IEC Electronics Corp.
Q4 2014 Earnings Call Transcript

Published: 25 Nov 2014

[Operator:]

Greetings and welcome to the IEC Electronics Fourth Quarter and Year End 2014 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. John Nesbett of IMS. Thank you, Mr. Nesbett. You may begin.

[John Nesbett:]

Good morning and thank you for calling in. On the call this morning, we have Barry Gilbert, Chairman and CEO, as well as Michael Williams, Chief Financial Officer. Before we get started, I'd 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 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made in reliance upon the protections provided by such acts for the forward-looking statements. These forward-looking statements, such as when the company describes what is 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, the capabilities -- and capabilities of business operations, any financial or other guidance, all statement that are not based on historical facts will reflect the company's current expectations concerning future results and events. The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events, that is subject to various uncertainties and other factors that may cause the company’s actual results, performance, or achievements to be different from any future results, performance or achievements expressed or implied by these statements. Specific risks and uncertainties include, but are not limited to, those set forth in part 1 including the risk factors and management's discussion and analysis, financial conditions and results of operation section and the company’s Form 10-K for the fiscal year ended September 30th, 2013 filed with the SEC on November 25th, 2014 and in the company’s subsequently filed SEC reports and its earnings release immediately before this call. The company undertakes no obligation to publicly update or correct any future-looking statements, whether as a result of new information, future events, or other otherwise. Okay. I will now turn the call over to Barry Gilbert. Please go ahead, Barry.

[Barry Gilbert:]

Thank you, and good morning. The fourth quarter was not without its challenges, but we made great progress writing the business with the ramp of several programs during the first half of 2015. Additionally, we added new customers and new programs from existing customers as we move away from some of the difficult circumstances we've encountered during the past year. I'll discuss more in a few minutes. Our backlog for September 30th, 2014 was $105 million, a more than 20% increase compared to September 30th, 2013. This increase is particularly rewarding since we have been looking at our backlog decline for fiscal 2012 and fiscal 2013. The backlog declined two years ago among other things, prompted an effort to rebuild not only our management team, but also our salesforce. Now these changes are starting to bear fruit. We all would like change to move at a quicker pace. Sometimes, things take time. Just as important, this backlog -- as this backlog number doesn’t include an order we're expecting from our key space launch systems customer. This is an important space program I mentioned last quarter. Changing subject, but just as important as the backlog increase, we also lowered our debt $5.4 million for the year. Mike will discuss more in a few minutes. To us, this is broad indication that some of our managerial changes are taking hold and starting to move us in a better direction for the future. As I mentioned on a previous call, ours is not a business where we can place an order today -- or receive an order today, and we'll start manufacturing tomorrow. There's a great deal of preparation which takes place. In some cases, facility adjustments and proper training of the workforce are needed to begin production. For a lack of a better term, our fourth quarter was largely a prep quarter. Having said that, we're half way through our first quarter and we're making good progress, not perfect, but good progress. On a year-over-year basis, fourth quarter revenue declined 8.8% compared to the fourth quarter of fiscal 2013. Our Q4 of fiscal 2013 was one of the best quarters we had in many years. Comparatively, we made the decision to give up one customer. With that said we operate under best of our customers and as previously announced they had some issues in this past quarter which did not exist last year at this time. On a sequential basis, revenue increased approximately 8% compared to the third quarter of 2014. This sequential increase is important because it shows me that some of the pieces are finally falling in the place and its attraction that we've gained in the marketplace is also beginning to be reflected in our revenue. Everyone wants instant change. There is no instant change in this business. We have a diverse customer base that includes a number of Fortune 500 Companies. The largest concentration of these companies are customers representing approximately 50% of our revenue comes from our aerospace and defense business. Though slightly less for the quarter, I will discuss in a few minutes, to me what it is important is that we have a strong portfolio of customers between primes and sub-primes in this segment, which represents solid potential for repeat [ph] business over the long-term. Additionally, we're very pleased to have received notice of the dismissal in its entirety of the Class Action Lawsuit which was filed against the company in June of 2013. We also reached an agreement with our insurance carrier. Mike will discuss this in a moment. It is also gratifying to have these issues favorably resolved and behind us. We're focused on rebuilding the company; the past might not always be as smooth or straight. But we're making steady progress. I'll now turn the call over to our CFO, Mike Williams to review the numbers.

