IEC Electronics Corp. (NYSEMKT:IEC)
Q1 2016 Earnings Conference Call
February 12, 2016 10:00 am ET
John Nesbett - Founder & President, IMS
Jeff Schlarbaum - President, CEO
Mike Williams - CFO
Mark Jordan - Noble Financial
Andrew Huang - B. Riley
Greetings and welcome to the IEC Electronics First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. John Nesbett from IMS. Thank you, Mr. Nesbett. You may begin.
Good morning and thank you for calling in. On the call this morning, we have Jeff Schlarbaum, President and Chief Executive Officer, as well as Michael Williams, Chief Financial Officer. Before we get started, I'd like to take a moment to read the Safe Harbor statement.
This conference call contains certain statements that are or may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made in reliance upon the protections provided by such acts for the forward-looking statements. These forward-looking statements, such as when the company describes what is believes, expects, or anticipates, will occur, and other statements include, but are not limited to, statements regarding future sales and operating results, future prospects, the capabilities and capacities of business operations, any financial or other guidance and all statement that are not based on historical facts but rather reflect the company's current expectations concerning future results and events.
The ultimate correctness of these forward-looking statements is dependent upon a number of risks and events and is subject to uncertainties and other factors that may cause the company's actual results, performance, or achievements to be different from any future results, performance or achievements expressed or implied by these statements. Specific risks and uncertainties include, but are not limited to, those set forth in its earnings release immediately before this call and reports it files with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or correct any forward-looking statements, whether as a result of new information, future events, or other otherwise, except as required by law.
Okay. I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.
Great. Thanks John. Good morning, everyone.
We're pleased with our strong start to fiscal 2015. Just over a year ago, I returned to IEC and within a few months, our new management team established a focused strategy to turn our company around. Since then, we have steadily and consistently driven improved performance and in the first quarter, which is our third full quarter since the change in control.
IEC achieved solid revenue growth, enhanced profitability and our third consecutive quarter of gross margin improvement. Our entire organization is working very hard to move forward from the challenges of recent years and those efforts are reflected in our first quarter results.
So let me provide a little bit of highlights from the quarter. On the revenue front, revenue grew 14.2% to $32.9 million driven by increased strength from our medical and aerospace and defense customers.
On a market sector basis, our revenue breakdown for the quarter is as follows; Aerospace & Defense was 40%; Medical 41%; Industrial was 16%; and Communications and Others was 3%. We are encouraged by the opportunities we are seeing as we continue to regain the confidence of our customers and the marketplace.
On the gross margins, they increased to 17.7% reflecting our third consecutive quarter of gross margin improvement. Let me give a little bit of additional context around the improvement on the gross profit side.
Historically, our production levels have matched our sales level, however, in the first quarter we increased production to build the finished goods of roughly $1.4 million at the request of few of our customers. And as a result, our production outpaced sales. This had a favorable impact on our gross margins. However, on a normalized basis, our gross margins would have been 16.5%, still a sizeable year-over-year increase compared to 12% in Q1 of fiscal 2015.
We steadily delivered improved performance over the past three quarters and looking forward, it's reasonable to expect that we will continue to generate gross profit margins at or above the gross margins we generated exiting our fiscal fourth quarter of 2015.
On the net income side, we posted $1.5 million or $0.15 a share which demonstrates a significant improvement and profitability compared to the first quarter of fiscal 2015.
In terms of our balance sheet, it remains strong with $22.0 million in working capital and we reduced our net debt by $700,000 during the quarter.
In early January, we also refreshed our branding with the introduction of a new logo and a Web site. If you haven't had a chance to take a look, please visit when you have a chance.
We are effectively moving forward with the strategic initiatives we put in place to drive revenue and margin growth, sustained profitability and operational excellence. Organic revenue growth remained the key focus as we look to strengthen our relationships with existing customers and to expand the programs we anticipate in. Likewise, we've unified our operations to increase efficiencies, which resulted in increased productivity in the first quarter.
Our higher production rate contributed to a higher inventory position as we produced a larger amount of finished goods in anticipation of our customers' future needs. However, we do remain committed to more effectively managing our assets, including reducing inventory, as these initiatives will take some time to gain traction.
As I've said before, the success of the company hinges on our customer relationships. Many of our customers have reconfirmed their commitment to partnering with IEC and we continued to work together for the successful execution of ongoing projects and as we gain exposure to new programs.
