Q1 2023 Allied Motion Technologies Inc Earnings Call
Participants
Michael R. Leach; Senior VP & CFO; Allied Motion Technologies Inc.
Richard S. Warzala; Chairman, CEO & President; Allied Motion Technologies Inc.
Edward Randolph Jackson; MD & Senior Research Analyst; Northland Capital Markets, Research Division
Gregory William Palm; Senior Research Analyst; Craig-Hallum Capital Group LLC, Research Division
Craig Mychajluk; SVP of Operations; Kei Advisors LLC
Presentation
Operator
Good day, and welcome to the Allied Motion Technologies First Quarter Fiscal Year 2023 Financial Results Conference Call. Should you need assistance, (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Craig Mychajluk, Investor Relations. Please go ahead.
Craig Mychajluk
Yes. 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 Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our first quarter 2023 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 closed. If not, you can find it on our website at alliedmotion.com, along with the slides that accompany today's discussion.
If you're reviewing those slides, please turn to Slide 2 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 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. 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 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 have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. With that, please turn to Slide 3, and I'll turn it over to Dick to begin. Dick?
Richard S. Warzala
Thank you, Craig, and welcome, everyone. We delivered record sales in the quarter, further strengthened our margin profile and achieved a measurably improved bottom line. This level of performance speaks to the ability of our entire team to execute our strategy at a very high level as well as our market diversification, particularly within industries that demand precision controlled motion solutions. First quarter revenue of $145.5 million was up 27% and reflected higher demand across most targeted markets, along with impressive organic growth of 25%, the highest level in recent history. Of note was the strength within our industrial vertical with strong end-market demand in industrial automation, oil and gas, HVAC and material handling. Aerospace and Defense markets also grew substantially during the quarter due to organic growth, incremental demand from acquisitions and defense program timing. And our medical markets saw double-digit growth from higher demand within surgical-related markets and medical mobility. Equally important was the continued strengthening of our gross margin, which reflects the higher volume, including more technology solutions-based sales and margin accretive acquisitions. This translated into strong operating leverage as operating income increased 167% and net income more than doubled over last year's first quarter.
On an adjusted basis, our earnings per share were $0.55, up 53% from $0.36 per share last year. Given the strong earnings performance, we generated solid cash from operations, which helped offset what is typically a higher cash consumption quarter. Our orders in backlog were both down sequentially, which was not unexpected given the Improving supply chain and macro environment. I will talk to this performance later in the presentation. Overall, 2023 is off to a strong start. We expect our investments in technology and solutions to continue to yield results and over time, drive an enhanced margin profile. With that, let me turn it over to Mike for a more in-depth review of the financials. Mike?
Michael R. Leach
Thank you, Dick. As a reminder, our results include the acquisitions completed during the second quarter of 2022. Starting on Slide 4, we provide some details regarding our top line. First quarter revenue increased 27% or $30.8 million to $145.5 million. The unfavorable impact of exchange rate fluctuations on revenue was $3.3 million in the quarter. Excluding FX, revenue was up 30% and organic revenue growth was 25%. As highlighted, Aerospace and Defense grew 125%. Industrial market sales were up 38% and Medical was up 11% in the quarter. Dick reviewed the specific end market drivers behind each of these growth markets. Sales for the distribution channel were about 4% of total and increased 10% during the quarter. One market that declined was vehicle as higher commercial automotive demand was more than offset by lower demand within agricultural vehicles. Powersports is still the largest component within vehicle and saw modest growth year-over-year.
Slide 5 shows the change in our revenue mix by market on a trailing 12-month basis and the drivers behind that change. Industrial continues to be strong and remains our largest market, making up 40% of our total TTM sales. Solid organic growth and contributions from recent acquisitions contributed to this performance as well as the A&D and medical growth. Vehicle market growth was up slightly on a trailing 12-month basis as truck and commercial automotive demand more than offset the weaker agricultural vehicle demand. As highlighted on Slide 6, our first quarter gross margin was 31.5%, up 230 basis points from the prior year period. Higher volume, margin accretive acquisitions and pricing more than offset remaining global supply chain constraints and higher material and labor costs. Consistent with our stated objectives, you can see the progress we are making by executing our strategy in the annualized chart on the right as we achieved a trailing 12-month gross margin level of 31.8%, up from 30% in 2021.
