IntriCon Corporation
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Good day everyone. Welcome to the IntriCon, third quarter results conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Scott Longval, Chief Financial Officer. Please go ahead sir.

[Scott Longval:]

Thank you operator. Joining me on today’s call is Mark Gorder, IntriCon’s CEO. Before we begin I’d like to preface our remarks with the customary Safe Harbor statement. Today’s conference call contains certain forward-looking statements. These statements are based on current estimates and assumptions of IntriCon’s management and are subject to uncertainty and changes in circumstances. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Actual results may vary materially from the expectations contained in today’s call. Important factors that could cause such differences include amongst others those set forth under the headings Risk Factors, and management’s discussion and analysis of financial condition and results of operations and our 10-K filing for the year ended December 31, 2013. With that, I’d like to introduce Mark for a strategic look at IntriCon’s third quarter.

[Mark Gorder:]

Thank you Scott and thank you everyone for joining us today. I would like to begin by reviewing 2014’s third quarter key highlights and results for the company, and after that Scott will cover the financials in more detail and then we’ll open up the call for questions. By this time most of you have had a chance to review our third quarter press release. Revenue of $17 million and income of $558,000 represents a significant improvement from 2013 third quarter results. This performance translated into double-digit top and bottom line gains for the third consecutive quarter and I’m proud of the efforts of our entire team. Across the company all of our businesses were strong and this led to a higher year-over-year earnings in the third quarter. Well, I’m pleased with our financial performance for the quarter and year-to-date; we are far from satisfied. Strategically we remain focused on driving business with our key medical and hearing health customers and relentlessly pursuing our highest potential growth opportunity in value hearing health and medical biotelemetry. Looking at our three businesses, sales in our medical business rose 59% in the 2014 third quarter compared to the year ago period. Contributions from Medtronic's 530G insulin pump system fueled a large portion on the year-over-year sales increase. In addition we grew sales in our proprietary cardiac diagnostic monitoring products by 44% in the third quarter, as we continued to expand our customer base. Furthermore we are receiving a positive feedback from customers about the treatment, flexibility and economic benefits of remote patient monitoring, which we believe will drive future gains. In hearing health, sales rose a 11% over the prior-year third quarter, primarily due to the strong device sales to hi HealthInnovations. As anticipated, this was partially offset by lower conventional channel sales. We are encouraged by hi HealthInnovations recent public announcement outlining its new hearing aid discount program. A free resource for businesses that allows their employees and their families to purchase high tech custom program hearing aids. As we previously noted, within the conventional hearing health channel, industry growth continues to be constrained by high device costs, distribution inefficiencies and retail consolidation. These factors among others have created a need for an outcomes-based hearing health model. To capitalize on the marketing opportunity, we are concentrating our efforts on significant perspective partnerships and customers, and are aggressively pursuing the value hearing aid, personal sound amplifier and situational listening device channels. We anticipate securing at least on of these opportunities by year-end. Looking at our professional audio communications business, sales rose 48% from the prior-year period. During the third quarter, we continued delivery on a significant contract with the Singapore government to provide technically advanced headsets worn in military applications. This contract will run through the end of 2014. We will continue to leverage core technologies in professional audio communication to support existing customers, as well as seek related hearing health and medical product opportunities. I’ll now touch on other key initiatives. As previously outlined on our last call, we are placing a priority on liquidity management and more specifically reducing bank debt. I’m pleased to report that during the third quarter we lowered our bank debt by more than $600,000 with a year-to-date pay-down in debt of $1.9 million. Total bank debt at the end of the quarter was $6.6 million. Due to a few sizable investments we intend to make in the near term, we anticipate debt levels to remain relatively flat for the next quarter or two. As we said in today’s release, the business has clearly shown positive momentum throughout 2014, and we plan to build on this foundation of growth in the future. We anticipate an annual 2014 year-over-year revenue increase between 28% and 30%. We are guided by our strategic goals, aggressively pursuing opportunities in value hearing health and medical biotelemetry, while driving profitability. Now I’d like to turn the call over to Scott.

[Scott Longval:]

