LaBarge, Inc. (LB)
F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 30, 2008 11:00 am ET

Executives

Craig LaBarge – President and CEO

Don Nonnenkamp – CFO, VP and Secretary

Analysts

Fred Buonocore – CJS Securities

Paul Mammola – Sidoti & Company

Matthew Crews – Noble Financials

Tom Spiro – Spiro Capital

Presentation

Operator

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

Craig LaBarge

Hi. Good morning, everyone. Thanks very much for joining us today for our discussion of LaBarge’s financial results for the fiscal 2009 first quarter, which ended September 28. With me today is Don Nonnenkamp, Chief Financial Officer for LaBarge. And as is our practice, we’ll begin with some prepared remarks, and then open up the call for questions.

First, LaBarge had an excellent first quarter despite the weakening general economic conditions during the period. Higher shipments to customers in several market sectors drove double digit year-over-year growth in both sales and earnings. In addition, we attained our highest quarterly gross margin in two years, the result of improved operating efficiencies and favorable product mix during the quarter.

To review the results in more detail, I’m going to turn the call over to Don.

Don Nonnenkamp

Good morning. The fiscal 2009 first quarter net sales were $68.2 million, up 15% from $59.2 million in the fiscal 2008 first quarter. Net earnings rose 46% to $3.7 million, $0.23 per diluted share, versus $2.5 million, $0.16 per diluted share in the fiscal 2008 first quarter.

First quarter gross margin was 20.9%, an increase of 170 basis points from 19.2% in the year ago first quarter, and 140 basis points higher than the fiscal 2008 fourth quarter. As Craig said, the higher gross margin in the fiscal 2009 first quarter was the result of improved operating efficiencies and a favorable product mix.

Selling, general, and administrative expense as a percent of sales was 12.1% versus 11.7% in the fiscal 2008 first quarter. In actual dollars, fiscal 2009 first quarter SG&A increased 19% from the previous first quarter, primarily due to higher compensation expenses.

As a percent of sales, operating income improved to 8.8% versus 7.5% in the same period a year ago. Interest expense declined to $158,000 compared to $427,000 in the fiscal 2008 first quarter on lower average debt levels.

Net cash flow from operations increased to $7.3 million, compared to $5.1 million in the fiscal 2008 first quarter. Total debt at September 28 was $8.3 million, down 47% from $15.6 million to June 29th fiscal year-end, and down 65% from $23.5 million at the end of last year’s first quarter.

Stockholders’ equity at September 28 was $95.9 million, up 5% from $91.5 million at June 29th, and up 20% from $79.6 million at the end of last year’s first quarter. I also want to mention that subsequent to the end of the quarter, we closed on a new two-year senior credit facility. That agreement provides for a $10 million term loan and a $25 million of revolving credit agreement.

And finally, backlog at the end of fiscal 2009 first quarter was $218.4 million, down just 1% from $221.3 million FD at fiscal year-end despite a 15% increase in shipments. Backlog at the end of last year’s first quarter was $245.5 million, a record for the company and the result of the company’s highest level of new bookings in a single quarter. Approximately 70% of the backlog at September 28th is scheduled to ship in the following 12 months.

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

Craig LaBarge

Thanks, Don. Shipments on a variety of defense programs comprised the largest portion of our fiscal 2009 first quarter net sales at about 45%, compared with 39% in the fiscal 2008 first quarter. Actual sales dollars from the defense market sector increased 35% in this year’s first quarter versus a year ago.

Shipments to natural resources customers represented 16% of fiscal 2009 first quarter net sales versus 26% in the fiscal 2008 first quarter. Actual sales dollars from this market sector declined 28% in the fiscal 2009 first quarter versus last year primarily due to lower shipments to mining customers.

Shipments to industrial customers were 21% of our 2009 first quarter sales, compared with 19% in the comparable period of 2008. Actual sales dollars from the industrial market sector were up 33% in the fiscal 2009 first quarter versus the year earlier due to increased shipments of equipment used in glass container manufacturing systems.

Shipments to medical customers represented 7% of our fiscal 2009 first quarter sales, compared to 5% a year ago. Actual sales dollars from the medical market sector increased 49% this quarter versus the first quarter of last year.

Shipments to commercial aerospace customers were just 5% of our fiscal 2009 first quarter revenues, down from 7% in last year’s first quarter. Fiscal 2009 sales in dollar terms declined 15% from a year ago due to lower shipments on this very light jet program and an airline freighter conversion program.

