Allient Inc. (ALNT) Q2 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to the Allient Inc. Second Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Craig Mychajluk, Investor Relations. Thank you. Please go ahead.

Yes. Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allient. On the call today are Dick Warzala, our Chairman, President and CEO; and Jim Michaud, our Chief Financial Officer. Dick and Jim will review our second quarter 2026 results, provide a strategic and operational update and share our outlook. We'll then open the line for questions. As a reminder, our earnings release and the accompanying slide presentation are available on our website at allient.com. If following along, please turn to Slide 2 for our safe harbor statement. During today's call, we may make forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated. These risks and factors are outlined in our SEC filings and in the earnings release. We will also discuss certain 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 as well as the slides. With that, please turn to Slide 3, and I'll turn it over to Dick to begin.

Thank you, Craig, and welcome, everyone. We delivered an excellent second quarter and more importantly, one that further demonstrates the earning power of the model when stronger demand, improved mix and disciplined execution come together. The quality of the quarter was evident across the P&L with strong top line growth, record gross margin and a significant increase in earnings. We also saw excellent order activity with record bookings in the quarter and in the period that resulted in a 1.31x book-to-bill ratio. That gives us improved visibility into the second half of the year and supports a constructive view as we move through 2026. What stands out is not just the magnitude of the quarterly improvement, but the quality of it. We saw broad-based demand across key targeted markets, especially industrial automation, data center and other infrastructure, Aerospace & Defense and Medical applications. At the same time, the operating work we have been doing throughout the organization is increasingly showing up in better margins, better leverage and better earnings conversion. This quarter also enforces the value of the portfolio we have been shaping. We have intentionally positioned Allient toward higher-value motion, controls and power applications where our engineering content is deeper, our customer relationships are stronger and the margin profile is more attractive over time. That strategy is helping us improve not only growth, but also the quality and durability of that growth. If you look at the end market mix, the portfolio continues to align well with long-term secular drivers. Industrial remains an area of particular encouragement for us, especially where our technologies support automation, electrification, energy efficiency and digital infrastructure. Those are markets where we believe our capabilities are differentiated and where the opportunities continue to expand. Data center and other infrastructure have become an increasingly meaningful contributor within our Industrial business. As we indicated previously, we plan to provide investors with more visibility into this market given its growth profile and strategic importance to the portfolio. In the second quarter, sales tied to data center and infrastructure applications were $16.3 million or 10.6% of total revenue, up 60% from the prior year period. On a trailing 12-month basis, sales were $57.1 million or 9.9% of total sales, up 69% year-over-year. This opportunity is centered on the power quality layer of the data center, where our Allient Power portfolio brings deep domain expertise. Through active and passive harmonic filters, line reactors and related solutions, we help customers reduce harmonics, stabilize and clean the electrical waveform and meet stringent power quality standards, including IEEE 519 compliance. The result is more reliable and efficient power for increasingly compute-dense data center environments, stronger protection for critical equipment and a strong fit with the challenges operators face as AI and other high-power applications increase load and complexity. So stepping back, the second quarter was about more than just strong reported results. It was another proof point that the actions we have taken to reposition the company, simplify the organization and drive better execution are translating into stronger financial performance and a more resilient operating model. Turning to Slide 4, I want to spend a moment on Simplify to Accelerate NOW or STAN, because it is an important part of why the organization is performing better. STAN is driving better decision-making, execution, margin and responsiveness. But the key point is that it is not a single initiative or short-term program. It is a company-wide mindset that shapes how we think, make decisions, solve problems, collaborate across teams and serve customers every day. In simple terms, STAN is how we work. At its core, STAN is designed to unleash more of the organization's potential by empowering our teams to act with urgency, ownership and accountability. The now in STAN matters. It reinforces a get it done mentality, removing obstacles, we work forward and delivering results faster rather than waiting for things to happen. It is also supported by a practical tool set. That includes our Allient Systematic Tools, or AST, which helps standardize, simplify and continuously improve how we work. It also includes digital and IT tools that reduce manual processes and redundancy as well as AI and other enabling technologies where they can improve decision-making, productivity and execution. What matters most, though, is the result. In the second quarter, operational improvements under STAN contributed to record gross margin through better mix, execution and cost discipline. We are seeing faster decision-making, stronger accountability and better responsiveness across the company, and those improvements are helping create a more scalable and more profitable operating model. The annualized savings figures on the slide, $10 million in 2024 and $6 million in '25 are a reflection of this broader effort. But I want to emphasize that STAN is bigger than cost takeout. It is about building a culture that continuously improves the business and positions Allient to move faster and serve customers better over time. So when we talked about improved margin, better leverage and stronger earnings power, STAN is one of the foundational reasons that it is happening. With that, let me turn it over to Jim for a more in-depth review of the financials.

