IEC Electronics Corp.
Q2 2017 Earnings Call Transcript

Published: 12 May 2017

[Operator:]

Greetings, and welcome to the IEC Electronics Second 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, 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 in this call 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. Please go ahead.

[Jeff Schlarbaum:]

Thank you, Audra, and good morning, everyone. Our second quarter results came in largely as we expected. As we discussed on previous calls, we have been managing through volume decline from two large strategic customers, which impacted both revenues and profitability. However, it’s important to reaffirm, this volume contraction isn’t due to lost program, but related to how these customers or managing the supply chain needs and working through their end market dynamics. The revenue contraction impacted our New York facility. As most of you know, we took proactive steps in October to realign our customer ensure. In line with retain and necessary skilled labor and expertise needed to support the life saving and mission critical products we manufactured. As a result, we have been able to produce gross margins through this period that were very similar to the broader industry averages. That said, I’m very encouraged about where we said today and our prospects for the balance of the year. We expect to return the profitability in Q3 and excess 2017 on a path to achieve similar run-rate levels to those achieved in fiscal 2016. So far we have experiences volume increase in one of these two strategic customers while the other customers recovery is slower than expected. However, we have also seen significant new program activity from several existing customers while also adding new customers to our business. Our revenue distribution in the second quarter of fiscal 2017 was medical 32%, aerospace and defense 44%, industrial 21% with communications and others at 3%. The medical revenue percentage came up a bit this quarter despite the revenue decrease have already discussed and as volumes normalized during the second half of 2017 we expect medical sector sales to remain in the 20, I'm sorry, in the 30% to 40% range. While we saw year-over-year decline in revenues in the aerospace and defense sector during the second quarter we did add two new customers in the segment and look forward to driving growth in this segment as those customer volumes ramped to production. With the new management team in turned around, we would instituted three strategic initiatives that we have been executing against and like to review how those initiatives are going. Our first priority to drive improving margins and establish the same profitability. We made strong progress in both fronts through most of calendar 2016 and have been to speed them as we discussed in the past two quarters and we expect improving revenue and an anticipated return to profitability in Q3. Net we are focused on strengthen our balance sheet by reducing debt and improving our inventory position. You may note that our inventory position increased this quarter for the first time in several quarters, as we prepared to ramp production for certain customers. overall we have made great progress over the past year with dramatic improvements in all working capital and balance sheet matrices largely because of this. Last week we signed a new amendment to our existing credit facility agreement with our bank - that expands our borrowing capacity reduces our interest rate and favorably reduces the self in complexity of our covenants. We believe this new agreement demonstrates the strength of our business and the ongoing confidence of our banking partner. Finally, we are focused on driving organic growth and major component of this initiative is our ability to win new programs from our existing customers and add new customers. One of the most important elements of our business is building customer confidence related to not only our consistent manufacturing execution, but also the overall business continuity and stability. Frankly, prior to the changes in control in 2015, that trusting confidence has been broken with our improved operational performance and deleveraged balance sheet we have rebuild and improved our relationships and customer satisfaction levels with many of our existing customers and we can now demonstrate to both potential and existing customers that IEC is no longer a supply chain partner with risk. We believe our ability to consistently provide high-quality products and excellent service stay the competitive advantage. We believe our customer base which consists of many market leaders and - right including several Fortune 500 companies is among the best in our industry and we also recognize the importance of continuing to expand diversify and strengthen our sales pipeline ultimately our revenue mix. We continue to execute against our new customer acquisition initiatives which include reorganizing and retraining our entire direct sales structure to ensure we have the right infrastructure and are consistently communicating the value proposition of IEC. We are strengthening the skills and resources of our marketing and insight sales operation so that they can work efficiently identify and attract potential customers will benefit from our unique capabilities and we are adopting and advance sales analytics program to help us major and prioritize our sales funnel and to ensure that we are pursuing a right prospects taking the necessary steps and improving the likelihood of converting those prospects into meaningful contract awards. Through these initiatives, we are seeing a favorable impact on our sales pipeline. We have seen significant growth quarter-over-quarter and early sales funnel in terms of prospecting and engaging target customers which we believe could be huger, strategic manufacturing partners. In addition, we continue to cultivate and build stronger relationships with potential new customers who are currently in the process of evaluating IEC for their supply chain needs, here in some cases are in the final stage of the sales pipeline were a specific opportunities are being determined. As mentioned previously we have added two new customers and a variety of new programs from existing customers during the second quarter. These developments are encouraging and we believe the combination of new programs and the new volumes will support improve performance in the second half of this fiscal year. With our enhance sales structure, solid balance sheet and strengthening pipeline we believe we are well position to win contracts in the complex in highly regulated markets to which we operate and we are optimistic that we will see volume and revenue recovery in the second half of fiscal 2017. I will now turn the call over Mike Williams to review the company's financial performance. Mike.

