Q4 2021 Allied Motion Technologies Inc Earnings 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 and your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Craig's Mahalik 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 <expletive> <unk>, our chairman, President and CEO , and Mike Leach, our Chief Financial Officer.
Yeah, Mike we're going to review, our fourth quarter and full year 2021 results and provide an update on the company's strategic progress and outlook.
After which we'll open it up for Q&A.
They 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 Allied motion dotcom.
Along with the slides that accompany today's discussion.
Viewing 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 and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.
You can find these documents center web site or at SEC 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've 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 <expletive> to begin.
Okay.
Thank you Craig and welcome everyone.
Our overall results continue to demonstrate the successful execution of our strategic growth initiatives.
Full year revenue grew 10% to more than $403 million.
Driven by continued strength across most of our served markets.
Our industrial markets reached all time highs and were up 19% over last year.
Gross and net market reflected strong demand in material handling industrial automation pumps oil and gas.
And electronic solutions for motor control and instrumentation.
Our vehicle market also continued to show strength with 18% growth for the year.
Largely driven by agricultural construction and power sports demand.
And while demand in this market did increase for the year, we did experience a dip in the fourth quarter due to supply chain challenges.
We continue to be encouraged by their medical market demand, which saw growth for the year. Despite extremely tough comparisons from last year, given the significant demand for our products during the height of the pandemic.
While we have seen our commercial aerospace business begin to rebound our broader A&D market has continued to be challenged.
Largely due to the timing of specific defense programs.
As I'm sure. All of you are aware operating conditions continue to be challenge given the overall inefficiencies created by the global supply chain constraints and the impacts from cost inflation on logistics energy material and labor.
On the material side. This has been most apparent with respect to the cost increase of electronic components.
You were on allocation and experienced an extended lead times.
Anything we have ever contended with in the past.
As a result, we have enhanced our supply chain management capabilities to ensure we are responding quickly to changing dynamics with sound purchasing and logistics decisions.
We are actively engaged with our customers and suppliers and have made strategic purchasing decisions on certain critical components.
Which is reflected on our inventory build this past year.
Gross margin expanded to 30% in 2021.
We ended the year with net income of 21 for $24 1 million or $1 66 per diluted share.
Even when excluding nonrecurring items adjusted net income was $1 26 per share for the year, which was up 26%.
We ended 2021 with a record backlog of nearly $250 million with strong order input across the board.
A highlight during the fourth quarter was the closing of the three acquisitions, which are noted on slide five.
Our acquisition team did an outstanding job getting this completed in a very tight timeframe.
On our last earnings call, we did spend time discussing the first two acquisitions <unk>.
And we will now provide more color on spectrum controls, which we announced on December 31 2021.
Located in Bellevue, Washington Spectrum has grown nicely by designing and manufacturing a wide range of Ruggedized and highly sophisticated industrial Io and safety Io modules utilized and automation applications.
New product additions include marquee displays and an exciting new one box universal industrial gateway product that simultaneously supports multiple communications protocols.
And simplifies the integration automation solution.
Whether you are modernizing networks connecting legacy devices.
Our integrating new equipment.
The Universal Industrial Gateway provides a cost effective flexible solution for every systems integrator.
Spectrum products are used in a broad range of industrial controls applications.
Are sold and supported through partnerships.
With plc manufacturers in the industrial automation distribution channel.
With spectrum, we further expand electronic technology technology capabilities within Allied.
And we believe that further enhances our ability to be a higher value added solutions supplier.
Industrial automation and industrial controls market.
We also believe that we can leverage the spectrum Knowhow and safety Io.
And utilized key elements of that in other markets requiring safety functions are example vehicle and Andy applications.
We look forward to our bright future together and welcome Bruce Slander founder spectrum, who will continue to lead the business.
As well as the entire spectrum organization to the Allied team.
In reviewing the three acquisitions.
Note that there are several common themes from a strategic standpoint.
Including one.
They enhance our customer base adds significant new engineering resources, and infuse additional technology slash knowhow to expand and complement our current capabilities.
Two.
They accelerate our expansion into important markets for allied, including Aerospace and defense automation robotics.
<unk> Sciences and medical.
Three.
They provide us with an opportunity to leverage the technologies.
Whereby allied is better positioned to create higher value solutions for our target markets and our customers.
And lastly.
We expect that we can leverage our joint channels to market and utilize our global footprint to gain additional market share and content with our higher value added solutions.
