Earnings Call Transcript - ALNT Q4 2022

Operator, Operator

Greetings, and welcome to the Allied Motion Technologies Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. At this time all participants are in a listen-only mode. As a reminder, this conference is being recorded. I would now like to turn the call over to Craig Mychajluk of Investor Relations. Thank you. You may begin.

Craig Mychajluk, Investor Relations

Yes. Thank you and good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion. Joining me on the call are Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer. Dick and Mike are going to review our fourth quarter and full year 2022 results and provide an update on the company's strategic progress and outlook, after which we'll open up for Q&A. Should have a copy of the financial results that were released yesterday after the market closed. If not, you can find it on our website at alliedmotion.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'll 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 and slides. With that, please turn to Slide 3, and I'll turn it over to Dick to begin. Dick?

Dick Warzala, Chairman, President and CEO

Thank you, Craig, and welcome, everyone. The fourth quarter capped off a record year for Allied, as we continue to execute our strategy, leverage our diversified end market mix and further develop our One Allied global platform. I'm incredibly proud of the teamwork and dedication of the entire Allied team as their consistent and focused efforts advanced our strategic priorities, both organically and inorganically while navigating macro headwinds. There were a number of highlights during the fourth quarter, as revenue grew 35%, due to higher demand across each of our target markets, which included incremental sales from acquisitions and impressive organic growth of 18% during the quarter. Equally important was the strengthening of our margin profile, in spite of the overall inefficiencies created by the global supply chain and labor constraints. Both operating income and net income doubled over last year's fourth quarter. And on an adjusted basis, our earnings per share were $0.43, up from $0.30 last year. For the year, we reached a milestone as our revenue grew 25% across the $500 million level. We achieved solid annual organic growth of 12% on a constant currency basis, which reflected strong demand within our Industrial and Aerospace & Defense markets. We believe our performance across markets substantiates the investments we have made to grow, diversify and strengthen our business. As you know, strategic acquisitions are a key component of our growth strategy. We completed three acquisitions in the fourth quarter of 2021 and another three in the second quarter of 2022. Collectively, they enhanced our value proposition with new technology offerings, strengthened our competitive position, and improved our overall margin profile. The integrations have progressed well and our teams are working hard to maximize opportunities and realize the full potential of these businesses. Overall, we achieved our stated goal of gross margin expansion, reaching a record 31.3% for the year, which was up 130 basis points. And we have not yet fully leveraged these acquisition costs, we still delivered annual net income of $17.4 million or $1.09 per diluted share and on adjusted basis, net income per share of $1.88, which was up 18% for the year. With that, let me turn it over to Mike for a more in-depth review of the financials.

