IEC Electronics Corp.
Q4 2019 Earnings Call Transcript

Published: 22 Nov 2019

[Operator:]

Greetings and welcome to the IEC Electronics’ Fourth Quarter and Yearend 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Audra Gavelis, Director of Marketing and Investor Relations. Thank you. You may begin.

[Audra Gavelis:]

Thank you for calling in. On the call this morning, we have Jeff Schlarbaum, President and CEO; and Tom Barbato, CFO.Before we get started, I would like to take a moment to read the Safe Harbor statement. This conference call contains certain statements that are or may be deemed to be forward-looking statements within the meaning of Section 21E of Securities Exchange Act of 1934 as amended and the Private Securities Litigation Reform Act of 1995. These forward-looking statements such as when the Company describes what it believes, expects or anticipates will occur and other similar statements include, but are not limited to, statements regarding future sales, backlog and operating results, future prospects, strategic initiatives, turnaround efforts, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical facts, but rather reflect the Company's current expectations concerning future results and events.The ultimate accuracy of these forward-looking statements is dependent upon a number of risks and uncertainties that may cause the Company's actual results or performance to be different than as expressed or implied by these statements. Specific risks and uncertainties include, but are not limited to those set forth in the Company's earnings release issued immediately before this call and in the Company's most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and 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.Additionally, on today’s call, management’s statements include a discussion of certain non-GAAP financial measures. Reconciliations of such supplemental information to the comparable GAAP measures are included as part of the earnings release the Company issued today.I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeffrey Schlarbaum:]

Thank you, Audra, and good morning, everyone. We are pleased to have closed out a strong 2019 fiscal year with an outstanding fiscal fourth quarter with our revenue of $43.9 million, which represents year-over-year growth of 28.4%.We had gross margins at 14.6% which is an increase of 150 basis points compared to the same quarter last year and operating income of $2.7 million which is 70% higher compared to the same quarter last year and net income of $1.8 million or $0.17 per share.The fiscal fourth quarter marks our fifth consecutive quarter of revenue growth and our second sequential quarter of revenues over $40 million. These revenue levels represent our ability to leverage our resources more efficiently while converting our backlog, which allows us to deliver margins that we believe are some of the best in our industry.This growth momentum is particularly gratifying because we believe it is a direct result of the investments we’ve made to scale the business which are resulted in extended customer commitments including a significant number of new, higher value and longer duration awards.Our growth is rooted in our strategic customer relationships, which we believe has improved our ability to win new programs more consistently, among both new and existing customers.These relationships are the result of our ability to consistently perform for our customers that trust us to manufacture their life-saving and mission-critical products. Additionally, our vertically-integrated portfolio of offerings remain a competitive advantage for IEC, as it allows us to control the cost, the quality and the lead time of critical components, which at the same time allows our customers to minimize the number of manufacturing partners they need to manage.In addition, with marketplace recognition of our capabilities steadily growing, we are also excited about the many opportunities we are seeing to onboard new customers. Over the past three fiscal quarters, we have seen over 10% of revenue come from these new customers.Turning to the full year results, I am pleased to report our fiscal 2019 revenue of $157 million, a 34% increase compared to our prior year results and operating income of $7.6 million, a 178% increase compared to prior year results.In a moment, I will turn the call over to Tom to discuss the financial results in greater detail, but before I do, I would also like to highlight our backlog of $212 million which represents the net result of booking more than $230 million in new orders during the fiscal year, which represents growth of 59% in our backlog since the close of fiscal 2018.Clearly, our bookings were strong for the fiscal year and I am exceptionally pleased with our book-to-bill ratio of 1.5 to 1 knowing our annual sales were up more than 30% year-over-year. Our backlog composition is also changing and now includes a greater number of longer-term contracts.For example, less than 10% of our backlog at the start of fiscal 2019 represented order commitments greater than one year in comparison to our starting backlog this year 2020, in which approximately 30% of the orders are deliverable in time periods greater than one year, which ultimately enhances our ability to better plan for the future.A key competitive advantage for IEC is our ability to efficiently support the life-saving, mission-critical programs we manufacture which requires that we have trained staff to ready well in advance of a program ramp up. We are continually looking for opportunities to introduce automation into our manufacturing processes to reduce our dependency on adding incremental resources and to improve quality.However, with that said, developing the skills of our workforce remains a priority and it’s essential for our high-complexity assembly and test processes that are required to manufacture our customers’ final product. During fiscal 2019, we onboarded 151 new employees.Also related to our ability to convert projects from backlog to production is the availability of raw materials. As you know, our industry has continued to grapple with the global component shortages for approximately two years now.Components used in consumer products are becoming more readily available, but we continue to see some tightness in the supply chain for the highly engineered sole source components we use on behalf of our customers operating in these highly regulated markets.The shortage situation has been a reality for us for some time now and we are focused on balancing the need for an efficient inventory management with ensuring we have the right parts on hand to meet our customer commitments as they are released to go into production.Fiscal 2019 was an exceptionally strong year for IEC and we believe our performance this year is indicative of what our future holds. We believe the growth we have delivered is due to our strategic customer relationships and enhanced reputation in the marketplace.As we move into fiscal 2020, we have a strong platform to build from and believe we are well positioned to continue this momentum and expand our leadership position.Now I will turn the call over to Tom to provide more detail around our fiscal fourth quarter and year ending financial performance. Tom?