As a fully integrated U.S.-based manufacturing partner, we believe IEC is uniquely positioned to provide innovative technical solutions to customers and highly regulated end markets and we are enthusiastic about the opportunities ahead.
The first quarter was a great start to the fiscal 2016 year and we are energized to build upon these results.
I will now turn the call over to Mike Williams to review our company's financial performance.
First quarter revenue was $32.9 million, a 14.2% increase as compared to the first quarter of last year. Growth of $4.1 million was driven primarily by our medical customers and in particular by higher demand from our customer that was on FDA hold last year. We also had several other customers with increased demand and an existing customer with a new program. In total, our medical customers grew $4.5 million year-over-year.
Our Aerospace & Defense sector increased $1.4 million, we saw fluctuations and activity from many customers, but one new customer in particular helped drive the growth for this group.
The growth from our Medical and Aerospace & Defense sectors was partially offset by decreases of $1.9 million from industrial customers. The decline in industrial was primarily related to lower demand from one customer that is sourcing more product from an alternate source as well as having softer end market demand.
First quarter gross profit increased $2.4 million to 17.7% of sales from 12% of sales in the first quarter of the prior fiscal year. Several factors contributed to the margin increase including higher production volume, changes in customer mix and improved labor efficiencies.
As Jeff mentioned earlier in the call, production outpaced sales in the quarter favorably impacting margin performance. On a normalized basis, gross margin would have been 16.5%. Higher sales and increased finished good requirements for certain customers improved our leverage of fixed costs. We steadily improved our labor cost during the past year by focusing on lean manufacturing comparatively, we had higher labor cost in the first quarter of fiscal 2015 due to hiring and training from programs that ramped up in the early fiscal 2015.
Selling and administrative expenses excluding restatement related expenses increased $800,000 and represented 12.3% of sales in the first quarter of fiscal 2016, compared to a 11.3% of sales in the same quarter prior fiscal year. The increase in selling and administrative expenses was primarily due to higher comparable bad debt expense, severance costs and higher professional expenses related to year-end activity including the bank refinancing.
Net income for the quarter increased to $1.5 million or $0.15 per share compared to a net loss of $800,000 or a loss of $0.08 per share in the same prior year period, which included $0.02 from continuing -- a loss of $0.02 from continued operations and a loss of $0.06 from discontinued operations.
Now, turning to the balance sheet, working capital at the end of the quarter was $22.2 million compared to $21.9 million at September 30, 2015. Accounts receivable decreased $4.7 million for the quarter, primarily due to a more efficient linear production and shipment flow throughout the quarter. Accounts payable also reduced by $5 million due to lower raw material cost, reimbursement and subsequent payment of legal fees related to the SEC investigation and more importantly due to a more consistent supply chain process week-to-week.
Inventory was up slightly due to the increase in finished goods as previously discussed, while raw material decreased $700,000. We will continue to focus on better asset management in particular the need to reduce raw materials and work-in-process as well as ageing of certain customer accounts receivable. We look forward to getting back to the industry leading asset management metrics, the company was able to achieve from prior years.
Also as of the close of the quarter, the company paid down approximately $700,000 in net debt and improved debt to EBITDAs ratio from 5.2 in Q4 of fiscal 2015 to 4.1 as calculated per our credit facility agreement.
With that, I will now turn the call back over to Jeff.
Great. Thanks Mike.
So let me recap where we stand today in relation to our near-term financial goals. A key priority identified as organic growth, we have a very strong customer base and we are delivering on our commitment to drive improved performance and project success. So to that end, we are honored to receive a supplier excellence award recently from a longstanding customer Harris Corporation. It was truly gratifying to be recognized for dependability and consistency. We are also focused on introducing our capabilities to new audiences.
Improving gross margin performance remains a focus. And as mentioned earlier in the call, our gross margin increased significantly in the first quarter. Going forward, we expect to generate gross margins at or higher than the gross margins we generated exiting fiscal 2015.
The first quarter was the first and recent memory that we did not -- that we did not have significant one-time items in the P&L. And we are pleased to have reached that milestone. We expect to see continued moderation in one-time items and believe that this combined with revenue growth, improved gross margins and cost containment should help us achieve sustained profitability.
Finally, we are committed to reducing inventory and enhancing asset utilization to drive improved working capital and debt reduction.
