Q2 2021 Allied Motion Technologies Inc Earnings Call
Reflecting the recovery and our vehicle and industrial markets.
Notably, we achieved double digit organic growth of 12, 4%.
Our vehicle markets were up 82% year over year, which was largely driven by power sports as well as growth and other end markets such as commercial automotive and construction vehicles.
The resurgence of our industrial market, which was up 20% over the prior year has been broad based with gains and material handling automation HVA see electronics.
And oil and gas projects as well.
Yeah.
Revenue from medical as normalized as residual demand from the pandemic as mostly ended.
Our A&D markets continued to be impacted by the pandemic, although on a sequential basis, we saw 15% growth.
Overall, we are encouraged by improvements and increasing demand as demonstrated by our record level of orders and backlog and the quarter.
Like many others, we have faced significant material and supply chain constraints, resulting and extended lead times and higher material cost.
For example, sourcing components for electronics has been very tight.
And we are strategically building inventory if possible given anticipated future demand.
We believe our teams have done an excellent job managing demand and fulfilling orders to satisfy customer requirements to date. However.
However, we expect these adverse market conditions to continue for the foreseeable future.
The result of these efforts was reflected in our margin performance.
On a sequential basis gross margin was up 110 basis points to 37%.
Operating margin was up 10 basis points and adjusted EBITDA margin improved 40 basis points.
As a result, net income increased 60% over the prior year to $4.6 million or <unk> 32 per diluted share.
We continued to generate strong cash from operations of $10.9 million during the quarter.
This enabled us to reduce total debt by $7.6 million and further improve our bank leverage ratio to 244 times.
During the quarter, we were among those that were the subject of cyber security breach.
We discovered the issue fairly early and were able to immediately implement our risk management playbook, which entails bringing in forensic experts and the field.
We were able to contain the issue and we were able to get operations back up and running without a material impact on our results for the quarter.
We have also since implemented additional security measures. Thus further safeguarding our systems. Unfortunately, we believe cyber security is a net national issue and all are at risk.
We were pleased with our ability to act quickly and decisively to contain the breach and move forward.
Moving on we are excited about the progress we are making and are increasingly encouraged by our potential over the longer term with record backlog and increasing order trends and we are confident and our initiatives and the strength of our business model.
Importantly, we are making the investments necessary to execute on our 1 allied strategy and strategic areas of excellence to drive further growth.
Enable scalability and improve our earnings power.
Our advanced engineering skills that create integrated solutions for our customers continue to be a key differentiator for us.
The breadth of our product offering and our ability to provide and optimized and complete control motion solution.
Sets us apart from our competition, enabling us to take market share and gain more business from current customers.
With that let me turn it over to Mike for a more in depth review of the financials.
Thank you Nick as a reminder, all share and per share information and our earnings release and slides reflect the 3 for 2 stock split completed in April.
Yeah.
Starting on slide 4 we provide some detail regarding our top line.
Second quarter revenue increased 17% or $14.9 million to $101.5 million.
Demand was particularly strong and vehicle improving 82% year over year, our interest dust real markets grew 20% year over year and 8% on a sequential basis.
Both verticals are benefiting from the continued economic recovery.
The favorable impact of exchange rate fluctuations on revenue was $4.1 million and the quarter.
Excluding FX revenue was up 12, 4%.
Sales to U S customers were 55% up from 50% and the prior year period with the balance of sales to customers, primarily in Europe, Canada and Asia Pacific.
The change in Gi and geographic mix reflects the strong vehicle market demand.
Slide 5 shows change and our revenue mix by market for the trailing 12 month period.
Total TTM revenue was up 8% and reflects the impact of our diversified business model, including the addition of dynamic controls to our medical market, which continued to perform well.
The economic impact of COVID-19, pandemic was reflected and the reduced demand or order deferrals within A&D.
And while industrial has seen improving demand that Marco was still down on a trailing 12 month basis, given the significant headwinds from the impact of the pandemic over the last year.
