements will give us the 100 basis points per year. So I think let's make sure that we take that and we're clear on that going forward. Operating margin is always a challenge based on mix. And that's what's sometimes difficult from quarter to quarter or year over year to really look at. So depending on And obviously, as you know, the mix of our products based on certain markets and certain products sold, the margins will be lower. And on the opposite of that, I mean, we have others that are much higher gross margin based upon, I'll call it, the IP involved in the markets we're serving as well as the content that we have in those in terms of a solution set. So let's, I think let's level set and say, we are going to proceed here with meeting our commitments for 100 basis points improvement on a combination of gross margin and operating margin level. Okay?

Makes sense to me. I think I'll leave it there. Thanks, and best of luck. Thank you, Greg.

The next question will come from Ted Jackson with Northlink Securities. Please go ahead.

Thanks very much. Congrats on a very solid quarter, guys. Thanks. Thanks, Ted. So a couple of questions. One, just because following up on the prior kind of Q&A and commentary, you know, I understand, you know, supply chains normalizing out and some, you know, floating around with you, if you would, with regards to orders and shipments. But you also, you know, feel pretty confident that you're going to be able to continue to show growth on an organic basis in the second half of the year. Is that what I picked up from all that dialogue?

Yeah, I mean, I think from an organic growth standpoint, we're certainly confident that we can continue to grow. The comment that I just, I think, want to clarify is that in the past, you would see some more seasonality in our business quarter over quarter. And based on what we're seeing and based on backlog that had some items that sat in there waiting for supply chain to free up and ship. I think we're seeing more of a normalized quarter-over-quarter shipping rate, and then we see that going forward. Now, fourth quarter, we'll let you know as we get closer because that's always been a crapshoot for us in the past and based upon what happens with our customers. But really what we're seeing is more stability and less competition less cyclical shipments in a quarter over quarter. Europe has a tendency to be lower in Q3. Many countries shut down for multiple weeks in August. So that's July and August. So we do see some weakness there. But I guess I would say to you and to everyone else is that Europe the expectations of the cyclicality that we saw or seasonality we saw in the past is going to be muted. Okay.

Okay. Just to kind of help clarify a little bit, you know, with regards to backlog, if you look in your backlog, you know, how much of your backlog shifts in third quarter?

Well, I would say to you that here's the, when we say what's in our backlog and our reported backlog, because We only have in our backlog items which have firm release dates or production dates. So it varies by customer. We have, depending on the lead times that we have, so when they release, we'll call it a planned order or forecasted order, to a firm production date, that's when it officially goes into our backlog. But you really don't see those. Those are pretty much book and ship within a very short period of time and pretty much wash out in the quarter. So to answer your question, for third quarter, 95% plus is in our backlog if you would consider as well the blanket orders that will come and go within the quarter. So it's pretty much locked in the third quarter at this point. Yeah, the dynamic of our backlog hasn't changed. We've stated that what's in the backlog, most of it will ship within the next six to nine months.

Okay. And then shifting over, just out of curiosity, I know Rockwell is a distribution channel for you, and they reported results earlier in the week, and honestly, they had some difficult performance in the stock as well. One of the things that impacted them during that quarter, and probably really the only thing, was that they put this new distribution center in place, and it caused a little bit of a hiccup in terms of timing with regards to some revenues. And I was curious, given your exposure to Rockwell, is there anything within that that has played out for Allied motion? And is there anything we need to think about on that front?

Not really.

Okay. And then, Dick, the last, well, probably maybe three press releases, it's been pretty consistent with regards to discussion about Europe and certain kind of softness and pockets of it, if you would. You know, with regards to this current quarter, is there any, you know, kind of relative shift with regards to that weakness relative to, you know, say, you know, first quarter? Or is it just a continuation of kind of the same kind of generalized bullies, if you would, that affected the region because of the Ukraine war?

Yeah, what I would say to you is this, is that surprisingly, the bookings the bookings in quarters one and two and so forth, and based upon, we had expected some, in Europe, some impact on it and so forth, and we really weren't seeing that to a great magnitude. We have seen some additional softness in the booking levels, but there's still strong backlogs to work off of. So, you know, energy prices, the Ukraine war, I think are still impacting, and you've got, but, The reality is the bookings have remained strong, orders replaced. There has been a little bit of softness here in the last few months that we've noticed. But again, too, it's holiday season in Europe. So that's a hard one to predict.

Yeah, you're not the only one that has that problem. My last question is just on the vehicle business. You know, you commented on the commercial vehicle business and the strength you're seeing within there, and it's offset some of the ag side of things, which clearly is from the small ag equipment market. But in the commercial vehicle side of the equation, there's clearly been some, call it, forward demand pull through because of emission rule changes and stuff. Given that market dynamic, how do you see that part of your vehicle business performing as we roll out of 23 and into 24? And maybe you could give a little color with regards to the exposure within that line item that the commercial vehicle market is relative to the aggregate.

