IEC Electronics Corp.
Q4 2020 Earnings Call Transcript

Published: 20 Nov 2020

[Operator:]

Greetings, and welcome to the IEC Electronics Fourth Quarter 2020 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. There is a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett, of IMS Investor Relations. Thank you, sir. You may begin.

[John Nesbett:]

Good morning, and thank you for calling. On the call this morning, we have Jeff Schlarbaum, President and CEO; 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 or 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.

[Jeff Schlarbaum:]

Thank you, John, and good morning, everyone. First off, let me say, I hope this call finds everyone staying safe and healthy. This pandemic has been a long haul, and I know we're all looking forward to an eventual return to some normalcy. Now let me turn the call over to our business. Our fourth quarter closed out a strong year for IEC. Revenues for the quarter of $46.4 million kept us firmly above our latest internal quarterly benchmark target of $45 million. We achieved solid gross margin of 14.5% of sales, and we delivered net income of $1.9 million or $0.18 per basic and diluted share. Stepping away for a moment from the fourth quarter and looking at the big picture, at the start of fiscal 2020, we reaffirmed our three primary goals

[Tom Barbato:]

Thanks, Jeff, and good morning, everyone. Revenue for the fourth quarter of fiscal 2020 was $46.4 million, an increase of 5.7% as compared to the fourth quarter of fiscal 2019. Gross profit for the fourth quarter of fiscal 2020 was $6.7 million compared to gross profit of $6.4 million in the fourth quarter of fiscal 2019. Gross margin was 14.5% of sales in the fourth quarter of fiscal 2020 compared to gross margin of 14.6% of sales in the fourth quarter of fiscal 2019. Selling and administrative expenses increased slightly to $3.8 million and decreased as a percentage of sales to 8.2% as compared to $3.7 million and 8.4% of sales in the fourth quarter of fiscal 2019. The company recorded net income of $1.9 million in the fourth quarter of fiscal 2020 or $0.18 per basic and diluted share compared to net income of $1.8 million or $0.17 per basic and diluted share in the fourth quarter of fiscal 2019. To build on what Jeff noted earlier, during the quarter, we generated operating cash flow of $7.3 million compared to operating cash flow usage of $1.2 million in the fourth quarter of fiscal 2019. Now looking at the results for the full year fiscal 2020. Revenue increased 16.4% to $182.7 million compared to $157 million in the prior fiscal year. Growth was primarily driven by an increase in sales in the aerospace and defense sector of $14.4 million, and an increase in sales in the medical sector of $14.1 million. Looking at our market sectors for fiscal 2020, we saw revenue distribution of aerospace and defense at 60%, medical at 26% and industrial at 14%. The aerospace and defense sector saw a net increase of $14.4 million in comparison to fiscal 2019, primarily driven by ramping of production for certain customers, increases in demand with other customers offset by reductions in revenue related to disengaging with certain customers, programs ending and customer delays. Sales in the medical sector increased $14.1 million, primarily related to new programs ramping with an existing customer, which resulted in a $17.5 million increase in revenue as well as increased demand in a variety of other customers. These increases were partially offset by programs ending for various customers. Industrial sector sales decreased by $2.8 million, primarily due to products on hold at two customers, fluctuations in demand and programs ending. Gross profit in fiscal 2020 was $24.1 million or 13.2% of sales compared to gross profit of $21.6 million or 13.8% of sales in fiscal 2019. Gross margin for the full year fiscal 2020 was adversely impacted by a onetime inventory write-down of $1 million in the fiscal first quarter related to reorganization activities at an end customer in the medical sector. Adjusting for this onetime charge, adjusted gross profit was $25.1 million or 13.7% of sales. Please refer to the reconciliation tables provided in the press release issued this morning for further information regarding this non-GAAP measure.

[Jeff Schlarbaum:]

All right. Great. Thank you, Tom. Fiscal 2020 was a strong year for IEC, one where we proved our ability to grow our leadership position as a premier electronic manufacturing solutions provider for highly complex products and highly regulated industries. Despite the economic and public health challenges the world has experienced throughout the majority of this calendar year, we were able to deliver on our three primary goals of driving double-digit organic growth, continuing to achieve industry-leading margins and generating solid operating cash flow. We believe we are uniquely positioned for continued progress in fiscal 2021. And we're intent on winning new customers and program awards as we advance our reputation as a vertically integrated provider of 100% U.S.-based manufacturing for life-saving and mission critical products.

[Operator:]

Thank you. Our first question comes from the line of Chris Sakai with Singular. Please proceed with your question.

[Chris Sakai:]

I had a question on -- I know you guys hit your three goals for the year and congrats. Just was wondering, are you guys going to come out with goals for 2021? And if so, when?

