Key Technology's (KTEC) CEO Jack Ehren on Q2 2016 Results - Earnings Call Transcript

| About: Key Technology, (KTEC)

Key Technology, Inc. (NASDAQ:KTEC)

Q2 2016 Earnings Conference Call

April 28, 2016 17:00 ET

Executives

Cathy Burlingame - Director, IR

Jack Ehren - President & CEO

Jeffrey Siegal - SVP & CFO

Analysts

Operator

Good day, ladies and gentlemen. And welcome to the Key Technology Fiscal 2016 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will host a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded via the webcast.

Now I would like to hand the call over to Cathy Burlingame. Please proceed, ma'am.

Cathy Burlingame

Thank you, Brian. Good afternoon, and thank you for joining us for the Key Technology fiscal 2016 second quarter conference call. Hosting the call today will be Jack Ehren, President and Chief Executive Officer; and Jeff Siegal, Senior Vice President and Chief Financial Officer. Today's call is being recorded and will be available for replay on the investor relations homepage of our website at www.key.net.

Before we begin, I would like to remind you that comments made in today's call may include forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations or beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These and other cautionary statements are listed in today's release. For a more detailed discussion, please refer to the company's annual report on Form 10-K filed with the Securities and Exchange Commission in December of 2015.

Now I'd like to turn the call over to Jack Ehren, President and Chief Executive Officer, for a discussion of the company's results.

Jack Ehren

Thank you, Cathy. Good afternoon. Our strategy for driving long-term value continues to concentrate on providing innovative, industry-leading solutions that can be effectively leveraged across existing and new applications and insertion points, expanding in our core markets in North America and EMEA, penetrating high potential adjacent and geographic markets, capitalizing on strategic partnerships, and implementing enhanced operational efficiencies. We remain fully focused and committed to generating sustainable, long-term growth and profitability and creating long-term shareholder value. This past quarter, we have continued to progress on the execution of our overall strategy. And we are achieving steady progress throughout all functional areas of our company.

In the second fiscal quarter, orders were solid, with significant contributions from our North America and EMEA regions, most notably in the processed potato and processed fruit and vegetable segments. And our ending second quarter backlog of $38 million is our largest quarterly backlog in almost 3 years, and one of the larger backlogs in our company's history. After sluggish orders in North America in fiscal years 2014 and 2015, we are seeing positive trends in this region, with increased year-to-date orders in our core markets over the prior year, most significantly in both processed potatoes and processed fruit and vegetables. We also continue to see strong potential opportunities in our core segments in North America, in the second half of this fiscal year and into fiscal year 2017.

In fiscal year 2015, we achieved record orders in euros in our EMEA region with a 32% year-over-year orders growth. Fiscal year 2016 year-to-date orders in the EMEA region, in euros, have continued to increase over the fiscal 2015 levels with the largest impact being in the potato segment. We remain focused on our strategic relationships and partnerships in the EMEA region. And we see continuing important, strategic opportunities in this region, as well, in the second half of fiscal 2016.

Our solid bookings during the quarter and strong beginning backlog enabled us to realize favorable utilization in our facilities and to increase our gross margins to approximately 30% in the second fiscal quarter despite a larger mix of lower-margin product line shipments. In addition, in the second quarter, despite increased sales, we effectively controlled our overall operating expenses to a level below the total expenses recorded in our first fiscal quarter. The research and development expenses for the second quarter included an additional $600,000 of cost associated with incremental consulting and contract services, as previously communicated, to help ensure the timely release of VERYX applications.

The year-to-date general and administrative expenses also include $680,000 of restructuring charges incurred in our first fiscal quarter. We continue to make important progress on the further development of our VERYX platform. We are currently continuing with our extensive North America and EMEA field testing at customer locations, as well as conducting customer demonstrations in our innovation and solution centers in North America and Europe. We remain very encouraged by the positive feedback, support, and collaboration we are receiving from our customers globally. Our positive results are now being converted into VERYX orders for the coming fall season for the specific applications currently released. And our funnel of opportunities for the VERYX platform in our core markets continues to grow steadily. We will ship our first VERYX production units in this third fiscal quarter, and we expect to start accepting orders for additional core market applications the summer.

