Allied Motion Technologies Inc. Aktie

Thank you. This conference is being recorded. It is now my pleasure to introduce your host, Craig MacPhail, Investor Relations. Please go ahead.

Yes, thank you, and good morning, everyone. We certainly appreciate your time today, as well as your interest in Allient. On the call today are Dick Warzala, our Chairman, President, and CEO, and Jim Michaud, our Chief Financial Officer. Dick and Jim will review our second quarter 2024 results, provide a strategic and operational update, and share our outlook, and open the line for questions. As a reminder, the earnings release and the company slide presentation are available on our website at allient.com. Following along, please turn to slide 2 for our Safe Harbor statement. During today's call, we may make forward-looking statements that involve risks and uncertainties.

Actual results may differ materially from those indicated. These risks and factors are outlined in our SEC filings and in the earnings release. We will also discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release as well as the slides. With that, please turn to slide 3, and I'll turn it over to Dick to begin.

Thank you, Craig, and welcome, everyone. We delivered an excellent second quarter, and more importantly, one that further demonstrates the earning power of the model when stronger demand, improved mix, and disciplined execution come together. The quality of the quarter was evident across the P&L with strong top-line growth, record gross margin, and a significant increase in earnings. We also saw excellent order activity with record bookings in the quarter, and in the period that resulted in a 1.31x book-to-bill ratio. That gives us improved visibility into the second half of the year and supports a constructive view as we move through 2024. What stands out is not just the magnitude of the quarterly improvement, but the quality of it. We saw broad-based demand across key targeted markets, especially industrial automation, data center and other infrastructure, aerospace and defense, and medical applications.

At the same time, the operating work we have been doing throughout the organization is increasingly showing up in better margins, better leverage, and better earnings conversion. This quarter also reinforces the value of the portfolio we have been shaping. We have intentionally positioned Allient toward higher-value motion, controls, and power applications where our engineering content is deeper, our customer relationships are stronger, and the margin profile is more attractive over time. That strategy is helping us improve not only growth, but also the quality and durability of that growth. If you look at the end market mix, the portfolio continues to align well with long-term secular drivers. The offshore remains an area of particular encouragement for us, especially where our technologies support automation, electrification, energy efficiency, and digital infrastructure. Those are markets where we believe our capabilities are differentiated and where the opportunities continue to expand.

Data center and other infrastructure have become an increasingly meaningful contributor within our industrial business. As we indicated previously, we plan to provide investors with more visibility into this market given its growth profile and strategic importance to the portfolio. In the second quarter, sales tied to data center and infrastructure applications were $16.3 million, or 10.6% of total revenue, up 60% from the prior year period. On a trailing 12-month basis, sales were $57.1 million, or 9.9% of total sales, up 69% year over year. This opportunity is centered on the power quality layer of the data center, where our Allient Power portfolio brings deep domain expertise. Through active and passive harmonic filters, line reactors, and related solutions, we help customers reduce harmonics, stabilize and clean the electrical waveform, and meet stringent power quality standards, including IEEE 519 compliance. The result is more reliable and efficient power for increasingly compute-dense data center environments, stronger protection for critical equipment, and a strong fit with the challenges operators face as AI and other high-power applications increase load and complexity.

So stepping back, the second quarter was about more than just strong reported results. It was another proof point that the actions we have taken to reposition the company, simplify the organization, and drive better execution are translating into stronger financial performance and a more resilient operating model. Turning to slide 4, I want to spend a moment on Simplify to Accelerate Now, or STAN, because it is an important part of why the organization is performing better. STAN is driving better decision-making, execution, margin, and responsiveness. But the key point is that it is not a single initiative or short-term program. It is a company-wide mindset that shapes how we think, make decisions, solve problems, collaborate across teams, and serve customers every day. In simple terms, STAN is how we work.

At its core, STAN is designed to unleash more of the organization's potential by empowering our teams to act with urgency, ownership, and accountability. The Now in STAN matters. It reinforces a get-it-done mentality, removing obstacles, moving forward, and delivering results faster rather than waiting for things to happen. It is also supported by a practical toolset. That includes our Allient Systematic Tools, or AST, which help standardize, simplify, and continuously improve how we work. It also includes digital and IT tools that reduce manual processes and redundancy, as well as AI and other enabling technologies where they can improve decision-making, productivity, and execution. What matters most, though, is the result. In the second quarter, operational improvements under STAN contributed to record gross margins through better mix, execution, and cost discipline.

We are seeing faster decision-making, stronger accountability, and better responsiveness across the company, and those improvements are helping create a more scalable and more profitable operating model. The annualized savings figures on the slide, $10 million in 2023 and $6 million in 2024, are a reflection of this broader effort. But I would emphasize that STAN is bigger than cost takeout. It is about building a culture that continuously improves the business and positions Allient to move faster and serve customers better over time. So when we talked about improved margin, better leverage, and stronger earnings power, STAN is one of the foundational reasons that it is happening. With that, let me turn it over to Jim for a more in-depth review of the financials.

Thank you, Dick, and good morning, everyone. Please turn to slide 5. Revenue increased 10% year over year to $153.8 million. On a constant currency basis, revenue grew 9% organically, with foreign currency translation providing a favorable tailwind of approximately $1.3 million in the quarter. 54% of second quarter sales were to U.S. customers, with the balance primarily in Europe, Canada, and Asia Pacific, continuing to reflect the benefit of our diversified geographic footprint. Looking at the verticals, industrial revenue increased 17%, driven by continued strength in industrial automation and power quality solutions supporting data center infrastructure. Aerospace and defense increased 16%, reflecting strong defense-related demand and program activity, and notably, that growth came despite the previously announced M10 Booker program cancellation. Medical increased 9% on broad-based demand, including surgical robotics and other precision motion applications.

The vehicle market declined 7% primarily due to lower power sports demand. Overall, this slide reinforces both the breadth of demand in the quarter and the continued alignment of the portfolio with higher-value applications. Turning to slide 6, the trailing 12-month market mix continues to support a more resilient and more margin-accretive business profile. Industrial represented 49% of trailing 12-month revenue at the end of the second quarter, up from 47% a year ago, while medical remained steady at 15%. Vehicle was 17%, aerospace and defense was 15%, and distribution was 4%. The bigger takeaway here is that the portfolio is increasingly aligned around attractive growth verticals and higher-value applications, including motion and controls tied to automation, power quality for data center infrastructure, precision medical applications, and defense-related programs. That mix matters because it supports both growth and profitability.

It also helps explain why we continue to see structural improvement in the business as we move forward. Please turn to slide 7. Gross margin expanded 170 basis points year over year to a record 34.9% in the quarter, with gross profit increasing to $53.6 million. The primary drivers were higher volume, favorable mix, and operational gains tied to STAN, lean tools, and broader productivity initiatives. We have said the margin opportunity at Allient is structural, and this quarter is a good example of that. The simplification of work, lean disciplines, footprint actions, and productivity improvements across the business are creating a more scalable margin profile, and that gives us confidence the progress is durable over time. Mix also played an important role in the quarter, and mix can be lumpy, so while we are encouraged by the gross margin performance, we would expect some quarter-to-quarter variability as those structural gains continue to build. On the tariff front, the team also continues to do a very good job mitigating exposure.

Across the last year, we have taken a disciplined approach that includes pricing actions where appropriate, supplier negotiations, strategic buys, sourcing adjustments, and broader supply chain diversification. Those actions help keep tariff-related pressure from becoming a more significant drag on performance. With respect to the Section 301-related tariff refunds, the company has submitted or expects to submit claims for refunds of approximately $1.3 million. Due to uncertainties regarding the timing and ultimate amount of any recovery, no receivable has been recorded as of the end of the quarter. Turning to slide 8, operating income increased to $15.6 million from $11.7 million in the prior period, and operating margin improved to 10.2% from 8.4%. That is not an all-time record for the company, but it is the highest operating margin level in roughly a decade.

Operating costs were 24.7% of revenue, improving 10 basis points year over year despite higher commissions, incentive compensation, and growth-related spending. Restructuring and business realignment costs were $600,000 in the quarter, down from the prior year, but remain elevated due to costs associated with the Dothan transition. We continue to expect restructuring realignment costs of approximately $2 million to $3 million for the full year 2024. So the message on this slide is that we are seeing the leverage benefits of a stronger operating model while still funding the business appropriately and continuing to work through remaining transition-related costs. Please turn to slide 9. Earnings growth accelerated meaningfully in the quarter as the margin improvements flowed through the P&L and lower interest expense provided an additional tailwind. Net income increased 85% to $10.4 million, or $0.61 per diluted share. Adjusted net income increased 42% to $13.5 million, or $0.80 per diluted share, and adjusted EBITDA increased 18% to $23.7 million, or 15.4% of revenue.

Interest expense declined by approximately $1 million year over year to $2.5 million due to the lower average debt balance. The effective tax rate was 20.2% for the quarter. We continue to expect a full-year tax rate in the range of 21% to 23%. The bottom line takeaway is straightforward. Stronger mix, higher gross margin, improved operating leverage, and lower interest expense combined to produce substantially stronger earnings. Moving to slide 10, net cash provided by operating activities was $14 million in the quarter and $20 million for the first 6 months of the year. The year-over-year change in operating cash flow primarily reflects accounts receivable timing and investments in inventory to support our rapid growth and strategic buys of critical materials.

Inventory turnover was 3.1x compared to 3.2x for the full year 2023. We continue to focus on inventory discipline, strengthening working capital management, and taking out costs while also making disciplined investments to support growth and protect the supply chain where appropriate. The broader point is that the working capital profile reflects both growth and intentional actions. We have been willing to make selective inventory investments where that supports customer service and helps mitigate supply and tariff-related uncertainty, while still keeping a sharp focus on cash conversion over time. Capital expenditures were $7.1 million for the first 6 months of 2024. We are investing in capacity and productivity, notably in areas tied to data center-related power quality, automation, and other growth initiatives. For the full year 2024, we expect capital expenses of approximately $12 million to $15 million. Please turn to slide 11. Continued deleveraging remains an important part of the financial story.

Total debt ended the quarter at $173.3 million, down $7.1 million since year-end 2023. Net debt was $131.2 million, leverage improved to 1.63x, and the bank leverage ratio improved to 2.07x, which is defined under our credit agreement and excludes foreign cash and certain other areas. We also ended the quarter with approximately $42 million of cash and $162 million of unused revolver capacity. This continues to strengthen our financial flexibility. A stronger balance sheet lowers interest expense, supports disciplined investment in the business, and provides capacity to pursue value-creating opportunities while remaining well within our covenant requirements. With that, if you advance to slide 12, I will now turn the call back over to Dick.

