IEC Electronics Corp.
Q3 2017 Earnings Call Transcript

Published: 11 Aug 2017

[Operator:]

Greetings and welcome to the IEC Electronics Earnings Conference 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. It is now my pleasure to introduce your host, Ms. 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; as well as Michael Williams, Chief Financial Officer. Before I 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 the 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 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 contained herein whether as a result of new information, future events or otherwise, except as required by law. I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeff Schlarbaum:]

Thank you, Audra and good morning, everyone. This was a solid quarter for IEC coming in largely as we expected with the sizable growth in revenue, improved gross profit margins and a return to profitability. As we anticipated, we experienced an increase in volume during the quarter. And more specifically we experienced an increase from one of our large strategic customers who have previously reduced volumes in the first half of the fiscal year. Additionally, we generated significant new program activity from several existing customers as well as new customers during the third quarter which demonstrates the positive changes we have created with our revamped sales and marketing program, focused squarely on improving the quality and the size of our sales funnel. Reestablishing organic growth and strength in our pipeline to drive revenues is one of our primary goals, as we continue to rebuild the business. With the momentum that we are seeing, we expect our volume levels will increase through the balance of the fiscal year. Turning now to our revenue distribution during the third quarter

[Michael Williams:]

Thanks, Jeff. Revenue for the third quarter of fiscal 2017, $26.5 million, decline of 18.5%, as compared to the same quarter last year, but a significant sequential increase compared to fiscal Q2 revenue of $21.4 million. The company experienced declines in its medical and industrial market sectors and saw a slight increase in the aerospace and defense sector. The decrease of $4.9 million in the medical sector is primarily related to a decline in demand from one customer who is managing its supply chain needs and working through end-market dynamics. Aerospace and defense sector, where programs frequently fluctuate in demand or end and are replaced by new programs, saw a net increase of $200,000. Two new customers contributed $2.3 million in revenue but were offset by declines in existing customers as well as $400,000 decrease due to our decision to disengage with a customer due to lack of probability. The industrial sector declined $1.1 million, due primarily to several customers whose end markets have softened. Gross profit for the third quarter of fiscal 2017 was $3.7 million or 14% of sales compared to $5.5 million or 16.8% of sales in the third quarter of fiscal 2016. Gross profit margin also improved as compared to fiscal 2017 second quarter gross margin of 10.7%. As volume and revenue growth begins to come back, we're seeing increases in gross profit. Selling and administrative expenses decreased to $2.6 million and represented 9.8% of sales in the third quarter of fiscal 2017 compared to 10.7% of sales in the prior fiscal year third quarter. The $900,000 decrease in selling and administrative expenses in the third quarter fiscal 2017 was primarily due to lower wage and related expenses of $600,000, driven mainly by headcount reductions. And $200,000 reduction professional expenses as compared to Q3 of fiscal 2016. The company recorded net income in the third quarter of fiscal 2017 of $800,000 or $0.08 per share compared to net income of $1.6 million or $0.16 per share in the third quarter of fiscal 2016. Now looking at the results for the nine months of fiscal 2017, revenues decreased 30.2% to $68.8 million with declines across all three sectors. The medical sector decreased by $22.1 million, aerospace and defense was down $4.7 million and industrial decreased $2.7 million. Gross profit margin was 11.3% for the first nine months of fiscal 2017 as compared to 17.3% in the first nine months of fiscal 2016. The reduction in revenue year-over-year had the most impact to gross profit. Again, our proactive cost reductions in labor and overhead cost lessoned the impact of the lower revenue during the nine months of fiscal 2017. Selling and administrative expenses decreased to $7.7 million in the first nine months of fiscal 2017 as compared to $11.2 million in the first nine months of 2016. Selling and administrative expenses as a percentage of sales decreased slightly for the first nine months to 11.2%. The decline in expenses occurred primarily due to our cost-reduction efforts to lower wage and related expenses of $2.4 million, driven mainly by headcount reductions and severance cost incurred in fiscal 2016 of $500,000 that did not repeat. We also reduced legal and professional expenses by $500,000 compared to the first nine months of 2016 and had favorable bad debt expense of $400,000 during the first nine months of fiscal 2017 due to improved cash collections process. Net loss for the first nine months of 2017 was $700,000 or a loss of $0.07 per share as compared to net income of $4.6 million or $0.45 per share in the same prior-year period. Now looking at our balance sheet, we continue to focus on our cash conversion cycle. Accounts receivable was down from fiscal 2016 year-end due to volume and reduced aging. Inventory is higher than our fiscal 2016 year-end balance. As Jeff mentioned, this is directly related to the growth of sales preparing for new programs. For the nine months ended June 30, 2017, the company's cash flow used from operations was $800,000, largely related to reduced earnings and increase in inventory. Our capital purchases this fiscal year through June 30 were $2 million as we continue to invest in new equipment and technology. With that, I will now turn the call back over to Jeff.

