IEC Electronics Corp.
Q4 2018 Earnings Call Transcript

Published: 28 Nov 2018

[Operator:]

Greetings, and welcome to IEC Electronics Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Audra Gavelis, Director of Marketing and Investor Relations. Thank you. Please go ahead.

[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 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 following this call and in the Company's most recent Annual Report on Form 10-K, on our Quarterly Reports on Form 10-Q and our 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.

[Jeffrey Schlarbaum:]

Thank you, Audra, and good morning, everyone. Before I begin, I'd like to take a moment to introduce Tom Barbato. Tom joined us as Senior Vice President of Finance and Chief Financial Officer. He was previously with Xerox where he enjoyed a 23-year career, most recently serving as Vice President Finance, North American Operations. Tom has been with us for a few months now, and he is already proven to be a strong addition to our team. So please join me in welcoming him to his first IEC earnings call.

[Thomas Barbato:]

Thanks Jeff. I am happy to be here.

[Jeffrey Schlarbaum:]

This is an exciting time for our Company, as we believe we have fully exited our turnaround phase and are now positioned to drive sustained profitable growth. The past few years have been characterized by our efforts to reinstate profitability, improve asset management, and reestablish organic growth. The success of these efforts is evident in our strong fourth quarter and 2018 fiscal year results, which included increased revenues and significant backlog growth. During the fourth quarter, we saw revenue of $34.2 million, a level we haven't achieved in five years since the fiscal fourth quarter of 2013. Similarly, our backlog at September 30 was $133 million, a backlog level that IEC hasn't achieved in over 20 years, dating back to the mid-to-late ‘90s. Our focus on operational excellence, restoring customer confidence, and strengthening our sales pipeline were all key contributors to making this happen. Throughout fiscal 2018, we focused on continuing to target the right markets and customers for our specialized, high complexity manufacturing capabilities. By delivering operational excellence and exceeding expectations, customer confidence levels continue to grow and we are seeing increased opportunities to leverage our vertical service offerings and expand into new programs from existing customers as well as onboard new ones. We have a longstanding customer relationships based upon our success as a reliable manufacturing partner and we continue to leverage our scientific laboratories, our interconnect solutions, our precision metalworking, and our electronics assembly service offerings to position IEC as a full service provider for our target customer base. During fiscal 2018, we achieved revenue growth of 21.2% compared to the prior fiscal year as well as an 85% increase in backlog as of September 30, 2018. We delivered a solid book-to-bill ratio for fiscal year 2018 of 1.5

[Thomas Barbato:]

