Orion Energy Systems, Inc. (NYSEMKT:OESX)
F4Q 2013 Earnings Call
May 22, 2013, 05:00 PM ET
Scott Jensen - CFO
John Scribante - CEO
Steve Shaw - Sidoti & Company
Good day, ladies and gentlemen, and welcome to Orion Energy’s Fourth Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference is being recorded.
I’ll now turn the conference over to, Scott Jensen, Chief Financial Officer. Please begin.
Thank you, operator. Good afternoon, everyone, and thank you for joining us today for the Orion Energy Systems’ fourth quarter and fiscal 2013 year-end conference call. Once again, my name is Scott Jensen, Chief Financial Officer. With me on the call today is John Scribante, Chief Executive Officer.
As a reminder, the earnings press release issued today once again includes a section that briefly discusses the supplemental information document that was posted to the company’s website. This supplemental information document provides additional details and analysis on Orion’s financial performance for the fourth quarter and fiscal year ended March 31, 2013. Additionally, several slides that highlight key metrics from the company’s financial and operational performance for the same time period have also been posted to the company’s website.
I will now read the Safe Harbor statement. Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified as such because the context of such statements will include words, such as believe, anticipate, expect or words of similar import. Similarly, statements that describe future plans, objectives, or goals are also forward-looking statements.
These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include among others matters that we have described in our press release issued this afternoon and in our filings with the Securities and Exchange Commission. Except as described in these filings we disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly conference call if at all.
And now, I would like to turn the call over to John Scribante, Chief Executive Officer of Orion Energy Systems.
Good afternoon everybody. Thank you for joining our call. Today, I'll begin with a brief overview of our results for the quarter. Then I'll discuss our pending transaction with Harris Manufacturing. Third, I'll give you an update on the progress we’ve made against our strategic initiatives. And finally I'll detail some of our more longer term priorities.
By all accounts, we ended our fiscal 2013 in a much stronger position than when we began. Our improving financial results in the second half of our fiscal year that is consistent year-over-year revenue growth, substantial earnings improvement and a strengthening balance sheet. These all are direct results of the execution of our short-term plan to realign and expand our sales force, increase our fiscal discipline and streamline our operations.
Turning to our results, the fourth quarter was a great quarter for Orion by delivering very solid performance. Specifically, revenue increased 4% over 2012 to $22.3 million and our core lighting product revenues increased 10%, marking it the first time in six quarters that we grew our revenues in this segment, and our GAAP earnings per share were $0.03 versus a loss of $0.01 last year. And most significantly, our fourth quarter performance marks the second consecutive quarter of improving both revenues and profitability.
So continuing with our financial position, we finished the fourth quarter with approximately $14.4 million in cash and generated $2.3 million in free cash flow. With cash, equity and total assets relatively unchanged, we reduced our debt 11% compared to the prior quarter. Continued execution of our purchasing strategies and financial discipline led to across the board reductions in all significant inventory product categories, and inventory level decreased 10% from our third quarter and 12% from our prior year-end. Overall, these improving results were driven by our diligence and commitment to implementing our short-term plan of improving operational efficiencies.
And today, we are very excited to announce the signing of a definitive agreement to acquire Harris Manufacturing and the related entities; a manufacturer and marketer of energy efficient lighting products. Fundamentally, this company is very similar to Orion in many regards. With over 40 years experience with energy efficient lighting systems, the company offers a comprehensive product line of LED and fluorescent fixtures, day-lighting products, and fixture retrofit solutions.
On a higher level the Harris acquisition holds true to our strategy we have discussed in recent calls as it will further expand our sales force, broaden the markets that we serve, as well as provide immediate and accretive growth in earnings.
Let me share with you the specific rationale behind this deal and why it makes sense for Orion. First of all, Harris provides innovative LED products and this acquisition helps us stay ahead of the competition by bringing these new products to the market. An example of this is the very unique and patent pending LDR, which is a LED fixture retrofit for general office applications that does not require the removal of the old fixture. This is a significant savings in labor and customer disruption. This product alone provides a sizable new market opportunity, it complements our recently announced LED Downlight and will allow our sales team to reach deeper into its diverse customer base.