Mike Leach, Chief Financial Officer

Thank you, Dick. As a reminder, our results include the acquisitions completed during the fourth quarter of 2021 and the second quarter of 2022. Starting on slide five, we've provided some detail regarding our topline. As expected, we did see some minor seasonality seeping back into the business during the fourth quarter, particularly in December, due primarily to the typical holiday shutdowns and customer inventory adjustments associated with general business conditions normalizing. Nevertheless, fourth quarter revenue increased 35% to $131 million, which reflected higher demand across each of our target markets and incremental sales from acquisitions. The unfavorable impact of exchange rate fluctuations on revenue was $6.7 million in the quarter. Excluding FX, revenue was up 42% and organic revenue growth was 18.3%. Revenue in the aerospace and defense market grew 197% from organic growth, program timing, and incremental acquisition demand. Industrial market sales growth was 46%, reflecting strong end market demand in industrial automation, material handling, and electronics. We saw 8% sales growth within our vehicle market, largely from commercial automotive, trucks, and powersports demand. While medical markets benefited from surgical-related markets in medical pumps, there were offsetting pressures due to lower pandemic-related sales. The distribution market, while a small component of our total revenue, increased 22% during the quarter. As Dick highlighted, our full year results are also strong, with revenue growth of 25%. On a constant currency basis, revenue was up 30% for the year, which included 12% organic growth. Sales to US customers were 58% of our total compared with 54% for 2021, with the balance of sales to customers primarily in Europe, Canada, and Asia-Pacific. The shift in mix continues to reflect the impact of our recent acquisitions that largely sell to the US market. Slide six shows the change in our revenue mix by market for the full year period along with the 2022 growth rate for each market and the drivers behind the change. Sales to industrial markets were up 43%, driven by the verticals noted on the slide. Industrial has seen nice growth over the last year and continues to be our largest market, making up 38% of our total sales. Vehicle grew slightly, as strong truck and commercial vehicle demand offset lower sales in construction and powersports. Medical market revenue was nearly flat on a full year basis, reflecting similar impacts in the fourth quarter. While acquisitions contributed to the Aerospace & Defense growth, we were also driving solid organic growth and benefiting from defense market program timing. As highlighted on Slide 7, our fourth quarter gross margin was 31.1%, up 240 basis points from the year ago period. Higher volume, margin accretive acquisitions and pricing more than offset continued global supply chain disruptions and rising material and labor costs. Consistent with our stated objectives, you can see the progress we are making by executing our strategy in the annualized chart on the right, as we achieved a record annual gross margin level of 31.3%. While our recent M&A activity is certainly helping, we also attribute this performance to our global team that continues to drive higher-margin solution-based sales. Moving on to Slide 8, fourth quarter operating income more than doubled to $8.2 million or 6.2% of sales, which was up 210 basis points. Operating costs and expenses as a percent of revenue were 24.8%, up a modest 30 basis points, largely attributable to our second quarter M&A activity. Operating costs for the full year were also elevated due to M&A activity, which resulted in higher engineering and R&D costs, intangible amortization expense, and business development costs. Over time, we expect to fully leverage those expenses with continued sales growth. On Slide 9, we present GAAP net income and adjusted net income, along with our adjusted EBITDA results. Our net income and diluted EPS have been adjusted for certain items, which we believe provides a better understanding of our earnings power, inclusive of adjusting for non-cash amortization of intangible assets, which reflects the company's strategy to grow through acquisitions as well as organically. Fourth quarter adjusted net income was $6.9 million or $0.43 per diluted share, up 43% from the adjusted $0.30 per diluted share in the prior year period. The effective tax rate was 27.7% compared with 53.9% as the prior period included a $0.5 million valuation allowance of a deferred tax asset in foreign jurisdiction. We expect our income tax rate for the full year 2023 to be approximately 25% to 27%. Adjusted EBITDA increased 47% to $16.6 million, or 12.7% of revenue, which was up 100 basis points from the fourth quarter in 2021. For the full year, adjusted EBITDA was up 31% to $65.5 million and as a percent of sales was 13%, up 60 basis points. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress in our operating performance. Slides 10 and 11 provide an overview of our balance sheet and cash flow. Total debt was approximately $236 million at year-end. We used about $44 million in cash to complete the three acquisitions in the second quarter, net of cash acquired, which was largely funded with debt. The debt increase also reflects the new finance lease that we highlighted during the first quarter of 2022 for a manufacturing facility expansion to support continued growth. At the end of 2022, debt, net of cash was about $205 million, or 48.7% of net debt to capitalization. Our bank leverage ratio was 3.42 times. During 2022, we generated $5.6 million of cash from operations, a decrease from the prior year due to high levels of inventory and working capital timing. Based on our cash flow projections, we expect to deliver over time in a manner that aligns with and is consistent with our historical performance, and you can see the strong cash generation during the recent fourth quarter. Full year capital expenditures were $15.9 million and were largely focused on new customer projects. We expect 2023 CapEx to range between $18 million and $23 million. Inventory turns were 2.9 times in 2022, a slight change from our 2021 performance as our teams continue to manage our inventory to meet increasing customer demand and combat sourcing and lead-time challenges. Our DSO saw a bump up to 54 days, largely due to timing and mix of customers. With that, I'll now turn the call back over to Dick.