Thank you, Jim. Orders increased 49% year over year and 27% sequentially to a record $201.3 million, resulting in a book-to-bill ratio of 1.31x. Backlog ended the quarter at $298 million, and most of that backlog is expected to convert to revenue within 3 to 9 months, which is consistent with our historical conversion patterns. That order strength was led by industrial and aerospace and defense, and it gives us improved visibility into the second half of 2024. So when we put together the strong second quarter results, the continued margin progress, and the strength in orders and backlog, we believe the company is entering the back half of the year with solid momentum. As we look ahead, the message is that Allient is executing with discipline while continuing to position the business for growth. First, our portfolio remains aligned with attractive growth verticals, including industrial automation, data center and other infrastructure, aerospace and defense programs, and medical applications. Areas where customer demand remains healthy and where our technologies and engineering capabilities can create differentiated value. We also continue to make encouraging progress in the drone and unmanned systems market.

While this is not a major revenue driver for us today, we do see a meaningful opportunity to expand our presence over time, and we are making strong strides in building a viable off-the-shelf offering for commercial and defense-oriented applications. We expect that portfolio to continue taking shape during the second half of this year. This builds on capabilities we have already discussed publicly, including COTS propulsion motors and the broader expansion of our motion, control, and power solutions for unmanned applications. Second, the company is operating with more discipline and better responsiveness. STAN and our broader optimization actions continue to support margin expansion, and we remain focused on cash generation, disciplined capital spending, and continued deleveraging. Those are not temporary initiatives. They are central to how we are running the business and improving the quality of our financial performance. Third, we believe the company is positioned for continued growth, stronger demand, record orders, and increased backlog support improved visibility, and we are building momentum with improving earnings power.

While the macro and trade environment remains dynamic, our diversified end markets, global operations, and proactive mitigation actions help support resilience. What gives us confidence is what we control. We have built a stronger operating model. We have a healthier balance sheet. And we have continued to align the portfolio around long-term secular drivers, which we believe Allient is well positioned to benefit from over time. With that, operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question today is coming from Max Michaelis of Lake Street Capital. Please go ahead.

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

I'd say it's in line.

Okay, and that's, and you'd say that has continued kind of into Q3?

Did we say that? Or you asked me a question, Max. No, this is a question. I'm just teasing. No, yes, to answer your question, we do see, we're 1 month into Q3, but we do see it continuing. Our intake is strong, and shipments remained strong as well.

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

Sure. So, as we've relayed in the past, I mean, we do see this as a significant opportunity for us. We're well positioned and well suited to handle applications that are in the drone and unmanned vehicle markets. So what I would tell you is that we've invested heavily internally here the last 6 to 9 months, and you'll start seeing the product announcements rolling out. The team has done an amazing job, the internal team. We're launching a complete product line of COTS off-the-shelf propulsion motors, as well as where our strength has always been in the drone and unmanned vehicle markets is really what we call custom critical solutions.

While there's a number of companies out there supplying these off-the-shelf products, few of them can do what we can do when it comes to very specific applications that require design expertise that we can bring to the party. So a little preview. We will be announcing and we'll be releasing some products to the marketplace. There is a ground-based vehicle show in Detroit, more of an engineering show next week outside of Detroit, Novi, Michigan. We'll be displaying some products there that we have never displayed before, and we'll be giving a preview of what's to come, leading up to AUSA in October, where you'll see a full launch of not only the motor products, but also electronic products and bringing our composites into the mix as well.

You know, we've been, while the results are good and they're improving, I just have to emphasize, we've continued to invest. We're making significant investments in leveraging our engineering talent for both, you know, the electromagnetics and electronics, as well as light-weighting that goes into the defense markets, and certainly drones and unmanned vehicles is one of those.

Awesome. Thanks, guys. That's good for me, and congrats again.

Thank you, Max.

Thank you. The next question is coming from Greg Palm of Craig-Hallum. Please go ahead.

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

Sure. Great question, Greg. Thank you, too. Yes, we announced in this last quarter that we had made a change into the way that we actually record orders or bookings, and that for larger, more significant blanket-type orders, we were not, you know, booking it into our backlog unless it was within 1 year and within a scheduled lead time and literally, you know, moved into production. So one thing I would say to you is this. There are orders that are sitting out there that haven't been converted into bookings yet that we do have visibility toward. And as they continue to progress and they get released into production, they'll show up on our backlog. It's a little more smoothing rather than the big lumpiness that we had for some of these large orders in the past. So that's a positive because those aren't reflected in there.

The second thing I would say to you, which is driving orders a little bit right now, is lead times. Lead times have expanded. And we've certainly been encouraging our customers to make sure they get their orders into us. Don't wait till the last minute because, you know, lead times for our supply chain and our supply chain have gone out. So we are seeing some orders coming in quicker than we might have seen in the past, not to a great extent, but I would tell you that there's some acceleration, and let's just say, you know, if we look at it, you know, 3 months in advance versus where we would see it before based upon lead time expansion.

And last question, is there anything in there that's really significant? Yes, there's $200 million in bookings, which we think is significant, but there's nothing, you know, one area that really jumps out and says it's outside that lead time we talked about. So it's continued increase in demand in the areas that we focused on, and the demand is now flowing through. Okay? So you are correct in your assessment. We do see, as Max asked the question earlier about, we're a month into the third quarter, what's it looking like, how's it shaping up, and it's continuing at a pretty strong pace here.

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

Yes, so both are true, both of what you said. So clearly, the absorption as we continue to add volume and with our fixed cost base that we have here and not have to add costs to support it, I mean, that's clearly driving through margin improvement, and the mix is improving over time. This has been a long-term effort of ours to transition the company into certain market opportunities that we felt gave us better opportunity to grow the margin profile based upon the solutions we offered and the integration of the products and the higher margin opportunities. So that is what's happening as well. So it is a combination of both of what you said, and it's better absorption.

I would also tell you that we're not stopping. We talked about our cost improvements in terms of the cost takeouts and STAN and so forth. They're continuing. You know, last quarter we incurred some costs that, we said, you know, the transition of a product line, our production, wasn't going up to snuff and plan as we had expected, and we had incurred some extra costs. We put a full-court press on it. We're still not there, but it is absolutely improving. And we see additional opportunities to streamline the organization, leverage what we have, and to continue to do as we gain more, we learn more, and we see more opportunities for those cost reductions as well. So I think it's a combination of, you know, things coming together nicely as we've been working on for the last several years.

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

Yes. Well, I would say to you first, we've been expanding our capacity, and we're ready to go online here late this quarter or early next quarter. Our goal is to have the expansion in place, and it's well underway. You know, viewed it a couple weeks ago. And so we're well positioned, very well positioned to, you know, handle the increased demand. So, our, we talked about the acquisition we made a few years back, the synergies that we realized at our Wisconsin operations and leveraging the Mexican operations as well, that has paid off big dividends and has helped us quite a bit in terms of expanding our capacity and relocating some of the high labor content products and then concentrating on the more sophisticated assembly and technician-type work that we do for the final assembly.

With regard to the equipment that we offer, I've mentioned this in the past, and from our active filter standpoint, we have the highest power active filter in the marketplace today. So that does help in terms of footprint, and it helps in terms of not having to daisy-chain multiple units together to achieve the same power that we can put out in 1 particular unit. So we need to stay ahead of the curve. We recognize the market's going to continue moving. There's a higher demand coming. And, you know, that's our responsibility to make sure that we do stay ahead of the curve as far as the opportunity in the future.

Based upon everything you hear in the news and so forth, yes, there's some regulatory, but I do think that if everyone just takes a deep breath, some wise decisions have been made to ensure that all these data centers, the large data centers, are coming online, that they can supply their own power, they can have clean water and do all of this. And I think that those actions, you know, they are happening and it's a positive.

You did not ask the question, but I will answer this, because it's going to come. People have asked us what's the opportunity for us and wanted it simplified in terms of our value of shipments per megawatt-hour, if we could come up with a measure to give people a feel for what that is. And it's, you know, it's not just a cut-and-dry black-and-white answer because it depends on, you know, the design and the amount of equipment that we're supplying into it, whether it's just line reactors or it's active filters or passive filters or a combination of all. But I would say to you that, you know, on the low end, if it's just simply a line reactor, we might be talking about a couple thousand dollars per megawatt. When it gets into a more complete solution which we offer, including communications gateways, filters, and reactors and so forth, and even getting into some equipment that we supply that does fiber alignment, we supply products to that market that does fiber alignment, that's even in the equation now, we're over $40,000 per megawatt.

So I'm not going to give you what I believe the forecast is. If anyone could go to one of their AI tools and look at what the forecasting is for data center per megawatt or gigawatt that they're looking at to do the math. But I hope that gives you some color. We've been asked that a lot. We've been asked about our growth in data centers. We do believe we're going to continue to grow faster than our average growth within our company in those markets as well.

Yep, makes sense. I'm sure I can speak on behalf of everybody on this call. I appreciate all the increased disclosures, really helpful. Thanks.

Thank you. The next question is coming from Ted Jackson of Northland Securities. Please go ahead.

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

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

Hello? Hello? Hear me now? Hi, Dick. Can you? It's like an old cell ad. My question was, you gave some commentary in the data center and on the trailing 12 months you said that you put out $57.1 million in revenue and you gave a year-over-year growth number for that, and I did not catch that. I was curious what that growth number was. And then I have a couple actual, you know, fundamental questions.

Oh, okay. Okay. All right, let me pull it back out to give you the, make sure it's accurate enough. I don't have that off the top of my head here. Jim, you have that handy? I'll find it here real quick here.

Yep, 69% year over year.

Okay, 12 months. Go ahead. Yes, no, no, I got it. I appreciate it. Let's move over to, like, more interesting questions. I mean, we spend a lot of time talking about data centers and industrial. Let's go to a couple of the other verticals. And let's start with, like, the vehicle mix. In the past, a big component of that had been power sports, and clearly you've been de-emphasizing it, and rightly so, and the market's been doing terrible, but the business itself has actually performed pretty well. I thought it might be interesting to have you lay out the different end markets that are there within the vehicle market.

You know, I mean, you've seen a turnaround with regards to the commercial vehicle market. I know you have exposure there, but just kind of sort of the, you know, kind of the mix of business that you have in there and kind of what you're seeing with regards to that mix. That's my first question.