[Jeff Schlarbaum:]

Yes. So I would say, Chris, a continuation of 2020 is what we expect for 2021. I've continued to reaffirm that we've put a business model in place that should consistently generate double-digit growth, and we delivered that for the last couple of years, despite some of the challenges in the macro market. And we're poised to continue to carry that forward into 2021. Margins, we've been ahead of our class and delivering industry-leading margins. And so again, we believe that we'll be well positioned to preserve our leadership position in margin performance. And then lastly, again, a year ago -- this time a year ago, we were saying that we've invested a lot in of cash and acquiring the materials and investing in the demand we were seeing. But we expected that finally in 2020 that we will start to convert that investment into operating cash. And so that was the third goal that we put forth, and we achieved that as well. So I believe that as we look forward into 2021, we'll be able to continue to deliver operating cash flow. So maybe not specifically the exact data points that you want to see in terms of go-forward goals, but I think those are the ones that we believe are most important double-digit growth, solid industry-leading margins and continuing to generate cash flow. And so that's what we have in-store for 2021.

[Chris Sakai:]

Okay. Great. And then just a question I had on the purchase of the Rochester facility. Is this -- what are the costs associated with this? Are they large? Or how should we look at that? And will it improve margin?

[Jeff Schlarbaum:]

So here's a couple of ways to look at it. One, I have a metals -- precision metals operation that's a stand-alone business in the Rochester area today. So we will be exiting that facility. So we'll eliminate the overhead associated with that operation, and we're going to move it into the new building that we purchased. So that's pretty much of a wash. We'll just trade one for another. In terms of the balance of that operation, there'll be some initial start-up costs that will put some modest pressure on margins. However, what I can say is that this is an investment in continued growth. And one of the challenges that we've had with our business is that, we don’t have an endless supply of skill, talent at the ready when customers bring new programs forward. So this facility will allow us to gain access to a much broader talent market and invest in the skill development and bench strength. So we'll be able to sustain what we have certainly demonstrated so far, which is driving industry-leading growth. And so there'll be a modest investment this year to put in place that safety net. But that safety net is going to allow us to continue to grow for the foreseeable future and very strongly. So yes, we're pretty excited about it.

[Operator:]

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

[Shawn Boyd:]

Can you hear me okay?

[Jeff Schlarbaum:]

I can hear you fine.

[Shawn Boyd:]

Great. Congrats on the quarter and the year, gentlemen. If I could, you called out the large award from defense contractor. I think it was $15 million that escalated to $25 million, but actually didn't generate any material revenues this year. Did that push out possibly? Was that supposed to ramp in the September quarter?

[Jeff Schlarbaum:]

No, it really didn't. No. It was a program that we've been in talks with this particular company for a long time. The lead times associated with many of the components that have been designed into the product had pretty significant lead times. So we really only anticipated building some very early-stage qualification units in the prior fiscal year, and we really didn't envision any production. So it's pretty much on schedule, to be honest with you. So we were probably surprised that we were able to actually improve some of the component lead times to deliver some of the early assemblies last fiscal quarter, but no. The balance of the qualification work is finishing up, and we'll be pivoting soon to ramps in production. So we're pretty excited about the prospects of getting to a production cruising altitude here over the next couple of quarters.

[Shawn Boyd:]

Got it. That's good to hear, Jeff. So that would be a material contribution to revenues here in the December quarter or March? When do we start to see that really kick in?

[Jeff Schlarbaum:]

Yes, I would say -- I would look at it from a calendar perspective that we finish up all the sort of qualification and early phase deliveries for test and approval this quarter. And then we start to pivot to a ramp in production in calendar Q1 and then get into steady -- higher volumes of steady production preceding quarters from there.

[Shawn Boyd:]

Got it. Okay. And on the -- switching gears over to the 12-month backlog for a second here. The 19% growth, great to see. And what I'm wondering is, you're covering more and more of your forward 12 months, right? So specifically -- and please correct me if I'm wrong on the math here. But now we're, I don't know, 80%, 85% covered. A year ago, we were sort of 80% to 83% covered going in. A year before that, we were in the high 70s. So each year is getting a little bit better visibility. Can you just give us a little more color on that? Is that just the shift and going more towards medical? Is it better, larger customers? What's helping you there?