Second, several of Harris’ existing product lines in market segments are very complementary to Orion’s line with very little overlap.
Third, their manufacturing and international sourcing capabilities have allowed them to compete very profitably in the large and highly competitive fluorescent conversion kit business which will be a great expansion to our product line.
Four, the acquisition opens up the door to new markets for Orion by accelerating our position in the growing federal government market, general office space market, retail store chains and the new construction markets, spaces for which Orion has had very little presence in the past.
Fifth, Harris brings over a strong, talented and long tenured sales force as well as project engineering team all of them will be a key advantage as we go forward.
Lastly, with this deal being immediately accretive upon close, it will provide several synergies as we integrate it into the Orion enterprise. Specifically, we expect cost savings in manufacturing, sourcing and general operations. We will leverage Orion’s existing operations and capabilities to support and grow Harris which will ultimately lead to increased earnings potential for Orion as a whole.
Summarizing the Harris transaction, it’s the talented people, the financial strength, their innovative LED products, expanded markets, sourcing and manufacturing synergies all that makes this acquisition so strategic for us.
Now I want to share with you some of our key wins for the quarter. As we have discussed in the past, diversifying our product is a key initiative for us. Our growing range of products from interior and exterior lighting, solid state LED lighting to energy management controls, light pipes and solar technologies all have enhanced our ability to expand our addressable market and in turn drive topline growth.
Orion’s cold storage LED product continues to outshine the competition and most recently was selected by a major player in new construction for the food distribution industry, a decision that was primarily based on our superior thermal and optical technologies. While there are many LED companies out there few focus on these advantages which gives us a significant competitive advantage.
Moving on our core fluorescent lighting platform remains robust. While there are still some challenges in terms of our customer’s capital spending this product platform will continue to have significant value in the marketplace and as I mentioned earlier we saw growth in this sector for the first time in one and a half years. Lastly we continue to have success with our national accounts as well as new customer wins such as adding a family restaurant chain, a building materials manufacturer, and a leading logistics company to the list.
We continue to focus on three key areas that have driven our latest results that is increasing sales, operation excellence and new product development, all with an eye on maintaining our commitment to financial discipline.
On the sales front since October we have added several new direct sales reps with a focus on high performance that possess a high degree of experience within the broad energy management industry and the Harris acquisition adds several more to the list. We have consolidated all sales forces under one common direction which has proven to be a very successful strategy for both our direct sales efforts as well as our partner network, and today our partners have a clear picture of our go-to-market strategy and are realizing the synergies of working alongside each other. From an operational excellence point of view, we reduced discretionary spending significantly, increased our plant efficiency, improved our R&D function and focused our entire work force on achieving profitable results.
So looking ahead we remain focused on these key operational areas while also increasing our commitment to our lean manufacturing initiatives. Our refocused and streamlined product development function continues to bear fruit. As you know we recently released the ISON class of LED lighting product that takes full advantage of the significant improvements and in the performance and quality of LED components, growing market recognition and the affordability of LED and increased utility support for these products. Going forward we plan to add more LED products with an eye towards making the LED systems more efficient and useful using our enhanced communication and control platform.
As you can see we've made consistent progress with our tactical initiatives in the last two quarters but as we look ahead our focus is shifting to the strategic areas that will drive long term performance. specifically we will be focusing on five key areas, increasing shareholders value through consistent growth in earnings per share and return on capital, innovating and being the market leader in product performance and customer return on investment, supporting growth and margin expansion initiatives with strategic discipline capital investment, marketing premium products in markets with significant growth opportunities and most importantly developing talented and effective management team and work force.
So with that I will turn the call over to Scott Jensen.