As we move to 2016, we also intend to increase our efforts to heighten IEC's profile in the investment community through participation at investor conferences. In January, we presented at the Noble Financial Capital Markets Conference in Florida and we'll be presenting at the Sidoti Emerging Growth Conference in New York at the end of March and also B. Riley's Annual Investor Conference in California in May.
I would also like to take this opportunity to invite you to attend our annual shareholder meeting which will be held on Thursday, March 3 at 9 a.m. here at our corporate headquarters in New York, New York. I hope to see many of you here.
In closing, we are quite pleased with our progress this quarter and we believe building a solid foundation to drive shareholder value through continued growth and profitability.
With that, I will now turn the call over to questions.
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mark Jordan with Noble Financial. Please proceed with your question.
Good morning, Jeff. Congratulations on a really good quarter. I believe last quarter you talked about some of the challenges that you would face in fiscal 2016 relative to sort of legacy customer issues that you inherited from the prior management team, or you going to be potentially losing some business. At that time, a quarter ago, you stated that you thought that new business awards that you would be able to achieve would offset the decline in some of the legacy activities and, therefore, year-over-year be relatively flat year. Could you update that given obviously a very strong start to the year?
Yes, absolutely. Thanks Mark for the question. Nice talking to you. The revenue issue that we -- that I had discussed earlier was related to our industrial sector one and one specific customer. And so that revenue -- while we're still engaged with that customer as reduced quite substantially. But, you are right, we have seen continued strength with key existing customers, as I said, the medical sector remains very strong. We continue to pledge our support to those customers and their end markets are performing well. We've seen some increase in some of our key aerospace and defense customers, which also has helped to offset.
So, and then, frankly some of our smaller emerging customers that we are really unsure of how they would be affected by the current end market dynamics, they've actually been a little bit stronger than we anticipated. So while individually those customer did not represent a lot of revenue on the aggregate, they actually moved the needle for us. So all those three factors combined have really not only offset the industrial revenue contraction we saw from that one customer, but actually helped us -- make-up more than the difference.
So, as we look out into the balance of 2016, we are working really hard to try to restore the revenue contraction from the industrial customer, which still I think is uncertain at best. So as we see continued strength in our existing customers and we start to add new programs from the renewed confidence that we have from our existing customers. And then, hopefully, as we get towards the end of the year, we start adding some new customers through our new customer acquisition program. I think that will position us for organic growth a few quarters from now.
Okay. Mike, I noticed that in the Q that you had increased your inventory reserves and accounts receivable provision by -- in aggregate by $722,000. Are these reserve levels now at a point where you view them as balanced, or do you need the -- or should we expect significant or meaningful increases in those moving forward, I mean, obviously having solid earnings and increasing reserves -- sign of a very strong quarter?
I will let Mike add anything, I mean not if covered, but I think we are adequately reserved on the inventory and receivable side. As we reengage with a number of our customers that we had lost touch over the last year or two, we are cleaning up some of the aged AR, but we did take a reserve to some that have drifted out beyond a level that we were comfortable with. I believe that the vast majority of it, we will collect and on the inventory side, again, we have gone through the majority of the clean ups. So I look at going forward the accruals and the reserves that we have taken up until now should adequately take care of what inefficiencies we had on the inventory side and going forward, I don't see it reoccurring at that pace. And I don't know, Mike, do you have anything to add on that?
No. I think we are adequately reserved as you mentioned and we are focused on cleaning that up the particular customers that have aged a well as the inventory management that we've talked about and really having that improved supply/demand operations process to be really managing our raw material with better. So we are improving both of those areas and so we don't see that level going forward. But, we do believe we are adequately reserved right now.
Okay. Final question for me guys, I noticed the -- obviously, you've mentioned the award from Harris. In the quarter you said communications represent only 3% of revenue. Harris has a huge tactical radio manufacturing operation in Rochester. Is that a potential target that you have meaningful upside potential with regards to volumes at that customer over time?
Yes. Just to clarify we have Harris in our aerospace and defense sector, so they are not in our communication sector. Those are more a commercial communications. So, you're right, we have other communication customers as well that you might consider communications, Mark, but just to clarify most of our communication customers are in the aerospace and defense. And that's certainly where Harris resides.
