IEC Electronics Corp.
Q1 2017 Earnings Call Transcript

Published: 10 Feb 2017

[Operator:]

Greetings, and welcome to the IEC Electronics' First Quarter 2017 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Audra Gavelis, Director of Marketing and Investor Relations for IEC Electronics. Thank you. You may begin.

[Audra Gavelis:]

Thank you for calling in. On the call this morning we have Jeff Schlarbaum, President and CEO; as well as Michael Williams, Chief Financial Officer. Before we get started, I would like to take a moment to read the Safe Harbor statement. This conference call contains certain statements that are or may be deemed to be forward-looking statements. These forward-looking statements such as when the company describes what it believes, expects, or anticipates will occur and other similar statements include but are not limited to, statements regarding future sales 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 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 contained herein whether as a result of new information, future events or otherwise, expect as required by law. I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeff Schlarbaum:]

Thank you, Audra, and good morning, everyone. As we expected and discussed on our fiscal 2016 year-end call, during the first quarter of fiscal 2017 we saw the impact of the volume decline we had anticipated from two of our large strategic customers which affected both our revenue and profitability. It's important to reiterate that the revenue contraction isn't due to the loss of any program as but rather to two key customers who are currently working through at this inventory positions and managing their supply chain needs. These are long standing IEC customers who remain committed manufacturing partners and are working through the respective end market dynamics. While we expect that the revenue decrease will persist through the second quarter of this fiscal year, we are optimistic and expect that volumes just start to ramp up in the second half of fiscal 2017 positioning us to exit the years at similar levels to fiscal 2016. We're particularly encouraged by the fact that we saw improved bookings resulting in a backlog net increase of 14% or $7.6 million in the first quarter of fiscal 2017. The revenue contract and related margin decrease were isolated to our New York facility where we had previously taken proactive steps to align our cost structure while retaining the key skilled labor and expertise needed to support the life saving and mission critical products to be manufactured. Our other facilities however achieved solid gross profit performance, consistent with our company's total gross profit performance in fiscal 2016. So despite the immediate topline impact to the New York operation in the first quarter we delivered gross margins similar to the broader industry average. Hence we believe we are well positioned to return to industry-leading margins and profitability and sales volumes return. As you move through the turnaround, we continue to implement our strategy and focus on the market sectors that are best suited to our capabilities and our expertise. Our revenue distribution in the first quarter of fiscal 2017 was as follows; medical was 28%, aerospace and defense was 50%, industrial was 20%, communications and others was 2%. And medical revenue percentage was lower this quarter due to the revenue decrease I have already discussed and we anticipate that our revenue blend will shift on medical sector sales, closer to the 30% to 40% range as we see volumes normalize. We remain committed to the -- to executing the three strategic initiatives that we put in place to drive the turnaround which include improving margins and establishing sustained profitability, strengthen our balance sheet by reducing debt and improving our inventory position; and third, positioning the company to re-establish organic growth. We have demonstrated considerable progress with the first two goals. The third in sequence re-establishing organic growth is now the primary focus of our turnaround efforts. In order to achieve this goal, we had to make fundamental changes to our go-to-market approach, to rebuild our new customer pipeline. We believe our core customer base is excellent but the current revenue softness reinforces the need to expand, diversify and strengthen our sales pipeline and ultimately our revenue mix. When I returned after the 2015 proxy contest, the sales process was broken and the new customer pipeline was drive [ph]. While we recognized that these were important issues, it was imperative that we first improve our operational performance to reestablish profitability and bolster customer satisfaction levels, as well as delever the balance sheet to assure our existing customers and potential new customers that IEC was no longer a high risk supply option. Of the past seven quarters, we have consistently delivered performance to increase our customer's confidence and IEC as a long-term strategic manufacturing partner. In parallel, we enhanced our go-to-market strategy which included unifying all operating units under one IEC brand and reestablishing a more compelling value proposition for our target customers. We are now revitalizing our go-to-market execution abilities and adopting best practices to broaden our pipeline and add new customers to enhance our current rooster of blue-chip customers, many of whom are Fortune 500 companies. Specifically, our new customer acquisition initiatives are three pronged approach consisting we building our entire direct sales structure, developing robust inside sales and finally developing a proactive lead generation platform to accurately and effectively identify the target customers we seek to engage as our strategic manufacturing partners. Today we have upgraded and reorganized our sales structure with dedicated business development leaders across the nation in the West Coast, in the Midwest and on the East Coast to focus on their specific markets. Furthermore, our IEC sales force overlays a network of outside manufacturing labs expanding our reach and over the past few months we have also realigned our partnerships to ensure we have the right people delivering the right message about IEC. We've been developing a robust inside sales program which is supported by a proactive lead generation program to identify potential customers and start the conversation about IEC's unique capabilities to solve challenges they may be facing and to minimize their supply chain risks. In addition to these initiatives I just mentioned, we have adopted a fairly sophisticated sales analytics program to accurately measure and prioritize our sales process and ensure that we're pursuing attractive prospects and taking the right steps along the way to convert our strategic pursuits to meaningful manufacturing contract awards. We are confident that our new sales structure combined with our other initiatives will generate increased opportunities. And while the sales cycle in our industry is 12 to 18 months, our backlog is increased during the first quarter of fiscal 2017 which is an encouraging development. For example, we recently won an important program from a new customer, a division of a Top 5 aerospace and defense company, and were adding business from other existing customers as well. We're pleased about this early progress but also realize we have a lot more work yet to do. Our balance sheet remains strong with $13.7 million in working capital. We've reduced inventory to $14.5 million and as mentioned previously, net debt was reduced down to $11.8 million. We believe our strength and balance sheet provides with the necessary foundation to drive future growth and is a major component to our ability to compete for new customers and programs. As we work through the revenue reductions, we're currently experiencing -- we remain focused on enhancing our position in the marketplace by improving our operational execution, to produce consistent and predictable results for our customers. With our operational improvements strengthened balance sheet, restructured sales organization; we believe we are well positioned to effectively pursue and win contracts in the complex and highly regulated markets that are best suited for our capabilities and expertise. I will now turn the call over to Mike Williams to review the company's financial performance. Mike?