Thanks, Jeff. Revenue for the fourth quarter of fiscal 2018 was $34.2 million, an increase of 24% as compared to the fourth quarter of fiscal 2017 and a sequential increase of 15% compared to third quarter of fiscal 2018. Looking at our market sectors in the fourth quarter of fiscal 2018, we saw revenue distribution of aerospace and defense of 53%, medical of 25%, and industrial of 22%. The aerospace and defense sector with a net increase of $1.8 million, primarily driven by new programs and growth of existing programs. We continue to see strong demand from one of our existing customers, accounting for $3.8 million increase in the quarter, which offset an expected temporary reduction in demand from another customer. Sales in the medical sector increased by $2.3 million in the fourth quarter compared to the same period of the prior fiscal year. Related to increased demand from one customer whose demand had previously been on hold as well as growth with a customer where we reestablished a previous relationship. We expect some continued volatility in the medical sector going forward. Industrial sector sales increased by $2.4 million primarily due to increased demand from several customers whose end markets have grown offset by modest decreases in demand from other customers. $600,000 of the increase was related to a new product. Gross profit for the fourth quarter of fiscal 2018 was $4.5 million compared to gross profit of $3.5 million in the fourth quarter of fiscal 2017. Gross margins of 13.1% in the fourth quarter of fiscal 2018 was up 50 basis points in comparison to gross margins in the fourth quarter of fiscal 2017. Selling and administrative expenses increased $400,000 and decreased as a percentage of sales to 8.5% as compared to 9% of sales in the fourth quarter of fiscal 2017. The increase in expense was primarily due to higher wage and related expenses. The Company recorded net income of $9.1 million in the fourth quarter of fiscal 2018 or $0.89 per share compared to net income of $755,000 or $0.07 per share in the fourth quarter of fiscal 2017. Net income for Q4 included a one-time adjustment to the Company's deferred tax asset allowance in the amount of $7.8 million reflecting the Company's confidence that deferred tax assets will be utilized in future periods. On a non-GAAP basis, excluding the one-time tax benefit, fourth quarter net income was $1.3 million or $0.13 per share. Now looking at the results for the full fiscal year 2018. Revenue increased 21% to $116.9 million compared to $96.5 million in the prior fiscal year. Growth was primarily driven by an increase in sales in the aerospace sector of $18.7 million and increases in the industrial sector of $2.6 million, partially offset by decreases of $900,000 in the medical sector. Revenue distribution for fiscal 2018 with aerospace and defense at 59%, medical at 22%, and industrial at 19%. Gross profit increased to $14.2 million or gross margin of 12.1% from $11.3 million or 11.7% of sales in fiscal 2017. Selling and administrative expenses increased to $11.4 million and decreased as a percentage of sales to 9.8% in fiscal 2018 compared to $10.2 million or 10.6% of sales in the prior fiscal year. The increase in selling and administrative expenses was primarily due to higher wage and related expenses. Net income for fiscal 2018 was $10.4 million or $1.01 per share as compared to net income of $81,000 or $0.01 a share in fiscal 2017. Full-year net income included a tax benefit of approximately $1 million recorded in the first quarter of fiscal 2018 resulting from the release of the valuation allowance on our AMT credits as a result of the December 2017 U.S. Tax Cuts and Jobs Act, as well as the previously discussed $7.8 million adjustment to the Company’s deferred tax asset allowance, which took place in Q4. On a non-GAAP basis, excluding the one-time tax benefits, fiscal 2018 net income was $1.6 million or $0.15 per share. Now looking at our balance sheet. Our balance sheet remained strong with $21 million in working capital and $25 million in stockholder equity. You will see that inventories at September 30, 2018 were $34 million compared to $15.6 million at September 30, 2017. As we’ve discussed on prior calls, our inventory levels are directly associated with our ability to convert our backlog. In the fourth quarter, we had increased inventory as we prepared to execute on orders. We are seeing a willingness of some of our customers to help mitigate the impact of the global component shortage, which is reflected in the $6 million year-over-year increase in customer deposits. With that, I'll turn it back to Jeff.

[Jeffrey Schlarbaum:]

Great. Thank you, Tom. Fiscal 2018 was a strong year for us, providing a solid platform. We exit our turnaround phase and begin to fully execute our growth phase. With this shift, we are focused on three key initiatives; driving sustained growth, strengthening our balance sheet and improving profitability. We're energized by the activity we're seeing in the marketplace from both new and existing customers and believe we're in an excellent position to drive continued growth and increase our leadership position as a reliable and consistent manufacturing partner for life-saving and mission critical products. We remain focused on fostering our reputation as a provider of diverse, vertically integrated manufacturing solutions, combined with operational excellence and expertise and high complexity programs. These capabilities have allowed us to diversify the number of programs we support for our existing customers to create enduring relationships and also give us a competitive advantage when we pursue new customers. We believe our robust sales pipeline and significant backlog growth position us for double-digit revenue growth in fiscal 2019. Our balance sheet remains solid and we will look to continue to improve our supply chain methods to counterbalance, the industry-wide component shortages, with the goal of optimizing inventory and working capital to generate higher levels of free cash flow. We are focused on ensuring we have a right inventory on hand to convert orders to shipments, which means that at times we're carrying more inventory than we would like and we will continue to look for ways to improve our inventory levels. With our anticipated revenue growth, we also continue to implement business initiatives that allow us to support our customers increasing demands. We continued to move forward with the planning of our new headquarter facility in Newark and expect groundbreaking to occur next quarter. In addition, we are carefully evaluating the exact timing of a phased rollout of an upgraded ERP system to ensure that we do not impact our customers’ needs as we transitioned to a new system, while we maximize the business process improvements to support our continued growth. Throughout our turnaround period, we've made many changes to broaden our capabilities and achieve operational excellence, and these improvements are allowing us to gain traction in the marketplace. Our longstanding customer relationships and our manufacturing expertise in highly complex life-saving mission critical products along with a robust sales pipeline, and a growing backlog, all combine to provide us a solid foundation for the continued growth and the success of our Company. We are focused on executing the opportunities that are in front of us and continuing to drive further growth as we move through what we are anticipating to be an exciting fiscal 2019. With that, I will now hand it back over to the operator for any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Christian Herbosa with NOBLE Capital.

