Q1 2022 Allied Motion Technologies Inc Earnings Call
Greetings and welcome to the Allied Motion Technologies, Inc. First quarter fiscal year 2022 financial results.
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Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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I'd now like to turn the conference over to your host correct Mahalik head of Investor Relations. Please go ahead.
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> Rosella, our chairman President and CEO and.
And Mike Leach, our Chief Financial Officer.
<expletive> and Mike are going to review, our first quarter 2022 results and provide an update on the company's strategic progress and outlook after which we'll open it up for Q&A.
Should have a copy of the financial results that were released yesterday after the market close.
You can find it on our website at Allied motion Dot 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 and uncertainties and other factors are discussed with the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.
Find these documents on our website.
Or at SEC Gov.
I want to point out as well that during today's call, we'll discuss non-GAAP measures, which we believe will be useful in evaluating our performance.
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 fly so with that please turn to slide three and I'll turn it over to Jack to begin.
[laughter].
Thank you Craig and welcome everyone.
Our results continue to demonstrate the successful execution of our strategic growth initiatives.
First quarter revenue grew 13% to nearly $115 million with organic growth representing five 3%.
Our industrial market saw strong demand.
Resulting in market growth of 46% over last year.
We are benefiting from continued economic recovery in a number of submarkets, including material handling pumps oil and gas industrial automation and instrumentation.
Recent acquisitions also contributed to the growth in our industrial and A&D market.
While we are doing relatively well on the top line. The challenge like many others is on margins and supply chain issues and inflationary pressures on logistics energy materials and labor continue to persist.
We are actively managing these challenges and believe our operating performance will reflect our efforts over the long term.
This includes being proactive on pricing and realizing the full potential of our margin enhancing acquisitions.
Excluding non recurring items, we achieved adjusted net income of $3 $8 million or 24 cents per share for the quarter versus our reported net income of $2 5 million or <unk> 16 per diluted share.
Order levels continue to be strong and we ended the first quarter with a record backlog of $289 million.
I will talk to this performance later in the presentation and with that let me turn it over to Mike for a more in depth review of the financials Mike.
Thank you Nick as a reminder, our results include the acquisitions of <unk> systems on November two 2021 Alio industries on November four 2021 and spectrum controls on December 32021.
Starting on slide four we provide some detail regarding our top line.
First quarter revenue increased 13% to $114 8 million and reflected the higher demand in the industrial markets as <expletive> discussed and approximately $11 million of incremental revenue from acquisitions.
The unfavorable impact of exchange rate fluctuations on revenue was $3 2 million in the quarter.
Excluding FX revenue was up 16% and organic revenue growth was five 3%.
It is also worth noting that we estimate the impact of supply chain constraints on revenue was approximately $6 million to $7 million in the first quarter.
The recent acquisitions contribute to the A&D group with growth of 27% in the quarter.
Partially offsetting were lower sales in the vehicle markets of 5%.
Largely due to broad supply chain challenges within commercial automotive.
Medical markets declined 8% due to the lapping of a strong prior year periods that was still benefiting from pandemic related sales.
Sales to U S customers were 56% of our total compared to 51% in last year's period.
And the balance of sales were to customers, primarily in Europe , Canada and Asia Pacific.
The mix shift reflects the impact of our fourth quarter acquisitions that largely sell to the U S market.
Slide five shows the change in our revenue and revenue mix by market on a trailing 12 month basis.
Sales to industrial markets were up 34%.
Benefiting from new solution offerings, and continued economic recovery in a number of verticals as well as contributions from our recent acquisitions.
Vehicle markets were up 10% on strong truck agricultural and construction demand.
While acquisitions contributed to the year, our space and defense growth in the recent quarter that market is still down due to program timing.
The change in medical markets reflect reflected similar pandemic related impact as the first quarter.
As depicted on slide six our gross profit was down 40 basis points from the year ago period.
Higher volume improved mix and accretive acquisitions were offset by continued global supply chain challenges with rising materials transportation and labor costs.
