IEC Electronics Corp.
Q1 2019 Earnings Call Transcript

Published: 6 Feb 2019

[Operator:]

Good day, ladies and gentlemen and welcome to the IEC Electronics First Quarter 2019 Earnings Call. All lines have been placed on listen-only mode. The floor will be opened for live questions at the end of today’s presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Audra Gavelis. Ma'am the floor is yours.

[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 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 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'll now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeff Schlarbaum:]

Well, good morning and thank you Audra. Our fiscal 2019 is off to a great start as demonstrated by significant revenue growth a 68% to $35.4 million year-over-year for our fiscal first quarter along with sequential revenue growth from our fiscal Q4 2018. A notable development as historically, our first quarter performance typically shows a sequential decline. In addition, improved profitability and the gross margin performance of 14.3% demonstrates improved operational execution to convert our growing backlog. As mentioned during our last earnings call, we commenced the adoption of the new revenue recognition accounting standard ASC 606 beginning this fiscal year. And while we saw a modestly favorable impact in fiscal Q1, based on what we currently know, we expect that it will not have a material impact on our full year results. We're pleased to have delivered strong margins in the first quarter of fiscal 2019, a sequential increase of 120 basis points demonstrating our improved operational efficiency scaling with our workforce and leveraging our overhead. While our margin performance can be impacted by the effects of the ongoing global component shortages, the process of training new employees to support our customers increasing manufacturing demands and the typical margin pressure associated with ramping up new programs in the early stages we continue to be more diligent in our response to these challenges. And in addition, we remain focused on developing novel approaches and executing increasingly more effective operational strategies to drive enhanced future margins. We observed strong backlog growth in our fiscal 2019 first quarter, due to another solid book-to-bill quarter, where we achieved a ratio close to 1.6

[Tom Barbato:]

Good morning, everyone. Effective October 1, 2018 we adopted new revenue recognition principles pursuant to ASC 606. Details on our adoption and impacts on fiscal Q1 revenue and profitability are contained in our 10-Q. As Jeff mentioned earlier, although we saw a benefit in the fiscal first quarter based on what we currently know, we do not expect there will be a material impact on our full fiscal year results. As a result, we will talk to GAAP results inclusive of the impacts of the ASC 606 today and on a go-forward basis. Revenue for the first quarter of fiscal 2019 was $35.4 million, an increase of 68% as compared to the first quarter of fiscal 2018. Looking at our market sectors. In the first quarter of fiscal 2019, we saw a revenue distribution of aerospace and defense at 53%; medical at 26% which is an increase from 17% in fiscal Q1 2018; and industrial at 21%. The aerospace and defense sector saw a net increase in revenues of $5.9 million, primarily driven by new programs from existing customers and increased demand on existing programs. We continue to see strong demand from one existing customer, accounting for a $4 million increase in revenue in the quarter. And we saw an increase of $0.5 million related to a production ramp from a new customer. Sales in the medical sector increased by $5.5 million compared to the same period of the prior year. Approximately, $3.4 million of the increase was attributable to ramp in new programs with existing customers. The remainder of the increase was related to increased demand from numerous existing programs. Industrial sector sales increased by $2.9 million, primarily due to ramp of new programs with two new customers, which amounted to $2.5 million of quarter-over-quarter growth. We also saw increased demand from several customers whose end markets have grown, offset by modest decreases in demand from other customers. Gross profit for the first quarter of fiscal 2019 was $5.1 million compared to gross profit of $1.5 million in the first quarter of fiscal 2018. Gross margins of 14.3% in the first quarter of fiscal 2019 is a significant improvement compared to the gross margins of 7.2% in the first quarter of 2018. Selling and administrative expenses increased $600,000 and decreased as a percentage of sales to 9.5%, as compared to 13.2% of sales in the first quarter of fiscal 2018. The increase in expense was primarily due to higher wage and related expenses. The company recorded net income of $1.1 million in the first quarter of fiscal 2019 or $0.10 per basic and diluted share, compared to a net loss of $500,000 or a loss of $0.05 per basic and diluted share in the first quarter of fiscal 2018. Now looking at our balance sheet. Our balance sheet remained strong with $25 million in working capital and $27 million in stockholder equity. You will see that inventory at December 28, 2018, was $37.2 million, up slightly compared to $34.1 million at September 30, 2018. As we discussed on prior calls, our inventory levels are directly associated with our ability to convert our backlog. In the first quarter, we had increased inventory as we prepared to execute orders and attempted to mitigate the risks associated with the ongoing component shortage. We continue to see a willingness of some of our customers to help mitigate the impact of the global component shortage, which is reflected in the $1.1 million increase in customer deposits since September 30, 2018. With that, I'll turn it back to Jeff.

