Allied Motion Technologies Inc. Aktie

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.

Good morning, and welcome to the Allient Inc. Second Quarter Fiscal Year 2025 Financial Results Conference Call. [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.

Joining me today are Dick Warzala, our Chairman, President and CEO; and Jim Michaud, our Chief Financial Officer. Dick and Jim will walk through our second quarter 2025 results, provide a strategic update and share our outlook. We'll then open up the call for Q&A. You should have a copy of the financial results that were released yesterday after the market closed. If not, you can find it on our website at allient.com, along with the slides that accompany today's discussion.

If you're reviewing those slides, please turn to Slide 2 for the safe harbor statement. As you are aware, we may make forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov.

I want to point out as well that during today's call, we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release 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. We continue to build momentum in the second quarter, delivering record gross margin, strong profitability and exceptional cash generation. This performance reflects the consistent execution of our operational priorities and the alignment we are seeing across our markets, organization and strategic road map.

Revenue increased 5% sequentially and 3% year-over-year, supported by solid demand in data center infrastructure, defense and select high-value medical applications. While powersports within the vehicle market remained under pressure, we did see healthy sequential growth from that vertical. It is worth noting that approximately $3 million to $4 million of revenue was pulled into the second quarter as customers accelerated shipments due to concerns around supply constraints in heavy rare earth materials.

Gross margin reached a record 33.2%, up 100 basis points sequentially and 330 basis points from a year ago, driven by a favorable mix, higher volumes and continued improvement in operating discipline. This translated into meaningful EBITDA growth and a significant increase in profitability with net income up 58% from Q1 and nearly fivefold year-over-year.

We also generated $24.5 million in operating cash during the quarter, another record, which enabled us to further reduce debt and strengthen our balance sheet. Our Simplify to Accelerate NOW program remains central to our performance, driving efficiency, aligning with evolving customer needs and enhancing responsiveness across our global operations.

The operational foundation we have built is delivering results even in a dynamic external environment, including tariff and material supply challenges, particularly in heavy rare earths, where we are actively managing constraints. The initiatives we put in place are tracking well, both in terms of cost savings and operational agility. For example, our [ goals in ] restructuring launched as a cornerstone of the 2025 effort is on track and expected to play a meaningful role in achieving the $6 million to $7 million in targeted annualized savings this year.

Looking ahead, we remain focused on building on this momentum, executing with discipline, scaling the benefits of our transformation initiatives and advancing toward our long-term financial and strategic objectives.

With that, let me turn it over to Jim for a more in-depth review of the financials.

Thank you, Dick, and good morning, everyone. Let's begin with Slide 5. Revenue for the second quarter was $139.6 million, a 3% increase year-over-year and up 5% sequentially. This growth was driven by continued strength in our aerospace and defense programs, industrial markets, especially HVAC and data center infrastructure and select medical applications. Revenue growth also benefited from a favorable foreign exchange impact of $2.4 million.

Sales to U.S. customers accounted for 55% of total revenue, in line with last year. The geographic and end market diversification of our portfolio remains a key strength. Looking at our market performance, Aerospace and Defense grew 13%, reflecting program timing and strong execution. We continue to see a healthy pipeline of opportunities in the defense sector and believe this market will remain a solid contributor to growth as we move forward.

Medical was up 4%, led by solid demand for surgical instruments. The industrial market increased 3%, driven by continued strength for HVAC and data center market applications where our power quality solutions are needed. We are also encouraged by early signs of recovery in industrial automation, where demand has been challenged over the past year given the inventory destocking. We are beginning to see more consistent activity and ordering trends. Vehicle revenue was down 7% due to ongoing softness in powersports, although we did see sequential sales improvement in the vehicle market.

Now turning to Slide 6 for the composition of our revenue over the trailing 12 months, along with the key catalysts driving these changes. We have seen a meaningful shift in mix with growth in higher value industrial and aerospace defense solutions helping to offset ongoing pressure in the vehicle market. This evolution reflects not only external market dynamics such as softness in recreational spend and volatility in automation, but also our deliberate effort to focus on more resilient margin-accretive applications.