[Jeff Schlarbaum:]

Great. Thanks, Mike. This was a solid quarter for the company as we saw increased volumes with existing customers as well as volumes from new customers favorably impact our revenue and margin performance and we returned to profitability. As we look forward, we expect to see volumes continue to recover as existing customers continue to ramp production and as we add new customers. We continue to build upon our reputation as a consistent and reliable design and manufacturing partner for lifesaving and mission-critical products, we're focused on leveraging our enhanced sales organization and our growing market recognition to win new programs from our existing partners and to add new customers to our already strong base. As we move toward the completion of fiscal 2017, executing our key initiatives is integral to our continued growth. Our entire organization is focused on surpassing customer expeditions so we continue to be their partner of choice by leveraging our capabilities and our rebuilt sales organization to drive sustained organic growth over the long term. We also continue to demonstrate improvement in our asset management and to drive operational improvements that over the long term will enable us to continue to deliver industry-leading margins. We're adding new customers and programs. And as I mentioned earlier, with the momentum that we are seeing, we expect our volume levels to increase to the balance of our fiscal year. With that, I will now turn the call over to questions.

[Operator:]

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Ben Klieve of Noble Financial. Please go ahead.

[Ben Klieve:]

Alright, thank you. First of all congratulations to you on our really great quarter, I have a few questions for you, first of all, regarding the new clients that you discussed in the aerospace and defense. That's great to see, and I'm wondering if you can elaborate a bit on those relationships? And specifically, what - kind of where you see those contracts are in the production process? Do see a lot of, kind of, volume runway left, or did they end the quarter kind of a pretty much a full run rate?

[Jeff Schlarbaum:]

Yes, good question. And Ben, nice talking with you, so the new customers that we're adding are, I would say in the earlier life cycle of their production ramp. And so we're not at full production rates yet. And that's likely to continue to increase probably over the next, I'd say, three to four quarters as we reach volume production levels.

[Ben Klieve:]

And correct me if I wrong, did I heard you say that there is a - Mike, did I hear you say there is a $2.3 million contribution from those two customers in the quarter? Is that - was that an accurate - did I hear that accurately?

[Michael Williams:]

Yeah, that's correct.

[Jeff Schlarbaum:]

Yeah.

[Ben Klieve:]

Okay, perfect. Next question, SG&A on the quarter, I'm having a hard time wrapping my brain around how it was so low, especially on a sequential basis. I'm just - I'm wondering how you were able to tick SG&A down from the second quarter despite a 25% ramp in revenues. I mean, did you have expenses that you're pushing forward into Q4? Did you classify anything up from SG&A and the cost of goods sold? I mean, how is cost there - how is SG&A in Q3 relative to Q2, so different on a percentage basis?

[Michael Williams:]

Yes. So percentage, you're correct that very different from absolute dollar that they are pretty much the same $2.6 million to - one was $2.6 million, $2.65 million and the one is $2.6 million. So from a dollars standpoint, they're pretty much the same. Our SG&A is largely headcount and headcount related costs. Some professional fees, as I mentioned, that are down year-over-year. We did have some favorable bad debt expense. Again, as we continue to improve our collection process where we have very little now aged greater than 60 days, less than $200,000 of our ARs greater than 60 days, so that's really the drive for keeping our headcount flat quarter-to-quarter.

[Ben Klieve:]

Okay. And also one question I have here is given the restructuring efforts that you had to make in light of the softness from these two medical clients, I'm wondering how your cost structure has been impacted on a forward looking basis? Basically, as your volumes continue to ramp next year, do you think that those restructuring efforts move the ceiling at all for your gross margins and operating margins relative to where they were in the first couple of quarters of fiscal '16 or do you think that the ceiling on margins is relatively unchanged?

[Michael Williams:]

So great question, we absolutely believe we'll see flow through from a margin perspective as we continue to increase the volumes. To what extent, Ben, I think we got to monitor how we have to add new resources to support the types of programs we're adding, and based on their complexity and based on their requirements. But if you kind of look at where we aggregated margins last year, it came out at around 16%. We were at 14% this quarter. We'll we trending back towards those levels as volumes continue to increase. And then, I'll just have to get back to you on subsequent meetings on how we see the resource allocation and additions marrying up to these types of programs we are adding, and if we actually start to breakthrough that ceiling or not? Too early to say, but we'll get probably better visibility as we start to go through the next couple of quarters.