Thank you Mark. I’ll begin by reviewing our third quarter financial results in more detail. For the 2014 third quarter we reported net sales of $17 million, up from $12.3 million in the prior year period. Net income rose to $558,000 or $0.09 per diluted share compared to a net loss of $825,000 or $0.14 per diluted share for the 2013 third quarter, which included a net loss from discontinued operations of $393,000 or $0.07 per diluted share stemming from restructuring activities. Gross profit margins grew to 26.3% from 21.9% in the prior year third quarter. The gains stem primarily from volume increases and cost reductions achieved from a global restructuring plan. For the 2014 nine-month period, IntriCon reported higher net sales of $51.8 million and net income of $1.9 million or $0.31 per diluted share. This compares to the 2013 nine-month net sales of $37.9 million and a net loss of $4.7 million or $0.83 per diluted share. Net income from continuing operations for the 2014 nine month period was $2.2 million or $0.36 per diluted share, with discontinued operations net loss of $270,000 or $0.04 per diluted share. The 2013 nine month results included a loss from continuing operation of $2.4 million or $0.43 per diluted share and a discontinued operations net loss of $2.3 million or $0.41 per diluted share. Our gross profit margins also showed a nice increase for the nine months period rising to 27.1% from 22% in the prior year period. Again, the improvement was primarily due to volume increases and cost reductions. The third quarter year-to-date operating expenses of $3.8 million and $11.3 million respectively increased $946,000 and $1.4 million over the prior year comparable periods. The primary drivers were one time research and development tax credit refund of $570,000 that benefited 2013 and not 2014, an additional investment throughout 2014 to support our goal of aggressively pursuing value hearing health and biotelemetry initiatives. Turning to other financial metrics, as Mark previously mentioned, IntriCon reduced its bank debt by $1.9 million year-to-date to $6.6 million as of the end of the quarter and we generated approximately $2.9 million in positive operating cash flow. With a keen focus on tight working capital management, our total cash cycle days at the end of the third quarter was 65. This is a marked improvement from 76 days at the end of the comparable prior year period. Cash cycle days are comprised of day sales outstanding which totaled 38 days, plus day sales and inventory which stood at 73 days, less days payable outstanding at the end of the third quarter at 46 days. Now, I’d like to turn the call back over to the operator so we can take your questions.

[Operator:]

Thank you. (Operator Instructions). We’ll go first to Dick Ryan with Dougherty.

[Dick Ryan:]

Hi, good afternoon guys.

[Mark Gorder:]

Dick, how are you doing?

[Dick Ryan:]

Good. Say Scott, I know you gave a breakdown of revenue in the Q. Can you provide us the revenue breakdown for the Q3?

[Scott Longval:]

Yes. So for the third quarter, hearing health revenue was $5.5 million, our medical business $2.6 million, our medical for Medtronic was $6.1 million and our professional communications was $2.8 million.

[Dick Ryan:]

Okay. I was kind of looking at a little bit of maybe digestion after the strong medical for the first couple of quarters. Is that a reasonable assumption to look at in Q4 or maybe Q1 or has something changed in the medical dynamic that it should continue at these levels.

[Scott Longval:]

I think if you are looking at kind of our base medical business, again we’ve been running in that $2.4 million to $2.6 million. I think we would continue to see some incremental growth there. With the Medtronic business as we’ve discussed in prior calls, we saw the ramp-up for them to fill their pipeline on the 530G program. It dipped a little bit as we expected in the third quarter. But we do anticipate looking into ‘15 that business is growing at a double-digit rate. So while there maybe some quarter-to-quarter fluctuations due to them either managing the program or their inventory levels, if we look at a bigger picture year-over-year we are eyeing double digit growth for that business.

[Dick Ryan:]

Okay. Maybe a margin question. Looks like revenues were similar levels as Q1, Q2. We did see a little step down in gross margin. Was it a mix issue, was there anything going on in pricing or can you talk a little bit about that and what we might – how we might look at gross margins going forward?

[Mark Gorder:]

Sure, a good question. I would say there is two impacters to the margin in the third quarter. The first we had a slight mix issue, but more of an impact in that were some of these initiatives that we are continuing to ramp to fund for 2015. So there’s programs that we are working on right now, that we have experienced some additional resource needs and investments that need to be made, so we can ensure that revenue comes to fruition in early ’15 and throughout ’15.

[Dick Ryan:]

Okay. The hearing health side and you mentioned hi HealthInnovations employer program that they introduced. Can you give us a sense of how the – have they been buying inventory for that program or can you kind of talk about that relationship? Does the exclusive end at the end of this year or maybe kind of just give us a check up on where you stand with hi Health?

[Mark Gorder:]

Dick, this is Mark. I’ll take that one. As we mentioned in the past quarters we felt that once hi HealthInnovations got through working down their inventory, they would start buying at their use rate and they have now been doing that and as a result we are experiencing good year-over-year numbers. I think the recent announcement that they made shows that they are still significantly committed to this initiative and we think that’s a very positive statement on their part to offer these hearing aids to an increased customer base. So we expect to see that business continue to grow on a year-over-year basis and be a significant part of our overall value, hearing health initiative, of which there are, we think several other very important components as well. And I think the second part of your question was on the contract. That contract, does come to a close at the end of 2014. However, they have an option to renew it and we also have other ancillary agreements that lock them in to a new hearing aid that we just released towards the end of this year. So we think the relationship is in good stead.

[Dick Ryan:]

Have you introduced that new hearing aid and will that be in both of their programs?

[Mark Gorder:]

Yes, that was in their programs in the fourth quarter or is in the third quarter, I’m sorry and it will be continuing to expand in the fourth quarter.

[Dick Ryan:]

Okay, great. Thank you. I’ll get back in the queue.

[Mark Gorder:]

Thanks Dick.

[Operator:]

We’ll hear next from Ed Huffman (ph).