Collectively we expect the three acquisitions to provide incremental revenue of approximately approximately $60 million in 2022.
The accretive to our earnings.
And generate gross margins that are above our current average rates.
In fact as part of our strategy.
We talked about expanding gross margins by 1% year over year.
And these acquisitions will be instrumental in helping us achieve our goals.
With that let me turn it over to Mike for a more in depth review of the financials Mike.
Thank you <expletive> .
As a reminder, our results include the operations of <unk> system from November 2021.
The Alio industries from November four 2021.
All share and per share information reflect equal 32021, three for two stock split.
Spectrum controls acquisition closed on December 30, <unk> 2021, therefore, the material impact to the financials.
Spectrum.
This is found in the backlog numbers depositions and general balance sheet.
Starting on slide six we provide some detail regarding our top line.
Fourth quarter revenue increased 4% to $96 8 million and <unk>.
Reflected higher demand in the industrial markets and approximately $2 million of incremental revenue from acquisitions.
The unfavorable impact of exchange rate fluctuations on revenue was <unk> 9 billion in the quarter.
Excluding FX revenue was up 5% in the quarter.
It is also worth noting that we estimate the impact of supply chain constraints, and then revenue was approximately $3 million in the fourth quarter.
Excluding our most recent acquisition past due backlog is in the $7 million range.
For the year revenue reached a record $403 5 million.
Up 10% largely due to double digit growth in the industrial and vehicle markets.
Sales to U S customers were 54% of our total compared with 53% in last year's period and.
And the balance of sales to customers primarily in Europe .
Canada, and the Asia Pacific region.
Slide seven shows the change in our revenue mix by market for the full year period, along with the 2021 growth rate for each market and the drivers behind the change.
Sales to industrial markets were up 19% and benefited from continued economic recovery in a number of verticals as <expletive> noted.
Also contributing to the overall revenue growth was demand within our vehicle markets, which were up 18% and in medical which we reflected a return of elective surgeries.
Partially offsetting was the aerospace and defense markets, which declined due simply to the timing of specific defense programs.
Yes.
Note that the <unk> business will primarily be reflected in the industrial and A&D categories.
Elliot will largely be in the medical and industrial.
Our distribution category, while small now we will expand the spectrum business is largely distributor based.
It will be reflected in that category on a go forward basis.
As depicted on slide eight our gross profit was up for the quarter and full year period.
Of note was the margin expansion that was achieved despite the ongoing supply chain and cost inflation challenges.
Strategic pricing and mix were the primary drivers of the growth.
Moving on to slide nine.
Fourth quarter operating income was down quarter over quarter due to an elevated level of operating expenses, which were up 170 basis points as a percent of revenue.
Approximately 100 basis points of that increase was attributable to higher business development costs, given the three acquisitions completed during the fourth quarter and the continuing optimization of our global manufacturing footprint.
The remaining operating expense increase was largely within sales and marketing expense.
Which reflected higher commissions and incentive compensation as well as trade show cost resuming late in 2021.
These investments and activities reflect the continued execution of our strategy.
As we have stated we anticipate growing our margins over the long term the disciplined execution of our lean toolkit asps.
Combined with leveraging higher volumes and accretive M&A.
On slide 10, we present GAAP net income and adjusted net income along with our adjusted EBITDA results.
Fourth quarter adjusted net income.
Which excludes business development costs and other nonrecurring items was $2 9 million or <unk> 20 per diluted share compared with $2 7 million.
Our <unk> 19 per diluted share in the 2024th quarter.
The effective tax rate was elevated in the quarter at 53, 9% due to a $5 million valuation allowance of a deferred tax asset in a foreign jurisdiction.
And it was also impacted by the mix of income from higher tax rate jurisdictions.
We expect our income tax rate for full year 2022 to be approximately 24% to 26%.
Full year net income outperformed the prior year on a GAAP and adjusted basis.
Adjusted EBIT margin improved 80 basis points.
In the quarter to 11, 5% and.
And for the full year was 12, 4% up 60 basis points.
We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
Slide 11, and 12 provide an overview of our balance sheet and cash flow.
We paid down more than 12 billion of debt during the year. However, total debt was up reflecting borrowings for the acquisition activity in the fourth quarter.
Collectively the purchase price for the three acquisitions was approximately $100 million, including deferred payments.
With a mix of cash and equity components in each.
At the end of the year debt net of cash was $136 5 million or 42, 1% of net debt to capitalization and our bank leverage ratio was approximately 3.0 times.