Dick Warzala, Chairman, President and CEO

Thank you, Mike. We entered 2023 with momentum on our side as we continue to have a solid pipeline of opportunities and are encouraged with order levels from each of our target end markets. As highlighted on Slide 12, fourth quarter orders of $145.6 million drove a book-to-bill ratio of 1.1 times and record backlog of more than $330 million at year-end. The robust order level was broad-based and reflects a noted FX headwind of $12.5 million. Our backlog was up 32% over the prior year period and 6% sequentially. The time to convert the majority of backlog to sales is within the next nine months. While there are still some components with long lead times, generally speaking, we are seeing stability within our supply chain. Turning to Slide 13 for our outlook. While a heightened level of macroeconomic uncertainty remains, we believe we are in a position of strength and are confident we can continue to execute our strategy by capitalizing on the many growth opportunities and positive underlying demand trends within our targeted markets. Specifically, demand is expected to continue at relatively strong current levels within our industrial markets, which should continue to benefit from our increased market presence around industrial automation, material handling, and as well as oil and gas tailwinds. Aerospace & Defense is expected to be bolstered by our recent acquisitions, and we anticipate further organic growth given our exposure and program participation. We are anticipating modest growth within our vehicle segments as the market supply chain continues to improve and demand schedules from our automotive customers continue to firm up for 2023. Our medical markets should continue to trend away from the pandemic-related sales to a more normalized sales environment focused on the higher-margin surgical related end markets. Having gained greater traction in many of our served markets, we are creating a larger, more robust base of business to support continuous and sustainable organic growth well into the future. While fostering organic growth remains an emphasis, strategic acquisitions are an equally important element of our overall growth strategy over the long-term. We are currently focused on maximizing our recent acquisitions, driving cash conversion, and paying down debt, while still grooming potential opportunities and building out our M&A pipeline. Lastly, we believe we can continue to enhance our margin profile as we demonstrated this last year by further expanding our multi-technology solution opportunities, and driving continuous improvement through utilization of AST, our lean toolkit in all aspects of our business. With that, operator, let's open the line for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Greg Palm with Craig-Hallum. Please proceed with your questions.

Greg Palm, Analyst

Thanks. Morning everyone. I wanted to just start a little bit about the quarterly results. Revenues down a little bit sequentially, but maybe not as much as some of the past years. And I think what really stood out is bookings were actually up quite a bit sequentially. So, I'm just kind of curious if you've noticed any change in behavior at your customers, kind of, what are you hearing and seeing in terms of expectations for the next year?

Dick Warzala, Chairman, President and CEO

I'll begin and then Mike can provide additional insights. Greg, you're right in noting that the fourth quarter is always unpredictable. We're uncertain about what will happen based on past experiences where we've delayed orders to improve inventory levels for year-end for many of our customers, leading to some postponements until the new year. However, considering the broader context and the diversity within our company, this issue has been somewhat lessened. I believe we should anticipate that the significant seasonal decline we experienced before, driven by a few suppliers, may not occur this time. Furthermore, you're right that we've seen strong demand heading into next year without any declines, and perhaps Mike would like to elaborate on that.

Mike Leach, Chief Financial Officer

Yes, I think the only thing I would add to what Dick said was that where we're operating with a very strong backlog and with some improvement in supply chain, right, that's allowing us to dig into that backlog and ship. So, I think some of the seasonality that we expected to see in Q4 may have been partially offset by our ability to drop in the backlog as well from a sales perspective.

Greg Palm, Analyst

Okay. Yes, makes sense. Any notable change in order patterns and sentiment on a year-to-date basis?

Mike Leach, Chief Financial Officer

We've been shocked by the strength of the demand, Greg. It varies a little bit month-by-month. Heading into Q1, we haven't really seen any change in the order patterns to a significant degree. I think larger macroeconomic events are at play, so maybe a little weakness from the European side in terms of forward-looking. But generally speaking, as we've stated pretty much all year long, it's just a little surprising the level of demand and support out there.

