IEC Electronics Corp.
Q4 2015 Earnings Call Transcript

Published: 18 Dec 2015

[Operator:]

Greetings and welcome to the IEC Electronics Fourth Quarter 2015 Financial Results Conference Call. At this time, all participants are in 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, John Nesbett of IMS. Please go ahead sir.

[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 the Private Securities Litigation Reform Act of 1995 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 and capacities of business operations, any financial or other guidance and all statement that are not based on historical facts but rather reflect the Company’s current expectations concerning future results and events. The ultimate correctness of these forward-looking statements are dependent upon a number of risks and events and subject to 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 its earnings release immediately before this call and reports it files with the Securities and Exchange Commission. 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, except as required by law. Okay. I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

[Jeff Schlarbaum:]

Thanks John. Good morning everyone. This was a solid quarter for IEC, where we made remain measurable progress towards executing our turnaround strategy and meeting the goals we outlined earlier in the year. To summarize, first, this quarter we were largely without SCB and we’ve already begun to see the benefits of this divestiture. Second, we saw a solid revenue growth from continuing operations of 7.4%. Third, our margins have increased over the course of the year and we’re quite strong in the fourth quarter at 15%. And lastly, our balance sheet and liquidity improved. Our net debt came down by $1.9 million during the quarter, and we secured a two year extension on our revolving credit facility. And perhaps the most important development for the quarter, we’ve completed the divestiture of the Southern California Braiding Subsidiary. Consistent with this strategy we laid out to either revitalize or divest our underperforming West Coast operations. After closely evaluating the situation it became clear to us that SCB was absorbing disproportionate resources relative to its size and strategic importance to our overall business. With the sales, we’ve been able to redirect our financial and managerial resources to focus on growing our core business and improving our overall financial health, clearly an illustration of addition through subtraction. Importantly, I like to add that as we discussed our performance today our presentation of results for continuing operations in both fiscal 2014 and fiscal 2015 do not include contributions from SCB. We're executing daily on a strategic initiatives we put in place to establish the same profitability to return to operational excellence and to unify the IEC brand. Operationally we made progress in both the branding and an efficiency standpoint with the more unified approach that has resulted in improvements across our business. We remain focused on our commitment to more effectively manage our assets including reducing inventory and our efforts are gaining traction. In the past few months many of our customers have reaffirmed their strategic commitment to work with IEC and we continue to work closely with them to ensure the success of ongoing projects and to maximize our opportunities and demonstrate how IEC's capabilities might apply to their new projects. While still in its early stages the centralizations initiative at our largest operation in New York has resulted in greater efficiencies and improvements in quality and consistency across our enterprise. Additionally, our efforts to unify under one stronger IEC brand are paying off both internally and with our customer base in fact we will be launching a new website in the coming weeks which will give you a view of the new IEC. It's been a very busy couple of months and we're optimistic that we've broken through many of the stronger headwinds that we had faced earlier this year. As we closeout our fiscal and calendar 2015, we're encouraged by the progress we've made and energized by our plans for the coming year. I will now turn the call over to Mike Williams to review the Company's financial performance. Mike?

[Michael Williams:]

