Q2 2022 Allied Motion Technologies Inc Earnings Call
I.
Thank you for standing by and this is the conference operator. Welcome to the allied motion technologies Inc. second quarter- fiscal year 2022- financial results- conference call.
As a reminder, all participants are in listen-only mode and the conference is being recorded.
After the presentation, there will be an opportunity to add questions.
To join the question Q. you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero.
I would now like to turn the conference over to Craig moholk Investor relation. Please go ahead.
Thank you and good morning everyone. We certainly appreciate your time today, as well as your interest and allied motion.
Joining me on the call de roiszlla, our Chairman, President and CEO , and mly, our Chief Financial Officer.
<expletive> and Mike are going to review our second 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. If not, you can find it on our website at Allied motion com, along with the slides that accompanied today's discussion.
If you are 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 QA. These statements apply a future of 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 combine new documents on our website or an SEC backup.
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 is a substitute for results toprepared in accordance with at.
We have provided reconciliations of non-GAAP two comparable GAAP measures in the tables of company in the earnings release and slides with that. Please turn to SL three and I'll turn it over to <expletive> to again <exp.letive>.
Thank you Craig, and welcome everyone.
Our results continue to demonstrate the successful execution of our strategic growth initiatives.
Second quarter revenue grew 21% to a record 122.7 million, with solid organic growth of 10%.
Our industrial markets saw strong demand, resulting in market growth of 40% over last year.
We are benefiting from new solution offerings, acquisitions and continued economic recovery in recovery in broader end market verticals, including industrial automation, oil and gas, material handling, HVAC and instrumentation.
Recent acquisitions also contributed to the aerospace and defense market, which doubled from the year-ago period.
While we are doing well in the top line, the highlight of the quarter was the improvement in our gross margin performance.
Which is consistent with our stated objectives, as we achieved a record level of 32%.
This was up 170 basis points from a year ago and a significant 320 basis points over the sequential first quarter.
rminea activity.
Is certainly helping, but we also equate this performance, So our global teams that continue to manage multiple headwinds, as supply chain issues and inflationary pressures on logistics energy, material and labor continue to persist.
Even at the operating level, our performance was solid as we continue to invest for future growth.
And taking into account the costs associated with the acquisitions that have not yet been fully leveraged.
We achieved adjusted net income per share of 36 cents, up 9% from 33% per share in the prior year period.
Our pipeline of opportunities remains high and order levels continued to be strong, with a book to Bill, a one point one X in the second quarter, yielding a record backlog of nearly three hundred and twenty-four million.
I will talk more to orders and backlog later into presentation.
We had a busy quarter on the MA front, as we continue to augment our growth and profitability strategy.
Turn aside for.
We highlight the three acquisitions we completed in the quarter.
Located in camerarilla California, and gap expands our precision motor capabilities by providing industry-leading high performance, zero coging, slotless Motors for use in applications in aerospace, defense and medical that require precise motion in a compact, high torque to volume package.
We also see the potential to advance our total solution capability in the robotics, semiconductor and instrumentation markets.
Second we acquired fph group with locations in Ontario Canada, and Michigan. fph brings technically advanced, reliable and cost effect of electrical drive systems and light weighting technologies for existing and future ground-based vehicles in the defense industry.
fphh has a proven relationship with leading defense prime contractors and ants's critical manufacturing licenses and certifications.
Which we believe we can leverage to drive deeper penetration within defense applications.
Lastly, we acquired erx on a summer's worth new Hampshire.
A company was over 70 years of history, providing high precision electromagnetic solutions, including linear and roonary motor technology for aerospace and defense, life sciences, semiconductor and other industrial applications.
Their patented widing technologies, combined with the robotic manufacturing, assures best-in-class linear Motors, as they provide the highest linear force density in the industry and have been selected and utilize on our own lao solution offerings for many years.
We'd like to thank certainly all the new employees allied and welcome to the allied family.
In reviewing the six acquisitions.
Which is some of the highlights, is 1: they add significant new engineering resources to our growing global engineering capabilities.
They provide new technologies and position us with several market-leading products and solutions that expand and complement our current capabilities.
