Allient Inc. Common Stock 2026 Q2 Earnings Call

Yeah. Thank you. 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 James Michaud, our Chief Financial Officer. Dick and Jim will review our second quarter 2026 results, provide a strategic and operational update, and share our outlook. We'll open the line for questions. As a reminder, our earnings release and the accompanying slide presentation are available on our website at allient.com. If following along, please turn to slide two for our safe harbor statement. During today's call, we may make forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated. These risks and factors are outlined in our SEC filings and in the earnings release. We will also discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance.

You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release as well as the slides. With that, please turn to slide three. I'll turn it over to Dick to begin.

Thank you, Craig. Welcome everyone. We delivered an excellent second quarter. More importantly, one that further demonstrates the earning power of the model when stronger demand, improved mix, and disciplined execution come together. The quality of the quarter was evident across the P&L, with strong top-line growth, record gross margin, a significant increase in earnings. We also saw excellent order activity with record bookings in the quarter. In the period, that resulted in a 1.31 times book-to-bill ratio. That gives us improved visibility into the second half of the year and supports a constructive view as we move through 2026. What stands out is not just the magnitude of the quarterly improvement, but the quality of it. We saw broad-based demand across key targeted markets, especially industrial automation, data center and other infrastructure, aerospace and defense, and medical applications.

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

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

The result is more reliable and efficient power for increasingly compute-dense data center environments, stronger protection for critical equipment, and a strong fit with the challenges operators face as AI and other high-power applications increase load and complexity. Stepping back, the second quarter was about more than just strong reported results. It was another proof point that the actions we have taken to reposition the company, simplify the organization, and drive better execution are translating into stronger financial performance and a more resilient operating model. Turning to slide four, I want to spend a moment on Simplify to Accelerate NOW or STAN, because it is an important part of why the organization is performing better. STAN is driving better decision-making, execution, margin, and responsiveness. The key point is that it is not a single initiative or short-term program.

It is a company-wide mindset that shapes how we think, make decisions, solve problems, collaborate across teams, and serve customers every day. In simple terms, STAN is how we work. At its core, STAN is designed to unleash more of the organization's potential by empowering our teams to act with urgency, ownership, and accountability. The now in STAN matters. It reinforces a get it done mentality, removing obstacles, we work forward and delivering results faster rather than waiting for things to happen. It is also supported by a practical tool set. That includes our Allient Systematic Tools, or AST, which helps standardize, simplify, and continuously improve how we work. It also includes digital and IT tools that reduce manual processes and redundancy, as well as AI and other enabling technologies where they can improve decision-making, productivity, and execution. What matters most, though, is the result.

In the second quarter, operational improvements under STAN contributed to record gross margin through better mix, execution, and cost discipline. We are seeing faster decision-making, stronger accountability, and better responsiveness across the company, and those improvements are helping create a more scalable and more profitable operating model. The annualized savings figures on the slide, $10 million in 2024 and $6 million in 2025, are a reflection of this broader effort. I would emphasize that STAN is bigger than cost takeout. It is about building a culture that continuously improves the business and positions Allient to move faster and serve customers better over time. When we talked about improved margin, better leverage, and stronger earnings power, STAN is one of the foundational reasons that it is happening. With that, let me turn it over to Jim for a more in-depth review of the financials.

Thank you, Dick, and good morning, everyone. Please turn to slide five. Revenue increased 10% year-over-year to $153.8 million. On a constant currency basis, revenue grew 9% organically, with foreign currency translation providing a favorable tailwind of approximately $1.3 million in the quarter. 54% of second quarter sales were to U.S. customers, with the balance primarily in Europe, Canada, and Asia-Pacific, continuing to reflect the benefit of our diversified geographic footprint. Looking at the verticals, industrial revenue increased 17%, driven by continued strength in industrial automation and power quality solutions supporting data center infrastructure. Aerospace and defense increased 16%, reflecting strong defense-related demand and program activity, and notably, that growth came despite the previously announced MTEM Booker program cancellation. Medical increased 9% on broad-based demand, including surgical robotics and other precision motion applications. The vehicle market declined 7%, due primarily to lower power sports demand.

Overall, this slide reinforces both the breadth of demand in the quarter and the continued alignment of the portfolio with higher-value applications. Turning to slide six. The trailing 12-month market mix continues to support a more resilient and more margin-accretive business profile. Industrial represented 49% of trailing 12-month revenue at the end of the second quarter, up from 47% a year ago, while medical remained steady at 15%, vehicle was 17%, aerospace and defense was 15%, and distribution was 4%. The bigger takeaway here is that the portfolio is increasingly aligned around attractive growth verticals and higher-value applications, including motion and controls tied to automation, power quality for data center infrastructure, precision medical applications, and defense-related programs. That mix matters because it supports both growth and profitability. It also helps explains why we continue to see structural improvement in the business as we move forward. Please turn to slide seven.

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

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

Operating costs were 24.7% of revenue, improving 10 basis points year-over-year, despite higher commissions, incentive compensation, and growth-related spending. Restructuring and business realignment costs were $600,000 in the quarter, down from the prior year, but remain elevated due to costs associated with the Dolton transition. We continue to expect restructuring and realignment costs of approximately $2 million-$3 million for the full year 2026. The message on this slide is that we are seeing the leverage benefits of a stronger operating model while still funding the business appropriately and continuing to work through remaining transition-related costs. Please turn to slide nine. Earnings growth accelerated meaningfully in the quarter as the margin improvements flowed through the P&L and lower interest expense provided an additional tailwind. Net income increased 85% to $10.4 million, or $0.61 per diluted share.