Greg Palm, Analyst

Yes. Okay. And then just sticking with the quarter, one more question. Gross margin did dip down a little bit sequentially relative to Q3, even Q2 levels. And I was just curious if there was anything that stood out mix? Anything else that you want to point out?

Dick Warzala, Chairman, President and CEO

So again, I think that's part of the seasonality from a sequential standpoint, right? We're not leveraging as much volume, if you will. And then our own holiday-type shutdowns, right? You're not pushing as much volume through your shop floor and generating absorption, if you will, to boost that putting into inventory. So I think that's not unexpected. I will say it is still a constant battle with inflationary cost pressures. So I think the good team over the years has done a good job raising selling prices to offset what we've seen from a cost perspective, but it's a constant battle, and it has ebbs and flows.

Greg Palm, Analyst

Got it. Okay. I will leave it there. Thanks.

Dick Warzala, Chairman, President and CEO

Thanks, Greg.

Operator, Operator

Thank you. Our next questions come from the line of Ted Jackson with Northland Securities. Please proceed with your questions.

Ted Jackson, Analyst

Thank you, Dick and Mike. Congratulations on a very solid quarter.

Dick Warzala, Chairman, President and CEO

Thanks, Ted.

Ted Jackson, Analyst

I have a few questions. I'd like to start with the top line. First, can we discuss Aerospace & Defense? I've noticed that you have experienced ongoing strength in this area. With the current war in Europe involving Ukraine, I came across an interesting article in the Journal several weeks ago discussing how there hasn't been a significant increase in defense orders compared to expectations for 2022. The main reason cited was a lack of production capacity and supply issues, as the manufacturing lines aren't fully equipped to meet the existing demand. Given this context, could you share your insights into what you're observing in the defense market and how you anticipate that business will perform throughout 2023 and beyond?

Dick Warzala, Chairman, President and CEO

Sure. I would say that the article is quite accurate in noting that while there have been inquiries regarding higher volumes, we have not yet seen these volumes translate into actual orders with assigned delivery dates. The preliminary work to assess availability and timing is ongoing. However, our sales process is just one part of the overall system. Even if we are ready to deliver, if others aren’t able to deliver, they will need to reorder and reschedule. It doesn’t make sense to have part of the needed equipment ready while the rest is not. We've observed some adjustments being made to meet immediate, urgent needs, which has led to other equipment being delayed to create capacity. This situation is not just from our perspective but involves the entire supply chain necessary to fulfill these demands. So, while the article is accurate, we can say inventories are being depleted, and demand exists. Eventually, these inventories will need to be replenished.

Ted Jackson, Analyst

Yes. So it sounds like it's clearly a bullish driver in terms of the business. But given some of the issues maybe it will be a little lumpier in the near term as these kind of production issues work themselves through?

Dick Warzala, Chairman, President and CEO

Correct.

Ted Jackson, Analyst

The spending through the K indicates that Polaris accounted for about 11% of revenue, approximately $55 million. You've done a commendable job diversifying and reducing reliance on Polaris. However, they remain a significant customer, and during their call, they voiced concerns about the 2023 outlook. If I recall correctly, they even mentioned the side-by-side market. Given that context, I am curious how your expectations for modest growth in vehicles align with the possibility that Polaris may not be a source of growth. If that is the case, where do you see growth opportunities in vehicles that will enable you to achieve that modest growth?

Dick Warzala, Chairman, President and CEO

Yes, I can address that. You're absolutely correct. Our business with Polaris has remained robust, thanks to our diversification into other markets and the overall growth of the company. This has led to a decrease in the overall percentage of sales related to Allied. While we aimed to diversify, we also want to ensure that Polaris does not experience a drop in volume. The entire market has seen significant growth during COVID, and it's possible that demand may stabilize, but Polaris is closer to the end market than we are. We serve various customers in that sector, and we should anticipate some shifts. However, as you pointed out, the impact will be less significant due to our sales volume and diversified customer base. In other vehicle markets, we're observing some strength, with major programs we've invested in over the years, including construction vehicles, buses, automotive, and trucks. We have promising emerging applications focused on electrification that are starting to gain traction. We also have contracts that are not included in our backlog, referred to as unscheduled backlog, particularly for automotive. We're noticing that schedules are firming up and improving, although the industry still faces challenges with certain components affecting lead times. We expect to see an increase from our side based on these schedules, compensating for any potential declines from the utility sports market. Additionally, when considering ATVs and side-by-sides, keep in mind that ATVs are more residential products, while side-by-sides serve various applications, including industrial and commercial uses.

