ALNT earnings call analysis

NASDAQ:ALNT Q4 2025 Earnings Call Transcript Generated on 6/8/2026 Operator | Conference Operator: Good day and welcome to the Ellion, Inc. Fourth Quarter Fiscal Year 2025 Financial Results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Craig Mihalik, Investor Relations. Please go ahead. Craig Mihalik | Investor Relations: Yeah, thank you, and good morning, everyone. We certainly appreciate your time today, as well as your interest in Alliant. On the call today are Dick Rosella, our Chairman, President, and CEO, and Jim Michaud, our Chief Financial Officer. Dick and Jim will review our fourth quarter and full year 2025 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 company slide presentation are available on our website at Alliant.com. If you're following along, please turn to slide two for our safe harbor statement. During today's call, we will 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'll also discuss certain non-GAAP measures 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, two comparable GAAP measures in the tables accompanying the earnings release, as well as the slides. So with that, please turn to slide three, and I'll turn it over to Dick to begin. Dick Rosella | Chairman, President, and CEO: Thank you, Craig, and welcome, everyone. Dick Rosella | Chairman, President, and CEO: We entered 2025 with clear priorities. expanding structural margins, strengthening the balance sheet, and positioning the portfolio around durable secular growth drivers. As we close the year, I am pleased to say we made measurable progress on all three. We delivered a strong fourth quarter and, importantly, exited 2025 with improving momentum across the business. The fourth quarter reflected several highlights, but it can be summarized by a few themes. improving industrial demand, discipline execution across the organization, and structural margin expansion driven by our Simplify to Accelerate Now program. This performance was not only a function of higher volumes, it was operating leverage. It was improved mix, and it was sustained cost discipline translating directly into stronger profitability. We saw improving conditions in our largest vertical industrial. A significant automation destocking we have discussed throughout the year appears largely behind us, and ordering patterns are returning to more normalized levels. At the same time, demand for our power quality solutions supporting data center infrastructure remains strong. Vehicle performance was stronger than expected in the quarter, primarily tied to commercial automotive production timing. While we do not view that as a structural shift, it contributed to the top line in the period. Medical remained steady and consistent, and aerospace and defense reflected normal program timing dynamics. So what we experienced in Q4 was broad participation across the portfolio. That balance across verticals matters. It reinforces diversification of the model and supports the durability of our results. Equally important, the margin expansion we delivered wasn't simply volume driven. It reflected better mix when compared with last year's results, improved cost structure, and continued execution under our Simplify to Accelerate Now initiative. The operational work we have been doing over the past few years is now clearly embedded in the model. Turning to slide four and looking at the full year, 2025 was about strengthening the foundation of the company. We set out a clear objective under our Simplify to Accelerate Now program, reduce complexity, improved throughput, and strengthened margins in a way that is sustainable. We targeted a set of structural savings in the range of $6 to $7 million for 2025. Dick Rosella | Chairman, President, and CEO: And while not yet complete, we delivered meaningful progress on that target. Dick Rosella | Chairman, President, and CEO: These savings are being realized through footprint optimization, where we are consolidating overlapping operations and focusing our resources where we have scale and competitive advantage. Accelerated product development, where we streamlined our process and reduced time to market for our offerings. Lean manufacturing disciplines, where we improved standard work and reduced non-value added time on our shop floors, consistent with best practices that helped cut costs while improving quality and reliability. This is a journey and it never ends. One example that speaks to all three is the transition of our Dothan facility. We announced this last year as part of our realignment strategy with the plan to focus Dothan on advanced fabrication capabilities, including machining. As a result, we transferred assembly work to facilities where we have complementary capabilities. That effort, while still a work in progress, is expected to drive down costs and reduce complexity across our North American footprint. Dick Rosella | Chairman, President, and CEO: Overall, we delivered record gross margins for the year. We expanded operating income at a rate well ahead of revenue growth. Dick Rosella | Chairman, President, and CEO: We generated record operating cash flow. And we reduced net debt significantly, bringing leverage down to levels that gives us real financial flexibility. The balance sheet today looks very different than it did a year ago, and that matters because it allows us to invest in organic growth, support new program launches, and pursue disciplined capital allocation opportunities from a position of strength. With that, let me turn it over to Jim for a more in-depth review of the financials. Jim Michaud | Chief Financial Officer: Thank you, Dick, and good morning, everyone. Turning to slide five, fourth quarter revenue increased 17% year-over-year to $143.4 million, including 15% organic growth on a constant currency basis. The growth was driven primarily by strengthening industrial demand, particularly automation and power quality applications, as well as increased commercial automotive shipments within the vehicle market. From a geographic perspective, 50... Revenue was generated in the U.S. with the balance coming primarily from Europe, Canada, and Asia Pacific, consistent with our diversified footprint. Let me walk you through performance by major vertical because that's where the real story sits. Industrial revenue increased 24% in the quarter. The primary driver was strengthening automation demand as ordering patterns from our largest automation customer returned to more normalized levels following the extended destocking cycle. In addition, demand for power quality solutions supporting data center infrastructure remained very strong. Those applications continue to benefit from electrification and digital infrastructure investment. Vehicle revenue increased 35%. This was primarily due to increased commercial automotive shipments tied to a transitioning model program. As Dick mentioned, we view this as production schedule timing rather than a new long-term run rate. Construction markets also improved, and power sports conditions appear to have stabilized relative to earlier softness. Medical revenue increased 9%, supported by steady demand for surgical instruments and continued traction in precise, motion applications. Aerospace and defense declined 5%, reflecting the lumpy nature of defense and space program shipments, along with the previously announced M-10 Booker tank program cancellation. Importantly, underlying defense program activity remains solid. Distribution channel sales increased 11%, although that remains a smaller component of total revenue. Turning to slide six, Here we show the composition of our revenue over the trailing 12 months, along with the year-over-year change in each market and the key drivers of that change. This slide really highlights something important about how the business has evolved and what you are seeing in the mix is intentional. Industrial remains our largest vertical, and it's increasingly anchored by higher value applications. power quality for data center infrastructure, motion solutions tied to automation, and applications aligned with electrification. That's where we have been directing engineering focus and capital. Aerospace and defense continues to represent a meaningful and growing contributor. While quarterly shipments can be lumpy, the underlying program activity and pipeline remain solid, and that vertical provides longer cycle visibility. Medical remains steady and consistent. Surgical applications continue to be reliable contributors, and our precision motion capabilities position us well in that space. Vehicle, while still important, is a smaller percentage of the mix than it was previously. That's partly market-driven, but it's also strategic. We have intentionally shifted away from lower margin programs and toward higher value applications across the portfolio. So when you step back, the mix today is more margin accretive and better aligned with durable secular growth drivers than it was just a couple of years ago. That evolution matters because it supports the margin expansion and earnings durability we have delivered. On slide seven, gross margin expanded 90 basis points year over year to 32.4%. The improvement was driven by higher volumes, favorable mix, and operational efficiencies from our simplified initiative. Sequentially, gross margin moderated largely due to a higher proportion of vehicle revenue, which carries lower relative margins. For the full year, gross margin expanded 150 basis points to a record 32.8%. Turning to slide eight and the drivers behind the margin and operating income expansion, What stands out in 2025 is not just the headline results, but how we've achieved them. As Dick outlined, the Simplify to Accelerate Now program was designed to structurally reduce complexity, improve throughput, and strengthen margins. The operating performance you see here is the financial expression of that work. The structural savings we delivered in 2024 and now 2025 are embedded in the business, and they are showing up directly in leverage and operating income expansion. Realignment costs related to these actions during the year are primarily associated with the Dothan transition. The transition to date has been successful, not just from a cost perspective, but operationally. We are realizing enhanced manufacturing focus and early elements of the anticipated savings. When you layer these structural improvements with improved volume and mix, the impact on leverage becomes clear. At the operating level, we drove meaningful improvement in expense discipline. We captured upside from higher volumes while at the same time controlling SG&A, allowing operating income to grow significantly faster than revenue. In the fourth quarter, operating income increased 76% to $11.4 million, or 7.9% of a revenue. For the full year, operating income increased 46% to $44 million, or 7.9% of revenue. Turning to slide nine, you can clearly see how the structural margin expansion and discipline execution translated into meaningful bottom line growth. Net income for the quarter more than doubled to 6.4 million, or 38 cents per diluted share. Adjusted net income was 9.3 million, or 55 cents per share. Adjusted EBITDA was 19 million, or 13.3% of revenue, up 170 basis points. For the full year, net income was 22 million, or $1.32 per diluted share. Adjusted EBITDA was 76.9 million, or 13.9% of revenue, representing 210 basis point expansion year over year. Our full year effective tax rate was 23.3%. For 2026, we expect our tax rate to be between 21 and 23%. Turning to slide 10. This slide reflects disciplined execution against the three financial priorities we outlined at the beginning of the year. Those priorities were improving working capital and inventory efficiency, take out structural costs, and reduce debt and strengthen the balance sheet. Starting with cash generation, we delivered record operating cash flow of $56.7 million for the year, up 35% from the prior year. That level of cash conversion reflects both improved profitability and better working capital management. Inventory discipline was a major focus in 2025. Despite navigating automation normalization and rare earth considerations during the year, we improved inventory turns to 3.2 times compared to 2.7 at the end of 2024. That is a meaningful step forward. We tightened planning processes, aligned production more closely with demand signals, and reduced excess inventory that had built up during the prior cycle. Importantly, we did that while maintaining strong customer service levels. On receivables, day sales outstanding improved to 57 days for the year versus 60 last year. That reflects better collections, stronger billing discipline, and improved customer mix. When you combine inventory turns improvement with DSO reduction, you see a structurally better working capital profile. Capital expenditures for 2025 were $7 million, with disciplined, focused investments tied to customer programs and productivity initiatives. For 2026, we expect capital expenditures in the range of $10 to $12 million, primarily supporting customer programs and growth initiatives. So slide 10 is really about execution. We said we would improve working capital. We did. We said we would drive structural cost improvements. We did. And we said we would reduce debt. That shows up clearly on the next slide as the balance sheet story is directly connected to the execution we just discussed. Total debt declined to $180.4 million. Net debt declined to $139.7 million, a $48.4 million reduction year over year. Our leverage ratio improved significantly to 1.82 times from 3.01 at the end of 2024. Our bank-defined leverage ratio ended the year at 2.34, comfortably within covenant levels and providing meaningful headroom. The combination of stronger earnings, improved cash conversion, and disciplined CapEx allowed us to materially deleverage in a single year. That's important for two reasons. First, it lowers financial risk and reduces interest burden over time. Second, it creates flexibility to invest in organic growth, support new program launches, and evaluate disciplined capital deployment opportunities from a position of strength. So when you look at slides 10 and 11 together, they tell a clear story. Operational improvements translated into cash, cash translated into deleveraging, and deleveraging translated into flexibility. That's the financial flywheel we've been working toward. And with that, if you advance to slide 12, I will now turn the call back over to Dick. Thank you, Jim. Dick Rosella | Chairman, President, and CEO: As we moved through the fourth quarter, order trends improved. Automation demand is stabilizing. Power quality tied to data center infrastructure remains strong. And our aerospace and defense pipeline continues to provide long-term and long-term cycle visibility. Orders were up sequentially, and year over year, we exited with a book-to-bill ratio slightly above one. That's important as it reflects positive momentum as we enter 2026. Backlog ended the year at approximately 233 million, with the majority expected to convert within three to nine months, consistent with our historical patterns. The visibility we have today supports a constructive start to the year. As we look into 2026, We believe we are positioned to build on that momentum. At the same time, we remain realistic. The macro environment is still uneven across certain end markets. Customer capital spending can move in phases, and policy and tariff considerations remain part of the broader landscape. We continue to