[Christian Herbosa:]

Hi. Thanks for taking my call. So you've had a lot of success this year in your new business pipeline. Do you think you've exhausted a lot of opportunities in your sales funnel? Or do you feel there is still a lot more attractive opportunities out there?

[Jeffrey Schlarbaum:]

Yes. Great question, Christian. Thanks. No, we've got a lot of exciting opportunities in our sales pipeline. Our philosophy is it's more about quality than quantity and so when we bring on a new customer, we're typically bringing on a new customer where we're taking on a piece of business that maybe smaller in scope to start, but those customers represent significant growth opportunities as we expand our reach into their operations. So we've done an excellent job of onboarding customers with a long-term growth potential and we see others in our pipeline that had that same potential.

[Christian Herbosa:]

Okay. Thanks. So is there a specific sector that you feel there's particularly more opportunity?

[Jeffrey Schlarbaum:]

Frankly, it's really coming across the three main sectors that we have continually focused on, which is aerospace and defense sector, the medical sector, and the high complexity industrial sector. So it's really coming from – equally from all three of those sectors to be honest.

[Christian Herbosa:]

Okay. So going forward in 2019, you would say that revenue breakdown between sectors in 2019 will roughly be the same?

[Jeffrey Schlarbaum:]

I would anticipate that the industrial sector and the medical sector will represent a larger percentage of our sales at the expense of our defense sector, but defense will still be the largest percentage of our revenue and all three sectors are anticipated to grow next year.

[Christian Herbosa:]

Okay, thanks. Thanks for the color.

[Jeffrey Schlarbaum:]

Absolutely. Thank you.

[Operator:]

Our next question comes from the line of Nehal Chokshi with Maxim.

[Nehal Chokshi:]

Yes. Thanks for taking the questions and excellent results. Congratulations. So I guess – if I look at your backlog at the end of the fiscal year for the past five years or so, it has typically represented about 55% to 70% of growth for fiscal year that was recognized. Would you say that would be a prudent rule of thumb to utilize for fiscal year 2019 or that would be too aggressive?

[Jeffrey Schlarbaum:]

Great question, Nehal. I don't think it's an unreasonable expectation to have. My only reservation candidly is our ability to execute all the order demands that our customers have in light of the continued shortages that we experienced on the component side. We anticipate that as we get towards the end of fiscal 2019, based on what we're hearing from manufacturers and other supply partners is that that will improve and so our ability to execute a greater percentage of our backlog will also improve, but that's the only uncertainty that I see as we go into next year. That makes it more difficult to give you a precise answer, and therefore, I would just temper the expectation a little bit.

[Nehal Chokshi:]

Okay. And of that $133 million, usually you give what percent of that is expected to ship within the next 12 months? Can you provide that?

[Jeffrey Schlarbaum:]

Yes, we effectively see roughly $124 million of that to ship in the next 12 months.

[Nehal Chokshi:]

Okay, great. And then – so given your book-to-bill that you gave of 1.3, I calculated you had bookings of $44 million. And I think your bookings in the June quarter was around $54 million, which I think was probably a 20-year record high, clarify if that is not correct. So you did have a Q-over-Q decline in orders, so the question that I have is that as a result of a softening of the demand environment relative to the June Q, or was that because June Q orders represented a local peak due to prior quarters of having the golden screw problem?

[Jeffrey Schlarbaum:]

Great question. So Nehal, the 1.3

[Nehal Chokshi:]

Okay, great. And then, I think you did cover this in your narrative, but I didn't quite catch it, so I'll just ask the question anyhow. So you have a flattish Q-over-Q guide for the December quarter and that is much stronger than what you typically see it down 20% Q-over-Q. So it sounds like it's a result of a ramp of new programs rather than satisfying pent-up demand from the golden screw problem from the past quarters. Is that correct?

