LaBarge, Inc. F4Q08 (Qtr End 06/29/08) Earnings Call Transcript

LaBarge, Inc. (LB)

F4Q08 (Qtr End 06/29/08) Earnings Call Transcript

August 28, 2008 11:00 am ET

Executives

Craig LaBarge – CEO and President

Don Nonnenkamp – VP and CFO

Analysts

Fred Buonocore – CJS Securities

Chris McDonald – Kennedy Capital

Peter Okkan [ph] – Smith Barney

Tom Spiro – Spiro Capital Management

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the LaBarge Incorporated Fiscal 2008 Year-End Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for question. (Operator instructions)

Before we begin, the Company would like to remind you that during this call the speakers will be making certain forward-looking statements. The Company's actual results may differ significantly from the results described in or suggested by these forward-looking statements. The Company's actual results are subject to a number of risks, including, but not limited to, those described in its filings with the Securities and Exchange Commission.

As a reminder, this conference is being recorded today August 28th, 2008.

I would now like to turn the conference over to Mr. Craig LaBarge, President and CEO. Please go ahead, sir.

Craig LaBarge

Good morning, everyone. Thank you for joining us today for a discussion of LaBarge's financial results for the fiscal 2008 fourth quarter and full year, which ended June 29. 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.

Robust order flow, improved operating efficiencies, and broad-bases strength in the markets that we serve contributed to an outstanding fiscal year for LaBarge. The Company’s sales, earnings, and bookings all reached record highs. Fiscal 2008 fourth quarter sales and earnings also represented new quarterly records for the Company. In addition, improved operating efficiencies and product mix in the current year periods generated year-over-year gross margin expansion for both the fourth quarter and the full fiscal year.

To review the results in more detail I am going to turn the call over to Don.

Don Nonnenkamp

Good morning. In the fiscal 2008 fourth quarter net sales were $77.8 million, up 20% from $64.9 million in the fiscal 2007 fourth quarter. Net earnings rose 58% to $4.6 million, $0.28 per diluted share versus $2.9 million, $0.18 per diluted share in the last year fourth quarter.

Fourth quarter gross margin was 19.5%, improving 150 basis points from the 18% in fiscal 2007.

SG&A expense as percent of sales declined to 9.6% versus 10.4% in the fiscal 2007 fourth quarter. In actual dollars, fiscal 2008 fourth quarter SG&A increased 10% from previous fourth quarter contrasted the 20% increase in sales volume.

As a percent of sales, operating income was 10% versus 7.6% in the same period a year ago. Interest expense was $253,000 compared with $469,000 in the period a year ago. Net cash flow from operations was $12.9 million compared with a negative $1 million in the fiscal 2007 fourth quarter. I would call your attention to the drop in accounts receivable in the fourth quarter of about $6 million and inventory also dropped to about $2 million in the fourth quarter.

Results for 2008 full fiscal year were as follows. Net sales were $279.5 million, up 19% from $235.2 million in fiscal 2007. Net earnings were $14.8 million, $0.92 per diluted share, up 31% from $11.3 million, or $0.71 per diluted share in fiscal 2007.

Including fiscal 2008 results, LaBarge has achieved a five-year compound annual growth rate of 22% in sales and 35% in net earnings from continuing operations.

Fiscal 2008 full year gross margin was 19.7%, up 20 basis points from 19.5% in fiscal 2007. Higher gross margin in fiscal 2008 fourth quarter and full year were the result of improved operating efficiencies and product mix.

SG&A as a percent of sales declined to 10.6% from 11.2% in fiscal 2007. In actual dollars, fiscal 2008 SG&A increased 13% from the previous year in contrast to the 19% increase in sales. Increase in SG&A in fiscal 2008 was primarily attributable to higher variable compensation and medical expenses.

Operating income as a percent of sales was 9.1% compared with 8.3% in fiscal 2007. Interest expense was $1.5 million compared to $2.2 million in fiscal 2007. The reduced interest expense in the 2008 fourth quarter and full year reflects lower average debt levels.