monitor developments closely, and we will adjust as needed. With respect to the recent Supreme Court ruling and broader trade policy discussions, We are continuing to evaluate any potential implications. As we have discussed previously, we have taken proactive steps over the past several years to diversify our supply base, localize certain sourcing where appropriate, and manage tariff exposure through pricing and operational adjustments. We remain disciplined in how we evaluate these developments, and we will adjust as needed. What gives us confidence is what we control. We control our cost structure, and it's structurally better than it was a few years ago. We control working capital discipline, and we demonstrated that in 2025. We control capital allocation, and we strengthened the balance sheet meaningfully over the past year. We continue to align the portfolio around higher value motion controls and power solutions serving durable secular drivers of electrification, automation, energy efficiency, increased defense spending, and digital infrastructure. These drivers are not short cycle themes. They represent long-term shifts in how energy is generated and used. how systems are automated, and how infrastructure is built. Alliant's technologies are directly aligned with those transitions. We exit in 2025 with improved margins, stronger cash flow, and a materialer, stronger balance sheet. That combination provides flexibility and resilience, and it positions us to execute through varying market conditions. We believe we're entering 2026 from a position of strength. We have an excellent opportunity to leverage the foundation we have been building to simplify to accelerate now initiatives, simplify our organization, drive out cost, and accelerate growth rates well into the future. Dick Rosella | Chairman, President, and CEO: With that, operator, please open the line for questions. Operator | Conference Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Tomo Siano with JP Morgan. Please go ahead. Hi, good morning, everyone. Dick Rosella | Chairman, President, and CEO: Good morning, Tomo. Tomo Siano | Analyst, J.P. Morgan: Thank you for taking my questions. So while the cyclical macro recovery such as improving ISM is expected, Alliant has clearly driving a structural growth and margin improvement through initiatives like Simplify to Accelerate now. So looking ahead to 2026, which do you see as the bigger contributor to growth and margin expansions, external tailwinds, or your own self-help measures? Any more colors on 2026, please? Thank you. Dick Rosella | Chairman, President, and CEO: Okay, so let me take your first question, I believe, as I understand it, is that you're looking for what are the seculars that we expect to be generating the largest growth opportunities for us in 2026. Is that correct? Tomo Siano | Analyst, J.P. Morgan: Mm-hmm. I want to get a more sense of the cyclical characteristics of the recovery you see versus the structural themes you see in 2026. Dick Rosella | Chairman, President, and CEO: Tomo, I'm sorry. Dick Rosella | Chairman, President, and CEO: I don't know whether it's our line or your line, but you're breaking up on us, and I'm having a hard time picking up some of the comments or questions. Tomo Siano | Analyst, J.P. Morgan: I'm sorry. Could you talk about 2026, the growth of the sales driven by cyclical recovery versus structurally items for the revenue side? I wanted to get some color on the margin side as well. Thank you. Dick Rosella | Chairman, President, and CEO: Okay. I think I have it here now. Well, first off, as we talked about here, as we've been repositioning our business and looking at where we see some of the long cycle, longer term drivers, and we mentioned data center infrastructure, we do see that continuing. We see, I believe, one of the issues that has been addressed quite over the last few days here has been about the energy side of it and how were they going to generate power. And it seems like some of the companies are stepping up to do that on their own, which I think was a major concern. That doesn't affect us. You know, we obviously need the power. And as the data center expansion continues, you know, we play a pretty significant role in making sure that that power is being delivered efficiently and effectively. and, you know, eliminating distortion within the grid and so forth. So, I think we do see that opportunity continuing now into the 2026 and into the future. Again, it's based upon infrastructure. It's based upon capital projects. And, of course, those are subject to the developments as the prime contractors and or developers determine the right timing for those. As far as aerospace and defense, let's call it defense more than aerospace, you know, that is impacted by many factors. And, you know, we will still now, given the The war that's going on in Iran right now, I think it's going to take a little bit of time here to settle down for us to figure out how that will have an impact on our business, whether it's immediately or long term. That's too soon to call. As far as the other programs go, which we've been very actively involved in, with some of the key drivers in terms of defense applications, whether it's drones, whether it's missile defense and so forth, I mean, We have been a player in those markets for some time here now, and we do see that continuing. One thing that's occurring there is, of course, is the requirement for defense products and suppliers to be based in North America or the U.S., and the that's definitely plays into an advantage for us as we do have a pretty significant manufacturing based in design engineering team in North America. The other areas that, you know, we see opportunities of course, is we don't see medical slowing down the, the advent of AI and medical and the use of sophisticated diagnostic tools. And again, some of the key areas that we've been involved in for many years. We continue to participate, and we're pretty excited about that. And automation will come. Automation comes in the form of our normal or typical industrial automation, and even in the robotic side of it, sometimes referred to as exciting areas of humidizing and so forth. And again, it's another area we participated in, and we continue to participate in. We see growth and stabilization there. European markets, and especially Germany, seems to be remaining a little bit soft, and they're not predicting any growth for 2026. So we'll see how that shakes out as the year goes along, but that's the forecast that we're getting right now is that the industrial markets in Germany, in fact, may decline this year, which we did, you know, we saw some signs that it was going to improve, but the the latest information we're getting is that that may not be the case. Dick Rosella | Chairman, President, and CEO: And I think our diversification in many different markets plays well for us, and there is a good balance. Dick Rosella | Chairman, President, and CEO: I mean, we do believe that the Industrial sector will continue to grow because we do have automation in that sector, as we call it, and also the data center infrastructure is in there as well. So we do see that continue to grow, and we see defense growing, whether it's cycle timing, as Jim had mentioned, you know, the government canceled the M10 Booker program, and that's a realignment of how they see the priorities on the battlefield going forward. and the challenges that are being faced. As far as margins, margins is a big factor based upon mix for us. And I can tell you that our focus and emphasis on new applications has been in the markets and will continue to be. And our investments will be made in the markets where the margins are above or above our average. That's been our focus and will continue to be our focus. And capital spending will align with that. So I think, you know, that we are in pretty good shape. Our book-to-bill ratio is improving. And that's one of the things that we pay close attention to in this to determine whether or not, you know, we have converted some of the opportunities we're working on and it's showing up in bookings that will later show up in shipments. That's a long-winded answer. I hope I've covered them all. If not, you can go ahead and ask me to add to that if necessary. Tomo Siano | Analyst, J.P. Morgan: Thank you. Very helpful, Dick. Thank you. And just to follow up on a capital allocation standpoint, congrats on leverage, improved and strong cash flow generations. How would you prioritize capital allocations for 2026 among organic growth, investment, M&A, and shareholder returns, please? Dick Rosella | Chairman, President, and CEO: Sure. I would say to you that, again, going into 2026, I mean, we feel that our pipeline of opportunities is quite strong. And our investments that we make will be to support what we have control over and in hand right now, which is, you know, some significant opportunities and that we will need to invest to realize some of those opportunities. So that's going to be the majority of the investment that we see going forward. I would also say to you that You know, we are paying very close attention there in terms of the pipeline of acquisitions. We certainly have had certain areas that we won't discuss on the call here that we're paying close attention to. And if the opportunity does arise, I mean, we think we're well positioned to take advantage of that and to move forward with it. With And I think the Simplify to Accelerate Now initiative, I just want to make it clear, we're not done. We see that we started, we had several initiatives that were well underway and executed quite successfully, but certain things were not completed in 2025 that are recurring into 2026, and we will have the discipline to get them done and drive costs out. We also see that we have other opportunities. And when we look at our infrastructure and our footprint and so forth, to continue to drive costs out, to become more efficient in the way we do things. So that's not ending. That will continue. And It's not like we did a mad push for a couple years and it's all completed. It's not. There's more opportunity ahead of us here. And 2026 will not be one that we just sit back and say, okay, let's just take a deep breath and look at what we did and, you know, move on from here. We're going to be aggressively going after some additional opportunities to improve our cost base. And they're there. Tomo Siano | Analyst, J.P. Morgan: That's helpful as well. Thank you very much. Dick Rosella | Chairman, President, and CEO: That's all from me. Thank you, Jomo. Operator | Conference Operator: And the next question comes from Greg Palm with Craig Hallam. Please go ahead. Greg Palm | Analyst, Craig-Hallum Capital Group: Thanks. Good morning, everybody. Congrats on a good way to finish 2025. Jim Michaud | Chief Financial Officer: Thank you, Greg. Appreciate it, Greg. Greg Palm | Analyst, Craig-Hallum Capital Group: I don't remember the last time you actually grew revenues sequentially from Q3 to Q4. Maybe it's happened once or twice, but I understand maybe a little bit was due to some outsized you know growth and commercial vehicle which you you talked about but just broadly speaking you know what else drove the the better than expected seasonality that you'd normally see and just to be clear what what kind of trends have you seen uh so far in in q1 yeah great question greg because it was abnormal you're absolutely correct you follow us a long time and Dick Rosella | Chairman, President, and CEO: You know, it's, as we say, going into Q4 is always, there's some unknowns. We've seen years where, you know, demand was pent up, supply chain crisis, things like that, which caused some irregularities in the normal cyclical patterns that we would see during the year. We did, in fact, have a few, I'll call them pull-ins, that we hadn't anticipated. So, it did elevate Q4 sales to a certain extent, and one that we mentioned, the commercial vehicle side of it, we don't see that having, you know, that was a one-time surge based upon some demand that had been sitting out there, and we see it returning to normal. In a couple other areas, there were a few that surprises, I'll call them, and I won't mention in detail what they were, but they they were, you know, pulling in product. And then as we turned the year, we saw that that was reflected in a little bit lower demand in the first quarter. So there were some offsets there that, you know, we're going to have to, we'll be addressing and see as it's still early, of course, but see how that lands. But that is a little bit unusual. And thank you for pointing it out because there were, I'll just say there were three different uh drivers of that and one was a one time which will reduce to normal and the other two we did see a little bit of reduction after they were pulled ahead uh as we started a year but nothing nothing that we see that will change normal run rates on an annual basis it was just unusual just into you know leaving this aside what type of sort of demand Greg Palm | Analyst, Craig-Hallum Capital Group: are you seeing right now just across your markets? I mean, any change? I know things sort of strengthened as we went through 2025, but any strength? And just curious as you look at what's occurred over the last week, what kind of risks or even opportunities could that bring about this year? Sure. Dick Rosella | Chairman, President, and CEO: I mean, our order inputs seem to be coming in quite well, and we saw some improvement through the year. And And as you mentioned, for us, we watched that very closely because that's obviously an indicator of what we're going to see in terms of converting it into shipments. So that's encouraging. We see some of that continuing to flow in nicely. As far as what's happened in the last week, I mean, of course, there's no surprise, I guess, in saying that we're the defense side of the business and we certainly do supply products that are being utilized right now. how that converts into orders. We were surprised when they were heavily consumed and we didn't see production orders happening as fast as we would have expected, which indicated there was a big stockpile. We think the stockpile had been chewed up. We saw some return to starting to ship again for some defense-related products. So if you just ask for what our gut feel is, is that there will need to be an increase in certainly some of the products that we deliver to do some replenishment. What the total amount is, the impact is, hard for me to say and hard for us to say, but I'm sure we'll start seeing some of that fairly soon. Greg Palm | Analyst, Craig-Hallum Capital Group: And I know you mentioned drones, and that's an opportunity that you've called out a little bit more recently. Are you able to share with us? any traction that you're seeing just in terms of what the opportunities set that might be emerging there? Dick Rosella | Chairman, President, and CEO: Sure. I, you know, our company is well regarded and well respected for doing, you know, for high performance solutions, custom engineering and so forth. And I'd say, you know, our activity in that market had been primarily in that space and it accelerated. It certainly accelerated as far as the pipeline of opportunities go, the prototyping that we're doing, the quoting that we're doing. But it also seems to be expanding into the class one or group one, whatever way you want to describe it, devices, and has caught our attention. And one of the areas of opportunity for us that we see is that we know