IntriCon Corporation
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Good day and welcome to the IntriCon, Fourth 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 fourth quarter.

[Mark Gorder:]

Thank you, Scott and thank you everyone for joining us today. I would like to begin by reviewing key highlights and results for the fourth quarter. After that Scott will cover the financials in more detail and then we’ll take your questions. By this time most of you have had a chance to review our fourth quarter press release. Revenue of $16.5 million and income of 360,000 represents a significant improvement from 2013 fourth quarter results. This translated into double-digit top and bottom line gains for fourth consecutive quarter and capped off the strongest year from net sales, gross margin and profitability perspective, since the serious restructuring nearly a decade ago. Looking at our three businesses, sales in our hearing health business rose 31% from the prior year quarter primarily due to initial gains on targeted value hearing health initiatives including value hearing aids, personal sound amplifiers products and assisted listening devices. We continue to make significant strides in the value hearing health market as demonstrated by the PC Werth partnership. As we previously noted within the conventional hearing health channel industry growth and penetration rate continues to be stagnated by highly device cost, distribution inefficiencies and retail consolidation. These factors along with the rapidly growing aging population have created a need for an outcomes-based hearing health model. To capitalize on this opportunity we are concentrating our efforts and significant perspective partnerships and customers. To expand on the PC Werth partnership, PC Werth through its partnership with IntriCon has been appointed as one of the main suppliers to the National Health Service or NHS supply chains national framework. The NHS is the largest purchaser of hearing aids in the world, supplying an estimated 1.2 million hearing aids annually. Under the agreement, PC Werth will distribute IntriCon hearing aid products under the Kamplex brand name. PC Werth will provide the required marketing, selling, training and service support, and IntriCon is currently working on product approval with the NHS Audiology Supplies Group and anticipates having product approved and available for sale in the first half of 2015. In our medical business sales declined 9% in the 2014 fourth quarter, primarily due to an anticipated reduction in sales to IntriCon’s largest customer, Medtronic. To support Medtronic’s MiniMed 530G insulin pump launch in late 2013, IntriCon built and sold significant inventory from the fourth quarter of 2013 through the first half of 2014. Based on current demand we anticipate Medtronic revenue to grow sequentially from fourth quarter levels in the 2015 first quarter and throughout the year. In fact this morning, on their earnings conference call, Medtronic discussed the strong adoption in clinical benefits in the 530G system and the initial launch of their next generation 640G system which is being offered in select international markets. Looking at our professional audio the medications business, sales rose 41% from the prior-year period. During the fourth quarter, we completed the final delivery on $2 million contract with the Singapore government to provide a technically advanced headsets worn in military applications. We will continue to leverage its core technologies in professional audio communication to support existing customers, as well as seek related hearing health and medical product opportunities. I will now briefly touch on other key initiatives. I wanted to provide some further commentary on our value hearing health initiative. As previously discussed, we have and will continue to invest heavily in this space. We believe along with other industry professionals that the current retail model does not meet the needs of a vast majority of the hearing-impaired population. This is evidenced by the low stagnant penetration rate of hearing devices in the U.S. market. Initially we are positioning ourselves to serve the emergence of new hearing healthcare delivery models which are focused on providing the best outcome-based solution for the patient at the lowest cost. We believe this will require the most advanced outcome-based technology to be incorporated in our value hearing aid PSAP and assisted listening device platforms. We are currently working to form strong partnerships with complementary organizations that understand its support the emergence of the value hearing health space. We anticipate securing a few more notable partners in the first half of 2015. Building on those efforts during the fourth quarter, we announced receipt of CE Mark approval. CE Mark approval represents a significant milestone for IntriCon's access into the European value hearing health market. Historically we have sold hearing aid products in Europe through other manufacturers. The CE Mark allows us to directly pursue significant value hearing health opportunities throughout the region with our white portfolio of hearing aid products. We believe we are better positioned in order to aggressively pursue value hearing health opportunities in the region and from meaningful partnerships to drive future growth. As outlined in previous calls, we have placed the priority on liquidity management. I'm pleased to report that during the fourth quarter we continue to pay down debt and ended the year with a $2 million reduction in the bank debt over the prior year end. Total bank debt at the end of the quarter was 6.5 million. Due to a few sizable investments we intend to make near term and support our strategic goals, aggressively pursuing opportunities in the value hearing health and medical biotelemetry, we anticipate that debt leg also will increase modestly for the next quarter or two. To wrap up my comments, I would like to reiterate that 2014 was a very successful year that we are far from satisfied, as we carry the positive momentum into 2015, we anticipate higher sales for the full-year with the first quarter revenue to be consistent with our 2014 fourth quarter. Now I would like to turn the call over to Scott.

