Executives
Craig LaBarge – CEO and President
Don Nonnenkamp – VP and CFO
Analysts
Fred Buonocore – CJS Securities
Paul Mammola – Sidoti & Company
Mark Jordan – Noble Financial
LaBarge, Inc. (LB) F3Q10 (Qtr End 03/28/10) Earnings Call Transcript April 29, 2009 11:00 AM ET
Operator
Welcome to the LaBarge Incorporated fiscal 2010 third quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, April 29, 2010.
I would now like to turn the conference over to Craig LaBarge. Please go ahead.
Craig LaBarge
Good morning, everyone. Thank you for joining us today for a discussion of LaBarge's financial results for the fiscal 2010 third quarter and first nine months, which ended on March 28. With me today is Don Nonnenkamp, Chief Financial Officer for LaBarge.
As is our practice, we will begin with some prepared remarks and then we will open up the call for questions. We continue to experience broad-based strengthening in our business with customer demand increasing across several key market sectors, especially industrial and natural resources. The fiscal 2010 third quarter was the strongest of the current fiscal year-to-date with sales, gross margin, operating income, bookings, and backlog, all up significantly from this year's fiscal second quarter levels, as well as from the comparable period a year earlier.
I should note that the reconciliation of any non-GAAP financial measures mentioned during this call are provided in today's press release, which is available on labarge.com.
I'll now turn the call over to Don to review the financial results for the quarter.
Don Nonnenkamp
Good morning. Fiscal 2010 third quarter results are as follows. Net sales were $74.7 million versus $72.2 million in last year's third quarter and $69 million in the current-year second quarter. This year's third quarter sales included $16.6 million from the Appleton operation, which was acquired in December of '08. Appleton contributed sales of $13.6 million in last year's third quarter and $15.7 million in the current-year second quarter. Appleton's sales growth is largely attributable to the resurgence in demand from that operation's customers in the industrial sector.
Net earnings, on a fully diluted basis, were $0.26 a share compared with $0.24 in last year's third quarter and $0.18 in the current-year second quarter. This year's third quarter net earnings included $0.04 per share contributed by the Appleton operation.
Gross margin was 20.6% compared with 20.3% in the comparable period a year earlier and 19.9% in the current-year second quarter. Appleton's third quarter gross margin was 12.7% compared with 8.9% in last year's third quarter and 11.6% in the current-year second quarter. Appleton's improved gross margins are primarily the result of better efficiencies, plant utilization, and mix.
SG&A expense was $8.4 million versus $7.8 million in the comparable period a year earlier and $8.9 million in the current-year second quarter. Higher SG&A in the current year's periods is a result of accrued incentive compensation. We expect this year's fourth quarter SG&A will follow suit and be up from the comparable period a year ago.
Operating income was $6.9 million or 9.4% of sales compared with $6.8 million or 9.5% of sales in last year's third quarter and $4.8 million or 7% of sales in the current-year second quarter. Interest expense was $400,000 compared with $508,000 in the last year's third quarter and $421,000 in the current-year second quarter, reflecting lower average debt levels.
Net cash flow from operating activities was a negative $472,000 compared with a positive $12.2 million in the comparable period a year earlier and a positive $6.4 million in this year's second quarter. The negative cash flow from operations in the current-year third quarter is primarily caused by higher accounts receivable in the period.
Depreciation and amortization expense in the third quarter was $2.2 million compared with $2.1 million in the comparable period a year ago and $2.3 million in this year's second quarter. Total debt at March 28 was $39.4 million compared with $41.4 million at the end of December and $45.5 million at the end of last fiscal year. Stockholders' equity at March 28 was $111.6 million compared with $108.3 million at the end of the second quarter and $103.2 million at the end of last fiscal year.
And finally, backlog at March 28 was $194.4 million compared with $180.5 million at December quarter-end and $168 million at the end of last fiscal year. Approximately 85% of the backlog at the end of March was scheduled to ship in the following 12 months.
And now, I'll turn the call back to Craig.
Craig LaBarge
Thanks, Don. Shipments to customers in the defense, industrial, natural resources, and medical market sectors comprised approximately 95% of LaBarge's fiscal 2010 third quarter net sales.