Ted Jackson, Analyst

I would like to ask another question regarding a specific area of your business. Can you provide some insight into your exposure to the construction and heavy equipment markets? It's worth noting that the players in those industries have a significant backlog to address. I can see how that exposure could be advantageous for you. Could you share some information about how much of your vehicle business is derived from that segment of the market?

Dick Warzala, Chairman, President and CEO

Yes. It’s important to note that our vehicle market is quite diversified beyond just the largest players. Approximately 50% of our business is derived from the power sports market, while the remainder comes from various other submarkets. We also have significant exposure in construction and agricultural sectors, which have remained robust and are expected to continue thriving. This aligns with several programs we have previously implemented that are now yielding results. We see a backlog of opportunities, and we anticipate further growth potential in the future.

Ted Jackson, Analyst

Okay, I'm going to kind of just one more. I have a whole list, but I'm going to get out of line because other people don’t want to talk. On the backlog, you had a nice pickup in backlog, it's healthy. I'm curious when I look at that like it was, I think, $330 million backlog number, we're so far into this quarter, how much of that backlog is scheduled to go out beyond the first quarter?

Dick Warzala, Chairman, President and CEO

We're already two-thirds of the way through the first quarter. As we assess the situation, we're considering the entire backlog in relation to the rest of the period.

Ted Jackson, Analyst

I'm not. I still awake for that. I'm still stuck in December.

Dick Warzala, Chairman, President and CEO

Got you. I don't have the number off the top of my head. Mike, you might want to.

Mike Leach, Chief Financial Officer

No. But to characterize the backlog, I would say it's largely in the next six to nine months due to the stretched lead-times we've experienced over the last couple of years. So, for Q3, I'm not sure I can provide that information right now.

Dick Warzala, Chairman, President and CEO

Yes, we've observed ongoing strength in incoming orders, which means the backlog remains robust. I can't provide an exact number at this moment, but we anticipate that question will come up in the future, so we need to be ready. However, we typically refrain from discussing forward-looking metrics. We're currently about two-thirds of the way through the process, and we need to assess our position, even if we're not entirely certain yet.

Mike Leach, Chief Financial Officer

Yes. And I would suggest that we're not looking for fill for the first quarter, right?

Ted Jackson, Analyst

Well, that's actually, that's very helpful. So I do have more questions, but I'm going to step out of queue, and I'll come back in at that at a later time. Thanks very much.

Operator, Operator

Thank you. Our next questions come from the line of Brett Kearney with Gabelli Funds. Please proceed with your question.

Brett Kearney, Analyst

Hi, guys. Good morning. Thanks for taking my question.

Dick Warzala, Chairman, President and CEO

Good morning, Brett.

Mike Leach, Chief Financial Officer

Good morning.

Brett Kearney, Analyst

I wanted to touch on the really strong growth you're seeing within your industrial end market. Obviously, there's concern's out there on kind of how the broader macro environment could unfold. But we're also hearing from folks on just kind of the historic reindustrialization that's taking place in the US in part supported by some of the federal spending streams, some of the recent inflation Reduction Act, CHIPS and Science Act, IIJA. I'm sure it's hard for you guys to parse out where exactly the orders are coming from. But within your industrial market, what's your sense in talking to some of your customers and channel partners some of the activity and applications your solutions are going into related to kind of industrial plant build-out, particularly in North America?