how to produce product and buy it. we have one of the benefits that we enjoy based upon having a certain percentage of our business, as we've stated in the past, we like to keep it in the single digits of automotive, is we do know how to produce higher volume solutions, cost competitively, and with the use of automation. So I see it very encouraging, and I see it as a real opportunity for us to take our know-how that we have gained and developed over the years and to redeploy it into some of these other areas. While they're, you know, the pricing and the margins may not necessarily be the same as the, you know, the higher performance custom engineered products, certainly the volumes do give you the opportunity to from a volume standpoint and from an operating margin standpoint to be incremental to our business. So that's an area that we see. The shift to North America has created certainly an increase in inquiries. And as I said, we've been in the business in different applications. We see our Our technology base that we have in electronics and controls and motors and so forth, in lightweighting and composites, it definitely does give us an opportunity here to expand that. So we're pretty excited about it. Greg Palm | Analyst, Craig-Hallum Capital Group: Okay, great. And I guess just last one, I recall last year you announced the facility expansion where you're doing a bulk of the data center work, and I'm curious what the status is of that, and do you feel like you have – you know, adequate capacity, you know, as that's done or once it's done to capitalize? What are you seeing in terms of the opportunities out there? Dick Rosella | Chairman, President, and CEO: Yes. To answer your question, it's coming along extremely well. It'll be, you know, late second quarter, early third quarter when it's fully operational. Timing couldn't have been better. That's all I can say. Timing couldn't have been better. The opportunities we're seeing and the fact that we had addressed it in advance to expand our capabilities and our footprint. We're definitely fortuitous here as the demands of the market continue to go up. So I think we'll start to unfold here later in the year. You'll start to see some pretty significant increases in volume in that area. And our timing was good. Dick Rosella | Chairman, President, and CEO: Okay, perfect. Appreciate all the color. Thanks. Thank you, Greg. Operator | Conference Operator: And the next question comes from Max Michaelis with Lake Street Capital Markets. Please go ahead. Max Michaelis | Analyst, Lake Street Capital Markets: Hey, guys. Thanks for taking my questions. I just want to kind of go back to the data center opportunity. From your comments here in the Q&A and then prepared remarks, it sounds like it would be safe to say you expect the data center opportunity to accelerate in 2026 over 2025 in terms of growth rate. Is that correct? Dick Rosella | Chairman, President, and CEO: Yes, we do. And what I would say to you is that definitely the opportunities are there. As Greg asked the previous question, you know, about the expansion to our facility, our main facility, that was, you know, underway and last year was approved and is, you know, reaching the point of completion. And that's critical for us to be able to handle the increased demand that we expect to see. I will say to you that, you know, there was an acceleration into last year of some of the, you know, products that we produce and accelerated deliveries. And, you know, we're going to have to pay, as you look at us and pay close attention to, I mean, the order input rates and what we see there, because it's not a smooth, you know, incrementally improving business. It's definitely, you can see some fairly substantial jumps in opportunities and timing of orders and when the demand and shipments are going to occur. You know, it's not just going to be a straight line here. It's going to be a we'll see that perhaps, you know, in the third and fourth quarters of this year where you'll see some ramping. Max Michaelis | Analyst, Lake Street Capital Markets: Is this growth primarily driven by new contract wins and new customers, or are you guys expand or kind of a mix between expanding wallet share with other customer existing customers? Dick Rosella | Chairman, President, and CEO: Oh, the market itself is expanding and we're, we're, you know, we have a, uh, we've talked in the past about some of our capabilities that, uh, put us in a very nice competitive position in the market. And I think that's what's, that's definitely driving it. So it's, there's market expansion and, you know, the technology we have to support and service that is also being recognized and, you know, accelerating some of those opportunities for us as well. And I don't want to, you know, you guys are fairly new and I appreciate you joining us as an analyst and, In the past, we talked about an acquisition that we did in Wisconsin that gave us a capability and a manufacturing capability and footprint in Mexico. And we've been leveraging that to a great extent here and helping us accelerate our ability, you know, to meet those demands. And it has proven to be, you know, to be very helpful for us as we've been addressing some of those. So it's been, you know, our capability, our production capability, the expansion that we're doing to continue to improve upon that. as well as our technology, which gives us a nice competitive edge in the marketplace. I'm not saying we're alone, but we clearly have, you know, a product that is recognized as high-performing and, you know, very cost-effective. Max Michaelis | Analyst, Lake Street Capital Markets: Okay, and then last one from me. With the M10 Booker program coming to an end, I mean, is there any other programs you can share with us to kind of give us an idea where you guys expect to head next, or is it something you can't share? Dick Rosella | Chairman, President, and CEO: No, I'd rather not share. And I say it's sure we could share, but defense programs, as we found out with N10 Booker, that was not a one-year program. That was a six, seven-year program. And if you look at it, it said there's logic behind it, what's happening. And as the battlefield's transitioning here, the utilization of drones, the utilization of missiles, less, you know, boots on the ground. Booker was a larger vehicle. It's not going to go away, you know, itself for the need for those larger vehicles and boots on the ground and some applications or some arenas. But what we will see is we see a shift towards smaller, more agile, more autonomous vehicles. And, you know, we're positioned as well on those. So one of the things just, you know, for us to get the message out as we've acquired companies in the past, And we looked at more of a fully integrated solution. And we do provide some pretty significant advantages there in that we have, we can handle the electrification, we can handle actuation. So we've got motors, we've got controls, we've got tries, we've got IO, and we have lightweighting composites. And those composites are used quite extensively. And composites aren't just for, I mentioned lightweighting, but there are other reasons you use lightweighting, structural integrity or improved strength. you know, EMI protection, as well as lightweighting to make them more efficient as you move towards, whether it's electric or hybrid vehicles to improve, you know, battery life and so forth. So I would say to you that, again, we are in quite a unique position to be able to offer all of that to some of the prime contractors, in addition to, to one of the things where the Department of War is pushing really hard now. I mean, accelerated development, you know, these long design-in cycle times, like a six, seven-year Booker program, and then canceling at the end, the speed of play is going to be absolutely critical. And that's one of the things where if you have products that are already being utilized in other markets that you can leverage. That gives you, again, a little bit of a competitive advantage. And some of the – and they're vehicles. In many cases, they're vehicles. And since we have been very strong in the vehicle market with some of our products, we're able to leverage those. So COTS, commercial off-the-shelf products, are critical. We can leverage those, and we can, again, apply engineering and modifications to – fit them for purpose, whether it's more ruggedized, whether it's more environmental, lighter, higher performance, and so forth. So we're very excited about it, and we've made an investment. And, you know, we haven't seen the returns on those investments yet, but we're highly confident that we're positioning ourselves well here for the future. Dick Rosella | Chairman, President, and CEO: Awesome. Thanks. Again, if you have any questions, please press Operator | Conference Operator: please press star and then one. Our next question comes from Ted Jackson with Northland Securities. Please go ahead. Thanks very much. Ted Jackson | Analyst, Northland Securities: You guys sound so optimistic. It's really, it's infectious. I have a couple of questions. So, Dick, on the domestication of work, you know, and its drive for you, You know, you've been dancing around that, you know, and this whole thing with the NDAA, there's kind of two buckets to, you know, bringing, you know, this stuff back into the country. And one is the actual manufacturing, and the other is the supply chain. You know, and I think, you know, for Alliant, you know, the manufacturing bucket is pretty straightforward. Is there work that you need to do on the supply chain? to bring anything into compliance within DAA by the time it becomes, you know, fully into effect in January? Dick Rosella | Chairman, President, and CEO: A very good question. Dick Rosella | Chairman, President, and CEO: And the answer is there's always going to be work to be done there. There's no quick answers to some of the, you know, rare earth minerals and materials that are being utilized in some of the higher performing products here. So, you're 100% correct. We have the capacity and the capability to produce in North America. We've got ample capacity. And some of the work that we have been doing over the past few years that we've talked about, facility rationalization, and it's there and it's to our advantage. We have about 1.2 million square feet of manufacturing space within the company. And in North America, a substantial portion of that. So, and we've freed up a significant amount of space here that we can redeploy, you know, if there is a quick demand and a ramp up for certain, let's just call it initiatives that may be undertaken. Supply chain is another, it definitely is another challenge. And we've been hot and heavy on it. and working on it, we have a team that's on it, but I will not tell you that, I can't sit here and tell you that it's completely solved. We're subject to other governments and other policies that they may impose, but we've been working hard to minimize the impact, to solidify supply chain sources, but some of that ramp up has not been as quick as we would have liked to have seen it, or the government would have liked to have seen it. So there's clearly going to have to be, the government's going to have to look at that and really decide, you know, there's a desire and there's a reality in whether the two meet. And I think, you know, we'll be working through some of that this year. But it's an excellent question. It's something that, you know, we're on top of. We're doing everything we can possibly do to resource We were already started before some of this had happened for regionalization of supply chain, had nothing to do with tariffs and duties and restrictions and all of that. It was more of a logical business decision. So we were pretty well prepared. On the other hand, we cannot control when things some of the other factors that come into play could impact us. So, Jim, do you have anything you want to add to that? Yeah. Jim Michaud | Chief Financial Officer: What I would tell you, Ted, and this is just really dovetailing what Dick just mentioned, you know, the Feds have, are really investing billions of dollars in a number of companies here in the U.S. And obviously, you know, we've been in contact with all of them. But as Dick just mentioned, it's going to take time, you know, for all of the, you know, supply chain in and around, you know, the rare earths and the, you know, processing of materials and so forth to evolve. And I don't think it's going to all happen when we hit January 1st. But I can tell you, you know, we have teams here that are working diligently with a variety of different suppliers. And, you know, we're setting the foundation for us to, you know, partner with these companies that the government is investing in. Ted Jackson | Analyst, Northland Securities: So, and I did want to get into magnets, but let's just keep on, but, and so I'm gonna jump over there, but, um, but on the, the, the, the main issue for you on the supply chain side is rare earth around magnets. I mean, everyone has that problem. I have to believe that your government is well aware of that. I mean, do you have any dialogue with the government? Do they understand that, you know, at some level you have to be practical or are you just, you know, saying that yourself? And then. Dick Rosella | Chairman, President, and CEO: Now, as Jim mentioned, he says that we've been in close contact with the government and the key officials in the government, working hand in hand, working hand in hand to, and that's why I said to you, you know, at some point in time, you know, reality and there's a desire and there's a push, but there's also reality of the timing of when all of this could occur. But we can, I can just tell you this, we're hand in hand, we're in there, we're working with, you know, the identified sources that are being supported and invested in. Okay. So And we're not letting up on it. We're not stopping there. So it's a continuous effort to make sure that we're working all the angles as well as staying very close to the key government officials and activities that are being undertaken right now. Ted Jackson | Analyst, Northland Securities: Beyond magnets, is there any other critical kind of components or parts that you had to go out and Dick Rosella | Chairman, President, and CEO: resource or or need to resource to move into compliance um there's yes to answer your question there's other components but they're not as complicated or as difficult to resource i mean you may it's a cost factor more than anything uh something else that does impact that as well you know so without getting into all the details of the different components that we're seeing. You are seeing certain supply shortages in pockets of areas, even electronic components. You see some things popping up based upon demand and other areas that are occurring. They're stressing the supply chain side of it. But to answer your question, yes, there are other components that are key that, you know, if you're talking about motors, for a motor to function, whether it's laminated steel, whether it's bearings you know uh it's but there are alternatives the alternatives may be more costly but there are alternatives magnets are a little bit unique in themselves so highlighting the magnet side of it is is important uh and the others are there but you know they get impacted on by based on other factors you know so so anyway it sounds like it'll just be uh Ted Jackson | Analyst, Northland Securities: a topic for discussion every