[Michael Williams:]

Thank you, Barry. As Barry mentioned earlier, revenue decreased during the fourth quarter of fiscal 2014 to $36 million in revenue, as compared to revenue of $39 million the same quarter last year. Gross profit in the fourth quarter of fiscal 2014 was 10.6% of sales as compared to 13.9% of sales in the fourth quarter of the prior fiscal year. Gross profit was lower primarily due to reduced leverage on fixed manufacturing cost caused by lower sales volume, unfavorable changes to product mix and higher cost related to the onboarding of additional labor to support the ramp of our medical business. Selling and administrative expense decreased approximately $200,000, the 10% of sales in the quarter just ended, primarily due to lower bad debt expense and intangible amortization. Reductions in administrative expense has been offset by increased selling expense as we have put more investments behind generating sales for new and existing customers, as Barry previously mentioned. Restatement and related expenses of $400,000 during the quarter were more than offset by $1.7 million that was reported related to the company's resolution of certain Directors' and Officers' liability insurance claims. As part of the resolution, IEC received $1.3 million from its primary insurance carrier for partial reimbursement for certain expenses accrued through June 30, 2014 in conjunction with the SEC investigation and the recently dismissed Shareholder Class Action Suit. The company also reached agreement as to the scope of certain expenses incurred after June 30, 2014. Company recorded a net loss of $446,000 or $0.05 per basic and diluted share compared to a net loss of $8.7 million or $0.89 per basic and diluted share in the fourth quarter of fiscal 2013. For the fourth quarter of fiscal 2014, we recorded a provision for income tax of $1.6 million which was driven largely by valuation allowance of $1.1 million related to recent change in the New York State's income tax legislation. Qualified manufacturers will be taxed at a 0% rate which begins in fiscal 2015 for IEC, therefore our New York State net operating losses and credits will most likely not be realized. Also during the fourth quarter fiscal 2013, the company recorded impairment charges of roughly 14.2 million related to its Southern California Braiding operation. For the fiscal year ended September 30, 2014 revenue decreased 3.8% to $136 million. Gross profit for the fiscal year 2014 was 11.8% of sales as compared to 12.5% of sales in the prior fiscal year. During the majority of fiscal 2014 we maintained a level of overhead to support anticipated higher revenue in future period. Additionally, in the fourth quarter fiscal 2014 labor costs were higher, as I previously mentioned, to enable training for programs expected to ramp in the first half of 2015. Selling and administrative expense decreased $900,000 in fiscal 2014, representing 10.7% of sales as compared to 11% of sales in fiscal 2013. The decrease is primarily related to lower wage related expense which was a result of the cost reductions implemented in the first quarter of fiscal 2014 and lower intangible amortization. Restatement and related expenses were $1.1 million for fiscal 2014 or roughly $700,000 lower than fiscal 2013 due mainly to the previously noted insurance resolution. Interest expense for fiscal 2014 was $1.8 million versus $1.2 million in fiscal 2013. IEC's average outstanding debt was higher in 2014 than in 2013 as well as the weighted average interest rate was roughly six-tenths of a percent higher. Those two items accounted for roughly $300,000 of the increase and the net impact of adjusting the interest rate swaps to fair value accounted to another $300,000. Net loss for fiscal year 2014 was $2.1 million or $0.21 per basic and diluted share as compared to the net loss of $9.5 million or $0.98 per basic and diluted share in the prior fiscal year. As previously mentioned IEC recorded $14.2 million of impairment charges in the fourth quarter of 2013 and recorded $1.1 million tax valuation allowance in the fourth quarter of 2014. Our balance sheet remained solid with approximately $26 million of working capital. We have made significant improvements in managing our cash flow. Primarily as a result of these improvements we were able to reduce our net debt by roughly $4.4 million from the end of our third fiscal quarter to $29.4 million as of September 30, 2014. With that I will now turn the call back over to Barry.

[Barry Gilbert:]