Thank you, Dick, and good morning, everyone. Please turn to Slide 5. Revenue increased 10% year-over-year to $153.8 million. On a constant currency basis, revenue grew 9% organically with foreign currency translation providing a favorable tailwind of approximately $1.3 million in the quarter. 54% of second quarter sales were to U.S. customers with the balance primarily in Europe, Canada and Asia Pacific, continuing to reflect the benefit of our diversified geographic footprint. Looking at the verticals, Industrial revenue increased 17%, driven by continued strength in industrial automation and power quality solutions supporting data center infrastructure. Aerospace & Defense increased 16%, reflecting strong defense-related demand and program activity. And notably, that growth came despite the previously announced M10 Booker program cancellation. Medical increased 9% on broad-based demand, including surgical robotics and other precision motion applications. The Vehicle market declined 7% due primarily to lower powersports demand. Overall, this slide reinforces both the breadth of demand in the quarter and the continued alignment of the portfolio with higher-value applications. Turning to Slide 6. The trailing 12-month market mix continues to support a more resilient and more margin-accretive business profile. Industrial represented 49% of trailing 12-month revenue at the end of the second quarter, up from 47% a year ago, while Medical remained steady at 15%, Vehicle was 17%, Aerospace & Defense was 15% and Distribution was 4%. The bigger takeaway here is that the portfolio is increasingly aligned around attractive growth verticals and higher-value applications, including motion and controls tied to automation, power quality for data center infrastructure, precision medical applications and defense-related programs. That mix matters because it supports both growth and profitability. That also helps explain why we continue to see structural improvement in the business as we move forward. Please turn to Slide 7. Gross margin expanded 170 basis points year-over-year to a record 34.9% in the quarter, with gross profit increasing to $53.6 million. The primary drivers were higher volume, favorable mix and operational gains tied to STAN, lean tools and broader productivity initiatives. We have said the margin opportunity at Allient is structural, and this quarter is a good example of that. The simplification of work, lean disciplines, footprint actions and productivity improvements across the business are creating a more scalable margin profile, and that gives us confidence the progress is durable over time. Mix also played an important role in the quarter and mix can be lumpy. So while we are encouraged by the gross margin performance, we would expect some quarter-to-quarter variability as those structural gains continue to build. On the tariff front, the team also continued to do a very good job mitigating exposure. Across the last year, we have taken a disciplined approach that includes pricing actions where appropriate, supplier negotiations, strategic buys, sourcing adjustments and broader supply chain diversification. Those actions helped keep tariff-related pressure from becoming a more significant drag on performance. With respect to the IEEPA-related tariff refunds, the company has submitted or expects to submit claims for refunds of approximately $1.3 million. Due to uncertainties regarding the timing and ultimate amount of any recovery, no receivable has been recorded as of the end of the quarter. Turning to Slide 8. Operating income increased to $15.6 million from $11.7 million in the prior period, and operating margin improved to 10.2% from 8.4%. While that is not an all-time record for the company, it is the highest operating margin level in roughly a decade. Operating costs were 24.7% of revenue, improving 10 basis points year-over-year despite higher commissions, incentive compensation and growth-related spending. Restructuring and business realignment costs were $600,000 in the quarter, down from the prior year, but remain elevated due to costs associated with the Dothan transition. We continue to expect restructuring and realignment costs of approximately $2 million to $3 million for the full year 2026. So the message on this slide is that we are seeing the leverage benefits of a stronger operating model while still funding the business appropriately and continuing to work through remaining transition-related costs. Please turn to Slide 9. Earnings growth accelerated meaningfully in the quarter as the margin improvements flowed through the P&L and lower interest expense provided an additional tailwind. Net income increased 85% to $10.4 million or $0.61 per diluted share. Adjusted net income increased 42% to $13.5 million or $0.80 per diluted share, and adjusted EBITDA increased 18% to $23.7 million or 15.4% of revenue. Interest expense declined by approximately $1 million year-over-year to $2.5 million due to the lower average debt balance. The effective tax rate was 20.2% for the quarter. We continue to expect a full year tax rate in the range of 21% to 23%. The bottom line takeaway is straightforward. Stronger mix, higher gross margin, improved operating leverage and lower interest expense combined to produce substantially stronger earnings. Moving to Slide 10. Net cash provided by operating activities was $14 million in the quarter and $20 million for the first 6 months of the year. The year-over-year change in operating cash flow primarily reflects accounts receivable timing and investments in inventory to support our rapid growth and strategic buys of critical materials. Inventory turnover was 3.1x compared to 3.2x for the full year 2025. We continue to focus on inventory discipline, strengthening working capital management and taking out cost while also making disciplined investments to support growth and protect the supply chain where appropriate. The broader point is that the working capital profile reflects both growth and intentional actions. We have been willing to make selective inventory investments where that supports customer service and helps mitigate supply and tariff-related uncertainty while still keeping a sharp focus on cash conversion over time. Capital expenditures were $7.1 million for the first 6 months of 2026. We are investing in capacity and productivity, notably in areas tied to data center-related power quality, automation and other growth initiatives. For full year 2026, we expect our capital expenses of approximately $12 million to $15 million. Please turn to Slide 11. Continued deleveraging remains an important part of the financial story. Total debt ended the quarter at $173.3 million, down $7.1 million since year-end 2025. Net debt was $131.2 million. Leverage improved to 1.63x and the bank leverage ratio improved to 2.07x, which is defined under our credit agreement and excludes foreign cash and certain other adjustments. We also ended the quarter with approximately $42 million of cash and $162 million of unused revolver capacity. This continues to strengthen our financial flexibility. A stronger balance sheet lowers interest expense, supports disciplined investment in the business and provides capacity to pursue value-creating opportunities while remaining well within our covenant requirements. With that, if you advance to Slide 12, I will now turn the call back over to Dick.