The industrial sector is our largest market and reflects similar impacts as the recent quarter. Aerospace and defense continues to be a growth driver. Meanwhile, our vehicle exposure has been intentionally refined. While near-term demand in powersports remains soft, our proactive repositioning away from lower-margin programs is helping to protect profitability. Overall, our revenue mix today is more diversified, more balanced and better aligned with where we see long-term opportunity, and that puts us in a strong position to manage near-term headwinds while driving sustained performance.

On Slide 7, we are pleased to report a record gross margin of 33.2%, up 330 basis points from last year and 100 basis points sequentially. This improvement marks our fourth consecutive quarter of expansion. Key drivers included favorable mix, higher volumes and ongoing implementation of lean manufacturing disciplines as well as our Simplify to Accelerate NOW program.

Slide 8 highlights our operating leverage. Operating income more than doubled to $11.7 million with operating margin rising 480 basis points year-over-year to 8.4% and improving 180 basis points sequentially. SG&A was 14.7% of sales, down 60 basis points from last year, demonstrating cost discipline despite inflationary and incentive-based pressures. Restructuring and business realignment costs were $1.1 million in the quarter, supporting future margin improvement.

Turning to Slide 9. Net income increased to $5.6 million or $0.34 per diluted share. On an adjusted basis, net income was $9.5 million or $0.57 per diluted share, up from $0.46 per share in Q1 and $0.29 per share in the prior year. Our effective tax rate for Q2 was 23.1% as we continue to expect our full rate to land between 21% and 23%. As for interest expense, we did see an increase despite lower debt levels. As we discussed last quarter, this was largely due to the expiration of 2 favorable interest rate swaps late last year, which were replaced at higher prevailing rates. While still competitive in today's market, they are not as favorable as the prior arrangements.

Additionally, our amended credit facility carries a modestly higher spread contributing to the increase. That said, our overall interest burden remains manageable, and our strong cash flow is enabling continuing deleveraging. Adjusted EBITDA increased meaningful to $20.1 million or 14.4% of revenue, driving strong conversion on higher volumes and a more favorable mix. This represents margin expansion of 420 basis points year-over-year and 120 basis points sequentially.

Turning to Slide 10. We delivered record operating cash flow of $24.5 million in the quarter, up 76% sequentially and nearly 3x the level generated in the same period last year. On a year-to-date basis, operating cash flow now stands at $38.4 million, more than double what we achieved in the first half of 2024. This strong performance reflects both profit growth and disciplined working capital execution.

Our inventory turns improved to 3.1x, up from 2.7x at the end of the year. This was driven by tighter demand alignment, better planning and continued progress under our Simplify to Accelerate NOW initiative. At the same time, our days sales outstanding improved, signaling stronger collections and more efficient conversion of sales into cash. We used a portion of our cash to reduce debt by $20 million in the quarter, bringing us to the balance sheet discussion on Slide 11.

We ended Q2 with nearly $50 million in cash and lowered our net debt by $35.8 million year-to-date, bringing our leverage ratio down to 2.3x compared with 3x at the end of last year. Our bank-defined leverage ratio, which excludes certain items like foreign cash, was 2.9x, well within covenant levels. Capital expenditures were $3.2 million through the first half of the year. We have refined our full year 2025 capital expenditures outlook to a range of $8 million to $10 million compared with the prior estimate of $10 million to $12 million.

Overall, we are executing well across all 3 of our financial priorities for 2025, improving inventory turns and working capital, maintaining cost discipline and reducing debt. These efforts position us well to continue expanding profitability and create financial flexibility for strategic execution.

With that, if you advance to Slide 12, I will now turn the call back over to Dick.

Thank you, Jim. While our book-to-bill ratio was modestly below 1 at 0.97, demand trends remain steady in key sectors like industrial, where our power quality solutions continue to perform well and in aerospace and defense, where we are seeing continued traction with both legacy and new programs.

Backlog ended the quarter at $236.6 million, down slightly from Q1 and prior year levels as customers continue to manage through inventory normalization. The majority of our backlog is still expected to convert within 3 to 9 months, which is consistent with historical patterns.

Importantly, we are seeing signs that the destocking cycle is largely behind us, especially in the industrial automation end markets. Order activity is becoming more consistent and quoting volumes are improving in several key verticals, which gives us confidence heading into the second half. That said, we do expect third quarter sales to be sequentially lower due to the $3 million to $4 million in revenue that was pulled into Q2.

