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.