Thanks Jeff. As Jeff mentioned earlier our discussion will be focused on the results from continuing operations for both 2014 and 2015 time period, excluding the results of SCB which we divested at the start of the fourth quarter. SCB's results are presented as discontinued operations just below income tax. Revenue from continuing operations for the fourth quarter was 33.9 million, a 7.4% increase as compare to the fourth quarter of last year, growth of 5.5 million was driven primarily by our medical customers and in particular by higher demand from our customer that was on FDA hold last year. We had growth within our Aerospace and Defense sector of $1 million. The growth from our Medical, and Aerospace and Defense sectors was partially offset by decreases of 2.9 million from industrial customers as well as the decline of 1.1 million from our communication sector. The net decline in industrial was related to lower demand as one particular customer has transitioned substantial work to other sources while we added three new industrial programs. These programs are not expected to fully offset the decline that I just mentioned. The decline in revenue from our communication customers was largely due to a shift in the business model for one of our customers and then our decision in 2014 to end a customer relationship due to lack of profitability. Fourth quarter gross profit increased 1.7 million to 15.3% of sales from 11% of sales in the fourth quarter of the prior fiscal year. Several factors contributed to the margin increase including improved labor efficiency, our ability to leverage overhead and lower excess and obsolete inventory expense. We’ve steadily improved our labor cost during 2015 and as of the end of the fourth quarter our headcount is down roughly 20% from a year ago, half of which is related to the divested SCB subsidiary. Our revenue per average headcount has steadily increased in each of the last three quarters. Selling and administrative expenses excluding restatement and related expenses increased 200,000 and represented 9.9% of sales in the fourth quarter of fiscal 2015, compare to 10% of sales in the same quarter in prior fiscal year. The increase in selling and administrative expenses was primarily due to higher bad debt expense in fourth quarter of fiscal 2015 compared to a slight benefit a year ago. Net income from continuing operations for the quarter was 800,000 or $0.08 per share as compared to net income from continuing operations of 1.4 million or $0.14 per share in the same period a year ago; however for fiscal fourth quarter of 2014, the company reported a benefit of approximately 1.3 million net of expenses in connection with its resolution of directors and officers liability insurance claims. Now turning to the results for the full fiscal year 2015, revenue from continuing operations for the year increased 5.1% to 127 million driven primarily by increased demand from our medical customers as discussed earlier. Gross profit margin for fiscal 2015 was 12.8% up from 11.3% in the prior year, improved gross margin is related to improved efficiencies in labor and overhead. Selling and administrative expenses excluding restatement or related expenses, increased to $16.6 million primarily due to increases related to the proxy contest and resulting change of control which totaled $3.5 million. Excluding these costs, selling and administrative expense increased $600,000 and represented 10.4% of sales in fiscal 2015 as well as in 2014. Net loss from continuing operations for the year was $3.8 million or $0.37 per share as compared to a net loss from continuing operations of $14.7 million or $1.49 per share in the previous year. We have presented the results of our divested SCB subsidiary in discontinuing operations, the loss from discontinuing operations for the year ended September 30, 2015 was $6.4 million or a loss of $0.64 per share as compared to a net loss of $423,000 or $0.04 per share in fiscal 2014. The Company’s net loss for the year was $10.2 million or $1.01 per share compared to a net loss of $15.1 million or $1.53 per share in the prior year. Backlog for September 30, 2015 was $91.6 million as compared to backlog of $105.3 million at September 30, 2014. The yearend 2014 backlog adjusted to reflect orders to ship within 12 months and excluding SCB was $89.1 million versus 2015 yearend backlog expected to ship within 12 months of $91.2 million. Now turning to the balance sheet. Working capital at the end of the quarter was $21.9 million compared to $24 million at September 30, 2014. The change is primarily due to an increase in accounts receivable of $2.5 million and a $5.4 million increase in inventory. But these were more than offset by the divested current assets of SCB of $2.2 million and increase in customer deposits of $4.2 million and a reduction in other current assets of $2 million due to the subsequent in term [ph] reimbursement previously mentioned. The $5.4 million increase in inventories was driven by certain Aerospace and Defense customers who require us to buy material in advance prior to production, further increases were related to delays in certain smaller programs. It is important to note that our customer deposits have increased by $4.2 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 will continue to focus on better inventory management with our vendors and customers going forward in order to get back to the inventory terms the Company was able to achieve in prior years. Also, subsequent to the close of the quarter, the Company extended the maturity date of its revolving credit facility with M&T Bank from January 18, 2016 to January 18, 2018. Additional information regarding the extension were disclosed in the 8-K filed today. With that, I will now turn the call back over to Jeff.

[Jeff Schlarbaum:]

