IEC Electronics Corp.
Q3 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Greetings, and welcome to the IEC Electronics Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Jennifer Belodeau. Please begin.

[Jennifer Belodeau:]

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 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 facts, 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, our 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. With that out of the way, I'll turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeff Schlarbaum:]

Well, thank you, Jen, and good morning, everyone. It's a pleasure to speak to everyone this morning, and I hope you're all safe and healthy. This was another strong quarter for IEC. It was led by solid revenue of $47.4 million. It was an increase of 17% year-over-year, and it was a sequential increase of 7%, compared to our second fiscal quarter of 2020. Our quarterly revenue growth to more than $47 million, generated all organically, is particularly notable when you consider that it was just one year ago that we achieved a company milestone while breaking through our internal $40 million quarterly revenue target. We then set our sights on an internal target of $45 million in quarterly revenue, which we substantially surpassed this quarter, while at the same time, also delivering what we believe to be an industry-leading gross margin of 14%. Our ability to generate such high levels of organic growth is a testament to the growing reputation IEC has achieved as a highly capable and reliable electronic manufacturing solutions provider for highly-complex products and highly-regulated industries. And it also speaks volumes about the dedication and resilience of our employees who have continued to get the job done in the midst of the current pandemic. In addition to our top line success, we delivered substantially improved profitability, with net income growth of 75% to $2.1 million for the quarter or $0.20 per basic and diluted share. It was also gratifying to generate $6 million in operating cash flow during the quarter, a significant change from the same period in fiscal 2019 when we were consuming cash to support our continued backlog growth, primarily associated with the purchase of inventory. Finally, in light of our growing revenue, which increased 21% fiscal year-to-date, compared to the same nine-month period a year ago, our backlog remains at near the same level as it was at the start of the 2020 fiscal year, and our book-to-bill ratio for the third quarter was a solid 0.9

[Tom Barbato:]

Good morning, everyone. Revenue for the third quarter of fiscal 2020 was $47.4 million, an increase of 17% as compared to the third quarter of fiscal 2019 and improved by 7% sequentially as compared to the second quarter of fiscal 2020. Gross profit for the third quarter of fiscal 2020 was $6.6 million, compared to gross profit of $5.6 million in the third quarter of fiscal 2019. Gross margin was 14% in the third quarter of fiscal 2020, slightly higher than the gross margin of 13.9% in the third quarter of fiscal 2019. Selling and administrative expenses of 3.7 million were consistent with the third quarter of fiscal 2019, a decrease as a percentage of sales to 7.8% as compared to 9.2% of sales in the third quarter of fiscal 2019. The company recorded net income of $2.1 million in the third quarter of fiscal 2020 or $0.20 per basic and diluted share, compared to net income of $1.2 million or $0.12 per basic and $0.11 per diluted share in the third quarter of fiscal 2019. As Jeff noted, during the quarter, we generated operating cash flow of $6 million, compared to last fiscal year's third quarter when we used $391,000 in cash flow from operations as we invested in inventory to support our strong and growing backlog. Looking at our market sectors for the third quarter of 2020, we saw revenue distribution of aerospace and defense at 59%, medical at 28%, and industrial at 13%. The aerospace and defense sector saw a net increase of $3.4 million in comparison to Q3 of fiscal 2019, primarily driven by the ramping of production for certain customers and increases in demand with other customers, offset by reductions in revenue related to disengaging with certain customers, as well as programs ending and program delays. Sales in the medical sector increased $4.4 million, primarily related to new programs ramping with an existing customer, which resulted in $5.3 million increase in revenue, as well as increased demand from a variety of other customers. These increases were partially offset by a program on hold with another customer. Industrial sector sales decreased by $0.7 million, primarily due to fluctuations in demand with certain customers. Now looking at the results for the first nine months of fiscal 2020, revenue increased 21% to $136.3 million, compared to $113.1 million in the prior fiscal period. Growth was primarily driven by an increase in sales in the aerospace and defense sector of $15.8 million and an increase in sales in the medical sector of $9.7 million. Gross profit in the first nine months of fiscal 2020 was $17.4 million or 12.8% of sales, compared to gross profit of $15.3 million or 13.5% of sales in the first nine months of fiscal 2019. Gross margin in the first nine months of fiscal 2020 was adversely impacted by the onetime inventory write-down of $1 million in the fiscal first quarter related to reorganization activities at an end customer in the medical sector. Selling and administrative expenses decreased $200,000 to $10.2 million and decreased as a percentage of sales to 7.5% in the first nine months of fiscal 2020, compared to $10.4 million or 9.2% of sales in the comparable prior year fiscal period. The decrease in selling and administrative expenses was primarily due to lower payroll and related expenses. Net income for the first nine months of fiscal 2020 was $4.8 million or $0.46 per basic and $0.45 per diluted share as compared to net income of $3 million or $0.28 per basic and diluted share in the same prior fiscal year period. Adjusted for the impact of the first quarter one-time inventory reserve, adjusted net income would have been $5.6 million or $0.54 per basic and $0.52 per diluted share. Please see the reconciliation tables included in the press release this morning for further information regarding these non-GAAP measures. For the first nine months of fiscal 2020, we generated $7.8 million in cash flow from operations compared to cash flow used in operating activities last year of $9.2 million. Now looking at our balance sheet, our balance sheet remains strong, with $43.5 million in working capital and $36.7 million in stockholders' equity. You'll see that inventory at the end of the third quarter was $46.9 million, up modestly compared to the $44.3 million at the end of fiscal 2019. We continue to see a willingness on the part of our customers to help mitigate the risks associated with ongoing component shortages. And as a result, customer deposits grew to $20.4 million at the end of the third quarter in comparison to $13.2 million at September 30, 2019. Additionally, effective June 4, 2020, we entered into the sixth amended and restated credit facility agreement with M&T Bank, which increased our revolving credit facility to $45 million and added provisions that allow the company subject to certain requirements to request further increases in minimum amounts of $5 million up to $55 million. The new credit agreement is a testament to the overall improved financial condition of the post turnaround IEC and notwithstanding all the uncertainty associated with the worldwide pandemic is a reflection of the strategic partnership alignment between IEC and M&T Bank. With that, I'll turn it back to Jeff.

