MOCON, Inc. (NASDAQ:MOCO)
Q4 2016 Earnings Conference Call
March 1, 2017, 16:30 ET
Steven Hooser - IR
Robert Demorest - CEO
Elissa Lindsoe - CFO
Good day, everyone. My name is Christine and I am the operator. Welcome to MOCON's Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session [Operator Instructions]. Today's conference is being recorded. I would now like to turn the call over to Stephen Hoosier, MOCON's Investor Relations representative. Please go ahead, Steven.
Thank you, Christine and thank you for joining us today for our fourth quarter 2016 financial results. With me on the call today are Bob Demorest, Chief Executive Officer and Elissa Lindsoe, Chief Financial Officer. We will open up to the audience for a Q&A session after we complete our prepared remarks. Please note that we are also webcasting this call. Both the earnings press release that was issued earlier and the webcast link can be accessed on our Investor Relations website at mocon.com.
Before I turn the call over to management, I'd like to remind everyone that during today's call, including the Q&A session, we may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities and other expectations of the company. These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call. These risks include those that are detailed in our most recent annual report on Form 10-K and in today's earnings press release and may be amended or supplemented by subsequent quarterly reports on Form 10-Q or other reports filed with the Securities and Exchange Commission. The statements made during this conference call are based upon information known to MOCON as of the date and time of this call. We assume no obligation to update the information presented in today's call.
During today's call, we will also discuss non-GAAP financial measures, including adjusted EBITDA. These measures, when used in combination with GAAP results, provide us with useful information to better understand our business, and we believe investors may want to consider this impact on our performance as well. A reconciliation of GAAP to non-GAAP measures can be found in today's earnings release.
With that, I would now like to turn the call over to Bob Demorest, MOCON's President and Chief Executive Officer. Bob?
Thanks Steven. Thanks to all of you on the line for participating in our earnings call and we appreciate your time and continued interest in MOCON. At this time last year, I was lamenting our fiscal year 2015 financial performance. Our annual revenue in 2015 ended down 6% from 2014 on a GAAP basis. Round 1 of our realignment plan became necessary in the second half of 2015. In order to ride the ship in light of the external headwinds, we were facing with the following euro and oil prices. We ended up increasing our fully diluted earnings per share from $0.27 in 2014 to $0.51 cents in 2015, which was certainly good but the revenue softness was an overhanging cloud.
We were able to reduce our debt and we held our cash steady. Sitting before you, just one year later, I am excited to report the following. Our 2016 annual revenue was up 4% from 2015 on a GAAP basis. The year did not start out as strong as we had hoped and because the first half was flat, we triggered round 2 of our realignment plan. I'm happy to say that it did make a difference. We pushed the one MOCON theme very hard resulting in a flatter matrixed organization. And as part of this initiative in April, we will be changing the name of Dansensor to MOCON Europe AS.
Our third quarter of 2016 revenue was up 7% over the third quarter of 2015 and our fourth quarter was up by 10% year-over-year matching our best shipment quarter ever. Net income was up substantially. We paid off our entire credit line and we increased our cash position resulting in a strong balance sheet. Our adjusted EBITDA was 17% of revenue compared to 14% in 2015. Fully diluted earnings per share in 2016 was $0.86 compared to $0.51 in 2015 a 69% increase for the year.
In other news, please join me in welcoming Maurice Janssen, our new Senior Vice President of global sales and marketing to our team. He joined MOCON mid-January and is based out of our Minneapolis headquarters. He reports directly to me and is responsible for leading our sales and marketing teams across all segments. Maurice has over 20 years of sales and marketing experience in similar industries to ours. He was most recently Vice President of Sales and Marketing Latin America for FOSS, a Danish based supplier of analytical instruments for the food, beverages, and agriculture sectors. Maurice is a great addition to our team and we are delighted to have him.
I will now turn the call over to Elissa to run through the operating results. And will return with my closing remarks after she is done. Elissa?
Thank you, Bob and good afternoon everyone. Revenue for the fourth quarter of 2016 was $16.9 million, up 10% from the $15.3 million reported in the same period of 2015. This performance matches our prior quarterly record that was set in the fourth quarter of 2014 and at that time the euro was much stronger than it is today. Full year 2016 revenue was $63 million, an increase of 4% from the $60.8 million reported in 2015. Gross margin was 57% of revenue in our fourth quarter of 2016, which is an increase of two percentage points from the 55% reported in the year ago quarter.
SG&A expenses were 37 percent of revenue in the fourth quarter of 2016 compared to 38 of revenues in the fourth quarter of 2016. Research and development expenses were 7% of revenue in Q4 2016 compared to 8% in Q4 2015. The spending level continues to be in line with our ongoing commitment to invest in existing offering, as well as advanced sensor technology. Our fourth quarter of 2016 operating income of $2.1 million or 12% of revenue is a nice improvement from 4% of revenue in the year ago quarter. Our MOCON realignment initiatives have contributed to these positive results. I will go into more detail by business segment momentarily, but I'll cover the remainder of our income statements before doing so.