We plan to continue releasing our VERYX platform by sizes and applications throughout fiscal year 2016 and beyond. We expect VERYX orders to continue to increase throughout fiscal year 2016 and into 2017, with a more significant positive impact on revenues and earnings expected to be realized in fiscal year 2017. As we aggressively continue on our transformational journey to reshape our culture, our approach to technology leadership, our customer relationships globally, and our overall ways of doing business, we remain energized and focused as we execute on our long-term strategy and our commitment to generating positive returns for the company and our shareholders.

I will now turn the call over to Jeff for an overview of our financial results.

Jeffrey Siegal

Thank you, Jack. I will now discuss the second quarter results for fiscal 2016. Second quarter net sales were $28.5 million compared with $21.6 million reported in the same quarter, a year ago. Sales of automated inspection systems in the second quarter totaled $9.6 million compared with $7.9 million in the same period a year ago, a 20% increase.

Second quarter net sales of process systems were $11.9 million compared with $7.2 million in 2015, a 65% increase. The increases in automated inspection and process systems sales were anticipated due to the higher beginning backlog as we entered the quarter. From a geographic perspective, the growth was primarily in the EMEA region. From a market perspective, the largest growth was in potatoes. Parts and service net sales were $7 million versus $6.5 million in the same period a year ago, a 9% increase.

Gross profit for the second quarter was $8.5 million compared with $5.7 million for the second quarter of fiscal 2015. As a percent of sales, margins of 29.7% increased from the 26.4% reported for the same quarter, a year ago. Gross margins for the quarter ended March 31, 2016, were positively affected by more efficient plant utilization due to the higher sales and production volumes, and lower warranty and customer support charges as compared to the same quarter last year.

Operating expenses of $9.1 million for the second quarter were 31.9% of net sales compared with $8.6 million or 39.8% of net sales for the same quarter last year. Operating expenses for the three-month period ended March 31, 2016, were impacted compared to the same period in the prior year by approximately $600,000 related to increased research and development expenses associated with incremental consulting and contract services related to new product development.

The loss from operations in the second quarter improved significantly to $641,000 from $2.9 million in the same period in the prior year. The net loss for the second quarter was $550,000 or $0.09 per fully diluted share compared with a net loss of $1.9 million or $0.31 per fully diluted share in the same period last year.

I will now discuss our second quarter 2016 orders and backlog. For the second quarter ended March 31, we recorded orders of $29.2 million. Last year's second quarter orders totaled $25.1 million. Our backlog at the end of the second quarter was $38 million. This compares with $32.2 million at the end of the second quarter, last year. The increase in orders was due to increases primarily in North America and Europe. Orders were up most significantly in the processed fruit and vegetable market. The backlog mix at the end of the second quarter was 40% automated inspection systems, 55% process systems, and 5% parts and service.

For the six months ended March 31, 2016, net sales were $53.3 million as compared to $41.7 million for the same period in the prior year. Net sales were up 21% in automated inspection systems, up 49% in process systems, and up 9% in parts and service. The net loss for the first six months of fiscal 2016 was $0.36 per diluted share as compared to a net loss of $0.60 per diluted share in the first six months of 2015. Cash at the end of the second quarter was $4 million compared with $7.7 million at September 30, 2015.

Looking forward, net sales for the third quarter of fiscal 2016 are expected to increase significantly as compared to the net sales recorded in the second quarter of fiscal 2016, due to the higher beginning backlog. Gross margins are expected to be lower in the third quarter of fiscal 2016 as compared to the second quarter of fiscal 2016, due primarily to less favorable product mix. Operating expenses for the third quarter of fiscal 2016 are anticipated to be slightly lower as compared to the second quarter of fiscal 2016.

I will now turn the call back over to Jack.

Jack Ehren

Thank you, Jeff. We will now open up the call for questions.

Question-and-Answer Session

Operator

Jack Ehren

I just want to thank everybody for joining the call. And we look forward to talking with everybody again next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today's program, and you may all disconnect. Everybody have a wonderful day.

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