While Europe is showing signs of stabilization, the region has not fully recovered and Q3 is typically a seasonally weaker period in Europe. As we look ahead, our strategy remains unchanged to drive sustainable, profitable growth while delivering lasting value to our customers, employees and shareholders. We continue to align the business around margin-accretive technology-forward solutions that meet the evolving needs of our customers in motion, control and power.

The benefits of our Simplify to Accelerate NOW program are clearly reflected in our performance through margin expansion, operating leverage, improved working capital and stronger cash flow. We remain proactive in managing external risks, including tariffs and rare earth supply dynamics. Our mitigation strategies are proving effective, and we are confident in our ability to protect both supply continuity and profitability.

More broadly, we are encouraged by constructive signs across our served markets, supported by long-term trends in electrification, automation, energy efficiency and precision control. This includes seeing early signs of recovery in industrial automation and steady momentum in A&D.

The operational foundation we have built, the strength of our balance sheet and the momentum behind our core initiatives positions us well to execute through the second half and to drive long-term value well beyond.

With that, operator, let's open the line for questions.

[Operator Instructions] Today's first question comes from Greg Palm with Craig-Hallum Capital Group.

Congrats on the results. So I just want to maybe understand, again, kind of what you're seeing out there. So it sounds like you're feeling good that the destocking is in the rearview mirror. You're starting to maybe see some green shoots in industrial, A&D remains strong. Anything else you want to maybe call out or highlight?

No, I think you've hit the highlights.

And in A&D specifically, what -- maybe remind us, number one, kind of what your major exposure areas are? And just in terms of kind of visibility to the remainder of the year and even next, where are we at? How strong is the demand?

Sure. Well, A&D, certainly in some of the applications that we work on, we do get some good visibility, long-term visibility, and we work on longer-term contracts. And we continue to do that. So we are seeing some very positive results. We've made some significant improvements in our operating capabilities, some of the restructuring we've talked about here that's underway that solidifies operations and gives us and provides a greater strength within certain facilities. I think that's playing out well. We're meeting with key customers on a regular basis.

And I think from a legacy business standpoint, and some of the applications we're on, we do see that there is some opportunity to increase volumes and to hopefully expand margins as we've consolidated the operations. Some of the new applications with government programs or military programs, there's usually risk, and there's no guarantee that those programs come to fruition. We have seen a few cancellations. We've seen a few programs move to the right. We're seeing other programs moving to the left, meaning accelerating.

So it's a mixed bag right now. We feel there's a transition going on in terms of the way warfare is going to be fought and the types of vehicles or devices that are going to be needed for that. And I do believe that our team is well positioned to capitalize on it as we move forward. So there will be some minor bumps along the way, but we feel we're on track, and we're in a good position to capitalize on those as they move forward.

Okay. Great. And then maybe lastly, on the rare earth magnets, which I know we talked about a lot last quarter. I mean, on a relative basis, given what's happened in the last month, are you feeling better, worse, the same? What's the risk profile there?

Yes. Our team has worked extremely hard to stay on top of it and engage all of our operations. And I think we have a pretty good outlook what we feel is going to happen. We've seen some improvements, although I just -- we have to be very cautious here and say that this is -- most of the materials that we're talking about are coming out of China, and there's always a risk that things can change in the short-term. But we're starting to see some things loosen up some of the licenses being approved. We still have some exposure.

We talked before about the exposure we see potentially for the remainder of the year, there's somewhere between [ 1 million and 3 million ] in shipments that could be impacted by it. But I would also say to you with -- because of that, I mentioned that we had an accelerated -- some accelerated shipments or pull-ins into Q2. We believe that, that was a reflection of the concern on the heavy rare earth and that our customers wanted to get some supply on hand to make sure that they were protected.

So those were pull aheads. And as it was mentioned that, that could have an impact on our third quarter shipments I also would state that there's no -- we don't have enough visibility. We don't really know what all of our customers' plans are. So while we're saying there could be an impact, we're also knowing -- we're also realizing that they could also pull ahead again. And as long as we had materials to supply that.