[Unidentified Participant:]

Looking at sales and everything you are talking about is bordering 2014 over 2013. But if you just look at ’14, it appears as if sales are flat lined here on a quarter-by-quarter basis in 2014 and I’m wondering if there is something that’s attributing to that that you are aware of.

[Mark Gorder:]

One of the things that did contribute to that was Medtronic got FDA approval in the fourth quarter of last year for their 530G Pump system and as part of their ramp, they went through a significant increase in purchase systems to fill the pipeline, which they did probably in the first and second quarter. So we were anticipating a slightly lower Medtronic volume in the third and fourth quarter due to that. However, if you go back and you research into Medtronic’s public statements about their diabetes market, they expect a significant growth and I think the number that they have published is around 18% per annum for the continuous glucose monitoring market. We are in every significant product in their continuous glucose monitoring portfolio and we expect to grow year-over-year at similar rates to Medtronic with that particular segment of our business.

[Scott Longval:]

And this is Scott. I just like to add to that. In addition to that there is a number of significant value hearing health opportunities that we’ve been working on over the last couple of quarters that we anticipate will be that the driver for revenue in future years, ’15 and ’16 alike. So there is a number of activities going on that we believe that will continue to drive year-over-year double-digit growth.

[Unidentified Participant:]

Yes, I’m not sure that you answered my question, but when I look at the nine month sales of $51 million and the three month sale of $17 million, its an exact factor of three. So it appears as though sales growth has been basically flat across the whole, the first three quarters. And then the second question or comment that I have is in past I have called the company several times, have been unable to talk to the President. I’ve been promised on each occasion that he would call me back. I have yet to hear from him and that’s not a good way to do Investor Relations.

[Scott Longval:]

I apologize about this. This is Scott Longval and my phone number and my contact is at the bottom of each press release.

[Unidentified Participant:]

And I know, because I have called that number.

[Scott Longval:]

Okay. I would like to take that offline with you then please. Any further questions.

[Unidentified Participant:]

And you should have my phone number somewhere in your past (inaudible).

[Scott Longval:]

Any further questions.

[Operator:]

We’ll go back to Dick Ryan.

[Dick Ryan:]

Yes, a couple of follow-ups. Mark, you mentioned kind of the subdued nature within the conventional hearing health or hearing aid channel and you know some of those issues have been quite sustaining over a period of time. Does the prospect of Siemens maybe selling itself or IPO-ing decision that appears to be kind of imminent. Has that created any angst in the channel or people sitting back and taking a wait and see attitude or can you kind of address maybe a little more some of the fundamental issues in the conventional channel.

[Mark Gorder:]

One of the major trends there has been the consolidation of retail over the past years, where the large manufacturers have continued to buy up retail and part of the issue is there is excess manufacturing capacity in the channel, and I think that with the slow growth and the emergence of the value market, we kind of expected to see some consolidation in the manufacturing sector. So I’m not surprised that Siemens is being purchased or potentially purchased by other parties. I think that one could expect some continued consolidation within the large manufacturing space; that serves kind of the traditional market. But we’ve not heard anything specifically upsetting relative to Siemens. That doesn’t seem to be on anybody’s radar as far as affecting what’s going on in the end market or any of the trends that are helping this value space to emerge. It really is more dealing with the underlying dynamics within the conventional channel. Did that answer your question?

[Dick Ryan:]

Yes, that’s good Mark. I appreciate it. Back to Medtronic, you mentioned kind of being tied to the significant product, continuous glucose monitoring going forward. I know they’ve had some management changeover in the diabetes section and increasingly they had kind of supply chain meetings. Anything coming out of there that gives you comfort or angst when you look at the management changeover that’s occurred there, is it a pretty solid relationship on a long-term basis?

[Mark Gorder:]

We think it is and we were just – we have been a lead sponsor at Medtronic Junior Diabetes Foundation Fundraiser in Northridge, California for the last seven years I believe and each year as a lead sponsor we get the opportunity to meet with their key executives. So we were able to meet with all the key executives that are now in charge of the diabetes group and its an impressive group. Several came from GE and all of them had significant working relationships with Medtronic’s CEO and one of the positive things we got out of it was that IntriCon has a very good reputation there and as a key partner in all the continuous glucose monitoring products and accessories, we were viewed as a very positive partner. So we think that relationships in good shape and as long as we continue to drive cost reductions, innovation in new products and provide high quality, we think we are in good stead.

[Dick Ryan:]

Great. That’s it from me, thanks. Good quarter guys.

[Mark Gorder:]

Thank you, Dick.

[Operator:]

And at this time I’ll turn the program back to Mark Gorder for closing remarks.

[Mark Gorder:]

Once again, we appreciate you taking time out of your day to join the call. We are pleased with the company’s performance year-to-date and remain focused on our strategy of generating business with our key medical and hearing health customers in concentrating on our highest potential opportunities and value of hearing health in medical biotelemetry. We look forward to updating you on our progress next quarter. Thank you again for joining us.

[Operator:]

Again, that will conclude today’s conference. Thank you all for joining us.