As depicted on slide 6 our gross profit was up $4.8 million or 18% to $31.2 million, reflecting higher volume compared with the prior year period.
Our second quarter gross margin increased 110 basis points sequentially to 37%, reflecting strong volume levels favorable mix and the disciplined execution of our lean toolkit asps.
We continue to believe that our team is managing the impact of the supply chain and material cost constraint as well and we are constantly working hard to offset those impacts ulta.
Ultimately, we expect some lingering headwinds to continue for the near term, but as we have stated we do anticipate and anticipate seeing margins grow over the long term.
Moving on to slide 7.
Second quarter operating income was $6.7 million up $1.7 million from the 2022nd quarter and slightly up from the first quarter of 2021.
Operating margin of 6.6% increased 80 basis points year over year, and 10 basis points sequentially.
Operating costs as a percentage of revenue improved 60 basis points year over year to 24, 1% as higher volume and disciplined cost control offset increased incentive compensation.
Which was largely in the G&A line.
On slide 8 you can see our bottom line and adjusted EBITDA results.
Net income increased to $4.6 million from 32 per diluted share up from 12 from the second quarter of 2020.
The effective tax rate for the quarter was 21, 9% compared with 29, 9%.
The lower rate was largely driven by higher discrete income tax benefits primarily related to share based awards.
We expect our income tax rate for the remaining quarters of 2021 to range between 26% to 28%.
Adjusted EBIT for the quarter was $12.4 million or 12, 2% of sales up from $10.1 million or 11, 7% of sales and the prior year period.
Sequentially adjusted EBITDA increased <unk> 4 million and 40 basis points.
We use adjusted EBITDA as an internal metric and believe it is useful and determining our progress and operating performance.
Slides 9 and 10 provide an overview of our balance sheet and cash flow, we paid down $7.6 million of debt during the quarter, resulting in a $112.4 million of debt total debt at the end of the period.
Debt net of cash was $89 million and net debt to net capitalization was 36%.
Down 440 basis points from year end.
Our bank leverage ratio was 244 times at quarter end.
And while we are comfortable at this level, we will continue to focus on paying down debt to reload for future acquisitions.
We generated strong cash flow from operations of $10.9 million and the second quarter and a total of $16.5 billion for the year to date period.
Second quarter, Capex was $2.8 million and largely focused on new customer projects as well as ERP implementations.
We expect our fiscal 2021, capex to range between $12 million and $15 million.
Inventory turns were 3.7 times down slightly from 2020.
Our teams have been managing our inventory levels, well as we work to meet increasing customer demand and combat sourcing and lead time challenges.
Our DSO was consistent at 47 days and the quarter.
Given the strength of our balance sheet demonstrated agility and diversify the end markets, we are confident and well positioned to continue driving further efficiency profitable growth and enhanced free cash flow over the long term.
With that I'll now turn the call back over to Vic.
Thank you Mike.
Turning to slide 11 that highlights encouraging trends as customer demand and our strengthened market position has resulted in record orders and backlog.
Since the low point during the onset of the pandemic, we have achieved 1 full year of consistent order growth, reaching $119 million and the second quarter.
This represents a 48% increase over the second quarter of 2020 and up 4% sequentially.
All of our major market channels are contributing and our book to Bill ratio was solid at 117 for the quarter.
Backlog increased 12% over the sequential first quarter and was up 33% over last year's second quarter to more than $170 million.
Approximately 90% of our backlog.
It is expected to convert to sales over the next 3 to 6 months.
From a market perspective, we expect demand within our vehicle and industrial markets to remain strong and the third quarter as we are seeing increasing order activity, reflecting continued improving economic conditions.
Demand and our medical market is expected to still be solid with the ongoing recovery and electric surgeries.
We continue to take a cautious approach with our A&D markets, though we are encouraged to see increased quoting and orders, which we expect will have a positive impact in fiscal 2022 and beyond.
We do not anticipate any meaningful improvement to inflation and supply chain constraints and the near term. We believe we can continue to leverage the strength of our supply chain management capabilities to help navigate this dynamic landscape.