[Jeff Schlarbaum:]

Great. Thank you, Tom. Despite the economic and public health challenges the world has experienced during the last several months, IEC has remained intently focused on growing our leadership position as an immensely capable and reliable electronic manufacturing solutions provider for highly-complex products in highly-regulated industries. We're uniquely positioned as a provider of 100% U.S.-based manufacturing for life-saving and mission-critical products, and we expect to continue leveraging our unique capabilities to facilitate additional wins with new customers and add new program awards with existing customers. Fiscal 2020 has been a strong year for our company, and we remain focused on driving continued organic growth, industry-leading margin performance and improved profitability as we close out our fiscal year. With that, I will now hand the call back over to the operator for any questions.

[Operator:]

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

[Chris Sakai:]

Hi, good morning. Question, I guess, is from the three sectors, can you just comment on, I guess, the business environment and where you found the most favorable? And where was the least favorable?

[Jeff Schlarbaum:]

Yes, absolutely. Good morning, Chris. Nice talking to you. So, in terms of – if you look at just sequentially, Q3 versus Q2, if I look at this quarter, we saw about 40% of the increased sales come from the defense sector, we saw another 40% come from the medical sector. And so when we do the math, it's probably a little under 20% coming from the industrial sector. So, that's really the answer, I guess, you're seeking is what industry led the least amount to the increased sequential revenue, and that was the industrial sector. Both defense and medical were pretty steady and had good solid quarters.

[Chris Sakai:]

Okay. But – so as far as industrial goes, can you shed some light on us as to why – what was going on there? Why was it not performing, as well as the other sectors?

[Jeff Schlarbaum:]

Yes. So, I think the essential versus non-essential company classifications and product classifications associated with the defense and medical industries, most of our defense customers obviously were classified as essential businesses with essential products, obviously, supporting national security initiatives. The medical sector, again, largely had essential classifications for essential products. We saw a couple non-essential medical products get affected, but it was the minority. And I think the industrial sector was much more of a mixed bag. There were a number of companies that we support that were considered essential manufacturers, but there was a number of them that weren't. And certainly, with some of the conservative procurement initiatives underway at some companies with all the economic uncertainties, I think the industrial sector suffered the most because they didn't have – but certainly, the ones that we sport didn't all have products that were considered essential during this COVID-19 pandemic. So, that's my read on why the industrial sector didn't fare as well compared to the other two.

