Q3 2022 Allied Motion Technologies Inc Earnings Call
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Good day and welcome to the Allied motion third quarter 2022 conference call.
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I would now like to turn the conference over to Craig Mahalik of Investor Relations. Please go ahead.
Yeah. Thank you and first off I, just want to apologize to everyone for the delay we had some technical difficulties.
We certainly appreciate your time today as well as your interest in Allied motion joining.
Joining me on the call are <expletive> <unk>, our chairman, President and CEO, and Mike Leach, our Chief Financial Officer.
<expletive> and Mike are going to review, our third quarter 2022 results and provide an update on the company's strategic progress and outlook after which we'll open up for Q&A.
You should have a copy of the financial results that were released yesterday after the market globe. If not you can find it on our website at Allied motion Dot com along with the slides that accompany today's discussion you.
You're reviewing those slides please turn to slide two for the Safe Harbor statement.
As you are aware, we may make forward looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call.
These risks uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.
You can find these documents on our website or 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 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 part with that please turn to slide three I'll turn it over to <expletive> to begin.
Thank you Craig and welcome everyone.
We delivered strong results during the third quarter, which demonstrated the power of our strategy is our global teams to execute very well in a challenging macro environment.
We continued to leverage our diversified end market mix benefit from new solution offering.
Organically and Inorganically and further developed our one allied global platform to drive record sales.
Third quarter revenue grew 30% to $134 4 million with strong organic growth of 15% on a car.
Constant currency basis.
While we are seeing broad based demand across each of our target markets. Two of them are the primary drivers of our growth.
Aerospace and defense revenue grew 59% due to incremental demand from acquisitions, the best program timing and solid organic growth.
Revenue from industrial markets was up 39% in the quarter, but anything from our acquisition and strong end market demand with industrial automation pumps and oil and gas.
We.
To strengthen our margin profile, despite ongoing macroeconomic economic headwinds.
We delivered gross margin of 32.2%.
Which represented 130 basis point increase from the year ago period.
Operating income grew 35% to a record $11 7 million with a margin of eight 7% and adjusted EBITDA margin expanded 80 basis points to 14, 8%.
While our recent M&A activity is certainly helping we also we quaker's performance to our global team that continues to manage supply chain issues and inflationary pressures on logistics energy material and labor.
We achieved adjusted net income per share of 65 per share, which was up 22% from 49% per share in the prior year period.
We continue to have a solid pipeline of opportunities and are encouraged with coding and order levels for each of our target end markets.
The integration of our recently acquired businesses has progressed well.
Which have enhanced our value proposition and we're working hard to maximize the opportunities and realize the full potential of these barging enhancing businesses.
And with that let me turn it over to Mike for a more in depth review of the financials Mike.
Thank you <expletive> and as a reminder, our results include the acquisitions completed during the fourth quarter of 2021 in the second quarter of 2022.
Starting on slide four we provide some detail regarding our top line.
Third quarter revenue increased 30% to $134 4 million a record level, which reflected strong demand in the A&D and industrial markets as <expletive> discussed and incremental sales from acquisitions.
The unfavorable impact of exchange rate fluctuations on revenue was $7 2 million in the quarter, excluding FX revenue was up 37% and organic revenue growth was 15%.
Revenue in the vehicle and medical markets each grew 4%.
Vehicle market sales growth reflected higher demand from the commercial automotive and trucks well.
Well medical markets have now largely lapped pandemic related sales and are benefiting from the return of electric selective surgeries and recent acquisitions.
The distribution market, while small a small component of our total revenue increased 25% during the quarter.
Okay.
Sales to U S customers were 59% of our total compared with 56%.
In last year's period, and the balance of sales to customers, primarily in Europe , Canada and Asia Pacific.
The shift in mix continues to reflect the impact of our recent acquisitions that largely sell to the U S market.
Slide five shows the change in our revenue mix by market on a trailing 12 month basis.
Sales to industrial markets were up 39% driven by the verticals noted on the slide.
Industrial has seen nice growth over the last year and now makes up 38% of our total sales.
Our second largest market is the vehicle.
Which contracted 4% as strong truck and agricultural vehicle demand was offset by broad supply chain challenges in other market verticals.
Medical market revenue was relatively flat on a TTM basis, reflecting similar impacts as the third quarter.
