Orion Energy Systems, Inc. (NYSEMKT:OESX)
F1Q 2014 Earnings Conference Call
August 1, 2013, 5:00 PM ET
Scott R. Jensen - Chief Financial Officer
John H. Scribante - Chief Executive Officer
Steve Shaw - Sidoti & Company
Good day, ladies and gentlemen, and welcome to Orion Energy’s First Quarter Fiscal 2014 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this call may be recorded.
I would now like to introduce your host for today's conference, Scott Jensen, Chief Financial Officer. Please go ahead.
Thank you. And welcome to Orion Energy's fiscal 2014 first quarter conference call. With me today is John Scribante, our 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 analyses on Orion’s financial performance for the fiscal first quarter ended June 30, 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. Remarks that follow, including answers to 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. Please go ahead, John.
Good afternoon everybody and thank you for joining us today. I will begin with a brief overview of our results for the quarter and then I will discuss the integration of Harris, our go forward strategy and some commentary on our end markets, after which we will return to Scott to go over our financial results in detail.
While it pains me to have to announce a loss and recognizing that we have rarely ever posted a profit in our first quarter we were nonetheless very pleased to announce once again we delivered significant year-over-year improvement in our financial performance.
Our total revenue rose 36% to $20.9 million and our operating loss was reduced to $800,000 from $3.6 million last year a 77% improvement. Our core lighting efficiency revenue increased by 26% year-over-year, the second consecutive quarter of growth in this segment and LED products accounted for 7% of our efficiency sales, up from 2% last year.
Our solar revenue also grew as we began construction on our $20 million [Brick] township landfill project. As our listeners may know Orion’s revenue is somewhat seasonal and this has in the past impacted our first quarter bottom line results. That being said we are clearly not satisfied with the fact that we didn’t turn profit this quarter. However we continue to make meaningful progress across a number of fronts and believe that our days of losses are now behind us.
We know that the company is moving in the right direction and therefore we have begun to provide quarterly guidance which speaks to our confidence in our future results and Scott will speak further on this in a moment about some one-time expenses.
The company generated $2 million of net cash from operations during the fiscal first quarter compared to a breakeven cash generation from last year. We ended the quarter with 15.5 million in cash and equivalents as we continue to strengthen our balance sheet for future growth.
Further demonstrating our improved balance sheet over the last three quarters we have reduced our total inventory levels by approximately 18%. Subsequent to the quarter end on July 1 the company completed its acquisition of Harris Manufacturing on schedule and we started the process of integrating these operations as I will discuss in a moment.
We continue executing on growth strategy that strengthens our sales force, broadens our technology offerings and customer base and focuses the entire company on bottom line results. We expect that as growth accelerates there should be less of a seasonal impact to our quarterly results and in tandem more predictability to our revenue, cash flow and earnings.
We have maintained our focus on improved asset utilization and working capital management to expand our margins and drive cash flow as revenue growth fuels operating leverage across the organization. All-in-all we are very pleased with where Orion stood at the end of the quarter with the continued progress of our strategic initiatives and are on track for continued improvement in operating results going forward.
Now let me speak briefly about the recently completed Harris acquisition. While we closed on this just one month ago today we took many steps prior to July to ensure a seamless transition and since then have brought our two organizations closer together.
We are currently integrating all aspects of the two companies to best utilize our broader product portfolio, strengthen sales force and customer relationships. And as we said last quarter we expect Harris to immediately help Orion enter additional markets and broaden our customer base.
Harris has a complementary line of LED and fluorescent and fixtures, day lighting products and retrofit solutions that serve several segments where Orion was previously lacking, specifically the fast federal government market along with general office space, retail stores and new construction markets. And with Orion’s vast engineering staff manufacturing capability and marketing expertise we will rapidly commercial the LDR LED product that Harris had developed.
While I’d to say more about our specific integration plans we are still assessing operating synergies and finalizing our go-forward marketing strategy. Although we anticipate providing much further color in this regard in the very near future. But I can assure you that Harris will immediately be accretive to earnings and has already bolstered both our sales force and product portfolio.
We will leverage Orion’s existing manufacturing capacity to handle the anticipated growth going forward as we maintain a focus on improved operating efficiencies. And with Harris as part of Orion we are now stronger more valuable provider of engineered solutions for our customer.
If we step back and take a look at the company as a whole I am very pleased with where we are in terms of our vision to become a much more customer centric, innovative and value added provider of energy solutions.