[Chris Sakai:]

Okay. All right, great. Thanks for that. And just one other question. As far as – do you disclose your amount of customers? And how has that grown over sequentially?

[Jeff Schlarbaum:]

So actually – interesting question. We don't report total number of customers that we support. As I've talked about in the past, our strategy has revolved around the strategic alignment with these national global market-leading OEMs that have multiple divisions, multiple locations, and our strategy has been to primarily focus on performing well, gaining the advocacy of our customer partner to introduce us into new product divisions, different locations. And we have a new customer acquisition program, but it doesn't get as much attention as we do with our existing customer growth strategy. So, we add a half a dozen new customers a year. So, we really try to minimize all the additional overhead and complicated dynamics with bringing on new customer partners. It's much more efficient to grow with the strategic OEMs that we've been aligned with. So, we add a handful of customers every year, but we don't – the sort of the punch line is, we don't report total number of customers served, but we add a small handful year-over-year.

[Chris Sakai:]

Okay, great. Well, thanks for that.

[Jeff Schlarbaum:]

Thanks for the questions. Nice talking to you Chris.

[Operator:]

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

[Shawn Boyd:]

Good morning, gentlemen. Can you hear me?

[Jeff Schlarbaum:]

Yes, we can hear you great. Good morning.

[Shawn Boyd:]

Great. Going back on just the revenue growth that we saw and in particular, looking down at the segments. Medical, very strong this quarter, again, on a year-over-year basis, also strong in Q1. Can you just give us a little bit more color of what's going on in there and kind of sustainability as we go forward?

[Jeff Schlarbaum:]

Yes. You know that it's hard for us always to predict the future. As you know, we're not in the front lines of the demand creation that our customers are. We're on the back end as they're forecasting demands and reaction to what they're seeing in their end markets, so we're sort of second-tier in that visibility, but what we saw in the quarter is a number of our mainstay medical customers see strong demand. I think that's a testament to the essential nature of the products that they've brought to market. And despite the uncertainties and the comment I made before about some companies conserving their capital for non-essential acquisitions, these products were on fairly high demand. So, I think that's a piece of it. We're also starting to bring on some additional new customers, and I see those as being accretive over time. It wasn't a significant amount of revenue in Q3, but I see that building as we move into Q4 and into next year. So medical remains an important sector for us. The time to revenue and acquiring new customers is very lengthy because of all the regulatory hurdles you got to overcome to switch work. So, it's a blessing in one respect for us because it's fairly sticky, but it's a bit challenging to onboard new programs. So, I see that as a continued focus for us to exploit our capabilities for medical OEMs that seek the kind of manufacturing model we represent.

[Shawn Boyd:]

Got it. Got it. So looking at your backlog, too, is it fair to say we should expect kind of the continued mix in this – a similar mix going forward or a similar level of growth out of medical?

[Jeff Schlarbaum:]

Best I can tell, right? I mean it's – like I said, the visibility that we have isn't as good as what our customers are seeing on the front lines. But just when I looked at Q3 versus Q2, medical and defense, equally, were split between their representation on the increased sales. And really, the industrial sector was the one that didn't show as much strength. So, medical and defense were equally strong. So, will that continue? I think some variation of it, hard to say specifically.

[Shawn Boyd:]

Okay. Switching gears to the customer deposits. If I'm looking at this right, you're now covering 44% of inventory. Great to see. And of course, it's a wonderful benefit to your cash flow, as you guys called out. Is this – looking at that ratio to inventory, is there a certain level you might be targeting? And maybe another way to ask this or a way we could discuss it is, if I were a brand-new program coming in that you were starting at IEC, is there a certain sort of minimum expected level of deposits that I would have to be thinking about is taking into – that I'd better be ready for if I'm going to be a customer of IEC?

[Jeff Schlarbaum:]

So, it's a great question, and I'm probably not going to give you the answer you're looking for, but it isn't a canned formula. We really don't have a canned formula. We work, we customize these on-boarding strategies and continued material acquisition strategies based on the unique dynamics of each customer and each program. It really gets down to the risk-reward trade-offs with how much we want to invest, and I say we, us and our customers, how much we want to invest in minimizing risk to lock up inventory. And they recognize the fact that our business is to manufacture their products. It's to take raw materials and convert it into a finished product and distribute it to them wherever they need it. And we're not a distributor. Our business is not to go acquire parts and sit on them for future distribution. So having said that, it's really a customized approach, and thankfully, we have customers that see the value in minimizing their risks and our total risks, and we invest with them, and this is a byproduct of those customized strategies.