And as noted well acquisitions contribute to the aerospace and defense growth, we are driving solid organic business growth and benefiting from some defense market program timing.
As depicted on slide six our gross profit was 32, 2% up 130 basis points from the year ago period, and down just 20 basis points from our record high achieved last quarter.
Higher volume pricing and margin accretive acquisitions more than offset continued global supply chain disruptions and rising material and labor costs.
With our stated objectives you can see the progress we are making in the annualized chart on the right.
Moving on to slide seven third quarter operating income reached a record 11.7 million or eight 7% of sales compared with $8 7 million or eight 4% in the year ago period.
Operating costs and expenses as a percent of revenues were 23, 5% up 90 basis points, but largely attributable to our M&A activity with step up amortization expenses as well as added engineering and development costs. So we have not yet fully leveraged.
Helping to offset the leverage gained on the SG&A line.
Which decreased 60 basis points to 13, 9% of revenue our lowest level in more than three years.
As we have stated we anticipate growing our margins over the long term.
With the disciplined execution of our lean toolkit, a S T combined with leveraging higher volume.
On slide eight we present, our bottom line and adjusted EBITDA results.
Our GAAP net income and diluted EPS have been adjusted for certain items, including amortization of intangible assets related to acquisitions.
We believe that adjusted EPS provides a better understanding of our earnings power inclusive of adjusting for the noncash amortization of intangible assets, which reflects the company's strategy to grow through acquisitions as well as organically.
Third quarter adjusted net income was $9 7 million or 60 cents per diluted share that was an increase of 22, 2% adjusted <unk> 49 per share in the prior year period.
The effective tax rate was 27, 5% compared with 24 six as the prior period included a discrete benefit for the investment tax credit.
We expect our income tax for the full year 2022 to be approximately 25% to 27%.
Based on changes to the geographic mix.
Adjusted EBITDA increased 37% to nearly $20 million or 14, 8% of revenue, which was up 80 basis points. We.
We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
Okay.
Slide nine and 10 provide an overview of our balance sheet and cash flow.
That was approximately 232 million at quarter end.
During the second quarter, we used about 45 million in cash to complete three acquisitions net.
Net of cash acquired which was largely funded with debt.
The debt increase also reflects a new finance lease that was highlighted during the first quarter of 2022.
We're manufacturing facility expansion to support continued growth.
At the end of the third quarter debt net of cash was about $212 million or.
Or 51, 3% of net debt to capitalization or.
Our bank leverage ratio was three approximately 375 times.
Based on our cash flow projections, we expect to delever over time in a manner that aligns with and it's consistent with our historical performance.
So far this year, we've utilized $5 8 million of net cash from operations and invested $11 million in capital investments, which largely focused on growth opportunities and new customer projects.
As we at round out the end of the year and based on the pace of some projects, we've refined and slightly lowered our 2022 capex expectations.
Arrange between 14 and $18 million.
Inventory turns were three one times in the third quarter up slightly from our 2021 performance as our teams continued to manage our inventory to meet increasing customer demand come bad sourcing and lead time challenges are.
Our DSO saw jumped to 55 days in the quarter, largely due to timing and mix of customers with that I'll now turn the call back over to <expletive>.
Thank you Mike.
Our backlog and bookings remained solid as highlighted on slide 11.
Orders were more than a 126 million in the quarter, representing a book to bill ratio of just under Onex.
This level also reflects a note an FX headwind of $7 3 million.
Our backlog was up 67% over the prior year period, although we saw a 4% decline from the sequential second quarter, which reflected the loosening of some supply chain constraints.
The time to convert the majority of backlog to sales is within the next nine months.
While there are still some components with long lead times generally speaking we are starting to see some stabilization within our supply chain.
Turning to slide 11 for our outlook.
We are a stronger company today and expect to see further benefits as we leverage the full potential of our recent acquisitions.
As a reminder, our M&A strategy has delivered approximately 100 million annually of new business or platform that will be fully realized in 2023.
And incrementally higher margin profile.
Equally important we have created a stronger long term competitive position across our targeted markets.
Pacific like demand is expected to continue at relatively strong levels across our many industrial end markets.
Overall, our vehicle demand has been stable with the most significant increase the volume occurring in our automotive market.
It is an indicator that the supply chain is improving as demand schedules from our customers continued to firm up for 2023.