Sure. Well, I mean, we're not going into specifics about what the Percentage of sales overall, we talk about the overall vehicle market. I would say to you that the impact on us for commercial automotive is not really significant. We have seen increase. We have seen the volume and the demand going up. Where we talk about the offset, which I'll say is the much greater magnitude, which will mute some of that growth, is in the agriculture equipment and programs that we were working on with our OEMs in Eastern Europe, which were essentially shut down. So until that has a greater impact on us in the reduction on our level of shipments there versus commercial automotive ramp-up, we would gladly substitute and swap those two and see that demand for the agricultural equipment and construction equipment and so forth, that impact in Eastern Europe, go back to what the expected levels were and have a, let's say, a slower growth on automotive, we would be perfectly happy with that. And the impact would be, we talk about mix and so forth and margins, that would definitely have a positive impact, favorable to the company. So I would just say to you that these are the, the diversification of the company is what's really our strength. And while some markets are, experience in a little softness, our other markets are growing. And that is our intention to continue to do that in the future. And we've always said that we like the benefits of the commercial automotive market and that the core unit volume, the discipline it teaches you, the zero defect mentality, and the positive impacts on overall costs and other areas that that can bring. We also don't want to be overweighted in that area. Let's do enough to realize those benefits, but let's make sure that we don't get overweighted. So I hope that helps you understand it. To answer your question, we have seen an increase, and I think we'll continue to see increases. But the offset is more powerful than the increase that we see in that market. And the increases are coming from the new programs that we have been discussing for the last couple of years. Correct.

Yeah, they're coming. That's super helpful. So I'll get out of line, and I look forward to seeing you guys in New York later in the month.

Great, Ted.

Again, if you have a question, please press star, then 1. Our next question will come from Brett Kearney with the Gabella Funds. Please go ahead.

Hi, guys. Good morning. Thanks for taking my question.

Good morning, Brett.

I was going to follow up on the vehicle new program awards. You kind of covered it some in your prepared remarks and in the discussion right there. But just on whether those program launches are still kind of on the original timetables. And maybe if you could remind us kind of the ramp schedules there. And then also the customers and products you're supporting there on some of the new programs seem to be You know, that product set seems to be growing nicely globally. Maybe opportunities if you guys perform there as you have done historically, you know, longer term with some of these customer relationships you've developed.

Yeah, I mean, those programs were all delayed through COVID. And so they definitely were pushed. And I would tell you that if we look at the original forecast, that we were provided for programs, and let's say without COVID and without supply chain, we're probably two years behind. So nothing has changed in terms of what we expect our annual revenue base to be in that area. Programs are moving forward. It's just a matter that they were pushed out, and the ramp-up was delayed, but it's clearly ramping up. So I would tell you that next year we'll be at... what we stated for the new program shipment levels will be at full level of what we've stated. So they are moving forward, and they're moving forward nicely.

Excellent. Okay, and then I think just last one, we've covered the topic of destocking across the industrial channel. Maybe we've heard from some folks that there's some you know, inventory adjustments taking place on the medical OEM side. It seems like, you know, the applications you guys are on there kind of insulate you, but maybe what you're seeing positives and negatives on the medical side of the business.

Yeah, I mean, I would tell you that that's one that has been, of course, you go back through the COVID time and you take a look at what the products were shipping during COVID and those that were not shipping. You know, we've said here, I think within the last, within the past year, year and a half, they kind of normalized back to, we'll call it a normal period of time, a non-COVID period of time. We're, you know, so our instrumentation and our surgical equipment and all the other surgical equipment that goes on when I say surgical, including oncology and surgical robotics and other surgical, I mean, they're, they're tracking nicely. Uh, the, so we're up 3% overall, you know, year over year. And I would say to you that, uh, you know, there may be some correction going on and maybe the growth rate should be higher. It's, it's, it's certainly in the drag on our overall growth rate that we've seen for the company that some other areas, but on the other hand, it's been stable. And I think it's, it's pretty steady and it's probably, you know, if there's restocking, um, We're not really seeing it, all right? So don't know where that's occurring, but we're not seeing it.

Yep, excellent. Thanks so much, Nick.

Okay. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Well, thank you, everyone, for joining us on today's call and for your interest in Allied Motion. As always, please feel free to reach out at any time, and we look forward to talking with all of you again after our third quarter 2023 results. In addition to the Investor Day at NASDAQ, please join us at the Northland Capital Markets Conference on September 19th in Minneapolis. Thank you for your participation, and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.