Shipments to defense customers represented the largest portion of fiscal 2010 third quarter net sales at 39%. This compares with 45% in the fiscal 2009 third quarter. In actual dollars, fiscal 2010 third quarter sales from the defense market sector were down about 11% from last year's third quarter, which had near-record levels of quarterly defense sales and down 4% from the current-year second quarter.
Shipments to industrial customers represented 26% of fiscal 2010 third quarter net sales versus 18% in the fiscal 2009 third quarter. In actual dollars, fiscal 2010 third quarter sales from the industrial market sector were up 52% from the comparable period a year earlier and up 33% from the current-year second quarter.
The main contributors to this recovery were significantly higher shipments to Owens-Illinois, which were up about 30% in the current-year third quarter compared with a year earlier and as Don mentioned earlier, a resurgence in demand from many of Appleton's industrial customers.
Shipments to natural resources customers represented 19% of fiscal 2010 third quarter net sales versus 20% in the fiscal 2009 third quarter. In actual dollars, fiscal 2010 third quarter sales from the natural resources market sector increased 3% from the comparable period a year earlier and about 5% from the current-year second quarter.
We've begun to see strengthening across the natural resources sector recently, including oil and gas and mining, although much of the current-period growth is attributable to increased shipments to a wind power generation customer.
Shipments to medical customers increased 11% or – represented, I'm sorry, 11% of third quarter net sales in both fiscal 2010 and fiscal 2009. In actual dollars, fiscal 2010 third quarter sales from the medical sector grew about 2% from the comparable period a year earlier and 20% from the current-year second quarter. The growth in medical sales from the current-year second quarter was a result of increased shipments to multiple medical sector customers.
In terms of new business generation, this year's third quarter was a real standout. Bookings increased 50% from last year's third quarter and 14% from this year's second quarter, representing the company's second-highest booking quarter ever. The two main drivers were the industrial and natural resources market sectors.
In these sectors, we are experiencing increased demand from multiple customers that have been relatively quiet over the previous few quarters and we are being successful in bringing new customers on board. These are trends that we expect will continue for the foreseeable future. The same is true in the medical sector where we've begun to experience increased demand from multiple medical device customers.
Although third quarter defense bookings were down from recent quarters, bidding activity remains quite good, and we expect bookings to pick up in the second half of this calendar year.
In addition, we remain pleased about our current progress in positioning the company to participate in numerous long-term military platforms including such programs as the Black Hawk helicopter, the F-35 Joint Strike Fighter, and many different missile systems. In addition, we believe we are well positioned to win other new opportunities from within the defense sector as prime contracts increasingly look to outsourcing as a key way to reduce their costs.
Overall, our bookings outlook is very positive as we continue to leverage our strategic investments in new manufacturing technologies and expanded capabilities to win new business and improve our operating efficiencies. Our successful performance, which is already moving LaBarge toward record results, validates our business model, our strong relationships with our customers, our success in winning new business, and the contributions of the Appleton acquisition.
We remain very pleased with LaBarge's excellent progress and expect the fiscal fourth quarter, which will end on June 27, to be the strongest quarter of the fiscal year with sales and earnings moderately higher than this year's third quarter levels.
Based on our current visibility and the anticipated continued strengthening of order flow across key market sectors, particularly industrial and natural resources, we expect continued business strength well into next fiscal year with sales and earnings for the 2011 full fiscal year expected to reach new record levels.
With that, I will open up the call for any questions that anyone may have.
Jessica, I don't know if we have any questions or –
Question-and-Answer Session
Operator
Thank you. (Operator Instructions). Our first question comes from the line of Fred Buonocore from CJS Securities. Your line is now open.
Fred Buonocore – CJS Securities
Thank you. Yes, good morning.
Craig LaBarge
Good morning, Fred.
Don Nonnenkamp
Good morning, Fred.
Craig LaBarge
Thank you.
Fred Buonocore – CJS Securities
Just in terms of the margin improvement, you are clearly seeing that in the Appleton operation, but stripping that out, it looks like your core margin was pretty close to 23%. And I just wanted to see if this is a trend we should expect to continue or what may have driven those strong margins during the quarter.