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

And when you say automotive, that's just basically passenger cars, Ford, GM kind of stuff. That's what you're, and when you say truck, I assume you're meaning more like Class A, Class 5 through 8 kind of stuff.

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

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

Yes, we're getting into granularity that we have not provided in the past. But I would just say this to you. It's steady. And we have to remember when we talk about power sports, there's a couple, you're talking about the ATV versus the UTV market. We've made that clear in the past. One's a utility vehicle used in commercial and in industrial applications, one's passengers or individuals. So we've continued to focus more on the industrial, commercial-type applications. And we're not, by no means is this a market that we want out of.

I mean, we think that it does leverage, again, our expertise, a strong expertise in steering applications. And we are able to apply that technology into some of the other vehicle markets, as well as automated material handling, and things of that nature as well. So I prefer not to break it out because we're starting to get too granular, and just leave it vehicle as a whole as we've been reporting. But suffice it to say that, you know, there has been a transition and, you know, we would expect, you know, to, I'll say, maintain a certain level of business, but it no longer drives our business as it did 10, 12 years ago.

Shifting over to aerospace and defense. I mean, my model only goes back to 2019, but in the history of what I've got in my model, a record quarter. And I'm kind of curious, you know, what's driving that? Are there any particular programs in place that are making that happen? You know, and then, you know, maybe talk a bit about, you know, what pushed the quarter to be so strong, what the outlook is, and kind of the drivers behind that business. So then you can move on.

First of all, I would say it's going to accelerate. We talked for many months, many quarters, about the increase in the number of inquiries and quoting that we were doing based on higher volumes and so forth, and they've come to reality. We see that that's not a defense-related application. That's not a [ short-lived ]. That's continuing. And in addition to that, as I made some commentary earlier about what we're doing in the drone area and what we're releasing and coming to market, you'll start to see that unfold. I would emphasize as well, the counter-drone market. We see that as, you know, as important as the, you know, the drones themselves.

And the product line, I'll just restate it, that we are launching is state-of-the-art, and we put a significant amount of our resources on it and utilize the principles of STAN for the decision making first, and how can we accelerate it, how are we going to compete, and I think it's pretty exciting because we're able now to go to the market and we're able to talk to customers who have come to us about volume applications where we weren't positioned to do it, where we are positioned.

Not that we're opening up the floodgates, we're selective in what we're picking. You know, there are some things that we're not going to chase, but the applications that we're working on on some of the higher-end applications that we've been in all along. Now looking at the COTS applications that we're able to support, which then leads us to more and more custom critical, and our team has done a great job. Electronics are being, we've got customers now, some beta customers or alpha customers, I'll call them for some of our electronics releasing, state-of-the-art. Leading edge state-of-the-art. It's positioning us well and it's helping us because it's not just where that technology that we've been designing, we've been investing in, and we've been feeling the impact on our P&L as an investment.

We're leveraging the technologies not just in, you know, for the drone applications, but in defense markets as well as industrial and commercial markets too. So I think we've got a pretty impressive, you know, platform of products that are going to be starting to be released and those will come out as well. And it's all just coming together. I think some reality of, you know, the quoting we did in the past, converting into orders today, seeing some acceleration, opening up some new opportunities in markets, I think we're getting better recognition in the market. Done a great job marketing it, and we're going to do even a better job. The team has stepped up big time. So you're going to see more information out there about Allient and how Allient plays and so forth. So I think, yes, it's positive. It's definitely positive.

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

Yes, it really depends on what we're shipping in the mix. And I've said this before, and just so for sake of making sure it's consistent here, is that as we, for some of the larger contracts that we have out there, we get blanket orders from our customers and then we get releases against us. So we have, and again, I won't get into the individual companies, but we have companies that are basically able to react to, there's a forecasted demand, there's a mix that we don't necessarily know, but an order gets placed that we have to deliver within 72 hours.

So obviously this is part of where you have some inventory and you have a design of a product line that allows you that flexibility. But as far as a rule of thumb here, what would we consider book-to-bill business versus on any, in any quarter versus, you know, a backlog-based business, I would tell you that we're, you know, 20% to 25% book-to-bill.

Okay. That was super helpful. Dick, thanks for all the clarity. It's always a pleasure to listen to you talk about the business. You know it and you're passionate about it. Congratulations.

Thank you, Ted. Appreciate it.

[Operator Instructions] Our next question is coming from Tomo Sano of J.P. Morgan. Please go ahead.

Could you talk about STAN's annualized savings? You had $10 million in 2023 and $6 million in 2024. What is your expectation for this year and what are the next levers for incremental savings?

Sure. So I would tell you that for 2025, we targeted amounts similar to what we saw in 2024, $5 million to $7 million. We're still working on that. And I do believe, you know, it's achievable. So, and then going forward, as I said, every time we finish something, we seem to uncover that there's more opportunity. I would tell you that, you know, we've got a list of opportunities internally here, given our size and given the resources that we have available to it, that I would say we've got a runway of 2 to 3 more years where we can continue to see this $5 million to $7 million cost takeouts and optimization of the units.

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

Yes, significant improvement was made in the second quarter, and some of that was realized by, as we mentioned in the first quarter call, you know, we could have shipped more if the transition had gone smoother and so forth. The team is doing a really nice job of attacking the root causes of the problems and getting the efficiency and productivity up as well as starting to cut into some of the, you know, the past dues that are cutting into that.

And, you know, every move at Dothan has been around a long time. And unfortunately, you know, there's a high mix business and sometimes low volume, and that adds a little complexity to it. And so making, you know, getting everything up to snuff, you know, fixed and identifying the supply chain and ensuring that all of that's being addressed in an appropriate manner. I will tell you that it will continue to improve throughout the year. We're going to continue to invest and improve throughout the year. We're making some investments to accelerate it.

And this is my opinion, that we have significant opportunity to improve not only in Dothan, but also in our Reynosa facility as well. And that'll continue through the year. You'll see some continued restructuring costs there as we make the investments necessary to ensure that we achieve the results that we're looking for.

Thank you, Dick. If I may squeeze just one more thing. Could you talk about the current environment about the factory automations broadly? We were on the Automate show and then visited your booths and then felt like a sense of urgency about the factory automation given from some physical AI concept as well. Could you talk about how you see the environment from your perspectives broadly?

Sure. So let's, you know, for our business, I would kind of look at it from North America and let's say Europe. Europe is seeing some improvement, which is great. It's not going gangbusters, but it's improving. And it's a slow, steady improvement from, you know, we're heavily invested into our customers who are in the automation market. An encouraging sign, it's not just like I said, big jump in demand all of a sudden. And in North America, we have definitely, you know, seen some improvements as well. So there's an acceleration of getting our products in place so that we can handle the demand and these pent-up demand for certain projects out there.

So there's encouraging signs. As well as our portfolio is evolving and developing there, so I wouldn't want to indicate in any way that, we're a supplier to the big integrators, to the big players in the automation industry. And as we continue to enhance our product portfolios and design products that are directed and dedicated to that in niche areas, we are definitely seeing some traction there. And then we're going to continue to do that.

That changes the margin profile as well. If you're competing with what I'll call, they can be off-the-shelf products, but they're kind of standardized in many suppliers, it will impact your ability to drive margin improvement. So, again, our focus has not been on the masses. It's been on ensuring that we can integrate our technologies together, use our electronics to enhance our ability to sell, as well as integrated solutions, and that continues to improve. So it's encouraging. It's definitely encouraging for what we're seeing the signs there.

Thank you. It's very helpful. Congrats on the quarter.

Thank you.

Thank you. The next question is coming from Gerry Sweeney of Roth Capital Partners. Please go ahead.

Actually, two more questions on data center work. I'm wondering if there's an opportunity to expand into some adjacencies around the work that you have now, and secondarily, how much of revenue do you feel comfortable with as sort of a percentage of revenue related to data centers?

Great questions. Comfortable with as much as we can get. I'll just say that. And it's an interesting question because we have been, by some of the majors have been asked about, and they've come to our facilities and done their assessments and so forth and looked at our capacity, and they see that our team has done a nice job. This team's primarily in Wisconsin between our two facilities there and leveraging the Mexican facility. You know, they have been proactive and they've been ahead of the game in making sure that we are addressing capacity needs and labor needs and so forth.

So when it comes to this, I kind of give you that answer because I remember when I was sitting in a meeting and the team brought to me, well, we can either do this or we can do this. I say you go for the big one. We'll support it as required. How big can that be in relative, as I said, I would prefer not to give you what I think it's going to be. I gave you the numbers of what our value is per megawatt. You can go out and do the calculations yourself and see what the opportunity is. And I say if our goal is to be one of the leaders, if we can, you know, if we can move our percentage of capture in the marketplace. And I'm not uncomfortable with seeing that our capture rate and they're going 20%, 25%, 30%. So I'll leave it at that, let you work the numbers and everyone else work them on their own because I don't want to come back to me that's what I told you it's going to be.

What else was it that you were interested in besides that? Adjacencies. Adjacencies, yes. Absolutely is. Same type of solutions we had. So you notice we talk about data center and other infrastructure. Definitely. You know, the same types of requirements that you're seeing at data centers as you get these larger applications, waste and, you know, wastewater treatment plants and so forth. There's definitely going to be expansion there and continued demand there, and our products serve those as well.

Got it. Then finally, I lied, threw questions out too. Obviously, we're in a new build market for data centers. Is there an opportunity for repair, replacement, refurbishment, upgrading of facilities over time, or is it too early to tell?

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

Got it. Great. Thanks, guys. I appreciate it.

Thank you, Gerry.

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

Well, thank you everyone for joining us on today's call and for your interest in Allient. We will be participating in the Lake Street Big 10 Conference in New York City on September 10th. 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 2024 results. Have a great day. Thank you, operator.

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

Greetings, and welcome to the Allient First Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] As a note, this conference is being recorded.

I would now like to turn the call over to Craig Mychajluk, Investor Relations. Thank you, Craig. You may begin.

Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allient. On the call today are Dick Warzala, our Chairman, President and CEO; and Jim Michaud, our Chief Financial Officer. Dick and Jim will review our first quarter 2026 results, provide a strategic and operational update and share our outlook. We'll then open the line for your questions.

As a reminder, our earnings release and the accompanying slide presentation are available on our website at allient.com.

If you're following along, please turn to Slide 2 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, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release as well as the slides.

With that, please turn to Slide 3, and I'll turn it over to Dick to begin. Dick?

