IEC Electronics Corp.
Q1 2020 Earnings Call Transcript

Published: 5 Feb 2020

[Operator:]

Greetings. Welcome to IEC Electronics first quarter 2020 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Audra Gavelis, Director of Marketing and IR. Thank you. You may begin.

[Audra Gavelis:]

Thank you for calling in. On the call this morning we have Jeff Schlarbaum, President and CEO and Tom Barbato, CFO.Before we get started, I would like to take a moment to read the Safe Harbor statement. This conference call contains certain statements that are or 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 materially 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, quarterly reports on Form 10-Q and its 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:]

Thank you, Audra and good morning everyone. Fiscal 2020 is off to a solid start with fiscal quarter revenue of 44.7 million which represents a 26% increase compared to the same quarter last year and this also marks our sixth consecutive quarter of sequential revenue growth.We've now consistently achieved revenue in excess of 40 million for the past three quarters, a key revenue milestone that was targeted when we initiated the turnaround of the business more than two years ago. It's important to note that we achieved strong results in the quarter despite recording a onetime inventory reserve of 1 million due to a Chapter 11 reorganization at one of our end customers in the medical sector that occurred in the latter part of the calendar year. While we believe we have sufficient controls in place to minimize risks associated with the customers we serve unforeseen developments such as this are difficult to completely prevent and in many ways remain a challenge for the companies in the industry at large supporting the innovation of new products for early lifecycle companies.However, it's a testament to the strength and the endurance of IEC's current business that has been fortified over the past few years as we have bolstered our scale and diversity, which has created a much stronger foundation to absorb an unforeseen event such as this.Our gross margin in the quarter was 11.7% of sales excluding the onetime reserve adjusted gross margin would have been 13.9% of sales consistent with fiscal 2019 gross margin levels, which we believe highlights the ongoing strength of our business and our ability to consistently deliver industry leading gross margin performance. Please refer to the reconciliation tables included in the press release issued this morning for further information regarding this non-GAAP measure. As we entered fiscal 2020 with a robust backlog, our pipeline also remains strong. Our growth momentum is rewarding because it's a direct reflection of the focused investments we've made to organically scale the business. We have dedicated a great deal of effort to go to big partners who recognize the value of our unique vertically integrated service model and this has resulted in longer term and increasingly higher value commitments from both existing customers as well as a significant number of awards from new customers which provide the opportunity for ongoing growth and diversity.Customers trust us to manufacture their lifesaving and mission critical products and our integrated portfolio of offerings and capabilities allow us to control the cost, the quality and the lead times of critical components, thereby enabling our customers to minimize the number of strategic supply partners they manage. Backlog remains strong, although it was down modestly from the prior quarter. Given the almost 60% growth in backlog we saw in fiscal 2019 this minor reduction actually gave us some breathing room to focus on reducing our past due order levels. We anticipate and we've begun to experience an increase in backlog in the second quarter of fiscal 2020. As we pointed out last quarter, our backlog composition is changing and now includes a greater number of longer term contracts. As a result, more than 30% of our current backlog is deliverable in time periods beyond our current fiscal year, which enhances our ability to better plan for the future.The component shortages we have been contending with continue to improve and I'm proud of the way our team has managed through it, successfully mitigating numerous potential disruptions to our end customers. We continue, however to see some tightness in the supply chain for the highly engineered sole source components we use on behalf of our customer base who are operating in highly regulated markets. We remain focused on balancing the need for efficient inventory management with ensuring we have the right parts on hand to meet our customer commitments as they're scheduled for production. Speaking of production construction crews have been working hard and will continue through the winter to keep the timeline on track for the opening of our new State of the Art manufacturing and new headquarters facility. We expect the building to be complete this summer and there's a lot of excitement and anticipation amongst the management team, our employees, our customers, and the local community.Our current facility has served us well for a very long time, but as we've discussed before, it does not meet our growing business needs because of its age and limited flexibility, especially with regards to manufacturing efficiency and expansion of technology. We believe this innovative new space will not only help us service existing customers better, but will also provide a competitive advantage for our business development talent recruiting efforts. Along those lines, we continue to onboard new employees including over 60 new hires in the fiscal quarter. We remain focused on investing in our workforce and providing the most effective training to try to minimize the impact of the human element as we continue to ramp up for the manufacturer of the lifesaving and mission-critical products we support. This was a solid quarter for IEC. We're delivering consistent growth driven by our strategic customer relationships and enhanced reputation in the marketplace.We had a strong platform to build from and believe we are well positioned to continue this momentum and expand our leadership position. Now I'll turn the call over to Tom to provide more detail on our fiscal first quarter financial performance. Tom.