Additionally, improved volume leverage and productivity gains are in place to help offset the operational challenges of the tight supply chain.
Our strong cash generation will enable us to continue to pay down debt and at the same time execute acquisitions, which remains an important element of our overall strategy.
Our acquisition pipeline has been building.
But we are continuing to see very high valuations and as.
And our history has demonstrated we will be prudent with our M&A strategy as we look to enhance the long term growth and profitability profile of Allied motion.
As we look forward, we believe we have a platform that can deliver expanding margins and given the emergence of a more stable environment. We are optimistic that we will continue to drive growth and the future.
With that operator, let's open the line for questions.
We will now begin the question and answer session.
You May press Star then 1 on your telephone keypad furious and the speakerphone. Please pick up your handset before pressing the keys.
And the charter your question please per store and 2 at this time, we will pause commentary there with some of our offer.
And for your first question comes from Greg Palm of Craig Hallum Capital Group. Please proceed.
Yeah. Thanks morning, everyone. Congrats on the good results here I guess, just starting off with.
Kind of revenue and orders so orders significantly outpaced revenue. So I'm curious if there was a chunk that maybe it wasn't fulfilled maybe it got pushed into this quarter or it doesn't sound like the cyber security impact was material, but did that inhibit your ability to ship anything at all.
Yeah.
Yes, Greg Thanks, and thanks for the question.
Yes, well it wasn't a material impact I mean, some items did get pushed.
Our systems.
Our.
Integrated systems, which means directly from order entry to delivery of product to our customers. So there was definitely some impact on it.
And not every system was impacted okay. So we do have multiple systems and the company, but I would tell you that.
It certainly did have some impact, but as we said not material and certainly nothing theres no loss business. There is business that will debt.
Delayed into July, but it was not material.
And Greg I would just add that I think it was probably.
Supply chain issues, probably impacted us more so than and the breached it.
Yes.
Sense and I guess on that line.
Of thinking.
So I think gross margins were nicely ahead of expectations, even in light of more supply chain challenges, you got increase and port logistics costs et cetera.
Are you able to quantify maybe what the headwind is right now and I think you said that you're not expecting really much in terms of free up in the near term, but how are you sort of thinking about maybe further gross margin expansion. If we assume that some of these items.
Eventually sort of go away.
Sure.
Well first off I think.
And as we've outlined in the past as debt most of our major contracts.
Our have material increased clauses that are inflation clauses or.
And so we are able to look at the core material components that go into our products and.
The index and show that they are increasing we are able to pass that increase on so we are fortunate there when it comes to some discrete components.
Which we need to go out and secure maybe and a secondary market in order to keep product per.
Production moving our customers are totally engaged with us on the process. So during that process, if we'd have to.
Incur additional cost we engage our customers.
And to notify them of that into get authorization to go out and do the spot buys, especially in electronic components to ensure that we.
We can keep the pipeline going.
From a margin increase standpoint, we're going to continue to see and as we've gone and made the statement and the past.
Our goal here is to improve our margins by 1% per year for the next 10 years.
And we do believe with our solution offerings, our integrated solution offerings and.
And our operational efficiencies that we're gaining and we will continue to gain that we will see those improvements as time goes on so I would say I would tell you that.
Our teams are working hard we're not out of the woods.
It's a scramble.
And obviously with the Corona virus and this delta variant and who knows what that impact will be but from right now we see everybody continuing to forge ahead and.
And we don't see any signs of shutting down and we see signs of everybody's got to figure out how to keep going here. If this thing does continue to.
Effect.
And a way with the.
Number of infections and increasing over time here, so and it was I'm encouraged that our teams got it under control for the best of our abilities and.
And our strategic sourcing activities.
While they haven't been as strategic and they've been more.
Reactionary to getting supply we've been able to do that and we will get back on track here and we will continue to leverage some of the capabilities that we have.
And the long run.
Okay. That's good to hear and just kind of looking ahead I mean based on your commentary certainly the backlog is indicative of this but clearly on a path to quarterly revenues.