Despite these challenges gross margins improved 50 basis points from the sequential 2021 fourth quarter.
Moving on to slide seven.
First quarter operating income was $4 3 million or three 7% of sales compared with $6 6 million or six 5% in the year ago period.
Operating costs and expense as a percentage of revenue were 25, 4% up 230 basis points of which 140 basis points was attributable to higher engineering and development costs largely attributable to the three acquisitions completed in the fourth quarter of 2021.
Also contributing to the operating expense increase was higher business development costs of <unk> 8 million or 70 basis points.
As a percent of revenue, which reflects our M&A activity as well as activities and optimizing our global manufacturing footprint.
These investments and activities reflect our continued commitment to execute on our strategy.
As we have stated we anticipate growing our margins over the long term with a disciplined execution of our lean toolkit asps.
With leveraging higher volume.
On slide eight we present GAAP net income and adjusted net income along with our adjusted EBITDA results.
First quarter, adjusted net income, which excludes business development costs and other nonrecurring items was $3 8 million or 24 per diluted share compared with $4 6 million.
Our <unk> 32 per diluted share in.
In the first quarter of 2021.
The effective tax rate was 21, 3% in the first quarter of 2022 due to discrete tax benefits in the period we.
We expect our income tax rate for full year 2022 to be approximately 24% to 26%.
Adjusted EBITDA was $12 9 million or 11, 2%, which.
Which was down 60 basis points in the quarter.
We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
Slides nine and 10 provide an overview of our balance sheet and cash flow.
Total debt was 100, $178 6 million up $19 7 million from year end 2021.
Approximately half of the debt increase was attributable to a new finance leases for our manufacturing facility expansion in Germantown, Wisconsin to support continued growth.
At the end of the first quarter debt net of cash was $161 7 million or 45, 5% of net debt to capitalization.
And our bank leverage ratio was 349 times.
We've consistently demonstrated our ability to delever our balance sheet following acquisitions and is our expectation that we will continue the strategy to reload for future growth opportunities.
We used $13 4 million in net cash from operations, reflecting higher levels of inventory to deal with supply chain challenges and payment of incentive compensation earned in 2021.
Capex for the quarter was $2 5 million and largely focused on new customer projects.
We expect our 2022 capex to range between $15 million and $20 million and to be focused on growth opportunities.
Inventory turns were three one times compared with 3.0 at December 2021.
Our teams continue to manage our inventory to meet increasing customer demand.
Combat sourcing and lead time challenges.
Our DSO increased to 55 days in the quarter.
Largely due to timing.
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 11 orders are more than $155 million in the quarter up 35% sequentially and year over year with strength across most end markets.
This represented a solid book to Bill ratio of one four times.
Customers continue to place orders with additional lead time to ensure they are in the pipeline given the current supply chain challenges.
As a result, we are seeing some buildup in the backlog numbers, which hit another record increasing 16% over the sequential fourth quarter and up 90% over the prior year period to $289 million.
Just under half the increase in the quarter was from our acquired companies and the time to convert the majority of backlog to sales is within the next nine months.
As we look forward, we expect demand within our industrial markets to remain strong vehicle demand will be muted by supply chain disruptions in the short term. Although we are seeing some encouraging signs with production demands being increase for late this year and early into 2023.
Demand in our medical markets has been solid as we lap prior year pandemic related sales, which reflects the continued return of more elective surgeries.
We are also expecting to see stronger A&D performance and we see a lift from our recent acquisitions.
On the M&A front, our pipeline is still very active as we continue to pursue opportunities to complement our organic growth efforts.
2022 has started on a solid path, although we do expect that in the near term, we will continue to battle supply chain and inflationary challenges.
The Russia, Ukraine conflict and Covid Lockdowns in China.
We will provide additional uncertainty at a macro level.
Monitoring these events closely to anticipate and implement the necessary corrective actions to mitigate the impacts.
We believe our long term success is within our control and to ensure that we will continue to be driven by our discipline and focus on the execution of our strategy.