We've consistently demonstrated our ability to quickly delever our balance sheet following acquisition.
And it is our expectation that we will continue the strategy to reload for future growth opportunities.
We generated solid cash flow from operations of $25 4 million during 2021, despite the continued inventory build to mitigate supply chain issues.
Full year, Capex was $13 7 million and largely focused on new customer projects as well as continued ERP implementation.
We expect our fiscal 2022 capex to range between 15 and $20 million and be focused on growth opportunities.
Inventory turns were down to 3.0 times when compared to three eight times in 2020 are.
Our teams continued to manage our inventory level as well as we work to meet increasing customer demand and combat sourcing and lead time challenges.
In addition, our DSO improved to 45 days in 2021.
I would like to reemphasize that we believe we are in a position of strength and we will continue to work hard to advance our strategy by investing in organic and acquisitive growth.
With that I'll now turn the call back over to <expletive> .
Thank you Mike.
Our backlog and bookings remained robust as highlighted on slide 13.
Orders were approximately $115 million in the quarter up 6% over 2024th quarter with the majority of our major market channels contributing.
This represents a solid book to Bill ratio of one two times for the full year, we had $468 million of orders, which also represents a book to bill ratio of one two times.
Backlog hit another record, increasing 35% sequentially over the third quarter and up 77% over last year's fourth quarter to nearly $250 million.
Approximately 80% of our backlog is expected to convert to sales within the next nine months.
Included in our backlog is approximately $48 million of.
Of incremental backlog from our new acquisitions.
As we look forward.
We expect demand with our industrial and vehicle markets to remain strong.
While we will enjoy the benefits from our long large automotive contracts that we announced over the last several years.
These programs have been delayed and slow to ramp as a result of supply chain issues with electronic components.
To be clear demand has not gone away.
But it has been pushed out.
As a reminder, once we get into full rate production, we expect to deliver $40 million plus per year in revenue at.
At the peak of the contracts.
Also we will note that the vast majority of these contracts are not included in our stated backlog numbers.
As we will only released them to backlog once we have been provided firm production release states.
Demand in our medical markets is expected to be solid and reflects the continued return to more elective surgeries as.
As well as some residual demand from the pandemic.
We are also expecting to see a bounce back in our A&D markets given recent wins the timing of certain defense projects and.
And the incremental benefit from our acquisitions.
Sure.
We do anticipate that the supply chain pressures will continue well into 2022 before the situation begins to normalize.
While we are optimistic on our future the continuing supply chain challenges have resulted in multiple program launch delays.
In addition, we are closely watching the current unrest in Ukraine as it has the potential to further impact and delayed the launch of multiple new programs.
As we move forward, we will continue to take a strategic approach to enhancing our existing products and technology.
Our acquisition pipeline is still very active and we believe we have the financial flexibility to execute opportunities that meet critical elements of our strategic filter.
We have a track record of demonstrated success.
And we will continue to pursue external opportunities to complement our organic growth efforts.
In summary, while 2021 was a solid year with revenue and earnings growth and improving margins. We do expect that in the near term, we will continue to battle supply chain and inflationary challenges.
As we move into the second half of the year, we do expect improving conditions.
We further expect that.
And we will begin to realize the full benefit of our existing base.
And newly acquired businesses.
Most importantly.
Allied motion has a great team.
And through this team, we are unwavering and committed to our long term strategy.
As we continue to expand and build our foundation to ensure sustainable and continued revenue growth.
Margin expansion.
And enhanced profitability in the future.
With that operator, let's open the line for questions.
Thank you Steve would like to ask a question. Please press star one on your telephone keypad.
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First question is from Greg Palm with Craig Hallum Capital Group. Please proceed.
Yeah. Thanks, Good morning, everyone. Just wanted to start with some maybe some comments from a big picture standpoint, you've got such a broad reach across all sorts of end markets and geographies any change in demand trends, whether that's recent weeks what are you seeing quarter to date.
Yes. Good morning, Greg. Thank you for the question I would say to you that.
What we've experienced in what I think we're going to continue to experience.
When you talk about order rates and trends is that.
Customers are placing orders.
Further in advance than they were in the past and they need to get into the pipeline.
They want to ensure they are in the pipeline as we've made them aware of certain critical components with extended lead times. So I do think yes.
Our backlog has been.
Built based upon.
Demand that's further out into the future.
<unk>.
As a result of the current to supply chain challenges that we're facing today as far as.