Dick Warzala, Chairman, President and CEO

That's a great question. There is incredible demand that we're experiencing, and the focus is on fulfilling those requirements. One of our larger acquisitions significantly supports this area, and we are not seeing any slowdown. In fact, we have a backlog that we will continue to address in the future. I fully agree that several factors come into play regarding industrialization in the US, but as a global supplier, we observe this trend worldwide. Labor constraints that existed before COVID are still present today. This has led to innovation becoming essential for everyone to manage the labor challenges they face. I concur that there is strong potential looking ahead, and the main concern is whether suppliers can meet the demand within the desired timeframe.

Brett Kearney, Analyst

Excellent. Thanks so much, Dick.

Dick Warzala, Chairman, President and CEO

Thank you, Brett.

Operator, Operator

Thank you. Our next questions come from the line of Gerry Sweeney with ROTH Capital. Please proceed with your questions.

Gerry Sweeney, Analyst

Good morning, Dick and Mike. Thanks for taking my call.

Dick Warzala, Chairman, President and CEO

Good morning, Gerry.

Gerry Sweeney, Analyst

Just a couple of quick follow-up questions. One, you talked a little bit about inflation, constant battle. Just curious where you are on both material cost and labor costs sort of pushing those costs through? Are you up to date still trailing a little bit? And is the market receptive to catch up more catch up pricing, if necessary?

Dick Warzala, Chairman, President and CEO

I'll let Mike start. Maybe I'll add to whenever he says, at this point.

Mike Leach, Chief Financial Officer

There's a natural ebb and flow in our situation. Late last year, we were in a position where contractual agreements allowed us to adjust prices accordingly. Typically, there's a three to six month delay before these adjustments are reflected in our results, and our team has effectively managed to address purchase price variances. However, it's challenging to maintain any margin when this is largely a zero-based pass-through, which impacts our gross margins. It's important to note that our reports indicate a consistent increase in prices, and we might soon face a situation where demand and inflation will clash, making it more difficult to adjust prices. We're not currently overwhelmed by the market, but we've observed significant increases over the last three months that have started to moderate, without experiencing a drastic jump.

Gerry Sweeney, Analyst

Yeah. Got you. Less velocity, I guess. Yeah. I got it. Or the gap has narrowed.

Dick Warzala, Chairman, President and CEO

I agree with what Mike mentioned. We expected to see some slowing, but that hasn't happened. As prices continue to rise, we will eventually face resistance, impacting the overall inflation rate and labor costs. Commodity prices are more straightforward because they're governed by contracts. However, labor cost increases are also tied to contracts, and relying on expected cost reductions when signing long-term agreements is unwise given the current market. It's difficult to navigate these challenges and predict future outcomes. We need to ensure we're managing risks carefully and staying vigilant in our current contracts and new quotes.

Gerry Sweeney, Analyst

Got it. Staying focused on margins, I believe we achieved a record on a full year basis. However, I'm curious about the transition from component sales to solution sales, which has been a continuous process and will remain so. Can you provide some insights on how these sales have changed over specific time periods, such as one, three, or five years? It would be helpful to get more visibility on this.

Dick Warzala, Chairman, President and CEO

We've talked about this in several calls regarding our transition from component sales to solution sales. If you look back about five years, you can see the difference in what we counted as component versus solution sales. We also noted that it can be tricky because what we once viewed as a solution sale, like adding gearing to a motor, we now see more as a component sale. Today, a solution might involve adding electronics, specific feedback mechanisms, or more complex software solutions. To address your question, we have formed a dedicated team within the company that's working on some very exciting projects. During our board meeting yesterday, we reflected on our market activities. Years ago, we began selling integrated drives with motors as part of our strategic focus. As we tally up the opportunities we've successfully engaged with through solution-based selling, it's evident that this has become a significant part of our new business. While our component business will always exist, we are definitely observing a shift towards more system-based, integrated solutions. Furthermore, our approach has evolved from simply adding a drive to a motor to now undertaking more complex modeling and simulation projects that enhance our response time to market, truly addressing customer needs rather than just their perceived requirements. We have invested in what we initially called our global electronics team, which has since evolved into a global engineering team focused on major programs, allowing us to adequately staff and secure large projects related to our system solutions. This area continues to expand, surpassing our previous capabilities. My figures may not be precise due to classification nuances, but I'd estimate that over 50% of our work with the global team involves system sale opportunities, incorporating multiple technologies into comprehensive solutions. The margins are higher in these sophisticated solutions, but caution is advised as developing them involves significant investment, which could reach into millions of dollars, typically amortized more like a software or advanced electronics business. This is the direction we're moving towards, and it's clearly taking shape.

