IEC Electronics Corp.
Q3 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Greetings and welcome to the IEC Electronics Third Quarter 2015 Financial Results Conference Call. 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 Jeff Schlarbaum, President and Chief Executive Officer, 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 statements include, but are not limited to statements regarding future sales and operating results, future prospects, the capabilities, capacities of business operations, any financial or other guidance and all statement that are not based on historical facts are rather 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 and 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 in the company’s Form 10-K for the fiscal year ended September 30th, 2014 filed with the SEC and in the company’s subsequently Form 10-Q. 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 Jeff Schlarbaum. Please go ahead, Barry.

[Jeffrey Schlarbaum:]

Thanks John. Good morning everyone. We are pleased with the progress we made this quarter while we are still in the initial phase of our turnaround strategy, revenues increased 4% compared to the third quarter of last year and 5% sequentially compared to the second quarter of 2015. Gross margin improved to 13.7% in the quarter as compared to 11.5% in the third quarter of last year. We also paid down $3 million in net debt during the quarter so we’re pleased to be able to report measurable progress towards our goal of stabilizing our business, reestablishing customer confidence and returning to operational excellence. A very important development we recently announced the divestiture of our Southern California Braiding subsidiary. On last quarter’s call we discussed our West Coast strategy at that time we expressed our intent to consider consolidation or divestiture with a greater good of the business and its overall profitability. After close evaluation it has become evidence that SCB was clearly absorbing disproportionate resources relative to its size and strategic importance to our overall business and this sale allows us to focus on our core business in vertical markets. Additionally the sale enables us to redirect our resources both from a financial and a managerial perspective while creating an immediate positive impact on the company’s financial health. We are executing our daily goal through historic profitability return to operational excellence and unify the IEC brand. We believe we are improving our relationships across our customer base and are planting the seeds to drive future organic growth. We believe there are number of opportunities to add the work we are doing for our existing customers and are focused on increasing our exposure to these new programs. As I mentioned in our last call we are intense on growing revenues. First our reengaging and reestablishing credibility with our existing customers and then second by adding new customers in the markets we serve. Additionally we have now centralized our largest operation in New York to drive greater efficiencies and improved quality and execution across the enterprise while we continue to advance the process of unifying the organization under one IEC brand. It’s been a very busy couple months and we're encouraged by the initial progress we've made. And we'll now turn the call over to Mike Williams to review the company's financial performance. Mike?

[Michael Williams:]

Thanks Jeff. As Jeff mentioned, revenue for the third quarter was $34.4 million is 4.4% increase as compared to the third quarter of last year. Growth of $3.9 m was driven by our medical customers and in particular higher demand from our customer that was on FDA hold last year. We also have growth within our industrial customer base of $2.8 million, primarily from new programs with existing customers. However, maybe fiscal estimate future volumes and easier programs as it depends on the customers dual source strategy. The growth from our medical and industrial sectors was partially offset by decrease is a $4.2 million from aerospace and defense customers as well as a decline of $1.1 million from our communication sector. $2 million of the demand decrease in our aerospace and defense sector is attributable to SCB, which was partly due to issues for quality and on demand delivery. The remaining decline was driven by lower demand from several customers and the lining down of certain legacy programs. The drop in revenues from our communication sector was always due to our decision last fall during the customer relationship due to lack of profitability. Third quarter gross profit increased $900,000 to 13.7% of sales from 11.5% of sales in the third quarter of the prior fiscal year. This improvement was largely driven by improved rate efficiency. And as if the end of the third quarter of fiscal 2015 our headcount was down roughly 10% from a year ago. The improvements in our process and discipline with our controls enabled us to be more efficient and we well over the previous 18 months. It also realize the certain material cost reductions and leverage to overhead with prior aspects. Selling and administrative expenses excluding restatement related expenses increased $900,000 and represented 11.8% sales in the third quarter of fiscal 2015 compared to 9.7% of sales in the same quarter of prior fiscal year. The increase in selling and administrative expenses was driven by several items. Roughly $300,000 was due to realizing income of just over $200,000 in the prior year relating to improved collection on each receivables versus less than $100,000 of bad debt expense this quarter. We also incurred expenses in the third quarter of 2015 related to the vendor requirements as to the recent amendment to our credit agreement, legal cost related to the SEC divestiture and the higher temporary wages and medical costs. During the third quarter, we've recorded a $4.1 million impairment charge related primarily to goodwill and intangible associated with the SEC as a result of the subsequent divestiture. Now taking a look at the balance sheet, working capital at the end of the quarter was $10.5 million compared to $24 million at September 30, 2014. The decline was mainly due to the $11 million outstanding balance and our revolving credit facility being classified as part of the current portion of our long-term debt because it matures in January of 2016. On May 8 we amended our credit agreement with M&T to modify the financial covenants with the next six quarters. These new covenants adjust for some of the one-time cost previously reported for the proxy contest, change of control, lender requirements and re-audit of 2014. The amendment or given that the room we need to move forward can see from clients state center internal forecast. We have a strong relationship with M&T and have confident about our liquidity position especially giving our various strategic initiatives to improve the financial performance of the company. It is also important that to point out that our inventories increased by $4.9 million for the nine months ended June 26, 2015. This increase was driven by certain aerospace and defense customers who required us to buy material and advance prior to production further increases whereas increasing finished goods for customer account bond requirements and our New York facility and delays in certain smaller programs. It is equally important to now look at our customer deposit have increased by $2.5 million. This is due to our improved efforts to work with our customers to advance pay for sourcing material ahead of production for various reasons. We’ll continue to focus on better inventory management with our vendors and customers going forward in order to get back to the inventory turns the company is able to achieve in prior years. With that I will now turn the call back over to Jeff.