[Michael Williams:]

Thanks, Jeff. Revenue for the second quarter of fiscal 2017 was $21.4 million a declined a 35.5% as compared to the same quarter last year, but up slightly from Q1 revenue of 21 million. The fiscal first half performance as Jeff mentioned was expected to do mainly to volume reductions from two large customers. The Company did experience declines across all three market sectors. The decrease of $9.6 million in the second quarter in the medical sector is primarily related to two customers or managing their supply chain need and working through their end market dynamics. Although, as Jeff mentioned we have experienced volume pick up with one of these two customers. Aerospace and defense sector were programs frequently fluctuate in demand or in and our replace by new programs. So, our net decrease of $1.9 million in Q2, which included a $500,000 decrease related to the Company's decision to disengage with the customer due to the lack of profitability. The Company added two new customers in the second quarter to contribute $600,000 in revenue. The industrial sector declined by $500,000 in the second quarter primarily impacted by declines from several customers as end market has soften. Gross profit for the second quarter of fiscal 2017, was $2.3 million a 10.7% of sales compared to $5.7 million or 17.3% of sales in the second quarter of fiscal 2016. Gross profit percentage was up when compared to our first quarter which is 8.6%. the year-over-year volume and revenue reduction previously discussed significantly impacted gross profit, but the reductions were made in overhead less in the volume impact. Selling and administrative expenses decreased to $2.7 million and represent a 12.5% of sales in the second quarter of fiscal 2017 compared to 11.3% of sales in the prior fiscal year second quarter. The 1.1 million decrease in selling and administrative expenses was primarily due to lower wage and related expenses of 700,000 driven mainly by headcount reductions and 300,000 of severance incurred in Q1 of fiscal 2016. The Company recorded a net loss in the second quarter of fiscal 2017, a 615,000 or a loss of $0.06 per share, compared to net income of 1.5 million or $0.14 per share in the second quarter of fiscal 2016. Again versus Q1 of fiscal 2017, this was a slight improvement. Now looking at the results for the first six months of 2017, revenue decreased 35.9% to 42.3 million were decline across all three major sectors. The medical sector decrease by 17.2 million aerospace and defense was down 4.9 million and industrial decrease 1.5 million in the first six months of fiscal 2017. Gross profit margin was 9.6% as compared to 17.5% in the first six months of fiscal ’16. Again our proactive cost reductions in labor and overhead costs less in the impact of the lower revenue. Selling and administrative expenses decreased to 5.1 million as compared to 7.7 million in the first six months of fiscal 2016. SG&A as a percentage of sales was 12% versus 11.7% in fiscal 2016. The decrease and expenses is primarily due to our proactive costs reduction approach to lower wage related expenses of 1.3 million driven mainly by headcount reductions. Severance costs in fiscal 2016, 100,000 that did not repeat. Favorable bad debt expense of 400,000 due to improved cash collections process and lower legal and professional expenses of 400,000 as compared to the first six months of fiscal 2016. Net loss for the first six months of 2017 was $1.5 million or loss of $0.14 per share, as compared to net income of $3 million and $0.29 per share in the same prior year period. Now looking at the balance sheet, we continue to focus on our cash conversion cycle. Accounts receivable is down from year-end due to volume and reduce hedging. Inventory was higher than our fiscal 2016 year-end as an increase during this past quarter. This is related to the preparation for new programs one to be shifting Q3 of fiscal 2017. As we have discussed in previous calls, for certain programs and by materials in advance. So we are ready operationally and our customers gave us to go ahead for programs to go into production. We also request customer deposits in many of these cases. Our customer deposits are up from 2016 fiscal year-end and up roughly 1 million from last quarter. For the six months ended March 31, 2017, the Company’s cash flow from operations was 700,000. Our capital purchases 1.5 million as we continue to invest a new equipment and technology. Additionally as Jeff mentioned last week, we sign amendment to our credit facility agreement with M&T bank, which moves us to an asset based lending arrangement. We believe that this new structure is better aligned with our business needs and expectations. The amendment extents the maturity to May of 2022 expands our borrowing ability under revolver against inventory, while reducing our interest rates and reducing the complexity in number of covenants. With that, I'll turn the call back over to Jeff.