Thanks Mike. In the fourth quarter we saw increased revenue in our Industrial and Medical sectors and revenue decline in our Aerospace and Defense markets and our Communications and Other sectors. At the end of fourth quarter of 2014, our revenue breakdown was the following. Aerospace and Defense was 46% of our revenue. As mentioned earlier, our Aerospace and Defense business represents approximately 50% of all of the company's revenue for 2014. During the quarter, one of the large contributors to the shortfall was the program involving a prime which appears to the influenced by troop reductions in the Middle East. It is not clear to us or for that matter our customer, if the program has been cancelled altogether. And in addition comparison with Q4 fiscal 2013, we made the decision to stop working with one of the divisions of a prime we did not have a balanced relationship with them and that ended at the end of fiscal 2013. Our Industrial sector represented 26% of this quarter's revenue and any change was nominal primarily due to the demand fluctuation coupled with a small amount of revenue from a new program with an existing customer and equally small amount of revenue from a new customer that will grow over time. Our Medical sector represents 23% of this quarter's revenue. However, this sector had some large swings. Our customer recently released from FDA hold had solid volume in Q4 of 2013 and a small amount of revenue in Q4 of 2014. Offsetting that shortfall was another medical customer that has little revenue in Q4 of 2013 and a solid amount of revenue in Q4 of 2014. The goal is not to confuse, however, to make it clear that once both of these customers are on the same path we could have some existing quarters with our medical customers. To that end, we are about to embark on another large program for a different medical customer that will take the better part of 2015 to hit its strides with the final growth being fiscal 2016. The remaining 5% of our sales for the quarter is in the Communication and Other sector. We experienced a revenue decline of 1.5 million related to lower revenue from one customer's conversion from turnkey manufacturing to customer-furnished material program. This was a decision to reduce credit risk and knowingly reduce sales. Summarizing, despite many challenges during fiscal 2014, we worked through restatement expenses and legal fees, we lowered our debt $5 million -- by more than $5 million and we grew our backlog by more than 20%. We rebuilt and strengthened our sales and management team and our increased backlog is a result of that effort. Before I open the phones to questions, we are pleased with our activity. We are seeing and expect our pipeline to remain solid across all three primary markets. Looking forward, we currently expect our sales growth to be between 8% and 10% for fiscal 2015, with improved margins we work our way through our volume ramp and new customer issues. On that note, I would like to open up the call to -- for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jenny Wolfertz with Comstock Partners. Please go ahead with your question.

[Jennifer Wolfertz:]

Thank you. Good morning, Barry. Could you give us a little more color around margins going forward? Could you just indicate that your expectation is that they may improve in 2015?

[Barry Gilbert:]

We absolutely see our margins going forward and expanding. We have not gone ahead and won't until we have completed the ramp or the programs that were also mentioned. We able to go ahead and precisely discuss how strong we think our margins will be, but we absolutely see them getting stronger.

[Jennifer Wolfertz:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Mark Jordan with Nobel Financials. Please proceed with your question.

[Mark Jordan:]

Thank you. Barry, first question relative to cash flow, it’s obviously very positive, paying down debt this year. Do you have any goals in terms of what you think the company should be able to do in fiscal 2015 with regards to debt reduction given the fact that you are growing your revenue base again?

[Barry Gilbert:]

Good morning, Mark. We do have goal, but not on unlike the last answer that I just offered. I want to be careful until we see what our first quarter looks like and that if we have got all of our ramp cost under control. I think that once that has been better defined, I will be prepared to walk out on the branch and discuss exactly what our cash flow improvements look like. We think that they will as strong as this year, at a minimal, and that's the best of I can say right now.

[Mark Jordan:]

All right. Again, from your commentary it sounds like you fully corrected on -- any potential insurance refund in the fourth quarter. Will there be any more expenses under the heading of restatement and related costs in fiscal 2015 or will that line disappear moving forward?

[Barry Gilbert:]

No, that line won't disappear until we have completely dealt with whatever questions the SEC might have. We will be receiving continued reimbursement over the course of time. It’s not perfect. It’s not complete. But it’s better than zero which is what it’s been.

[Mark Jordan:]

Okay. Again, any sense is to obviously with the shareholders do behind you, how active has the SEC suit been and there is any range of potentially expenditures you might be facing in fiscal 2015?

[Barry Gilbert:]

Yeah, so, there is no suit. It’s an investigation. I just want -- and no, I mean, they move with their own pace and we have little visibility. There is not a lot of a dialog as to where they are headed.

[Mark Jordan:]

Okay. You have talked a little bit about the new programs that you are ramping has currently got a cost issue. In your release you say that you will mitigate these costs during the second half of the fiscal year. Could you describe what's the strategy would be for mitigating those costs?

[Barry Gilbert:]

There are two elements associated with that. One element deals with the training of people. And the second element is in 2012 there were a series of manufacturing steps that were introduced and they are not so easy to pull out. It happens to be for medical customer. And unlike military or industrial or communication where you can easily go ahead and eliminate things, with medical customers where you are involving human life you have got to be a lot more careful and you have got to go through a more -- maturely more rigorous process in removing these costs. To cut them out would be easy, dealing with the relationship improve to be enormously challenging if we did that without their participation.

[Mark Jordan:]

Okay. Does that require regulatory approval if you -- and expect potentially changing the product?