quarter. So as you kind of progress through it, and you're not the only one. I mean, it's so many different companies. I'm just shifting over to kind of the commercial vehicle market and the fourth quarter. You know, so you had like a pig in the python with regards to the fourth quarter. And I guess what I would want to ask on that is, One is if you could kind of quantify it a bit to help us kind of realign how our first quarter will look. You know what I'm saying? Because you typically have some seasonality from fourth to first just to make sure that we think it should be helpful for all analysts in terms of just getting their 26 numbers done. And then on a more macro level, the commercial vehicle market is definitely, I mean, I wouldn't say definitely, but it seems to me is very much on a rebound. You know, you've seen a pickup in freight rates. You know, if you listen to like Ackar and Volvo and all the Class 8 guys, you know, starting in November, they saw order activity bookings pick up substantially. It continued through January. I've talked to some of their suppliers. It continued through February. So, you know, you're going to see a lot of that translate over into an improved demand environment, probably when we get to the back half of 26, assuming that this continues, and it sets up well for 27. Can you talk a little bit about what things that you are supplying into that market and how you see that market playing out as we roll through the year into 27? Dick Rosella | Chairman, President, and CEO: Okay. Is your question about what we supply into the commercial automotive or what do we supply into the truck and construction or all of them? Ted Jackson | Analyst, Northland Securities: I guess you could say all of them. I mean, I was trying not to get too granular, but I'm always interested in more than this. I'm American. Dick Rosella | Chairman, President, and CEO: Okay. So what I would say to you is this. Yes, we did see... And we can echo the fact that we did see some improvements. And when we talk about vehicle, and thanks for bringing it up, because many times people have their own definition of what's vehicle. Our definition of vehicle is commercial automotive, bus, construction, marine, agricultural, truck, and rail. That's our vehicle. That's what we consider vehicle. So we have to continually remind people when we talk about vehicle, And also, actually, we do have power sports in there. And when we talk about vehicle, don't get too wrapped up in thinking of us as an automotive company. We've mentioned we have a target to keep that in single digits. And the major reason for that is it's a long lead time, design in cycle time. It's very cost competitive, and it's heavily capital intensive. And we've chosen to take, you know, and invest our money in other areas. But we do see differences in the, and I've mentioned to you before that power sports, you know, has become automotive-like, commercial automotive-like. Not to the same extent, but it has, you know, gone in the area. But we did see increases in pretty much across the board. And the impact of the one-time effect of of the fourth quarter that you could see going forward, I would tell you about two and a half, two and a half million. Okay. In fourth quarter. So then the, as far as the applications go, when you get into agricultural construction and so forth, we're in several applications, you know, different types of actuators and so forth. But one of the key elements fundamentally that we're in and pretty much across the board in vehicles is steering applications. So it's agnostic to whether it's gas or, you know, petrol or whether it's electrification. So we can be utilized in each. We've also involved in electrohydraulics for some of the larger vehicles. Again, primarily in steering areas. So we have a great expertise in steering. And, you know, and that's kind of where we focus our efforts not just in, you know, that vehicle, but also in some of the industrial applications as well. Okay. Does that help you? Ted Jackson | Analyst, Northland Securities: That does. And I know we're at the kind of timeline, so I'll stop. So thanks again. Dick Rosella | Chairman, President, and CEO: Okay. Thank you, Ted. Dick Rosella | Chairman, President, and CEO: Thank you, everyone. And I think if there's no more questions, which I believe there aren't. Operator, can you confirm that? Operator | Conference Operator: Yeah, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Dick Rosella | Chairman, President, and CEO: Well, thank you, everyone, for joining us on today's call and for your interest in Alliant. We will be participating in the JPMorgan Industrials Conference in Washington, D.C., on March 17. 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 first quarter 2026 results. Dick Rosella | Chairman, President, and CEO: Have a great day, and that will conclude the call, operator. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. jsPDF 3.0.3 D:20260608224717-00'00'

NASDAQ:ALNT Q3 2025 Earnings Call Transcript Generated on 6/8/2026 Conference Operator | Operator: Good day, and welcome to the Alliant, Inc. Third Quarter Fiscal 2025 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please ignore conference pressures for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To retry your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Craig Mihalik, Investor Relations. Please go ahead. Craig Mihalik | Investor Relations: Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Alliant. On the call today are Dick Rosella, the Chairman, President, and CEO, and Jim Michaud, our Chief Financial Officer. Dick and Jim will review our third quarter 2025 results, provide a strategic and operational update, and share our outlook. We'll then open the line for your questions. As a reminder, our Q3 earnings release and the accompanying slide presentation are available on our website at Alliant.com. If you're following along, please turn to slide two 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 our Q3 earnings release. We also discussed 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 earnings release, as well as the slides. So with that, please turn to slide three, and I'll turn it over to Dick to begin. Dick Rosella | Chairman, President, and CEO: Dick. Thank you, Craig, and welcome, everyone. Dick Rosella | Chairman, President, and CEO: Alliant delivered another strong quarter, underscored by double-digit revenue growth record gross margin, and continued deleveraging of our balance sheet. These results reflect the combination of healthy demand across key end markets and the tangible benefits of the efficiency initiatives we have put in place through our Simplify to Accelerate Now program. On the demand side, we saw notable strength in our industrial verticals, particularly power quality solutions for data center applications, as well as improving trends in automation. Our defense programs executed well, and the medical market delivered steady growth, even as mobility solutions remained soft. In addition, our vehicle business improved, led by contributions from commercial automotive and construction. Profitability was another highlight, with gross margin reaching a new record and operating leverage driving meaningful year-over-year improvements. Importantly, these gains were not only a result of volume, but also a reflection of mixed shift toward higher value programs and ongoing cost discipline. Cash generation and balance sheet strikes remain central to our story. Year to date, we have delivered significantly higher operating cash flow and further reduced debt, which has lowered our leverage ratio and enhanced financial flexibility. Jim will walk through some temporary impacts of the quarter, and at a high level, our results so far this year demonstrate our ability to convert top-line performance into stronger profitability, robust cash flow, and balance sheet progress. Stepping back, Q3 was not just about the numbers. It was about discipline and execution. The results highlight the resilience of our diversified portfolio, the value of our operational transformation, and our ongoing alignment with long-term secular growth drivers. Together, these elements reinforce the momentum we are building as we move toward year-end and beyond. With that, let me turn it over to Jim for a more in-depth review of the financials. Jim Michaud | Chief Financial Officer: Thank you, Dick, and good morning, everyone. Please turn to slide five. Q3 revenue increased $13.5 million year-over-year, reaching $138.7 million, reflecting strong industrial market demand along with solid performance in our other core end markets. Foreign exchange contributed $2.3 million in tailwinds, with the remainder organic. Sequentially, revenue declined less than 1%. as the second quarter included 3 to 4 million of customer pull-ins related to anticipated supply constraints on components with heavy rare earth content. Sales to U.S. customers accounted for 57% of Q3 revenue, with Europe, Canada, and Asia Pacific representing the balance. Breaking down performance by market. Industrial market revenue advanced 20%. led by strong demand for power quality solutions in data centers, as well as improving industrial automation trends, which more than offset softness in oil and gas. Medical grew 6%, with surgical instruments offsetting weaker mobility solutions. Vehicle sales were up 6%, supported by commercial, automotive, and construction. Aerospace and defense revenue was up 2%, as scheduled defense and space program deliveries continued. We did experience some short-term shipment delays linked to customer validations during our Dothan facility transition, but overall, demand remains intact and positions us well as validations complete. Distribution channel sales were down 6%, though they represent a smaller share of our overall mix. Turning to slide six, here we show the composition of our revenue over the trailing 12 months, along with the year-over-year change in each market the key drivers of that change. As you can see, our industrial market is our largest vertical at 48% of total revenue, supported by continued strength in data center applications. While industrial automation is still working through the tail end of destocking, we are seeing healthier order flow, which has helped offset softer demand in oil and gas applications. Aerospace and defense increased to 15% of revenue, reflecting both timing of defense and space program deliveries, as well as strong execution on our growth initiatives in this sector. Demand remains solid, and our pipeline and defense continues to provide visibility into sustained growth. Medical accounted for 15% of revenue, led by higher demand for surgical instruments. This growth was partially offset by softness in certain pump-related products and mobility solutions, but overall, the medical sector continues to represent a steady contributor. Vehicle represented 17% of revenue compared with 22% in the prior year. The year-over-year decline primarily reflects reduced demand in power sports and select truck applications. That said, within the quarter, we did see strength from commercial automotive helping to partially balance the softness in recreational markets. Overall, this slide reinforces that our revenue base is better aligned with higher value margin accretive opportunities. We are deliberately positioning the company towards markets with strong secular growth drivers while also managing through areas experiencing softness. Turning to slide seven. gross profit reached $46.2 million, with gross margin expanding to a record 33.3%, up 190 basis points year over year and 10 basis points sequentially. This marks our fifth consecutive quarter of margin expansion. Drivers included mixed improvement, higher volumes, and disciplined lean manufacturing execution. On slide eight, operating income increased sharply to $12.2 million, or 8.8% of revenue, reflecting the continued scalability of our business model. This represents an improvement of 350 basis points year over year and 40 basis points sequentially. Operating leverage was a key driver as operating expenses declined to 24.5% of revenue, a 160 basis point improvement versus last year, even as we continue to invest in strategic initiatives. This demonstrates the effectiveness of our cost discipline and the structural benefits we are capturing. Our simplified to accelerate now program continues to play a central role in driving these results. We delivered $10 million in annualized savings in 2024, and we remain on track to achieve an additional $6 to $7 million in 2025. These savings are being realized through footprint optimization accelerated product development, and lean manufacturing disciplines. Importantly, we are already beginning to see margin tailwinds from the Dothan Fabrication Center of Excellence, with the full benefit expected to phase in during the latter part of 2025. We did record $800,000 in realignment costs during the third quarter to support this transformation, but these actions are positioning us for sustained efficiency and margin improvement moving forward. Slide 9 shows our bottom line performance. Net income more than tripled year over year to $6.5 million, or $0.39 per diluted share. Adjusted net income was $9.9 million, or $0.59 per share. Our effective income tax rate was 22.2% for the third quarter of 2025, and we continue to expect our full year rate to land between 21% and 23%. Adjusted EBITDA increased to 20.3 million, or 14.6% of revenue, driven by strong conversion on higher volumes and a more favorable mix. This represents margin expansion of 310 basis points year-over-year and 20 basis points sequentially. Turning to slide 10, year-to-date operating cash flow was 43.1 million, up 46% from last year. This reflects both stronger profit generation and disciplined working capital execution. Our free cash flow this past quarter was impacted by approximately $5 million of temporary inventory billed largely tied to rare earth magnets and to ensure continuity during the Dothan transition. In addition, we experienced a modest increase in sales outstanding which rose to 61 days, reflecting sales mix, and we also had the timing impact of certain insurance premium payments. Despite these temporary factors, our underlying cash generation remains very strong. Year-to-date capital expenditures of $5.1 million reflected continued investment in key customer-driven projects. Given project timing and fourth-quarter expectations, we have narrowed our full-year CapEx forecast to $6.5 to $8.5 million from the prior $8 to $10 million range. Importantly, we are executing well against our three financial priorities for 2025. Reducing inventory and strengthening working capital management, we've already improved inventory turns to three in Q3, up from 2.7 at year end, despite the temporary build this quarter. Cost discipline, evident in our SG&A leverage and ongoing benefits, was simplified to accelerate now. Reducing debt, supported by the strong cash flow we've generated. With that, let's turn to slide 11 to review the impact on our balance sheet. Debt declined by 12 million sequentially in Q3, bringing total year-to-date debt reduction to nearly 34 million. Net debt now stands at 150.8 million, and our leverage ratio has improved 2.1 times compared with three at the end of 2024. This consistent deleveraging combined with strong liquidity provides us with substantial flexibility to continue investing in strategic priorities while also strengthening our financial foundation. With that, if you advance to