Thank you, Jim. Orders increased 49% year-over-year and 27% sequentially to a record $201.3 million, resulting in a book-to-bill ratio of 1.31x. Backlog ended the quarter at $298 million, and most of that backlog is expected to convert to revenue within 3 to 9 months, which is consistent with our historical conversion patterns. That order strength was led by Industrial, Aerospace & Defense, and it gives us improved visibility into the second half of 2026. So when we put together the strong second quarter results, the continued margin progress and the strength in orders and backlog, we believe the company is entering the back half of the year with solid momentum. As we look ahead, the message is that Allient is executing with discipline while continuing to position the business for growth. First, our portfolio remains aligned with attractive growth verticals, including industrial automation, data center and other infrastructure, Aerospace & Defense programs and Medical applications. These are areas where customer demand remains healthy and where our technologies and engineering capabilities can create differentiated value. We also continue to make encouraging progress in the drone and unmanned systems market. While this is not a major revenue driver for us today, we do see a meaningful opportunity to expand our presence over time, and we are making strong strides in building a viable off-the-shelf offering for commercial and defense-oriented applications. We expect that portfolio to continue taking shape during the second half of this year. This builds on capabilities we have already discussed publicly, including COTS propulsion motors and the broader expansion of our motion control and power solutions for unmanned applications. Second, the company is operating with more discipline and better responsiveness. STAN and our broader optimization actions continue to support margin expansion, and we remain focused on cash generation, disciplined capital spending and continued deleveraging. Those are not temporary initiatives. They are central to how we are running the business and improving the quality of our financial performance. Third, we believe the company is positioned for continued growth. Stronger demand, record orders and increased backlog support improved visibility, and we are building momentum with improving earnings power. While the macro and trade environment remains dynamic, our diversified end markets, global operations and proactive mitigation actions help support resilience. What gives us confidence is what we control. We have built a stronger operating model. We have a healthier balance sheet, and we have continued to align the portfolio around long-term secular drivers, which we believe Allient is well positioned to benefit from over time. With that, operator, please open the line for questions.

[Operator Instructions] Our first question today is coming from Max Michaelis of Lake Street Capital.

Congrats on really the solid quarter. I kind of want to jump into the orders here, really strong order growth, especially in Industrial as well. I mean you shared the data center revenue number, I think it was up 60% in the quarter. Is that sort of in line with the order growth you're seeing as well? Or is that ahead or below? Or anything you could share there would help.