Thanks Mike. Now let me recap where we stand today in relation to the strategy we laid out in the second quarter. As we discussed a major part of the turnaround strategy was to evaluate and address our underperforming operations. Of the sale of SCB we have been able to redirect financial resources and managerial focus to benefit our core business. Given that SCB’s top line had contracted since we acquired it in fiscal 2011 and the division’s ongoing lack of profitability which was a considerable drag on the P&L, we expect the divestiture will benefit the long term performance of the Company. Another priority we identified was the revitalization of our sales performance. We have a very strong customer base made up of some of the marquee companies in our market segments. And I have personally visited a vast majority of them to discuss our initiatives to drive improved performance and project success. Many customers I’ve met with have reaffirmed their strategic alignment with IEC and several have committed to increasing their levels of business. There is however some work with a specific customer that prior to the change in control had begun transition to other sources and it will take some time for us to restore previous levels of business. We believe the best way to do that is to live on [ph] our commitments and restore our credibility. We continue to focus on establishing relationships with new customers who have programs that are the right strategic fit for IEC. To that end, let me tough on the current revenue contributions of each of our sector of business. At the end of the year, the revenue contribution from each of these market segments is as follows; Aerospace and Defense, 38%; Medical 34%; Industrial 26%; Communications and other 2%. So as we close the year, I am pleased with the approximate one-third, one-third, one-third write-down of our revenue contributions which is consistent with our strategy to diversify the revenue base. As I mentioned earlier, shift at our New York facility to a unified manufacturing structure from a decentralized market sector specific manufacturing model has already driven improved labor utilization and efficiencies resulting in better quality production for our customers. We remain committed to managing our assets more effectively and we're working diligently to reduce our current inventory position and to incorporate best practices to manage and control inventory levels of our business expense. As we move forward into fiscal 2016, we have some specific goals I'd like to share. From a revenue standpoint there are two developments I'd like to discuss, first, we said on the last quarter's call we lost about 6 million in annual sales from SCB. Additionally as I mentioned prior to last winter changes change in control, an industrial customer began shifting a greater portion of their outsource spend to a competitor, which will take some time for us to restore previous levels of business. We estimate that loss at approximately 10 million in annual sales. With the visibility we have today we remain optimistic that we will largely replace this revenue within the current fiscal year. Our margins are improving, going forward we expect to generate gross margin higher than the gross margin we generated in 2015. We expect to see continued moderation of the onetime charges and the noise that we have seen in the P&L over the past few years. A combination of revenue growth, improved gross profit margins, cost containment and the reduction of onetime item should help us drive the same profitability. Finally, we're committed to reduce inventory and enhancing assets utilization to drive improved working capital. As mentioned in this morning's press release, following the close of the fourth quarter, we begin discussions with and have subsequently reached a preliminary understanding with the SEC regarding a potential settlement of its investigation of IEC's restatement of consolidated financial statements for the fiscal year ended September 30, 2012 and the quarter ended December 28, 2012. We are not, however, in a position to comment further on this development at the time. There is a lot of work to be done, but we're pleased with our progress, not only for this quarter but we're energized to continue our efforts to create a platform for continued growth and sustained profitability. With that, I'll now turn the call over to questions.

[Operator:]

Thank you. [Operator Instructions] Our first question today is coming from the line of Mark Jordan from Noble Financials. Please proceed with your question.

[Mark Jordan:]

Good morning, Jeff, a question relative to gross margin obviously it's very gratifying to see that fourth quarter performance, my question is not in terms of guidance for fiscal 2015, but just taking a longer timeframe. Given that the Company is reverting back to a more New York centric operation, when that is running smoothly and it has a solid utilization rate, what type of range of gross margin would you put as a target that the Company should be able to achieve sometime within a reasonable future?

[Jeff Schlarbaum:]

Good morning, Mark. Thanks for the question. On the gross margin side as you know to look just back, not too long ago in fiscal 2014, our gross profit margins were 11.3%. In fiscal ’15 they increased to 12.8% and then if you look at even Q4 we were just north of 15%. So as I look out into fiscal ’16, we're pretty comfortable that the gross profit range more less exiting Q4 is where we see the business in fiscal ’16. And I think as you look our beyond ’16 and into ’17, it gets a little bit more cloudy but we'll have the benefit of a full year of improving the operations at our remaining West Coast facility in addition to the benefit of additional efficiencies and New York operation. So clearly we see opportunity to drive north of the margin structure that I just alluded to as we move into ’16, it's our second full quarter, right, so we've got two full quarters under our belt and we continue to gain greater command of the business over the course of the those quarters and looking forward. So give me a quarter or two to see some of the effects of these changes as I look at fiscal ’17, but I think that’s a pretty good range for you to look at in term of the near term business going into our upcoming fiscal ’16 year.

[Mark Jordan:]

Okay thank you. Question for Michael, on taxes. Now that you're looking at having some level of profitability or sustained profitability as your goal for fiscal ’16. How will you be booking your tax liability? Obviously you have a lot of off balance sheet NOLs. Will you be showing a tax rate and then not paying taxes, or will you be just showing a nominal tax rate, taxes paid as you did in the fourth quarter?