Gerry Sweeney, Analyst

Got it. I appreciate it. That's actually very helpful just from the qualitative aspect of understanding where you are. So I appreciate it. Thank you.

Dick Warzala, Chairman, President and CEO

Okay. Thank you, Gerry.

Operator, Operator

Thank you. Our next questions come from the line of Ted Jackson with Northland Securities.

Ted Jackson, Analyst

Thanks. Welcoming myself back. So I wanted to circle back and I have a quick discussion again back on the top line with regards to the distribution business. And I know it's not a major driver of top line performance, but I know it's an area that you have been focused on in terms of growth, and you really are seeing some nice growth there. Can you give a little color on kind of what actions new efforts that you've made that have driven that growth and kind of what are your plans going forward? How are you going to continue to drive that revenue line?

Dick Warzala, Chairman, President and CEO

Sure. I would say, Ted, that the conscious decision for one of our acquisitions sells entirely through the distribution channel. It's interesting because we don't report it through that channel, as we know the end markets they're serving. Instead, we report it in the end market. Our distribution sales and business have definitely increased, and we see an opportunity to grow in areas where we aren't currently participating. We've been successful in increasing the portion of our business that is growing through the channel, even though we're not reporting it that way. It's actually growing faster than our reports indicate. We're exploring additional ways to leverage our existing channel to boost our volume. This is important to us, and due to our broad customer base and the various products entering the market, it's a significant opportunity for expanding our business from a channel perspective.

Ted Jackson, Analyst

Is that growth coming as you're bringing more of your products into existing distribution partners, or do you see your future growth being driven by expanding your distribution partners in terms of the system?

Dick Warzala, Chairman, President and CEO

Great question. To start, we aim to leverage our current distribution partners to expand our reach with existing products. This approach allows us to test the market and assess if we have the appropriate solution or product mix that can be successfully delivered through these channels. Therefore, our primary opportunity lies within our current partnerships. While there is certainly potential to grow by adding more distribution channels, our initial focus will be on exploring how we can introduce more products within our existing channel.

Ted Jackson, Analyst

Okay. I have two final questions regarding guidance. First, can you explain the CapEx guidance for 2023? It appears to be slightly higher than what I had in my model. While I don't mean to imply any issues with running your business, I would appreciate insight into the investments being made and where that money is going. Secondly, on a related note, could you provide some guidance on your business development expenses for 2023? Those are my last two questions. Thank you.

Dick Warzala, Chairman, President and CEO

I'll let Mike take those.

Mike Leach, Chief Financial Officer

The capital expenditures have varied a bit. We didn't manage to execute all the projects planned for 2022 due to supply chain issues and delays in product delivery from vendors, which affected our ability to complete those projects. Consequently, the figures for 2022 are on the lower end of our expectations, with some of that continuing into 2023. Additionally, new business opportunities, while not requiring heavy capital, also contribute to our expenditures. Over 80% of the capital we spent this year was driven by growth and customer projects. This includes aligning one of our factories with a new product line, adding tooling, and increasing equipment capacity to meet future demands for existing programs. Most of our spending primarily focuses on growth, and we generally do not have significant maintenance or safety capital expenditures.