I'd say it's in line.

Okay. And that's -- and you'd say that has continued kind of into Q3?

Did we say that? Or you're asking a question, Max?

No, it is a question.

I'm just teasing. Yes, to answer your question, we do see -- we're 1 month into Q3, but we do see it continuing. Order intake is strong and shipments remained strong as well.

Okay. Great. And then you touched a little bit on drones. I mean, is there any sort of extra information you can kind of give us around orders? I know it's not a huge part of revenue in the A&D sector yet, but have they started to see a little bit of pickup in growth in the order side of things related to drones and autonomous systems?

Sure. So as we've relayed in the past, I mean, we do see this as a significant opportunity for us. We're well positioned and well suited to handle applications that are in the drone and unmanned vehicle markets. So what I would tell you is that we've invested heavily internally here in the last 6 to 9 months, and you'll start seeing product announcements rolling out. The team has done an amazing job, the internal team. They're launching a complete product line of COTS, off-the-shelf propulsion motors as well as where our strength has always been in the drone and unmanned vehicle markets is really what we call custom critical solutions. So while there's a number of companies out there supplying these off-the-shelf products, a few of them can do what we can do when it comes to very specific applications that require design expertise that we can bring to the party. So a little preview. We will be announcing and we'll be releasing some products to the marketplace. There is a ground-based vehicle show in Detroit, more of an engineering show next week outside of Detroit, Novi, Michigan. We'll be displaying some products there that we have never displayed before, and we'll be giving a preview of what's to come, leading up to AUSA in October, where you'll see a full launch of not only the motor products, but also electronic products and bringing our composites into the mix as well. So we've been -- while the results are good and they're improving, I just have to emphasize, we've continued to invest. We're making significant investments in leveraging our engineering talent for both the electromagnetics and electronics as well as lightweighting that goes into the defense markets and certainly drones and unmanned vehicles is one of those.

The next question is coming from Greg Palm of Craig-Hallum.

Yes. Congrats on the results. I frankly don't know where to start because there's just a lot of things that stood out. But maybe we can go back to the orders commentary because I think I heard you say there wasn't anything like unusual in terms of timing that's still going to translate into revenue over the next 3 to 6 months or 3 to 9 months, but were there certain large projects, orders that were within that? And I mean, just to be clear, based on your backlog activity right now and that likelihood that these flow to revenue at a similar time line as the past, I mean, I think it implies a pretty significant step-up over the revenue level you just reported. I'm just asking in light of kind of what normal seasonality trends would be.

Sure. Great question, Greg. Thank you, too. Yes, we announced in the last quarter that we had made a change into the way that we actually record orders or bookings and that for larger, more significant blanket type orders, we were not booking it into our backlog unless it was within 1 year and within a scheduled lead time and literally moved into production. So one thing I would say to you is this, there are orders that are sitting out there that haven't been converted into bookings yet that we do have visibility toward. And as they continue to progress and they get released into production, they'll show up on our backlog. So a little more smoothing rather than the big lumpiness that we had for some of these large orders in the past. So that's a positive because those aren't reflected in there. The second thing I would say to you, what's driving orders a little bit right now is lead time. Lead times have expanded. And we've certainly been encouraging our customers to make sure they get their orders into us, don't wait for the last minute because lead times for our supply chain and our supply chain have gone out. So there is -- we are seeing some orders coming in quicker than we might have seen in the past. Not to a great extent, but I would tell you that there's some acceleration, and let's just say if we look at it 3 months in advance versus where we would see it before based upon lead time expansion. And last question, is there anything in there that's really significant? Yes, there's $200 million in bookings, which we think is significant. And -- but there's nothing -- no one area that really jumps out and says it's not with -- it's outside that lead time we've talked about. So it's continued increase in demand in the areas that we focused on, and the demand is now flowing through, okay? So you are correct in your assessment. We do see, as Max asked the question earlier about how is the -- we're a month into the third quarter, what's it looking like? How is it shaping up? And it's continuing at a pretty strong pace here.

Yes. Okay. Makes sense. And then gross margin was the other. And I'm not sure how much of that strength is just a byproduct of more positive mix or maybe some of it is just a reflection of you're getting to a revenue level here where you're a lot better able to absorb some of those fixed costs. So I don't know, just curious if there was anything that maybe drove that a little bit higher than what normal? Or is this kind of a better normalized rate if we assume that the revenue profile continues to scale?