Thank you, John. Consistent with our prior earnings announcement we've provided additional content within the supplemental information document which was posted to our website earlier this afternoon covering our fourth quarter and fiscal year 2013 performance. Accordingly I will not spend time on the call walking you down the P&L on a line by line basis, but I do want to address some of our key areas. We're very pleased with our results for the fiscal 2013 fourth quarter. Revenue of $22.3 million exceeded our prior year fourth quarter by 4%.
Additionally, we experienced improved gross margins due to manufacturing cost containment initiatives and favorable contract cost management related to our solar projects. Our cost containment measures have also positively impacted our operating expenses. Although the full impact of these reductions continues to be offset by legacy legal expenses related to the SEC solar restatement inquiry and other legacy legal matters. These legal costs increased our fourth quarter G&A expenses by $340,000. Additionally, we experienced higher insurance cost due to increasing premium rates, which will increase our G&A expenses by 200,000 during fiscal 2014.
Despite these expense increases, our profit of $0.03 per diluted share for the fourth quarter was greatly improved over our prior year’s $0.01 loss per share in the fourth quarter. We finished fiscal 2013 with a $0.50 loss per share. This loss can be broken down in three significant areas. First, the valuation allowance against our deferred tax assets impacted us by $0.19 per share on a non-cash basis. Reorganization cost due to the management change that occurred in September impacted us by $0.10 per share and our first half fiscal 2013 results excluding the previously mentioned unusual charges resulted in $0.27 per share loss.
Our revenue for the fourth quarter included 3.6 million or approximately 16% of total revenues from solar projects from our engineered system segment. For fiscal 2013, our solar project revenue accounted for 22% of our total revenue. We continue to see our solar order backlog progress through construction stages reducing our overall backlog
On the efficiency side our wholesale revenue accounted for 70% of totally efficiency revenue during the fourth quarter. This increase when compared to recent prior quarters was due to strong order volume received from several of our formal direct sales people, who have transitioned into a manufacturer [rep-roll] earlier in the 2013 fiscal year. Had these revenues remained as direct sales, our wholesale percentage for the quarter would have been 57%. As we have previously discussed increasing our direct sales as a key part of our strategic initiatives moving forward. For the full fiscal year 2013, our wholesale contribution finished at 60% of total efficiency revenues. And as a reminder, we are targeting growing our mix of direct efficiency revenues towards 60% of our overall efficiency revenues.
During the fourth quarter our solar backlog decreased by approximately $10.1 million due to contract changes. In one instance, we decided to proactively exit a contract due to financial uncertainties and concerns that we felt would carry more financial risks than benefits. In another instance, our interest in the remaining portion of a project was sold to a third party and we reduce the value of the contract in our backlog accordingly. In both instances, the decisions related to these contracts were premised up on an analysis of the financial benefits versus the risks involved with proceeding.
Turning to the balance sheet, we ended the fiscal 2013 year with 14.4 million in cash and cash equivalents. This was a 10% increase from our December 31, 2012 cash balance. There were no borrowings outstanding under our revolving credit facility as of March 31, which has availability of 13.3 million.
As John mentioned, we made significant strives in reducing our current and long term inventories with cumulative inventories for fiscal 2013 year end at $26.7 million. This is a 12% decrease from our inventory balances at the end of fiscal 2012. We executed these reductions without negatively impacting customer service or quality, the exceptional members of our operations and finance teams are committed to continuing the operational discipline and execution to further expand at our near term successes, reducing inventory further and improving our cash flow.
During the back half of fiscal 2013, we successfully executed on our cost containment initiatives, identifying and implementing reductions that will generate future annualized cost savings of over $5.2 million. We remain committed to further reducing cost in our operations without sacrificing growth opportunities to deliver on our promise to provide consistent growth in earnings per share.
The expansion of our direct sales forces is a key component of our growth and profit initiatives for fiscal 2014 and beyond. We currently anticipate increasing our sales and marketing expenses by approximately $2.3 million related to new sales and project management hires. The net affect of the cost containment initiatives previously mentioned along with our anticipated headcount growth in sales and the other increased operation expenses previously discussed is anticipated to decrease our overall operating expenses by $2.1 million annually.