[Scott Longval:]

Thank you Mark. I’ll begin by reviewing our fourth quarter financial results in more detail. For the 2014 fourth quarter we reported net sales of $16.5 million, up from $15 million in the prior year period. IntriCon posted net income of $360,000 or $0.06 per diluted share compared to a net loss of $1.4 million or $0.25 per diluted share for the 2013 fourth quarter Included in the 2014 fourth-quarter results was a one-time $165,000, or $0.03 per diluted share, foreign tax expense charge. Included in 2013 fourth-quarter results was a net loss from discontinued operations of $1.6 million, or $0.27 per diluted share. Gross profit margins grew to 27.1% from 25.5% in the prior year fourth quarter. The gains stem primarily from volume increases and cost reductions achieved from our previously disclosed restructuring plan. For the full year 2014, we reported higher net sales of $68.3 million and net income of $2.2 million, or $0.37 per diluted share. This compares to 2013 annual sales of $53 million and a net loss of $6.2 million, or $1.08 per diluted share. Net income from continuing operations for the 2014 twelve-month period was $2.5 million, or $0.42 per diluted share, with a discontinued operations net loss of $270,000, or $0.04 per diluted share. The 2013 results included a loss from continuing operations of $2.3 million, or $0.40 per diluted share, and a discontinued operations net loss of $3.9 million, or $0.68 per diluted share. Gross profit margins increased to 27.1% from 23% for the full year 2013. Again, the improvement was primarily due to volume increases and cost reductions. Fourth quarter year-to-date operating expenses of 3.8 million and 15.1 million respectively increased 313,000 and 1.6 million over the prior year comparable periods. The primary drivers for additional investments throughout 2014 to support strategic initiatives and the 2013 third quarter one-time research and development tax credit refund of $570,000. Fourth quarter year-to-date income tax expense of 277,000 and 428,000; increased 219,000 and 211,000 over the prior year comparable periods. The increase was due to a fourth quarter one-time adjustment of $165,000 of foreign tax deductions disallowed by the Singapore government which were currently appearing. Going forward our foreign subsidiaries have utilized or net operating losses carryforwards and therefore we anticipate income tax expense to increase. However, the company is currently in net operating loss position exceeding $22 million to the US federal and state income tax purposes, and therefore we expect minimal tax expense in the US. Turning to other financial metrics. As Mark previously mentioned we reduced our bank debt by $2 million your-to-date and in the 2014 with debt of $6.5 million. And we generated approximately 2.9 million in positive operating cash flow. Our total cash cycle days at the end of the fourth quarter was 65. This was an increase from 59 days at the end of the comparable prior year period and consistent sequentially. Cash cycle days are comprised of day sales outstanding which totaled 42 days, plus day sales and inventory which stood at 57 days at the end of the fourth quarter, plus days payable outstanding which stood at 52 days. Now, I’d like to turn the call back over to the operator so we can take your questions.

[Operator:]

[Operator Instructions] And we will take our first question from Dick Ryan with Dougherty Brokerage Firm. Please go ahead sir.

[Dick Ryan:]

Hi, Mark and Scott. Mark, can you talk a little bit about PC Werth, it looks like the approval and getting ready to see some revenue from the UK may have slipped from Q1, any other color you can provide us on that slippage?

[Mark Gorder:]

As we are finding as we get into some of these new opportunities. We learned about some additional requirements that were not anticipated, so we had a of couple of things when we had to add additional interfaces to, in order to be able to fit hearing aids with all of the different software systems that International Health System uses. They had one that was very outdated and not even on a qualified basis to what used as a standard today, but they still use it with about 15% of their clinics. So we were not aware of that when we had that [indiscernible] and reengineer an interface to that software suite and that's been done and we are currently now working on the final approval using that interface.