Yes. So both are true, both of what you said. So clearly, the absorption as we continue to add volume and with our fixed cost base that we have here and not have to add cost to support it. I mean that's clearly driving through margin improvement and the mix is improving over time. This has been a long-term effort of ours to transition the company into certain market opportunities that we felt gave us better opportunity to grow the margin profile based upon the solutions we offered and the integration of the products and the higher margin opportunities. So that is what's happening as well. So it is a combination of both of what you said. It's mix and it's better absorption. I would also tell you that we're not stopping. We talked about our cost improvements in terms of the cost takeouts and STAN and so forth. They're continuing. Last quarter, we incurred some costs that we said the transition of a product line, our production wasn't going up to snuff and plan as we had expected, and we incurred some extra costs. We put a full-court press on it. We're still not there, but it is absolutely improving. And we see additional opportunities to streamline the organization, leverage what we have and to continue to do as we gain more, we learn more and we see more opportunities for those cost reductions as well. So I think it's a combination of things coming together nicely as we've been working on for the last several years.

Yes. Okay. And then lastly, appreciate some of the updated metrics information on data center. I'm just curious, as we sit here today, what is your kind of total capacity level at? And as you kind of think about whether it's some of the changes that are being proposed, whether it's new architecture, whether it's smaller footprints, how does your solution play into some of these proposed changes that might impact that market over the coming years?

Yes. Well, I would say to you, first, we've been expanding our capacity, and we're ready to go online here late this quarter or early next quarter. Our goal is to have the expansion in place, and it's well underway. I was -- I viewed it a couple of weeks ago. And so we're well positioned, very well positioned to handle the increased demand. So our -- we talked about our -- the acquisition we made a few years back that the synergies that we realized in our Wisconsin operations and leveraging the Mexican operations as well, that has paid off big dividends and has helped us quite a bit in terms of expanding our capacity and for -- and relocating some of the high labor content products and then concentrating on the more sophisticated assembly and technician type work that we do for the final assembly. With regard to the equipment that we offer, I've mentioned this in the past. And from our active filter standpoint, we have the highest power active filter in the marketplace today. So that does help in terms of footprint, and it helps in terms of not having to daisy chain multiple units together to achieve the same power that we can put out in one particular unit. So we need to stay ahead of the curve. We recognize the market is going to continue moving. There's a higher demand coming. And that's our responsibility to be -- to make sure that we do stay ahead of the curve. As far as the opportunity in the future, based upon everything you hear in the news and so forth, yes, there's some regulatory, but I do think that there -- if everyone just takes a deep breath, some wise decisions have been made to ensure that while these data centers, the large data centers are coming online that they can supply their own power, they can have clean water and do all of this. And I think that those actions, they are happening, and it's a positive. You did not ask the question, but I will answer this because it's going to come. And people have asked us what's the opportunity for us and wanted to simplify it in terms of our value of shipments per megawatt hour, if we could come up with a measure to give people a feel for what that is. And it's not just a cut and dry black and white answer because it depends on the design and the amount of equipment that we're supplying into it, whether it's just a line reactors or it's active filters or passive filters or a combination of all. But I would say to you that on the low end, if it's just simply a line reactor, we might be talking about a couple of thousand dollars per megawatt. When it gets into a more complete solution, which we offer, including communications gateways, filters and reactors and so forth and even getting into some equipment that we supply that does fiber alignment to -- we supply products to that market that does fiber alignment that that's even in the equation. Now we're over $40,000 per megawatt. So I'm not going to give you what I believe the forecast is. If anyone could go to one of their AI tools and look at what the forecast is for data center per megawatt or gigawatt that they're looking at and do the math. So it's -- but I hope that gives you some color. We've been asked that a lot. We've been asked about our growth in data centers. We do believe we're going to continue to grow faster than our average growth within our company in those markets as well.

Yes. Makes sense. I'm sure I can speak on behalf of everybody on this call. I appreciate all the increased disclosures. Really helpful.

The next question is coming from Ted Jackson of Northland Securities.

I have a clarification question and then a couple of follow-ups. One is when you gave the data center numbers, you threw out a trailing 12-month of $57.1 million and then you put a year-over-year growth rate number for that. I missed the year-over-year growth rate number. Could you say that again, please?