[Jeff Schlarbaum:]

Yes. I think it's -- first of all, I mean it's a testament to continuing to build on a strong customer foundation where we see reoccurring revenue from programs that have reached some levels of maturity, and then we're expanding into new programs with those customers that are layering on top of it. And then we're layering in some new customers in addition to that. And so I think one of it's just a byproduct of continuing to grow a diversified base of customers and programs and generating consistently increasing demand. The hard thing to predict, as I said probably a year ago, is we started to see longer-term bookings. And if you look back three years ago and earlier, pretty much the entire backlog was inside of 12 months. And for the first time in the nontrivial way last year, we saw a fair bit of our backlog actually spill beyond -- well beyond a year. And so I think we'll see some fluctuations in the backlog numbers as customer re-ups for another two years on a significant program and that increases the backlog, and it's hard for me to predict when that's going to happen. So I really think it's important that as we think about backlog, we all start looking at it more and more as to what's convertible in the next 12 months. And that's really more of a proxy of what we're likely to look like revenue-wise into the future, at least into the intermediate future. So it's been a steady linear growth, Shawn, year-over-year in that 12-month backlog, and this is just another extension of that. So I just think it's a sign of maturity and continued progress of securing demand.

[Shawn Boyd:]

Got it. Okay. And not to put words in your mouth, but looking at the 19% backlog -- 12-month backlog growth versus our target for simply double-digit growth, it seems like there's a pretty good amount of kind of opportunity there or potential headroom. Is that the way to

[Jeff Schlarbaum:]

Gives me a lot of confidence that, we should be able to continue to produce at double-digit rates. Absolutely.

[Shawn Boyd:]

Yes. Okay. Moving down the CapEx for a second. Obviously, this would be -- it seems like a bigger year with the transition into the new facility and then, of course, this Rochester add, it was just separate from that. Just maybe if you could, Tom, if you could give us a feel, you spent $6 million this year. Does that come down in 2021? And if so, kind of how far? Can you help us on that.

[Tom Barbato:]

No. I mean there's additional investments required to stand up both the new facility as well as our new headquarters facility here in New York. And I would just say that if you look back at the history and what we did in '18 and '19, spend levels were lower than we probably would have expected. And some of that is because we wanted to -- relative to upgrading some of our equipment, we wanted to do it in concert with moving because with many of our programs, we have to go through a validation process with our customers. So we didn't want to introduce new equipment, have to validate, then move and have to validate again. So we're kind of lining those things up so that we only have to do it once. And if you go back and look at the history, you'll see that those fiscal years were fairly light from an investment standpoint, and will be offset by the investments we made last year and the investments we'll continue to make this year. But over the period, I think we're really going to be in a nice position with our equipment platform, having the two facilities, and then also Albuquerque to complement things. And as Jeff mentioned earlier, just positions us well for growth going forward.

[Shawn Boyd:]

Got it. Okay. Last question for me. As you make the transition over to the new facility, and I know it might be early to ask this, but I'm going to ask it anyway. Are you opening the door to maybe some prospects that we weren't in the past? Are they looking at this and saying, well, now this is capable of the program that I need?

[Jeff Schlarbaum:]

Yes, I think there's going to be positive consequences associated with the new building that we completely haven't comprehended yet. I think when we're just starting to envision what it will be like hosting customer visits in this new state-of-the-art facility, that's custom-designed to not only produce best-in-class execution, but also demonstrate to customers that we have tremendous horsepower, both technically to support their innovations, but the capacity to continue to support new programs. And I think we're going to be the benefactors of that. In some respects today, they come into older facility, I see that we're very capable, maybe it's not apparent visually on how that type of setup scales for a particular customer. And the new building that all goes away. You walk to the front door and you see all the horsepower and you see the custom design, and you see it built for speed. I think it's going to provide new opportunities for us. When, where and how fast it comes, hard for me to say, but we've had a pretty good track record of growing the business, and I think this will only help it.

[Operator:]

Thank you. Our next question comes from the line of with . Please proceed with your question.

[Unidentified Analyst:]

Dave Shear here. I was just wondering how we were doing with any of the testing business? Is that growing?

[Jeff Schlarbaum:]

Yes. Good question, Dave. Good morning and nice to talking to you. So we have -- what you're referring to is our analytical and testing laboratory out in Albuquerque, New Mexico operation. We achieved some unique industry certifications a little over a year ago. And in 2020, we started to ramp up production for the lab. We're continuing to bring that service to our customers. It's a long serve -- it's a long sales cycle. I think I've talked about it before, there's different types of component testing. And so we're certified for sort of the entry-level component testing today, but we're also investing in the mid to higher level testing. And customers really want a one-stop solution where they not only can do the entry-level testing, but the mid and higher end testing, all with one supplier. So it's going to ramp over time, but probably ramp a little slower than we had anticipated because our customers really want a one-stop shop, and we've got a portion of it today, which has been a good start. But it probably will take us the balance of this year to really get that next level of expertise that we can then drive the sales in a more needle-moving manner.

[Operator:]

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

[Jeff Schlarbaum:]

Well, great. First, I'd like to say thank you, everyone, for calling in. We wish everyone continued health and safety as we continue to work through the challenges associated with the global pandemic. Thank you for your continued interest in IEC, and we look forward to speaking with everyone again next quarter.

[Operator:]

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