[Michael Williams:]

Thanks, Jeff. Revenue for the first quarter of fiscal 2017 was $21 million, a decline of 36% as compared with the same quarter last year. The company saw declines across all three market sectors. The decrease of $7.6 million in the medical sector is primarily related to two customers Jeff previously mentioned who have access inventory and are working through their end market dynamics. The aerospace and defense sector where programs frequently fluctuate in demand or end and are replaced by new programs saw a net decrease of $2.9 million which included an $800,000 decrease related to the company's decision to disengage with a customer due to lack of profitability. The industrial sector was primarily impacted by declines from several customers whose end markets have softened. Gross profit for the first quarter of fiscal 2017 was $1.8 million or 8.6% of sales compared to $5.8 million or 17.7% of sales in the first quarter of fiscal 2016. The year-over-year volume reduction previously discussed significantly impacted gross profit. However, the reductions we recently made in overhead lessened the volume impact. Selling and administrative expenses decreased to $2.4 million and represented 11.6% of sales in the first quarter of 2017, compared to 12.1% of sales in the prior fiscal year first quarter. The $1.5 million decrease in selling and administrative expenses was primarily due to a lower wage and related expenses of $800,000 driven by headcount reductions. And a favorable adjustment to the bad debt reserve due to improved collections and accounts receivable. The prior year first fiscal quarter have increased professional expenses of $400,000 related to employment matters, debt refinancing and other activity. The company recorded a net loss in the first quarter of fiscal 2017 of $865,000 or a loss of $0.09 per share, compared to net income of $1.5 million or $0.15 per share in the first quarter of fiscal 2016. Now turning to the balance sheet; we continue to drive our cash conversion cycle downward. Account receivable ageing was reduced significantly this quarter and total inventory decreased by approximately $900,000. We will continue to focus on improving the inventory returns as we move through the year. The company reduced debt net of cash by $7.2 million; this includes the pay down of $5.6 million in debt from the net proceeds of the sale leaseback transition -- transaction of Albuquerque, New Mexico facility. The remainder was due to cash flow generated from the improvements in working capital. During the first quarter we announced that IEC completed the sale and leaseback of our Albuquerque facility for an aggregate purchase price of $5.75 million with an initial lease term of 15 years. The proceeds were used to pay-off the related mortgage loan and pay down the term loan A. We made our final term loan A payment on January 1, 2017. Our debt net of cash with M&T Bank as of December 30, 2016 was $11.8 million; this was down almost $24 million since March 27, 2015, the first quarter end after the change in control. On November 28, 2016, we entered into the second amendment to the fifth amended and restated credit facility agreement with M&T Bank. This amendment reduced the revolving credit commitment from $20 million to $16 million since we do not anticipate the need for the excess credit. The financial covenants were also modified to better align with our fiscal 2017 expectations. With that I now turn the call back over to Jeff.