Moving on to Slide 7. The first quarter operating income more than doubled to $11.4 million or 7.8% of sales, which was up 410 basis points. Operating costs and expenses as a percent of revenue were 23.7%, down 170 basis points, which reflected the operating leverage obtained from strong revenue growth, along with consistent utilization of AST, our Lean toolkit in all aspects of our business.
On Slide 8, we present GAAP net income and adjusted net income, along with our adjusted EBITDA results. Our net income and diluted EPS have been adjusted for certain items, which we believe 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 acquisition as well as organically. Net income increased 152% to $6.3 million or $0.39 per diluted share, and on an adjusted basis, net income was $8.9 million or $0.55 per diluted share, up 53%. The effective tax rate was lower in the quarter at 23.2% due to discrete tax benefits. We expect our income tax rate for the full year 2023 to be approximately 25% to 27%. Adjusted EBITDA increased 47% to $19 million or 13.1% of revenue, which was up 190 basis points from the first quarter of 2022. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
Slides 9 and 10 provide an overview of our balance sheet and cash flow. In the first quarter, we made a $6.25 million deferred payment for a prior acquisition, which was reflected in our cash position at quarter end. Total debt was approximately $237 million, up $1 million from year-end 2022. Debt net of cash was about $211 million or 47.9% of net debt to capitalization. Our bank leverage ratio was 3.3x. We generated $3.6 million of cash from operations, which reflected higher net income and lower levels of inventory. The first quarter is typically a higher cash consumption period, so we are pleased with our cash generation, which compares with the cash usage of $13.4 million in the prior year. Based on our cash flow projections, we expect to continue to drive strong cash flow this year, consistent with historical trends. First quarter capital expenditures were $3.6 million, and we're largely focused on new customer projects. We expect 2023 CapEx to range between $18 million and $23 million. Inventory turns improved to 3.2x in the first quarter compared with 2.9x last year. Our teams continue to manage our inventory and meet customer demand while combating sourcing and lead time challenges. Our DSO saw a slight bump up to 55 days. This is largely due to timing and mix of customers. With that, I'll now turn the call back over to Dick.
Richard S. Warzala
Thank you, Mike. Slide 11 shows our orders and backlog levels. First quarter orders of approximately $123 million resulted in a book-to-bill ratio of 0.85x and backlog of approximately $309 million. While we are seeing some pockets of weakness in Europe, our overall demand outlook is positive with a healthy backlog to support our growth. Our backlog was up 7% over the prior year period but decreased from the sequential fourth quarter of 2022, given the loosening of some supply chain constraints. Given the improvements in the supply chain, we are making good inroads to reduce our lead times and our backlog as we accelerate shipments of several long lead products. Over the next couple of quarters, we do expect our backlog to decline slightly as our book-to-bill ratio stabilizes around one. The time to convert the majority of backlog to sales is still within the next 6- to 9-month window.
Turning to Slide 12 for our outlook. We remain well positioned for success through a wide range of economic environments. Demand is expected to continue at relatively strong current levels within our industrial markets, which should continue to benefit from our increased market presence around industrial automation and material handling as well as oil and gas. We are making solid inroads with defense applications and expect our overall A&D business to benefit as we further leverage recent acquisitions. Medical markets have trended away from the pandemic-related sales to a more normalized sales environment focused on surgical and instrumentation-related end markets. And lastly, we are anticipating modest growth in our vehicle markets as the supply chain improves and demand schedules from our automotive customers continue to firm up for 2023 and beyond. An area of focus beyond our margin objectives is driving cash conversion and paying down debt this year as we look to reload for future opportunities. We are still actively grooming potential acquisitions and building out our M&A pipeline as a key element of our overall growth strategy. We started the year on a strong note, and while a heightened level of uncertainty remains, we believe we can continue to execute our strategy and capitalize on the many growth opportunities and tailwinds within our targeted markets. With that, operator, let's open the line for questions.