They bring proven and established relationships and certifications to accelerate our expansion into important markets including aerospace and defense automation robotics, life sciences, semiconductor and medical.
And fourth, they expand our offerings and lead us into more demanding applications.
Thus our broadening capabilities enhances our value proposition and our competitive positioning.
Ultimately, allied is better positioned to create higher-value solutions for our target markets and our customers.
In 2023, we expect a collective contribution of the six acquisitions to exceed $1 million in revenue, with gross margins in the high 30% range and EBITDA margins in the high teens range.
The purchase price of all six acquisitions, including future payments, was approximately $16 million and was made up both approximately 70% in cash and the remainder in ammot stock.
Based on our cash flow projections. We expect to delever over time in a manner that aligns with and is consistent with our historical previous performance.
We further believe the new acquisitions will provide Li with significant new opportunities and we are focused on integrating each into the global allied platform.
By doing so, our intent is to maximize the opportunities and realize the full potential of these margin enhancing businesses.
While we have now provided additional color surrounding the six acquisitions, I will caution you that we will not be providing individual unit performance information in the future, as we will focus on leveraging the full one-allied potential and opportunities.
And with that let me turn it over to Mike for more in-depth review of the financials Mike.
Thank you <.expletive>. As a reminder, our results include a partial quarter of contribution from the acquisitions noted on Slide floor, as Fin gap was completed on May twenty-fourth, fph on May thirtieth and erx towards the end of the quarter on June seventeenth.
We also had the contributions from the three fourth quarter 2021 acquisitions.
Starting on Slide 5, we provide some detail regarding our top line.
Second quarter revenue increased 21% to 122.7 million, our record level, which reflected strong demand in the industrial markets, as <expletive> discussed, and incremental sales from acquisitions.
The unfavorable impact of exchange rate fluctuations on revenue was five point two million in the quarter.
Excluding FX, revenue was up 26%. In organic revenue growth was 10%.
The recent acquisitions contributed to the aerospace and defense growth as that market vertical doubled from a year ago.
Partially offsetting were lower sales in the vehicle market of 3%, largely due to broad supply chain challenges within commercial automotive.
And medical markets, which declined less than 1% due to the lapping of a strong prior year period and was still benefiting from some pandemic-related sales.
Sales to U's customers were fifteen-eight percent of our total, compared with 55% in last year's period.
And the balance of sales were to customers primarily in Europe , Canada and Asia Pacific.
The MI. The mix shift reflects the impact of our acquisitions that largely sell to the U's market.
Slide six shows the change in our revenue mix by market on a trailing 12 -month basis.
Sales to industrial markets were up 39% and driven by the end markets noted on the Slide.
Vehicle markets were down 4% as strong truck agricultural and construction vehicle demand was offset by the broad supply chain challenges in other market verticals.
As noted, acquisitions contributed to the aerospace and defense growth in the quarter which drove the TM performance.
The change in medical markets on a cttm basis reflects similar pandemic-related comps as the second quarter.
As depicted on Slide seven.
Our gross profit was 32%, a record level and up 170 basis points from the year ago period.
Higher volume pricing.
Margin accretive acquisitions, as well as selling price increases more than offset continued global supply chain disruptions, rising material and labor costs and noncash acquisition costs.
As <expletive> noted, you can see the significant improvement over the sequential quarter.
Moving on to Slide eight.
Second quarter operating income was seven point five million, or 6% of sales, compared with six point seven million, or 7%, in the year ago period.
Operating costs and expenses as a percent of revenue were 26% of 220 basis points.
This increase was all attributable to our MA activity, with higher business development and amortization expenses, as well as added engineering and development costs that we have not yet fully leveraged.
As we have stated, we anticipate growing our margins over the long term with the disciplined execution of our lean tool kit asst, combined with leveraging higher volume.
And continuing to evolve as assistance provider.
On Slide nine we present GAAP net income and adjusted net income, along with our adjusted EBITDA results.
Second quarter, adjusted net income, which excludes business development costs and other nonrecurring items, was five point seven million or 36 cents per diluted share, compared with four point eight million and 33 cents per diluted share in the second quarter of 2021.