So in terms of growth, yes, I mean, I was energized with their recognition of our teams efforts to make them successful, if they are very tough climate in Washington DC the funding seems to -- the funding releases are coming at the last minute. And it's putting a lot of pressure on companies like Harris and then there is supply base to react very quickly. And we put in place methods to service them very quickly in short turnaround times. So because of our ability to do that Harris will look more for those suppliers like us that can react in these short lead time environments and I think that serves as a great platform for growth.
Okay. Thank you very much.
[Operator Instructions] Our next question comes from the line of Andrew Huang with B. Riley. Please proceed with your question.
Thanks for taking my question. Congratulations on the revenue and the margin upside. I was wondering if you had any color on revenue growth for the March quarter, I think most of your peers have some degree of a seasonal, sequential downtick, so I'm wondering if I see would be any different?
So Andrew, I wouldn't say if I look out into the balance of our 2016, so having just finished Q1, if I look into Q2, Q3 and Q4 from an expectation standpoint, I would say mid-single digit, year-over-year growth is a fair expectation, it could be a little less, could be a little more. For us as I said in previous calls, we're really focused on restoring our operational performance, which then leads to restoring our financial performance, which then helps us restore the confidence with our current customers to win a greater share of their work, which we're putting ourselves in position to compete for new programs. And the more substantial organic growth will come from a new customer acquisition in which that entire model is under construction. And I think we will start to see new customer acquisition awards towards the end of our fiscal 2016, which will really impact fiscal 2017. But, no, I still see over the course of the next couple of quarters that year-over-year growth rates would be in that single-digit range.
That's great. And maybe if you could comment on profitability as well for the next three quarters?
Yes. So as I said in my prepared remarks, if you look at where we were exiting 2015 in Q4, we were mid-15 range in gross profit. We talked about the normalized gross profit, we would have achieved in this quarter at roughly 16.5. So, I think, as you look out into the balance of the year, those were pretty good ranges. And if we see some unanticipated strength in some of the markets where we can even further leverage our overhead and continue to improve on the labor efficiencies, then we could go north of that. But, I think from an expectation setting standpoint that's probably a good range looking out at the next couple of quarters.
Okay. And then, I just have a one last question, if you don't mind, it looks like you are not paying any income taxes this quarter, maybe do you have -- can you give us a sense of how long that will last?
Yes. That will last for the foreseeable future as far as this year and next year as we have a full valuation allowance in our deferred tax assets which are pretty significant and you can see that in the Q. So for this year, we don't really anticipate any income taxes on the P&L.
Okay. Thanks. And I will get back in the queue.
[Operator Instructions] Our question comes from Andrew Huang with B. Riley. Please proceed with your question.
Okay. Thanks. I just was hoping to get some cash flow items for the quarter, so do you have cash flow from operations and then CapEx?
Yes. Again, it's in --
Oh, in your 10, you just filed it, sorry.
Yes, yes. We filed that this morning. But, our CapEx was $685,000 for the quarter, which has been fairly consistent with our past capital spend.
And do you have any CapEx guidance for fiscal 2016?
Yes. We are targeting somewhere between say $3 million and $3.5 million at this point in total for the year.
Great. And do you have any targets for working capital measures exiting fiscal 2016?
We do. I'm not sure at this point I really want to get into some of those specifics. But, as both Jeff and I mentioned we are -- as a team and an organization we're really focused on reducing our inventory levels. Getting to the turns that this company previously had several years ago, our turns right now are not exactly where we want them to be and it's particularly stuck in raw materials. And then same with, our AR and AP, we need to continue to manage those where we have been getting better, but we still have a little ways to go on that.
Okay. And then, one last question, on the industrial segment, it seems like, I guess nine of your peers have kind of talked about the segment being weak. I was just curious from your perspective what you're seeing with your customers in terms of the outlook for the remainder of the year?
Yes. I don't think it's any surprise that when you look at the sector mix that the industrial sector has continued to contract. So I would concur that we are seeing softness in the large capital equipment ruggedized industrial products. And so, we are seeing some consistent -- some consistent softness with our peers in the industrial sector. Fortunately for us, our aerospace and defense sector coupled with our medical sector both remain very steady and very solid. So that sort of how we're seeing the current state.
Great. Thanks for taking my questions.
Great. Thanks Andrew.
There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
Well, thank you, everyone for calling in. We look forward to speaking with everyone next quarter and hope to see a lot of you at our upcoming annual shareholder meeting.
This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.
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