And so we emphasize that Q2 was a little higher than what we would have expected based upon the pull aheads and that Q3 could be impacted because of that. But I would also say to you that we are not 100% sure how our customers are going to react and what they're going to do going forward here, if that's just going to be inventory they're going to hold on hand and just continue the supply on a normalized basis with some safety stock in their possession.

So those are things that we're seeing, and that's caused some of that. And I think we are encouraged that there are some positive signs ahead things are loosening up and starting to get to a more normal state.

The next question is from Ted Jackson with Northland Securities.

Congratulations on a very nice quarter. I've got a few questions. Going back into the pull forward of revenue, just out of curiosity, within your reported segments, where was most of that pull forward coming from segments like Industrial, Medical, Vehicle, et cetera?

Yes. It's 2 areas that we saw in medical, and what I'll -- it's related around the types of materials that are typically used in the high-performance solutions. So when we talk about heavy rare earth, that usually means higher performance solutions and higher performance comes from, let's say, when we look at from a motor perspective, smaller size but higher energy magnets to produce more power. So it's either size constraints that are causing the need to use these higher performance or it's really truly high performance that the only way to get there is from the use of this type of magnetic material. So I would tell you, medical, some high-end industrial and some defense.

Now also what I would like to state, and I stated this before, Tim, but just allow me to repeat this. Our company has taken an approach more than 10 years ago. As I said before, we go through these cycles. It seems like every 7 to 8 years where magnet prices are under pressure and they get increased 300% to 400% and you have to work with your customers to get enough material to supply their demand and pass along surcharges based upon those prices.

In this case, we were challenged by the fact that we weren't even going to be allowed to receive the material. So that became a little bit more stressful for us. Because of this, what's occurred in the past, our company has been very proactive and designing products where possible that don't contain heavy rare earth. And we will continue to do so into the future to try to eliminate this risk as much as we possibly can off into the future. But we have already and have been for years taking actions to do that, and we have been successful.

Well, that would be great. And then the fact of the matter is as these barriers to trade come in place, it's driving the development of the domestic market, which over the longer-term would probably be quite [ big. ] So we'll see how it plays out over the next decade or so.

On the magnet supply, I mean, I know as all this came in place that you guys were on top of it and smart and did bring in some heavy earth high-end products into inventory to be in front of it. When you look at where you are with that, I mean, at what point would it become an issue if God forbid, the Chinese just stopped things again. I mean do you have enough supply to get you through the remainder of this year? I mean do you have supply that will take you into '26. And I'm not saying that you're going to run out of it. I'm just saying just kind of understanding like what level of safety stock you put in place.

Well, it varies, and it's -- there's multiple ways that we would be dealing with that. I'm going to let Jim talk a little bit about some of the things that we've done on the supply chain side and the actions that we've taken to ensure that we have material. But I say it varies because if, in fact, you have noticed that you're just not going to receive, and for example, the Chinese will not ship magnets or heavy rare earth materials to the U.S. for defense applications. U.S. doesn't want them, and China won't ship them.

So that's been out there for a while, and it's opened up opportunities domestically, but what that will do is drive pricing and cost will go up. So there's -- the government has taken some actions to mitigate it in the future, and we are on board and in the loop with what's happening here.

So it's just -- it's hard to give you a specific time frame because it will vary based upon products, the amount of safety stock we have for each, what the supply chain is looking like, our resourcing and also identifying some redesign opportunities that worse comes to worse, if you can't get product, then what are the alternatives from a design perspective that we can accelerate through and get approval from customers.

Typically, once our products get designed into these types of applications, the redesign and approval process is a very long period of time. Just like we saw during COVID, though, some of those roadblocks are removed because you had no choice but to remove and to accelerate the process itself.

So if that occurs, then we may be into that and our engineering team rather than focusing on new opportunities and developing opportunities may be redeployed to work on sustaining and corrective actions. But like as I said, we're in the loop on everything that's occurring. There are some good developments, they're going to take time to come online. And maybe, Jim, you want to talk about some of those a bit.

Yes. I mean I think you saw an example of that in yesterday's news where Apple announced that they're making an investment in manufacturing here in the U.S. and part of it had to do with the fact that the government is investing in putting in infrastructure related to our own exploration in rare earth materials and so forth.