[Ben Klieve:]

Understood, very good. And final question for me is relating to working capital investments. The investments that you made in working capital this quarter, do you expect the relationship between revenue growth and the working capital investments this quarter to remain relatively steady? Or do you think you're working capital is kind of peaked, and you are going to be able to generate a little bit more free cash flows as volumes continue to ramp here?

[Michael Williams:]

Yes, I think we're going to try to keep it relatively flat in the near term. And this increase in inventory is something we are not going to continue every quarter. But - so I would say it's more flat from a cash flow perspective.

[Ben Klieve:]

Okay, very good. Alright, Jeff, Mike and Audra thank you all for taking my questions and congrats again on a great quarter.

[Michael Williams:]

Great, thanks Ben.

[Operator:]

Thank you. Our next question is coming from Nihole Kushi of Maxim Group.

[Nihole Kushi:]

Thanks. So part of question might have assets a little bit, but the second customer that has reduced volumes that has not come back yet. What have they conveyed to you in terms of timing for returning to prior volume levels?

[Jeff Schlarbaum:]

So there's no crystal ball we held on the revenue recovery. We'll see increased volumes in fiscal 2018. We know that. But to the extent of how much the revenue is going to return and precisely, how it's going to fall into the quarterly buckets as we look at the next fiscal year. I don't have the greatest line of sight to that yet because they're still managing through some end-market dynamics. And so I think that's one that we'll just continue to speak to. And hopefully, we'll get greater clarity as we exit this year and go into fiscal Q1.

[Nihole Kushi:]

Beyond end-market dynamics, do you see other risks associated with the level - the volume levels returning to prior levels?

[Jeff Schlarbaum:]

I don't see additional risk. No, I don't see additional risk. I mean, we - our customer satisfaction levels are very strong across the board with our existing customers. We're winning new programs from them. And so to the extent that some customer volumes fluctuate from period to period, we see on an aggregated basis that we should be able to continue to win new programs from our existing customers and then selectively add new partners along the way. And so I think that risk is mitigated over time.

[Nihole Kushi:]

Okay, great. And what was cash from operations for the quarter, can you give that to us?

[Jeff Schlarbaum:]

Yeah. It was negative $1.5 million.

[Nihole Kushi:]

Okay. And then my last question is a little bit more industry comparative analysis that maybe you can help out with here. I've noticed that –keep here to common. Third days [ph] inventory is much higher than what you guys even have today, and to - almost two times higher than what you guys were able to operate at from fiscal year '07 to fiscal year '10, which is what I view as when you guys were running most efficiently. Do you have some visibility that you can share into why there's that differential?

[Jeff Schlarbaum:]

We continue to place a high degree of emphasis on our asset management. And as you remember Nihole, sort of watching the change of control recovery the balance sheet was a little lopsided. Then we had far too much inventory and that contributed to the increased debt levels. And so I think it's one of the aspects of our business that we excel at with this relentless focus on our inventory management. And we're not perfect. But as you noted, we're better than most. And so maybe the diversity of your business is a part of it. You're talking about DCO specifically, largely in the aerospace and defense and commercial aerospace markets. And that's a component of our business, but we have greater diversity obviously with the industry base and the medical base, which is one different factor. But also just the way we execute our business. And so while we've seen a slight uptick, we will continue to laser focus on managing the inventory turns and the inventory management.

[Nihole Kushi:]

Okay, great. Thank you very much.

[Jeff Schlarbaum:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Alan Lyons [ph] of West Hill Venture Capital.

[Unidentified Analyst:]

Thank you. Good morning, Jeff and Mike. Congratulations, really on the great recovery you've had so far from the blow you've received last year from your two medical customers. It's really nice to see the progress you have made. My questions are, first, can you give a little more update on where the Albuquerque operations, what it's doing, and progress you've seen in the last six months?

[Jeff Schlarbaum:]

Yes, it's a great question. So the Albuquerque operation, which we've owned for better part seven or eight years now, has kind of fluctuated year-over-year in terms of its operational performance. The sales have been sort of flat since day one, never really grown. And after the change of control, we put a great deal of emphasis on improving our process and structure in Albuquerque. So we have a new leadership team there. We have reoriented the factory and how we execute the business. And frankly, a fair bit of our new business pipeline is associated with programs that are aligned to be launched in Albuquerque because of those changes. So their actual gross profit performance has improved. And where it was lower than the aggregate company gross profit, now it's at. And I expect it to be better over time. So we made a lot of progress there. And we see opportunities to grow that site for the first time in a long time.