Our effective tax rate was 21% in Q4 of 2016 compared to 51% in the year ago quarter. This reduction was driven by the use of foreign tax credit and the effect of foreign operation that have lower tax rate. Net income for the fourth quarter of 2016 was $1.8 million or $0.30 per diluted share compared to net income of $0.3 million or $0.05 per diluted share in the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter of 2016 was $2.9 million or 17% of revenue compared to $2.1 million or 13% of revenue in the third quarter of 2016.
Moving to the details in our business segments; Package Testing was once again our largest segment, comprising 49% of overall revenue at $8.4 million up from $6.9 million in Q4 of 2015. 72% of revenue in Q4 of 2016 with some sales outside of the United States compared to 75 percent in Q4 of 2015. Package Testing gross margin was 56% of revenue in Q4 of 2016 up 2 percentage points from Q4 2015. This continued improvement was driven by revenue growth and process improvement initiatives that we have made. Operating expenses was 41% of revenue in Q4 of 2016 and 48% in the year ago quarter, resulting in Q4 operating margin that was 15% of revenue in 2016 and 11% of revenue in 2015.
Moving on to Permeation; this segment contributed 35% to overall revenue or $5.9 million in Q4 of 2016, down 9% from $6.5 million reported in Q4 of 2015. 67% percent of this segment Q4 2016 revenue was from sales outside of the United States compared to 58% in the same quarter of 2015. The decline in US based shipment was primarily driven by orders that were received too late in the quarter to be shipped before December 2016 as evidenced by the $800,000 sequential increase in our Permeation backlog during Q4 of 2016.
In addition, approximately $300,000 and $600,000 of the year-over-year decline for the quarter and the year respectively was attributable to the sale of our odor and aroma consulting business. If Q4 2016 gross margin in the Permeation segment was 63% compared to 59% in Q4 2015. The increase was driven by the mix between product, services and consulting. In the fourth quarter of 2016, product revenue which generates the highest gross margins in this segment comprised 81% of the overall segment revenue compared to 70% in the fourth quarter of 2015.
Q4 2016 operating expenses in our Permeation segment were 43% percent of revenue, which is up from 38% in the year ago quarter and that resulted in Q4 operating margins of 20% percent in 2016 compared to 21% in Q4 2015. Our Industrial Analyzers and Other segment comprised 15% of our Q4 2016 revenue which was $2.6 million up 37% from the $1.9 million reported in Q4 of 2015. 36% of this segment's revenue was from sales to foreign markets in Q4 of 2016 compared to 49% in the fourth quarter of 2015. The change in geographical mix was driven by increased volumes with domestic customers, while foreign volumes remain consistent with the prior year.
Q4 2016 gross margin for the segment was 45% of revenue, an increase of 3 percentage points when compared to 42% of revenue in queue for 2015. The increased gross margin is attributable to the year-over-year revenue growth. Our operating expenses in the Industrial Analyzers and Others Segment were 57% of revenue in Q4 of 2016 compared to 64% of revenue in Q4 2015. The operating loss in this segment for Q4 of 2016 with 12% of revenue compared to an operating loss of 18% in Q4 of 2015. The improvement was driven by reduced expenses as a result of the realignment plan.
Additionally effective in 2017, we have changed the way we are managing our business segment. As we realigned our business around the one MOCON strategy, our ability to segregate our operating expenses has become more difficult. For example, we used to have a separate P&L manager over each segment. Now today, Maurice Janssen leads our global sales and marketing efforts. Mike Barto leads all the global manufacturing and research and development team, and I lead all the global back office team. We still need to complete our segment analysis. But effective with our January internal reporting, we are no longer allocating operating expenses to each segment and anticipate that we will no longer report our segment performance to operating income, but we do anticipate providing revenue and gross margin for our segments.
Moving on to our cash flow and balance sheet, we continue to see a strengthening in our balance sheet. Since the beginning of 2016, cash and cash equivalents have grown by $2 million to $8.3 million in total on December 31, 2016. And in that same timeframe, we paid off a revolving line of credit and reported only $163,000 in debt, all of which relates to capital leases compared to $3 million of total debt on December 31, 2015. Accounts receivable were $10.7 million on December 31, 2016, which represents day sales outstanding to 57 up from 51 days reported in the third quarter of 2016. Inventory was $6.7 million down 14% since the beginning of the year. Net cash provided by operations was $7.3 million in the year ended December 31, 2016 compared to $6.4 million in all of 2015, which is a 14% increase. The improvement is driven primarily by the increase in net income.
This wraps up my prepared remarks on the financial. I will now turn the call back over to Bob for his closing remarks. Bob?
Thank you, Elissa. I remain encouraged with our strong second half resulting in a good year and a healthy backlog position going into 2017. The work we started in late 2015 to improve our product cost. And operating expense profile is starting to pay dividends, as evidenced by this performance. This turnaround was the result of an incredible amount of work by our team, led by our top management group of whom I am very proud. Now with the addition of Maurice Janssen, we have an experienced and highly capable group of visionary executives in the wheelhouse. And in my opinion, the best see suite MOCON has had in years. I am optimistic about 2017 and beyond, and I also want to thank our Board Of Directors for their valuable support and encouragement and engagement in MOCON's business.
With that, let me open up the call for your questions. Christine, please instruct our listeners on how to queue up.
Well, thank you very much for joining us on today's call. We look forward to discussing our Q1 results with you sometime in early May. Please have a great evening.
Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.
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