[Jeff Schlarbaum:]

Thank you Mike. With our visibility today, we remain optimistic that we'll see a stronger second half of fiscal 2017 and as expected volumes return from our existing customers and as we continue to add new customers. We believe the change we made in our operation and within our sales organization position us well to capitalize in opportunities as market recognition for our capabilities as a design and manufacturing partner for life saving and mission critical products continues to grow. As we move through the second half of fiscal 2017, we remain focused on our key initiatives to surpass customer expectations, so we continue to be their partner of choice, who they will trust with more of their work. We leverage our capabilities and rebuild sales organization to drive sustained organic growth over the long-term, we continue to drive improvement in our asset management and drive operational improvements that over the long-term will enable us to continue to deliver industry leading margins. We are adding customers and programs and as I mentioned earlier, we expect to exit this fiscal 2017 on a path to achieve similar run-rate levels to those we achieved in fiscal 2016. With that, I will now turn the call over to questions.

[Operator:]

Thank you. At this time we will be conducting a Question-and-Answer Session. [Operator Instructions]. Our first question comes from the line of Ben Klieve with Noble Capital Financial. Please proceed with your question.

[Benjamin Klieve:]

Alright thank you, so few questions this morning. First of all, if you exclude the impact of the two clients, I'm wondering if you are able to quantify the organic growth for the quarter. When I look at the sector discussion you had it looks like kind of the mid-single digit negative growth is that fair?

[Jeff Schlarbaum:]

Yes I mean really the growth that we envision Ben although we won customers in the quarter. The impact of revenue will be mostly accretive in Q3 and forward looking quarters and so what you saw in Q1 and Q2 is really the result of the two customer reductions and it was pretty much evenly split amongst Q1 and Q2.

[Benjamin Klieve:]

Okay thanks Jeff and regarding the restructured borrowing agreement, I'm wondering how impactful that’s going to be from a near-term modeling perspective from the interest expense? I mean are you able to say that interest rates today versus what it was before the restricted amendment?

[Jeff Schlarbaum:]

Yes. It's roughly 100 basis points reduction going forward.

[Benjamin Klieve:]

Okay, perfect. Thank you. And then one kind of broad question here. I certainly understand the challenges that you saw with these two clients are largely out of your control and just symptomatic of contract manufacturing sector in general. But that being said, now that you have the benefit of looking back, I'm wondering if there is anything that you are taking away from this that will help you kind of maybe not preventive in the future, but at least minimize the impact of this, help you prepared for something like this more. Are you able to take any lessons away from this?

[Jeff Schlarbaum:]

And yes it's a great question. So Ben I think one of the things that we have talked about in the past that [indiscernible] we are just something that this new administration inherited was the fact that the new customer pipeline was essentially dry, as the customers acquisition process was broken and the offset to absorbing any customer contraction is the addition of new customers and new programs on a continuing basis. And when you look back on the track that IEC was on prior to the - years before the change of control was year-over-year growth organically and that wasn’t because each customers was up into the right of a year. There were customers were up and some were down, but there was a consistent streams of new customers come into the Company. And so, what it happen when the change control occurred we focused operationally on fixing the fundamental execution challenges, getting the balance sheet right. And again the cost structure right to improve the margins and impose efficiencies. And so what its reinforcing is that the need to have a robust customer acquisition process and a steady stream of new prospects and clients coming to the Company is absolutely a necessity to offset any volume declines that you are going to see from time-to-time from your existing customer base. So, and the sales cycle as I said before, it can be anywhere from 12 months to 24 months. So, as our improved financials have emerged through the last 18 months, we can present ourselves very confidently to the marketplace as a low risk supplier that’s financially viable and healthy and has a very compelling service offering. And most recently a couple of customers have committed their manufacturing business to us and we see them as growing long-term partners and we have a very robust pipeline of new customers that’s emerging and we believe we will continue to convert new customers going forward. And that’s really the - that will be the offset to future volume decline if they occur to ensure a sustain growth. Does that help?