[Jeff Schlarbaum:]

Great. Thank you, Tom. We're pleased with our strong start to fiscal 2019 and we remain focused on our three key initiatives as we continue throughout the year

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Christian Herbosa from NOBLE Capital. Please state your question.

[Christian Herbosa:]

Hi, thanks for taking my call and congrats on a great quarter.

[Jeff Schlarbaum:]

Hey thanks Christian. Nice talking to you.

[Christian Herbosa:]

So, it looks like book-to-bill ratio jumped up a bit again this quarter sequentially. So, how do you see that ratio developing over the course of the rest of the year?

[Jeff Schlarbaum:]

That's a very fair question. And it's really hard to predict the sequence and the timing of the orders that we get from our customers. What I could say on the aggregate is our customers that were aligned with seemed to be in a very good place in their end markets and they're delivering ongoing volume increases and I expect that we'll continue to be the benefactors of their growth. So, I wish I could give you a specific number, but what I can say is that we anticipate seeing ongoing demand from our customers that will continue to propel our backlog.

[Christian Herbosa:]

Okay, great. Thanks for the color there. And then on your -- how do you view your current debt level now? And do you have a target net debt level that you'd like to get to?

[Jeff Schlarbaum:]

No, we, over the last couple of years, had taken quite a bit of debt off the balance sheet. This year with -- and basically last year with the challenges in the supply chain, it's put pressure on our balance sheet obviously because of inventory timing where we're bringing on parts for multiple customers on multiple programs and well in advance of clearing the sort of the last golden screw. And that's put pressure on our balance sheet. So, I guess, the best way to say that Christian is this -- throughout this year, we think we'll continue to better manage the inventory which will lower our debt. And at this point given the uncertainty in the market with the component shortages, I can't give you a precise estimate on what the balance sheet is going to look like debt-wise throughout the year, but I think you'll see a continued decline in our overall debt due to improvements in the supply chain and better management of our inventory.

[Christian Herbosa:]

Okay. Thanks, Jeff. Again just one more for me on the balance sheet. So it looks like you are adding a line there. You have about $6 million in unbilled contract revenue. Can you help me understand what's going on there?

[Jeff Schlarbaum:]

Yeah. So that's directly tied to the accounting required to comply with ASC 606, the new revenue recognition standard. So there is very detailed footnotes in the 10-Q that explain the accounting behind that, but that's why that was introduced in this quarter.

[Christian Herbosa:]

Okay, great. Thank you. That’s all for me. Thanks for your time.

[Jeff Schlarbaum:]

Great. Thanks, Christian.

[Operator:]

Thank you. And our next question comes from Aman Gulani from B. Riley. Please state your question.

[Aman Gulani:]

Hi, guys. Thanks for taking my question, and congratulations on the quarter. So, yeah, given the current macro environment, are you seeing any slowdown in any one specific end market? And then on the flipside of that question, are you seeing any particular end market that will be a significant growth driver for the rest of 2019?