Thank you, Craig, and welcome, everyone. We entered 2026 from a much stronger position than we were in a year ago. Over the last several years, we have worked to improve the quality of the business, strengthening the balance sheet, driving structural cost improvements and continuing to reposition the portfolio toward higher-value motion, controls and power applications aligned with attractive long-term growth trends. Our first quarter results reflect continued progress on that strategy with growth in revenue, gross profit, operating income and earnings, along with strong bookings to start the year.

What I want to emphasize this morning is that our performance is not simply about putting up another quarter of growth. It is about continuing to improve the profile of the company. That matters as it demonstrates that the operational work we have been doing is translating into better financial performance and stronger positioning as we move through 2026.

From an end market standpoint, the market sales mix does have an impact on the overall gross margins generated in the quarter. I would note that regarding the mix, we continue to experience strength from Vehicle in the quarter, particularly in commercial automotive as demand carried over to some extent from the stronger-than-expected activity we discussed on our fourth quarter call.

We are very encouraged by our progress in our industrial market, particularly industrial automation and power quality solutions supporting data center infrastructure. These are exactly the kinds of applications we are focusing our efforts on growing. They are aligned with durable sector drivers, they fit our technology strengths, and they tend to be more accretive to margins over time. So when we talk about improving the quality of growth, that is what we mean.

We are also continuing to deepen our role as a solutions partner with OEM customers by focusing on higher-value engineered systems and platforms, not just individual components. That approach supports stronger customer engagement, better competitive positioning and importantly, a more favorable margin profile.

On the demand side, orders were up 15% year-over-year and up 9% sequentially, resulting in a book-to-bill of 1.14x. This is an important indicator for us as it reflects improving momentum in key end markets and supports a constructive view as we move through the balance of 2026.

At the same time, I would also note that the first quarter did not fully reflect the leverage potential of the business. We absorbed elevated operating costs, including carryover expenses associated from the Dothan transition, along with other targeted investments to support ongoing operations. While the Dothan transition represents a near-term cost headwind, the actions underway will simplify operations, improve quality and efficiency and enhance long-term profitability. This reflects our Simplify to Accelerate NOW initiatives or STAN for short, in action from an operational standpoint.

Less visible but equally important are the significant internal investments we are making in our core business, particularly in R&D and product development. Our objective is to strengthen our electronic stack, further leverage our electromagnetic technologies to address high-growth market opportunities and expand the use of our lightweighting capabilities to create a durable competitive advantage for both Allient and our customers. Our recent technology acquisitions have created a strong technology base, and we are now aligning them more tightly with our core business to capture the benefits of scale and compounding. This further demonstrates STAN in action as we reposition the company for sustained future success.

One example is our initiative to bring state-of-the-art Allient intelligent controls products to market as quickly as possible. To enable this, we made a deliberate shift within one of our technology units, moving away from project-based onetime revenue opportunities towards scalable market-facing products aligned with our long-term strategy. While this decision resulted in a near-term reduction in revenue and profitability, we are confident the long-term value creation will be significantly greater. This reflects our willingness to bet on ourselves and make disciplined choices that drive enduring success.

Another example is our effort to accelerate development of a full range of new motors and controls for the defense market. Historically, an initiative of this scope would have taken years. At Allient, we are compressing that time line into months. To accomplish this, we are leveraging the expertise from another one of our recent acquisitions to lead the development, supported by existing technology units with proven ability to scale production. Again, this is STAN in action with a focus on speed, simplifying execution by concentrating resources within the highly experienced team that has delivered similar outcomes before. Using a sports analogy, we simplified the process by shortening the bench to utilize a highly experienced team that has been there and done it before.

So stepping back, the first quarter was a solid start to the year. Bookings were strong. Our targeted growth areas remained healthy. We made significant investments in our platform development and the business continued to move in the right direction from a product portfolio, operational and a financial standpoint. While the environment is still not uniform across every market, we believe the portfolio is better aligned, the company is operating more efficiently, and we are positioned to keep building from here.

With that, let me turn it over to Jim for an in-depth revenue of the financials.

Thank you, Dick, and good morning, everyone. Turning to Slide 4. First quarter revenue increased 5% to $138.9 million. On a constant currency basis, revenue grew 1% organically. Foreign currency translation provided a favorable impact of $5.1 million in the quarter. 50% of our Q1 revenue was generated in the U.S., with the balance coming primarily from Europe, Canada and Asia Pacific, consistent with our diversified geographic footprint.

Looking at performance by major vertical, Industrial was again the primary growth engine, up 8% year-over-year, reflecting continued strength in industrial automation and in power quality solutions supporting data center infrastructure. Those applications remain particularly healthy and are aligned with secular trends in electrification, digital infrastructure and energy efficiency.

Vehicle revenue increased 7% in the quarter, driven primarily by higher demand in commercial automotive. Medical revenue increased 2% with steady demand in surgical robotics and other precision motor applications, partially offset by softness in medical mobility. Aerospace and Defense declined 3%, as expected, driven by program timing and the previously announced M10 book of program cancellation rather than underlying pipeline weakness. Distribution, while a smaller part of the business portfolio, was down, reflecting normal variability in channel ordering patterns.

The key takeaway from this slide is that we saw a broad participation across the portfolio with particular strength in Industrial and Vehicle and a mix of steady and timing-driven dynamics in the other end markets.

Turning to Slide 5. We show the composition of revenue over the trailing 12 months and the year-over-year change by market. This slide reinforces how the business has evolved and why the mix matters for the margin and earnings durability we have been delivering. Industrial remains our largest vertical at roughly half of the trailing 12-month revenue and are increasingly anchored by higher-value applications, power quality for data center infrastructure, motion and controls tied to automation and solutions aligned with electrification. That's exactly where we've been directing engineering resources and capital.

Vehicle represents about 18% of the trailing 12 months' revenue. While still an important part of the business, it is a smaller percentage of mix than it was several years ago. That's both market-driven and intentional as we have consciously shifted away from lower margin, more commoditized programs towards higher-value applications where our technology and systems content can support better returns.

Medical remained steady at roughly 15% of revenue. Surgical instrument and other precision motion applications continue to be reliable contributors. Aerospace and Defense also represents roughly mid-teens of the mix and provides longer cycle visibility, even though quarterly shipments can be lumpy as programs ramp and pause. So the mix today is more margin accretive and more tightly aligned with long-term secular drivers than it was just a few years ago, and that mix shift is a key underpinning of our structural margin expansion.

On Slide 6, we highlight gross profit and margin trends. First quarter gross margin expanded 50 basis points year-over-year to 32.7% on gross profit of $45.4 million. The improvement was driven by higher sales volume, improved product mix and continued operational benefits from our Simplify to Accelerate NOW initiative. The structural work we've done over the last several years and continue to undertake consolidating overlapping operations, focusing resources where we have scale and advantage and driving lean disciplines, are being realized in our performance.

Those actions are embedded in our manufacturing and supply chain processes and provide a more durable foundation as demand continues to move through their normal cycles despite experiencing more pressure from the evolving tariff policy. So while quarterly margins will always reflect some mix variability, the broader message is consistent. We are structurally improving the profitability of the business, and we continue to see opportunity to build on that over time.

During the fourth quarter, U.S. trade policy underwent more changes. The Supreme Court determined that tariffs previously imposed under the International Emergency and Economic Powers Act, otherwise known as IEEPA, were not authorized and are subject to refund. While U.S. Customs has initiated an administrative process to facilitate the submission and payment of refund claims through a phased approach, we are currently evaluating our eligibility to recover previously paid tariffs and intend to submit refund claims after our review. The ultimate amount and timing of any such refunds remain uncertain and depend among other factors like processing time lines, claims validation and any unexpected administrative challenges that may come about.

In addition, incremental tariffs were imposed on a broad range of products that is expected to expire in July unless extended or replaced through other legislative action. We have taken and continue to assess actions to mitigate these changes, including price adjustments, supplier negotiations and supply chain diversification. While we do not believe these increases have had a material impact to our operating performance to date, we are monitoring the evolution of the trade policy and the pressure it may have on margins should current measures stay in effect for an extended period or be expanded.

Turning to Slide 7. Operating income increased to $9.3 million in the quarter or 6.7% of revenue. We delivered 10 basis points of operating margin expansion year-over-year even as certain cost items were elevated in the quarter. SG&A expense was 16.1% of sales, up 120 basis points year-over-year, primarily due to higher commissions and incentive compensation on stronger sales volume, increased trade show and commercial activity and elevated IT-related costs, including cloud-based subscription costs and infrastructure. We view those as investments to support growth and productivity.

Restructuring and business realignment costs remain elevated as we continue to execute the Dothan transition and related optimization actions. We expect total restructuring and realignment costs of approximately $2 million to $3 million for the full year 2026. That's consistent with finishing the work that is already underway and completing additional changes that we expect to undertake.

The way to summarize this slide is that we continue to expand operating margin year-over-year, even while absorbing near-term costs tied to Dothan and certain commercial and IT investments, and we are doing so from a structurally improved base.

On Slide 8, you can see how the margin expansion translated into earnings. Net income increased 51% to $5.4 million or $0.32 per diluted share compared with $0.21 per diluted share in the prior period. Adjusted net income was $8.4 million or $0.50 per diluted share compared with $0.46 per share a year ago. Adjusted EBITDA was $17.3 million in the quarter or 12.4% of revenue, slightly below the prior period as elevated SG&A costs weighed on adjusted EBITDA even as the underlying margin structure continued to improve. Interest expense declined $1 million to $2.6 million, primarily due to lower average debt balance as we continue to deliver. Our effective income tax rate for the quarter was 21%, and we continue to expect a full year tax rate in the 21% to 23% range.

The key takeaway is that bottom line performance continues to benefit from a stronger operating model and a lower interest burden as leverage comes down.

Moving to Slide 9. We focus on cash flow, working capital and capital deployment. Net cash provided by operating activities was $6.2 million in the quarter compared to $13.9 million in the prior period. The decrease was primarily driven due to timing differences and a larger incentive payouts rather than underlying business performance, specifically certain customer payments that typically would have been received prior to quarter end, were collected shortly after the period close. We continue to prioritize inventory discipline while making strategic purchases to mitigate impacts to the ever-evolving trade policy. As such, inventory was modestly higher quarter-over-quarter. We've improved turns compared to where we were just 2 years ago, and our goal is to keep driving better performance over time.