Market variations there is not much change there.
There seems to be decent strength across the board.
Okay perfect.
And in terms of supply chains, you noted a maybe a newer risk or concern given the conflict in Ukraine is that a significant supply base for you or the industry or just maybe give us a little bit of color on how maybe that could impact supply chain challenges even further.
Sure first of all from an order standpoint, it has very minimal impact on us.
Derived much revenue from that.
Is that market.
But from a supply chain standpoint, both material and labor.
There are a significant supplier to the European automotive industry. So.
One of our concerns there would be.
The automotive suppliers are not getting obviously their parts when they are not going to build vehicles and our programs will just get further delayed and thats, where we see the majority are some materials.
Most it's not a significant contributor to our direct supply chain. It may be more of a contributor to our customer supply chain, especially in the automotive market.
Okay makes sense and then last one just wanted to dig into the acquisitions, a little bit more I mean can you sort of give us some sense on how the integrations of all three are going but maybe more importantly.
Any initial examples of revenue synergies to date, whether that's new.
<unk> from from sort of your overlap now or.
And in terms of some of the product and the expertise and having all the teams together.
I'd like to get a little bit more color on kind of how you're seeing things progress here.
Sure.
Let me, let me first off I think I can talk about.
<unk> mentioned that we are going to be attending some tradeshows again.
In Boston, the upcoming health care, Robotics, and robotics summit and.
We will be there.
First time, we will be attending that it'll be limited.
Exhibition for us but.
But I think we're going to be showing there is certainly.
Thats, an important market for us and we believe we certainly have some leading edge solutions from a technology standpoint, and now with our additions.
Given that it's a little bit of a limited space will be showing lots of new capabilities are which truly extends us into mulch.
Multi axis positioning and control at the nano position.
<unk> level and as part of that there's a real pull through of several allied products that are that are utilized in those devices, including drives controls motors, both rotary and linear.
And Allied has now will be releasing and announcing a release of a linear motor product line.
That's been under development for a number of years that we do feel has some.
Good opportunities in the life Sciences, and medical markets as well as in the automation industries.
So.
There will be a great example of some of the pull through and the systems enhanced or more value added systems capabilities that we'll be able to demonstrate at the automate show in Detroit in June .
We will be a further demonstration of what some of these capabilities are so now we will be adding to that in addition, we will have some actual.
You'll live demo equipment, there with the added capabilities.
But we'll also be adding to it some of the control products from spectrum, which will include the industrial communications gateway as well as their Io and safety Io. So those will be great. Examples I would courage anybody.
To get a better understanding of who allied is what <unk> does and we can kind of walk you through from the component side of it up to the higher value added system side of it and really getting into some leading edge technology.
Sure.
These companies have brought onboard.
One thing I do want to mention and I probably should.
I'll just highlight a little bit more we talked about supply chain challenges and we said, especially in electronic components area.
And we normally we don't sit here and give guidance into the future as you know that but I would want to caution everyone. We made acquisition acquisitions full knowledge and understanding that we would have challenges coming out of the gates with components.
We have and Thats why.
Listen to what my comments were about challenges in the first half of the year.
We're working hard working very closely we have a solid backlog.
All was deliverable and we received the components it would be outstanding, but we do expect.
So as to be challenged and as we move through first quarter, it's going to be.
Severely challenged second quarter, we will get better and as we move into the second half of the year, we will start seeing the true results and benefits from the acquisitions.
Alright.
It makes sense I appreciate all that color best of luck going forward. Thanks.
Thanks, Greg.
Our next question is from <expletive> Ryan with <unk> Securities. Please proceed.
Thank you <expletive> you mentioned customers ordering further out the normal how about do you have any concerns of.
Double ordering or are you seeing any.
Potential issues around that.
No I don't think.
Like I sit here and say that there hasnt been some of that I think.
But the reality is that what we're seeing is orders are being placed with longer lead times.
So nothing has jumped out of how that is demand is unrealistic or beyond what we've seen.
And can't be supported supported it's just that they're getting into the queue earlier.
So that is that attributed to some of the backlog build of course.
Sure we don't have any major experience about double ordering at this point.
Okay, Great. So you mentioned oil and gas in the previous commentary I'm not sure if I caught it but what we are.
What's gone on in the market.
What are you seeing a TCR.
Yeah, I mean demand is very high.
Our challenge is getting getting the product out the door quite frankly, we talked about.
Yes.
Yeah.
The backlog build.