So I think we're very encouraged by that. We've been in discussions with a lot of suppliers and as many are, understanding who's going to be a player, who's going to be able to produce and when. So I think we're well in tune with that. And I'm actually very encouraged that some of those opportunities are going to come online sooner than I think any of us expected. And hopefully, we'll participate in that.

You may want to mention you went to Washington and talk to the government officials.

Yes. I did have an opportunity to go to the Department of Commerce and met with several of the individuals involved in trade talks and so forth and very, very informative. And as I mentioned, they are obviously helping many companies, not dissimilar to ours in identifying opportunities to look at alternate sources and where those are and the like. So there's a great collaboration, I would tell you, between companies and the Department of Commerce to ensure that companies like ours are being supported, and we understand what the alternatives are.

Great. I have 2 more questions. A quick one, hopefully, in terms of an answer. But with all the scuttlebutt and momentum around kind of unmanned vehicles and drones and stuff, just kind of curious what kind of exposure you have, if any, to the market and how much of that is based on commercial versus industrial? Just maybe there's nothing even there, but it's just -- it's a hot topic right now. I'm just kind of curious, and then I have one more after that.

I'll answer it very quickly. It's a hot topic for us as well.

So you guys are...

You said short. You wanted a quick answer, I gave you a quick answer. Yes, we see it as you do. There's definitely some opportunities, and we're well positioned to capitalize on some of this. And without getting into a lot of detail on it for competitive reasons, I mean, it is something that's on our radar.

Okay. I'll leave it there. And then my last question is, as you -- all your efficiency stuff is coming to roost, you're really doing a good job of driving margins, putting that in the -- making the business stand up and deliver cash and deliver return to shareholders. You're deleveraging the business. You've gotten your business down to for lack of a better term, let's call it, targeted leverage ratios.

Historically, you've always been acquisitive in terms of just building growth through acquisition. As you're kind of exiting some of these strategic efforts in terms of realignment of the business, restructuring the business, making the business more efficient, getting debt paid down. What's going on, on the M&A strategy for you all? How active are you in the pipeline? Are you going to turn it back on? That's my last question.

Yes. We really -- from an investigation, from a grooming standpoint, from identifying opportunities for us in the marketplace, we never shut it down entirely. But what we did do is say it is a time period when we will be establishing communications with certain key opportunities for us in the future that we saw it was a really good strategic fit. So we've been doing that.

And I would say to you that we are not going to stop. We've got some great momentum going in terms of identifying efficiencies and changing the way we do business. And that streamlining will continue. I think we just believe it's a heck of a lot more efficient and it's better and it's -- we can do things faster that's stand, Simplify to Accelerate NOW. It's worked its way into the deep bowels and roots of the company. It's not going to change. We're going to keep doing that. It really is healthy, and it aligns very well with our AST initiatives. So our lean toolkit and training and so forth.

So I would say to you that, yes, we are getting well positioned that we could execute an acquisition. And we will certainly be very cautious and careful to make sure everything is lining up properly that it's a great strategic fit and provide some continued increased value for what we're doing. And that the value of our recent acquisitions have been in -- as we mentioned, has been in certain technologies and market penetration that we were looking for as well as accretive to our average gross margin.

So anything we do would need to meet those criteria. But I would say to you that, yes, we're looking. We're paying attention to what's going on, and we've identified some opportunities that when the time is right, we'll be looking to bring them on.

[Operator Instructions] The next question comes from [ Craig Cosgrove, ] private investor.

Mr. Cosgrove used to be a controller for us in one of our operations. I'm guessing maybe by mistake. He's followed us very closely and has been a strong supporter since he's left. So maybe he hit the button by mistake.

We'll move on to our next question. It comes from Orin Hirschman with AIGH Investment Partners.

Congratulations on the results. Just a couple of random questions. In terms of the data center business, just one question. Is the power conditioning more to protect the servers? Does it protect the cooling equipment? Is it for both?

And then a follow-up on that on the data center side. I don't remember exactly the number I don't have it in front of me, but maybe you almost doubled year-over-year. Please correct me if I'm wrong. Could the business be up that much this year again? Do you have enough capacity even if there was enough to meet that type of demand? And I have one follow-up on that.