[Tom Barbato:]

Thanks Jeff. And good morning everyone. Revenue for the first quarter of fiscal 2020 was 44.7 million. An increase of 26.2% is compared to the first quarter of fiscal 2019. Gross profit for the first quarter of 2020 was 5.2 million compared to gross profit of 5.1 million in the first quarter of fiscal 2019. Gross margin was 11.7% of sales in the first quarter of 2020 compared to 14.3% in the first quarter of fiscal 2019. Gross margin was adversely impacted by a one time inventory charge of $1 million in the first fiscal quarter related to Chapter 11 reorganization activities at an end customer in our medical sector as Jeff described earlier, excluding the write down adjusted gross margin would have been 13.9% of sales consistent with gross margins for our fiscal 2019. As Jeff mentioned, please refer to the reconciliation tables provided in the press release for further information regarding this non-GAAP measure.Selling and administrative expenses decreased to 3.3 million or 7.4% of sales as compared to 3.4 million or nine and a half percent of sales in the first quarter of fiscal 2019. The company recorded net income of 1.2 million in the first quarter of fiscal 2020 or $0.11 per basic and diluted share, compared to net income of 1.1 million or $0.10 per basic and diluted share in the first quarter of fiscal 2019. Net income for the fiscal 2020 first quarter included the onetime inventory charge of $1 million as detailed earlier. Adjusted for the impact of the onetime inventory reserve adjusted net income would have been $2 million or $0.19 per basic and $0.18 per diluted share. Please see the 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 2020 we saw a revenue distribution of aerospace and defense at 61%, medical at 25% and industrial at 14%. The aerospace and defense sector saw a net increase of 8.8 million in comparison to Q1 at fiscal year 2019 primarily driven by the ramping of production for certain customers and increases in customer demand. The increases during the year were partially, during the quarter were partially offset by decreases of 2.1 million related to lower year over year demand. Sales in the medical sector increased 1.8 million primarily due to $3 million related to three new programs ramping with existing customers and a 1.8 million revenue increase from a customer who saw increases in their end market demand. The increases were partially offset by reductions in demand from certain customers in a program being on hold with another customer that amounted to approximately $3 million.The industrial sector sales decreased by 1.3 million primarily due to fluctuations in the band with certain customers and a project being on hold with another customer. Now looking at our balance sheet, our balance sheet remains strong with 40.8 million in working capital and 32.7 million in stockholders' equity. You will see that inventory at December 27th, 2019 was 45 million up compared to 44.3 million in September 30th 2019. As we've discussed on prior calls, our inventory levels are directly associated with our ability to convert our backlog. We continue to see a willingness on the part of our customers to help mitigate the risks associated with ongoing component shortages resulting in customer deposits growing to 15.1 million at the end of December 27th at the end of December 2019 in comparison to 13.2 million at the September 30th, 2019. One other item worth noting is that we generated 2.3 million of operating cash flow in the fiscal first quarter. Positive cash generation continues to be a critical priority for us. With that, I'll turn it back to Jeff.

[Jeff Schlarbaum:]

Great. Thanks Tom. The start of fiscal 2020 reflects a continuation of our strategic efforts to drive sustained growth, strengthen our balance sheet and improved profitability. The Chapter 11 reorganization activity at one of our end customers created a bit of a speed bump in the quarter, but we were able to continue executing across our business thanks to the diversity of our programs and the underlying strength of our operations. Reflecting our growth, our strong growth trajectory on January 2nd IEC began trading on the NASDAQ. We're excited about this change and believe that NASDAQ is a logical next step for us as we continue to grow our business and investor base while improving liquidity and shareholder value. As we move through fiscal 2020 we're intent on continuing to deliver operational excellence as a manufacturing partner for lifesaving and mission-critical products.Likewise, we're focused on expanding our existing customer engagements and leveraging our solid reputation to attract new partners. We're excited about the opportunities we're seeing in the marketplace and energized to build upon the momentum we've created during the last few quarters to strengthen our leadership position. With that I will now hand the call back over to the operator for any questions.Thank you. [Operator Instructions] Our first question is from Aman Gulani with B Riley FBR, please proceed.