[Jeff Schlarbaum:]

Great, thanks Mike. With our visibility today we're optimistic that we'll see a stronger second half of fiscal 2017 as we expect volumes to return from our existing customers and as we start to add new customers. We made significant fundamental changes both operationally and with our sales infrastructure which we believe better positions us as a design and manufacturing partner for life saving and mission critical products. And also improves our ability to market our capabilities to the customers and programs that are best suited to our strengths. As we navigate through fiscal 2017, we remain keenly focused on our key initiatives, namely exceeding our customer's expectations so we continue to be their partner of choice, who they trust us more with their work, to continue to reduce debt, to continue to demonstrate improvement in our asset management, to drive operational improvements at over the long-term will enable us to continue to deliver industry leading margins, and deliver our capabilities and our rebuilt sales organization to drive sustained organic growth over the long-term. While the financial rebuilt results in a first quarter of fiscal 2017 are below where we want them to be, as a company we have made considerable progress with our turnaround. By staying focused on these initiatives, we believe we'll be able to deliver long-term sustained performance and value creation for our shareholders. With that I will now turn the call over to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Ben Klieve with Noble Capital Markets. Please proceed with your question.

[Ben Klieve:]

Good morning guys, a couple of questions for you. So it sounds like you saw some headwinds outside of those two medical clients in both your defense and industrial verticals. I guess I'm curious, if you gave some kind of granular numbers but if you would exclude the impact of those two medical clients, what was your revenue growth rate over the quarter either on a sequential or year-over-year basis?

[Jeff Schlarbaum:]

It's pretty flat Ben. As you noted, there were some customers and it's not unusual for us that we'll see fluctuations during the year as some customers' demands will increase during the quarter and some customers' demands maybe reduced during the quarter and then they may flip-flop the next quarter, just as maybe some lumpiness in dairy markets or how they are managing the inventory. There could be a whole host of reasons for it but on total -- the revenue was really flat because we had some down but we also had some ups and that kind of offset one another.

[Ben Klieve:]

Okay, so a little bit of that defense and industrial weakness is offset by medical customers excluding the impact of those two?

[Jeff Schlarbaum:]

Yes, and we saw some strength in our aerospace and defense markets. We really had some customers exceed our demand expectations and just some of those gains were just offset with some of the industrial softness.

[Ben Klieve:]

Okay, got you. So I guess -- another question I have regarding these two clients and I guess your portfolio, the whole is -- what about the nature of these two clients, it really gives you confidence and visibility of ramping in the second half of the year. I mean what specifically are you seeing that really makes you feel that this has a very visible ramp starting in Q3?

[Jeff Schlarbaum:]

Yes, that's a fair question. So in both customers' cases, we have a very strong close relationship, we communicate on a regular basis and we're primary manufacturing EMS partner. So we know that when they have demand, they are coming to IEC to fulfill that demand. In some cases we have very good line of sight as to the end market demand that is consuming inventory, so we can see the inventory position within our customer and they share that with us. And so when we see their inventory levels going down, that gives us greater confidence that we're going to see new orders to replenish product that they have sold through. In other cases however, we don't have as good diagnostic visibility because of the systems that our customers use and the information they are willing to share with us. So I guess on one side of it I have some confidence that we're seeing the recovery with one of those medical customers because we're seeing the consumption of inventory and that will lead to replenishment of orders for us. And the other case that customers have told us that they are going to see end market returns, I don't have the same diagnostic visibility but we anticipate that they are going to reestablish volume purchases from us and just -- you know, the rate at which those volume purchases will occur is little bit unsure but on balance we see both of them picking up in about second half of the year.