[Thomas Barbato:]

Good morning, everyone. Revenue for the fourth quarter of fiscal 2019 was $43.9 million, an increase of 28.4% as compared to the fourth quarter of fiscal 2018 and a sequential increase of 9% compared to the third quarter of 2019.Gross profit for the fiscal fourth quarter - of fiscal 2019 was $6.4 million, compared to gross profit of $4.5 million in the fourth quarter of fiscal 2018. Gross margin of 14.6% in the fourth quarter of fiscal 2019 increased 150 basis points compared to gross margins of 13.1% in the fourth quarter of fiscal 2018.Selling and administrative expenses increased $800,000, to $3.7 million or 8.7% of sales as compared to $2.9 million or 8.5% of sales in the fourth quarter of fiscal 2018. The increase was primarily due to higher wage and related expenses.The Company recorded net income of $1.8 million in the fourth quarter of fiscal 2019 or $0.17 per basic and diluted share compared to net income of $9.1 million or $0.89 per basic share and $0.87 per diluted share in the fourth quarter of fiscal 2018.Net income for the fiscal 2018 fourth quarter included a one-time tax benefit of $7.8 million related to the company adjusting its deferred tax asset allowance, which we believe reflects confidence that the deferred tax assets will be utilized in future periods.On a non-GAAP basis, excluding the one-time tax benefit, fiscal fourth quarter 2018 net income was $1.3 million or $0.13 per basic share. We believe it is important to include these non-GAAP measures to evaluate our performance from period-to-period. I encourage you to look at the provided reconciliation of the non-GAAP measures to the closest GAAP measures, which for us are net income and net income per common share included in the earnings release associated with this call.Looking at the results for the full fiscal year 2019, revenue increased 34.3% to $157 million, compared to $116.9 million in the prior fiscal year.Looking at our market sectors for fiscal 2019, we saw revenue distribution of aerospace and defense at 60%, medical at 22% and industrial at 18%. Various increases and decreases for aerospace and defense customers resulted in a net increase in sales of $27.8 million for fiscal 2019, compared to fiscal 2018.Programs frequently fluctuate in demand or end and are replaced by new programs. Aggregate increases in sales in fiscal 2019 were due to net increase in customer demand was $13.3 million. We saw an increase in sales of $18.8 million from production ramp ups.However these increases were partially offset by ending customer relationships, contracts reaching the end of their term and other customer delays which caused a decrease in sales of $4.3 million during fiscal 2019. The net increase of $7.5 million in sales in the medical sector was primarily due to programs ramping up of $7.3 million, the remaining changes were the result of changes in customer demand.The net increase in sales in the industrial market sector of $4.7 million resulted primarily from the production ramp up of new programs with three customers which amounted to $5.2 million. The remaining increase was due to several customers whose end-markets have grown partially offset by decreases in demand from other customers.Gross profit increased $7.5 million and improved by 170 basis points from 12.1% of sales in fiscal 2018 to 13.8% of sales in fiscal 2019. Selling and administrative expenses increased $2.6 million and decreased as a percentage of sales to 9% in fiscal 2019 compared to $11.4 million or 9.8% 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 2019 was $4.8 million or $0.46 per basic share and $0.45 per diluted share as compared to net income of $10.4 million or $1.01 per basic and diluted share in the prior fiscal year.Fiscal 2018 net income included a tax benefit of $8.8 million related to the previously mentioned deferred tax asset allowance adjustment, as well as the first quarter of fiscal 2018 release of the valuation allowance on our alternative minimum tax credits as a result of the December 2017 U.S. Tax Cuts and Jobs Act.On a non-GAAP basis, excluding the one-time tax benefits, fiscal 2018 net income was $1.6 million or $0.15 per share. We believe it’s important to include these non-GAAP measures to evaluate our performance from period-to-period and again, I encourage you to look at the provided reconciliation of the non-GAAP measures to the closest GAAP measures, which for us are net income and net income per common share included in the earnings release associated with this call.Now looking at our balance sheet for fiscal 2019. Our balance sheet remains strong with $40.9 million in working capital and $31.2 million in stockholders' equity. You will see that inventories at September 30, 2019 were $44.3 million, up compared to $34.1 million at September 30, 2018. As we've discussed on prior calls, our inventory levels are directly associated with our ability to convert our backlog.We continue to see a willingness on the part of our customers to help mitigate the risks associated with the ongoing component shortages resulting in customer deposits growing to $13.2 million as we exited fiscal year 2019 in comparison to $7.6 million at the end of fiscal 2018.In fact, when you look at inventories, net of customer deposit, at the end of Q4, we saw a reduction in inventories as adjusted of $4 million in comparison to the inventories as adjusted at the end of fiscal Q3 2019.We believe that this is an important measure of our management of working capital considering our customer deposits and in light of our backlog and book-to-bill ratio. I encourage you to look at the provided reconciliation of the non-GAAP measures to the closest GAAP measures which for us is inventories included in the earnings release associated with this call.With that, I will turn it back – the call back to Jeff.