slide 12, I will now turn the call back over to Dick. Dick Rosella | Chairman, President, and CEO: Thank you, Jim. Orders in Q3 totaled 133.1 million, down slightly from Q2 but up significantly from last year. Our book-to-bill ratio of 0.96 reflects the normal seasonal cadence we typically see, and importantly, it also underscores solid underlying demand, particularly in our industrial and A&D markets, despite the cancellation of the M10 Booker tank program by the U.S. Army, which did have a direct impact on Alliant. Our backlog ended the quarter at 231 million, with the majority expected to ship within the next three to nine months, consistent with our historical conversion patterns. This backlog mix, together with our active quoting pipeline, gives us confidence in the resiliency of demand. As we look ahead, we recognize that the global industrial environment is gradually improving, but remains uneven. Policy and tariff risks Supply normalization and cost volatility continued to influence capital deployment across many verticals. We continue to proactively address tariff-related challenges. Although mitigation efforts are underway, tariffs resulted in a net quarterly impact of approximately $385,000 that we were unable to recover through pricing or other measures. The majority of this impact occurred within our power quality business and mitigation efforts are already underway. On rare earth supply, even though it appears that we will gain some breathing room given the agreement that was reached with China, our multi-pronged strategy, which includes broadening suppliers, qualifying alternative materials, and managing inventory dynamically in close collaboration with customers, will continue to be central to our strategic supply chain security initiatives. At the same time, our focus is primarily on advancing strategic initiatives that enhance long-term value, driving further margin expansion, maintaining working capital discipline, and investing in technology-forward higher-value solutions. The operational and financial momentum we generated in Q3 provides a strong foundation to carry forward into the balance of the year. Finally, it's important to remember that secular growth drivers such as electrification, automation, energy efficiency, digital infrastructure, and precision control continue to underpin our strategy. These themes align directly with Alliant's capabilities and positions us to deliver sustainable, profitable growth through varying market conditions. Dick Rosella | Chairman, President, and CEO: With that, operator, please open the line for questions. Yes, thank you. Conference Operator | Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you would like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble the roster. And the first question comes from Tomasano with J.P. Morgan. Hello, Duke and Jim. Dick Rosella | Chairman, President, and CEO: Good morning, Tom. How are you? Tomasano | Analyst, J.P. Morgan: Good, thank you. I would like to ask about the orders and backlogs for the first. And the book-to-bill ratio remained healthy at 0.96, as you mentioned. And how would you view the quality and the visibilities of the current backlog? And are there any areas of concerns? Dick Rosella | Chairman, President, and CEO: I would say to you that overall we're – and I want to clarify one thing. We would have been above one, but we did take a cancellation – in our backlog for the M10 Booker program cancellation. So that's in there. And without that, we would have been above one. So that's just a little more clarity on that. As far as the quality goes, I think we're very pleased with what we're seeing. It's the power quality area, data centers is coming strong. We're seeing good activity in the defense area. We're seeing industrial picking up, and we also see Europe has picked up, started to pick up, let's put it that way. It's not back to where it was, but it has started to pick up in the industrial areas. So across the board, I think we're fairly encouraged with the quality and the margin potential generation from the new orders and the backlog we have. Tomasano | Analyst, J.P. Morgan: Thank you, and follow up on the margin side, especially like Simplify to Accelerate Now initiatives. Could you elaborate on the progress and the future potential of the initiatives for 2026? Are there further savings or margin opportunities ahead? Dick Rosella | Chairman, President, and CEO: Yeah, absolutely. So this year, I mean, I would say to you that some of the actions that were taken in last year and this year, we'll call them, some of them were pretty low-hanging fruit, and we have validated that the actions that we're taking did result in real cost savings. The major action we've taken this year is to, in our Dothan facility, which had final assembly integration test operations, also some machining and so forth, and was co-mingled between many different markets and different types of products. The major effort that we undertook this year was to transfer the production from Dothan into two other facilities, one in Reynosa, Mexico, and in Tulsa, Oklahoma, which better align with the markets and the products that are being produced. And Dothan, what we will retain is we have a strong capability in the machining areas. And so this is where you hear us talk about the transition of Dothan into a fabrication center of excellence, that'll be underway. And I will say to you that that will be started in the beginning of the year after the transfer. And the transfer is fully expected to be complete by the end of this year and moving out throughout next year. There's plenty of opportunities for us for cost optimization when we look at the components that we have been buying or purchasing and actually evaluating some of the business we have and looking at better strategic sourcing. I think so, again, I would look at that opportunity as we really begin to move that fabrication center forward. That's where we will see some fairly significant cost savings and potential for us to grow our business in other areas as well. We have some good opportunities that we're working with and they were contingent upon us continue to expand for high precision motion applications and Dothan will give us an opportunity to do that. I also want to stress that while we say fabrication because we're talking about additive manufacturing as well as just machining and not just machining operations. So that's why in the past you would have heard us say Machining Center of Excellence because that's what they do. but we do believe that there's definite value to be added from fabrication. In addition to that, we are setting guidelines and working hard with all of our operations. And Tomo, we had to untangle some of our businesses, which when I say that, the focus on what were the investments necessary, what's the design cycle time, what's the lead in cycle time for design wins, and types of products being produced. And that caused some inefficiencies in the process. So we're doing that. We're much better aligned, and we're close to completing these efforts, much better aligned on the vertical markets that we're servicing, as well as the production processes that they're much more consistent within each, which then allows us to go back and really address areas of, you know, that we feel that we have some significant improvement opportunities. So that's another area. So that'll be unfolding in the next year. So definitely some cost savings, although I don't think we've quantified that exactly yet. In addition to that, I say more importantly is the front end. Looking at business opportunities that provide us better margin capabilities or potential and not getting seduced into some other activities that look, you know, the value looks high, but the true bottom line value is not as great and costs a lot from a capital investment standpoint. So we're very focused on the front end, making sure that we're working, we're focused on the right markets that can meet our margin goals and not get diverted based on some what look like great opportunities, but underlying it is long-term efforts, a lot of capital investment and sometimes not as good a return. So plenty going on. Dick Rosella | Chairman, President, and CEO: Thank you, Dick. Congrats on the quarter. Thank you. Thank you. Conference Operator | Operator: And the next question comes from Greg Palmer, Craig Hallam Capital Group. Greg Palmer | Analyst, Craig Hallam Capital Group: Yeah, thanks. Good morning. Congrats as well from me. I think from a segment level, industrial certainly stood out. And I know you called out stronger data center activities. So maybe you can just remind us exactly what you're selling into that market. Is there something going on that's causing the step up in demand there? I think last quarter you mentioned you're doing a facility expansion. So just wanted to get a little bit more color on that market specifically. Dick Rosella | Chairman, President, and CEO: Sure. So you're exactly right. Right, Greg. What's going on in that area is really the big uptick that we've seen or some of the uptick that we've seen is in the data center solutions and the data center solutions around our power quality equipment. So we are and we are expanding our facilities. That's our primary facility for producing that product. And we expect that to come online in early, let's say, second quarter of next year. but we still continue to see or have seen a significant demand uptick, and we don't see it slowing down anytime soon. So that is one of the big drivers, and that also, fortunately for us, is a margin accretive product line for us. In industrial, the automation side. We talked in the past about that. You know, we had a couple years ago, we had a banner year, but it was based on supply chain, issues with supply chain. And when demand freed up, you know, we delivered at a very high rate. In fact, we said we had a $46 million headwind going into last year. Okay. And then if we could average the three years out, and we would see demand coming back to a normalized level, and we've actually seen that again. So each quarter, we've seen a nice step up in our run rates, and we're getting close, and I say close, we're not quite there yet, but we're getting close to where we think the normalized run rate should be. And again, fortunately, it's in the higher-end controls area where our margins are accretive as well. The other industrial markets that we're seeing some improvement, as I mentioned, Europe. Europe has been down and down quite significantly. And the impact on us was from a couple of our businesses is about 25% reduction. And we're not back, but we're starting to see we're chipping back a little bit here. And we've got a runway to go there to get back to where we were and hopefully beyond. But they're starting to see some positive signs. although I do think that'll be a slower ramp up into next year. Defense side, good opportunities. We're working on many new opportunities, certainly in the drone space. Applications where we have a significant manufacturing capability that we've had for years that we're unleashing to make sure that we support the opportunities that are coming our way. And we're well positioned, whether it's the lower cost disposable drone or up to the highest end, highest performing drones, the requirements in the market. So there's a lot of activity going on in that space, and we're addressing it as fast as we can. And we're pretty encouraged that we're well positioned to take advantage of that. And on top of that, munitions. I mean, we know some orders for munitions have been released. And it's our turn to see those orders come through, but there's definitely some encouraging signs that the volume will increase there as well. So overall, and medical was good too. We have this idea of the medical instrumentation, surgical side of it has been positive as well. So signs are good. We talked about in the conversation with Tomo a lot of the activities we're doing to improve our cost structure, improve efficiencies, and Now, I think your question, you're talking about where the growth opportunities are and some of the activities that we're addressing and facing today. Greg Palmer | Analyst, Craig Hallam Capital Group: When might we see more of like an uptick or a step up in the drone space specifically? And then maybe you can just confirm, since you mentioned defense overall as a segment, what was the bookings impact on that M10 program? Dick Rosella | Chairman, President, and CEO: The bookings impact for this year was about $5 million that we had to take a hit on. And, you know, the longer term impact for us was, you know, a backlog of shipments, you know, averaging around $7 million a year for a number of years forward. So, you know, a lot of work was done on that. There are, you know, we're reviewing costs right now, and there's certainly cancellations coming. We don't know if there will be another outlet for that the M10 Booker tank. But right now, the way it seems is that it is going to wind down. They're just completing whatever was on order and canceling the rest. And I say on order, already in production and canceling the rest. But $5 million in this quarter. So as I mentioned, it would have been a positive book-to-bill ratio. As far as the drones, when you see it, I think, you know, It's like anything else. You have to go through the design in cycle time, get approved. We already have been in drone applications, and we're just seeing more. But I would tell you that they'll be stepping up throughout the year next year. Greg Palmer | Analyst, Craig Hallam Capital Group: Yep. Okay, perfect. And then just switching over to kind of profitability, I mean, I think it's pretty encouraging. You're generating mid-teens EBITDA margins. I mean, back-to-back really good quarters. I'm guessing you're not going to tell us where that can eventually land, but you know, it seems like there's still a pretty big chunk of your business that's operating well below, you know, normalized revenue levels or at least revenue levels from a few years ago. So volumes continue to come back. I'm guessing you start or you continue to see additional operating leverage. I mean, is that a fair statement? Dick Rosella | Chairman, President, and CEO: Yeah, definitely a fair statement. And I got a real focus on, um, looking at each individual, look at the foundation we have built, what we call technology units and how we regroup the companies into business units and getting very specific and setting targets. All have to contribute and all have to improve. And that's the key. And I think the bulk of the work in order to have clarity and line of sight and what could be accomplished there is coming into place here now. So I think I feel comfortable that's going to drive improvements and continued improvements in all areas, and that's our goal anyway. So definitely some opportunities there. Greg Palmer | Analyst, Craig Hallam Capital Group: Yep, okay. All right, well, keep it up. Thanks, and I'll hop back in the queue. Dick Rosella | Chairman, President, and CEO: Thank you. Conference Operator | Operator: Thank you. And once again, please press star, then 1 if you would like to ask a question. And the next question comes from Ted Jackson with Northland Securities. Ted Jackson | Analyst, Northland Securities: Thanks very much. Good morning. Dick Rosella | Chairman, President, and CEO: Morning. Dick Rosella | Chairman, President, and CEO: Morning, Ted. Ted Jackson | Analyst, Northland Securities: So I got a few questions for