Allient Inc. (NASDAQ:ALNT) Q3 2025 Earnings Call Transcript

Allient Inc. (NASDAQ:ALNT) Q3 2025 Earnings Call Transcript November 6, 2025

Craig Mychajluk: 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?

Richard Warzala: 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.

James Michaud: 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.

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

Tomohiko Sano: 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?

Q&A Session

Richard Warzala: 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.

Tomohiko Sano: 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?

Richard Warzala: 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.

Tomohiko Sano: Congrats on the quarter.

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

Greg Palm: 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.

Richard Warzala: 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.

Greg Palm: 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?

Richard Warzala: 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.

Greg Palm: 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?

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

Edward Jackson: 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?

Richard Warzala: 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.

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

James Michaud: Yes, that was in the European — in the euro-denominated transactions.

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

James Michaud: No, no.

Richard Warzala: Geographic.

Edward Jackson: 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?

Richard Warzala: Power quality primarily. HVAC.

Edward Jackson: 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?

Richard Warzala: 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.

Edward Jackson: 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.

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

Richard Warzala: 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.

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