As we said all along having the right sales force is key to the strategy. In similar way we need the right sales leadership. So in June we announced the hiring of Vince Alonzi, our new Vice President, Sales. Vince has over 20 years of sales management experience most recent with W.W. Grainger and we believe this track record and enthusiasm will be a tremendous fit with Orion where he's already been making a very positive impact.
Vince will focus on Orion’s direct sales force and lead our growing sales organization. He will assist in our efforts to leverage Orion’s larger product portfolio to penetrate new markets and broaden our customer base, bringing innovative solutions to commercial and industrial customers alike in a way that will accelerate our top line growth.
And Scott Green, the former Executive Vice President at Harris will continue to lead the Harris organization, the sales force as well as assist with new product development and project engineering. And we are very proud to have both of them on board with us.
Notably for the quarter our wholesale related revenues rose 26% year-over-year and accounted for nearly 62% of our total lighting efficiency sales, that’s up from 60% in the first quarter of fiscal ’13 illustrating that our channel strategy continues to succeed. We expect continued strong growth within wholesale and within our retail channels going forward bolstered by our acquisition of Harris.
From an innovation perspective our competitive advantage continues to be with superior optics and thermal management as is reflected in our 48 patents issued and 26 pending. But from an investment perspective our growing channel to market and ability to commercialize technology is truly our greatest achievement. This is a core part of our growth plan which involves both product development and a dedicated sales force.
Aside from adding Vince as our new VP of sales and bringing on four representatives from Harris we continue to execute against our fiscal ’14 plan and increase our direct sales force. As a reminder we have consolidated our sales staff under two brands within individual split by geographic and customer focus working alongside our go to market integration partners.
Given our focus on product evolution and sales force expansion we believe we are well positioned to thrive in the current marketplace. Our channel check tell us that as the economy continues to improved spending on energy efficiency is strengthening across a host of industries retail, commercials, manufacturing and the like.
Companies have the funds to invest for their future and we believe that the mass adoption of LED technology is rapidly approaching. We will be ready when that time occurs being proactive in terms of technology, marketing, manufacturability, innovative products and our customer response.
We are looking for ways to build scale within the industry as quickly as possible which may also involve future bolt-on acquisitions, similar to Harris or opportunities where we can commercialize someone else’s technology with our deep and broad channel to market.
To sum up let me just reiterate that Orion has made great strides improving at operating results just as we had led out nine months ago, but this is just beginning. We believe with the Harris acquisition, with its LED products and customers it has strengthened our competitive position and certainly will help us enter new markets and win new customers. At the same time we continue to focus on operating leverage, asset utilization and margin expansion to realize a new era of strong profits.
We are generating cash with the goal of strengthening our balance sheet to allow for financial flexibility and reduce debt along with lower interest expenses going forward. Overall we are more confident of Orion’s future than ever before and as such have begun providing quarterly guidance with this earnings call as Scott will review in a moment. This is a success for us but one in keeping with our improved outlook and our beliefs that our investors, analysts and employees deserve to know what we can achieve.
With that I will have ask Scott to review the financial results in detail.
Thank you, John. After the market close today we reported results for the first quarter of fiscal 2014. Consistent with our prior earnings announcements we have provided additional content within the supplemental information document which was posted to our website earlier this afternoon covering our fiscal first quarter performance.
Accordingly I will not be walking you down the P&L on a line-by-line basis but I will address some of our key areas. We are pleased with the substantial improvements in our performance as reflected in our results for the fiscal 2014 first quarter.
Revenue of 20.9 million exceeded our prior year first quarter by 36% and included $5 million or approximately 24% of total revenue from solar projects within our engineered systems segment. Our gross margins for the quarter were negatively impacted by several items.
First we had a higher mix of solar revenue at lower than average margins, reflecting the kick-off of construction on our $20 million solar landfill project for which we expect margins to be in the low 20% range for the remainder of fiscal 2014.
Our lighting efficiency margins for the quarter were 29.1%, an improvement over the prior year’s first quarter margins of 27.2%. Additionally this year’s margins were reduced by approximately 150 basis points, due to the liquidation of slow moving inventories.
During the first quarter we begin the formal implementation of lean manufacturing concepts across our operations. We made tremendous strides in a short period of time and we expect this initiative to allow us to increase output, without increasing variable cost, providing even great gross margin operating leverage.