[Jeffrey Schlarbaum:]

Thank you Mike. Let me now review the strategy we laid out last quarter and provide details around our execution thus far. First, I’ll address our recent divestiture of SCB. As we discussed last call a major part of our turnaround strategy is to evaluate and address underperforming operations with the sale of SCB we can now redirect our financial resources and managerial focus and created an immediate positive impact on the company’s financial health. SCB’s top line had contracted since we acquired it in fiscal 2011. And the division’s ongoing last profitability has been a considerable drag on our P&L. Furthermore it was a considerable distraction and significant time and attention was spent on improving that division, time that can now be spent growing and improving the balance of our business. Second, let me address the initiatives underway to revitalize organic sales performance. I have spent a significant amount of time visiting and speaking with existing clients. We have an amazing customer base comprised with some of the best companies across our market segments. And I personally reaffirmed our commitment to improve performance levels to bolster their confidence and drive additional new business rewards in the future. Many clients I have met with via firm their strategic alignment with IEC and several has committed to increasing their levels of business, some remain a work in progress as we deliver on our commitments and restore our credibility. In parallel, we remain focused on developing relationships with new customers with programs that are the right strategic fit for IEC. So that let me touch on the current revenue contributions of each sector of our business. A year ago our Aerospace and Defense business represented 50% of our revenues. Today our revenues are split roughly into thirds between Aerospace and Defense, and Medical and Industrial. I'm comfortable with this diversification of our revenue base and believe this is a more appropriate balance for our business particularly with the sale of our Southern California Braiding facility which was solely in Aerospace and Defense operations. We’ve been making progress towards improving our efficiencies of our operations and most notably with the shift at our New York facility to a unified manufacturing structure away from decentralized market sectors specifically in cash remodel. This change will drive improved braid utilization and efficiencies in building better quality production for our customers. Additionally we’re committed to managing our assets more effectively. Simply put our inventory levels are too high, we are working diligently to restore that number of best practices to reduce our overall inventory position and better manage and control inventory levels as our business expand. So what are our goals moving forward from a revenue standpoint we don’t have a revenue stream from Southern California Braiding but we’re optimistic that overtime we’ll be able to replace that revenue with the goal of restoring organic growth. Our margins have improved. Going forward we will continue to drive a process to deliver improved gross margins. Finally I expect that we will see moderation of the one-time charges and the noise that we have seen in the P&L over the last few years. A combination of revenue growth, improved gross margins, cost containment and reduced one-time items should help us bring more to the bottom-line. Finally we paid down additional debt this past quarter and our goal is to continue to do so. We’re pleased with the progress this quarter and we realize there’s a lot of work ahead but our team is energized to return IEC to its previous performance levels and to create a platform for continued growth. With that I will now turn the call over to questions.

[Operator:]

Thank you. We will now be conduction a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mark Jordan with Noble Financials. Please proceed with your question.

[Mark Jordan:]

Good morning, gentlemen. I like speedy improvement in gross margin in the quarter. Jeff how much revenue goes with SCB with the sales of how much revenue in the form of fiscal quarter?

[Jeffrey Schlarbaum:]

Yes. It’s a fair question. Unfortunately the 10-Q which has the specific information will be filed and once you see the 10-Q you’ll be able to get the information I can’t speak to it. The sales at SCB while there - have been reduced quite substantially from what the business represented two years back. So, I believe that with the sales loss that we experienced with SCB that over the course of the upcoming fiscal year that we should be in a position to drive that gap and overcome the revenue loss.

[Mark Jordan:]

Okay. You’re making SG&A expense 4 million you have built a couple of items have inflated that at higher level, temporary labor cost transaction expense and legal expense. What would be the normalized run rate for SG&A post divestiture once all the costs are settled?