Craig LaBarge
Yes, you are right on target. We would say our third quarter margin without Appleton is a 22.9%. So you are right on track. I think the margins in the third quarter were largely attributable to just very good execution. Certainly helping that was the somewhat higher sales revenues, which allow us to better utilize our facilities; overhead absorption has improved and that contributes a little bit as well. But really just very good execution and a good mix of business.
Fred Buonocore – CJS Securities
Great. So – I mean, is it safe to – or not safe to assume, but I mean, can we look at this as a potentially sustainable level or something you can be achieving again in future quarters, and then seeing the consolidated margin benefit as you continue to improve Appleton?
Craig LaBarge
Yes. I think that – I think that in the aggregate, as we certainly believe that our margins are sustainable. The key is continuing to drive improvement and couple that with growing revenues and I think margins should be pretty solid.
Fred Buonocore – CJS Securities
Very good. I'll get back in queue, thank you.
Craig LaBarge
Good.
Operator
Your next question comes from the line of Paul Mammola from Sidoti & Company. Your line is now open.
Paul Mammola – Sidoti & Company
Hi, good morning, everyone.
Craig LaBarge
Hello, Paul.
Don Nonnenkamp
Hi, Paul.
Paul Mammola – Sidoti & Company
If I can just piggyback to gross margin again, on Appleton, where do you think that gross margin can go and I guess, what's the roadmap to get there?
Craig LaBarge
Well, we do continue to believe that gross margins in the mid-teens are really quite achievable for Appleton. The roadmap to get there is really the same roadmap we've followed through the – throughout the rest of the company for a number of years and that is just continuing to drive improvement in the operations. It's going to come from better margins, better efficiencies, better capacity utilization, and just driving those improvements that allow us to squeeze out better margins.
Don Nonnenkamp
And the return of their – some of their more traditional customers, I think, is an important ingredient in that as well.
Paul Mammola – Sidoti & Company
Okay, helpful. That's fair. On the defense business, in terms of booking new work, would you say anything on the competitive side on that dynamic has changed? Is anyone out there pricing below you guys maybe to steal share or business? Is anything like that going on or would you say the industry as a whole is just in a – I guess a low double-digit decline at the present moment?
Craig LaBarge
I don't think the industry as a whole is declining quite that quickly. The business is really tied to major programs. So the timing of the booking of those orders is going to be important. But nonetheless, I don't – we don't look upon defense as being a growth driver by any means in the – over the next few years. But we are not really seeing crazy pricing out there in the marketplace.
We are able to be competitive and able to continue to win the business that we target, that we really go after and again, I think aided by our – all the big investments that we've made over the last several years and our operational excellence initiatives and upgrading our facilities and plants and keeping them really state-of-the-art allows us to be as competitive and as aggressive as anybody. So we are not particularly concerned about competitors out there doing crazy things with pricing and driving the business down.
Paul Mammola – Sidoti & Company
Okay. Thanks for your time.
Craig LaBarge
Good.
Operator
(Operator Instructions). Your next question comes from the line of Mark Jordan from Noble Financial. Please go ahead.
Craig LaBarge
Hello, Mark.
Mark Jordan – Noble Financial
(Technical Difficulty) – the absolute dollars. Where do you see the bottom of – in terms of defense and do you have a sense of what kind of rate that might grow at once you've kind of bottomed out that –
Craig LaBarge
Mark, the first part of your question, we lost. If you could repeat it?
Don Nonnenkamp
Yes.
Mark Jordan – Noble Financial
Okay. Question – the question related to defense business. Where do you see the bottom in terms of absolute dollars in that segment? And once you reach that, what kind of growth opportunity do you think that business segment (Technical Difficulty) –
Craig LaBarge
I'm not sure I understand the question as it relates to the bottom in absolute dollars. Are you talking about our revenues or industry spending? I'm not sure I follow.
Operator
I believe his line just got disconnected. He has dropped out of the queue.
Don Nonnenkamp
Well, perhaps we could move on to another question, and he'll get back into the queue.
Craig LaBarge
Yes, let's come back to that then.