Our cost containment measures implemented over the past nine months have continued to positively impact our financial results. Operating expenses were 6.6 million for the fiscal first quarter compared to approximately $8 million in the prior period. This decrease of $1.4 million or 17.6% was a result of headcount reductions, tighter spending controls, reduced audit fees and discretionary spending cuts across all areas of our business.
Additionally during the quarter we incurred some one-time expenses of approximately $100,000 for due diligent costs related to the Harris acquisition and an additional $100,000 for legacy legal expenses.
We do anticipate that we will continue to incur some additional non recurring expenses related to the Harris integration process during the remainder of fiscal 2014 but expect that the Harris acquisition will be accretive to our fiscal 2014 financial results.
Company reported a loss from operations of approximately $800,000 for the first quarter of fiscal ‘14, a 77% improvement compared to a loss from operations of 3.6 million for the first quarter of fiscal 2013. We reported a net loss of approximately $800,000 or $0.04 per share versus a net loss of 1.9 million or $0.09 per share in the prior year period.
Note that last year’s first quarter included a tax benefit of $1.6 million or $0.07 per share, while the fiscal 2014 first quarter did not. In addition the current year quarter was negatively impacted by non-recurring expenses totaling $400,000 or approximately $0.02 per share related to the acquisition of Harris, legacy legal expenses and the liquidation of slow moving inventory as I previously mentioned.
Over the last several quarters we have referenced the financial impact of unusual expenses incurred, which have predominantly included reorganization and legacy legal expenses. The amount of these expenses have continued to decline with each sequential quarter and we believe that the majority of these legacy expenses are now behind us.
Turning to the balance sheet we ended the fiscal 2014 first quarter with 15.5 million in cash and cash equivalents an 8% increase from our fiscal year end March 31 cash balance in what is seasonally our weakest performing quarter. We had no borrowings outstanding under our revolving credit facility which has availability of 13.3 million.
We continue to make strides in reducing working capital with total inventory of 25.3 million at the end of the quarter, a $1.4 million or 5% reduction to our fiscal 2013 year-end balance. Despite the tremendous reduction in inventory levels over the last three quarters we continue to remain diligent in our efforts to maintain inventory at strategic levels with both onsite and vendor supply agreements fast turn commitments to our customers.
Turning to cash flow we generated $2 million of cash from operations during the first quarter. On an EBITDA basis we were cash flow positive during the quarter and further generated cash through efficient working capital management as I just mentioned. Our minimal capital expenditures during the quarter were related to IP investments and investments in new product development and relating tooling.
Debt service for the quarter was $850,000 and included approximately $200,000 related to the early buyout of one of our funded Orion throughput customer agreements. In the future we expect an increase in debt service payment and interest expense due to the Harris acquisition.
As John mentioned we closed the purchase of Harris on July 1st. The purchase price was 10.1 million with the potential additional $1 million contingent upon the achievement of future revenue goals during the remainder of calendar 2013 and 2014.
The price consisted of $5 million in cash at closing, a $3 million seller funded note bearing interest at 4% over a three year term and the issuance of approximately 857,000 shares of stock representing a fair value on the date of issuance of $2.1 million. The earn-out of $1 million is also equity-based.
With regards to our liquidity despite the Harris purchase payment of $5 million at the start of our second quarter our recent receivables collections have been strong and we have already begun to replenish and rebuild our cash reserves. With a strong balance sheet and a focus on further improving cash from operations we have no liquidity concerns related to managing our business.
As John mentioned in his prepared remarks Orion has begun providing guidance in conjunction with today’s earnings release. For the second quarter of fiscal 2014 the three months ended September 30, 2013 the company anticipates revenue in the range of 24 million to 26 million and earnings between $0.01 and $0.03 per diluted share.
We intend to provide guidance going forward for each subsequent quarter given our increased visibility into our end markets and more predictable bottom line performance. This should assist both our investors and analysts to understand our business better and at the same time provides greater transparency over our future financial results and execution.
I would now like to turn the call back over to John for some closing remarks. John?
Before opening up call for questions let me just say a few words to summarize where we stand. We set out to transform this company a few quarters ago and I am pleased to say we are well on our way of doing just that.
We posted another quarter of substantial year-over-year top line growth and improved margins dramatically, at the same time increasing cash flow, streamlining the organization and building a topknot sales team, continuing the trend built on a solid focus on financial discipline.