Ted, I think I've lost you. I don't know if it's me or you. Yes, we lost...

You can hear me now?

I can.

Can you -- it's like an old cell line. My question was, you gave some commentary on the data center. And on the trailing 12-month, you said that you put out $57.1 million in revenue and you gave a year-over-year growth number for that. And I did not catch that. I was curious what that growth number was. And then I have a couple of actual fundamental questions.

Okay. Sorry. Let me pull it back up to give you that, make sure it's accurate, and not got off the top of my head here. Jim, do you have that handy? I'll find it here real quick here.

Yes. 69% year-over-year, trailing 12-month was. Go ahead.

Yes. No, no, I got it. I appreciate it. Let's move over to like more interesting questions. I mean we spent a lot of time talking about data centers and Industrial. Let's go to a couple of the other verticals. And let's start with like the Vehicle mix. I mean in the past, a big component of that had been powersports. And clearly, you've been deemphasizing it rightly so and the market has been doing terrible. But the business itself has actually performed pretty well. And so I thought it might be interesting to have you lay out sort of the different end markets that are there within the Vehicle market. I mean you've seen a turnaround with regards to the commercial vehicle market. I know you have exposure to there, but just kind of sort of the kind of the mix of business that you have in there and what you're seeing with regards to that mix? That's my first point.

Sure. So the mix -- when we talk about vehicle, as we've mentioned in the past, our goal is to keep, and it has been for a while as we reposition the company for automotive too. While it's important to us from the standpoint of the volume and the automation capabilities and the 0 defect mentality that it brings to the rest of the organization. We wanted to keep it managed in less than 10% of our overall revenues, and we continue to do that. So the other areas when we call -- when we say Vehicle, includes automotive, buses, construction vehicles, marine vehicles, the ATV market, rail and truck. So those are all combined. And year-over-year, they've remained pretty steady, and the one growth area that we've seen there has been the automotive.

When you say automotive, that's just basically passenger cars for kind of GM kind of stuff. It's not -- that's where you -- when you say truck, I assume you're meaning more like Class 8, Class 5 through 8 kind of stuff. Is that...

Correct.

Okay.

Correct. Passenger vehicles, when we say automotive, it's more passenger vehicles. And remember, our expertise is around steering applications. That's our primary expertise. There's others as well. But steering is the primary application. It's agnostic to whether it's petrol or it's EVs.

And then historically, in the past, powersports was a pretty big component of vehicles. I mean -- and it's been deemphasized. It's been shrinking. Where does that stand in terms of its contribution to the Vehicle market relative to where it was 3 years ago or so?

Yes. That's -- we're getting into granularity that we have not provided in the past. So -- but I would just say this to you, it's steady. And we have to remember, when we talk about powersports, there's a couple. You're talking about the ATV versus the UTV market. We've made that clear in the past. One is a utility vehicle used in commercial and in industrial applications, one is passengers or individuals. So we continue to focus on more on the industrial, commercial type applications. And we're not -- by no means is this a market that we want out of. I mean we think that it does leverage, again, our expertise, a strong expertise in steering applications, and we are able to apply that technology into some of the other vehicle markets as well as automated material handling and things of that nature as well. So I prefer not to break it out because we're starting to get too granular in terms of just leave it Vehicle as a whole as we've been reporting. But suffice it to say that there has been a transition, and we would expect to, I'll say, maintain a certain level of business, but it no longer drives our business as it did 10, 12 years ago.

Fair enough. Shifting over to Aerospace & Defense. I mean my model only goes back to 2019. But in the history of what I've got in my model, you had a record quarter. And I'm kind of curious what's driving that? Are there any particular programs in place that are making that happen? And then, maybe is there -- what do you -- maybe talk a bit about what pushed the quarter to be so strong, what the outlook is and kind of the drivers behind that business, [ so then we'll move on ].