Question and Answer Session
Operator
We will now begin the question-and-answer session. If you are using a speaker phone, (Operator Instructions) At this time, we will pause momentarily to assemble our roster. The first question today comes from Greg Palm with Craig-Hallum Capital Group.
Gregory William Palm
I guess maybe just starting off with the commentary around pockets of weakness. It would be helpful just to get a little bit more color on whether that's certain customer-driven, whether it's certain end markets, whether it's kind of broad-based across the geographies you mentioned. Yes, we'll start there.
Michael R. Leach
I think it's fairly broad-based, Greg. But we do see it, I guess, a little more predominantly, and again, this is on the order basis that we're talking about is in Europe. It's a little more pronounced in the industrial markets in Europe, particularly like in Germany. So I would tell you, it's mostly macroeconomic driven. Obviously, we do have some specific customers that have been impacted by the Ukrainian conflict as well that we've seen flow through. But I would also describe it as sporadic. I think we'll bounce from 1 month being really strong surprising orders and then 1 month being quite low. But then you compare that to 6 months ago, 12 months ago, I think mostly supply chain driven, right? We were seeing a lot higher orders just because of that. And what we've got going on is also a compression of those supply chain lead times. And again, our expectation, we've talked about this over time that we expect to see this book-to-bill flip a little bit simply driven by lead times improving.
Gregory William Palm
And do you get the sense on whether it's maybe destocking units for inventory normalization purposes? And I guess, have you seen cancellations altogether as part of that softness in orders?
Richard S. Warzala
I think the first part of that is more correct, more accurate in that you are seeing some adjustments. So again, people had built in longer lead times through the supply chain issues. And now as the lead times are starting to come back to more normal levels and materials are flowing, you are seeing some adjustments to some schedules, okay? We fully expected that, and it is occurring. And I would emphasize what Mike said. In Europe, there has been some remaining instability based upon Ukraine crisis, the impact on, let's call it, the energy cost, the impact on planned product sales and releases into that Eastern Europe market. But overall, we are holding up quite well in many areas. And while we hear about expected reductions, we continue to see some strength as well. But cancellations are rare.
Gregory William Palm
Okay. Makes sense. And then just in terms of the kind of the capital allocation strategy, a big, big year for acquisitions in 2022. And I know we've talked about a robust pipeline. Does the current environment and your, I guess, desire to pay down debt here, does that change your thinking around M&A in the near term? Or does an environment like this maybe mean there's some opportunities that could come out just based on valuations coming in?
Richard S. Warzala
Yes, I think you're absolutely correct. I mean, so we always have to be ready because their valuations have come down, and we are seeing some opportunities, so we do have to be ready because there are some strategic areas out there that we felt that we're looking at, and we would like to add in the future here. So some things are opening up. Valuations have declined. While we expect strong cash flow and the ability to pay down debt this year, we also feel that we're in a position to be selective, pick these acquisitions that really enhance our value to us strategically. And that's where we are. We're really looking at it from a strategic standpoint. And if you asked us if we were seeing something major come across that maybe changes what we would like to do, then we would have to be creative and figure out a way to get it done. But right now, I think we're in a good spot. We're focused on paying down debt. We're also focused on a couple of opportunities that are out there that we think could add some good strategic value to our overall portfolio and platform.
Edward Randolph Jackson
As a reminder, if you would (Operator Instructions) Your next question comes from Ted Jackson with Northwire Securities.
Dick, my congratulations on a very solid quarter. I have a few questions more around the financials. So starting with gross margins. You commented in your press release, in your presentation, that your long-term goal is to see about a percentage point increase in margin on an annualized basis. At least relative to my expectations, the first quarter margin was a little more robust than I might have expected. Is it fair to assume that you would see that kind of 1% increase across the year for 2023 and that we would be looking for your gross margin for the full year to be somewhere north of 32%.