[Barry Gilbert:]

Not from our perspective, any approvals are with our customers.

[Mark Jordan:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Mike Crawford with B. Riley. Please proceed with your question.

[Mike Crawford:]

Thank you. Barry may be you can quantify the margin impact of these additional production steps in 2012 that three-year period from 2010 to 2012 the company's gross margin was around 18% and now it’s been close to 12%. Is the impact can't be up taken.

[Barry Gilbert:]

No. The impact isn’t completely there, but it represents a bit. And because this customer has had the volume increases and then virtually shut off and now volume increases again, it is taken up quite a while not only to figure out where the decline in margins were coming from. But also to be able to go ahead and to answer your question specifically, understand other than pushing paper and pen around exactly what the margin accretion will be. We are -- we will understand -- that will unfold as the next quarter or two progress.

[Mike Crawford:]

Your three primary verticals are the gross margins, are these substantially different from each other once you would get into what might -- what you might characterize is a more normal operating environment.

[Barry Gilbert:]

Mike, you have asked that question in the past. And with the same answer, we don’t discuss the margin of our particular sectors.

[Mike Crawford:]

Okay. Also in your medical business, you mentioned yet another customer on boarding in FY 2015. This will be your fourth primary medial customer.

[Barry Gilbert:]

No. So, we have more than four now. And this is a customer that we already have to which one of those groups that had a very substantial program in their own right. And if something that they have developed and it appears that it’s got a lot of market traction for them, and that we are moving forward helping them on a number of fronts. It will take the better part of 2015 and into 2016, but I think its looks like it could be a very healthy program.

[Mike Crawford:]

If -- in a world where there is going to be another program on boarding and associated margin impact, if you just took these two programs up to a nice steady state manufacturing process, would you expect it to back into mid-teen EBITDA margins for the overall business?

[Barry Gilbert:]

You have asked the question which is I am not comfortable answering. It’s a very proper -- let's start there and it’s one that I should be answering. But I can't answer until I see what this quarter and possibly next quarter look like. And then I will gladly answer it. I haven’t been shy addressing these questions in the past, but the last couple of years have been quite turbulent from the standpoint of our margins and not completely understanding where the problems were residing. Well, we've now figured out that these are lots of cost that were introduced in 2012 and we're cleaning them up. And so I've just abided us step back and step away from what the question you've asked.

[Mike Crawford:]

Okay.

[Barry Gilbert:]

But I'll get there.

[Mike Crawford:]

I'll try a couple more if you don't mind.

[Barry Gilbert:]

No. Okay.

[Mike Crawford:]

The cash flow was nice in the quarter. It seems a lot of that was related to expanded tables, for instance, liabilities. Was that something you see as sustainable?

[Barry Gilbert:]

No. A couple of things. There's no question that the expanded tables contributed. But part of it dealt with also cleaning up of receivables that had gotten out of line. And the -- so that's part of it. I also think the other area that warrants attention that's going to get attention and is getting attention is inventory, we're not comfortable with the amount of inventory and we just -- so that give [ph] that all we had and contribute to what we see as some of the future cash flow for fiscal 2015.

[Mike Crawford:]

Okay. Thank you. And then last question relates to the extent you can talk about NASA as a customer, how big it's been in the past and what you see as a SOS opportunity once it hits its stride, given that it's probably hard at this point to say when that might happen if you don't have that order yet.

[Barry Gilbert:]

It is hard to say. What is becoming interesting though is that we are participating -- we have one very important customer, that's one of the -- I'll call as four keys, but at the end, the key customers in this entire program, but the reality is we're involved with two of them and we're involved with some of their subs which are supporting these companies. And we're on the edge of being involved a third. And so to be able to talk about the magnitude, I can't, only because I don't know how quickly this program is going move along. But we're finding ourselves in a better and better position all the time. That's not to say we know of our challenges, [indiscernible] we do. And we had the same challenges associated with training in the workforce that we have with some of our medical customers on the East Coast. But nonetheless, it is moving forward.

[Mike Crawford:]

Okay. Thank you.

[Barry Gilbert:]

My pleasure. Thank you.

[Operator:]

Thank you. Ladies and gentlemen there are no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

[Barry Gilbert:]

I'd like to thank you all for calling in this morning. And I wanted to thank you for your continued support of the company. We're well on the path to putting this back to the company that you've become used to historically over time. Thanks a lot. Take care. Look forward to speaking to you next quarter.

[Operator:]

Ladies and gentlemen this concludes our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.