[Jeffrey Schlarbaum:]

It's a combination of both. To be frank, it's really a combination of the two. It's not exclusive to just new program ramp ups. We're seeing volume increases as well from existing customers that are seasonally somewhat down.

[Nehal Chokshi:]

Okay. All right. And then the increase in inventory was already addressed. The accounts receivable was up a little bit more than usual when you do the DSOs calculation, what's the reason for that?

[Thomas Barbato:]

It was primarily due to the timing in the quarter of when the shipments took place. We had a significant amount of our revenue and shipments taking place in September of Q4.

[Nehal Chokshi:]

Okay. And then the accounts payable also spiked up quite significantly and I presume that's also partially financing the increase in the inventory as well as the customer deposits that you noted. I guess, were you able to actually increase the table terms to your suppliers?

[Thomas Barbato:]

That's been a focus area we have been successful in increasing terms with some of our suppliers and inventory and payables will continue to be a significant focus area in fiscal 2019.

[Nehal Chokshi:]

Okay. And does that come at the cost of higher COGS per unit?

[Thomas Barbato:]

No.

[Nehal Chokshi:]

Okay. All right. Great. And then finally, one of your key peers, SMTC, they announced a pretty significant acquisition. It seems like a good one. I would presume that you guys were approached about the acquisition as well. I'm wondering why you guys did not find it interesting.

[Jeffrey Schlarbaum:]

So I would say Nehal that as we look at the EMS landscape, we're really focused and the high value service area of the marketplace. And so when you look at the vertical capabilities that we have, the investment and scientific laboratories, the vertical integration, we're really poised to take advantage of more of our customer demand and attract new customers. And so unless something comes along that really is unique and differentiates us and some of those strategic service offerings, it just doesn't meet our long-term views of how best to serve our customers. So I guess that's the best way to answer that.

[Nehal Chokshi:]

That's a great answer. Thank you very much.

[Jeffrey Schlarbaum:]

All right. Thanks Nehal.

[Operator:]

Our next question comes from the line of [indiscernible] with B. Riley.

[Unidentified Analyst:]

Hi. Thanks for taking my question. Are you seeing any slowdown in demand in any particular end market? And then on the flip side, are you seeing any one single end market driving growth, specifically for you've got projecting quarter-over-quarter first quarter of 2019 being flat to up. So what do you attribute that to like any particular end markets?

[Jeffrey Schlarbaum:]

For us the three main markets that we focus on continuing to remain solid. We're not seeing any major downturns in any one of them. So I just think it's solid demand across the three sectors that we serve. So none really carrying more weight than the other at the moment.

[Unidentified Analyst:]

Got it. Thank you. And then how should we think about current capacity and then with the expansion in Newark, how much more capacity do you expect to come on line?

[Jeffrey Schlarbaum:]

Yes, capacity is an interesting question. It largely depends on the mix of work, right. Some work that will generate significant revenue can be very high complex, but lower volume in nature. Other products can be higher volume with lower ASPs and they have a different impact on capacity. But from a capital asset perspective, we're in a very solid position with available capacity. Our view is that as demand increases, really the challenge that we’ll manage is onboarding the proper technical talent and expanding our workforce to provide higher levels of volume. But from a CapEx perspective, we have plenty of available capacity.

[Unidentified Analyst:]

Thank you. Okay. And then is there any notable wins during the quarter that you can talk about?

[Jeffrey Schlarbaum:]

We really don't announce customer names and new program details. Customers prefer that we keep that private and confidential. So all I can say is that, we have a fair bit of a new customer ramp revenue in our fiscal fourth quarter and we anticipate more of those new customer volumes to increase as we move into 2019.

[Unidentified Analyst:]

Got it. Okay. And then just looking at the year-over-year improvement in gross margin, would you attribute that more to existing programs that were NPIs earlier this year that are sort of transitioning to higher volume and more efficient production or do you attributed more to like winning higher margin programs?