[Jeff Schlarbaum:]

Yeah. So a great question. And in the markets that we serve, we're obviously very focused in three main end markets being the aerospace, defense, the medical devices and what we consider to be high reliability industrial. And we're really not seeing any macro signals of a slowdown in the three markets that we're serving. So our customer seems to be well-positioned with their products and their end markets. And as a key strategic supplier to them, we're seeing the same benefit of that positioning in the marketplace. So candidly I am not seeing any slowdown as we speak. And in terms of what markets are up, we're just seeing that on the aggregate for us, it's pretty much across the board. Those three main markets that we're serving seem to be fairly solid. I think we're a benefactor of having very focused strategy on these mission-critical and lifesaving applications. So, I can't really speak to some of the other broader markets that maybe some of our competitors might participate in.

[Aman Gulani:]

Got it. Thank you. That's helpful. And then in regards to component shortages, are you seeing any improvement in lead times compared to last quarter, or are they still being extended out?

[Jeff Schlarbaum:]

Yeah. For the component set that we procure for the products in the market segments we're serving, we're seeing very, very, very modest improvements. So they're not significant needle moving differences. But what we're hearing from the supply chain is as we move into the second half of the calendar year that they expect to see a marked improvement in overall lead times and availability. So it's kind of a little bit of a wait-and-see. We're seeing a very slight improvement quarter-over-quarter. But based on their outlook, we're hoping to see a more pronounced improvement in the back half of the calendar year.

[Aman Gulani:]

Thank you. Okay. And just one more for me. So this seems like in the last quarters your gross margin has been walking up sequentially. Do you expect that trend to continue for the rest of the year? What do you think the main driver is for the margin expansion?

[Jeff Schlarbaum:]

So yes, a couple of points that you raised there in terms of margins. I would say on the first point, in terms of expected improvement, look when you evaluate the EMS industry and you look at the typical gross margin performance, you're in the high single digits or you're in a low teens and so we're in 14%. I can see us continuing to see opportunities to improve upon that and to remain and even maybe possibly move above that mid-teen level, but I think mid-teens is a pretty good expectation for where we can be as an organization. In terms of what we're seeing and what we can do to improve our margins, obviously we've on-boarded a lot of new projects which is fueling the backlog growth. And I think that we have opportunities to be more efficient and how we execute the manufacturing of those new programs. And obviously with the -- our workforce and becoming more adept at building those products that gives us a margin improvement opportunities. So I think absolutely, we have opportunities to improve margins over the course of time. And again given where our industry is and our competitors, I'd say sort of mid-teens is probably a reasonable expectation as we look out in the future.

[Aman Gulani:]

Got it. Thank you. I’ll pass it on.

[Jeff Schlarbaum:]

All right, great, thank you.

[Operator:]

Thank you. Our next question comes from Mike Morales from Walthausen & Company. Please state your question.

[Mike Morales:]

Hi, good morning everybody and thanks for taking my question. Thinking about the new facility, did that break ground in the first quarter like you expected last quarter?

[Jeff Schlarbaum:]

So we had some delays in some of the building dynamics and design issues and actually some local and state authority customer the red tape stuff. But we're on track to finish the building as we anticipated as we look at the end of this calendar year, but we got off to a little bit of a delayed start with the anticipated breaking of ground, so more looking like in the next couple of months up here in Rochester, New York as the winter winds down, the construction we believe will start at a more accelerated pace.

[Mike Morales:]

Okay. Thinking about the organic growth that you're seeing, can you help characterize that for me? When you say you're winning new programs, are you winning the next-generation of a product that you're already making? Are these completely separate products, different from what you're already making? What are the nature of them?

[Jeff Schlarbaum:]

Yes. That's a good question. Largely, we're winning new programs that we weren't formally affiliated with. So we're taking share. We're taking share in those accounts where we're performing for our customers and they're rewarding us with new programs. In some cases, we're the benefactors of increasing volumes on existing programs. But what's really driving the organic growth is winning the new programs that we weren't formally affiliated with and that's an exciting thing for us. It's a challenge as we onboard them. But I think it's an exciting time to be the recipient of our customer's recognition for performing well and so they're lining many new programs with us which is nice to see.