Through acquisitions and organic investments, we have strengthened our competitive position at several target markets and we are working hard to leverage these investments as quickly as possible.
Each of our recent acquisitions is accretive to our gross margin profile as expanded our technology base and capabilities and further enhanced our system selling opportunities to create additional value for our customers.
Similar to our base business, our actives that acquisitions are not immune from the daily supply chain disruptions and inflationary pressures that impact the efficiency of all businesses.
As we worked through these challenges we remain highly confident in our ability to enhance both our top and bottom line performance in the future.
The profile of Allied motion is rapidly evolving and a very positive manner.
We remain committed to executing our strategy and fully realizing our potential to emerge as an even larger and stronger enterprise in the future.
With that operator, let's open the line for questions.
Okay.
Thank you.
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Please where we pull for questions.
Our first question comes from Greg Palm with Craig Hallum Capital Group. Please proceed.
Yeah. Good morning, everybody. Thanks for taking the questions here I guess just yeah.
Good morning.
Just starting with supply chain, which unfortunately has only gotten worse since since our last update.
Update a few months ago are you, taking any new steps to address all these challenges I don't know if thats signing on new suppliers, whether that's shifting some of your own manufacturing elsewhere. What are you seeing any new thoughts there.
Yeah sure Greg I mean it is.
Every day.
Without fail it seems like somewhere in the company there is a new challenge that's popping up and.
And our team has been very good.
In fact, it but being able to address those and what are the things I mean, a recent one was.
Impacting our welding capabilities.
Was the ability to leverage our corporate buying power in order to ensure a steady supply of product that we needed to produce and to be able to world. So I think you just continue to see that and what that does.
Is it causes you to look at your process and I think longer term youll make some significant improvements, but it causes you to take a look at process and make changes and process that eliminate let's call. It certain commodities are certain components that.
Are in short supply.
So we look at it.
As much as we can localization of supply chain, we look at second sourcing.
Our customers are working very closely with us to.
To help us secure materials that are required for their products.
And I think it's not going to go away in the short term and as we said though.
Yeah that will make us stronger and better when we come out of this because there are certain procedures and processes, we put in place to make sure that.
We don't run into similar problems in the future. So I think.
To answer your question, Yes, we are seeing them in.
Yes, we are doing whatever we can do to effectively deal with them and I would state that.
Yes, especially with electronic components typically are demands are much lower than what you would see in consumer electronics or automotive.
So the secondary market is available in many cases, although at a much higher price.
That helps it makes sense.
And have you just to dig in just one step further have you taken any significant pricing actions or are you planning to in order to offset.
As additional input cost inflation that we've that we've seen and I guess, how should we think about the trajectory for gross margins as we sort of go through the year, knowing everything that we know today.
Yeah.
Yes, good great question I think.
As we've mentioned before price increases do lag.
By the time.
You're getting supply cost increases in the by the time, you turn around and pass them on unless they're part of.
A blanket agreement where commodity pricing is already addressed and there you have to deal with about a one on one basis. So we have.
Oh very actively been looking at that and I would say to you that we.
We did see some improvement at the end of Q1 that should find its way into Q2 and forward.
But this is not something.
I look at it and say how far can this go.
Youre going to get pushed back and the market has kind of pushed back. So I think we'll start seeing some resistance overall not.
Everybody pushing back and saying how much more can be tolerated here before everyone prices themselves out of out of the market. So but I do think you will see some we had some momentum late in the first quarter that will carry in the second quarter.
Okay. Good I also add that youre largely passing through those increases without additional margin right. So it's a cause.
<unk>.
<unk> growth a little bit to just passing through those costs.
Yes makes sense.
Then lastly, as it relates to the book to Bill that really jumped up versus prior quarters. I mean do you get the sense that those are all real orders or could some of them just be kind of you know.
Inventory builds that potentially could get cancelled any thoughts there.
Well I'll answer the first part and I'll, let Mike talk about and add some color to it I would say to you. This.
There's no question.
That.
Customers are getting into the <unk>.