Medical markets have largely lap strong pandemic related levels and should continue to be solid.
And aerospace and defense will be bolstered by our recent acquisitions and we anticipate further organic growth given our exposure and program participation.
As a reminder, in the past we did experienced seasonality in demand, reflecting modest reductions in our fourth quarter shipments.
This was primarily due to the typical holiday shutdowns and customer inventory adjustments occurring in December .
Now that business conditions seem to be normalizing, we may see some minor seasonality creeping back into the business in Q4.
We will continue to innovate and invest in each of our targeted markets as the various end markets with each offer significant opportunities for long term growth.
While the global outlook May have softened we continue to remain highly confident in our ability to navigate through these unique challenges.
We will stay focused on executing our strategy.
Serving our customers, while continuing to capitalize on opportunities to drive growth and improve our operational excellent execution throughout the company.
With that operator, let's open the line for questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star and then one on your telephone keypad.
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This time, we will pause for a moment to assemble our roster.
Our first question today will come from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Hey, good morning, everyone. Thanks for taking the questions and congrats on the good results, especially in light of some pretty.
Severe FX headwinds.
Thank you Greg.
You know I, maybe just start with you know kind of a broad you know commentary on you know the demand landscape I mean or are you.
Seen anything out there that gives you caution I mean, the bookings were still pretty strong I guess your initial commentary suggests that.
Things are still holding up so just wanted to maybe dig into that a little bit further.
No I would say to you that they are.
And you're waiting to be fairly strong we did see.
As we mentioned there has been some reduction sequentially quarter over quarter.
And I think all along we've been saying that we would expect that some of that would start to occur.
As deliveries were getting back to normal lead times were.
You know, becoming more predictable and supply chain was improving so I would suggest to you that all of those are occurring.
And.
In light of all of that we're still seeing.
Robust demand going forward here.
And on the supply chain specifically.
You know what what pain points are still out there and I guess in the past you've.
Sort of been able to quantify you know some of that impact to margins I mean, he has that normalized at this point or are you still seeing some larger margin headwinds related to supply chain that that could further boost margins from here.
Assuming they are bit.
Sure I mean, I would tell you that again electronic components has been they've been the major challenge throughout the company.
And what's happened with electronic components as you were.
The shortage in supply as well as a very long lead times as well as.
Everyone attempting to get into the pipeline and scoping out parts of that were out there caused some very significant.
A P P DS with regard to specific components. When you had to go to secondary markets.
We're still seeing some of that but I would say to you. It's the exception now where it.
He was the flood gates are open and we were battling.
Significant number now and it's not happening as frequently but it still happens I do think that AR has as I mentioned, we're seeing supply chain, improving we starting to see reliability of delivery and we're seeing more signs that our customers are experiencing the same.
And the same thing because.
They don't they're not getting their components are not placing demand for us in the overall, it's definitely so we're starting to see that stabilize I would say overall, it's definitely improving it's not just electronic components. There's you know at times, we're running into specific issues and I wouldn't say to you that you know.
Covid hasn't gone away.
Got it.
We have experienced in a couple of instances, where there's been an uptick that our suppliers were.
The band is slow slow down.
And we've also seen where value decisions have been made by suppliers, meaning that.
They're going into life on certain types of commodities are products in there.
Giving you noticed it along notices but you're scrambling to find.
An alternative that can be approved by customers. So it's not it hasn't totally gone away, but it's definitely improved.
Yeah understood.
On the margins.
The operating leverage has become really impressive and I think the EBITDA margin was was definitely the highest quarterly.
Quarterly amount since we've been following the company.
But just broadly speaking as you look ahead, how sustainable is that I know that's been a focus point you know over over the years, but it seems like the last couple of quarters, you've really sort of broken out to the upside partly just.
Due to some internal initiatives, but the acquisitions, probably help just given their higher margin in nature right, Yeah, I'll I'll look.
Mike speak to that yeah, Greg we definitely have seen that movement. We do think it is sustainable.
Obviously part of that is the gross margin expansion, but.
We are leveraging more effectively and I think we've been we've been broadcasting all along right that but that will be part of the margin expansion that we've been talking about all along.
I would tell you that.
You know, we still have a ways to go we think in the sense that you know we do have backlog that's tied up.
Some of the acquisitions are not yet fully being fully leveraged our that we expect to see at some point in time, just given you know pushing additional revenue across.