The effective tax rate was 27% in the second quarter.
We expect our income tax rate for the full year 2022 to be approximately 20 cent to 27%, based on changes to geographic mix.
Adjusted EBITDA was 16.2 million, or 13% of revenue, which was up 100 basis points. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
slidees 10 and 11 provide an overview of our balance sheet and cash flow.
Total debt was approximately 229 million at quarter end.
During the quarter, we use 44 pointyeight million of cash to complete the three acquisitions, net of cash acquired, which was largely funded by the debt.
The debt increase also reflects a new finance lease that was highlighted during the first quarter of 2022 for our manufacturing facility expansion in germantown Wisconsin, to support continued growth.
At the end of the second quarter, debt net of cash was about two million, or 50% of net debt to capitalization, and our bank leverage ratio was approximately three point seven times.
We have historically 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 generated 13.1 million net cash from operations during the quarter and utilized three point nine million on capital investments, which largely focused on new customer projects.
We expect our 2022 CapEx to range between 15 and two million and to be focused on growth opportunities.
Inventory turns were 3: X in the second quarter, consistent with our 2021 performance, as our teams continued to manage our inventory to meet increasing customer demand, combat sourcing and lead time challenges.
Our DSO increased slightly to 49 days in the quarter, largely due to timing.
With that. I'll now turn the call back over to <expletive>.
Thank you, Mike.
parvback loggin bookings remained strong, as highlighted on Slide thirteen.
Borders were more than $139 million in the quarter, representing a book-to-bill ratio one point one times.
This level also reflects a noted FX headwind of $6 million.
Our backlog hit another record, increasing 12% over the sequential first quarter and up 90% over the prior year period, to approximately three hundred and twenty-four million.
About two-thirds of this sequential increase in the quarter was from our acquired companies. The time to convert the majority of backlog to sales is within the next nine months.
Turning to Slide 14. we remain positive on our outlook.
To reiterate, we have been busy on the MA front, having now completed six acquisitions over an eight -month period.
We believe these are strategic conditions to Allied and, as previously mentioned, we have now added approximately $1 million annually of new business. That will be fully realized in 2023, with a measurably higher margin profile.
Equally important to the collective financial contributions. Our overall technology offerings are enhanced and our competitive positioning in target markets and strengthen.
As we look forward. We are excited to leverage our stronger competitive position across our targeted markets.
Specifically demand is expected to remain strong across our many industrial endmarkeks and, in particular, customer automation, oil and gas and material handling.
Over the short-term vehicle demand is expected to be muted due to the continuation of supply chain constraints. However, we do see encouraging production demand later this year and into 2020. -three.
Medical markets have largely lapped strong pandemic-related levels and should remain solid.
And aerospace and defense should improve, especially with the recent acquisitions.
While headwinds remained, we are confident that we can continue to anticipate and make the necessary adjustments to mitigate potential impacts and remain highly confident in our ability to enhance both our top and bottom line performance in the future.
With that operator. Let's open the line for questions.
Certainly we will now begin the question ANS session.
To join the question. Hugh, you may press a star, then one on your telephone keypad. You will hear a home acknowledging your request.
If you were using a speaker phone. Please pick up your handset before pressing any keys.
To withdraw your question. Please press star then to. We will pause for a moment as collars join the queue.
The first question comes from Greg pem with Craig hele, N capital group.
Please go ahead.
Yes I think morning everyone addresss some the good results here.
Thank you, GRE morning morortning.
So maybe, starting with a broader view on macro, what you're seeing thus foreign in July , based on the quarter, based of the bookings, doesn't imply like you're seeing any slowdown but any end markets and geograph ies, that maybe you're a little bit more concern versus last time we talked, or is everything still fairly strong at this point?
Well everything we've seen so far. The indicators are still quite positive. We do expect and, given summer in Europe and typical in summer and Europe , you see- some slowdowns and business and potentially, of course, the FX headwinds that we're seeing and potentially the impacts of Ukraine war, But right now we have to say that things seem to be continuing and are still strong.