Richard S. Warzala
Well, yes, a couple of things. I just want to make a comment about here. And I think we made some statements, and we followed them up in conference calls to talk about the gross margin and overall operating profit improvement. So yes, we are focused on both. We're focused on the gross margin improvement. I think in the bigger picture, we're really looking at this as a combination of gross margin and operating margin improvement. And we do feel comfortable that the actions that we are taking right now will allow us to achieve what we have stated, okay? But I do want to put it in context, I'll keep repeating it. So to make sure that it's not confusing, we may have added to the confusion, but it's really about the combination of those 2. AST brings us several opportunities. There are some synergies that we can certainly realize that we're working on. And in addition to that, we are very focused on the solution set sales and leveraging the opportunities we have to bring in new orders with higher gross margins that will actually allow us to realize what we stated in our goals. So I hope that helps.
Edward Randolph Jackson
Sure. Second question. The revenue was to my eye quite strong in the first quarter. Should we expect to see you build upon that in the second quarter? Are we going to see some sequential growth on the top line in second quarter versus first quarter?
Richard S. Warzala
Yes. Yes, good question. So a couple of things occurred. As you noticed, that's a very strong increase over the first quarter of last year. We've had a backlog that's increased substantially. We've had supply chain constraints. We've had long lead times that we've been dealing with. So we had some, I'll call it, some pent-up demand in past due items that we needed to clean up here as supply chain started to flow, and we did see some of that in Q1. So I'd say to set expectations in the proper manner is that we would normally see a nice crescendo from Q1 to Q2 and so forth. We think Q1 represents some of the clean-up, I'll call it. And Q2 will not build off of that Q1 clean-up, let's call it, and that resulted in the sales. We do expect that we'll be solid, we'll be strong, but I wouldn't go back to historical data and say, well, you guys really jump from Q1 to Q2 and Q3. I think we've seen Q1, we picked up and cleaned up some things that because of supply chain constraints, we were able to do so.
Michael R. Leach
I was just going to say, I don't think the Crescendo will be in this as steep as it traditionally is from a seasonality standpoint, right? I think we've enjoyed some of that already here in Q1. And while we do expect the benefit of some seasonality, I just don't think it will be as pronounced as it's been in the past, Ted.
Edward Randolph Jackson
So is it fair to maybe think of taking the second quarter and putting it sort of into more of a normalized, I mean, for lack of, I'm putting these words in your mouth, but I'm recognizing that and not expecting to agree with them, but like basically kind of reset a second quarter to what would be a normalized level and then let the rest of the year kind of flow through from that. Is that kind of the way to think about sort of the remainder of the year?
Richard S. Warzala
Well, I think maybe the better way to look at it, although that's fine, I think it's the adjustment of the first quarter revenues for the past due catch-up, that if you were to factor those out and say where would they have fallen, some of those would have fallen in Q2. So Q1, we enjoyed some success there because, as I said, some loosening of supply chain and demand still there and strong. So it's more about adjusting Q1 and saying some of Q2 sales were accelerated into Q1 and Q1 was a little bit higher based upon some clean-up, that would be the best way to look at it.
Edward Randolph Jackson
I have 2 more questions, then I'm going to get out line. I mean now they are just about financials. You did have a little bit higher on the G&A than I might have thought. Is there anything in there that I should be aware about? Is there anything in there that's maybe one-off or that was pushed there because of the strength in the top line in the first quarter that I should take into account as I think about the rest of the year?
Michael R. Leach
Well, I think first, I would point to incentive compensation and the performance in Q1 certainly impacts that. So that's probably the largest driver of G&A being up. That will obviously be dependent on performance for the rest of the year as well in terms of how that trend continues.
Richard S. Warzala
Yes. And there's a couple of other things that we're recruiting for. We do have an Investor Day planned for the first time here in August, and we're beginning to accrue for those expenses we're going to see there. We've had a little bit more active trade show participation this year. And again, we're recognizing on an annualized basis and not just the expensing that when it occurs. So some of those things that are in Q1, that we're preparing for events that we know are going to be happening through the rest of the year. So as Mike stated that, also I would tell you some of these other planned events that are coming that bigger push on the marketing side of it and some expansion in that area, trade show opportunities and Investor Day.