First off, I would say it's going to accelerate. We've talked for many months, many quarters about the increased number of inquiries and quoting that we were doing based on higher volumes and so forth, and they've come to reality. We see that, that's not -- in defense-related applications, that's not stopping. That's continuing. And in addition to that, as I made some commentary earlier about the -- what we're doing in the drone area and what we're releasing and coming to market, you'll start to see that unfold. I would emphasize as well the counter drone market. We see that as, as important as the drones themselves. And the product line, I'll just restate it that we are launching is state-of-the-art, and we put a significant amount of our resources on it and utilize the principles of STAN to -- for the decision-making first and how can we accelerate it, how we're going to compete. And I think it's pretty exciting because we're able now to -- we're able to go to the market and we're able to talk to customers who have come to us about volume applications where we weren't positioned to do it where we are positioned. We're -- not that we're opening up the floodgates. We're selective in what we're picking. There are some things that we're not going to chase. But the applications that we're working on, some of the higher-end applications that we've been in all along, now looking at the cost applications that we're able to support, which then leads us to more and more custom critical, and our team has done a great job. Electronics are being -- we've got customers now, some beta customers or alpha customers, I'll call them for some of our electronics releasing, state-of-the-art, leading-edge state-of-the-art. It's positioning us well, and it's helping us because it's not just we're -- that technology that we've been designing, we've been investing in, and we've been feeling the impact on our P&L as an investment. It's -- we're leveraging the technologies, not just in -- for the drone applications, but in defense markets as well as industrial and commercial markets, too. So I think we've got a pretty impressive platform of products that are going to be starting to be released and those will come out as well. And it's all just coming together. I think some reality of the quoting we did in the past, converting into orders today, seeing some acceleration, opening up some new opportunities in the market. So I think we're getting better recognition in the market. I think we've done a great job marketing it, and we're going to do even a better job. The team has stepped up a big time. So you're going to see more information out there about Allient and how Allient plays and so forth. So I think, yes, it's positive. It's definitely positive.

Okay. And then my last question, just kind of more curious, with bookings and backlog and the strength you have, I'm just kind of curious, I mean, as you roll into any quarter, how much of a typical quarter gets driven by any kind of near-term business that's book and ship in the quarter and kind of a rule of thumb, how much of it comes out of backlog?

Yes. It really depends on what we're shipping in the mix. And I've said this before and just so for sake of making sure it's consistent here is that as we -- for some of the larger contracts that we have out there, we get blanket orders from our customers and then we get releases against those. So we have -- and again, I won't get into the individual companies, but we have companies that are basically able to react to -- there's a forecasted demand. There's a mix that we don't necessarily know. But if an order gets placed that we have to deliver within 72 hours. So obviously, this is part of where you have some inventory and you have a design of a product line that allows you that flexibility. But as far as a rule of thumb here, what would we consider book-to-bill business versus on any -- in any quarter versus a backlog-based business, I would tell you that we're 20%, 25% book-to-bill.

Okay. Thanks for all the clarity. It's always a pleasure to listen to you talk about the business. You know it and you're passionate about. Congrats on the quarter.

[Operator Instructions] Our next question is coming from Tomo Sano of JPMorgan.

Could you talk about STAN's annualized savings? You had a $10 million in 2024 and $6 million in 2025. What is your expectation for this year? And what are the next levers for incremental savings?

Sure. So I would tell you that for 2026, we targeted an amount similar to what we saw in 2025, $5 million to $7 million. I mean we're still working on that, and I do believe it's achievable. So -- and then going forward, as I said, every time we finish something, we seem to uncover that there's more opportunity that I would tell you that we've got a list of opportunities internally here, given our size and given the resources that we have available to it that I would say we're -- we've got a runway of 2 to 3 more years where we can continue to see this $5 million to $7 million cost takeouts and optimization of the units.

And if you could talk about Dothan transitions? Could you update us on ramp quality, delivery and incremental costs? And when you expect normalization here?

Yes. The significant improvement was made in the second quarter. And some of that was realized by -- as we mentioned in the first quarter call, we could have shipped more if the transition had gone smoother and so forth. The team is doing a really nice job of attacking the root causes of the problems and getting the efficiency and productivity up as well as starting to cut into some of the past dues that are cutting into that. And there, every move -- Dothan has been around a long time. And unfortunately, there's -- it's a high mix business and sometimes low volume. And that adds a little complexity to it. And so making -- getting everything up to snuff, fixed and identifying the supply chain and ensuring that all of that's being addressed in an appropriate manner. I will tell you that it will continue to improve throughout the year. We're going to continue to invest and improve throughout the year. We're making some investments to accelerate it. And we have -- and this is my opinion that we have significant opportunity to improve not only in Dothan, but also in our Reynosa facility as well. And that will continue through the year. You'll start -- you'll see some continued restructuring costs there as we make the investments necessary to ensure that we achieve the results that we're looking for.

