Greetings. Welcome to the Allied Motion Technologies Inc. Third Quarter Fiscal Year 2021 Financial Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Craig Mychajluk, Investor Relations. You may begin.

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 third quarter 2021 results and provide an update on the company's strategic progress and outlook. After which, we will open it up for Q&A. As part of today's Q&A, we do ask that you limit your questions to 2 or 3 in order to allow enough time for all participants. And you could certainly go back into the queue for additional follow-ups. 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, as well as we did send out a release this morning on another acquisition that went out around 9:30 a.m. Eastern time that can also be found on our website. On the website, you'll also find the slides that accompany today's discussion. If you are reviewing those slides, please turn to Slide 2 for the safe harbor statement. As you are aware, we may make some forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents 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?

Thank you, Craig, and welcome, everyone. Our third quarter results reflect strong execution from both a sales and operational perspective. Backlog grew by 9% sequentially to a record $186 million with strong order input across the board. Total revenue grew 9% over last year's third quarter to $103.5 million, driven by continued strength across most of our served markets, but in particular, a strong recovery in our industrial markets, which were up 39%. This was primarily led by increased demand for our applications and solutions in automation, vehicle handling, electronics and oil and gas projects. Our vehicle markets continue to outpace prior year comparisons as the third quarter was up 5%, largely driven by construction and truck demand. Power sports demand has still been very solid, though moderated some from its recent highs. The medical markets were down year-over-year given the exceptionally strong demand resulting from the onset of the pandemic last year but did grow 4% sequentially as we have seen a return of more elective surgeries as well as some uptick in COVID-related products and solutions given various variants that have developed around the world. A&D has continued to be challenged, but we are seeing new project activity levels increasing, which is encouraging. We are certainly not alone dealing with the unique factors of the current environment, including inflationary pressures, supply chain disruptions and labor shortages. The effectiveness of the actions we have implemented to mitigate these factors is demonstrated on our revenue growth, margin expansion and increased profitability. In fact, on both a year-over-year and sequential basis, gross margin, operating margin and adjusted EBITDA margins have improved. As a result, net income increased 49% over the prior year to $6 million or $0.41 per diluted share. Even though we did have a fairly significant build in inventory…

Thank you, Dick. As a reminder, all share and per share information in our earnings release and slides reflect the 3-for-2 stock split completed in April. Starting on Slide 5, we provide some detail regarding our top line. Third quarter revenue increased 9% to $103.5 million. This is a record high and is the third consecutive quarter of achieving greater than $100 million, further demonstrating the success of our strategy and the benefit of the broad-based recovery underway in many of our served markets. In particular, demand was strong in industrial, improving 39% year-over-year, while vehicle markets improved 5%. On a sequential basis, industrial grew 4%, medical grew 4% and vehicle was up 1%. The favorable impact of exchange rate fluctuations on revenue was $0.8 million in the quarter. Excluding FX, revenue was up 8.5%. Sales to U.S. customers were 56%, in line with the prior year period, and the balance of sales were to customers primarily in Europe, Canada and Asia Pacific. Slide 6 shows the change in our revenue mix by market for the trailing 12-month period. Total TTM revenue was up 11% and reflects the impact of our diversified business model. The economic impact of the pandemic, along with general program timing is reflected in the reduced demand order deferrals within A&D. And though industrial faced significant headwinds from the pandemic last year, our actions and the ongoing improving market conditions are reflected in the 9% gain on a TTM basis. Note that on a go-forward basis, the ORMEC business will primarily be reflected in the industrial and A&D categories. As depicted on Slide 7, our gross profit was up $3.9 million or 14% to $32 million. Our gross margin expanded 120 basis points year-over-year and was up 20 basis points sequentially to 30.9%, reflecting strong volume…