[Jeffrey Schlarbaum:]

I would really say it's the former. As we get through – if you think about last year and late in 2017, we were planning a lot of business development seeds that started to sprout and we were in the early phase of new customer onboarding, and so we're absorbing a lot of cost and we weren't seeing the true benefit of the higher revenue volumes. We're just starting to see that now and we saw that in Q4 and I think we'll continue to see those volumes increase in 2019, which will help bolster our margins and partially offset any new program that we bring on board that put downward pressure on margins just because of the learning curve issues you go through.

[Unidentified Analyst:]

Got it. Thank you. And then last question for me. Are you seeing an overall improvement in customer concentration compared to last year?

[Jeffrey Schlarbaum:]

Clarify your question. I'm not sure I understand what your question is.

[Unidentified Analyst:]

I mean is there like a reduction in customer concentration relative to fiscal 2017?

[Jeffrey Schlarbaum:]

Well, when I look at fiscal 2018, this past year and I look at the year ahead, we are continuing to see a number of new customers that weren't really moving the revenue needle in the 2017 period. That started to come on board in 2018 and we see being needle movers in 2019. So it's a slower progression as we bring them up, but we're now starting to see the benefits and that's what's really driving the backlog of winning these new programs with existing customers as they ramp up in addition to complementing the new customers that we brought on board.

[Unidentified Analyst:]

Thank you. I'll pass it on.

[Jeffrey Schlarbaum:]

All right. Thank you.

[Operator:]

Our next question comes from the line of Orin Hirschman with AIGH.

[Orin Hirschman:]

Hi. How are you? Congratulations on the progress here.

[Jeffrey Schlarbaum:]

Thank you very much.

[Orin Hirschman:]

In terms of the new wins, it's really almost repetitive of your prior question, but I'm going to add one additional nuance to it. It sounds like perhaps there are more in the medical and industrial space, albeit continued good wins on the aerospace, defense. Is that an accurate portrayal? And then if so, is there a certain capability or set of capabilities within those verticals where you specifically are winning business compared to other contracts, electronic manufacturers?

[Jeffrey Schlarbaum:]

Our customers have continued to say that they're focused on outsourcing a greater volume of their demand to a smaller, more capable array of suppliers. And so we're seeing the benefits of solid operational execution, which is then inspiring them to consider IEC for a greater percentage of their outsource work. I think it's a combination, obviously some of our unique capabilities, but at the end of the day it's how you perform. And the companies that are performing for their customers win a greater share of the work, but we’re the benefactors of that in 2018, which led to our backlog growth.

[Orin Hirschman:]

Within the verticals, is it fair to say with the medical and industrial is even stronger than the aerospace in terms of the new wins or it's hard to say it that way?

[Jeffrey Schlarbaum:]

No, I would say it's equally spread. I mean, candidly, it's just equally spread amongst the three. We haven't really seen any one sector overly weighted in the newer wins. Now what I can say and it showed up in the revenue distribution as we saw greater volume strength on the aerospace, defense side in 2018. But the – from where the wins are coming from, we're seeing wins across all three sectors.

[Orin Hirschman:]

Okay. And just in terms of the overall industry, particularly in smaller things like you are, you mentioned you have tons of capacity as needed if you can get enough hands on deck that are well trained. Is there a shortage though “usable capacity” at this moment because there aren’t enough trained people across? And if so, how does that affect you? Does it give you better pickings in terms of contracts? Or it doesn't really have an effect in that way?

[Jeffrey Schlarbaum:]

That's an interesting question. When we look at our capacity, it really back to sort of the former question and largely driven by the mix of work we get. Some work – some of the electronics assembly work can be automated and put a lot less pressure on staffing demands, right. And then there's other programs depending on the architecture of the electronics that require a much broader array of human capital. So for us today, since we're not in that high volume arena, it doesn't put as much pressure on requirements for high volume staffing needs, rather it's just making sure that we have the right technical skill through the onboarding and training process as we develop the workforce of the future.

[Orin Hirschman:]

Okay. Let me let other people ask and congratulations on the progress.

[Jeffrey Schlarbaum:]

Great, thank you very much.

[Operator:]

Our next question is from the line of Shawn Boyd with Next Mark Capital.

[Shawn Boyd:]

Good morning. Congrats on the quarter. Can you hear me okay?

[Jeffrey Schlarbaum:]

Yes, I can, yep.

