IEC Electronics Corp.
Q1 2021 Earnings Call Transcript

Published: 3 Feb 2021

[Operator:]

Greetings. And welcome to IEC Electronics First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instruction] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett, with Institutional Marketing Services. Thank you. You may begin.

[John Nesbett:]

Good morning and thank you for calling in. On the call this morning, we have Jeff Schlarbaum, President and Chief Executive Officer; and Tom Barbato, Chief Financial Officer. Before we get started, I’d like to take a moment to read the safe harbor statement. This conference call contains certain statements that are and may be deemed to be forward-looking statements. These forward-looking statements, such as when the company describes what it believes, expects or anticipates will occur and other similar statements include, but are not limited to, statements regarding future sales, backlog and operating results, future prospects strategic initiatives, turnaround efforts, the capabilities and capacities of business operations, any financial or other guidance, and all statements that are not based on historical fact, but rather reflect the company’s current expectations concerning future results and events. The ultimate accuracy of these forward-looking statements is dependent upon a number of risks and uncertainties that may cause the company’s actual results or performance to be different than as expressed or implied by these statements. Specific risks and uncertainties include, but are not limited to, those set forth in the company’s earnings release issued immediately before this call and in the company’s most recent annual report on Form 10-K or quarterly reports on Form 10-Q and other reports filed with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or correct any of the forward-looking statements made during this call, whether as a result of new information, future events or otherwise, except as required by law. I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeff Schlarbaum:]