Net cash flow from operations was $18 million compared with $11.9 million in the previous year. Total debt at June 29^th was $15.6 million, down 39% from $25.7 million at the end of the third quarter and down 40% from $26.3 million at the end of last fiscal year. Our pay down of debt has continued into the first quarter of the current fiscal year as our operating cash flow is healthy.

Stockholders’ equity at June 29^th was $91.5 million, up 5% from $86.9 million at the end of the third quarter and up 20% from $76.4 million at the end of last year.

After a record level of shipments in the fourth quarter strong bookings resulted in healthy year-end backlog of $221.3 million, down 7% from $238.1 million at the third quarter, but up 7% from $206.2 million at the end of the previous year. Approximately 80% of the backlog at fiscal year end was scheduled to ship in the next 12 months.

During fiscal 2008, the Company repurchased 123,400 shares of its common stock in the open market, including 37,400 in the fourth quarter. As a reminder, again, our stock buyback has two purposes – to reduce the dilutive aspects of the Company’s compensation programs and to support the stock in the market.

I am now going to turn the call back over to Craig.

Craig LaBarge

Thanks Don. The larges contributors to sales in fiscal 2008 were from customers in the defense, natural resources, and industrial market sectors. Shipments on a variety of defense programs comprised the largest portion of revenues, accounting for about 38% of fiscal 2008 net sales compared with 37% in fiscal 2007. Actual sales dollars from the defense market sector increased 23% for the year compared to last fiscal year.

Shipments to natural resources customers represented about 23% of fiscal 2008 net sales versus 24% in fiscal 2007. Actual sales dollars from this market sector were up approximately 14% in fiscal 2008 versus a year earlier primarily the result of higher sales to mining customers during fiscal 2008.

Shipments to industrial customers were 18% of fiscal 2008 net sales compared with 16% in fiscal 2007. Actual sales dollars from the industrial market sector were up 38% in fiscal 2008 versus a year earlier due primarily to increased shipments of equipment used in glass container manufacturing systems.

Shipments to commercial aerospace customers represented 7% of fiscal 2008 revenues compared with 8% in fiscal 2007. Our 2008 sales from the commercial aerospace market sector were up about 15% from a year ago largely due to increased shipments on a very light jet program.

Shipments to medical customers represented 7% of our 2008 sales versus just 3% in fiscal 2007. Actual sales dollars from the medical sector more than doubled in fiscal 2008 versus a year earlier due to increased sales to various new and existing medical customers.

Revenues from the government systems market sectors represented just 4% of fiscal 2008 sales versus 9% in fiscal 2007. The year ago period included shipments for a postal automation program that was completed during the 2007 fiscal year.

Bookings of new business were strong in fiscal 2008 setting a new Company record at approximately $300 million. As with sales, the largest contributions to bookings came from customers in the defense, natural resources, and industrial market sectors.

Full year bookings from defense customers increased 66% over the prior year comprising a combination of new and follow-on business on a wide variety of military programs. Some examples include the MESA advanced radar system, the tactical Tomahawk cruise missile program, and the stealth F-22 Raptor aircraft.

In the natural resources market sector, orders were actually down about 16% from the previous fiscal year due to lower bookings from both the oil and gas and the mining market sectors.

In the industrial market sector, booking were up 27% from a year ago. The growth is largely attributable to increased orders from OI for equipment used in glass container manufacturing systems.

Full year bookings to medical customers were more than double that of a year earlier due to our ongoing efforts to develop new and existing customers in the medical equipment market.

Given the amount of press coverage that one of our customers, Eclipse Aviation, has been receiving lately, I think it’s appropriate to comment on the situation as it relates to LaBarge. Those of you who closely follow Eclipse likely know that the Company has experienced numerous production delays. Last week, Eclipse announced that it was implementing an operational excellence plan to improve productivity and this action – and that this action will slow down production through the balance of calendar 2008.

This does mean delivery delays for LaBarge and in fact all of the Eclipse’s suppliers. All of the indications that we are receiving from Eclipse are that these delays are temporary and their plan is to begin a new production ramp at the beginning of calendar 2009. We continue to believe that Eclipse’s business is very promising and that once their production ramps up so will ours.