[Mike Morales:]

Sure. So just so we're clear. If you were making X for a customer in the past by and large you're not making X 2.0 with these wins? You were making X and Y a completely new product?

[Jeff Schlarbaum:]

I think that's exactly correct. And again, the only caveat there is some of the X is some volume increases. But again, largely it is brand new awards that we weren't affiliated with before.

[Mike Morales:]

Sure. Reading through the Q can you help me understand the comment about the expectation for volatility in the medical sector looking forward?

[Jeff Schlarbaum:]

Just for us and when we look at our customer demand many of our customers and why – they align their manufacturing with IEC is that there are spikes in volumes both upward and downward. And we see with our medical customer's solid relationships strategic relationships, but we can go through a quarter where demands are up significantly. And then, as we deliver they're digesting that demand and that inventory. And so we may see some downward pressure on volumes. So it's just sort of a cautionary note that it's a little bit choppy. But overall, as you look at the aggregate, it's solid volume.

[Mike Morales:]

Sure. So nothing out of the ordinary there that's just kind of the nature of the business as it's been historically as well?

[Jeff Schlarbaum:]

I would say that's correct. Yes.

[Mike Morales:]

Okay. And last one for me. Digging a bit further into the high book-to-bill, help me understand that a little bit better. You're obviously winning a lot of new programs. The component shortage causes problems. Is the biggest driver behind some of these high book-to-bill – waiting for that golden screw to come in or is it something else?

[Jeff Schlarbaum:]

Yes. I would say that, the book-to-bill sort of performance you've seen is really independent of the component shortages that we're seeing in the marketplace. Obviously, once we get the orders from our customers then we have to rely on the marketplace to fulfill raw material needs that we have to convert those orders into a finished product. But really to bid to your question the book-to-bill is really a by-product of our customers aligning an increasingly higher level of demand with IEC on many of these new programs and that's driving the new order volume. So they're really two independent issues, but it's really the new program awards that we're seeing from our customers that drive the book-to-bill.

[Mike Morales:]

And to clarify double ordering is that a problem that IEC typically has or does that not affect you guys as much?

[Jeff Schlarbaum:]

No. It doesn't affect us. It really doesn't, because we're the single source for many of these programs. It doesn't mean, we're a sole source that other companies couldn't supply over the course of time, but our customers typically aren't supplying – are outsourcing the same product to us as our competitors. So, given that fact, it really eliminates or mitigates the double ordering issue because we're that single source provider for that particular project.

[Mike Morales:]

Sure. That's all I had. Thanks for the color, Jeff, appreciate it.

[Jeff Schlarbaum:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Nehal Chokshi from Maxim Group.

[Nehal Chokshi:]

Yeah. Thank you. And congratulations on that barn burner of a bookings, guessing that might be at least a 10-year high, is that correct?

[Jeff Schlarbaum:]

Yes. So Nehal thank you very much. Yeah. The bookings are – to your point we haven't seen this kind of bookings in more than a decade. And frankly from a backlog perspective, as you know IEC is a 52-year-old company and you'd have to go back to 1997 specifically when the manufacturing was high-volume and low-mix. And today, as you know, we're very high mix, lower volume, so the nature of the products are very different. But there was only that one point in time when our backlog was higher. Other than that, we're at an all-time high from a bookings and backlog perspective.

[Nehal Chokshi:]

That's great. Congratulations. So those bookings what was the mix between new programs versus existing programs?

[Jeff Schlarbaum:]

Great question. I don't actually have that breakdown for you Nehal. In fact, as I'm looking at Tom here, we should look at that as we go forward and try to include that on our next earnings call. But largely, what I would say is the bookings are a by-product of existing customer new programs. That's heavily weighted on that side of the new orders that we're receiving.

[Nehal Chokshi:]

Okay got it. And then the gross margin that was well above our estimate. And so you got good sequential gross profit leverage relative to revenue growth. Was that leverage due to mix towards existing programs alleviating component costs or a better ability to push through the power component cost increases?