[Michael Williams:]

Yeah, it will be just like the fourth quarter. It will be several years before we’re able to sustain and show the profitability before we change how we’re trading [ph] to protect assets. So it will be like the fourth quarter.

[Mark Jordan:]

And a final question from me, and I guess back to Jeff, talking about business development. Obviously you’ve talked about repairing some of the issues that have developed over the last year or so. Could you talk about what is your strategy for new business development on how you’re going in the next 12 months to bring new business into the Company?

[Jeff Schlarbaum:]

Absolutely. So if you look at my previous tenure at the Company we enjoyed a fair bit of success through our organic new customer acquisition methods. Some of those were abandoned and redefined over the past couple of years. And so I see us returning to some of the methods we used in the past to drive the organic growth. Really focused on strategic alignment of customers that represent good core customers that frankly are part of our portfolio of customers today, which frankly are and largely in the portfolio of customers if you look back three or four years ago. So we haven’t added significant number of genuine portfolio accounts that have the ability to grow over time. So moving away from some of the business development activities that involve some more transactional electronics manufacturing service arrangement and to more strategic customer alignments with OEMs that have potential to outsource much greater volume over a longer term period. And so, it’s really realigning to those types of prospects that will provide us opportunity that as we engage we do not have to add significant number of new customers, but to add selectively the new ones that we can then grow with over a considerable amount of time. And so those are some of the realignments we’re making in our new customer acquisition model.

[Operator:]

[Operator Instructions] Our next question today is coming from Andrew Huang from B. Riley & Company. Please proceed with your question.

[Andrew Huang:]

I was hoping you could give us some color on the replacement of the $10 million in annual revenue loss to a competitor. When you think about offsetting that lost business, how many customers do you have in mind and what would be the timing of the new business coming in?

[Jeff Schlarbaum:]

Andrew thanks for the question. Well said, it’s business, so let me just circle back a little bit. So prior to the change in control, which during that period have created some turbulent performance between IEC and its customers, this particular customer reacted with a transition of the work that we were doing to one of our competitors. If I look at the makeup of our business today, I see with the existing core customers and the improved performance of those existing customers and adding new programs with those existing customers and with a modest view of new customer acquisitions, no more than two to three as they engage in the middle of this fiscal year that will have largely if not fully made up the difference of that revenue loss in our fiscal 2016.

[Andrew Huang:]

So the implication then would be that if you look at fiscal ’16 revenue it should be up at least $10 million year-over-year. Is that another way to translate what you just said?

[Jeff Schlarbaum:]

No, I think when you look at [indiscernible] continuing operations cases the $10 million was in our fiscal 2015 revenue and we don’t see an erosion in our 2016 revenue, so I would say it would be more flat to slightly up year-over-year and not down because of the lost revenue.

[Andrew Huang:]

Got it, and then as a follow on question, since there is going to be some new business coming in, would that initially come in at lower gross margin and maybe improve throughout the year?

[Jeff Schlarbaum:]

It does, I mean there is a learning curve in our business with the new customer engagement. So you’re not going to see a quoted margin until you get into some rhythm of volume production. So I would see the customers that come in this fiscal year and probably the backend of the fiscal year are really modest revenue contributions and very modest margin contributions and then as we start to ramp them up we see in fiscal ’17 accretive revenue as well as margins more in line with our quoted margins.

[Andrew Huang:]

Got it and then just as a follow on, can you share with us maybe a CapEx plan for fiscal ’16?

[Jeff Schlarbaum:]

Yes, for fiscal ’16, more or less we're just north of 3 million in our fiscal planning in terms of equipment and facilities, so based on our success in managing the cash in pulling cash out of the inventory that may influence that CapEx number a little bit up or down, but largely in the $3 million range.

[Operator:]

Thank you. We've reached end of our question-and-answer session. I like to turn the floor back over to management for any further or closing comments.

[Jeff Schlarbaum:]

We had a very good fiscal Q4 and we look forward to continued improvements as we move into fiscal ’16, so once again thank you for calling in and we look forward to speaking with everybody once again next quarter.

[Operator:]

Thank you. That concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.