We weren’t profitable this quarter primarily due to order timing. But we were dedicated to seeing if this that does not happen again. As I said in the past our strategic operating plan is focused on five key areas; driving growth and margin expansion, creating innovative products and being the leader in customer satisfaction, delivering lighting solutions in markets with significant growth opportunities, developing a talented and effective work force to sustain our product leadership and customer retention and in doing all of this, increasing shareholder returns through EPS growth and a higher return on capital.
After three consecutive quarters of improved performance we are now well on our way to building Orion Energy into the company we know it can be. One positions for revenue acceleration, improved margins and stronger cash flow going forward. We have much more work to do but we are confident that the future looks bright. And I’d like to personally thank our employees for all of their hard work thus far and our investors for their steadfast patience and continued compliments. Our best is yet to come.
With that operator we will now open up the call for questions.
(Operator Instructions) And our first question comes from Steve Shaw from Sidoti & Company. Please go ahead.
Steve Shaw - Sidoti & Company
Hi, guys how are you doing?
Steve Shaw - Sidoti & Company
I got on little late but what would you guys say is it causing a revenue growth is it more of the added sales effort or more of a customer's opening up their pockets.
Yeah I it’s probably little bit of both, although I honestly believe that our focus and the consolidation of our sales teams and just a renewed energy around driving results, driving performance in the sales organization we have a higher caliber sales organization today than we have ever had. We have brought on some solid people but also sales management just a lot more dedicated attitude of just getting after the business and going out and getting. There is enough business out there that we just need to be getting our share of.
So I am going to put a lot of credibility on just our consolidation of our sales force and leadership and the sales organization but I also see some opening up of the wallets happening too. The customers seem to be planning more and we are getting a lot more enquiries about future projects that they have been putting on shelf for a while. So I see a little bit of both. But I got to give a lot of credit to what we have been doing in the sales organization as well.
Steve Shaw - Sidoti & Company
Okay. and then you guys noted that the solar project were bigger than you guys last year is there anything that you can point to directly that caused that or is that sort of a random thing?
Steve you missed opening part of the call. We did kick off our $20 million solar landfill project in New Jersey. Construction started during the quarter and a large portion of our $5 million was specifically attributed to that project.
Steve Shaw - Sidoti & Company
And then I know you guys talked a lot about Harris specifically regarding the LED products have you guys had any Orion customers either asked about them or order them this past quarter?
Yeah, so that is a product that is just come into its final stages of commercialization. We are waiting on some approvals, DLC approvals and things like. So that’s a product that is just now being introduced to the marketplace. So little early to say that we are converting Orion customers to actually placing orders, although we have received some orders just recently. It’s really in the introduction stage right now. So…
Steve Shaw - Sidoti & Company
Okay. And then once that LED project is sort of up and running for you guys is there any cost over with some of the intelligent lighting system that you guys have or in other words how easy would it be to stimulate that technology to some of the other products?
You are saying taking our existing controls and applying it to the office environment?
Steve Shaw - Sidoti & Company
So little bit of front end tweaking on that but it can certainly be dropped in. It’s in our controls. We took from the high base space applied it to the exterior lightings and we are exploring options right now as to what we want to do in the office space but there is some front end hardware that’s going to be a little different, that’s off the shelf in terms of some of some of the sensoring and the receiving equipment but the back end is all products that we have already just developed.
It’s now with that said I am also anticipating that existing customers may have particularly high rise buildings, commercial office buildings are going to have different controls that they have already invested in. And so we are already making provisions to just back-end integrate to existing control systems. So whatever we do we’ll have to apply to both, both ours as well as other third parties that people are using.
Steve Shaw - Sidoti & Company
Okay all right thanks John, thanks Scott.
Thank you. (Operator Instructions). And we have a question from Anthony Orbanic from OGT. Please go ahead.
Anthony Orbanic - OGT Trading
Hi, good afternoon, Anthony from OTG Trading. Actually I have few questions, actually in (inaudible) energy management especially with the solar lamps. Also for, that…
I am sorry. I think Anthony has connected. And I am not showing any further questions. I would now like to turn the call back over to John Scribante for any further remarks.
Okay, great. Well thank you very much. We appreciate all of your support and all of your confidence in us. We've got a lot ahead of us and a lot of great opportunity. So we have our annual shareholder meeting coming up next week. I may see some of you there but if not we will look forward to talking with you in a few months. Thank you and have a good day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.
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