I would caution you as <expletive> noted, we do expect to see some level of seasonality in the business return that was very common.
In the past right and so that'll ultimately effect.
On a singular quarter basis for potentially in Q4, you know our ability to leverage those costs, but generally speaking, yes, we expect to continue to drive leverage in those.
Overtime.
Yeah, and I think to add on to what Mike said here is that.
Just to emphasize the fact that we were not where we think we can be we think there's significant room for continued improvement.
And how much of that is a byproduct of just.
You know volume continued to increase revenue versus you know.
Additional internal initiatives that can help drive further.
Improvements on their own.
Certainly volume is going to help that but we're certainly we're utilizing as we've said in the past our S. T tool set to drive out cost.
We've been focused on.
Rationalization activities are with our manufacturing footprint and are starting to see some gains there. So we think theres multiple pads or excuse me that will leverage.
Okay, Great I'll leave it there best of luck. Thanks.
Thank you Greg.
Sure.
And again, if you would like to ask a question. Please press star and then one.
Our next question today is from Gerry Sweeney of Roth Capital. Please go ahead.
Good morning, Mike Thanks for taking my call.
Morning Dragon jewelry.
Question around.
Engineering development acquisition, you're adding a lot of technology around solutions and I think that's where you want to drive the company longer term.
I was wondering if you could give a little bit of details on how these efforts maybe you have changed your positioning.
And the last I don't know.
Couple of years, you've made some some series of acquisitions that I think really positioned well I'm just curious how that's driving revenue backlog you know how the integration of those acquisitions are going and sort of where this could take you.
One you know 12, 18 24 months out.
Sure Yes.
Yes, I mean.
It definitely was a focus and is a focus within the company, where you saw six acquisitions within the last 12 months.
And as we mentioned.
All those acquisitions were more technology oriented.
Versus adding a large.
Our revenue base.
But what's really exciting Jerry is that Oh, putting together the plans going forward here in the next year and beyond is when we look at.
Let's just call it the market specific opportunity.
We look at all the technology that we can bring to bear in terms of products and or.
All solutions.
Just continues to expand where.
We would in the past we will look at it we say okay. We can put a motor in there maybe a motor and a gearbox no.
But maybe some electronics, but now with the whole solution set has is driven much higher at a much higher level, where we're talking.
In terms of value horsepower solution in a particular application and that's the way we're looking at it so.
The whole combination is very exciting and just see how the one team strategy is really pulling together across all the to use.
And across all technologies and how that commit.
Commitment that we've made in the investment we made and what we call get global electric engineering team to pull it all together first off the standardized established some platforms are building blocks that we could utilize and leverage.
Lead to really come up with leading edge solutions. So we've identified areas of opportunity that we think we can bring.
Our unique solution to the market that the market may not even see yet or understand yet, but in addition to that existing applications, where the incremental or increased value of what we could bring to each unit, we're selling and significant.
And so I would tell you that it's definitely an exciting.
Change in the company.
And if you went back three four years ago.
And I looked at the programs and projects, we're working on very exciting, but you look at them again today and you say Wow, it's really it's really incredible and I think.
Having just.
We haven't what we do is our board does travel to our operations that we rotate that we were very interested in letting our board meet management different facilities also to get their input what theyre doing.
One on one conversation.
And get to understand.
Where we're headed and one of the things I can tell you that the board had mentioned is that they can see that culture driven throughout the entire company no matter what it is whether it's a corporate support function.
Whether it's a technology itself or whether it's a you know a centralized.
[noise] solution et cetera.
It's the same and it's consistent so that's what's really exciting week.
We've moved in and again doing six acquisitions and the integration pace became very important it has to be handled quite a bit differently.
We do one or two a year.
Quite simple it just happens naturally well in this case, we had to drive the process.
So you've seen a.
A substantial uptick in the training side of it you're starting to see changes that are going to be made to the website to prepare.
Ourselves and the market for who is ally today, who L. L. I would be in the future and I think it's very exciting.
You can think about what other small smaller acquisitions were.
Let's call it a technology play with a lower level of sales and limited resources to go out there and.
Penetrates the market to generate more opportunities in sales well they got out a training session and there was 150 people sitting on the other end for within Allied and all of a sudden you've got tentacles, reaching everywhere.