Thank you, Mike. Slide 12 highlights encouraging trends as customer demand and our strengthened market position, again, has resulted in record orders and backlog. We have now achieved 5 consecutive quarters of order growth since the low point during the onset of the pandemic last year, reaching $120 million in the third quarter. This represents a 35% increase over last year's third quarter. All of our major market channels are contributing, and our book-to-bill ratio was solid at 1.2. Backlog increased 9% sequentially over the second quarter and was up 50% over last year's third quarter to more than $185 million. Approximately 9% of our backlog -- 90% of our backlog is expected to convert to sales over the next 3 to 9 months. We estimate that $3 million to $5 million of our current backlog is a carryover due to the global supply and shipping challenges. Importantly, this level has remained relatively steady from last quarter as our teams have continued to do a great job meeting our customers' demands. As we look out, industrial and vehicle demand remains strong, and while most customers will accept everything we can deliver, shortages from other suppliers can and may impact our shipments as well. In the fourth quarter, we do expect some seasonality given typical holiday shutdowns and inventory adjustments. Although we believe that impact could lessen, if there is improvement related to the global supply chain challenges. Demand in our medical market is expected to still be solid with the ongoing recovery of elective surgeries and potential demand from the pandemic. While we continue to take a cautious approach with our A&D markets, we are seeing some increased quoting and project activity, and we further expect to benefit from ORMEC in this space in 2022 and beyond. From an inflation…

Our first question is from Greg Palm with Craig-Hallum.

A lot of good stuff to unpack here. So maybe we'll start, and sorry if I missed this, but were you able to fulfill or ship the entirety of demand that you had in the quarter? Was there some impact from, I don't know, supply chains that maybe pushed a certain amount of revenue out to Q4 or beyond?

Yes. There was definitely some impact, Greg, and I think what we mentioned is it's about $3 million to $5 million in revenue, which was pretty much consistent with what we saw in the previous quarter. So there was some push.

And I mean, what's your view of supply chains going forward? I mean, do we expect that, that same sort of amount of revenue will end up getting pushed from Q4 to Q1? I mean, do you see any signs of easing? Or do you think this is going to be with us for some time still?

Well, unfortunately, I think it's a challenge every single day, and it shows up in different places at different times. So I think we're -- we still will have these challenges moving forward. And I don't think there's any reason to expect that we're not going to see some delays in our ability to ship. And what I've mentioned in my script, may not have been very clear is that even if we have everything we need to ship product to a customer, there's -- many of our customers have taken on a different approach to manufacturing where the single piece flow, reduced inventory, just-in-time inventory, they're doing partial bills of what -- with the components they have and subassemblies that they can put together with the whole fit as other components show up, they can complete their assemblies. So we're impacted by that as well, which is very hard for us to predict what -- when that's -- or if and when that's going to happen. But I would say to you that we have the demand there. Our customers will take, almost all of them, anything we can ship them. And we are working very closely with them to ensure we're aligned and shipping the products that they need, so they can ultimately get their product out the door. But I think those challenges are still ahead of us here, too. They're not going away.

Yes. Makes sense. And I guess, if I could ask one more and sort of focus on the same subject, but I'm curious how you're viewing your own competitive positioning with everything going on. I mean, lots of talks about whether it's reshoring or secondary sourcing for supply chains. And I mean, do you think that this is maybe an event that can drive more business to a company like Allied Motion, given all your capabilities?

Well, it's happening. I mean, we're getting -- we are receiving inquiries about -- for shipping products that their current suppliers are having difficulty meeting. And again, it depends on the product, it depends on what the components are, whether it's electronic components or whether magnetic components, whether it's mechanical components. I mean, in many cases, we are taking on some new business and satisfying those demands. And hopefully, we can retain that long term. So we're doing the best we can to satisfy those. And in some cases, though, it's -- you're locked and loaded with your existing backlog and existing customers. And you may not be able to meet their needs. And so -- but the challenges are there, the opportunities are there, and we are seeing them. And so hopefully, they do convert long-term for some additional business for us.

And then, I think we're well-positioned from a manufacturing footprint standpoint, Greg, right, to support the movement towards localization of supply that you see happening globally, right, with our expanded footprint, we have capabilities, as you alluded to, that allow us to support customers in any geographic locale.

Yes. And we'll add even further to that is that we talked about before the pandemic about strengthening our strategic sourcing team and looking at localization of supply chain. So we were already down that path. And we've talked about that in the past, and we're continuing down that path. We believe, and I think clearly, what's happened here is not just supply chain, but logistics channels and delays in ports and so forth. I think there's going to be an increased emphasis on localization. And we had already started down that path, and we're going to continue to accelerate that.

Got it. All right. Best of luck going forward.

Our next question is from Dick Ryan with Colliers.

So Dick, in the Q, you mentioned the China -- your China facility had some shutdown due to their power rationing over there. Can you just refresh us the impact that you -- I mean what China contributes from a revenue standpoint and how significant this issue could be going forward if that rationing continues next year?