you. Just a few cleanup items and then some bigger ones. But with the whole thing with the tank, which is a disappointment, will there be anything that you have to write down in future periods because of that? Dick Rosella | Chairman, President, and CEO: No. No, there's full recovery of costs and transit. We're working through that right now. But no, we will not have to write anything down. Ted Jackson | Analyst, Northland Securities: Okay. Then going over to the positive FX impact, within your revenue verticals, where was that? Jim Michaud | Chief Financial Officer: That was in the European, in the Euro-denominated transactions. Ted Jackson | Analyst, Northland Securities: But was it across any verticals? Was it concentrated into anything in particular, I mean, industrial? Dick Rosella | Chairman, President, and CEO: No, no. No, no. Geographic. Okay. Ted Jackson | Analyst, Northland Securities: And then can you remind us, I don't know if you had discussed this with the prior call, but the orders that got pulled forward from 3Q into 2Q, what verticals were those in? Dick Rosella | Chairman, President, and CEO: Power quality, primarily. Okay. HVACs. Ted Jackson | Analyst, Northland Securities: Um, then, uh, in the vehicle market, you know, I mean, I know you've worked very, very hard at lowering your exposure within the power sports world, you know, and it's, you know, but I'm kind of curious, you know, with regards to that segment, you know, if you could maybe cover, you know, uh, kind of the mix of where that revenue comes from these days, you know, you, you highlighted strength in, um, uh, uh, commercial vehicle and construction. Um, and then, so I'm kind of curious, like, um, how much of that business now is exposed within power sports? What's the mix for that to construction? You know, how much is commercial vehicle? And then maybe, you know, what, you know, some color with regards to, like, construction and commercial vehicle as to sort of where are you providing your solutions and what? Dick Rosella | Chairman, President, and CEO: Okay. So I would say to you first, Ted, we don't and we haven't in the past and, you know, giving you the real specifics on the percentages of each in the market, but I will give you some guidance on it. I mean, we've said to you that commercial automotive would always be something that we would stress to be below 10% of our annual revenues, and it is below 10% of our annual revenues, okay? And why do we want to do that? Well, we do like the core unit volume that gives us the strategic purchasing power. It gives us the ability to apply what we have in the automotive markets into other related vehicle markets. So getting a cost advantage there. But I would tell you that our vehicle, our commercial automotive market is performing well. It has definitely where when we started talking about it, you know, four or five years ago, that there were real challenges there, that, you know, the book of business that we had acquired and some of the challenges in the market itself through supply chain and, you know, price increases and so forth. We worked our way through it, and it's something that's performing, you know, I would tell you the net differential has been very, very positive for us. As far as power sports go, we did mention that, we have mentioned that one of our major customers had a two source, even the day we bought the company was going to have multiple sources while we were single source for a long time. They had advised us that they were going to be having multiple sources of supply and therefore we did lose portion of that business starting a little over a year ago. So that business is down. The market's been down. And it is below 10% of our business. So before, if you were back in 2013, 14 timeframe, you would have realized that that was maybe 22, 23% of our business. And now it's below 10%. So we think that's healthy. And I would want to make a statement. It's not that We want it to be less. It is. And, you know, there's certainly some things that are going to impact it going forward. You know, the tariffs, the USMCA agreements, the content of North American content that's in vehicles and so forth. So, you know, we've got a very robust solution that's, you know, it's the higher end of the performance range and we're applying that in other areas. So, We like the diversification we're seeing into other markets. But power sports is definitely from where it was in its heyday early on. And when power steering became a part of every vehicle, we were one of the leaders in that. And we enjoyed higher margins. But it's definitely a challenge today in getting automotive-like, I'll call it. And then the rest of it is made up of the other vehicles. We talk about large trucks, rail, marine, construction, bus, all of that. So it's a combination of all of those agricultural. And those are all solid. And those are all solid. And we're emphasizing that we'd like to see growth in those as well. That's about the best of the color I can give you at this point. I hope that helps. Ted Jackson | Analyst, Northland Securities: Oh, it was great color, Jake. I appreciate it. You know what I mean? Because if you look at that section, that segment, excuse me, you know what I mean? You know, I just said like a little over a year ago, you know, you kind of, you know, went to dual source. But, you know, the business is really stabilized. Let's just call it $20, $22 million in quarterly revenue. And, you know, now that that business is where it's at, you see what I'm saying? The headwinds are gone. Of it, you know, I'm talking about power sports are giving away. So I'm kind of wanting to understand the mix of it to see, you know, where, you know, what growth will come now that you have, you know what I mean? Because our sports market in and of itself is clearly, you know, flatlining at this point. Then you have these other verticals as well. So I want to understand it because I, you know, the segment's actually poised probably to start performing better. Dick Rosella | Chairman, President, and CEO: I had another question I want to ask you really quick. Give me a second. I lost my train of thought. I'll step out of line because I just completely went out of my mind. If I think about it, I'll punch back in. Thanks. Okay. Thanks, Ted. Thank you. Conference Operator | Operator: And that does conclude the question and answer session, so I would like to turn it over to management for any closing comments. Dick Rosella | Chairman, President, and CEO: Well, thank you, everyone, for joining us on today's call and for your interest in Alliant. 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 fourth quarter 2025 results. Have a great day. Dick Rosella | Chairman, President, and CEO: Thank you. The conference is now concluded. Conference Operator | Operator: Thank you for attending today's presentation. Dick Rosella | Chairman, President, and CEO: We now disconnect your lines. jsPDF 3.0.3 D:20260608224913-00'00'

NASDAQ:ALNT Q2 2025 Earnings Call Transcript Generated on 6/9/2026 Operator | Conference Operator: Good morning and welcome to the Alliance Inc. second quarter fiscal year 2025 financial results conference call. All participants will be in listen only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, spin one. Please note, this event is being recorded. I would now like to turn the conference over to Craig Mahalik, investor relations. Please go ahead. Craig Mahalik | Investor Relations: Yeah, thank you and good morning everyone. We certainly appreciate your time today as well as your interest in Alliance. Joining me today are Dick Wazella, our chairman, president and CEO, and Jim Michaud, our chief financial officer. Dick and Jim will walk through our second quarter 2025 results, provide a strategic update and share our outlook. We'll then open up the call for Q&A. 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 alliant.com along with the slides that accompany today's discussion. If you're reviewing those slides, please turn to slide two for the safe harbor statement. As you are aware, we may make forward looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks 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 scc.gov. I want to point out as well that during today's call, we will discuss some non-GAP measures which we believe will be useful and evaluated in our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAP. We have provided reconciliations of non-GAP to comparable GAP measures in the tables accompanying the earnings release as well as the slides. So with that, please turn to slide three Dick Wazella | Chairman, President and CEO: and I'll turn it over to Dick to begin. Moderator | Conference Moderator: Dick? Dick Wazella | Chairman, President and CEO: Thank you, Craig, and welcome everyone. We continue to Dick Wazella | Chairman, President and CEO: build momentum in the second quarter, delivering record gross margin, strong profitability, and exceptional cash generation. This performance reflects the consistent execution of our operational priorities and the alignment we are seeing across our markets, organization, and strategic roadmap. Revenue increased 5% sequentially and 3% -over-year, supported by solid demand in data center infrastructure, defense, and select high-value medical applications. While power sports within the vehicle market remained under pressure, we did see healthy sequential growth from that vertical. It is worth noting that approximately $3-4 million of revenue was pulled into the second quarter as customers accelerated shipments due to concerns around supply constraints and heavy rare earth materials. Gross margin reached a record 33.2%, up 100 basis points sequentially and 330 basis points from a year ago, driven by a favorable mix, higher volumes, and continued improvement in operating discipline. This translated into meaningful EBITDA growth and a significant increase in profitability, with net income up 58% from Q1 and nearly five-fold -over-year. We also generated $24.5 million in operating cash during the quarter, another record which enabled us to further reduce debt and strengthen our balance sheet. Our Simplify to Accelerate Now program remains central to our performance, driving efficiency, aligning with evolving customer needs, and enhancing responsiveness across our global operations. The operational foundation we have built is delivering results even in a dynamic external environment, including tariff and material supply challenges, particularly in heavy rare earth where we are actively managing constraints. The initiatives we put in place are tracking well, both in terms of cost savings and operational agility. For example, our Dothan restructuring, launched as a quarterstone of the 2025 effort, is on track and expected to play a meaningful role in achieving the $6-7 million in targeted annualized savings this year. Looking ahead, we remain focused on building on this momentum, executing with discipline, scaling the benefits of our transformation initiatives, and advancing toward our long-term financial and strategic objectives. With that, let me turn it over to Jim for a more in-depth review of the financials. Dick Wazella | Chairman, President and CEO: Thank you, Dick, Jim Michaud | Chief Financial Officer: and good morning, everyone. Let's begin with slide five. Revenue for the second quarter was $139.6 million, a 3% increase -over-year and up 5% sequentially. This growth was driven by continued strength in our aerospace and defense programs, industrial markets, especially HVAC and data center infrastructure, and select medical applications. Revenue growth also benefited from a favorable foreign exchange impact of $2.4 million. Sales to U.S. customers accounted for 55% of total revenue in line with last year. The geographic and end-market diversification of our portfolio remains a key strength. Looking at our market performance, aerospace and defense grew 13%, reflecting program timing and strong execution. We continue to see a healthy pipeline of opportunities in the defense sector and believe this market will remain a solid contributor to growth as we move forward. Medical was up 4%, led by solid demand for surgical instruments. The industrial market increased 3%, driven by continued strength for HVAC and data center market applications where our power quality solutions are needed. We are also encouraged by early signs of recovery in industrial automation, where demand has been challenged over the past year given the inventory de-stocking. We are beginning to see more consistent activity and ordering trends. Vehicle revenue was down 7% due to ongoing softness in power sports, although we did see sequential sales improvement in the vehicle market. Now turning to slide 6 for the composition of our revenue over the trailing 12 months, along with the key catalysts driving these changes. We have seen a meaningful shift in mix, with growth in higher value, industrial and aerospace defense solutions helping to offset ongoing pressure in the vehicle market. This evolution reflects not only external market dynamics such as softness in recreational spend and volatility in automation, but also our deliberate effort to focus on more resilient margin accretive applications. The industrial sector is our largest market and reflects similar impacts as the recent quarter. Aerospace and defense continues to be a growth driver. Meanwhile, our vehicle exposure has been intentionally refined. While near-term demand in power sports remains soft, our proactive repositioning away from lower margin programs is helping to protect profitability. Overall, our revenue mix today is more diversified, more balanced, and better aligned with where we see long-term opportunity, and that puts us in a strong position to manage near-term headwinds while driving sustained performance. On slide 7, we are pleased to report a record gross margin of 33.2%, up 330 basis points from last year and 100 basis points sequentially. This improvement marks our fourth consecutive quarter of expansion. Key drivers included favorable mix, higher volumes, and ongoing implementation of lean manufacturing disciplines, as well as our Simplified to Accelerate Now program. Slide 8 highlights our operating leverage. Operating income more than doubled to $11.7 million, with operating margin rising 480 basis points year over year to .4% and approving 180 basis points sequentially. SG&A was .7% of sales, down 60 basis points from last year, demonstrating cost discipline despite inflationary and incentive-based pressures. Restructuring and business realignment costs were $1.1 million in the quarter, supporting future margin improvement. Turning to slide 9, net income increased to $5.6 million, or $0.34 per diluted share. On an adjusted basis, net income was $9.5 million, or $0.57 per diluted share, up from $0.46 per share in Q1 and $0.29 per share in the prior year. Our effective tax rate for Q2 was 23.1%, as we continue to expect our full rate to land between 21 and 23%. As for interest expense, we did see an increase despite lower debt levels. As we discussed last quarter, this was largely due to the expiration of two favorable interest rate swaps late last year, which were replaced at higher prevailing rates. While still competitive in today's market, they are not as favorable as the prior arrangements. Additionally, our amended credit facility carries a modestly higher spread, contributing to the increase. That said, our overall interest burden remains manageable, and our strong cash flow is enabling