Dick Warzala, Chairman, President and CEO

I will add to that and then let Mike move on to the next section. Yes, what he covered included delays due to the supply chain, which is correct, but there are other reasons as well. There have been delayed program launches, so in addition to the supply chain issues, it wasn't necessarily anything under our control, but we are part of the overall solution. If they can’t obtain everything they need, they postpone the program. Some of these delayed launches have also pushed back the capital investments required. Additionally, we have experienced early success with new opportunities that we’ve been working on, and these are beginning to ramp up. As they grow, we are seeing expansions beyond our original estimates that will need capital investments. We have focused on efficiencies, costs, and quality, all of which play a role in these expansions, which will also create additional revenue streams to support them. Another point to mention is that additional spending has arisen from the localization of manufacturing. We have standardized certain product lines we are investing in, which are multinational. We believe we need to be close to our customers, so there may be some redundancy in systems between Europe and North America because there is enough demand in both regions. Our planning has taken this into account, and the sizes of these expansions are appropriate. This may not result in one large capital expansion in a single area but rather multiple smaller ones. The returns on these investments are quick, and we have a program ramping up currently. We identified a highly automated and sophisticated facility in Reynosa, Mexico that can produce the necessary products, but these are intended for customers in Europe. Upon reviewing our internal transportation costs, we realized that with just over a year’s payback, we could duplicate some of the capital investment in Europe and eliminate those transportation costs. Transportation expenses often escalate unexpectedly, leading to high air freight costs. Lastly, I'll mention the need for efficiencies and upgrades due to labor constraints. One of our facilities has indicated that they need six more full-time employees for production, but since they can't hire them, they must upgrade their processes and automate their operations to increase efficiency. This allows them to achieve the same output without needing extra staff. These are additional reasons driving our operations, and I believe they will continue to strengthen our company moving forward.

Mike Leach, Chief Financial Officer

Yes. Regarding debt costs, there are two main factors influencing this: our mergers and acquisitions activity and the expansion or rationalization of some of our facilities. These activities, facilitated by our lean AST tool set, will continue. However, this aspect represents the lesser side of our cost considerations. We are continually seeking to optimize our operations. For instance, we recently relocated one of our North American facilities to a larger, more advanced site, which should yield significant benefits moving forward. While we pay attention to costs associated with such moves, M&A activity is a driving force. As previously discussed, we are currently focused on reducing debt, but we are always exploring growth opportunities. The timing of these opportunities may not always coincide with our current priorities. We will proceed along this path, and depending on how these opportunities arise and our funding capabilities, they will influence our M&A expenses.

Ted Jackson, Analyst

Kind of let me reframe my question. So since I would imagine that anyone that covers you doesn't have any M&A built into their forecast. And so, if we were to assume that you had no M&A, kind of would be a sort of a steady state of that line item within your P&L and why I ask is because we do actually for pro forma back it out. And since it's really not something that's not operational expense that we see, it's kind of hard to model with that a little bit of guidance. I mean, you see it like a $400,000 a year kind of steady state, absent any kind of M&A as you kind of work towards constant reevaluation and efficiency stuff 500,000 a year. Is it just kind of some kind of track it might be helpful at least?

Dick Warzala, Chairman, President and CEO

Yeah. Let us come back to you on that, Ted. I think rather than just shooting a number to you right now, I mean, we could do a little bit of mark here and come up with something that would be more representative of what we really think is going to be in the future here. I think we just be looking at, okay, here's what we did. So if we say, it's how to do it six, we're going to do two. We're going to do three, instead of whatever. Let us get back to you with a number that you can plug into your model. I think it'd be more accurate.

Ted Jackson, Analyst

Okay. That's fair. Thanks for taking all my questions and again congratulations on a very nice quarter.

Dick Warzala, Chairman, President and CEO

Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to management for any closing comments.

Dick Warzala, Chairman, President and CEO

Well, thank you, everyone, for joining us on today's call and for your interest in Allied Motion. For those of you that are interested, we will be participating in person at the ROTH Conference in Dana Point, California next week on Monday, March 13. Otherwise, as always, please feel free to reach out to us at any time, and we look forward to talking to you with all of you again after our first quarter 2023 results. Thank you for your participation, and have a great day.

Operator, Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.