[Unidentified Analyst:]

Great. Could you give me your current employee count compared to where it was before you had to take the 8% to 9% reduction because of the two medical customers?

[Jeff Schlarbaum:]

So if you think about our revenue. I mean, our headcount levels today, Al, it's about 625 - 600 to 625, somewhere in that range. And if you look at sort of a year ago, it was probably around 650, so rough numbers. And Mike's probably got the actual numbers in front of him.

[Michael Williams:]

Yeah, it's around 600 today and a year ago it was about 700.

[Jeff Schlarbaum:]

Okay. There you go.

[Unidentified Analyst:]

Okay. So you have the hiring back since you cut back is limited?

[Jeff Schlarbaum:]

Yeah, we've hired back some. I think we've hired back some to support the volume. You're right, not to the extent that we reduced.

[Michael Williams:]

Even this quarter, we only added 16 people back.

[Unidentified Analyst:]

So in talking about the growth from new and existing customers, could you give me a little amplification by segment, and particularly any new medical customers picked up?

[Jeff Schlarbaum:]

So the new customers we've added are exclusive to the aerospace and defense sector. We have a number of medical sector prospects in the sales funnel. But we get to convert them. And as you know, given the regulatory compliance issues with medical companies related to FDA validation and such, the transition from one supplier to another is much more complicated and contracted where we don't have those same the regulatory hurdles to overcome in the other sectors. So we have a number of good medical prospects in the funnel, but we'll report back when we start to convert some of them. But the new customer wins have been primarily in the aerospace and defense ones.

[Unidentified Analyst:]

Okay, great. Okay, well, thank you and hope you can continue the great progress you've been making.

[Michael Williams:]

Great. Thanks, Al. Nice talking to you.

[Operator:]

Thank you. Our next question is coming from Alex Gates of Clayton Partners. Please go ahead.

[Alex Gates:]

Hey, good morning guys. Jeff, I think you've made some comments on the last call about a few sales opportunities that were in final decision-making stages. And it sounds like you're able to that couple of those across the goal line, which is great. But I was just wondering is your win rate where you wanted to be right now or is it still significantly below where you guys were before the change in control and everything?

[Jeff Schlarbaum:]

Yeah. When you look at the pipeline construction, it really was dry and non-existent at the time of change of control. There wasn't much in there. And so it's been a steady build-up from that point. But like I said, for the first 18 months, really focused on operational improvements and balance sheet improvements so we could take a strong healthy financial condition and operating performance to the new perspective customers, which is really only been over the last year. So when I look at the scale and scope of the funnel, it's much greater. We are starting to convert some of the wins, but not at the rate I expect them to convert them in the future. So I think we have improved conversion rates. And this is just the early stages of some of the success - successes.

[Alex Gates:]

Great. And has that conversion just come with time and execution or do you need to add additional people or what are sort of the components for that?

[Jeff Schlarbaum:]

Yeah, so it's a process. And as more customers get to the latter phases of the decision process, we'll see a greater of them convert to a new wins. We won't win them all, but it's not a matter of adding more headcount. It's really working those opportunities from the early stages that were gone through to the mid-stages, which some are in, to the latter stages. So it's more than get to the latter stages. We will see an increasing number of conversions.

[Alex Gates:]

Great. It's good to hear. And then my last question, on the large customer that the volumes are sort of come back. It sounds like that long-term kind of strategic customer of yours. Can you see this as a return to normal levels going forward or is it more a temporary increase and a little bit more of a question mark in long-term?

[Jeff Schlarbaum:]

Yes, fair question. How I would answer that is, we've seen the volumes return to somewhat historical norms. I mean, they're not there completely. And ever volumes with each and every one of our customers can, and often, do fluctuate quarter-to-quarter, not significant fluctuations, but fluctuate quarter-to-quarter. So I would say that they are trending back towards historical norm levels. And they've already come back quite a bit already. So that's probably the best I can characterize it.

[Alex Gates:]

Okay, great. That's helpful. That does it for me and congrats on a good quarter. Thanks, very much.

[Jeff Schlarbaum:]

Great. Thanks Alex. Nice talking to you.

[Operator:]

Thank you. [Operator Instructions] At this time, I would like to turn the further back over to management for any additional or closing comments.

[Jeff Schlarbaum:]

Yes, thank you, everyone for calling in. We appreciate everybody's attention this morning. And we look forward to speaking with everybody again next quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.