Days sales outstanding were roughly 61 days in the quarter compared with about 57 days for the full year 2025, and we expect some normalization as we move through the year. Capital expenditures in the quarter were $2.2 million. We are investing in capacity and productivity, notably in the areas tied to data center-related power quality, automation and other growth initiatives. For full year 2026, we expect CapEx of approximately $12 million to $15.

Overall, Slide 9 is about staying disciplined, managing working capital, funding targeted growth and efficiency investments and supporting our deleveraging priority.

Turning to Slide 10. Our balance sheet is in a stronger position than it was a year ago, and that matters for how we can support growth and navigate the external environment. At March 31, cash and cash equivalents were $41.2 million. Total debt was $177.3 million and net debt declined to $136.1 million. Total debt was down $3.1 million during the quarter, and our leverage ratio, defined as the total net debt divided by trailing 12-month adjusted EBITDA, improved to 1.78x and is down significantly from where we were a couple of years ago.

The bank leverage ratio as defined under our credit agreement and excluding foreign cash and certain other adjustments was 2.24x at quarter end, comfortably within covenant levels. We also had $158 million of unused capacity under our revolving credit facility, providing additional liquidity.

So the story of Slide 10 is straightforward. Lower debt reduces financial risk and interest expense over time, and it also gives us more flexibility to support organic growth, new program launches and disciplined capital allocation from a stronger position.

With that, if you advance to Slide 11, I will now turn the call back over to Dick.

Thank you, Jim. What we are seeing on the order side is encouraging and in our view, reinforces the progress we are making in the business. First quarter orders were $158.1 million, an increase of 15% year-over-year and 9% sequentially. That produced a book-to-bill ratio of 1.14x, which is an important sign of positive momentum as we move further into the year. The strength was led primarily by Industrial and Vehicle. As we discussed earlier, Vehicle was supportive in the quarter, particularly in commercial automotive, and we did see some continuation of the stronger activity that emerged late in 2025.

Industrial has continued its strength, especially industrial automation and power quality solutions supporting data center infrastructure, which are strategic growth areas for the company and attractive from a margin standpoint. We are also seeing steady underlying activity in Medical and Defense, even as individual programs may ramp and pause at different times. That diversification matters. It allows us to navigate variability in any one vertical while still building the overall business.

Backlog ended the quarter at $251 million, up from year-end, and the majority of that backlog is expected to convert to revenue in 3 to 5 months, which is consistent with our historical conversion patterns. So we look at orders and backlog together, we believe they support a constructive view of the business as we move through the balance of the year.

More broadly, this is consistent with what we have been saying for some time. We continue to align the business around the markets, customers and applications where we believe we can create the most value, not just in terms of revenue, but in terms of mix, margin quality and long-term durability. The bookings profile we saw in the quarter is another sign that this repositioning is gaining traction.

Turning to Slide 12. I would frame the outlook in a straightforward way. First, we believe we are positioned to build on the momentum we saw in the first quarter. Bookings were strong, backlog improved and our targeted growth areas remained healthy. Industrial automation and data center infrastructure continue to align the portfolio with attractive end markets, and we remain focused on deepening our role as a solutions partner through higher-value engineered systems and platforms for defense and medical applications where our technologies are tightly aligned with customer needs.

Second, we are going to remain disciplined. We will keep emphasizing cash generation, disciplined capital spending and further deleveraging because that combination has clearly strengthened our financial position over the last several years. We worked hard to build a stronger balance sheet, improve the cost structure and operate the business more efficiently, and that work is continuing. Simplify to accelerate NOW and our broader optimization efforts are not onetime initiatives. They are part of an ongoing effort to simplify the organization, improve throughput, eliminate waste, reduce cost and strengthen profitability over time. We still have work to do, including completing the Dothan transition and finishing the remaining structural actions that will continue to improve our gross and operating margin profile.

Third, while we are constructive, we are also realistic. The macro environment is still uneven across certain end markets and geographies. Customer spending can move in phases and trade and policy remain part of the broader backdrop. We are monitoring these developments closely. And at the same time, we have taken proactive steps over the last several years to diversify our supply base, localize sourcing where appropriate and manage exposure through pricing and operational actions. What gives us confidence is what we control.

Our cost structure is structurally better than it was a few years ago. Our capital allocation is disciplined. Our balance sheet is stronger. And through the internal investments we have been making, our portfolio is increasingly aligned around long-term secular drivers where Allient can add differentiated value, including electrification, automation, energy efficiency, increased defense spending and digital infrastructure. These are not short-cycle themes. They represent fundamental shifts in how energy is generated and used, how systems are automated and how critical infrastructure is designed and built. Our motion, controls and power technologies, combined with our systems-level engineering capabilities position us well to support those transitions.

I would also like to note that we increased our dividend. This represents the confidence we have in our future and provides a return to our investors. Quarter 1 demonstrated that the foundation we have built is working. Our job now is to continue simplifying the organization, driving out cost, supporting our customers and investing in the right programs and capabilities so that we can convert that foundation to sustainable, high-quality growth and value creation over time. I view us as being in the early to mid earnings -- innings of our journey and STAN is key to our success as we move forward. It provides us a framework to execute our strategy and leverage our AST toolkit. Most importantly, though, it is the outstanding team here at Allient that truly makes it happen.

With that, operator, please open the line for questions.

[Operator Instructions] Our first question is from the line of Gerry Sweeney with ROTH Capital Partners.

I wanted to start on the A&D side. Obviously, you highlighted and we knew about some headwinds, especially around the M10 Booker program, but also a lot of news out there in terms of replenishing certain munitions, et cetera, and some of our more high-end equipment per se. I was just curious as to how you play into that opportunity and what you're hearing from maybe some of the -- in the background on opportunities as we go forward on that front?

Sure. I can tell you this is that everything that you're hearing about that the replenishment that will be occurring, it has to occur. I mean there's been a huge consumption of some of the Defense products that absolutely need to be replenished. And we are seeing progress in those areas. So I can start by saying to you that we had a very strong bookings first quarter. I can tell you, we've come out even stronger in April already. Now typically, we don't give forecast and guidance, but this is the actual. And April has started out extremely strong, and we see continued progress in the areas that you've been discussing.

Got it. The other area that I think is an opportunity I wanted to discuss a little bit for -- more is data centers. And I know it's a topic for sure, and it's come up everywhere. But especially power quality, which I think we play an important role in. And one of the aspects we're looking at is dollars are really starting to hit the ground in data centers, right? On the front end, you're seeing some huge upticks in backlog, especially on the construction companies. Obviously, Allient is a little bit later in this process because -- after the initial build-out. But how does this play out in an opportunity? Because if you think about it, AI started 3 years ago, it takes 2 years to build a data center, '25 investment is much larger than '24, '24, much larger than '23. So it would imply that there is a burgeoning opportunity for you in the next couple of years. I just want to get your thoughts on that front.

100% correct. It is part of the growth that we're seeing. It's part of the strength that we're seeing in our bookings and it did have an impact on our growth last year, and we think it will be -- continue to grow and be more significant as we move forward this year and into the following years. So you're absolutely correct. It is happening. We are seeing it converted into orders and backlog and with the -- and the other encouraging sign is that you're seeing the markets looking for acceleration of delivery. So that's good and it's bad. I mean you have to have the capacity in order to be able to handle it, which fortunately, we made the investments. We made the investments in acquiring a company in Oshkosh that had a production capability in Mexico that we've been able to leverage and also an expansion of our facility up in Milwaukee. So -- and those are -- they're playing into those markets. So I think we have made our investments in advance of what the increasing demand is, and we're prepared to deliver to it. And you are correct, we are seeing the positive benefits and impacts of that.

And one more question on that front. Would you be involved only in new builds? Or is there a retrofit opportunity?

Well, that's a great question. I can't answer it with 100% confidence, but I would say to you that if the retrofit is to improve the performance or the throughput of existing data centers and in order to do that, they're going to need equipment like ours. So if that is happening, and I'm not sure -- I can't answer that...

Yes. I'm not sure either, to be honest with you. I've just been hearing more some existing data centers are being retrofitted. That's just in the last couple of days. So...

Yes, it makes sense. It absolutely makes sense. I mean you've got the infrastructure there and what you want to do is you take advantage of current technology and leverage that. And if you're going to do that, then you're going to be leveraging our stuff as well. So we'll have to take a look at that.

Our next question is from the line of Max Michaelis with Lake Street Capital Markets.

First one for me, I want to go back to A&D. It sounds like you're seeing a lot of positive momentum here in Q2. I was curious to know if you're seeing a lot of that activity around drones or if it's just kind of a broad-based strength in the Defense space?

Well, there's obviously a significant interest in drones. And we take it serious, and we feel we're in a great position. In past conference calls, we've talked about our capabilities and motors that are used in the propulsion and so forth and the requirement that certain products are going to have to convert to U.S.-made products for U.S. defense applications. So we are well positioned to take advantage of that.

In saying that, there -- we are -- we have typically been in the high-end side of that, the high end, meaning the more expensive, larger, more sophisticated drone applications that weren't necessarily just propulsion, but we do see that the opportunity in propulsion for us given our experience and knowledge of the motor types, our ability to scale and meaning scale because having been in the vehicle business and in other businesses where we make millions of motors a year, this is one of the beauties of our company. We can convert from design to full-scale production.

And I mentioned in part of my prepared script here is that leveraging one of our newer acquisitions from a technology standpoint, but also from a design standpoint and combining it with existing operations that know how to scale. That's what's going to be required in the market, and we've been working extremely hard to position ourselves to be able to take advantage of it, okay? So we see it as important. We're making an investment. We're moving very, very quickly. That's all I can say about that right now.

Perfect. Now a couple more for me here. Secondly, you noted vehicle was strong as well in orders in Q1. Just curious to know if you're kind of turning away any sort of low-margin vehicle orders or if you're just accepting all now?

Yes, great question. I mean -- so if we remember vehicle, we describe vehicle as it's not just automotive. We mentioned, in particular, commercial automotive is a portion of our business, but the other vehicle markets have been strong as well, okay? And typically, they're in some custom applications that enhance their actuation and so forth and the margin profiles are better. I will say that our team has done a great job of making improvements in process, adding some automation to the process. And we are not working on massive new programs. That's the one thing that I would say to you that what we've turned away from is that we're not interested in working on a design for a low-margin commercial automotive project that we don't particularly add any other value than what they're looking for is price.

So more about not getting involved in the high upfront CapEx requirements, the long design-in cycle time, the long time before you start to see a return on investment. We are leveraging what we have. And fortunately, for us, I mean, it is continuing to grow. And I would tell you that our operating margins have improved.