<unk> is quite high and what we have to do is manage staff to ensure that we're focused on the right opportunities as a company. So now let's move from acquisition to high focus on integration and high focus on making sure that we're picking the right opportunities to really invest the money from a corporate standpoint, and there's no shortage of those that's all I can.
It's really exciting times does.
Does this change.
How you go to market in terms of sales or.
It's just a gradual process or just curious how how that kind of fits into a great question.
So it won't change because we're not.
We're not eliminating word out against our cost some developments in most of our work is cost them. We actually have standard platforms that we build off of and we can leverage but it really is tailored to an end user and end customer that's not going to change in the way. We go to market with that will not change we've been successful at it will continue well what you.
Do see.
And I say, it's a very good question because as you get into the higher levels of sophistication in terms of system integration.
It's a different skill set necessary systems engineering becomes a very no more important part of that process a program manage becomes a more part in part an important part of that progress project and program. So we you do see that we were adding resources in certain places and realignment.
Technology units at our operations to better support that so that's that is actually you know what we're working on internally as we move into 'twenty two 'twenty three and later this year all part of the integration process. So it's a great question. We have the distribution channel that is opened up and.
Between T C I and spectrum that are with Rockwell automation in their automation fair will be there and I know that.
Opportunities for more pull through without just introduced just rockwell, but others that have been brought to the systems integrators in the automation companies that were working with but also we have to say, it's a higher level systems integration system Engineering and program management that will.
We'll change how we go to market.
So where are those opportunities.
So it's a good great question and that's why you're starting to see as we go through this integration process and everybody getting to get becomes familiar as we're laying out those players moving in the future and we're getting refocused on some significant major opportunities that levers leverages technology for several many of our technology units.
Yeah.
Not sure how to.
Asked this question, but if we were to sit here and track you know this evolution and I'm not sure. If again if somebody were to ask me if I were to ask you like.
How much component sales were up revenue will take two or three years ago versus component sales versus solution sales today would that be an adequate or appropriate question to ask to see how you're moving along this transition knowing that they're not getting rid of some of that component sales I don't believe at least.
Absolutely correct, let's say here's here's the challenge.
That's what we're seeing internally, what we call the system sale three years ago or four years ago.
It's something we would call a component sale today, having a motor and a gearbox or Gary got it. Okay. Yeah. We would've said that was a system sale of motor gearing in some embedded electronics, we would say that was a system sale.
Sales were really talking about today are much more sophisticated their software development that goes on there's multi access control, there's all kinds of Iot support there's many.
It could be many types of motors that could be composite materials for light weighting and vehicles.
So it's it's what we call the system before.
We kind of look at it today and say geez, that's no longer a system that became a way of life that where we had to train.
Our sales force to say, hey, you're not just selling a motor you're selling motor in gearing and feedback and you know and the control or drive electronics.
Became a way of life, So I would call in many cases, what we call the system before perhaps a component today.
And the real true higher level system integration.
That gets it becomes a part of either.
Shane or process, it's much more sophisticated and we're much more embedded in the logic and the value of that is much higher.
There's some incredible knowhow that goes in their software.
Software development.
And it really does drive the value so what might have been.
Just a thousand dollar sale.
And now I'll be a 3000 dollar sale of a 50000 dollar sale could be 100000 dollar sale and beyond that that's really what the differences so to answer your question.
If we go back to our original definition.
We would tell you that more than 50% of our sales our solution oriented.
But when it but really it is approaching more like 60.
70% in the future as we're looking at these major programs that we're investing in to go after them.
Got it.
Higher value content and much more sophistication at some point.
Yeah, Hi, Ranga here, if I got it.
I I appreciate it I will jump back in line. Thank you.
Thank you Sir.
And ladies and gentlemen at this time showing no further questions. We will conclude the question and answer session I'd like to turn the conference back over to management for any closing remarks.
Yes. Thank you everyone for joining us on today's call and for your interest in Allied motion I would also like to apologize for the late start as our hosting company did have some technical difficulties in getting us getting to call initiated so hopefully with that doesn't happen again for those of you that are interested we will be participating in person at the Baird.
Real conference in Chicago next week on Thursday November 10.
As always please feel free to reach out to us at any time, when we look forward to talking with you all again after our fourth quarter 2022 results.
Thank you for your participation and have a great day.
The conference has now concluded and we thank you for attending today's presentation.
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