[Shawn Boyd:]

Right. Did you quantify or can you quantify how much business is a component shortages cost you in the September quarter?

[Jeffrey Schlarbaum:]

It isn't as black and white as you would think that clearly the component shortages prevented us from converting for our customers and as Tom alluded to with some of the AR – spike in AR because of the non-linearity with the demand pushing to the end of the quarter, which was caused by the component shortages, then at that point in the quarter, sometimes it becomes a throughput issue. So it's really how you measure at what point in the quarter you have the constraint. But there's no doubt that it cost us millions of dollars and converting for our customers in terms of order demand that we had fostered that that component shortages prevented us from converting. I hesitate to give you a precise number, but it was a pretty, pretty material size number when we look at it. But I think we had some from the prior quarter that spilled over and we were able to convert in the first part of the quarter. So it's kind of a rolling issue and, I believe it will get better and better as we go forward, especially because our inventory levels have increased such that, we have the raw material in large cases in hand and it's just the “golden screw” that we're waiting on to convert the final piece. So that's a kind of a probably a less clear answer then you'd like to see, but it's just kind of a complicated, time with the complexity of the products we build and the custom parts that we're acquiring.

[Shawn Boyd:]

Got it. I appreciate that. I know you had called it out in the previous quarters. So it sounds as though few million, it sounds as though it's sort of a similar impact that you expect it to start improving. Could you give us a little bit more color on the customer deposits versus the building inventory? Is that really dollar-for-dollar or does it depend on the program, how's that working?

[Jeffrey Schlarbaum:]

Yes, so it really depends on a) the customer and b) the program. So it's not a dollar for dollar thing. So in many cases, we may go out and work with our customers to acquire parts knowing that there may be some golden screw obstacles that may not clear in time. So for those situations we'll make a mutual agreement to go buy the parts, but if we don't clear them all, our customers will support us with advanced deposit prepaid to offset, the working capital pressure. It doesn't always happen with every customer, but we try to work out something that's reasonable for both sides and because more and more customers want to try to get out in front of it that that drove the increase in the customer deposits for this past quarter.

[Shawn Boyd:]

Got it, got it, very good. And just stepping back for a second, I think you commented that you expect the issue to lighten up considerably by the second half of fiscal 2019. We're talking to June and September quarters of next year. Is there a particular initial production you see coming on in particular components or is it just your feeling that that's going to be enough time for the industry to adapt? What's driving that confidence?

[Jeffrey Schlarbaum:]

It's really just what we're hearing from the marketplace. We stay very close connected with our distribution partners. We stay very close to connected with the manufacturers of the components that we buy from. And they're out looking that for the next six months. It's going to still be tight and that it will start to loosen up in the back end of the year. So it's really just predicated on the outlook for getting from the manufacturers themselves.

[Shawn Boyd:]

Got it. Okay. Revenue is flat. Well, let's put it this way. Bucking the seasonal decline in the December quarter, which is great. We're now a month away from starting the March quarter. I don't want to put this too far out there, but I do want to ask, how does that look? Generally, you guys are then up from December to March and up through the year. So is there – do we expect to be knocked down, so it's a flat to slightly up here in December and then doing the usual and up from here? Can you just give us a little bit better kind of look given that we're not that far away here?

[Jeffrey Schlarbaum:]

Yes. So we're – the only hesitation that I have, obviously is that there is some occasional lumpiness associated with the EMS industry and sort of holistically, but we see sequential increases as they move throughout fiscal 2019. When you look at revenue levels that we achieved in Q4, we haven't achieved those revenue levels in many, many years. So we think we can build upon that going throughout the year and so I'm not going to give you a specific percentage increase, but suffice it to say we believe we're going to build on those revenue levels as we go throughout 2019.