[Jeff Schlarbaum:]

Yes, no. I think Nehal, it's a combination of things. But frankly, it's a by-product of building some of these programs in greater volumes where we're absorbing the overhead more efficiently, we're executing the manufacturing more efficiently. And what you saw last year where there was a lot of choppiness, it was because a lot of these programs were coming onboard and there's a lot of costs and overhead on the early stages of learning and executing. And then maybe another quarter will be offset with a more mature product seeing volume increases, but today really it's a byproduct of across the board leveraging our overhead and executing more efficiently.

[Nehal Chokshi:]

Got it. Understood. And it looks like you're managing the cash flow impact to the component shortages by hitting longer days payables from your suppliers. And that's offsetting the higher inventory levels as well as the customer pay forward that you also noted. So what are the components you have been stocking up on? And I can see that from the 10-Q that that's raw materials that's going up. And the corollary of that is what's the risk? You are left with high component costs as supply and demand comes into balance and some of these components might be depreciating assets?

[Jeff Schlarbaum:]

Yes. So a lot there in your question, what I would try to say simply Nehal is that there isn't really one component type or a narrow grouping of component types that are driving the inventory increases. It's really from the MLCCs across the board to other components even some of the bill-to-print fabricated items like a printed wiring boards. So we're seeing it across the board. Again, not concerned about sort of a depreciating asset perspective because we're on contract with these customers. We were buying them at the prices that we quoted. And if there are significant increases to the components that our customers are specifying with the manufacturers that they require then we can work collaborative with them on those cost variances. So again, bringing on the inventory that we have positions us, so when the last golden screw clears, we're able to convert the kit versus deferring inventory receipts. And then taking the risk that some of those available parts that we could have taken a receipt of, go-to other suppliers or other competitors. And then we're left trying to, not only source the golden screw, but the readily available parts. So we're trying to just make sure that, we position everything we can. It's going to put some pressure on the balance sheet, but as the component market continues to, should I say, loosen up in the back half of the year, we see those raw material levels going down.

[Nehal Chokshi:]

Okay. And so what's your expectation for free cash flow to net income ratio as you go through the balance of fiscal year 2019?

[Jeff Schlarbaum:]

That's a great question. And I would expect to nothing less that you would ask us that Nehal. And as I said to you before, this year free cash flow is going to be a challenge to predict. With our growing demand, backlog demand we are and I am making a decision to invest in procuring the materials that we need to convert the growing backlog in the face of these component shortages. So that's the area where it's absolutely putting pressure on cash flow, but we're focused on delivering for our customers, achieving continued ongoing revenue growth, continue to improve our profitability. And this year you're going to have to let me grind through the component climate. And I think as we get towards the back end of the year, I'll be a more predictive area where I can give you better visibility on cash flow.

[Nehal Chokshi:]

Okay. That's fair. And then I calculate that your backlog at the end of the quarter was about $134 [ph] million, is that right?

[Jeff Schlarbaum:]

That's a pretty good estimate yes.

[Nehal Chokshi:]

Okay. And what percent do you expect that to ship within the next 12 months?

[Jeff Schlarbaum:]

Well here you go again Nehal, so great question. If not for the component shortages, I could be much more clear in sort of timing of the revenue conversion. But that's been really our issue up until now as we have demand that exceeds our ability to convert because of those challenges. And frankly, there's an additional issue of obviously as I referenced in my prepared remarks earlier the nature of the work that we do requires very talented, very skilled, very sophisticated workforce. And so, as we onboard our new employees which we are doing at a very rapid pace, it takes some time for them to get to the level where they're efficient and adept at building and manufacturing these complicated products. All that said, it's a bit foggy in terms of how much I can convert of the existing backlog. But what we do know is that, we'll increasingly convert higher levels. And again, since we exited the turnaround just a quarter ago in fiscal 2018, this is our first year of bonafide organic growth. And so again you're going to have to let me get through this year of exercising these new muscles. And as we do, as we get to the back half of the year, I think I'll be in a much better position to give you guidance as to percentages and levels of backlog growth that we can convert in the future.