Got it okay, and gross margin, which was clearly the bright spot. How much of the improvement? I mean, are you able to quantify the improvement from the acquisitions alone in the quarter, knowing that those are higher-margin contributors? And then can you also quantify the impact from what you're still seeing from the supply chain challenges that that going to be better this quarter?
Well I like chain, let's start to supply chain, I mean.
We're seeing some slight improvements in when I say slight improvements of some lead times starting to shorten and we're getting some pleasant surprises of things showing up that were exactly on the other side. There's still the negative surprises that are occurring to our teams are still fighting to battle and.
It's.
It's those couple components that may be missing that prevent you from shipping and your products, and those are the battles that we continue to find every day. I will say that some are doing better than others.
Electronic components are still a challenge, although we're starting to see some light at the end of the tunnel here. That's what I would tell you. As far as the.
Contribution of the acquisition versus the core business, let's call it clearly the acquisitions. As we mentioned, the margin profile is higher and did have an impact. I will also say no, that we've seen some improvement in our cot, our technology units, as we call over our business units, and I think it's it's really a testament to our team will continue to focus on where the inefficiencies that existing because the material shortages and inability to build complete products- some of that starting to go away, we're starting to see some improvements. We've also done affiliate consolidation in. That's gone quite well. We've also shift some product lines around during the quarter and that's gone quite well. So overall, I see you know the operating team doing an excellent job and work with what they have and yes, it is's a positive impact. But the majority of the impact for the margin increase clearly comes from the higher margin generating businesses. I remember they were in the courarter. They were near, quite frankly, near the end of the quarter that those occurred both from a percentage standpoint to clearly Re high. I would add and concur and add that the collective six acquisitions delivered as expected from a margin perspective and delivered that we said collectively in the past that they would largely deliver our goal of the hundred basis point improvement in margin. The other ite M that I would highlight is we talked previously about the lag in selling price increases from a on a contractual basis and somecertainly you know that legag, caught up here in Q2 in terms of them being passed through both on a contractual basis and significantly on the negotiated basis, know to fight the elevated input costs. So I think that was another strong compute to contribue to the quarter. Beside the acquisition is our success and passing along those selling price increases and neutralizing, if you will, to some extent the supply chain impact.
Yes that's helpful. So I mean, if I think about to go forward, I mean you'll now have sort of full run rate contribution from the higher-margin acquisition and if you assume that supply chain continue to improve, I mean it would the logical. What you saw in Q2 can probably be improved upon in future requarters. I mean any reason why that won't be the case.
Neither you're you're. Logically, it doesn't 't make sense for us to be able to do that it. We would caution you that we do have one of the acquisitions that is still lagging.
And not contributing to the levels that we initially planned and we see it moving to the right the backlog's very strong but that's been and that's one where it's been impacted by supply chain in electronic components. So we're not realizing the full impact with that and it's questionable whether B even resolve itself in quarter three So I'm just caution there's some beauting going on there but overall.
What you've stated Greg, I think is fairly accurate and I think that impact that the coross criabity is or so on the operating margin provides then the gross margin side, but it does impact gross margin to some extent.
Got it okay, great. And then the last one is without getting specific customer names. Can you give us some sense? So maybe what end markets you're seeing the most traction for in terms of these new wins, what types of applications or solutions that you're seeing the most progress, and?
Yes literally. I mean again, it's kind of interesting. What we're seeing here is across the Board, which I think speaks well to our diversification. So we're seeing some specialty. We say I was say specialty vehicle because we, our solutions, are quite special in those applications. We're seeing industrial opportunities, medical opportunities, So defense opportunities. So I would just have to say idea that that's the exciting part about it. It's not just one vertical, it's the. We created this platform, we created this set of markets that we feel our growth opportunities- H B a, C- still a strong oil and gas, of course, has been strong. So it's it's across the Board in our solution offerings, I think are having an impact there.
Awesome allright, I'll leave it there. Good luck to going forward to grt. Get on the results.
Thank you, .greg, thanks greag.
Once again, if you have a question, please press a star, then one.
The next question comes from Jerry sleey with Ross capital.
Please go ahead.
Good morning <expletive> and Mike. Thanks for taking my call.
morny Jerry morning.