continuing deleveraging. Adjusted EBITDA increased meaningful to 20.1 million, or .4% of revenue, driving strong conversion on higher volumes and a more favorable mix. This represents margin expansion of 420 basis points year over year, and 120 basis points sequentially. Turning to slide 10, we delivered record operating cash flow of 24.5 million in the quarter, up 76% sequentially, and nearly three times the level generated in the same period last year. On a -to-date basis, operating cash flow now stands at 38.4 million, more than double what we achieved in the first half of 2024. This strong performance reflects both profit growth and disciplined working capital execution. Our inventory turns improved to 3.1 times, up from 2.7 at the end of the year. This was driven by tighter demand alignment, better planning, and continued progress under our Simplify to Accelerate Now initiative. At the same time, our day sales are standing improved, signaling stronger collections and more efficient conversion of sales into cash. We used a portion of our cash to reduce debt by 20 million in the quarter, bringing us to the balance sheet discussion on slide 11. We ended Q2 with nearly 50 million in cash and lowered our net debt by 35.8 million year to date, bringing our leverage ratio down to 2.3 times, compared with 3 at the end of last year. Our bank-defined leverage ratio, which excludes certain items like foreign cash, was 2.9 times well within covenant levels. Capital expenditures were 3.2 million through the first half of the year. We have refined our full year 2025 capital expenders outlook to a range of 8 to 10 million, compared with the prior estimate of 10 to 12. Overall, we are executing well across all three of our financial priorities for 2025. Improving inventory turns and working capital, maintaining cost discipline, and reducing debt. These efforts position us well to continue expanding profitability and create financial flexibility for strategic execution. With that, if Dick Wazella | Chairman, President and CEO: you advance to slide 12, I will now return the call back over to Dick. Thank you, Jim. Dick Wazella | Chairman, President and CEO: While Dick Wazella | Chairman, President and CEO: our -to-bill ratio was modestly Dick Wazella | Chairman, President and CEO: below 1 at .97, demand trends remained steady in key sectors like industrial, where our power quality solutions continue to perform well, and in aerospace and defense, where we are seeing continued traction with both legacy and new programs. Backlog ended the quarter at 236.6 million, down slightly from Q1 and prior levels, as customers continued to manage through inventory normalization. The majority of our backlog is still expected to convert within three to nine months, which is consistent with historical patterns. Importantly, we are seeing signs that the de-stocking cycle is largely behind us, especially in the industrial automation and markets. Order activity is becoming more consistent, and quoting volumes are improving in several key verticals, which gives us confidence heading into the second half. That said, we do expect third quarter sales to be sequentially lower due to the three to four million in revenue that was pulled into Q2. While Europe is showing signs of stabilization, the region has not fully recovered, and Q3 is typically a seasonally weaker period in Europe. As we look ahead, our strategy remains unchanged to drive sustainable, profitable growth while delivering lasting value to our customers, employees, and shareholders. We continue to align the business around margin-accretive, technology-forward solutions that meet the evolving needs of our customers in motion, control, and power. The benefits of our Simplify to Accelerate Now program are clearly reflected in our performance through margin expansion, operating leverage, Dick Wazella | Chairman, President and CEO: improved working capital, and stronger cash flow. We remain proactive in Dick Wazella | Chairman, President and CEO: managing external risks, including tariffs and rare earth supply dynamics. Our mitigation strategies are proving effective, and we are confident in our ability to protect both supply continuity and profitability. More broadly, we are encouraged by constructive signs across our serve markets, supported by long-term trends in electrification, automation, energy efficiency, and precision control. This includes seeing early signs of recover in industrial automation and steady momentum in A&D. The operational foundation we have built, the strength of our balance sheet, and the momentum behind our core initiatives positions us well to execute through the second half and to drive long-term value well beyond. Dick Wazella | Chairman, President and CEO: With that, Operator, Dick Wazella | Chairman, President and CEO: let's Dick Wazella | Chairman, President and CEO: open the line for questions. Operator | Conference Operator: Certainly. We will now begin the question and answer session. To ask a question, you may press star and 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, you may press star then do. Today's first question comes from Greg Palm with Craig Hellam Capital Group. Please go ahead. Greg Palm | Analyst, Craig-Hallum Capital Group: Hey, good morning. Thanks for taking the questions, and congrats on the results. Thank you, Greg. Good morning to you. So, I just want to maybe understand, again, kind of what you're seeing out there. So, it sounds like, you know, you're feeling good that the de-stocking is in the rear view mirror. You're starting to maybe see some green shoots in industrial. A&D remains strong. You know, anything else you want to maybe call out or highlight? Dick Wazella | Chairman, President and CEO: No, I think you've hit the highlights. Greg Palm | Analyst, Craig-Hallum Capital Group: And in A&D specifically, what, maybe remind us, number one, you know, kind of what your major exposure areas are and just in terms of, you know, kind of visibility to the remainder of the year and even next, you know, where, where, where are we at? How, how strong is the Dick Wazella | Chairman, President and CEO: demand? Sure. Well, A&D is certainly in some of the applications that we work on, we do get some good visibility, long-term visibility, and we work on longer term contracts. And we continue to do that. So, we are seeing some very positive results. We've made some significant improvements in our operating capabilities. Some of the restructure we've talked about here that's underway that solidifies operations and gives us and provides greater strength within certain facilities. I think that's playing out well. We're meeting with key customers on a regular basis. And, and, and I think from a legacy business standpoint, and some of the applications we're on, we do see that there is some opportunity to increase volumes and to hopefully expand margins as we've consolidated the operations. Some of the new applications, you know, with government programs or military programs, there's usually risk and there's no guarantee that those programs come to fruition. We have seen a few cancellations. We've seen a few programs move to the right. We're seeing other programs moving to the left, meaning accelerating. So it's a mixed bag right now. We feel, you know, there's a transition going on in terms of the way warfare is going to be fought and the types of vehicles or devices that are going to be needed for that. And I do believe that our team is well positioned to capitalize on it as we move forward. So, you know, there'll be some minor bumps along the way, but we feel we're on track and we're in a good position to capitalize on those as they move forward. Greg Palm | Analyst, Craig-Hallum Capital Group: Okay, great. And then maybe lastly on the rare earth magnets, which I know we talked about a lot last quarter, I mean, on a relative basis, you know, given what's happened the last month, are you feeling better, worse, the same? What's the, what's the risk profile there? Dick Wazella | Chairman, President and CEO: Yeah, our team has worked extremely hard to stay on top of it and engage all of our operations and, and, and I think, you know, we have a pretty good outlook. What's we feel is going to happen. We've seen some improvements. Although I just, we have to, we have to be very cautious here and say that, you know, this is most of the materials that we're talking about are coming out of China and there's always a risk that things can change in the short term, but we're starting to see some things loosen up. Some of the licenses being approved. Um, we still have some exposure. Uh, we talked before about the exposure we see potentially for remain to the year. There's somewhere between a million and 3 million in shipments that could be impacted by it. Um, but I would also say to you, you know, with, because of that, I mentioned, uh, that we had an accelerated, some accelerated shipments or pull-ins into Q2, we believe that that was reflection of the concern on the heavy rare earth and that our customers wanted to get some supply on hand to make sure that they were protected. So, uh, those were pull-outs. And, you know, as it was mentioned that that could have an impact on our third quarter shipments. Um, I also would state that there's no, yeah, we don't have enough visibility. We don't really know what all of our customers are, plans are. Uh, you know, so while we're saying, you know, there's, there could be an impact, we're also knowing, we also realizing that they could also pull ahead again, and as long as we had materials to supply that, and so I, uh, we, we emphasize that Q2 was a little higher than, uh, what we would have expected based upon the pull-aheads and that Q3 could be impacted because of that, uh, but I would also say to you that we are not a hundred percent sure how our customers are going to react and what they're going to do going forward here, if that's just going to be, you know, inventory, they're going to hold on hand and, uh, and just continue the supply on a normalized basis with, uh, with some safety stock in their possession. So, so those are things that we're seeing and it's caused some of that. And, but I think we are encouraged, uh, that there are some positive signs ahead. Things are loosening up and starting to get to a more normal state. Dick Wazella | Chairman, President and CEO: Okay. Thanks for the call. Best of luck. Thanks. Thank you, Greg. Operator | Conference Operator: Thank you. The next question is from Ted Jackson with Northland Securities. Please go ahead. Ted Jackson | Analyst, Northland Securities: Hey, good morning and congratulations on a very nice quarter. Dick Wazella | Chairman, President and CEO: Morning, Dick Wazella | Chairman, President and CEO: Ted. Thank you. Ted Jackson | Analyst, Northland Securities: I've got a few questions. I'm going back into the, um, the pull forward of revenue. Just had a curiosity, uh, you know, within your reported segments, where was most of that pull forward coming from, you know, your segments like, you know, industrial, medical vehicle, et cetera. Dick Wazella | Chairman, President and CEO: Yeah, it's two areas that we saw in medical. Um, and what I'll, it's related around the, uh, the, the, the, the, types of materials that are typically used in the high performance solutions. So when we talk about heavy, rare earth, that usually means higher performance solutions and higher performance, uh, comes from, let's say this in, when we look at moat from a motor perspective, uh, smaller size, but higher energy magnets to produce more power. So it's either size constraints that are, you know, that are causing the need to use these higher performance, or it's really truly high performance that the only way to get there is from, uh, the use of this type of magnetic material. So I would tell you medical, some high end industrial, uh, and some defense. Now, also what I would like to state, and I state, I stated this before Ted, but I'll just allow me to repeat this. This, our company has taken an approach, uh, you know, more than 10 years ago. Uh, as I said, before we go through these cycles, it seems like every seven to eight years where magnet prices are under pressure and they, you know, they get increased three to 400%. And, uh, you have to, you know, work with your customers to, you know, get enough material, supply their demand and pass along surcharges based upon those prices. In this case, we were challenged by the fact that we weren't even going to be allowed to receive the materials. So that became a little bit more stressful for us because of this, you know, what's, what's occurred in the past. Our company has been very proactive in designing products where possible that don't contain heavy, rare earth. And we will continue to do so into the future to try to eliminate this risk as much as we possibly can off into the future. But we have already, and had been for years taking actions to do that. And we were, we have been successful. Ted Jackson | Analyst, Northland Securities: Um, uh, well, that would be great. And then, you know, the fact of the matter is, is, you know, as these barriers to trade come in place, it's driving the development of a domestic market, which over the longer term would probably be quite good for you. So, you know, we'll see how it plays out over the next decade or so, um, on the magnet supply, you know, I mean, I know as all this came in place that, you know, you guys were on top of it and smart and did bring in some heavy earth, you know, high end product, you know, into inventory to be in front of it. So when you look at where you are with that, at what point would it become an issue if, you know, God forbid, you know, the Chinese just stop things again? I mean, do you have enough supply to get you through the remainder of this year? Maybe you have a supply that would take them into 26. And I'm not saying that you're going to run out of it. I'm just saying, just kind of understanding like what Dick Wazella | Chairman, President and CEO: level of safety stock, you know, you put in place. Dick Wazella | Chairman, President and CEO: Well, Dick Wazella | Chairman, President and CEO: it varies, Dick Wazella | Chairman, President and CEO: you know, and it's, it's, uh, there's multiple ways that we would be dealing with that. I'm going to let Jim talk a little bit about some of the things that we've done in the supply chain side and the actions that we've taken to ensure that we have material, but I say it varies because if in fact you have noticed that, uh, you're just not going to receive, and for example, the Chinese will not ship magnets or heavy rare earth materials to the U S for defense applications. The U S doesn't want them and China won't ship them. So, you know, that's been out there for a while and it's opened up opportunities domestically, but what that's, what that will do is drive pricing and cost will go up. Uh, so there's the government has taken some actions to mitigate it in the future. And we are on board and in, you know, in the loop with what's happening here. So it's just, it's hard to give you a specific timeframe because it'll vary based upon products, the amount of safety stock we have for each, uh, what the supply chain is looking like our resourcing and also, you know, identifying some redesign opportunities that, you know, worse comes to worse, if you can't get product, then what are the alternatives from a design perspective that we can accelerate through and get approval from customers typically. And once our