Edward Randolph Jackson
Okay. And then my last kind of topic of questioning is just a quick discussion with regards to your forward view with regards to working capital and kind of how you see your working capital trending as we kind of roll through this year. I guess what I'm getting at is, how should we think about your receivable levels, your inventory, your payables? I mean it's not like there's anything in there that jumped out with regards to the first quarter. I just kind of want to circle back to it because I mean, it's a driver of your operating cash flow into free cash flow.
Richard S. Warzala
Sure. And certainly, it's a focus of the organization this year. I think we've talked about that in the past from a critical issue standpoint. Q2 and Q3 usually is about working capital conversion for us, right, as the seasonality drives consumption and turns tend to improve. So again, I think we saw a part of that in Q1 given the higher volume. And again, just by the fear or the mere fact that we intend to generate a fair amount of cash this year, it's going to be driven by continued improvement in those working capital turns and managing that closely. And I think the supply chain environment allows us to do that much better than it has in the past couple of years. So again, I would call out stable with improvement is how I would look at that for Q2 and Q3 to support the higher levels of businesses. But I was very, very encouraged by the improvement in inventory returns, right? To me, that's the key item.
Edward Randolph Jackson
Well, funny, what I was going to ask is you had a really nice turn and pickup or improvement in the turns, is that something that we would expect to see as we go through this year going forward? Is there a chance that we can see turns get back towards sort of pre-pandemic levels, maybe not this year, but by next year?
Michael R. Leach
Yes. I think that's certainly the intent and what we're trying to drive, again, the move from 2.9% to 3.2 is a good portion of that, though, right? Sustaining that and going to continue to drive it, leveraging the higher volume gets us a lot of the way there relative to... I think we've talked in the past about those pre-pandemic levels. So again, it's also driven by what markets are more having than others in terms of the nature of what we're producing, whether they're lower volume products or higher volume products. There's a lot that go into that. And certainly, we're not out of the woods from the supply chain standpoint. We're certainly describing it as better. But the reality is, right, we're still fighting battles and there's an inflationary aspect as well from a cost standpoint. That will be headwinds to that as well.
Richard S. Warzala
Yes. I can add some more to that, Tom. I think it's a great area to focus on. And I can tell you that we had one of our all hands on deck GM meetings this year. It certainly was a strong emphasis and focus, and our entire team is focused on it. And we have some great tools on our AST toolkit that provides them opportunities to it. But most importantly, Mike's mentioned it, I'll just reemphasize it, is supply chain. And as the supply chain crunch has occurred in the past, it only took a couple of parts that drove your inventory up a couple of parts missing that would drive your inventory up. And as those parts start to flow, then we're able to consume the rest of that inventory that was sitting there that couldn't move because of a few parts that were stragglers and getting them in. And again, that has a lot to do with being able to ship past dues as well. So I would say a real focus on the company. There's a huge emphasis on that area.
We realized that there's quite a bit of capital tied up, and our entire team knows that and is working on it. Supply chain is improving. It's clearly improving, and lead times are coming down, and that's all very encouraging signs. So to get back to where we were, it's a very significant improvement. And I think everybody can do the calculation in our working capital turns and what it does for our ability to generate cash and pay down that debt and put us in a position to continue the growth story here and do those strategic acquisitions that have been certainly helpful on our top line margin expansion as well as giving us the ability to create more strategic solutions. So I would tell you, we're excited about it. There's great opportunities ahead. Our team is well focused, understands the opportunity and just would love to see us get back to a normal operating environment where we can just do what we could pay to do, rather than scramble. So a great question. I think it is a focus. We will be focused on it, and we will see continued improvement.
Operator
Once again, if (Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Richard S. Warzala
Well, thank you, everyone, for joining us on today's call and for your interest in Allied Motion. For those of you that are interested, we will be participating in-person at the Craig-Hallum Institutional Investor Conference in Minneapolis on Wednesday, May 31. 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 2023 results. Thank you for your participation, and have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