Our next question comes from the line of Greg Palm with Craig-Hallum.

Can you -- maybe, I don't know if you're able to quantify some of these facility transition costs that you alluded to. I don't know how much that was in Q1, whether it gets better or worse in Q2. And just to be clear, is it sort of fully abate by second half? Anything lingering that we should be aware of?

Yes. No, great question. I mean that -- and we did bring it up because you get into transitions, there's always some unknowns. Some of the -- And many of the times, you're designed in on programs that require customer support in order to get requalified. So it's difficult for you to just pick it up and move it and you're dealing with many, many different parties and so forth. And what we are moving is more of a higher mix business, which adds complexity to it as well. I will say, in retrospect, could we have done a better job in identifying some of these challenges upfront? Of course, we could have. But we're correcting them, and we're moving fast on them.

And to answer your question, we do expect to drive out more cost, costs that we expected to drive out, improve efficiencies, and we will start to see the benefits of that in the second half of the year. Jim can -- he can provide you some numbers, give you some more detail on what the impacts have been.

Yes. As we mentioned during the call that we expect it to make some incremental investments, $2 million to $3 million over the course of 2026. And again, I would expect really the second half of the year to probably see more of a concentration of that. Again, as Dick mentioned, we're still stabilizing and working on the transition with Dothan. So that's continuing. And hopefully, by the end of the third quarter, that will be in a good place of where we expect it to be.

Okay. Makes sense. Shifting gears to the bookings, which I think was an all-time record. Obviously, stood out both from an absolute basis, year-over-year growth. I think you mentioned Vehicle, Industrial. Can you give us some sense, were there specific categories within that, that drove it? And then in response to an earlier question, you talked about April trends. Was that specific to Defense? Or was that across the board? I didn't catch that comment.

Sure. To answer your question, in the first quarter, we did see strength pretty much, I would say, across the board, but the magnitude or the significance of them are in some of the key drivers and markets that we mentioned to you. So Jerry had asked the question about the defense market and replenishment and so forth, and we did benefit from that, and we will continue to benefit from that.

I will say to you this, and -- as we've talked about how do we record bookings. And if we have a firm schedule for a multi -- full year or multiyear commitment to us, the only time that we actually record it as a booking is when we get a firm production schedule. So one of the things that we did do starting the beginning of the year here is that in the past, we have received with some forecasted demand of when deliveries are going to occur, and we may have booked a full amount, okay? We're doing it a little bit differently. And the bookings could have been significantly better if we book full program versus booking 4 to 5 months out of demand every quarter booking another quarter showing the demand and forecast demand and when we're shipping in a more current time frame.

So you heard me talk about moving in some of the backlog into a more current time frame. I think I said 3 to 5 months, I should have said 3 to 6 months. And that's because of the change that we've made. It is substantive. And I will say that if we go back, we do a comparison to one of the programs that we are now booking on a monthly or quarterly basis versus on a full annual basis, it could have been significantly higher. So we are seeing -- in the defense market, we're seeing those bookings coming in. We expect more to come. And also in the data center side of it. It's been significant growth in the first quarter, it was strong, and we also see strengthening coming right out of the shoots here in the second quarter.

So Greg, we don't -- rarely do we talk about what we've already seen. And I think my intent here is to -- while you look at it and say we may have missed in from a revenue projection or adjusted EBITDA projection, I would say to you, the business is strong and healthy, and we're very confident that what we're seeing here is -- we're certainly pleased with what we're seeing, and we want to share that, that there's no real reason of concern. The orders are coming. They are coming, they have come, and they will continue to come, and that results in the improvements that we expect for the full year and beyond.

Okay. So just to be clear, bookings were up 15% on a year-over-year basis. So they were very strong. But you're saying they were actually understated because of this sort of change in formula that you alluded to?

Yes. I mean if we had recorded a particular order that was pretty significant on, like we did a couple of years ago. The problem with it is you book it in one -- and we booked the whole thing. We have forecast demand. We found out that demand doesn't necessarily relate to reality. So you'll get pushouts as it goes on. So we decided to make the change and the change we made, it could have been significantly higher if we did it in the same manner, but we are making the change to be more level loading, more conservative about, okay, with current data, we will book when we get more of a firm demand on a short-term basis. So you're absolutely correct.

Okay. Understood. So I guess my last question then just in light of just your comments, I mean, I don't think 1% organic growth on a constant currency basis, which is what you reported in Q1 is necessarily a good representation of how you might view the year. I know you don't guide for the full year, but maybe would just appreciate any comments related to that?

Yes, I would agree with you. I think we're on a path to certainly exceed that. And I think we also remember, if we go back to what we talked about in -- the fourth quarter was better than we expected because we had some pull aheads, which was unusual in the fourth quarter, which did have an impact on what we were -- what was available to ship in the first quarter. So it was a balancing. It was a level loading to a certain extent. Again, unusual for certain -- well, for us as a company, but for certain customers to be accelerating shipments into the fourth quarter rather than pushing and allowing them to ship in first quarter. So we saw some of that. So I think if you look at a quarter-to-quarter basis, it may look -- all right, it's not that great. But when you look at it on a more longer term standpoint, there is some positive growth occurring.

Our next question comes from the line of Tomp Sano with JPMorgan.

Could you talk about operating margins? That was 6.7% in Q1. But excluding onetime items and considering the impacts of the Simplify to Accelerate NOW program, what would you estimate as the underlying or normalized margin levels? Additionally, if you could talk about some OP margin outlook from Q2 onward, it would be appreciated.

Yes. Good question, Tomo. So a couple of things. As we talked about, we're making investments in our research and development, new product development. And as Dick mentioned, we're on pace to bring products to market faster. And so we did make some strategic investments in order to facilitate and enable that. And I think we'll see some continued investments as we go throughout the rest of this year in order to execute on what we're strategically trying to do, and that is to bring products to market faster.

So I think the continued investments that we will make in the streamlining of the business as we have been doing in the last couple of years. And as we mentioned, we're continuing to complete the Dothan transition and continuing to look for opportunities where we see duplication. So I think our Simplify to Accelerate NOW DNA is well in place, and we're continuing to support the ongoing improvement in margins as a result of what those projects have demonstrated over the last couple of years.

If I may follow up on the vehicle in terms of the order trends or revenue, that was a bit surprisingly solid. So Dick, if you could talk about the 8% plus commercial automotive and construction strength offset by the lower power sports and truck demand? How should we look at these kind of customers' order trends over the next couple of quarters?

I think they're going to continue. I don't -- we don't see any signs that this was unusual by any stretch of the imagination or means. And I think we've seen return to growth in some of the nonautomotive vehicle markets, and I think that's a positive sign for us. We are continuing to work on new applications in those areas. As I mentioned, it's -- they're typically specialty and they're used in trucks and buses and construction equipment and so forth.

I think one thing is the -- talking about the impacts on the ATV market, the power sports and so forth, that has continued to bring a little bit of a drain on us, and we have mentioned in the past that, that market has moved in the direction of more commoditized commercial automotive. And we have -- while we're experiencing competition and we have experienced competition in the last several years that have come from the automotive side of it, the quantities don't necessarily lend themselves to it long-term. We have focused on what the future is going to look like and how we can provide a more integrated total solution versus a component solution. And from that standpoint, I think we feel good that we've hit a point of where we bottomed out, but that we will see some growth from there. So I think those are positive signs from that standpoint as well.

And we realigned our businesses, and we continue to realign our business. Some of the moves that we're taking -- undertaking right now and unfortunately, that we've incurred -- extended transition time periods and cost, I think in the long term, they're definitely going to pay dividends because the businesses are different and the investments that you make and how you structure the business has to be different. So our goal is to align the cost associated with those business with the profit potential. And that's exactly what we're doing.

So yes, it's painful. But the rewards will be there and the margin profiles that we're setting internally, it's not the same across the board. We've talked about this. I know you've asked us questions in the past, can we share more about which ones generate higher margins or not? And we've been reluctant to do so. When you talk about gross margins, that's one thing. But when you talk about operating profit, that's another. And our expectation is that the business potential has to be there, and it's our job to structure them to generate the operating profit and control the variable cost to the best of our ability and -- but certainly, the OpEx cost, which is not -- all parts are not created equal. That will drive operating margin in each of our markets that we've established targets for and we continue to move towards, okay?

So Vehicle, our specialty applications that we do, we're getting better and stronger in, and we're leveraging already designs and capital equipment that's in place, and we're certainly willing to take on more of those. We're just not willing to take on long-term, really cost competitive, long -- high CapEx and high-risk returns. That's -- we're changing the profile, and that's not part of our plans.

This does conclude our question-and-answer session. I'd like to turn the floor back over to management for closing comments.

Well, thank you, everyone, for joining us on today's call and for your interest in Allient. We will be participating in the Craig-Hallum Investor Conference in Minneapolis on May 28, and then the Virtual Northland Growth Conference on June 23. 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 second quarter 2026 results. Have a great day.

This concludes today's teleconference. Thank you very much for your participation. Please disconnect your lines, and have a wonderful day.

Good day, and welcome to the Allient Inc. Fourth Quarter Fiscal Year 2025 Financial Results. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Craig Mychajluk, Investor Relations. Please go ahead.

Yes. Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allient. On the call today are Dick Warzala, our Chairman, President and CEO; and Jim Michaud, our Chief Financial Officer. Nick 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 accompanied slide presentation are available on our website at allient.com. If you're following along, please turn to Slide 2 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 will also discuss certain non-GAAP measures. We believe it will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release as well as the slides.

So with that, please turn to Slide 3, and I'll turn it over to Dick to begin.

Thank you, Craig, and welcome, everyone. 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 3. 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, disciplined 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 auto 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 & 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. They 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 4 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, improve throughput, and strengthen margins in a way that is sustainable. We targeted a set of structural savings in the range of $6 million to $7 million for 2025. And while not yet complete, we delivered meaningful progress on that target. These savings are being realized through 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 reduce time to market for our offerings. Lean manufacturing disciplines where we improve standard work and reduce non-value-added time on our shop floors consistent with best practices that help cut costs while improving quality and reliability. This is a journey, and it never ends.

One example that speaks to all 3 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 for facilities where we have complementary capabilities. That effort while still a work in progress is expected to drive down cost and reduce complexity across our North American footprint.

Overall, we delivered record gross margins for the year. We expanded operating income at a rate well ahead of revenue growth. 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.