Getting into pipeline sooner given the extended lead times and longer lead times, they're real orders. They have scheduled delivery dates we wouldnt book them unless they're in unless they had stood up schedule over days because just to remind everyone. Our policy is that if we don't have a production date. It does not go into our backlog.
So we have that booked backlog number that we don't report on.
That's where the large automotive contracts went until we get a firm production release date. It does not go into that backlog. So they're real orders now is there a potential down the road when.
Blockchain issues R. R.
Being being met and we're starting to see some good flow and increase supply that things will get rescheduled.
There is a good chance of that but what we do have we will ship eventually.
And just to kind of a sad to that I think we saw some really nice performance out of our newly acquired businesses in the quarter relative to bookings some nice wins there.
We're much talked about in due diligence and came to fruition here in Q1. So we're very excited to see that as well and then going back to the comments about partnering with your customers.
<unk> to secure supply chain right I think there is evidence of that as well in the sense of proactively working with our customers to lock up.
Materials, and then in turn rate Youre getting the customer orders.
Increasing just just to provide that we're getting with the longer runway, but as <expletive> mentioned with defined production dates so that we feel good and confident about it.
Okay, well I appreciate the color and best of luck going forward.
Thank you Greg.
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Our next question comes from Brett Kearney with Gabelli funds. Please proceed.
Yes.
Hi, guys. Good morning, Thanks for taking my question.
Good morning, Brett.
You guys, obviously continue to execute very well do vary.
<unk> challenging operating environment.
Curious on one of those kind of unknowns you had mentioned <expletive> the China Lockdown situation. Just how you are viewing that at this stage. Both in terms of you know potential demand from some of your customers, what youre hearing and seeing and then any potential ripple through impacts on the broader industry.
From a supply standpoint, just kind of your broad latest thinking there.
Sure I would say to you. This is that our team in China, we have two locations there in changzhou and Suzhou.
I think the.
Given the circumstances, they continue to execute very effectively obviously with total lockdowns.
That puts a lot of work and it doesn't allow them to build product, but I would say to you that.
Our customers.
If you look at it on a global basis.
We're starting to see reality setting in.
And that.
Our customers.
In North America, and Europe are looking for localization of supply chain. So I would say, we're going to see more and more of that.
And.
So we had obviously that's our approach and our strategy is to be looked at a local a local supply chain to reduce the total cost of acquiring products and again trying to minimize the impacts of the increased logistics cost and fuel cost and so forth.
That was underway.
And we have now and as I said, we're starting to see not just inquiries, but we have received orders now that are looking for to change the supply chain over to us based upon domestic supply, which is a great sign.
Our products that are being built.
And shipped let's call it within China.
Up to this point, we have seen very little impact on those so for whatever reason.
Logistics components et cetera have been available to build product and ship product with domestically within China.
And I think.
More and more of our business.
As if were in China and doing business in China is about shipping product directly into China.
And I think less and less of its becoming export based and I think we'll see that trend continuing.
So.
With.
Electronic components, there's you can't just.
Make design changes and Theres other obviously other materials that are.
Fly chain is coming from China, but I do think over the long haul.
At the Resourcing of localization will take effect.
And we will have an overall positive impact on the business for ally.
Terrific I was actually going to be my follow up question was.
Kind of on.
<unk> and given the solutions you provide really into.
Many kind of automation applications, whether you are hearing and seeing that from customers and it sounds like.
That's certainly the case in North America and Europe .
Yes.
Just to add just a little bit more color too I mean, we made a.
Significant commitment to our Mexican facility, a couple of years ago, and they have done a great job of.
Receiving products that were built what we'll call the offshore not in North America that are actually primarily being used in North America. We've got.
Investments that we've made in capital equipment.
In Mexico ramped up very nicely and the cost situation or competitive situation, Mexico was very favorable so.
We see that as a bright spot for us and we just actually.
Approved <unk>.
Be well.
I'll call it a highly automated a fully automated.
Motor production line that has been in development for two years that is now on its way to Mexico will be ramping up in mid second quarter and at.