[Dick Ryan:]

Okay. So doesn’t sound like anything insurmountable?

[Mark Gorder:]

It was not.

[Dick Ryan:]

Okay. You mentioned some additional partnerships and progress on the value hearing healthside, can you may be, we've heard about the independent audiologist kind of being behind a rock and a hard place in the retail model, give us any update on what might be happening with that group?

[Scott Longval:]

The only thing I can say because some of these are still NDA that is we are working on several of them and we are spending a substantial amount of money in terms of developing new technology, supporting the partnerships. So there is R&D expense, marketing expense, there is a substantial amount of money we are spending to develop these and we hope to be able to announce some of these during the first half of the year. But I can't really elaborate more on, I would say that we are working on all the areas, we are working on developing relationships with the professionals, with the independence, with the people that are marketing personal sound amplifiers and situational listening devices. We have got a couple of there that we are working on, all of them are very interesting and they all add data points that help the investor connect with dots on how we are trying to create this new delivery model. But I can't speak in specifics yet.

[Dick Ryan:]

Sure. So their motivation is still seek a value supply for the hearing aid needs.

[Scott Longval:]

Yes. They all see the fact that we're going to have to figure out how the drive cost out of the delivery process and full productivity and provide better value for the consumer going forward. We simply can't afford to serve the number of hearing impaired coming into the market with the traditional what I would call kind of gold standard model.

[Dick Ryan:]

Sure. And I have got one from me. Do you breakout Medtronic versus the other medical business?

[Mark Gorder:]

We have Medtronic revenue for the current quarter was $5 million.

[Dick Ryan:]

5 million and you said sequential increase as we move through 2015?

[Scott Longval:]

Yes.

[Dick Ryan:]

Okay and Mark you mentioned, there is comment this morning good traction in domestically and starting the introduction with their 640G, you are in the next generation products set with them. I think in the past they have indicated may be 15% to 20% growth in their CGM segment. Do you still get the sense of that kind of gross rate you are looking for?

[Scott Longval:]

This is Scott. I would say there is nothing dictated, we just to believe any differentially. I don’t give you any sort of forward looking information on the call but the sense that we get with the working with that team is they are very aggressively growing that business and I think what we saw here in the second half of the year, more specifically in the fourth quarter is a kind of an anticipated and a lot going after they fill their pipeline and as we look into ’15 and since we are getting the demand that we are seeing come through and we are very confident that we are going to see that sequential growth.

[Mark Gorder:]

And I add Dick to that we feel like we are involved in all the team new product platforms going forward.

[Dick Ryan:]

Great. Okay, I will get back in the queue. Thank you.

[Operator:]

[Operator Instructions] At this time it appears there are no questions in our queue, I would like to turn the call back over to Mark Gorder for any closing and additional remarks.

[Mark Gorder:]

Thank you, operator.

[Operator:]

We did have -- Dick Ryan with Dougherty Brokerage Firm. Mr. Ryan your line is opened.

[Dick Ryan:]

One last one from me then, guys can you talk a little bit about what the state of United Health relationship is and then what you're seeing on their side of the hearing aid initiative?

[Mark Gorder:]

Yes, they continue to be committed, Dick. We made good progress quarter-to-quarter last year with them. I think that our expectation is that it will have year-old-year growth with them this year. Typically the business with them has been a little bit cyclical, but year-over-year we expect it to continue to grow.

[Operator:]

And I would like to turn the call back over to Mark Gorder for any closing and additional remarks.

[Mark Gorder:]

Thank you operator and thank you everyone for joining in the call today. We are pleased with the progress we made in 2014 and that's evident in our results, the strongest in more than a decade. Strategically if we look to the future we will maintain our focus on aggressively expanding our value hearing health reach by pursuing opportunities in value hearing health and medical biotelemetry. We look forward to updating you on our progress next quarter. And then thank you again all for joining the call.

[Operator:]

Ladies and gentlemen that this concludes today's presentation. We appreciate everyone's participation.