Focusing on cash flow, we generated $2.3 million in cash from operations during the fourth quarter. One point to note is that during our prior year fourth quarter we generated $5 million in cash from operations. This is the one key financial metric where we did not exceed our prior year quarterly performance. The reason for this was explained on our third quarter earnings call in February where we disclosed the resolution of vendor disputes which resulted in a $3 million reduction of our accounts payable balance occurring during the fiscal 2013 fourth quarter.
On an annual basis, our cash from operations was also $2.3 million and we made tremendous improvements in generating cash from operations during the back half of fiscal 2013. For the full year fiscal 2013, our cash balance decreased by $8.6 million, primarily due to the $6 million for share repurchases of our common stock, $2.8 million in net debt service and $2.2 million for capital expenditures. With our recent success in increasing cash flow, we are encouraged that our financial discipline will allow us to continue to manage working capital and increase our cash flow from operations in the future.
Let me next touch on a few financial details and expectations related to the Harris signing. Our purchase price is $10 million, with the potential additional $1 million contingent upon the achievement of future revenue goals. This price consists of $5 million in cash at closing, a $3 million seller funded note bearing interest at 4% over a three-year term and $2 million of Orion stock. The earn-out of $1 million is also equity based. We also expect that this transaction will result in synergies related to manufacturing, sourcing and general operations and that the transaction will be immediately accretive to our fiscal 2014 results. We expect to close the purchase of Harris during our fiscal 2014 second quarter.
We've made significant improvements and delivered profits over the last two quarters and we are extremely pleased with the hard work and the results of the entire Orion team. Looking forward, we believe the strategic initiatives that we are implementing across the business from streamlining our operations to our focus on financial discipline should help over the longer term with our ability to provide guidance on an ongoing basis.
That said, we are not there yet. Short delivery lead times and unpredictable customer behaviors have left us with small backlogs and limited revenue visibility related to our energy efficiency business over the last several years. We are committed to refining and perfecting our forecasting tools to improve in this area, but we have more ground to cover before we are prepared with confidence to set specific external expectations for our business.
We do, however, believe that we will increase our pre-tax income on a quarterly basis when compared to the same quarter in our prior year. As with typical seasonality in our business, our fiscal first quarter ending in June has historically been a slower time for us. That said, in the future, we do believe the Harris acquisition and their new construction business will help moderate the seasonality. Our fiscal first quarter of 2014 will also be impacted by increased costs related to due diligence and administrative expenses related to the Harris deal.
As I mentioned a moment ago, we will deliver improved pre-tax operating results, but we do not anticipate that we will deliver a profit in our first quarter. We still have some work to do, but we do expect the gap to Q1 profitability to shrink significantly.
At this time, I would like to turn the call back over to John for some final remarks. John?
Thanks, Scott. To sum up, our continued commitment to succeed was evident in our fourth quarter results. And as we build upon two consecutive quarters of robust performance, we firmly believe that we have established an even stronger foundation for future success and quarter that success is our sustained focus on innovation, financial discipline and operational excellence.
Operator, we will take calls at this time.
(Operator Instructions) First question is from Steve Shaw of Sidoti. Your line is open.
Steve Shaw - Sidoti & Company
Why was the acquisition so cheap in terms of Harris sale numbers?
I think we certainly saw value in the Harris acquisition and we felt good about the price that we paid. We see a lot of opportunity and return on our investment related to their sales force, their customer relationships and their product, which really rounds out some areas where we had gaps in our product portfolio.
Steve Shaw - Sidoti & Company
And then, does Harris rely on capital spending as much as Orion does?
So Harris does certainly sell into commercial, industrial, government. So they do have some of the challenges that we have related to capital spending. I think the one thing that they have done very well is to be able to enter into some longer-term commitments with customers, some key customer accounts and they are able to generate that revenue over multi-year periods where we have struggled sometimes within our national accounts to get sustained, consistent year-over-year revenue. It becomes little more capital budget sensitive.