Well, there's two things. I mean, we have two plants in China. One came as part of the Dynamic Controls acquisition that's from Suzhou, and they have the other plant in Changzhou. They do different things. And our plant in Changzhou was less impacted, I would say, from a rationing standpoint than our plant in Suzhou. Suzhou is primarily electronics and drives for the rehab market. And those products, while some of those are delivered directly into the Asian market. Most of those are exported out to Europe and North America. As long as we understand when the rationing is going to occur, and it just -- and they just don't hit you with that last minute, I mean, and there's work around. So what they'll try to do is not necessarily -- they'll shut certain factories down on certain days. So you may have to reschedule in order to fulfill demand. And I think it's -- but if they come in and like say you're going to be shut down for a week, and that has a much bigger impact. And just like the pandemic, I mean, there's not much you can do about it. You just got to -- we're going to work through it. And when the power comes back on, the lights come back on in the facility, you work over time or whatever it takes to meet the demand. So from a revenue standpoint, I mean, the bulk of our business is in North America and in Europe in a relatively small portion is shifted to Asia. But as I mentioned, under our Suzhou plant, some of that is exported. So we haven't seen -- we'll see a push out. We haven't seen anything that we're concerned about long term. We've dealt with this in the past. This is not just new -- this isn't new. When they've had the Olympics over there, they would shut down factories, they put you on a schedule and a roving schedule to reduce pollution and so forth. And our teams have been pretty effective in managing that. So I think we -- once we understand what the outlook is going to be, we'll plan a way around it and we'll keep supplying our customers.

Okay. Say, with the strong order flow, do you -- are you getting any sense that some of this might be double ordering, or is it just strength across all your end markets?

Well have you asked our customers? They'll all tell you they need it. If you ask based on my experience in the business and what I've seen in the cycles, I think there's definitely some double ordering that's going on. How much, it's hard to tell, but I don't think it's -- I mean, it's there. When will we feel the impacts and so forth and will it adjust over time? I mean, some of that we're seeing already, for example, I mean, think about automotive, and they were unable to get to electronic components. So that demand is just being pushed out into the future. It's not going away, it's just being pushed out. So I think it's there, Dick, to answer your question. And I would be -- it's difficult to quantify but I think we will see it. And not necessarily -- it will all hit at once. We may see it differently. It's based on different markets and different customers. But again, you talk to our customers, they need it. They need it now.

Okay. One last one, if I can. On your large auto wins, has anything in the supply chain impacted the outlook or the timing, how that will flow over the next several years? And can you refresh us how much revenue have you delivered to date? And how much is in backlog?

Well, I'd say, it definitely has impacted the timing because they're not building as many vehicles. So the -- we're seeing that being shifted out. It's not -- again, nothing is changing in terms of the -- in the overall demand. It is a timing issue. And so as they start building more vehicles, they get the electronic components they need to build vehicles will ramp up. And remember, as we talked about going into full rate production, we were talking about $40-plus million per year in revenue coming from there. Currently, the ramp-up that we've seen, we've delivered maybe $5 million to $7 million in revenue so far. But we expect that to continue to increase and move forward, but we have seen some delays.

Okay. Great. And congratulations on continued strong execution.

Our next question is from Gerry Sweeney with ROTH Capital.

Nice quarter. I wanted to talk about acquisitions and maybe from a higher level. I think over time, Allied Motions going from maybe components to solutions. I think you're looking at solutions to -- with these recent acquisitions, maybe going to higher technical value-oriented opportunities. And curious, is this part of that -- you even alluded to it, I think, in your comments, but alluded to part of the gross margin structure longer term, just getting into some higher value, more technical opportunities as you sort of develop your menu of technologies.