If I may squeeze just one more thing. High level, Dick, could you talk about the current environment about the factory automation broadly? We were on the Automate Show and then visited your booth and then felt like a sense of urgency about the factory automation given from like some physical AI concept as well. But could you talk about like how you see the environment from your perspective broadly?

Sure. So let's -- for our business, I would kind of look at it from North America and let's say, Europe. Europe has seen some improvement, which is great. It's not going gangbusters, but it's improving. And it's a slow, steady improvement from -- we're heavily invested into our customers who are in the automation market. So that's an encouraging sign. It's not just, like I said, big jump in demand all of a sudden. And in North America, we have definitely seen some improvements as well. So there's an acceleration of getting our products in place so that we can handle demand and these pent-up demand for certain projects out there. So there's encouraging signs. As well as we're -- our portfolio is evolving and developing there. So I wouldn't want to indicate in any way that we're a supplier to the big integrators, to the big players in the automation industry. And as we continue to enhance our product portfolios and design products that are directed and dedicated to that in niche areas, we are definitely seeing some traction there. And then we're going to continue to do that. That changes the margin profile as well. If you're competing with what I'll call -- they can be off-the-shelf products, but they're kind of standardized and many suppliers, it will impact your ability to drive margin improvement. So again, our focus has not been on the masses. It's been on ensuring that we can integrate our technologies together, use our electronics to enhance our ability to sell as well as integrated solutions, and that continues to improve. So it's encouraging. It's definitely encouraging for what we're seeing in the signs there.

The next question is coming from Gerry Sweeney of ROTH Capital Partners.

Congratulations on a nice quarter. One more question -- actually 2 more questions on data center work. Wondering if there's an opportunity to expand into some adjacencies around the work that you have now or opportunity of work that you have now? And secondarily, how much of revenue do you feel comfortable with as sort of a percentage of revenue related to data centers?

Great questions. Comfortable with as much as we can get. I'll just -- I'll say that. I -- and it's an interesting question because we have been, by some of the majors, been asked about, and they've come to our facilities and done their assessments and so forth and looked at our capacity, and they see that our team has done a nice job. This team is primarily in Wisconsin between our 2 facilities there and leveraging the Mexican facility. They have been proactive, and they've been ahead of the game in making sure that we are addressing capacity needs and labor needs and so forth. So when it comes to -- I kind of give you that answer because I remember when I was sitting in a meeting and the team brought to me, well, we can either do this or we can do this. And I say you go for a big one. Let's just -- we'll support it. We'll support it as required. So how big can that be in relative, as I said, I would prefer not to give you what I think it's going to be. Let you -- I gave you the numbers of what our value is per megawatt. You can go out and do the calculation yourself and see what the opportunity is. And I'd say our goal is to be one of the leaders, if we can move our percentage of capture in the marketplace, and I'm not uncomfortable with seeing that our capture rate in there going 20%, 25%, 30%. So that's -- I'll leave it at that and let you work the numbers on and everyone else work them on their own because I don't want it coming back to me, that's what I told you it's going to be. What else was it that you were interested in besides that?

Adjacence...

Adjacence. Yes, absolutely is. And the same type of solutions we have. So you noticed we talk about data center and other infrastructure. Definitely. The same types of requirements that you're seeing in data centers as you get these larger applications, wastewater treatment plants and so forth, there's definitely going to be expansion there and continued demand there, and our products serve those as well.

Got it. And then finally -- I lied, 3 questions, not 2. Obviously, we're in a new build market for data centers. Is there an opportunity for repair, replacement, refurbishment, upgrading of facilities over time? Or is it too early to tell?

No, I think there definitely is. I think there's companies out there focusing on that, that are saying that especially if you're going to get pushback in certain states and localities that are going to push back against data centers. They already have data centers there. The infrastructure is in place. It just needs to be upgraded and expanded. And I think there's clearly going to be some opportunities there, and we can play in either one.

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Well, thank you, everyone, for joining us on today's call and for your interest in Allient. We will be participating in the Lake Street BIG10 Conference in New York City on September 10. As always, please feel free to reach out to us at any time, and we look forward to talking to you all again after our third quarter 2026 results. Have a great day. Thank you, operator. That will conclude it.

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.