[Benjamin Klieve:]

Yes. Absolutely, absolutely. Thanks, Jeff. And there is two other quick book keeping questions and I'll hop back in queue here. Mike, I don’t know if I missed it, but do you disclosed depreciation and amortization for the quarter?

[Michael Williams:]

Yes. So, it was just roughly 640,000.

[Benjamin Klieve:]

Okay, perfect. And then will the [indiscernible] posted today or that can be later this week?

[Michael Williams:]

This morning.

[Benjamin Klieve:]

Oh it did post this morning. Okay, okay perfect I didn’t see that. Alight. I'll jump back in the queue. Thanks for taking my call.

[Michael Williams:]

Yes. You bet. Thanks, Ben.

[Operator:]

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

[Unidentified Analyst:]

Good morning. What markets are represented in the pipeline and where do you see the most opportunity to capturing the customers?

[Jeff Schlarbaum:]

Great question. We see in our market pursuit that the main target markets that we are successful in today by the ones that are driving our business pursuits. So, clearly the medical market, the aerospace and defense market and the industrial markets comprise 95% of our new business pursuits. So that really makes up the bulk of the new business funnel. And when I think about where the new customers are likely to come from that we converge from prospects to strategic manufacturing partners. It’s somewhat of a mixed bag, we are seeing quite a bit of traction in the aerospace and defense sector. We believe that some of our peer group are experiencing some turbulence either internally with operational execution issues or possibly other distractions. And it’s presenting opportunities for us as these strategic OEM companies in the aerospace and defense sectors are looking for stable and compelling manufacturing partners of the future. And IEC is looking to fit their need. So we are seen quite opportunities in that particular sector based on some of the turbulence that’s happening with some of our competitive peers.

[Unidentified Analyst:]

Okay. Great. Thank you.

[Operator:]

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

[Unidentified Analyst:]

Good morning Jeff and Mike. My question simply is on the third amended agreement with M&T bank. It talks about the ability to repurchase your stock under certain circumstances without M&T within consent. What are the circumstances you require written concern and when you don’t, could you amplify a little bit on that?

[Michael Williams:]

Yes, yes. So there is that clause in there, which we can repurchase up to three million in stock buyback without written concern. As long as we have a minimum of $4 million in availability on a revolver.

[Unidentified Analyst:]

Okay, great. So does Company have any plan based upon where the stock is execute on that in the near future?

[Jeff Schlarbaum:]

So [Alan] (Ph), I think the first step was to create the flexibility to consider such initiatives, which we have done. And now the question is as we look at the Company and the growth initiatives and we look at capital and we look at some of the areas that as we pursue some of these strategic OEMs the need potentially invest in certain capital to support their manufacturing requirements, it’s a the balance. And I think what we need to do as we look at the complexity and the completion of the new business pursuits. We got to balance that against our ability to do a stock repurchase. So I’m not prepared to tell you today that we are going to execute one way or another. But now we have the ability to considered internally, and over the course of time I could probably give you a better color as completion of our new business pursuits present themselves with potential capital needs or not.

[Unidentified Analyst:]

Got it. Okay. Thank you.

[Jeff Schlarbaum:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. Mr. Schlarbaum, it seems there are no further questions. I’ll turn the floor back to you for final remarks.

[Jeff Schlarbaum:]

Great. Well, thank you very much. I appreciate everybody calling in and we look forward to speak with everyone again next quarter.

[Operator:]

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