[Shawn Boyd:]

Got it. Okay. Was there anything kind of extraordinary about the quarter in that we should expect deposits actually decrease from here? Or should we – can we continue to see them kind of flat to increasing?

[Jeff Schlarbaum:]

Yes, you know I think...

[Shawn Boyd:]

In your revenue growth.

[Jeff Schlarbaum:]

Yes, I don't see any major trends fluctuating in either direction significantly. I think the overall trends are probably going to stay pretty steady. It's kind of like our bookings, it's – it could be a little lumpy. We might have a quarter where we draw some down as we're converting raw materials into finished products and shipping. That could be up because we have some newer programs where we're securing longer-term material horizons, and we haven't yet converted so we sit on the deposits for longer. So, it's kind of like the bookings, it's a little bit lumpy, but overall, I think the strategy will kind of remain in a similar band.

[Shawn Boyd:]

Got it. Okay. Congrats on the quarter. Thank you.

[Jeff Schlarbaum:]

Thanks. Nice talking to you.

[Operator:]

Our next question comes from Allan Lyons, a Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Okay. Thank you. Hey, good morning Jeff and Tom and congratulations on a great quarter and nine month results to date. So, really pleased with the performance. So I have a couple of questions. Could you do a little bit more – can you give a little bit of detail on the Albuquerque operation? In particular, what traction to date you've seen in assisting these existing defense customers, as well as those who don't manufacture for, for meeting the mandates that bonus received conform to the military grade standards for defense logistics agency?

[Jeff Schlarbaum:]

Yes. So specific to the Albuquerque operation, we've seen continued growth with that business. As I've mentioned before, in prior years, it was a pretty steady, slow growth business operation for us. And this past year in 2020, they really have contributed a fair bit to our overall growth. And to your point, I chalk it up to the visibility and the attractive nature of the defense programs they're on, some of which are newer programs that are ramping up. And they've done a good job at servicing those customers, and those customers have rewarded that execution with additional program awards. So overall, in Albuquerque, 2020 has been a growth year, a very good growth year for that site. And frankly, I see that continued growth looking out into the coming year.

[Unidentified Analyst:]

Great. Okay. Thanks. As far as – you've been working with customers opening up your approved vendor list and allowing IEC to source from multiple manufacturers, do they have any further success in that during the quarter?

[Jeff Schlarbaum:]

Yes. So that's always an ongoing battle, right? You're talking about raw materials and constraints that we are confronted with, both as a result of the COVID-19 pandemic with manufacturers not being at full capacity, yes, that's always a continued battle. I don't know that we're having better success. I think what we have done is better collaborate with our customers and frame the challenges and potential risks in the future that inspires them to allow us to work more aggressively to design in alternate manufacturers/ So, it gives us a greater flexibility, but as you know, in these highly regulated markets, it's not easy to go back and re-qualify a design that has already been locked in. So, it's a constant battle and one that we regularly work with our customers. And we make strides on it, but there's still a number of areas where we're kind of stuck with what we got and we just make the best of it.

[Unidentified Analyst:]

Right. One other question. When are your lease payments actually starting on the new building?

[Jeff Schlarbaum:]

When we move in. Yes. So we had hoped – on prior calls, I was hoping for mid-to-late summer. We've had some construction delays. So, assuming that those delays fade and we move closer to a grand opening, I think the fall looks more practical. But we wouldn't start any lease payments until we start to move in. And my best guess now is sometime in the fall.

[Unidentified Analyst:]

Right. Okay. Well thanks for the answers and good luck on the balance of the fiscal year and in the move as well. Thank you.

[Jeff Schlarbaum:]

Great. Al, thanks. Nice talking to you. Thanks for the questions.

[Operator:]

Thank you. At this time, I would like to turn the call back over to Mr. Jeffrey Schlarbaum for closing comments.

[Jeff Schlarbaum:]

Well, I just want to say thank you, again, for everyone for calling in. We wish everyone continued health and safety as we all continue to work through the challenges associated with the COVID-19 pandemic. So, as always, we look forward to speaking with everyone again next quarter. And thanks again for calling in.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.