<expletive> you had mentioned.
one of the acquisitions sort of.
Dual evolving to where you want to get it. I suspect that with spectrum controls and I know you don't necessarily call out business units.
As she said earlier, but that was, spectrum was one that he could say was going to be a little bit slow in terms.
Of hitting targets just because of.
By CHA issues I.
Am I correct in that assumption?
I'm not going to deny that.
Okay I, I just want to because it's just for modeling part. That's what insured, but can I get it? And you SSP on largely obliging? Yeah, but I mean the second to follow to that is obviously, I mean still very.
Very bullish on the technology.
To the table. Obviously, absolutely. The backlog is strong, it's- you know the' it's and it's interesting. I mean it's a few components here or there that are preventing us from.
That really getting the full production rate out the door here. So I think- and again I look at that and I would say that you say ujerry, and everyone else is- that even without that we perform fairly well, and and so we're not clicking on all cylinders here yet. So that's a good part to look forward to in the future years that, when it kicks in, it will definitely improve even where we are today.
Yeah just from a solution standpoint is we're on it. I I mean the whole idea or one of the. I guess he.
Themes. I believe it allied motion was the shift more towards.
From compponent tells the solutions.
Else I mean obviously I think these acquisitions probably help in that manner but.
Should we at some point even look at component sales?
Going completely in the rearof your mirror become a.
A total solutions provider and that helps margins.
Will there always be a mixinger.
Great question and I think the best way to answer that is. I just I want to look at, then point you to a slide here and mentioned to you that if you were to look at the similar Slide, you know prior years it's. It's the system solutions that we are actually offering today. ok, what we called a system in the past and I'll point you a Slide five for anyone that I as the Slide five in the slide deck, what we call the solution in the past and the first product, that shown on the left, top left there, the automated G PS's guided vehicle scary module, let's the motor with embedded electronics and connectors and cabling And so forth, and that was the bulk of the allied system solution, offering something that would look like, that would be embedded. You know you would have electronics and are garing embedded. What I will say to you.
In the future and we've talked about this internally is that's becoming part of our culture that.
It's going to be the exception when we're shipping a component, let's just call it just a motor.
And it's going to be more about the motor and electronic sand or the gearing which we use. We call solution.
Is a relatively lower level solution compared to the rest of the pictures that you're seeing here on that same Slide five So that system solution- and let me just just throw numbers out without given out too much information- with a motor and electronics or something we're talking in the range of an ASP of, let's say, anywhere from 100 to five $600.
When you start getting into the other solutions that we're showing you here.
Your start. You're talking about tens of thousands of dollars and even hundreds of thousands of dollars.
So they do inbed all the components that we have, that we offer and but' bring it at higher level, higher sophistication level, much more software involved. And I would tell you that as we look out into the future, that's what you're going to see. You're going to see more embedded software, more informatics, more you know allied, transitioning into a solution provider that can do model based designs and simulations and veryary precise, high level solution packages that are with as P that are much higher. So we will not abandon that core component: ability to produce product at a competitive price anywhere in the world. We feel that's core to our future technology and we will not abandon that because we can leverage that into our other markets and we continue to do that and it gives us that cot UN toify we need. But it's this the magnitude of what in there there's still, even in those motor and electronic solutions, is a tremendous amount of IP software and it just continues to develop and evolve, very sophisticated. So this is a good picture of transitioning.
What we call solution in the past is changing, getting in a much higher level, including much more embedded software, much more Communications capabilities. In then, the components of the past are we're embedding again more.
The IP, and we'll probably call them components, or rather than systems.
That all got it.
Okay you know I'm going to. I have a couple of questions But I want to say them for a follow call. But I I appreciate it and crats on a on a really great.
Thank you. Thank you Jerry, Thank you.
This concludes the question answer session. I would like to turn the conference back over to management for any clothing remarks.
Yes Thank you operator, and thank you everyone for joining us on today's call and for your interest in Allied motion.
As always, please feel free to reach out to us at any time and we look forward to talking with all of you again after our third quarter 2022 results.
Thank you for your participation and have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Then one when Don.