[Jeffrey Schlarbaum:]

Yeah. You should be able to specially more driving towards a target where SG&A runs at about 10.5% of sales that should be a very reasonable expectation for the business on ongoing basis normalized without the one-time charges.

[Mark Jordan:]

Okay. I am talking about target margins gross margins obviously look probably for those well below where they have been in prior times. If you’re going to look out a 12 plus month what would be a reasonable gross profit margin growth for this company?

[Jeffrey Schlarbaum:]

Yeah. I think again a fair question. Obviously it's my full four quarter here back at the company. I think it would be premature for me to give you that kind of guidance now. But I can tell you operationally there are number of initiatives that we're implementing and those initiatives will drive towards improved margins and so that’s the best guidance I can give you today and as I get more time under my belt I think I can provide better color on margin expectations going forward.

[Mark Jordan:]

Okay. You mentioned that as you did on the last call that inventories were up 4.7 million specifically in the aerospace defense side. Is there a delivery cycle that should converts that cash and how much incremental cash do you think you can take out of the inventory levels as you normal

[Jeffrey Schlarbaum:]

Yeah. So, as respect to the inventory levels it’s a number of different factors that grow higher inventory. Decentralize manufacturing operations on from the sales and operations standing perspective were driving a discrete planning process and not booking at the harmonized enterprise and looking at how common materials could be used across the different sectors. So as we unify those operations that we take better advantage of using common materials across the different sectors that are now falls it into one operation. The part is being answered, the other part of the answer is as we look at our internal sales and operations planning process will get better at converting the material - for our factories into our customers and third, we need to be stores from supply chain strategies that postpone materials from coming in to door until the last possible moment when they’re meet it. And those strategies hard in place today and so we need to restore those and combination of all those initiatives will take inventory levels down. And again after one full quarter to tell you precisely how much inventories can come out I think will be pretty mature but what I can tell you is we are absolutely going to drive material levels down and we will be creating more free cash flow and the cash flow will then allow us to continue to pay down a greater amount of debt.

[Mark Jordan:]

Okay. A final question from the obviously now that SCB is hold I assume in the third fiscal quarter you did reserve for all of the balance sheet issues . So I should be only assume that there are recent relatively modest legal related expenses that we in incurred July 2015 for the fiscal quarter.

[Jeffrey Schlarbaum:]

You want to take that?

[Michael Williams:]

Yeah. So we had a very small period in July where we have the business and there'll be some modest cost associated with the divestiture we were able to approve some of that in Q3 and then have a little bit more in our fourth quarter. As well as obviously the cash inflow from the sale itself within the fourth quarter.

[Mark Jordan:]

And then following that we should, as we move into the new fiscal year we should be relatively clean with regards to non-operating related issues.

[Jeffrey Schlarbaum:]

Yeah. That's a very fair expectation, the only matter that lingers market, the FCC investigation that is still ongoing. So it’s difficult for me to project that impact but all the other one-time events would be behind us.

[Mark Jordan:]

Okay. Thank you very much.

[Jeffrey Schlarbaum:]

All right. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Katy Parish [ph] with Northwest Management. Please proceed with your question.

[Unidentified Analyst:]

Hi, good morning. I just have a two part question here. Do you anticipate that the new revenue blend that you talked about of a third military and aero, a third medical and a third industrial will be the revenue model going forward and is there one of those in particular that you see a greater opportunity.

[Jeffrey Schlarbaum:]

It's a very good question. As I said in my comments, I'm more comfortable with the revenue brand as a third, a third, a third. So don't have a concentration risk. The company historically had a higher concentration in the Aerospace and Defense market-. So going forward I absolutely see us maintaining a fair balance and within few points here and there preserving that a third, a third, a third. We've got a distinguished service model that is equally attractive to customers in those market sectors. So I don't see us applying greater focus in just one single sector as much as really applying the focus on finding the right partners in those market factors. And I think it will drive a pretty even distribution of the revenue.

[Unidentified Analyst:]

Okay. Great, thanks.

[Jeffrey Schlarbaum:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of David Sheer with Numerical [ph]. Please proceed with your question.

[Unidentified Analyst:]

Well, Jeff how are you doing today?

[Jeffrey Schlarbaum:]

Hey good morning David.

[Unidentified Analyst:]

What I was wondering is do we have the figures for what the quarter would have been if Southern California Braiding have been told three months prior.

[Jeffrey Schlarbaum:]

David, we do but we haven't filed the Q and so we have to differ to the Q once it’s filed and the specific information will be in the Q.

[Unidentified Analyst:]

Okay. Great, thank you.

[Operator:]

Thank you. There are no further questions at this time. I would now like to turn the floor back over to management for closing comments

[Jeffrey Schlarbaum:]

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

[Operator:]

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