Great. Thank you, John, and good morning, everyone. I hope this call finds everyone safe and healthy. It’s certainly promising to know that the COVID-19 vaccines are increasingly more available which gives me hope and optimism that as immunization gained traction, we will see communities rebound and economic activity improve. Leading up to fiscal Q1, IEC had managed through the pandemic with only moderately adverse impacts to our business. Our leadership teams and the broader workforce, like most everyone else, have adapted to the inconveniences of modified shift structures, work in remote, social distancing, face coverings and the like. However as the nation experienced a significant spike in cases during the 2020 year in holiday season, we too saw spike impacting our business. Even though the number of positive cases of our workforce trended well below state and national averages, contact tracing resulted in quarantine orders that contributed to a level of increased absenteeism we hadn’t seen since the start of the pandemic. For example, in our largest business unit, providing electronic assembly services in Newark, New York. On a weekly basis during the month of December, approximately 15% to 20% of our workforce was unable to come to work. Obviously this created a rather strong headwind to efficiently and effectively execute on the order commitments loaded in our backlog for the customers we serve. Despite these recent COVID-19 related challenges, I am pleased to report our first quarter performance provided a strong start to fiscal 2021. With revenue growth of $47.5 million, improved gross margins of 12.1% and enhanced profitability with net income of $1.5 million or $0.15 per basic share and $0.14 per diluted share. These results represented year-over-year improvements across all three sectors, demonstrating our belief that we have built a business model capable of consistently, driving organic revenue growth and margins at the higher end of our sector. As we entered fiscal 2021, we believed we were well-positioned to continue achieving on-going organic growth, maintaining industry-leading margins and continuing to deliver enhanced profitability, and exiting our first fiscal 2021 quarter, we continue to believe in that very same outlook. We also believe we have set aggressive internal goals for our company’s performance, including a new $50 million benchmark for quarterly revenue. During the first quarter, we achieved our third consecutive quarter above our previously established internal $45 million quarterly revenue goal. And if not for the COVID-19 impacts and related workforce absences previously discussed, we believe we were well-positioned to surpass the next significant milestone of $50 million in quarterly revenue. Given we are not optimally staffed during the first quarter, we believe that our ability to achieve revenues of $47.5 million comfortably ahead of our previous internal revenue target of $45 million is an excellent indicator for what we might expect to achieve when fully operational and as a testament to the maturity of the business model we have established. We have an exceptional team at IEC and I’d like to take a moment to thank our employees for diligently executing our strategy throughout the many challenges the pandemic has presented. Despite the unpredictable public health and economic landscape, they have stayed focused on providing executional excellence in delivering high -- highly complex and highly engineered manufacturing solutions for lifesaving and mission critical products. During the last few years, our sales organization has sharpened its focus with great success on pursuing customers and end markets that embrace our 100% U.S.-based manufacturing model and recognize the value in our unique and vertically integrated service model. Our ability to serve as a compelling one-stop shop, our reputation for delivering the highest quality of customer service, along with an agile business model, which affords us the ability to quickly adapt to complex program fluctuations, continues to be a competitive advantage as we look to secure new customers and new programs. We continue to build upon our reputation as an advanced manufacturing partner for high complexity, lifesaving and mission critical products, and that favorable perception continues to gain traction with customers in the marketplace. Likewise, with our full suite of vertically integrated manufacturing services, we have a competitive advantage in attracting partners from a wide variety of regulated industries who are looking for the highest levels of IP protection, while improving continuity of supply and simultaneously reducing their supply chain risks. We believe we are competitively positioned to continue to win new customers and programs, and look forward to continuing to grow our leadership position as a provider of highly complex manufacturing solutions. We closed fiscal 2020 with a solid order backlog derived from a diverse range of customers and programs and we believe we are well-positioned to convert at higher levels. We have the demand, we have scaled our workforce and we have made progress with the supply chain to a level that we expect we will support the achievement of our next internal quarterly revenue target of $50 million. That said, as we sit here at the beginning of February, we believe the worst of the COVID-19 impacts are behind us and we are encouraged by the fact that we have already seen our staffing levels begin to normalize. Before I turn the call over to Tom to go through the financials, I’d like to provide a quick update on our new facilities. In November 2020, we open our new headquarter facilities in Newark, New York and begin moving our manufacturing operations from an existing location 2.5 miles away. We are conducting this move in stages to reduce risk for our customers and to minimize disruptions and I am pleased to report we are currently ahead of schedule. Not only is the space obviously brand new, but its custom state-of-the-art design is expected to improve our manufacturing flow and provide future operational efficiencies. Regarding the new building we purchased in Rochester, New York, we are making good progress getting it ready for occupancy and we expect that location will come fully online during our fiscal 2021 third quarter. This 86,000 square foot facility will establish a Rochester area campus for IEC that we believe will heighten our presence and improve our ability to recruit skilled resources across the entire region, addressing a critical need to support our goal of double-digit organic growth during fiscal 2021 and beyond. The goal is to consolidate our specialty metals operation from its current Rochester location and combine it with an expanded electronic assembly operation in this new facility. Our two new locations provide a symbolic fresh start to -- we are optimistic will be another strong year for IEC. We believe we have done a solid job mitigating the operational challenges associated with running a business during the pandemic and we wholeheartedly joining the excitement around the rollout of the COVID-19 vaccinations, which we hope will reinvigorate our country and its economy. We continue to be energized by the opportunities we are seeing in the marketplace and we look forward to growing our customer base and continuing to prove our capabilities as a highly differentiated supply chain partner for 100% U.S.-based manufacturing solutions. With that, I will now turn the call over to Tom to provide more detail around our first quarter financial performance. Tom?

[Tom Barbato:]