[Ben Klieve:]

Okay, perfect. Thank you. Couple of other questions regarding some things further down the income statement; here your SGA run rate at about 2,400 for the quarter -- you know, given all the changes that have happened over the last six months or so what can we look on a forward-looking basis; how can we -- how should we look at SGA? Is that 2,400 going to be more normalized rate or truly expect that to change in a meaningful way?

[Jeff Schlarbaum:]

Our SG&A year-over-year has come down will have come down quite substantially. In terms of our percent of sales while our sales are down and our SG&A are down, on balance there is going to be about the same percentage. We're going to be overall around 11%, SG&A as a percent of sales, lower SG&A, actual dollars spend but on the lower sales volumes. So percentage wise about the same.

[Ben Klieve:]

Okay.

[Jeff Schlarbaum:]

And we did at about $200,000 of favorable bad debt which we don't expect to repeat in Q1.

[Ben Klieve:]

Okay, perfect. And then I guess last -- just kind of book-keeping [ph] question here. What was your depreciation and amortization for the quarter and were you guys EBITDA breakeven?

[Jeff Schlarbaum:]

Yes. And our depreciation and amortization was around $800,000. And our EBITDA was about breakeven.

[Ben Klieve:]

Okay.

[Jeff Schlarbaum:]

Yes, we're breakeven at the EBITDA line.

[Ben Klieve:]

Perfect. Well, that's all I have. Thank you and congrats on the solid quarter on what was a pretty challenging environment for you guys.

[Jeff Schlarbaum:]

We appreciate all your support Ben, thanks.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of [indiscernible]. Please proceed with your question.

[Unidentified Analyst:]

Yes, good morning. I was hoping just to get some more clarification on possibly your pipeline and also the debt, I know you talked about the business in your pipeline in your prepared comments; but I was wondering if you could give some more color concerning maybe the balance of the pipeline and specifically, how much of that is new customers and maybe what sectors? And also the debt was reduced in the quarter but not as much as previous quarters; and just curious as how we should think about that going forward?

[Jeff Schlarbaum:]

Great, thank you Mike. So I'll take them in reverse order. In terms of the debt, as we've stated before; we had a substantial debt reduction during fiscal 2016. We drove our inventory down to very respectable levels in at $14 million to $15 million range, from inventory levels, almost near $30 million. So we've taken a lot of the inventory and we drove down a lot of the debt. This year I don't see those same kind of levels of debt reduction occurring because of the inventory. While we have a little bit more opportunities and sort of right size for our business, and when you look at this particular quarter, while it was a challenging quarter for us, outside sale leaseback proceeds, we generated cash flow to reduce another $1.7 million of debt. So I think that was obviously a pretty decent outcome but on a year-over-year basis, our debt will continue to be reduced but not nearly at the rate that we've seen it over this past year. So we had $1.7 million outside of the proceeds of this quarter. I think as we look at the rest of the year, we'll have a similar impact but I don't see that on a quarter-over-quarter basis, so I can't give you a specific number; we'll see reductions but not nearly at the rate before. So that's on the debt side. On the sales pipeline, what I can tell you is, the sales pipeline represents all markets; the three focused markets that we target, the medical device sector, the aerospace and defense sector, and the industrial sector. So I can tell you that it is almost equally represented across those three end market sectors. In terms of the make-up of the funnel, by and large the new business funnel is largely new customers. We have a whole host of companies across the markets that we serve that are in our new customer pipeline; we track them from the various stages that they are in, and as they get closer to converting into a new contract award. So I will continue to provide additional color on some of those analytics as we go forward but there are several customers that are close to closing, and many more that were adding to the funnel. So it's building in strength and diversity as we speak. So hopefully that gives you a little bit of better feel for how that new sales process is working.

[Unidentified Analyst:]

Yes, thank you.

[Operator:]

Thank you. Mr. Schlarbaum, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.

[Jeff Schlarbaum:]

Okay, great. Well, thank you everyone for calling in and we look forward to speaking with you all again, next quarter.

[Operator:]

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