You now exceed $100 million right and and so I'm curious as you see those topline improvements how are you thinking about further investments and the business and balancing those versus operating leverage.
Yes, very good.
And you want to take that Mike.
Go ahead, and then I'll jump in after.
Yeah, Greg I think we've talked in the past rate debt along with the gross margin improvements that we're.
Going to drive, we expect foundations and the operating leverage to occur as well.
And we've been investing heavily and the 1 allied structure and building the platform for growth here for a few years and certainly I think while we anticipate some significant growth.
Going forward and the future replicating, what we've done and and the path that I think that foundation is largely there so the pace at which we are.
Building that organization, we will not have to be as rapid as at best and had been and.
And in the past with the investments that we've made so certainly I think.
Operating leverage will help and magnify the improvement as well and gross margins over the next even the next 12 to 12 months to 18 months.
Okay understood. Thanks, a lot and I would add to that.
And I would add to that.
I'm, sorry, I was going to add to that and just say that.
We have a strong focus on major programs and major projects and platform development product platform development and that's going to continue.
And the leveraging of the core technology underneath it is very encouraging is that.
Our.
And as Mike mentioned, 1 allied to really talk about what that means is that.
We have a strong engineering.
Capability within the company, we have over 300 engineers and the company.
And.
The ability to leverage that capability and get them working together and.
Making sure that we've got a strong focus on the key activities that are going to drive substantial growth and the future. That's really where we are so it's very encouraging.
Our model based design simulation capabilities continue to improve meaning we can react much faster and get designed and quicker and get the right solution out there. So integrated solutions is again, a continued emphasis within the company and we have plenty to invest in internally and I can tell you that so <unk>.
Acquisitions are out there and we're going to continue but as we said we're going to stay disciplined we're going to find the right company's debt, where the combination of allied and the acquired company really bring additional value and we're looking for partners and that and that they want to realize additional value from the combination as well.
Understood No that's really helpful color, Thanks, and best of luck going forward.
Thanks Brent.
And our next question comes from <expletive> Ryan of Colliers. Please proceed.
Thank you.
And so when you look at the backlog how much and the new vehicle awards that you've announced previously and now work their way and to backlog.
Yeah.
Right now the backlog is only $3.5 million from the new vehicle Awards.
So it's still kind of new business.
Yes, and again for reminder, and I know you know how this works.
Is that we don't put something into backlog that's why when we had these large orders that were coming from vehicles that the awards that we had.
We talk about what the value of that is but when we get releases to production firm production releases and that's when they move into backlog.
And that's when we'll actually book the order so of that Theres, only 3 and $5 million there that we show, but it is ramping up and it's moving forward and I can tell you that there were on track.
Okay looking at your add backs I see it a little bit of an uptick and business development costs from Q1.
Sure that's tied to M&A, but do you think the.
Cadence of things Youre looking at or things that are kind of moving through the funnel.
Where are we.
<unk>.
Is it.
Picking up or are we still looking at some valuations that are just hard to accept.
Well I would tell you with a high level of confidence that we will be able to execute.
Deal or 2.
Before the end of the year.
Maybe more.
And as I mentioned debt.
The earlier commentary was that.
We're going to take discipline so were were.
Engaging and.
And deal activity, where there truly is value that can be added from both sides.
And also looking for partners in that regard and that's where we've had the greatest success from the past where.
We grew them. These we work we work them for a long period of time.
And when we absolutely when both parties see that there's value that can be attained.
And then we go out and we get it done and for US it's very key critical.
That when we acquire a company we acquired to expand our capabilities, whether it's technology, whether it's products geographic market and vertical markets. It's complementary there's of course, there's always and.
And overlap because it's a fundamental technologies slash Knowhow company that we're acquiring but that's what we're looking for it and the talent and we acquire.
And it's good talent is a good company and we intend to ensure that we keep the talent on board when we acquire a company. So I will tell you that we're encouraged.
Activity is moving fast and moving hard.
We've stayed away from devaluations that just.
Don't make sense long term for us.
Sure Mike.