[Nehal Chokshi:]

Okay, great. My last question is that given the -- what I think you said 20% increase in workers and clearly a strong backlog, strong bookings. You clearly are looking for a sequential increase in the March quarter. I guess, the real question here is that how much of the sequential increase do you minimally believe you'll be able to do?

[Jeff Schlarbaum:]

Yes. Great. Another great question. If I knew I'd already told you -- I would already have told you. So we're not holding back anything that we already know. And it's just really Nehal is how much was the parts and the workforce that we pull together to execute for our customers. So we see the increases. But again, I hate to say the same thing, but you're going to have to give me a few quarters as we're exercising these new growth muscles to really better estimate the conversion percentage of demand versus shipments to our customers.

[Nehal Chokshi:]

Okay. Very good. Thank you.

[Jeff Schlarbaum:]

All right. Thanks, Nehal.

[Operator:]

Thank you. Our next question comes from Mike Schellinger from MicroCapClub. Please state your question. Excuse me, Mike are you muted?

[Mike Schellinger:]

Oh, I’m sorry. So my question relates to backlog conversion, which you've talked a lot about. And what I was wondering is if you could rank the issues which -- from what you said so far are materials, personnel, new product introduction and I wonder maybe if facilities is the fourth one, so you can maybe just sort of characterize how those interplay together.

[Jeff Schlarbaum:]

Yes. It's a good question, Mike. First and foremost, it's materials. If we had all the materials available to clear the production of the particular products that we're building for our customers that would facilitate higher levels of backlog conversion. So that remains the number one constraint. What happens as we move through a particular fiscal quarter, the parts sometimes clear later than anticipated. So then we sort of have a labor bottleneck and that you can't have idle labor sitting on the sidelines waiting to sort of go into action and produce products. So secondarily, if we had unlimited labor capacity, we could produce at a higher level in the back end of the quarter as these parts clear late. But that's something that as you heard from other prepared remarks, we continue to onboard new employees. We continue to train and develop new employees. And so I think that constraint will lessen over time, but that's the second constraint. From a facilities and capital standpoint, we really don't have constraints. That's really -- it doesn't come to the equation. So it's really the aforementioned parts and then sometimes in some certain cases the labor and workforce.

[Mike Schellinger:]

And then it would maybe new product introduction be sort of third piece or is that really not much of a factor?

[Jeff Schlarbaum:]

In the ordinary course of our business, we continue to onboard new programs. Even with the existing projects that we build one of the callers earlier talked about existing programs and oddly enough on a lot of the existing programs we see variations of an existing program that you would consider a new product introduction. So it's pretty much an ongoing way of business for us. So that really hasn't created any uncertain bottlenecks, or have exacerbated backlog conversion. It's really the aforementioned parts and labor.

[Mike Schellinger:]

Okay. Thank you.

[Jeff Schlarbaum:]

All right. Great. Thanks.

[Operator:]

Thank you. And our next question comes from Shawn Boyd from Next Mark Capital.

[Shawn Boyd:]

Good morning and congratulations of the quarter.

[Jeff Schlarbaum:]

Hey. Thank you.

[Shawn Boyd:]

Just a couple, if I can, fellas, the order growth was again very strong, hit a new record. It sounds like, from the commentary earlier in the call, demand remains intact. You're not seeing any real macro issues coming under risk here. So I'm just going to kind of answer my question, but I'm assuming there's sort of nothing extraordinary in there and we can probably continue to see that growth going forward?

[Jeff Schlarbaum:]

Yes. Like I said, it's difficult to estimate the timing of the orders right? What I see is, ongoing strength with our customers' position in their end markets and in our alignment with them and on these key programs. So it's always difficult to project the timing of when they might reorder or award us a new project, but we're well positioned. We're performing for them. And we're a strategic piece of their supply chain programs. So I think we'll continue to see ongoing growth signals. It's just hard for me to predict the book-to-bill ratio.