Resourcing product that was not being built in North America, but it is primarily for North American usage show, we're continuing in that vein and at the same token I mean, we're looking at as I said in Europe .
There are supply chain and we're tapping into those and doing the best we can to localized supply chains and minimize all those other costs, but.
We've made investments and we're taking actions to do that.
Great that's incredibly helpful. Thanks, so much.
Thank you.
Okay.
Our next question from Gerry Sweeney with Roth Capital. Please proceed.
Good morning, <expletive> and Mike Thanks for taking my call.
Good morning, Jerry.
Just a question on spectrum controls.
I think with the fourth quarter results you mentioned that.
Spectrum was having some of the some challenges with.
Supply chain, and obviously youre going to go in there alright. Thank you some of your corporate buying powers how.
How much of an impact that spectrum have on the margins this quarter.
Hello.
Did I lose you.
Hello, operator.
Good luck with your line.
No.
Great Mike.
So Lucas.
We're there now we can hear you guys did we lose Jerry or no I'm.
Im here.
Okay quite a little bit of a case of COVID-19, but I thought.
I asked the question.
One acquire.
Sorry.
Optical will drop you started asking you about spectrum and then.
I didn't hear anything after that.
Obviously, you had mentioned you purchased spectrum and they were having some supply chain constraints and it was going to impact the quarter on margin. So I was curious as to.
If you could give us an idea of how much of an impact that had.
Excuse me in the quarter and if that's you see that improving going forward.
Sure.
We set the expectations for spectrum coming out of the.
I think we lost them again.
Okay.
Mike.
Uh huh.
Got it.
I think we lost you guys again.
Ladies and gentlemen, please hold.
Sure.
Okay.
Okay.
[music].
Yes.
[music].
Okay.
Okay.
[music].
Okay, Mike ill take your back on the comp Youre back in the conference Okay, great. Thank you.
Gary are you still there I am here, yes.
Sorry about that no.
No worries you heard my question correct. That's all we did we heard the question as I started to answer I started to started to answer it and then.
We were notified we don't notified that we were out so.
Anyway, what I said was that I started to say.
After the spectrum acquisition, we did state that spectrum.
I would start slow out of the gates, we knew we had some supply chain challenges going in and that they would ramp during the year.
We did experience.
Slower than expected ramp in Q1.
There was the supply chain challenges.
Even more significant.
And they are working through them, but we do think that.
As we progress through the year, we will.
We start to see improvement, we will see improvement and we will start to realize our ability to ship.
Very strong backlog that we have there. So it was a negative it was definitely a drain on our operating results in Q1.
Bob.
And we expected it to be neutral.
If our expectation right now is it's neutral in Q2 the results for Allied will be.
Much better than they were in Q1, let's put it that way okay.
My expectation actually I thought it was going to be a little bit more negative in <unk>, but.
But suffice to say.
Theyre being rectified.
As it fixes itself or you fix it I should say.
That'll that'll be that headwind should turn to a tailwind just in terms of aggregate numbers of margin.
Yes, again, we're seeing great order wins in the business as were talking really purely a supply chain constraint here with electronics, that's driving the disruption.
I mean, that's that business opens up a lot of opportunity, especially on the industrial side correct.
Oh sure Yeah got it okay I appreciate it thank you.
Alright, Thanks, Terry Thanks, everyone for your patience here.
Operator anymore.
Questions.
There are no more questions.
Okay.
Conclude here, though for those of you that are interested we will be participating in the Barrington spring virtual Investor Conference on Thursday May 9th 19, sorry may 19th also.
Allied we'll be exhibiting next week at the health care Robotics summit in Boston.
Automate Detroit the week of June six so if you have if you are in those areas and you have a chance it would be great opportunity you foresee for you to see how the system configurations are coming together the new acquisitions.
And get a good look at how what allied.
<unk> is beginning to look like and I mentioned profile change youll be able to see that.
We readily if you attend that.
It shows.
Otherwise 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 second quarter 2022 results. Thank you for your participation and have a great day.
Thank you. This concludes today's conference you may now disconnect.