And then Mike you mentioned, the supply chain and having a greater impact on revenue than the cyber security issue can you quantify what the revenue impact has been from the supply chain issues.
Yeah, again, I think I'd classify them as low 7 figure impacts again, nothing that I would describe ultimately is material and the sense that.
It's really deferred orders and nothing that would cause a cancellation or anything like that and frankly, it's no different than the pace and tempo of impact. If you will over the last couple of quarters. We've described that as a constant battle.
You, probably see a little bit of elevated inventory right. We're building strategic inventory to protect our customers some of that comes out of <unk>.
Cost as we've talked about and it impacts our gross margin to some extent, but.
Yeah, again, I would not describe it as overly material impact it's just.
Maybe I'll call it $3 million to $4 million of revenue on a quarterly basis that just.
Becomes directly impacted by.
And the ability to source.
On a timely fashion.
The good efforts are put in and and you're expecting to receive something and things just get perpetually put out.
From a timeline perspective, so it's just a tough thing to manage well and also add to that as debt.
As you hear from let's look at automotive.
The supply chain shortages and chips and electronics there.
They are building vehicles and their way.
Waiting too.
And back through the line when they receive a component or maybe missing or assembly that may be missing. So there were impacted by some of that as well if the if our.
<unk> can't get everything they need to build their product, there's a tendency to push everyone out, but I think we are seeing.
Some companies are saying they have to change the model Youre looking at 1 piece flow and lean manufacturing, but we are seeing certain customers, saying, hey, we cant do that and we'll never meet market demand and the future. So they are continuing to build its all of them will push that out and if there is significant enough enough components missing where they really can't bill.
Their product they will push it out so there's a little bit and the impact as well I'll tell you. Our team has done a really good job of.
And going into the secondary market and sourcing components and working closely with our customers to ensure that they're onboard with what we're doing.
And then <expletive> as I mentioned that we saw a similar level of deferral right coming out of Q1. So.
You had you had flow through coming into the quarter from it and obviously we had the impact.
The back end of the quarter. So it's kind of normalize itself over the last couple of quarters, but it still exists.
Sure. Thank you and the durations on the strong execution.
Thank you <expletive>.
And as a reminder.
If you have a question. Please press Star then 1.
Our next question comes from Brett Kearney of Gabelli funds. Please go ahead.
Hi, guys. Good morning, Thanks for taking my question.
Good morning, Greg.
You mentioned some of the new solutions and projects that you have rolling out obviously theres watch you've been able to win on the vehicle side, that's going to be ramping up but just curious whether there's anything else on kind of a new solution offerings that you are particularly excited about.
Well there are several of them and unfortunately.
Unfortunately, I don't really want to talk about them.
No I appreciate that we have to give you some color there, but I can suffice it to say.
We're seeing and.
Good actually it's in every market and that's what's exciting about it is that we're expanding our reach into our existing customer base.
And all of our markets. Our focus is really on the integration of our components into a more complete solution, whether it's active and passive components and our.
Filters or if its a and.
Incorporation of a drive and a control and feedback elements and gearing with a motor and that it's just more and more of that is happening and.
The other thing Thats really encouraging to us that.
We can.
We're keeping ahead of <unk>.
I can't say ahead of competition, but I can say ahead of.
And the product next generation designs and redesigns by our customers and we're delivering better value to them through the integration. So it is.
And industrial.
And.
I'll say, a and D. It's and medical it's across the board.
It's just.
And the direction of the company and the success that we've had is continuing to expand and grow from there. So.
Plenty plenty of them [laughter] mhm.
Got.
And that's really helpful color. Thanks, so much.
Youre welcome. Thank you Brett.
At this time with no further questions.
This concludes the question and answer session I would now like to turn the conference back over to management for any closing remarks.
Thank you. Thank you everyone for joining us on today's call and for your interest and Allied motion as always please feel free to reach out to us at any time and we look forward to talking with all of you again after our third quarter 2021 results.
Thank you for your participation stay safe and have a great day that will conclude our call operator.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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