Okay. So the first question, you're asking about what the addition of -- I think if I understand it correctly, the addition of our equipment, what it does, how it impacts the data center itself. So you talked about cooling. Yes, cooling is one of the things that we're on applications for cooling. But I'd say more importantly, it is about the quality of the power and the efficiency that it brings.

So as these -- we've talked about this in the past, where we have a very high performance and high-power solution that we can bring to the marketplace and we do bring to the marketplace. And any improvements in power quality that you can make are very substantial in terms of a return. So -- two things there. Yes, cooling...

Does the customer get that? Like is that the customers are sophisticated enough to understand that if there's a 1% improvement in that quality of power, how much that means to them?

Well, I can't speak for the customers, but I can directly for all the customers, but I think they certainly do understanding that with the demands for power and the infrastructure that has to go into place and someone that has a more efficient and more operation absolutely would probably have an edge.

And just part B and C on that question, if I may.

So you're talking about the demand and do we have capacity? Yes, we're definitely increasing. And as you know, we don't break that out as a specific [indiscernible]. We do talk about HVAC and HVAC is definitely growing for us, and it's in the industrial -- under the industrial sector.

The capacity, it's a -- demand is continuing to go up, and we see it continuing out of the future based upon the forecasted growth of data centers and the needs for our type of equipment. And we will be doing another expansion in our main facility that produces this type of product. We also have been able to leverage the acquisition we made last year in January with its electromagnetic capabilities in Mexico as well as in -- also in Wisconsin.

So I think we were -- the synergies that we realized they were very important and positioned us well to be able to satisfy the demand. But we are and have already invested, and we will continue to invest to increase capacity.

Okay. Two other questions, if I may, just jumping around. Just in terms of the automation side, there was some clear signs of a bounce back. I think it's your largest or one of your largest customers had a positive book-to-bill. Just give us some qualitative talk through on what that means for you on the automation side.

Sure. We -- in the past, we gave quite a bit of detail on a specific operating unit and what the impact on our performance was as we went through supply chain crisis and then as it opened up and how it improved our demand and how has it dropped out again as there was an overstocking situation. We do expect that we have turned the corner there, and we're getting to a position of normalization, and that will have a very nice positive effect or impact as we move forward. So it is definitely improving, and we're expecting to see the results as we move throughout the year. And all signs are in that direction.

Did you see some of that already in this past quarter?

We saw an improvement. So we've seen gradual improvement sequentially in Q1 over Q2. So we did see improvement, but we're continuing to see more improvement as we move ahead to get us to the point of normalization. So yes, a little bit, but we expect more coming forward.

Okay. My last question, which I think someone else alluded to, just on the munition side, there have been a number of companies that have indicated that they're capacity constrained. I've even heard of one of the majors like Northrop Grumman or Rockwell, that type of major offering to pay for capacity expansion for a vendor. And I've seen 2 cases like that recently. I guess my question is, is that business -- I'm assuming that business is continuing to ramp for you. Are you capacity constrained there as well?

No. We mentioned the restructuring that we did to consolidate some operations several years ago, I'd say, 3, 4 years ago, we -- the main operation for munitions -- well, there's 2 main operations for us for munitions applications, and those are being consolidated together. But we decided to increase our size of our facility and to allow us to grow into it. And that has put us in a really good position to -- to answer your question, we are not capacity constrained.

Okay. Are you seeing the same as other vendors in terms of the desire from your...

What we've seen -- yes. So what we've seen, there's -- certainly in the supply chain side of it, there can be some concern, but we haven't -- we've been working on sourcing for a while here when you go back to when the conflicts broke out and then the initial inquiries on what the projected demand might be. And over time, I don't -- Orin, I'm not sure that you had invested in us yet, but we had talked about that, that the inquiry level was quite high, but we hadn't seen any POs from that to increase the capacity.

We not have seen that. We have seen the orders come to fruition, and we now are beginning to ship at higher levels. And so we were prepared. We went out and we did quite a bit of work in advance of this because we were getting quotation requests for some significantly higher volumes. So we were preparing our supply base as well as preparing ourselves, and that is coming to fruition.

This concludes our question-and-answer session. I would now like to turn the call back to management for closing remarks.

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 third quarter 2025 results. Have a great day.

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.