[Shawn Boyd:]

Got it. Okay. If I can switch gears a little bit on the kind of delivering those orders. And as you book the business, the operating expenses with SG&A at this level for the quarter $3.3 million, $3.4 million. Now that we've kind of ramped up the employee base a bit, is that the sort of level to think about as we go through the rest of 2019, or are there any additional increases that we need to kind of model in at this point?

[Jeff Schlarbaum:]

Yes. No. I've always said that modeling our SG&A, it shouldn't be more than 10% and I don't think we can get under 9%, and so we kind of fell right in the middle of that for Q1. And I kind of see us hovering in that range as we move throughout the year. So I don't see any significant needle movers up or down.

[Shawn Boyd:]

Very good. And another, if I may, just in terms of the kind of clean up on the modeling, the tax rate. This 22% rate that we saw in Q1, is that the kind of level to think about for the rest of this year? And where do we stand on NOLs?

[Jeff Schlarbaum:]

Yes. So let me hand it over to Tom and he can give you some clarity on that.

[Tom Barbato:]

Yes. The 22% is what we would expect to see. We should be within a fairly tight range for the balance of the year.

[Shawn Boyd:]

Okay. And Tom just one last, if we could. Your CapEx, I know you've got a new facility coming on, but what kind of CapEx budget are you guys thinking about for this year versus last year?

[Jeff Schlarbaum:]

Yes. This is Jeff. I think if you look at historically and you look forward, we're sort of in that -- it's more than $3 million, but not a lot more than $4 million in annual capital. So we kind of see us in that range, probably more to the higher end of that range, but not excessively over it. And that's kind of where we've been in the last few years as we've been rebuilding the business, and kind of where I see us going forward.

[Shawn Boyd:]

Got it. Good enough. Thanks so much and good luck.

[Jeff Schlarbaum:]

Okay, great. Thanks, Shawn.

[Operator:]

Thank you. And our next question comes from Brandon Ferrell [ph] from Toucan Capital.

[Unidentified Analyst:]

Hey, guys. I had, I guess, a higher level question for you. I've spent some time reading some of these White House white papers about the threat to China from so much of the country's defense supply chain being overseas. And there's an obvious impetus within the administration to bring much of that onshore. So, I understand you guys are talking about the existing strength. It sounds like cyclically in your end markets. Can you speak to the potential for a bigger secular change in, for instance, printed circuit boards coming back to America? I understand you guys do more sensitive work as it is, so some of that stuff is already here. But are you seeing any changes there from a secular standpoint?

[Jeff Schlarbaum:]

So, Brandon, a great question. And I wish I could tell you that we're seeing a demonstrative sort of end market signal of demand shifting back to the U.S. As you said, that's sort of where we play. That's the core of what we do in these mission-critical applications. Sort of on a peripheral I would say that we see and hear some signals in the marketplace that some of our customers and some of these critical applications where they're less complicated and maybe a little bit higher volumes have taken -- undertaken announce our strategy to use lower-cost geographies. And we're hearing from them that they're starting to rethink that strategy. And obviously there's economic impacts as well as IP protection and just quality in delivery. But I can't tell you -- can't sit here today and tell you that it's we see a needle moving impact to our business. I just think we'll be the benefactors of those end market fluctuations that we're not anticipating being an added bonus but in terms of driving our existing organic growth, it's kind of what the products that we play in today that are already sourced in the U.S. And I see that to be the case going forward.

[Unidentified Analyst:]

Got it. That's all I had. Thank you.

[Jeff Schlarbaum:]

Great. Thanks, Brandon.

[Operator:]

Thank you. [Operator Instructions] And there appears to be no questions at this time.

[Jeff Schlarbaum:]

Okay, great. Well just wanted to say it was a pleasure to speak to everybody this morning. I want to thank you again for calling in. And Tom and I love to speaking with all of you again next quarter.

[Operator:]

Great. Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.