Thanks, Jeff, and good morning, everyone. Revenue for the first quarter of fiscal 2021 was $47.5 million, an increase of 6.1% as compared to the first quarter of fiscal 2020. Gross profit for the first quarter of fiscal 2021 was $5.7 million, compared to gross profit of $5.2 million in the first quarter of fiscal 2020. Gross margin was 12.1% of sales in the first quarter of fiscal 2021, compared to gross margin of 11.7% of sales in the first quarter of fiscal 2020, which includes the negative impact of a one-time inventory reserve of $1 million related to the reorganization at one of our company’s customers in the medical sector. Selling and administrative expenses increased slightly to $3.5 million, compared to $3.3 million in the first quarter of fiscal 2020 and remained consistent as the percentage of sales at 7.4% for both periods. The company recorded net income of $1.5 million in the first quarter of fiscal 2021 or $0.15 per basic share and $0.14 per diluted share, compared to net income of $1.2 million or a $0.11 per basic and diluted share in the first quarter of fiscal 2020. As previously mentioned, during the first quarter of the prior fiscal year, we incurred a $1 million pretax non-cash charge related to the increase in our excess and obsolete inventory reserves. No portion of the impairment charges anticipated the result in future cash expenditures. These charges impacted our GAAP financial results. Net income in the first quarter of the prior fiscal year was $1.2 million and adjusted for the $1 million impact for the one-time inventory reserve. Adjusted net income was $2 million or $0.19 per basic and $0.18 per diluted share. Please refer to reconciliation tables included in the press release this morning for further information regarding these non-GAAP measures. Looking at our market sectors, for the first quarter of fiscal 2021, we saw revenue distribution of aerospace and defense of 62%, medical at 26% and industrial at 12. The aerospace and defense sector saw a net increase of $1.2 million, in comparison to the first quarter of fiscal 2020, primarily driven by the ramping up production for one customer, the addition of a new customer, and increase in demand with other existing customers, offset by reductions in revenue related to certain customers who saw decreased demand in the quarter. Sales in the medical sector increased $1.3 million, primarily related to new programs ramping to existing customers, which resulted in a $1.9 million increase in revenue, as well as increased demand in a variety of other customers. These increases were partially offset by decreases in demand for certain customers in a program ending yet another customer. Industrial sector sales decreased by $400,000, primarily due to the phase out of one customer $1.1 million, offset by the net increase in demand of $500,000 for various other existing customers. Now looking at our balance sheet. Our balance sheet remains strong with $45.6 million in working capital and $40.6 million in stockholders’ equity. You will see that inventory at the end of the fiscal 2021 was $51.4 million, compared to $50 -- excuse me, you will see that inventory at the end of fiscal 2020 was $51.4 million, compared to $55.7 million at January 1, 2021. We continue to see a willingness on the part of our customers to help mitigate the risks associated with the ongoing component shortages. And as a result, customer deposits grew to $22.2 million at January 1, 2021, compared to $19.8 million at September 30, 2020, despite almost $6 million of existing deposits being consumed within the quarter. Additionally, you will note that property plant equipment increased to $49.9 million at January 1, 2021, compared to $23.6 million at September 30, 2020. This increase is attributable to the purchase of our new facility in Rochester, New York, which closed early in Q1 of fiscal 2021 and the establishment of a right to use asset tied to the long-term lease for our new headquarter facility in Newark, New York, which is also -- which also commenced within the quarter. Please see our Form 10-Q for more details on both of these transactions. With that, I will turn it back to Jeff.

[Jeff Schlarbaum:]

Great. Thank you, Tom. We are pleased to have delivered a solid start to fiscal 2021 and look forward to building upon this momentum as we move throughout the fiscal year. Reiterating some of my earlier comments, we believe we have set challenging internal goals for our company’s performance. During the first quarter, we achieved our third consecutive quarter above our internal $45 million quarterly revenue goal. And if not for the COVID-19 related workforce impacts, we believe we were well-positioned to surpass the next milestone of $50 million in quarterly revenue. As I sit here today, we believe we have a growing customer base in hand and demand to support the workforce investments we made to scale to higher levels. And we further believe we are making progress with our supply chain model to a level that will support the achievement of our next internal quarterly revenue target of $50 million. As I said earlier, we are also optimistic the worst of the COVID-19 impacts are behind us and we are already seeing staffing levels normalize, which positions us for continued progress in fiscal Q2 2021 and beyond. We remain intent on winning select strategic new customers, along with adding meaningful new programs as a result of our deeper and wider strategy with existing customers, all as a result of advancing our reputation as a highly agile and vertically integrated provider of 100% U.S.-based manufacturing solutions for lifesaving and mission-critical products. Now, with that, I will turn the call back over to the Operator for any additional questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.