To give you some context on the contribution of Eclipse to our overall business, in fiscal 2008, Eclipse represented about 4.5% of our total revenues. At fiscal year-end, we had a backlog for Eclipse of just under $40 million and about $32 million of that is scheduled to ship beyond the current fiscal year, beyond the next 12 months.

Looking forward, we anticipate that our fiscal 2009 first quarter sales and earnings will be up from the comparable period a year earlier. Our current backlog, healthy pipeline of new opportunities and our diverse mix of business continue to give us great confidence in the positive prospects for the Company.

At this time, Don and I will be happy to take any questions that you may have.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions) And our first question comes from the line of Fred Buonocore with CJS Securities. Please go ahead.

Fred Buonocore – CJS Securities

Yes, good morning, Don and Craig, how are you?

Craig LaBarge

Good. Good, Fred, how are you?

Fred Buonocore – CJS Securities

Wonderful, thank you.

Craig LaBarge

Good.

Fred Buonocore – CJS Securities

And outstanding quarter and year. Just wanted to see if you would be able to comment any further or more specifically on how we should think about growth for 2009. Any more specificity on that?

Craig LaBarge

Sure. I mean certainly at this point we are anticipating that we will be able to continue to grow the business. I certainly don’t think it would be realistic to expect another 30 plus percent growth in earnings this year. I think a number of our customers are, as are most people in this economy, a bit uncertain about the overall effect of the economy. I don’t think many of them or any them whatever really feeling a dramatic impact at this point, but there is certainly an added cautiousness on the part of our customers that we sense as they continually assess the overall economic condition. But, again, given our diverse mix of business and given the markets that we serve, we continue to expect that we will be able to continue growing the business.

Fred Buonocore – CJS Securities

Got it. And just to clarify on the Eclipse, you said $32 million of that $40 million backlog is scheduled to ship beyond the next 12 months, or beyond the end of – beyond –

Craig LaBarge

Beyond fiscal year 2009.

Don Nonnenkamp

Yeah, yeah, beyond fiscal year 2009. That’s the schedule that we have today, yeah.

Fred Buonocore – CJS Securities

Yeah. And just in terms of (inaudible) so your bookings declined a bit sequentially for Q4, which perhaps it was timing and other variance, but should we think of this or keep looking at this as a possible deceleration in demand as it relates to (inaudible)?

Craig LaBarge

I think it’s too early to know, I think it’s took early to tell. I mean our bookings tend to be lumpier than our sales. A lot of the bookings are – I mean the backlog and all is more heavily influenced by the government side of the business, which does tend to be lumpier. We try to announce those contracts as much as we can. But I think it’s too early to know. I think what we are sensing is more of a cautiousness on the part of customers. At this stage, I don’t think that we are seeing any real weakness in the markets that we are in, but naturally everybody is cautious and maybe a bit concerned about what’s going to happen to the overall economy. So we are not anticipating a decline in business at this stage of the game, that’s for sure.

Don Nonnenkamp

Another comment I’d make about the backlog, Fred is that it’s – we’ve talked about this before, as the business takes on a more of a commercial flavor that natural – our natural resource business, our commercial industrial business is less backlog sensitive – intensive than the defense business. So as our pie chart becomes more commercial and natural resource oriented, and medical is also that way, you will see less as a percent of our anticipated sales in backlog at any point in time.

Fred Buonocore – CJS Securities

Right. I understand that. Finally, operating margins (inaudible) the 10% level for the first time I guess since the fourth quarter of fiscal year ’06. Do you maybe view it as an opportunity for expansion or sustainable level of operating margin –

Craig LaBarge

I mean our general goals internally revolve around maintaining a 9% level of operating income. Could we hit – do better than that? I think in any given quarter we could do better than that or we could do a little worse than that. It just depends upon the mix of business and the volume and we get some leverage on our SG&A expense. We certainly saw that in the fourth quarter. Our overall level of expense was in the SG&A area was up but it was – the sales were up much more and we can get a little bit of leverage there. But I would think it would not be comfortable with an assumption that we are going to achieve 10% operating income going forward on a regular basis.

Fred Buonocore – CJS Securities

Right. (inaudible) sequential decline in gross margin (inaudible) mix, really it isn’t anything else?