[Jeffrey Schlarbaum:]

Thanks, Tom. When we began fiscal 2019, we identified three strategic initiatives driving sustained growth, strengthen our balance sheet and improving our profitability. As we sit here today, our results show that our team has made excellent progress executing these strategies during the year.It’s an exciting time for our company with our reputation as a top performing manufacturing partner for highly complex, life-saving and mission-critical products firmly established and growing.As we move into fiscal 2020, we are focused on capitalizing on this favorable market recognition to continue to expand our existing customer relationships, and to add to our customer base. We are also very excited about the progress being made on the construction of our new state-of-the-art facility which we anticipate being completed during 2020.I would like to thank our employees for their continued hard work in our dynamic and busy environment. It’s because of their efforts, that our company is well positioned to win new awards and attract new partners. We are energized to expand our leadership position and drive continued growth and profitability.Now with that, I will turn the call back over to the operator for any questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Nehal Chokshi with Maxim Group. Please proceed with your question.

[Nehal Chokshi:]

Yes. Thank you. Great quarter guys. You did say this at the beginning of the call, but I didn’t catch it. How much of that $212 million backlog is for shipments within fiscal year 2020?

[Jeffrey Schlarbaum:]

Roughly, 30%. Oh, no, you are saying in 2020? So, it’s 70% of it for 2020 and the 30% in outside a year.

[Nehal Chokshi:]

Got it. Okay. So, this backlog number is down Q-over-Q, which then implies that your orders was below your revenue. So I guess around $38 million or so, no, $36 million, which is a little bit below – you had a knockout bookings from the prior quarter from those big contracts that you guys had won.But this $38 million – I am sorry, $36 million is a bit below the prior runrate. Was that below your expectations or how would you characterize that?

[Jeffrey Schlarbaum:]

Yes. So, what I would say, Nehal, and you are right, when you look at the bookings that we achieve in Q3 far exceeded what we anticipated and it’s hard to always predict the timing. But what – how I would look at those is really aggregating Q3 and Q4. And if you look at Q3 and Q4 and you aggregated those two and took the average, I mean, it’s better than $60 million in bookings.I mean, it’s actually higher than that. But, so I am not – I am pleased whatsoever. It’s just more of a timing issue than anything.

[Nehal Chokshi:]

Okay. All right. And then, thinking about the upcoming December quarter here, over the past 15 years, I think accounted about 70% of the times you had a Q-over-Q decline anywhere from a very small to up to a 10% Q-over-Q decline. Can you remind us why that has been the case? And that would help us understand whether or not we should expect that to be the case again for this upcoming quarter?

[Jeffrey Schlarbaum:]

Yes. So, obviously, we have a significant amount of aerospace and defense business and the government follows the same fiscal calendar that we do. So it’s an October 1st through September 30th. So, obviously, the end of our fiscal year is the end of the government calendar and I think that has historically created a lower demand in the first quarter that continues to pick up throughout the year.Obviously, now, as the bookings continue to increase and the diversity of our bookings continuing to be broader, and then you may saw this last year, we didn’t experienced the seasonal softness in Q1. So, I think, that trend may continue as we look at a strong backlog with the greater amount of diversity. So, I guess, that’s why they characterize it.

[Nehal Chokshi:]

Then in that case, would you – at 70% of that $212 million backlog, obviously you still need to book more business within fiscal year 2020 in order to drive good growth, I would say. Would that be a fair statement?

[Jeffrey Schlarbaum:]

Yes. And I think and if you look at our bookings trend for the last four quarters in fiscal 2019, that even if we fell short of those level of bookings, the amount that we need to book and ship during the year to add to the base that we have is not a significant amount to drive double-digit growth.So, I am very comfortable with the large amount of book and shipped business that we anticipate to fall in during the year.