[Aman Gulani:]

Hey guys, thanks for taking my question. Nice quarter. Just want to get an idea of what was the key drivers for the top line growth, would you say it's more existing customers or new customers ramping up?

[Jeff Schlarbaum:]

So Aman, it's really a combination of the two. You know, we talked about in the past, we've got a really strong base of existing customers and we've been able to expand the business with new program wins within those existing customers. We're also, penetrating new locations or new divisions within those existing customers. So that certainly helps account for some of the growth, but we've onboarded a number of new customers as well. And so we're, while we're in the early stages of some of those program ramps. It's really been a combination of steady volumes from existing, new program awards from existing and some new customer onboarding.

[Aman Gulani:]

Got it. Thank you. And just turning to working capital, so inventory has been increasing sequentially for the last couple of quarters, how should we think about the cadence for the rest of the year? Do you think you'll be sort of working through some of that inventory as we progress through that year or do you think we should, do you think it will be over $40 million level throughout the year?

[Jeff Schlarbaum:]

So it's a fair question. And you know, I've talked about in the past that as we start to get some cadence and continuity in the business at these higher revenue levels, we should start to be able to moderate the intake of raw materials and actually begin to convert it at higher rates. And ultimately drive down the inventory levels and create greater levels of operating cash. So, you know, as Tom mentioned this quarter, we generated $2.3 million of operating cash. And so I believe that you know, the inventory levels will continue to be a focus and I think we'll be able to drive them down. I'd be hesitant to give you a specific number, but I see that going in a favorable direction so we can continue to deliver operating cash flow. And so I think that's probably the best outlook I can give you today.

[Aman Gulani:]

Sure. Thank you. That's helpful. And then last question for me, more housekeeping. Can you talk about your bookings and backlog during the quarter?

[Jeff Schlarbaum:]

So, what I can say is, we didn't have above one book to bill ratio during the quarter. We consumed some of our backlog. It was just a modest amount. So, I'm not prepared to give you the exact numbers, but what I can say is our bookings really are influenced by my timing within our customers. So, you know, if you look at the last, you know, quarters leading up to our fiscal year end, we saw extraordinarily high bookings that because of timing, some were delayed and fell into a period and some came in sooner. So and I really look at on the aggregate and last year we had a really solid booking year. And as I look at Q1 models were little softer, now Q2 we already see an increase in bookings and we're already seeing an increase in our backlog. So, it's hard for me to predict quarter to quarter, but the demand and the visibility appears to be, you know, continues to be solid.

[Aman Gulani:]

Thank you. And just one more question regarding the backlog. I mean, how, how do you think about contracts within the backlog I know you talked about 30%, of the contract deal over one year. Is that what you're sort of aiming for, for the rest of the year? Like getting that 30% to maybe 50% or 60%?

[Jeff Schlarbaum:]

I don't know that it'll ever get that high. And, you know, as I said last year we had bookings over a year representing less than 10%. And so, you know, we went into this year with it over 30% and maybe that increases a bit over time, but I don't see it increasing at extraordinary rates. We're still going to book and ship within the fiscal year, but you know, our backlogs are, you know, today is up over 200 million. So, you know, we're with a $200 million backlog with continued book and ship business within the quarter. I guess a longer term bookings are likely to increase a bit, but I wouldn't, wouldn't outlook the type of levels that you know you're mentioning, you know the 50, 60%. Maybe that's an outward years, but I don't see that in the near term visibility.

[Operator:]

Our next question is from Nehal Chokshi with Maxim Group. Please proceed.

[Nehal Chokshi:]

Thank you. By the way, congrats on the really strong December quarter, cash flow quarter. I think that's as strong as you've had since you came back Jeff, so congrats on that. Employees are up 7% Q to Q. What is down 20% Q to Q? Which metrics should we be looking at leading indicator for upcoming quarterly, Q to Q revenue growth?