Craig LaBarge

Yes, yes, it was just mix. We actually had a bit of an adjustment in the fourth quarter related to our overhead absorption that we took that was a factor there. We ended up actually over absorbed in the fourth quarter and had to adjust that.

Fred Buonocore – CJS Securities

Thank you, Craig.

Craig LaBarge

Okay, great.

Operator

Thank you sir. Our next question comes from the line of Chris McDonald with Kennedy Capital. Please go ahead.

Chris McDonald – Kennedy Capital

Hi good morning, Craig and Don, nice results.

Craig LaBarge

Thanks Chris.

Don Nonnenkamp

Thanks Chris.

Chris McDonald – Kennedy Capital

A few questions for you, one on the Owens Illinois business, are you pretty much ramped your steady state of production there? Is there still opportunity to grow that at this point?

Craig LaBarge

A lot of that growth was the ramp up of that new outsourcing that we had talked about a year or so ago. So we had the benefit of that in the year and that really boosted our revenues. I think we are pretty close to more of a steady state now with Owens. We are not aware of any new outsourcing, new opportunities, so we will be I think pretty much just sort of riding their – the strength of their business, so –

Chris McDonald – Kennedy Capital

Okay. And the medical growth has been really remarkable. I mean just – Craig, I wonder if you could spend a minute on – you said new customers growth with existing customers, and can you just talk about your vision for that vertical market over the course of the next couple of years and how big a focus that is for LaBarge right now.

Craig LaBarge

Yeah, over the last couple of years we have talked a little bit about how we are specifically targeting opportunities in the medical sector. We certainly have met with some real success in that area although as would be expected we had some false starts as well, but we have really developed a handful of new customers there and we are quite encouraged that we can continue to grow that business on a sort of a selective basis. It’s a good market for us; it’s a good fit for us given our overall strategy to really focus on these lower – kind of lower volumes, higher performance types of applications. A number of the customers that we are proud to call customers – to call customers now would be companies like Bausch & Lomb, Devilbus [ph], Strirrus [ph], Terumo. Terumo has actually been a customer for quite a few years. And we think that there is – there continue to be real opportunities there. I would expect to see as a percentage of our overall revenues that that will keep inching up.

Chris McDonald – Kennedy Capital

Has most of that – has most of the new business there been due to – been I guess share gains versus other suppliers or is it these larger companies looking at how they are producing equipment and wanting to outsource selective assemblies, et cetera –

Craig LaBarge

It’s very much a combination of the two although we have – for the most part we have tended to focus on new opportunities rather than trying to steal share from other competitors. As we have said about our business and our relationships with our customers, once we win business it’s, generally speaking, as long as you perform you keep that and those are the kind of relationships we try to develop. So, if we go into a customer, if they are having real problems with their current supplier, it does present an opportunity but more often than not we are looking for new kind of virgin relationships if you will.

Chris McDonald – Kennedy Capital

Right. What’s your sense in the natural resources vertical? Orders were a little bit lower here and I am just wondering if – I’d like to get your two cents on where you see that market going for LaBarge (inaudible)

Craig LaBarge

Yes, certainly we think that the industry will continue to be strong. I think the only scenario that we think of that would be – that might be problematic for the broader industry is if there is a real substantial economic slowdown that affects the rest of the world to the point where demand drops precipitously. We are not forecasting that, we are not expecting that at this stage, but our business with Schlumberger, our – one of our largest customers in the natural resources area is actually up just slightly over the last year. I’d say from what we are seeing right now their near term forecast doesn’t signal to us a growth of any consequence this year.

On the mining side, Modular Mining is our largest customer on the mining side of the business. They continue to expect that their business will be strong. However, this current quarter is down a bit because of a need on their part to kind of balance some inventory that was larger than they had anticipated having. So they continue to forecast good solid growth this year.

And then Joy [ph] is another customer and their business seems to solid. So we are continually looking to develop new customers in these areas and we are – takes a long time to develop new customers but we are continuing to work on that and hopefully we’ll have some things to talk about in that area over the course of this year.