[Chris Sakai:]

Hi, Tom and Jeff. Good morning. Just had a question on, as you guys expect and we are seeing the worst of the COVID the pandemic behind us. How is that going to affect sales in your medical segment?

[Jeff Schlarbaum:]

Yeah. Really the COVID related impacts we saw as it relates to demand, Chris, were mostly in the fiscal 2020 period and sort of the middle of the summer as some of those medical OEMs were seeing an increased demand to help at hospitals with additional equipment. So I’d say those, we are not seeing continued tailwinds from that. That’s -- the medical demand is sort of a normalized. My viewpoint on sort of the commentary around the COVID-19 impacts we have seen most recently were really around our ability to execute with disruptions to our workforce. We hadn’t seen significant disruptions up until the calendar Q4 timeframe with the nationwide spikes in cases that were reported. And surely enough we saw a significant amount of impacts to our workforce that really prevented us from maximizing conversion of order demand into revenue, because the factories were running 15% to 20% inefficient due to unusually high absenteeism. So those are really more of the sort of perspective I was thinking of when I talked about the recent COVID-19 impacts.

[Chris Sakai:]

Okay. And my other question, I guess, looks like there’s a noticeable increase in raw materials, an increase in inventory. I was just wondering if you could shed some light there?

[Jeff Schlarbaum:]

Couple of things, right. So, one is, it’s obviously a sign that we are out securing materials to support growing demand. So I think that’s another bullish indicator that we have demand to support it that’s growing. The other thing that, I attempted to weave in the messaging here, which is due to the impacts with our workforce, we had intended to deliver revenue at higher level, which would have consumed some of that raw material, which ultimately stranded it on the balance sheet and that’s what you see sort of at an increased level. And as Tom also mentioned, some of the advanced purchasing is also being offset with the prepays that our customers are committing to which is a bit of an offset. But those are probably the main drivers behind it.

[Chris Sakai:]

Okay. All right. Great. Thanks.

[Jeff Schlarbaum:]

Yeah. Take care. Nice talking to you.

[Operator:]

Our next question comes from the line of Jen Wolfertz with Comstock Partners. Please proceed with your question.

[Jen Wolfertz:]

Thank you. Good morning. I am just wondering if you can give us an update on where we stand with the large defense contract that you guys announced last year. I believe that is beginning to ramp. But if you could just get us a little color on that, that would be great?

[Jeff Schlarbaum:]

Yeah. No. Great question. Thanks, Jen. Yeah. We announced a significant defense customer award last year and we had talked about at the -- towards the end of the calendar year in 2020 starting to ramp up the production. So I am happy to report that in the calendar Q4, our fiscal Q1 timeframe, we launched the early stages of production. We were ultimately qualified by our customer and the end customer to green light the acceleration of production manufacturing. So in the current quarter, we are doing exactly that. We are launching higher quantity builds and are climbing the ramp up ladder and I expect that as we exit Q2 and enter into Q3, we will start to hit a volume cadence in manufacturing. So, it’s going well. I mean it’s -- there’s the usual disruptions of dialing in the manufacturing process, establishing the supply chain, which is challenging with some of these leading-edge innovative designs. But we are working our way through it and put a little bit of pressure -- margin pressure in Q1 because of some of the start and stops, but we think that fades and we see higher levels of production actually in this quarter going into Q3.

[Jen Wolfertz:]

Great. Thank you. Thanks for the update.

[Jeff Schlarbaum:]

Absolutely.

[Operator:]

[Operator Instructions] Our next question comes from the line of Shawn Boyd with Next Mark Capital. Please proceed with your question.

[Shawn Boyd:]

Good morning, gentlemen. Can you hear me okay?

[Jeff Schlarbaum:]

Yes. I can hear you. It’s a little muted but I can hear you fine, Shawn.