Yes.
The PCI order input rates had been extremely strong.
And it's not just oil and gas its HBC hvac's related.
And data arms and cooling in those and so forth, but it's.
The demand up.
Yes.
Yes.
<unk>.
With me could just deliver everything that we have books right now, but we can't so we are ramping up.
We expanded our facility in Germantown.
Added to.
About 40.
I would say, 40% more space to the facility itself and most of that is in the production area.
So we're positioning ourselves for.
Some nice growth in that operation, but I will tell you it hasn't been realized yet.
Okay.
Maybe just a higher level question with all the challenges you guys and everybody else is facing how do you think you come out of.
Yes.
At the end of this funnel from a competitive landscape. What do you think your opportunities are to increase market share further or.
Position yourself closer to their customers.
Yes, great Great question Dave.
I would say to you.
Yes.
Through this whole process I think as you've seen.
We stay committed to our long term strategy.
We have expansion in.
Technology product offerings geographic market footprint I think one of the things that's really exciting here is that we have we've continued to move forward on internal product development to expand our reach into our markets.
And add more and more value to the solutions and then add the acquisitions on top of that and the pull through that we will get from some existing product lines, our existing products in those new products, It's just very exciting.
Our team Hasnt stopped at all there moving forward I mean of course.
Unfortunately, we've had to divert.
Resources that would normally be working on new product and new program development.
To securing alternatives for parts shortages and supply shortages and allocation issues that we have but overall I would say I am excited about what we've been able to do and continue to do through this that are.
Higher value integration more value.
Higher gross margins are all coming through and will come through.
Programs have been delayed.
That's the only I guess the downside of it is that.
Programs that we would have and would have been launched at this point in time without these challenges are have been delayed so where it.
Yes.
Bond or just delayed.
And it's.
Where we've had solutions provided for that again increase our value increase our margins.
In some cases, we're not able to deliver those yet because they're not moving to the new platforms, our customers arent moving to new platform, but overall our team is doing a great job.
We're excited about it.
We're working on operational improvements at the same time and those are underway.
So I think.
No.
It's the next step for ally.
Establishing the foundation to take us to another level of Buck.
Okay, great. Thank you and good luck.
Thank you <expletive> .
As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Brett Kearney with Gabelli funds. Please proceed.
Hi, Good morning, guys. Thanks for taking my question.
Good morning.
You covered it some in Europe .
<unk> remarks, but curious if you could just talk about in aggregate from the three acquisitions you completed in Q4.
The talent coming over to the Allied organization, both from a leadership standpoint, but also technical and engineering resources.
Yes, great question. Thanks.
I'm glad you brought that up because we always are.
Are looking at how do we expand capabilities in the.
Market's.
Pretty difficult out there to add.
Engineering talent, certainly and we've been expanding our electronics capabilities here over the last several years and grown quite significantly so.
Aggregate between electronics and most of these electronic but electronic and mechanical engineering.
We've added.
With the three acquisitions approximately 45, new engineers in the company and we are recruiting right now.
Another seven to 10 engineers based upon program wins that we have and will be deliverable here in 2022 and beyond so.
Significant talent as far as the leadership goes.
All three private companies.
And.
And all three took equity in Allied so I think that's saying that they are they.
They believe in the future together that's great.
We have.
The talent in place to operate the companies. So when we talk about integration senior leadership is there it's still there it's going to remain there but.
But we will transition over time.
And it will begin to integrate into allied motion, but.
Tell you that we allied functions with our technology unit concept is that they have ownership of particular technologies and products that they that they lead for the world and thats not going to change so.
Yes, I think we've added some talent that.
Again from an R&D from a conceptual for an option entrepreneurial capability, we've added more talent for that and Thats exciting because the ideas are slowly and theyre coming together and Thats why I mentioned the two shows take a look to see what we're doing but we're looking for.
Bigger and better things here down the road.
Terrific. Thanks, so much.
Thank you Brett.
We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.
Yes.
Thank you operator, and thank you everyone for attending this quarter's conference call.
And as I said I would encourage you to.
Look at the shows that we have coming up that we mentioned that we would be at in addition to that there will be at the Roth Conference next week, our first in person conference in quite some time shareholder Investor Conference and we're really looking forward to that.
And again, we look forward I think we thank you for your support and we look forward to.
Talking to you again in our next conference call in May.
I'll do it operator, thank you.
This does conclude today's conference you may disconnect your lines at this time and thank you for your participation.
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