products get designed into these types of applications, the redesign and approval process is a very long period of time. Just like we saw during COVID though. Uh, some of those roadblocks are removed, uh, because that you had no choice, but to remove them and, uh, and to accelerate the process itself. So, so if that occurs, then, you know, we may be into that our engineering team, rather than focusing on new opportunities and developing opportunities, you know, maybe redeployed to, uh, work on sustaining and corrective actions. But, uh, like I said, we've, we're in the loop on everything that's occurring. There are some, you know, good developments. They're going to take time to come online and maybe Jim, you want to talk about some of those a bit. Jim Michaud | Chief Financial Officer: Yeah. I mean, I think you saw an example of that in yesterday's news where, um, you know, Apple announced that they're, you know, making an investment in manufacturing here in the U S and part of it had to do with the fact that, um, you know, the government is, you know, investing in putting in infrastructure, uh, related to our own exploration and, uh, you know, in rare earth materials and so forth. So I think we're very encouraged by that. You know, we've been in discussions with a lot of suppliers and, you know, as many are, um, understanding, you know, who's going to be a player, uh, you know, who's going to be able to produce and when, uh, so I think we're well in tune with that and I'm actually very encouraged that, um, some of those opportunities are going to come online, uh, you know, sooner than I think any of us expected and, you know, hopefully we'll participate in that. You may want to mention here, you Dick Wazella | Chairman, President and CEO: went to Jim Michaud | Chief Financial Officer: Washington and Dick Wazella | Chairman, President and CEO: the government officials. Yeah. Jim Michaud | Chief Financial Officer: Yeah. I, uh, I did have an opportunity to, um, you know, go to the department of commerce and, and, and met with, uh, you know, several of the, um, individuals involved in, in trade talks and so forth and, uh, you know, very, very informative. And as I mentioned, um, they are, uh, obviously helping many companies, not dissimilar to ours, um, in identifying opportunities to look at alternate sources and where those are and the like. So, uh, there's a great collaboration I would tell you, uh, between companies and the department of commerce to ensure that, you know, companies like ours are being supported and we understand what the alternatives are. Ted Jackson | Analyst, Northland Securities: I have two more questions. Um, a quick one, hopefully in terms of an answer, but, you know, with all the, um, you know, scuttlebutt and, you know, momentum around kind of, you know, unmanned vehicles and drones and stuff, just kind of curious what kind of exposure you have with any to the market and, you know, how much of that is, you know, based on commercial versus industrial. Just maybe, maybe there's nothing even there, but it's just, it's a hot topic right now. I'm just kind of curious and then I have one more. Dick Wazella | Chairman, President and CEO: I'll answer it very quickly. It's a hot topic for us as well. So you guys are, you said short, you wanted Dick Wazella | Chairman, President and CEO: a quick answer. I'll give you a quick answer. Yeah. We see it. We see it as you do. It's there's, there's definitely some opportunities and we're well positioned to capitalize on some of this and, you know, without getting into a lot of detail on it, uh, uh, for competitive reasons, I mean, it is something that's on our radar. Ted Jackson | Analyst, Northland Securities: Okay. I'll leave it there. Then, um, my last question is, you know, as you, you know, all your efficiency stuff is coming to roost, you're really doing a good job at driving margins, putting, you know, that in the business, you know, making the business, you know, stand up and deliver cash and, you know, deliver return to shareholders. You're up, de-liberating the business. You've gotten your business down to, you know, for lack of a better term, let's call it, you know, targeted leverage ratios. Um, historically you've always been, uh, uh, acquisitive in terms of just, you know, building growth through acquisition as you kind of, you know, exiting some of these, you know, strategic efforts in terms of, um, realigning of the business, restructuring the business, making the business more efficient, getting debt paid down, what's going on on the strategy for you? How active are you in the pipeline? Are you going to turn it back on? That's my last Dick Wazella | Chairman, President and CEO: question. Yeah, we really, from a investigation, from a grooming standpoint, from, uh, you know, identifying opportunities for us in the marketplace, we never shut it down entirely. Um, but what we did do is say it's a, it is a time period when we will be establishing communications with certain key, uh, you know, opportunities for us in the future that we saw it was a, a really good strategic fit. So we've been doing that. And I would say to you that, you know, we are not going to stop. We've got, um, some great momentum going in terms of identifying efficiencies and, and, and changing the way we do business, uh, and that the streamlining will continue. I think we just believe it's a heck of a lot more efficient and it's better. And it's, we can do things faster. That's no stand simplified to accelerate now. You know, it's worked its way into the deep bowels and roots of the company. It's not going to change. We're going to keep doing that. It's, it, it really is healthy and it aligns very well with our AST initiatives. So our lean toolkit and training and so forth. So I would say to you that yes, we are getting well positioned that we could execute an acquisition and, you know, we will certainly be very cautious and careful to make sure everything's lining up properly, that it's a great strategic fit and provide some continued increased value for what we're doing. And that's the value of our recent acquisitions have been in, as we've mentioned, has been in certain technologies and market penetration that we were looking for as well as a creative to our average gross margin. So anything we do would need to meet those criteria. But I would say to you that, yeah, you know, we're, we're, we're looking, we're paying attention to what's going on and we've identified some opportunities that in there when the time is right, we'll be looking to bring them on. Ted Jackson | Analyst, Northland Securities: All right. Well, again, congratulations on congratulations in the quarter. And Dick Wazella | Chairman, President and CEO: I'll step out of line. Thank you, Ted. Operator | Conference Operator: Thank you. As a reminder to ask a question, you may press star then one. The next question comes from Craig Cosgrove, private investor. Please go ahead. Moderator | Conference Moderator: Mr. Cosgrove, your line is open. Dick Wazella | Chairman, President and CEO: So Mr. Cosgrove used to be Dick Wazella | Chairman, President and CEO: a controller for us in one of our operations. I'm guessing maybe by mistake, he's followed us very closely has been a strong supporter since he's left. So maybe he hit the button by mistake. Operator | Conference Operator: Thank you. We'll move on to our next question. It comes from Oren Hirschman with AIGH investment partners. Please go ahead. Oren Hirschman | Analyst, AIGH Investment Partners: Hi, congratulations on the result. Um, just a couple of random questions. Thank you, Oren. In terms of the, so in terms of the data center business, just one question is, is the power conditioning more to protect the servers, is it to protect the cooling equipment, is it for both? And then a follow up on that on the data center side, you know, I don't remember exactly the number of them in front of me, but maybe almost doubled year over year, please correct me if I'm wrong. You know, could the business be up that much this year again? Do you have enough capacity, even if there was enough to meet that type of demand? And then I want to follow up on that. Dick Wazella | Chairman, President and CEO: Okay. So the first question you're asking about what the addition of, I think if I understand it correctly, the addition of our equipment, what it does, how it impacts the data center itself. So you talked about cooling. Yes. Cooling is one of the things that, you know, we're on applications for cooling, but I'd say more importantly, it is about the quality of the power and the efficiency that it brings. So as these, we've talked about this in the past where, you know, we have a very high performance and high power solution that we can bring to the marketplace. And we do bring to the marketplace and any improvements in power quality that you can make are very substantial in terms of a return. Oren Hirschman | Analyst, AIGH Investment Partners: So two things there. Cooling. Does the customer get that? Like is that the customer is there enough to understand that if there's a 1% improvement in that quality of power, how much that means to them? Dick Wazella | Chairman, President and CEO: Well, you know, I can't speak for the customers, but I can, you know, directly for all the customers, but I think they certainly do understanding that with the demands for power and, you know, the infrastructure that has to go into place and someone that has a more efficient and more, you know, operation, absolutely would probably have an edge. Dick Wazella | Chairman, President and CEO: And Oren Hirschman | Analyst, AIGH Investment Partners: just part B Dick Wazella | Chairman, President and CEO: and C on that question, if I may. So you're talking about the demand and do we have Dick Wazella | Chairman, President and CEO: capacity? Yes, we're definitely increasing. And as you know, we don't break that out as a specific pathway. We do talk about HVAC and HVAC is definitely growing for us and it's in the industrial, under the industrial sector. The capacity, you know, it's a, demand is continuing to go up and we see it continuing out of the future based upon the forecast, the growth of data centers and the needs for our type of equipment. And we will, you know, be doing it in another expansion and our main facility that produces this type of product. We also have been able to leverage the acquisition we made last year in January with its electromagnetic out capabilities in Mexico, as well as in, in also in Wisconsin. So I think we were, you know, that the synergies that we realized they were very important and positioned as well to be able to satisfy the demand, but we are and have already invested and we will continue to invest to increase capacity. Oren Hirschman | Analyst, AIGH Investment Partners: Okay. Two other questions, if I may, you know, just jumping around in terms of the automation side, you know, there was some, some clear signs of a bounce back. I think it's your largest or one of your largest customers had a positive book to bill, let's give us some, some qualitative talk through on what that means for you on the automation side. Dick Wazella | Chairman, President and CEO: Sure. We, in the past, we gave it quite a bit of detail on why specific operating unit and what the impact on our performance was as we went through supply chain crisis. And, and as it opened up and how it improved our demand and how has it dropped out again, as there was an overstocking situation, we do expect that, you know, we have turned the corner there and we're getting to a position of normalization. Uh, and that will have a, a very nice positive effect or impact as we move forward, so it is definitely improving. Uh, and we're expecting to see the results as we move throughout the year. And all signs are, are in that direction. Oren Hirschman | Analyst, AIGH Investment Partners: Did you see some of that already in this past quarter? Dick Wazella | Chairman, President and CEO: We saw an improvement. So we've seen gradual improvement, uh, sequentially in Q1 over Q2. So, uh, we did see improvement, but we're, we're starting, you know, we're continuing to see more improvement as we move ahead to get us to the point of normalization. So yes, a little bit, but we expect more coming forward. Oren Hirschman | Analyst, AIGH Investment Partners: Okay. My last question, which I think someone else alluded to, just on the, on the munitions side, you know, there've been a number of companies that have indicated that their capacity constraints, you know, I've even heard of, of, uh, I've even heard of, uh, of a, one of the majors, one of the majors, like, you know, like a Northrop Grumman or a Rockwell, that type of major offering to pay for capacity expansion for, for, for, uh, for a vendor. I've seen two cases like that recently. I guess my question is, you know, is that, is that business, I, I, I'm assuming that business is continuing to ramp for you, are you capacity constrained there as well? Dick Wazella | Chairman, President and CEO: No, we, uh, uh, we mentioned the restructuring that we did to consolidate some operations, uh, uh, several years ago, I'd say three, four years ago. We, the main operation for munitions, well, there's two main operations for us for munitions applications and those are being consolidated together, but we, uh, decided to increase our, uh, size of our facility and to allow us to grow into it, uh, and that has put us in a really good position to, uh, to answer your question, we are not capacity constraint. Oren Hirschman | Analyst, AIGH Investment Partners: Okay. Oh, you've seen the same as other vendors in terms of the desire from your, well, we've seen, yeah, we, what we've Dick Wazella | Chairman, President and CEO: seen. Yeah. So, so, yeah, what we've seen that there, there's certainly in the supply chain side of it, you know, there, there can be, uh, some concern, but we haven't, we've been working on sourcing for a while here when you go back to when the conflicts broke out and then, you know, the initial inquiries on what the projected demand might be, uh, and over time, you know, um, I don't, uh, or I, I'm not sure that you, you had invested in us yet, but we had talked about that, that the inquiry level was quite high, but we hadn't seen any, you know, POs from that to increase the capacity. But we would now have seen that we have seen the orders come to fruition and we now are beginning to ship at higher levels. And so we were prepared, we went out and we did quite a bit of work in advance of this because we were getting quotation requests for some significantly higher volume, so we were preparing our supply base as well as preparing ourselves. And that is coming to fruition. Oren Hirschman | Analyst, AIGH Investment Partners: Okay. Great. Um, Dick Wazella | Chairman, President and CEO: let's see, that's pretty much my question. Thank you so much. Okay. Thank you. Operator | Conference Operator: Thank you. This concludes our question and answer session. I would now like to turn the call back to management for closing remarks. Dick Wazella | Chairman, President and CEO: Thank you everyone for joining us on today's call and for your interest in We are very, very proud of you and we are very proud of you for being so resilient. 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, 2025 results. Have a great day. Operator | Conference Operator: The conference has now concluded. Thank you for your participation. You may now disconnect your lines. jsPDF 3.0.3 D:20260609232407-00'00'