Chris McDonald – Kennedy Capital

Okay, great, and then last question on gross margin and you kind of inched you way back towards that 20% to 22%-23% range that we have talked about in the past and I am – as you look at the growth that you’ve had I know a lot of these programs have been, some programs you have worked on for a year or more, do you see upward pressure on gross margins as they come down the learning curve and have – these are more I guess shift towards legacy programs versus new programs and the over the course of the next year or so.

Craig LaBarge

Yes, I don’t know the answer to that, to be honest with you. I mean we continue to believe the 20% – the 20% area is a reasonable assumption at this stage of the game. There is – there are individual periods and individual quarters where it could be better than that or slightly below that. We don’t see any real downward pressure certainly at this moment on margins of any consequence, but it depends very much on the mix of business in any given period. And as you say how much of that is going to be more mature, more somewhat higher margin business – I would think that that 20% number is still a good number to model.

Chris McDonald – Kennedy Capital

Okay. Thanks again. Appreciate it.

Craig LaBarge

Okay. Good.

Operator

Thank you sir. Our next question comes from the line of Peter Okkan [ph] with Smith Barney. Please go ahead.

Peter Okkan – Smith Barney

Congratulations on a great year.

Craig LaBarge

Thank you, Peter. How are you?

Peter Okkan – Smith Barney

Very good. I just had a question – couple of questions, you mentioned the five-year growth rate of sales of 22%, earnings of 35% I think, and yet the stock trades at 16 times ’08 earnings and if you put a 15% earnings growth for next year you basically at 14 times ’09 now obviously I am assuming that because we don’t really get much guidance in terms of hard numbers. So don’t you think it’s hurting you in the fact that A, people don’t know the story, there is no – there is only I think one analyst coverage, so I was wondering if there is anything coming with analyst coverage so that the story that right now is hitting on all cylinders can be heard in the marketplace where there is a not a lot of companies having record sales and earnings here. And therefore you are not really getting the play that you would get with maybe a little bit more projections or analyst – and/or analyst coverage.

Craig LaBarge

Well, let me try to address that. We are certainly working all the time to try to identify opportunities for additional coverage. We did have additional coverage a year or so ago, had a couple of people that were covering the Company in addition to CJS. And both of them for reasons unique to their organizations, not to LaBarge, dropped coverage – again, not just of LaBarge, but of small cap companies pretty much across the board. So it’s a struggle, it’s a constant struggle to get the story out, to communicate the story and communicate the message to a broad base of investors. We had been focused over the last few years on kind of getting our story out to institutional investors and sort of increasing the percentage of ownership in the Company among the institutions. I think that helped some with respect to liquidity in the stock, but – and we have got institutional ownership now that’s up around 40% or so. But clearly we need to find other ways to get the message out and tell our story. We continue to believe that the stock is a bargain and wish I could say otherwise that it was fully value but I don’t believe this.

Don Nonnenkamp

Let me add to this–

Peter Okkan – Smith Barney

Is there any hope of analyst coverage – sorry Don – coming? Is there –

Don Nonnenkamp

I was just going to comment on that. It is my expectation that we will have an additional analyst issuing a report in the next 30, 45 days.

Peter Okkan – Smith Barney

Okay, great. I mean because now is the time to hit on it because I mean things are working well for you. Thanks. You are welcome.

Craig LaBarge

Great. Thank you.

Operator

Thank you sir. (Operator instructions) Our next question comes from the line of Tom Spiro with Spiro Capital Management. Please go ahead.

Tom Spiro – Spiro Capital Management

Good morning.

Craig LaBarge

Good morning, Tom, how are you?

Tom Spiro – Spiro Capital Management

I am fine, I am fine, and congratulations on a strong year and a strong quarter. Very, very impressive. I’ve got two or three questions. One, sort of a big picture question, Craig. There is lots of discussion these days in the press and elsewhere about the resurgence of American manufacturing, change in the dollar, shipping costs, the rest of the story, which you know. LaBarge, as I understand it, has tended to appeal to those kind of customers who never would have looked offshore anyway. So I guess I am assuming that these stories, if there is some truth to them, really have not much of an implication for LaBarge, but I put the question to you anyway, is there much of a change coming or not?