Operator
Okay. Your next question comes from the line of Fred Buonocore. Your line is now open.
Fred Buonocore – CJS Securities
Yes, just getting back to discussing winning of new customers. Can you elaborate a little bit on that, please?
Craig LaBarge
In any particular sector or overall?
Fred Buonocore – CJS Securities
Well, I guess you referred to it as it relates to both (Technical Difficulty) industrial and natural resources, as well as medical. So I guess that's overall.
Craig LaBarge
Yes, yes. Okay, good. Well, in the natural resources side, we have seen a real strength improving over the last – really – in particular, the last quarter or so in the oil and gas sector. We've got early-stage relationships with a number of new customers across natural resources. So we are optimistic about that.
In the industrial side, the – we are seeing increased activity from quite a few customers in industrial, I'd say in addition to Owens-Illinois, which is clearly our largest industrial customer. We have at least another five or so multimillion dollar per year industrial customers and we are adding to that, we are adding some new customers. We've added customers in the last 90 days that we think have the potential to be multimillion dollar per year customers in the not-too-distant future.
On the medical side, similar. Our largest customers today on the medical side would be Smiths Medical and Bausch & Lomb. But in addition, we've got at least six other medical customers right now that are multimillion dollar customers or will be this fiscal year, fiscal 2010. So most of those – I'd say virtually all of those customers have potential for additional growth.
Fred Buonocore – CJS Securities
That's great. So that kind of leads up to the next question that you had to know you were going to get. But as it relates to your 2011 reference in terms of reaching record levels, that's a – that could mean a lot. So I'm just trying to think about that in terms of a – maybe even a top-line growth rate. Do you think you can get into or be in a teens kind of year-over-year growth rate for the full year or do you have any comment? Kind of give us some parameters around that. Thank you.
Craig LaBarge
Well, I would hesitate to give any more specific guidance. It certainly depends upon how strong some of these markets grow over the next few quarters and at this point, our bookings are very strong. Just kind of in touching on the bookings, we bottomed out in retrospect here on bookings in our fourth fiscal quarter last year. That was the bottom.
And then throughout the first fiscal quarter of this current year, the September quarter, bookings were up a little, very tentative, most of our customers on the non-defense side were very tentative. It got a little bit more – I guess I'd say more courageous in the second fiscal quarter and then in the third fiscal quarter, things just really got dramatically stronger across most of the market sectors. And that's continuing into this year. If that continues in industrial and natural resources and to some extent, in medical, that bodes quite well for us.
The offset would be defense spending, which we know is not going to be growing and we are in a little bit of a trough right now in defense spending – I mean, our defense orders for us that we expect will come back. Our order – our program opportunities and our future estimates look pretty good, but we are in a little bit of a trough right now and expect that to be strengthening during the balance of this calendar year.
But it's going to depend in defense – on the programs that we are on and what the funding levels end up being. We think we are very well positioned on programs like F-35 and Black Hawk and V-22 and a number of other programs and that should be solid, that should receive solid funding for the next several years. But – and in fact, some of them, like F-35, we are in the very early stages. We are still doing very low-rate production and still winning new business on that program. So as that program grows, we will reap the benefits of that.
Bottom line is I'm hesitant to give anything too specific about rates of growth next fiscal year, but we are optimistic.
Fred Buonocore – CJS Securities
That's very helpful, thank you. And then just a real quick follow-up for Don on the working capital side. Should we continue to see working capital as a pretty heavy use of cash for the balance of fiscal 2010 as your order rates increase?
Don Nonnenkamp
Well, I would say in our third quarter, our cash flow from ops was only a negative $400,000. So I'm not sure that I would call that a heavy use of cash. We had $8 million growth in accounts receivable in the third quarter and that was the major driver. So I would expect the fourth quarter's cash flow – cash flow from operations to be plus or minus $1 million or so. That's obviously a lot less than where we were at the first half of the year, which was – those first two quarters, it was over $12 million. But again, I think you will see continued growth in AR as sales improve in the fourth quarter, but perhaps a more moderating investment in inventory.
Capital expenditures for the quarter were only a little less than $1 million and I don't expect that we will have any significant change in that number when you see the fourth quarter; $1 million to $1.5 million in the fourth quarter.