[Jeff Schlarbaum:]

Wow, that's a great question. You know, we don't always Nehal, as you know, when we onboard new employees, you know get them up the learning curve as quickly as we can to contribute to immediate revenue growth demands. So, I think it's a more longer term indicator of where the business is going and it's, and it's more difficult to really tie it to the short term quarter performance or outlook. So, you know, in the whip, the whip I think, you know, for us I'm trying to reduce our raw material levels, obviously want to pivot to a more greater levels of finished goods so we can, we can supply products to our customers at a moment's notice, and react to increases in demand. And of course, you know, our whip levels, I like to you know, maintain an appropriate level of whip. So, you know, we're always able to, again, replenish finished goods and really it's the raw that we're going to hopefully continue to drive down that'll help us generate greater operating cash flow along with our operating profits. So, it's probably not giving me the exact answer you want, but that's kind of how I see things.

[Nehal Chokshi:]

Yeah, not exactly. But the way I would interpret that is that probably put a little bit more emphasis on width but not to the magnitude that it's down to its USD trajectory. Would that be a fair?

[Jeff Schlarbaum:]

Yes.

[Nehal Chokshi:]

Okay. All right. And then the inventory reserve taken, was that in the form of finished goods?

[Jeff Schlarbaum:]

No, it's raw material. No, we had a contract and we had been delivering on the contract, finished products and we are paid for the finished product. This was just a residual raw material that we were holding.

[Nehal Chokshi:]

And that raw material will not be able to be repurposed to other customers?

[Jeff Schlarbaum:]

Not immediately. So that was the reason for the reserve, depending on how things unfold in the future, possibly might have a demand for it. But in the near term with the programs we have in backlog we don't have an immediate need for it.

[Nehal Chokshi:]

Okay. And then you guys have started reporting this unbilled contract revenue on your balance sheets. I think it's the fifth quarter in a row and it continues to track up Q to Q. And given your comment around consuming backlog in the December quarter, what's been the driver of this unbilled contract revenue continue track up Q to Q then.

[Jeff Schlarbaum:]

Well let me, I'll give that one over to Tom and take a stab at that.

[Tom Barbato:]

So the thing I'll add, that's tied to the, the ASC 606 revenue recognition policy and obviously there's disclosure in the 10-Q in regards to that, but it's really, you know, tied to, you know whip and finished good levels for, you know, product that hasn't shipped yet. And you know, the increases within a quarter are highly dependent on what contracts the whip and finished goods are tied to and you know the mix of products within and the profitability within those those buckets.

[Nehal Chokshi:]

Okay. All right. I'll cede the floor for the time being. Thank you.

[Operator:]

Our next question is from Mike Morales with Walthausen & Company? Please proceed.

[Mike Morales:]

Good morning Jeff and Tom, thank you for taking my questions. Hey, going through the 10-Q for clarity the a 1.4 million reduction in medical revenues from that bond hold program, to be 100% clear that is separate from the Chapter 11 or the customer going through the Chapter 11 organization.

[Jeff Schlarbaum:]

Yeah, that's correct, Mike.

[Mike Morales:]

Okay. Okay. And then kind of going back to the mix of new and existing customers and new and existing programs, looking at the aero and defense performance for the quarter, 8.5 million high revenues from ramping of new programs. Can you guys just talk about whether the lion's share of that is new programs from existing customers, higher volumes on existing programs and just what you're seeing on the opportunities there?

[Jeff Schlarbaum:]

Yeah, that's a good question, Mike. It absolutely is a reflection of both higher volumes on existing programs that we support and also winning, new programs with the existing customers we support that we haven't been on in the past. So I don't have the exact breakdown of volume increases versus the new programs that we've awarded from or we won from existing customers. But it's really a combination of the two. And you know, without getting into to the details, it's probably, you know 50-50, 40-60 it's a pretty close combination of the two.

[Mike Morales:]

Okay. So really the growth that you're seeing is kind of from all different aspects, whether it's new programs or existing programs from existing customers or the same for new customers that you're talking to.

[Jeff Schlarbaum:]

Yes. Especially in the A&D sector. I think that's what you're speaking to, so it's certainly for the A&D sector.

[Mike Morales:]

Yeah. And on A&D specifically, I mean, are you guys seeing any level of increased competition out there that maybe you haven't seen in the past? As more people start to see the opportunity in that regulated end markets.