Thank you, Dick, and good morning, everyone. Turning to Slide 5. 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, 56% of 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% and supported by steady demand for surgical instruments and continued traction in precise motion applications. Aerospace & Defense declined 5%, and reflecting the lumpy nature of defense and space program shipments, along with the previously announced M10 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 6. 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 is 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 & Defense continues to represent a meaningful and growing contributor. While quarterly shipments can be lumpy, the underlying program activity and pipeline remains 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 7, 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 Simplify 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 8 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 our revenue. For the full year, operating income increased 46% to $44 million or 7.9% of revenue.

Turning to Slide 9, you can clearly see how the structural margin expansion and disciplined execution translated into meaningful bottom line growth. Net income for the quarter more than doubled to $6.4 million or $0.38 per diluted share. Adjusted net income was $9.3 million or $0.55 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 points 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 3 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 3.2x compared to 2.7 at the end of 2024. That is a meaningful step forward. We tightened planning processes, align 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, days 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 million 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 1.82x from 3.01x at the end of 2024. Our bank-defined leverage ratio ended the year at 2.34x, 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 2 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. As we move through the fourth quarter, order trends improved. Automation demand is stabilizing, power quality tied to data center infrastructure remains strong. And our Aerospace & Defense pipeline continues to provide a long-term cycle visibility. Orders were up sequentially and year-over-year, we exited with a book-to-bill ratio slightly above 1x. 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 3 to 9 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 is 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. And 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 our infrastructure is built. Allient's technologies are directly aligned with those transitions.

We exited 2025 with improved margins, stronger cash flow and a material stronger balance sheet. That combination provides flexibility and resilience, and it positions us to execute through varying market conditions. We believe we're ending 2026 from a position of strength. We have an excellent opportunity to leverage the foundation we have been building through our Simplify to Accelerate NOW initiatives: simplify our organization, drive out cost and accelerate growth rates well into the future.

With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Tomo Sano with JPMorgan.

So slide -- sorry, so while the cyclical macro recovery such as improving ISM, it is expected, Allient has clearly driving a structural growth and margin improvement through our initiatives like Simplify to Accelerate NOW. So looking ahead to 2026, which do you see as the bigger contributor to growth in margin expansions, external tailwinds or your own like self-help measures? Any more colors on 2026, please.

Okay. So if I -- 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?

I want to get the most sense about cyclical characteristics of the recovery you're seeing versus the structural the themes you see in 2026?

Tomo, I'm sorry, 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.

I'm sorry, I mean, could you talk about 2026, the gross of the sales driven by cyclical recovery versus like structurally items for the revenue side, I wanted to get some color on the margin side as well.

Okay. I think I have it here now. Well, first off, as we talked about here is we've been repositioning our business and looking at where we see some of the long longer-term drivers. And we mentioned the 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 are they going to generate power. And it seems like some of the companies are stepping up to do that on their own, which is, I think, was a major concern that doesn't affect us. We obviously need the power. And as the data center expansion continues, we play a pretty significant role in making sure that, that power is being delivered efficiently and effectively. And 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 -- and then as far as Aerospace & Defense, or let's call it, defense more than aerospace. That is impacted by many factors, and we will still now, given 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 is 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 that's definitely plays into an advantage for us as we do have a pretty significant manufacturing base and design engineering team in North America. The other areas that we see opportunities, of course, is we don't see medical slowing down the advent of AI in 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. And automation comes in the form of our normal or typical industrial automation and even in the robotic side of it, sometimes referred to as in exciting areas of humanizes 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 are -- 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 -- we saw some signs that it was going to improve, but the latest information we're getting is that, that may not be the case.

So that's -- and I think our diversification in many different markets plays well for us. And there is a good balance. 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, 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 it 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 we are in pretty good shape. Our book-to-bill ratio was improving. And that's one of the things that we pay close attention to, to determine whether or not 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.

So this 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.

Very helpful. And just a follow-up on a capital allocation standpoint. Congrats on leverage improved and strong cash flow generations. How would you prioritizing capital allocations for 2026 among organic growth, investment in M&A and shareholder returns, please?

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'll be making will be to support what we have control over and in hand right now, which is some significant opportunities and that we will need to invest to who 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 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 are -- we're paying close attention to. And if the opportunity does arise, I mean, we think we are well positioned to take advantage of that and to move forward with it.

With the -- and I think be 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 there certain things were not completed in 2025 that are recurring into 2026. And we will have the discipline to get them done and drive cost 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 cost 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 of years, and it's all completed. It's not. There's more opportunity ahead of us here. And 2026 will not be 1 that we just sit back and say, okay, let's just take a deep breath and look at what we did and move on from here. We're going to be aggressively going after some additional opportunities to improve our cost base and they're there.

And the next question comes from Greg Palm with Craig-Hallum.

Congrats on a good way to finish 2025.

Thank you, Greg.

Appreciate it, Greg.

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 growth in commercial vehicle, which you talked about. But just broadly speaking, what else drove the better-than-expected seasonality that you'd normally see. And just to be clear, what kind of trends have you seen so far in Q1?

Yes. Great question, Greg, because it was abnormal. You're absolutely correct. You followed us a long time, and it's -- as we say, going into Q4, is always -- there's some unknowns. We've seen years where 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 in commercial vehicle side of it, we don't see that having -- that was a onetime surge based upon some demand that had been sitting out there and we see it returning to normal.

In a couple of other areas, there was a few that surprises, I'll call it, and I won't mention in detail what they were, what they were 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 we're going to have to -- we'll be addressing and see. It's still early, of course, let's 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 3 different drivers of that and 1 was a onetime, which will reduce the normal. And the other 2, we did see a little bit of reduction after they were pulled ahead as we started the year. but nothing that we see that will change normal run rates on an annual basis. It was just unusual.

And just leaving this aside, what type of sort of demand 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, I'm 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. I mean our order input seem to be coming in quite well, and we saw some improvement through the year. And as we mentioned, for us, we watch 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 to, I guess, that in saying that we're in 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 also -- we were surprised when they were heavily consumed, and we did 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.

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 opportunity set that might be emerging there?

Sure. Our company is well regarded and well respected for high-performance solutions, custom engineering and so forth. And I'd say our activity in that market had been primarily in that space, and it accelerated. It certainly accelerated just further 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 1 or Group 1, 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 buying.

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 there -- the pricing and the margins may not necessarily be the same as 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.

It's -- -- the shift to North America has created a certainly an increase in inquiries. And as I said, we're -- we've been in the business in different applications. We see our technology base that we have in electronics and controls, 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.

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 adequate capacity as that's done or once it's done to capitalize, what are you seeing in terms of the opportunity set there?

Yes. To answer your question, it's coming along extremely well. It will be 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 they'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.

And the next question comes from Max Michaelis with Lake Street Capital Markets.

Just want to kind of go back to the data center opportunity. from your comments here in the Q&A and the prepared remarks, it sounds like it would be safe to say you expect the data center opportunity to accelerate 2026 versus 2025 in terms of growth rate. Is that correct?

Yes, we do. And what I would say to you is that definitely the opportunities are there, and as Greg asked the previous question about the expansion to our facility, our main facility that was underway and last year was approved and is 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 there was an acceleration into last year of some of the products that we produce and accelerated deliveries. And 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 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, it's not just going to be a straight line here. It's going to be -- we'll see that perhaps in the third and fourth quarters of this year, where you'll see some ramping.

Is this growth primarily driven by new contract wins with new customers? Or are you guys -- or kind of a mix between expanding wallet share with other customer -- existing customers?

The market itself is expanding. And we're -- we have a -- we've talked in the past about some of our capabilities that put us in a very nice competitive position in the market. And I think that's definitely driving it. So there's market expansion and the technology we have to support and service that is also being recognized in accelerating some of those opportunities for us as well. And I don't want to -- you guys are fairly new, and I appreciate you joining us as an analyst.

In the past talked about an acquisition that we did in Wisconsin that gave us a capability and a manufacturing capability footprint in Mexico. And we've been leveraging that to a great extent here and helping us accelerate our ability to meet those demands. And it has proven to be very helpful for us as we've been addressing some of those. So it's been 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 a product that is recognized as high-performing and very cost effective.

Okay. And then last one for me. With the M10 Booker program coming to an end, I mean, is there any other programs you can share with us, kind of give us an idea where you guys expect to head next? Or is it something you can't share?

No, I'd rather not share. And I say if sure, we could share but defense programs, as we found out with M10 Booker, that was not a 1-year program. That was a 6-, 7-year program. And if you look at it and say there's logic behind it, what's happening. And as the battlefield's transitioning here, utilization of drones, the utilization of missiles, less boots on the ground. Booker was a larger vehicle. It's not going to go away itself or 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 we're positioned as well unknowns.

So one of the things just for us to get the message out as we've acquired companies in the past, 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 actuations. So we've got motors. We've got controls, we've got drives, we've got I/O, and we have lightweighting composites. And those composites are used quite extensively and composites aren't just for -- and I mentioned lightweighting, but there are other reasons you use lightweighting, structural integrity or improved strength, EMI protection, as well as lightweighting to make them more efficient as you go -- move towards, whether it's electric or hybrid vehicles to improve battery life and so forth.

I would say to you that again, we are at a quite a unique position to be able to offer all of that to some of the prime contractors. In addition, to one of the things that the Department of War is pushing really hard now. I mean accelerated development. These long design-in cycle times like a 6-, 7-year Booker program and then canceling at the end, it's 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 -- in their vehicles, in many cases, their vehicles. And since we have been very strong in the 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 rocketize, 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 haven't -- and 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.

[Operator Instructions] Our next question comes from Ted Jackson with 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 and its drive for you. You've been dancing around that. And this whole thing with NDAA, there's kind of 2 buckets to bringing the stuff back into the country, and one is the actual manufacturing. And the other is the supply chain. And I think for Allient, the manufacturing bucket is pretty straightforward. Is there work that you need to do on the supply chain to bring anything into compliance within NDAA by the time it becomes fully into effect in January?

A very good question. And the answer is there's always going to be work to be done there. There's no quick answers to some of the rare earth minerals, some materials that are being utilized in some of the higher performed products here. So you're 100% correct. I mean 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. So 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 if there was 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 cannot sit here and tell you that it's completely solved. We're subject to other governments and other policies and that they may impose. But we've been working hard to mimic 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 is going to have to look at that and really decide there's a desire and there's a reality and whether the two meet. And I think we'll be working through some of that this year.