Fred Buonocore – CJS Securities
Got it. And just clarifying on the Q3 cash flow from operations, plus or minus around $1 million, so meaning just –
Don Nonnenkamp
Q4, Q4.
Fred Buonocore – CJS Securities
Q4. I mean, but relative to Q3. So you are just saying a use or a source of roughly $1 million for –
Don Nonnenkamp
Yes.
Fred Buonocore – CJS Securities
– cash flow from ops in Q4.
Don Nonnenkamp
Yes.
Fred Buonocore – CJS Securities
Great. Thank you very much.
Craig LaBarge
Okay.
Operator
Your next question comes from the line of Mark Jordan from Noble Financial. Your line is now open.
Craig LaBarge
Hello, Mark.
Mark Jordan – Noble Financial
Good morning.
Craig LaBarge
Sorry we lost you.
Mark Jordan – Noble Financial
Well, I could hear you fine. And I just – for some reason, we lost one channel.
Craig LaBarge
Okay.
Mark Jordan – Noble Financial
Your comments on the defense addressed what I was trying to get at in my previous question.
Craig LaBarge
Okay.
Mark Jordan – Noble Financial
Looking at the industrial and natural resource customers that you started to see an improved order flow from, are they also sharing a multi – or a longer-term view of their demand or are these orders coming in just kind of serially without feedback as to speculation as to longer-term needs?
Craig LaBarge
We don't often get a very useful long-term forecast from the customers. We see forecast from some customers, but two of our biggest customers in those markets would be Schlumberger and Owens-Illinois and we typically don't get long-term projections from them. I would say that we anticipate that the Owens-Illinois business is going to continue to be strong.
A lot of the new business that is driving the revenue levels today are still in the electronic and electromechanical area, but the key thing is that we've won a number of major new projects on the mechanical assembly side. And that's a new business and that looks quite solid.
Schlumberger, I think you can probably kind of follow rig count as the best measure of what we expect there and that business, which was very, very strong in calendar 2008, that would – which would be the early part of our fiscal 2009, until December of 2008, so towards the end of our second fiscal quarter in '09 and it just practically stopped.
Now, there were some sales that continued to run out, I mean but booking activity, order activity practically stopped. That really strengthened significantly in – beginning in about December of this fiscal year. So it was pretty much almost – I'm exaggerating a little bit, but it was almost shut down for – or at least our business inflow was almost shut down for about a year and it's come back very strongly. So – and I would expect that that's going to continue.
Mark Jordan – Noble Financial
You discussed earlier Appleton and a goal to get the gross margins there to the mid-teens. Longer-term, is there a structural reason why Appleton would not be able to move towards the corporate norm of 20% plus?
Craig LaBarge
I don't think there is a structural reason at all. I think that it's going to depend – it is going to be long term, it's going to be a matter of developing relationships and capabilities that allow us to move into higher-level products, that allow us to do much more higher-level kind of work like we do at most of our other facilities. Right now in Appleton, the majority of the revenues come from circuit card assembly, which is good business and should present opportunities for us then to move up into the higher-level products.
Don Nonnenkamp
With their existing customers.
Craig LaBarge
Yes, yes.
Don Nonnenkamp
And new customers. So it's not a situation where the customer base has to change and – we just have to move up the food chain with those customers.
Mark Jordan – Noble Financial
Okay. Thank you very much.
Craig LaBarge
Good.
Operator
Thank you. And I don't show any further questions on queue at this time. I would now like to turn it back over to management for any concluding remarks. Please go ahead.
Craig LaBarge
Okay. Well, I want to thank everyone for joining us today and for your continuing interest in LaBarge. We hope that you will join us again when we announce results for the fiscal 2010 fourth quarter and full fiscal year in late August – actually probably be early September I think, tentatively about September 1st. If you have any other questions in the mean time, please don't hesitate to contact us. Colleen Clements, our Director of Corporate Communications is always available.
So again, thanks and have a great day.
Operator
Thank you. Ladies and gentlemen, that does conclude our conference for today. If would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325, using the access code 4203561.
Thank you for your participation. You may now disconnect.
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