[Nehal Chokshi:]

Okay, okay. And I am not sure if we did – I am sure you did talk about, but I didn’t catch it. What were the drivers of the gross margin expansion on a Q-over-Q? And then on a year-over-year basis?

[Jeffrey Schlarbaum:]

I think, when you look at the margins, we are earlier, let’s say, Q2, when you look at Q2, we were investing a lot and converting these newer programs. Some of which were more stranded in manufacturing.We had workforce in place and those investments were completely absorbed. When you look at Q4, we saw nice absorption with the revenue levels that – like I said before, when we get above $40 million, I felt a lot more confident that that was the right revenue levels to effectively absorb the overhead investments we were making and to create solid gross profit margins. And I think that’s what Q4 represented.

[Nehal Chokshi:]

Okay. Great. My final question is that, will it be probably a fair way to think about the year-over-year revenue growth straight away throughout fiscal year 2020 as likely being at a high – at the beginning of the fiscal year and potentially tapering off – not that necessarily will, but that there is risk that that could happen.

[Jeffrey Schlarbaum:]

I am not sure I understand your question.

[Nehal Chokshi:]

I will just throw out some theoretical numbers here. But let’s say that, December 2019 quarter you might see 20% year-over-year growth and as we go through the quarters of fiscal year 2020, that year-over-year growth decelerates in a phase of like 10% year-over-year growth?

[Jeffrey Schlarbaum:]

I don’t know if it’s going to play out that way. Our business fluctuates quarter-over-quarter. I guess, the nature of the work that we do, right. So as an electronic manufacturing service provider for companies that outsource and manufacturing to us, there are customer controls dynamics that make it more difficult for me to predict precisely the flow of revenues from one quarter to the next.I can look at the aggregate year and with confidence say, I see double-digit growth again. I don’t think it’s as clean as what you just described, but we are going to be up year-over-year and I think that’s the best way I can state it for now.

[Nehal Chokshi:]

Okay, great. Thank you very much. Congratulations by the way.

[Jeffrey Schlarbaum:]

Thank you very much. Appreciated.

[Operator:]

[Operator Instructions] Our next question comes from the line of Chris Sakai with Singular Research. Please proceed with your question.

[Chris Sakai:]

Hi, everyone. Good morning. My question was on the Chinese tariff. I wanted to see if you are facing any headwinds there?

[Jeffrey Schlarbaum:]

Yes, so, nice talking to you, Chris. So, in terms of the tariffs, because we are build to print supplier to OEM companies that specify the manufacturers for their components that we’re supposed to acquire on their behalf to manufacturing the end-products, the tariff issue is sort of a pass through and that when we experienced that tariff expense, those are passed along through our customers for reimbursement.Now there may be a timing issue that in one quarter we get the expense and the next quarter we get the relief. But on the aggregate, those expenses that we are seeing as a relationship to their tariffs are largely covered by our customers reimbursing.

[Chris Sakai:]

Okay. But will there ever be a point where the demand – you’d see a lower demand because of the tariff increasing cost from your end?

[Jeffrey Schlarbaum:]

No, no. I mean, the thing about it is that, when you look at the products that we build, obviously, as Tom mentioned, we are over 60% aerospace and defense. And when you look at the life-saving medical devices we manufacture and the unique industrial products, they are – obviously we are manufacturing here.Most of the raw materials we’re acquiring from the U.S. and there is very little dependence on China per se for some of the discrete components that we buy, they are produced in China and those are subject to the tariffs. But actually a very small percentage of the overall raw materials we procure.

[Chris Sakai:]

Okay. Great. And then, you mentioned having additional cost to train workforce for the increase in backlog and I guess, to specialize the workforce. Will that be – how much cost will that add? Will it be a large amount or a noticeable amount?

[Jeffrey Schlarbaum:]

I guess, what I would say in that regard is, you saw some fluctuations in our gross profit margin in fiscal 2019. And you saw – and when you aggregated the first two quarters versus the second two quarters, you saw in the second two quarters that our profit margins improved, because that those revenue levels we were able to absorb the investments in the workforce development initiatives and draw really nice margins.And so, as we continued to climb the ladder, there could be some modest fluctuation from quarter-to-quarter. But I think, at the gross margin rates we produced on average in 2019, we should be able to expect those going forward in 2020 as well.

[Chris Sakai:]

Okay. Great. Thanks for that questions and answers.

[Jeffrey Schlarbaum:]

Great. Thanks talking to you, Chris. Take care.

[Operator:]

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

[Jeffrey Schlarbaum:]

Well, great. Thank you, everyone, for calling in. We appreciate your continued interest in IEC and we look forward to talking to everybody 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.