[Jeff Schlarbaum:]

I haven't really seen the competitive landscape change in a material nature. I think that the competitors that we've competed against historically sort of remain in that space. I'm aware of other companies wanting to get more into the A&D space. And it's one thing to talk about it's another thing to have a compelling platform that can be, you know, an advantage to the incumbent companies like ourselves. So I haven't really seen it change all that much. It's sort of the usual suspects, but I know companies are always striving on a regular basis to get into this sector because the A&D market has been, you know, really solid from a growth perspective.

[Mike Morales:]

Sure. And then last for me you know, thanks for the color on the progress on the new facility. I think anybody that's been in your current facility can appreciate the opportunity of the new one. Can you guys just talk about some of the things that you're doing both on the employee side and on your customers, or with your customers to ensure that the transition is really as smooth as it can be and to minimize disruptions? Thanks.

[Jeff Schlarbaum:]

Yeah, that's a fair question. You know, if you've visited our current facility then, you know, it's much easier to appreciate what the new facility, it's literally just over two miles down the road. So, since we own the current building and we're going to take a very measured and deliberate approach to the transition of programs, in a sequence of phases over to the new building, which will ensure that we minimize disruption for any of our customers. And, you know, with that, there's no specific deadline. It's just we get to enter and exit the new building and the old. So, I think with our experience with these technologies, in close proximity, with our employees being able to seamlessly move back and forth given the limited distance and us committing to a measured sequential phased approach, we feel very good that we'll minimize any potential disruptions.

[Mike Morales:]

Great. Thank you for taking my questions. Appreciate it.

[Operator:]

Yeah, our next question is from Chris Sakai with Singular Research. Please proceed.

[Chris Sakai:]

Hi, good morning. Just wanted to ask about your adjusted gross margin, do you have a target or where do you see it going for the rest of the year?

[Jeff Schlarbaum:]

Yeah. So I think Chris, my viewpoint on the last few calls and remains consistent here is that, you know, when you look at our margins, for last year on an aggregated basis, my intent is to more or less remain in that range as volumes increase. You know, as I said, and one of the earlier questions related to competitive pressures, you know, as volumes increase, we'll continue to encounter competitive pressures to make sure we're price competitive. And I think with our, with our unique and differentiated offering, we'll still be in an industry leading position, which we are in today and we have been for some time and I see us preserving that.But I think that from a margin perspective, I'm more in the lines of, you know, preserving in the range of where we were last year, more or less, while we increase volume levels at exceeding industry rates. So I think that's where I'm comfortable today. That may change over time, but that's my best outlook for now.

[Chris Sakai:]

Okay. Great. And then one question with the new facility, will this show, will it show any meaningful improvements increase in profitability? Will we be able to see anything along those ends?

[Jeff Schlarbaum:]

You know, I firmly believe that from an inefficiency standpoint, being able to design the flow from the ground up it's going to yield efficiencies. We're going to just be in the early stages of, the initial move sequence as we enter into the latter stages of our fiscal year. You know our fourth quarter is at July, August, September quarter, and that's about the time that we'll start to see in the very early stages of move. So as I look out into 2020, we believe that we'll see efficiency improvements, but, give me a little bit time just to get the move settled, and see how things are unfolding. But it certainly should be accretive to the overall program as we get settled over time.

[Operator:]

And we do have a follow up question from Nehal Chokshi with Maxim Group, please proceed.

[Nehal Chokshi:]

Ah, yes, thanks. Do you guys have any exposure to the Boeing 737 Max?

[Jeff Schlarbaum:]

We do not.

[Nehal Chokshi:]

Okay, good. And then presumably since all manufacturing is in the US and most of your supply chain is also US-based. You're not going to be having any impact from potential supply chain disruptions from the coronavirus in China, correct?

[Jeff Schlarbaum:]

Yeah, so Nehal our dependence on China is very low. Obviously as you know some of the discrete component manufacturers have manufacturing operations in China, but there's a wide supply chain for some of those more industrial and consumer related electronics. So it's not zero, but like you said, with our mission critical and life saving product mix for customers that we like to distribute in the US that are highly regulated, there's not a high dependence upon China for supply chain.

[Operator:]

We have reached the end of our question and answer session. I would like to turn the call back over to management for closing remarks.

[Jeff Schlarbaum:]

Thank you everyone for calling in. We really appreciate it, so pleasure speaking to everyone and we look forward to speaking again next quarter.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.