[Shawn Boyd:]

Great. Just wanted to get a little bit more on how things look in the order book and the pipeline. I know you would rather not quantify it quarter-by-quarter. But if we could just talk maybe anecdotally, we do have some pretty big crosscurrents going on, obviously the absenteeism hurt production in the quarter. But what can you tell us on orders and how companies are looking down the road as you get these new facilities on?

[Jeff Schlarbaum:]

Yeah. So, obviously, the larger macro signals are remained strong. We see these new operations as critical to support ongoing demand. So no pulling back there given the visibility we have to future demand signals from the customers. You are right, we don’t really get into backlog by quarter. But what I can say bookings wise, very similar to the bookings level in Q1 of 2020. So I look at year-over-year bookings levels were very similar and we had a very solid looking year in 2020. So I expect that to be the case for 2021 as well. We talk about his other facet of the booking cycle where some of these larger programs, one of the defense programs, I just spoke about, are multiyear programs are going to run for a very long time. And so our customers will commit to a sizable amount of business over a couple of years and those booking intervals are a bit lumpy. So those also have impact, but also make it a little less linear, but certainly when they occur, make up for other periods that may appear to be softer but on the aggregate, the order book is growing at a nice rate. So we still see very bullish signals. We are ramping up the other facilities to support it and we have customers in our pipeline that we are out coding and we see some strong buying signals that we will be fortunate enough to be selected as the manufacturing partner for the future. So I think on all fronts I am pretty pleased where we are at.

[Shawn Boyd:]

Great. Good to hear. And specifically on the aerospace and defense, would you think you can give us, probably, we have got a change in the administration, but it’s very, very early days and doesn’t seem to be any kind of impact real change yet in that respect. Anything you can tell us that we should be thinking about on that segment in particular?

[Jeff Schlarbaum:]

Yeah. I’d probably not have any greater insights than others that follow the aerospace and defense industry closely. But what we do know from talking to our customers for obviously on the front lines is that, they have commitments for their product lines and for the programs that they are supporting over the next couple of years. They don’t really see much change one way or another. Certainly, as you get out of couple of years and there -- the administration is able to affect commitments not yet made, maybe in years three and four, the administration, there could be some fluctuations. But I will go back to kind of what I have said in the past, which is, you really got to look closely at what kind of technologies and what kind of program positioning you have. We are on many of the innovative programs of the advanced technology variety that are going to be used in the conflicts that will occur in the future, whether it’s these weapons programs that are going to be invested in and critical for minimizing collateral damage in urban settings or just some of the advanced communication and technology year that’s worn by the soldiers. We are in a really good position from a diversity standpoint and from a technology standpoint that. Despite an administration change, if there are some changes, years three and four. I think, we are really well-positioned, because we have just got a great number of program positions across a wide variety of technologies.

[Shawn Boyd:]

Got it. Yeah. That makes sense. Jeff last one for me on the New York facility and the transition into the new modernized facility. If you could just update us again on when do you think you will be fully over into that facility?

[Jeff Schlarbaum:]

Yeah. So we made the first move of production in January. So the first phase of it is now complete. We have three other phases that we kind of look at in four blocks. We have three other phases to go. Phase number two will happen this quarter and sort of the, probably, actually when I look at this quarter, probably, not in March, will probably hold until April. So we will probably see the second phase in April. Probably see the third phase in July and the question is whether we can get the third and fourth phases in the July timeframe, which I am optimistic we will. And I think worst case is the fourth segment moves into October. So that’s kind of the goalpost. I think all done either in Q4, by Q4 of our fiscal year end or the fourth phase slipping into October of 2021.

[Shawn Boyd:]

Great. Fantastic. Thanks for the thought.

[Jeff Schlarbaum:]

All right. Appreciate the questions. Take care.

[Operator:]

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.

[Jeff Schlarbaum:]

Great. Thank you. And we just want to say thanks everyone for not only participating in today’s call, but we certainly wish everyone continued health and safety as we all work through the challenges associated with the pandemic. Appreciate your interest in IEC and we certainly look forward to speaking with everybody again next quarter.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.