Craig LaBarge

Well, actually – we actually do have some business that was overseas or was offshore and has now moved back. I do think that in the mad rush to move work offshore it was sort of the – it was the in thing and the trendy thing to do I think in a lot of ways and often for very, very good solid economic reasons. But sometimes it has – it wasn’t really for good economic reasons, it was just sort of a mad belief that if you weren’t offshore you couldn’t be competitive and I think a number of companies – quite a few companies have found that it – there are certain hidden costs associated with being offshore and not the least of which would be just the kind of support, the kind of inventory levels that end up carrying and freight and management costs. And they are looking more seriously about those decisions that were made in the past and in some cases work is coming back. And I think that’s just the – if nothing else hits the normal sort of shake out when people made these decisions without really fully understanding the implications. So we are – we expect we will see some additional opportunities there and frankly in a number of areas we know that we are competitive in certain types of work with the low cost areas of the world.

Tom Spiro – Spiro Capital Management

That’s helpful, thanks. Secondly, as I recall from our Q3 conference call there were some two or three discrete issues in the receivables department. One customer – a couple of customers might have delayed a little bit. I think one customer decided not to (inaudible) early get a discount, I was hoping, Don, you might review with us some of those discrete issues and then more a general commentary on receivables and bad debt.

Don Nonnenkamp

Well, as I mentioned in the commentary, between Q3 and Q4, our receivable balance on the balance sheet dropped $6 million. So, the $6 million after our sales went up by almost $3 million in the quarter. So, that is a evidence of the focus that we put on some of the receivable issues. We do still have some past due accounts and we are certainly working those. It’s not a – not something that anyone here takes lightly, you have my personal assurance of that. And so I believe over the next couple of quarters, you will continue to see more cash flow coming out of receivable account despite the anticipated growth in the sales.

Tom Spiro – Spiro Capital Management

Thanks. Next, raw materials/energy costs, lots of manufacturers have expressed concern about the pressures they are feeling in those areas. I was curious what you may be experiencing.

Craig LaBarge

We are certainly seeing cost growth in a number of areas, a lot electronic components that are in short supply over the course of 2008. We saw a lot of cost growth in certain of the fabricated metal products, machine parts, and welded fabricated parts. So, a number of areas have – we have seen real growth. In our business, we are generally able to fix those costs at the beginning of a contract. So, what we see is cost growth that’s going to affect prices going forward to our customers in a number of areas and so we can't be 100% effective in terms of fixing all of our costs. So we have some modest impact as a result of that and that usually occurs sort of at the end of a program. If you have to go out and buy a few more of a certain part to close out the contract, you end up paying more for those parts and that’s been – that’s certainly been something we’ve experienced over the past year or so.

Tom Spiro – Spiro Capital Management

And lastly, the CapEx budget for the new fiscal year please?

Craig LaBarge

The budget for the fiscal year is about $8 million for Capital – CapEx –

Tom Spiro – Spiro Capital Management

Any particular project?

Craig LaBarge

We are looking at – we are really looking at increasing some capacities but more importantly upgrading some capabilities in three of our plants in the area of really high end surface mount equipment for a circuit board assembly. We will be making further investments in Pittsburgh, Tulsa, and Houston, in that area is what our expectation is, and that’s really where the – that’s the big increase in CapEx next year or the current year versus last year.

Tom Spiro – Spiro Capital Management

Thank you.

Craig LaBarge

Good.

Operator

Thank you sir. And Mr. LaBarge, at this time there are no further questions. Please continue with any closing remarks.

Craig LaBarge

Great. Well, I want to thank everyone for joining us today and for your continued interest in LaBarge. We hope you’ll join us when we announce results for our fiscal 2009 first quarter in late October. In the mean time, if you have any other questions, please feel free to contact Colleen Clements, our Director of Corporate Communications. Thanks again and everyone have a good day.

Operator

And thank you sir. Ladies and gentlemen, this concludes the LaBarge Incorporated fiscal 2008 year end conference call. This conference will be available for replay after 12 O’clock Eastern Standard Time today through September 11 at midnight. This conference will be at the following number at 1-800-406-7325 or for international customers 303-590-3030 with access code 3909196. Once again, if you like to access this replay, please hit 1-800-406-7325 or 303-590-3030. Thank you for your participation. You may now disconnect.

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