Steve Shaw - Sidoti & Company
And what percentage of Harris’ sales are LED products?
Yeah, I think it's a small percent right now. Although with this innovation as they come forth with, we are anticipating it to be a large portion as we go forward. It's a very complementary product to our existing lines and historically their sales has been a lot of the same types of customers that ours have been and so LED is a great opportunity for both of us. I think for both companies LED is going to be a significant growth driver here.
Steve Shaw - Sidoti & Company
And John, can you just go over the LDR product one more time quickly?
Sure, you mean in terms of its functionality?
Steve Shaw - Sidoti & Company
And its play, well it’s for general offices, it replaces your standard two-foot by four-foot or two-foot by two-foot fluorescent fixture. We replaced the fluorescent with LED, but the most significant part about this and it's very unique in the marketplace and that is you have got two things that makes it significant. One is the time, and by the way, there is a YouTube video out there that will highlight this, but the time that it takes to replace a entire fixture versus just a swing door, so typically the swing door usually just includes the lens. In the LDR, it actually includes not only the lens, but all of the electronics and the guts of the LED fixture. So all you’re doing is taking the lens off and replacing it with the LDR as opposed to having to remove the entire fixture, which is more labor intensive; it creates a lot of dust and disruption in the workplace.
And then finally in a lot of these offices and older installations, if you are getting above the ceiling grid you’ve got contaminants like asbestos and other things you have to be concerned with. It is historically prohibited or at least slowed down a lot of our customers from making these changes. So this solves all of those problems and squarely puts us in a position from a cost point of view, total installed cost, and then just the disruption factor for customer.
Steve Shaw - Sidoti & Company
Okay. And then Scott, how might the Harris acquisition affects operating expenses in the back half of 2014 as you guys integrate?
Yeah, so what we expected in the back half of 2014, we will have some synergies, some costs that can be shared, but at this time Steve honestly we are not quite prepared to get into all of that detail.
(Operator Instructions) Our next question is from (George Caspar) [ph].
Congratulations on obvious progress that you have been making in the last several months, that is very good news. Just a little additional on the acquisition if I may, in terms of the square footage associated with Harris, what do they have in terms of manufacturing space and can you outline whether sales are generated geographic basis relative to their location?
They have, I am just generalizing here but probably about 40,000 square feet of manufacturing warehouse and front office and that's located in the Jacksonville area and their sales much like Orion’s are really across domestic US and a little bit throughout North America but its primarily the same market that Orion serves.
As you move toward conclusion of the acquisition, do you have some type of strategy that maybe you could manufacture their products at both the Florida location and your location in Manitowoc?
Sure. We are still working on really the strategy on the integration. We do see that there are operational and manufacturing synergies in just how we build products and utilize each other’s strengths, but we really haven't finalized any plans with regard to that.
Okay and one question on your current operations in Manitowoc. What's your objective over the next two quarters in terms of additional that you would like to accomplish to streamline operations on a cost basis, do you think you pretty well gleaned out what you possibly can on the cost side or can you do more?
Sure, great question. We certainly have taken a lot of strides in the manufacturing to date; however we are very optimistic in what we have yet to achieve and we have just started in the last several weeks a lean manufacturing initiative. We see some great early wins on some specific production lines where we are having significant improvements in efficiencies and throughput, quality improvements, some cost reductions and some of the component materials. We just see a lot of opportunity ahead of us there.
Again I just want to say how enthusiastic I am as a long term shareholder as to the changes in management direction at Orion and can’t help and be enthusiastic about your future. Thank you.
There are no further questions at this time. I would like to turn the call over to management for any closing remarks.
Okay, well I guess that sums up our conference call today. We truly appreciate your continued support and confidence in the work that we are doing and we look forward to reporting to you again in August for our fiscal ’14 first quarter results. Thank you very much.
Ladies and gentlemen thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.
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