Sure. Happy to talk about that, I mean, you're absolutely correct. I mean, as you've looked at the evolution of the company and you pay as we've -- previous acquisitions, component related, we would then take on the challenge internally of leveraging those components to come up with a more complete solution. Well, these two acquisitions take us to another level again. And what's important to understand is fundamental underneath the solutions that are being provided are exactly the same things, the electronics, the controls, the drives, the motors. But now the software, customer interface, the control solutions, the -- from an automation standpoint as well as looking at -- from ALIO, let's say, for example, the stages that they manufacture, so they -- they could incorporate products that we make and as well as adding multiple access to control together and really sophisticated nano precision positioning accuracy. Also the -- we talked about the Hexapod and then just encourage everybody to go look at the websites, and that's pretty amazing technology what they have there and repeatability is critical in those 6 axis applications, and they have that. So that's -- you've got to consider that really a robotic solution. And as you see, the miniaturization, also what you're seeing in genetic applications and so forth, in life sciences, it requires this nano precision in order to do the job from an automation standpoint or from an analysis standpoint that they need to do, and it requires this level of precision. So we're pulling through our base products. We are now at a higher level when we're looking at ORMEC, we're doing complete system design, very sophisticated system design, again, Multi access, many access they're multi axis controller, high-speed synchronization, up to 72 axes and many of their applications where they can do complete automation systems and build it, install it, write the software, support it long term. And again, pulling through products that Allied manufacturers. So -- and mentioned the gross margin profile. We mentioned -- we have stated that our goal is to improve gross margin by 100 basis points a year over the next 10 years. And this certainly gets us on target for 2022. And we think that given -- and for example, we said $20 million of revenues from these two is what we expect or potentially a little more. And gross margins -- at the high end of where we are today in their gross margins and what we stated the market can achieve. So it really puts us on path here to meet that one element, but also the system element and getting more and more involved and how all the company's products and strengths and system solutions come together here.

Perfect. That's a lot of great detail. I really appreciate that. Shifting gears, I didn't want to start with an inflation question, but obviously, a topic de jour. So obviously, there's a lot of levers to deal with inflation, right? I think internally, maybe externally, you can manage some pricing with your customers. You can maybe even pay over time internally, et cetera. And it feels like inflation is going to be here for a while, it could even increase. When you look at your toolbox of levers or however you want to describe it, how much opportunity do you still have left to manage some of these headwinds if they accelerate further or go on longer?

Well, that's such a tough question. I'll turn it over to Mike.

Well, certainly the environment -- yes. No, certainly, the environment has been supportive of adjusting pricing, right, given the current environment, I think it's so severe that the customers are more understanding, although that's certainly a challenge. As far as those levers go, right, we always focus on our Lean tools, right, our AST. And certainly, we have opportunities that we talked before about optimizing our manufacturing footprint. We talked about driving costs out of the businesses, whether that's in the manufacturing sites or whether it's to other operational expenses or even at our G&A line. So certainly, that's the lever. And again, continuing to progress down that solutions or advanced systems sales channel away from components and continuing to move up the ladder in terms of precision and the capabilities here as evidenced by the last 2 acquisitions will lead us down that path as well. So they get tougher, the longer it goes. There's no doubt about that. But certainly, I think we are working aggressively, irrespective of the supply chain environment and inflation to drive those things as our agenda.

Got it. I guess you can even say your previous work and focus and culture has sort of almost prepared you for some of this as well. So...

Correct. I would say that over time, that's even grown stronger. Our commitment to that, as we've referenced before, even our investment in our global supply chain group as another lever, if you will, that moves us down the Lean path, too. So...

Got it.

One of the things you should...

Sorry, go ahead.

No, go head, Gerry.

No, I was just saying. Thank you. That's all.

Well, what I was going to say is I just make sure that we're clear. Allied does make custom or customized components that are really an integral part of our customer systems. And so I think when we talk about components. So we're not moving away from components. We're looking at a way where we can leverage those components to a greater extent and also at the same time, approaching it from, I'll call it, the higher level system solution standpoint. So we are mission-critical in many of our -- a lot of our customer equipment with components that are designed specifically for them to meet their exacting needs. And we will continue down that path. I'm not abandoning that at all. What the solution side does bring to us is if you go back in time and you'd say, okay, Allied was a motor company. Allied still does make a lot of motors and is a motor company. And we would approach the market from a motor standpoint. Now we have the capabilities to approach the market from the top side as well. So from the electronic standpoint, from a control standpoint, from a more complete system standpoint. And if you're looking at automation systems, where instead of our customers having to assemble all the individual components together, we are putting them together, and we are committing to a higher level solution like nano positioning. So just to make that clear. And I think it just opens up for us, channels, new channels, new opportunities from opening the markets up from whether it's the electronic or control side, motorize, gearing side, whatever, okay?

Got it. That's very helpful. I do appreciate that.

We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.

Well, again, thank you, everyone, for attending our shareholder conference call here, and we really appreciate your participation. I think there's exciting times here at Allied. Our team worked extremely hard to get a couple of these acquisitions, which are very strategic to us, and we're looking forward to our new partners coming on board, and we're -- we think there's a bright future ahead for Allied and our shareholders. So thanks again. We look forward to talking to you soon. Bye now.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.