[Shawn Boyd:]

Fantastic. And if I could to kind of go one further on this and just thinking toward the full-year, you mentioned strong double-digit growth for FY 2019. In fact, this is 15% right now. I'm going to assume that's in that ballpark, but really what I want to look at, if I look at the backlogs and I calculate implied order kind of quantify in for Q4, but for the full-year it looks like our implied orders are around $178 million for FY 2018 and that's up 55%, 56% for 2017. So I'm trying to say, okay, I've got orders up well over 50% this year, driving that big backlog increase of 85% that you talked about. And we're talking about potentially 15% revenue growth in 2019. So that delta could be conservatism, it could be component shortages, the bottleneck there, it could be the labor constraints that you kind of the technical talent you mentioned a little bit. Help me if I'm looking at that’s the right way, maybe my order number is just wrong. But is that kind of the delta you need to think about and are those, can you prioritize those issues or…?

[Jeffrey Schlarbaum:]

I think it was well said and how you outline them yourself. It is a combination of all those different variables that as we exit our turnaround, we'll finally get into a rhythm where we have consistency and we have a more mature business base, and that hasn't happened in these last few years as we've navigated this turnaround. This year is going to be back to growth. And so to the extent that we can achieve higher levels of growth based on overcoming component issues, overcoming changes on our customer side with demand fluctuations, overcoming workforce expansion, all of those things are going to be variables in there that will affect our ability to achieve higher growth levels. So again, I won't give a specific percentage, but we see 2019 being a real solid growth year for us.

[Shawn Boyd:]

That’s great to hear. Jeff, thank you so much. One last if I may, I think these go over to Tom. That just two things if you can hit the 606 impact and how you might need to be thinking about that as we kind of go into modeling for next year? And then also just tax rate you guys start to be pretty profitable here. So I'm just guessing we might have a tax rate or do we have the NOLs covering that, so if you could just hit those two issues, I'll jump off. Thank you.

[Thomas Barbato:]

Yes. On the tax rate, I think, we do have the NOLs that will be carrying forward and that's reflected in the adjustments that we've made to the allowance in Q4. And then relative to the 606 impact, you'll see in the 10-K, the disclosure around that and we've estimated the impact, the going impact to retained earnings to be between $0.5 million and $1 million. So not a huge impact to us, but we'll be working to develop a process to try to outlook that and predict it on a go forward basis.

[Shawn Boyd:]

Got it. Okay. Well congrats again. Thanks guys.

[Jeffrey Schlarbaum:]

All right. Great. Thank you.

[Operator:]

Our next question comes from the line of Charles Neuhauser with Mainwall.

[Charles Neuhauser:]

Yes, hi. Just getting back to the margin issue, if you're talking strong double-digit growth in the topline in fiscal 2019, ordinarily one would expect to see operating leverage and improved margin. And of course in your case you've got the factor of the new business not being as profitable as that which has been developing for a while. So my question is do you feel that you will see operating income margin improvements in the next fiscal year?

[Jeffrey Schlarbaum:]

Yes, we do. Yes, for the reasons you just alluded to, yes.

[Charles Neuhauser:]

Okay. So that offsetting any drag from a new business. Can I ask you again, you did 4.5% operating margin in the fourth quarter. My trusty calculator tells me that. What do you consider a respectable operating profit margin in your business going forward when things get cranked up to the extent that you would like to see?

[Jeffrey Schlarbaum:]

As we look out into the near-term, which is the best visibility I got, which is sort of the upcoming year. I sort of see, that 5% and as we get more mature, going to increasing levels beyond that. But I don't want to get too far over my skis as this is really going to be our first solid year-over-year growth year with all the fundamentals in place. So I guess that's kind of how I see it for the foreseeable future, which means fiscal 2019 and beyond that I think it improves, but you just have to give me some time as we build the maturing that base that we're – in the process.

[Charles Neuhauser:]

Thanks, exactly. But again, you've always made the point that you're engaged in areas of the business that are not just the commodity, basic manufacturing – contract manufacturer margin type business. So I presume that there is an expectation that you're operating margin with continue to improve move forward over the next few years.

[Jeffrey Schlarbaum:]

Yes, absolutely. I agree with you. End of Q&A

[Operator:]

Okay. That seems we have no further questions at this time. I'd like to turn the floor back over to management for closing comments.

[Jeffrey Schlarbaum:]

Well, great. Thank you for everyone for calling in. And I'll just remind those that are interested, we will be presenting on December 4 at the LD Micro Investor Conference out in Los Angeles. So anybody that's there, we look forward to seeing you and otherwise we look forward to speaking to everyone again next quarter. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.