But it's an excellent question. It's something that 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 some of the other factors that come into play could impact us.

So Jim, do you have anything you want to add to that?

Yes. What I would tell you, Ted, and this is just really dovetailing what Dick just mentioned. The Feds have -- are really investing billions of dollars in a number of companies here in the U.S. And obviously, we've been in contact with all of them. But I think just mentioned, it's going to take time for all of the supply chain in and around the rare earth and the processing and materials and so forth to evolve. And I don't think it's going to all happen when we hit January 1. But I can tell you, we have teams here that are working diligently with a variety of different suppliers, and we're setting the foundation for us to partner with these companies that the government is investing in.

And I did want to get into magnets, but let's just keep -- and so I want to jump over there. But on the main issue for you on the supply chain side is rare earth around magnet. I mean, everyone has that problem. I have to believe that the government is well aware of that. I mean do you have any dialogue with the government? Do they understand that -- at some level, you have to be practical? Or are you just saying that yourself? And then...

As mentioned 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 to -- and that's why I said to you, at some point in time, reality and the desire and there's a push, but there's also a 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 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 that the key government officials and activities that are being undertaken right now.

Beyond magnets, is there any other critical kind of components or parts that you have had to go out and resource or our need to resource to move into compliance?

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 mean it's a cost factor more than anything. Something else that does impact that as well. 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 in 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, if you're talking about motors. For a motor function, whether it's laminated steel, whether it's bearings, it's but there are alternatives. The alternatives may be more costly, but they are our alternatives. Magnets are a little bit unique in themselves. So highlighting the magnet side of it is important. And the others are there but they get impacted on probably based on other factors.

So anyway, it sounds like it will just be 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. Just shifting over to kind of the commercial vehicle market and the fourth quarter. So you had like a pig and a 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, help us kind of realign like how our fourth -- 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 -- I think it would be helpful for all analysts in terms of just getting their '26 numbers done.

And then on a more macro level, I mean 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've seen a pickup in freight rates if you listen to like Packard, and Volvo and all the Class 8 guys. Starting in November, they saw order activity bookings pick up substantially. It continued through January. I talked to some of their suppliers. It continued through February. So 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 like how you see that market playing out as we roll through the year into '27?

Okay. So 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?

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 because I'm American.

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, agriculture, truck and rail. That's our vehicle. That's what we consider vehicles. So we have to continually remind people, when we talk about vehicle. And also, actually, we have powersports 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 and invest our money in other areas, but we do see differences in the -- and I've mentioned to you before that powersports has become automotive like -- commercial automotive light. Not to the same extent, but it has gone variable. But we did see increases in pretty much across the board and the impact of the onetime effect of the fourth quarter that you could see going forward, I would tell you, about $2.5 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, different types of actuators and so forth.

But 1 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 petrol or whether it's electrification. So we can be utilized the each. We've also involved in electrohydraulics for some of the larger vehicles, again, primarily in steering area. So we have a great expertise in steering. And that's kind of where we focus our efforts not just in that vehicle, but also in some of the industrial applications as well, okay? Does that help you?

That does. And I know we're at kind of end time line, so I'll stop.

Okay. Thank you, Ted. Thank you, everyone. And I think if there's no more questions, which I believe. There aren't operator, can you confirm that?

Yes. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you, everyone, for joining us on today's call and for your interest in Allient. 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. Have a great day, and that will conclude the call, operator.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Yes. Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allient. On the call today are Dick Warzala, our Chairman, President and CEO; and Jim Michaud, our Chief Financial Officer. Dick and Jim will review our third quarter 2025 results, provide a strategic and operational update and share our outlook. We will 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 allient.com. If you're following along, please turn to Slide 2 for our safe harbor statement. During today's call, we may make forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated. These risks and factors are outlined in our SEC filings and in our Q3 earnings release.

We also discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release as well as the slides.

So with that, please turn to Slide 3, and I'll turn it over to Dick to begin. Dick?

Thank you, Craig, and welcome, everyone. Allient 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 improvement. Importantly, these gains were not only a result of volume, but also a reflection of mix shift toward higher-value programs and ongoing cost discipline.

Cash generation and balance sheet strength 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 for the quarter, but 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.

Thank you, Dick, and good morning, everyone. Please turn to Slide 5. 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 million 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 6. 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. 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 in defense continues to provide visibility and to 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 powersports 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 7. 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 mix improvement, higher volumes, disciplined lean -- and disciplined lean manufacturing execution.

On Slide 8, 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 Simplify 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 million 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 build largely tied to rare earth magnets and to ensure continuity during the Dothan transition. In addition, we experienced a modest increase in days 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 million to $8.5 million from the prior $8 million to $10 million range. Importantly, we are executing well against our 3 financial priorities for 2025.

Reducing inventory and strengthening working capital management, we've already improved inventory turns to 3 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 with Simplify 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 to 2.1x compared with 3 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.

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 Allient.

Our backlog ended the quarter at $231 million, with the majority expected to ship within the next 3 to 9 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 risk, 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 multipronged 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 for 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 Allient's capabilities and positions us to deliver sustainable profitable growth through varying market conditions.

With that, operator, please open the line for questions.

[Operator Instructions] And the first question comes from Tomo Sano with JPMorgan.

I'd like to ask about the orders and backlog 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?

I would say to you that overall we're -- and I want to clarify one thing. We would have been above 1, 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 1. 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. 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.

And a follow-up on the margin side and 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 cost savings or margin opportunities ahead?

Yes, 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 2 other facilities, one in Reynosa, Mexico and in Tulsa, Oklahoma, which better align with the markets and the products that are being produced. In 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 will 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 to continue to expand our high-precision motion applications, and Dothan will give us an opportunity to do that.

I also want to stress that while we – 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 and 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 -- that we feel that we have some significant improvement opportunities. So that's another area. So that will 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'd 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 -- the value looks high, but the true bottom line value is not as great and cost 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 looked 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.

Congrats on the quarter.

And the next question comes from Greg Palm with Craig-Hallum Capital Group.

Congrats as well from me. I think from a segment level, industrial certainly stood out. I know you called out stronger data center activity. So maybe you can just remind us exactly what you're selling into that market? And is there just -- 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 I just wanted to get a little bit more color on that market specifically.

Sure. So you're exactly right, Greg, there. 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 solution is 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 a big -- 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 we had -- a couple of years ago, we had a banner year, but it was based on supply chain -- issues with supply chain. And when demand freed up, 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 it 3 years out, we would see demand coming back to a normalized level, and we've actually seen that again this year. So each quarter, we've seen a nice step-up in our run rates and we're getting close –- when 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 some of -- a couple of our businesses was 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 some 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 will be a slower ramp-up into next year.

On defense side, good opportunities, and 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 of the requirements in the market. So there is 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.

Add on top of that, munitions. I mean, we know some orders from 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 would have to say to you 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 with, 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.

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?

The bookings impact for this year was about $5 million that we had to take a hit on. And the longer-term impact for us was a backlog of shipments averaging around $7 million a year for a number of years forward. So a lot of work we've done on that. There are -- we're reviewing cost 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. When 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 drone, when you see it, I think 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.

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 it seems like there's still a pretty big chunk of your business that's operating well below normalized revenue levels or at least revenue levels from a few years ago. So as 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?

Yes, definitely a fair statement. And I think a real focus on 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 in setting targets. All have to contribute and all have to improve, and that's the key. And I think bulk of the work in order to have clarity and line of sight on what could be accomplished there is coming into place there now. And I think I feel comfortable that, that's going to drive improvements and continued improvements in all areas, and that's our goal anyways. So definitely some opportunities there.

[Operator Instructions] And the next question comes from Ted Jackson with Northland Securities.

So I got a few questions for you. Just a few cleanup items and then some bigger ones. But with the –- the whole thing with the tank and the -- which is a disappointment, will you -- will there be anything that you have to write down in future periods because of that?

No. No, there's full recovery of costs in [ transit ]. We're working through that right now. But no, we will not have to write anything down.

Okay. Then going over to the positive FX impact. Within your revenue verticals, where was that?

Yes, that was in the European -- in the euro-denominated transactions.

I mean, but was it in any –- it was across any verticals? Was it concentrated into anything in particular, I mean, industrial, for instance?

No, no.

Geographic.

Okay. And then can you remind -- so 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?

Power quality primarily. HVAC.

Then in the vehicle market -- I mean, I know you've worked very, very hard at lowering your exposure within the powersports world, and it's -- but I'm kind of curious with regards to that segment, if you could maybe cover kind of the mix of where that revenue comes from these days. You highlighted strength in commercial vehicle and construction. And then -- so I'm kind of curious. Like how much of that business now is exposed within powersports? What's the mix for that to construction? How much is commercial vehicle? And then maybe what -- some color with regards to like construction and commercial vehicle as to sort of what are you -- where are you providing your solutions, in what?

Okay. So I would say to you first, Ted, we don't and we haven't in the past given 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. It 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 -- when we started talking about it 4, 5 years ago that there were real challenges there, that the book of business that we had acquired and some of the challenges in the market itself through supply chain and price increases and so forth, we worked our way through it and it's something that's performing. I would tell you, the net differential has been very, very positive for us.

As far as powersports go, we did mention that -- we have mentioned that one of our major customers had a 2 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 a 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 time frame, 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 there's certainly some things that are going to impact it going forward, the tariffs, the USMCA agreements, the content of -- North American content that's in vehicles and so forth. So we've got a very robust solution that -- 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 powersports 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, okay?

And then the rest of it is made up of the other vehicles, where 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 are emphasizing that we'd like to see growth in those as well. That's about the best of the color I can give you with that at this point. I hope that helps.

No, it's great color, Dick. I appreciate it. Because if you look at that section -- that segment, excuse me. I mean, as you said like a little over a year ago, you kind of had -- went to dual source. But the business has really stabilized, just call it, $20 million, $22 million in quarterly revenue. Now that, that business is where it's at –- you see what I'm saying? -- the headwinds of it -- I'm talking about powersports -- are giving away. So I'm kind of wanting to understand the mix of it to see where -- what growth will come now that you –- you know what I mean? -- because powersports market in and of itself is clearly flatlining at this point. And then you have these other verticals as well. So I want to understand it because this segment is actually poised probably to start performing better.

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 -- like it went out of my mind. And if I think about it, I'll punch back in.

And that does conclude the question-and-answer session. So I would like to turn the floor to management for any closing comments.

Well, thank you, everyone, for joining us on today's call and for your interest in Allient. 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.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.