Turning to bookings of new business, bookings were at a healthy level during the first quarter although down 34% when compared with the record level of bookings during the same period a year ago. Customers in the defense, natural resources, and industrial market sectors continue to comprise the largest contributions to bookings in both the current and year ago periods.

Looking forward, we anticipate that the fiscal 2009 second quarter sales and earnings will be comparable to this year’s first quarter results. Given today’s uncertain economic environment, we’re closely monitoring business activity across all of our key market sectors and key customers. We’re beginning to see some weakness within the industrial market sector and the mining segment of our natural resources sector. However, we still believe that in the long term, our diverse market approach will serve us well.

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. We will now begin the question-and-answer session. (Operator instructions) One moment please. And our first question comes from the line of Fred Buonocore with CJS Securities. Please go ahead.

Fred Buonocore – CJS Securities

Yes. Good morning, Craig and Don. Nice quarter.

Craig LaBarge

Yes. Thanks, Fred.

Don Nonnenkamp

Thank you.

Fred Buonocore – CJS Securities

So your Q2 guidance is clearly very conservative, maybe even surprisingly conservative. It looks like it implies a little year-over-year growth in sales. Is this kind of based on partial conservatism given the current environment? Or are you really starting to get some sort of quantifiable sense for this from customers? And how does it reflect on your outlook for growth for the balance of FY ’09?

Craig LaBarge

With respect to the second quarter, I think it does certainly reflect some concerns about the overall economy and what impact it maybe having in some of our market sectors. We specifically mentioned some weakness that we’re seeing on the industrial side and in the mining area. And that is giving us some concern not only with respect to the second quarter, but potentially, the balance of the year as well. At this stage, we’re not really providing any specific guidance with regard to the balance of the year because we think there is some uncertainty with regard to what the impact of this weakening economy, not only here, but in other parts of the world, is going to have on the business. And we’re just going to have to track that, monitor that very, very closely, I tell you, as we’ve been doing as the year unfolds.

Fred Buonocore – CJS Securities

Understood. In addition to the mining customers and natural resources are you – given the decline and oil prices, are you seeing a slowdown also with your oilfield services customers?

Craig LaBarge

Well at this moment, we’re not. Business on the oil and gas side has continued to be relatively strong with regards to new order input. Mostly, what we’re seeing thus far is in terms of the weaknesses on the mining side of our natural resources business.

Fred Buonocore – CJS Securities

Got it.

Craig LaBarge

And I would tell you, that’s a relatively, I mean, fairly new development, just in the last month or so we’ve really seen it.

Fred Buonocore – CJS Securities

I understand. Then on the margin and size because this margin size is a very nice improvement over the last several quarters – put a – strong in part, due to mix. Can you tell us maybe the types of products that this mix involves? And do you expect this favorable mix to persist? And then, second part of that question is given your operational improvement, do you expect any further margin improvement in the coming quarters?

Craig LaBarge

Certainly, the things we’re doing on the operational side, our initiatives, and our operational excellence initiative, and our quality initiatives are what we believe going to have a very positive payback. The mix, however, is probably a more significant factor in margin over time than anything else. The range of margins on any given job is much larger than our typical average range. We still think that 20% is a good number. We still think that there will be times, such as in the first quarter, when we’ll be at the – above that. And given the mix that we’re looking at, I would hope we’d be above, and expect we’d be at or above 20% this year.

Fred Buonocore – CJS Securities

Got it. And finally, can you just comment on the sustainability of your business in the defense end market, which has really been your primary growth driver in recent quarters?

Craig LaBarge

Yes. Our defense opportunities and defense business continue to be – continues to be strong. We’ve got a nice portfolio of business that’s really comprised of many businesses over many, many different programs and most of the major prime contractors. We think that in a period where there is – as we look forward, is we see potentially more cost pressures on some of these programs. And we think that in that kind of an environment, we’re likely to see more movement towards outsourcing as a way for our customers to control or reduce their cost. So even in a slowing – with that spending environment, we think we’ll do well.

Fred Buonocore – CJS Securities

Very good. That’s all I have for now. Thank you.

Craig LaBarge

Okay.

Operator

Thank you. Our next question is from the line of Paul Mammola with Sidoti & Company Please go ahead.

Paul Mammola – Sidoti & Company

Hi. Good morning guys.

Craig LaBarge

Hi, Paul.

Paul Mammola – Sidoti & Company

On SG&A, Don, you gave some color there, jumping 20% on salaries. Would you expect that to continue in terms of as the percentage of sales or in dollars for the rest of the year or is that the high water mark?

Don Nonnenkamp

Well, no. I don’t expect that percentage to continue. It’s really made up of a couple of things. First of all, just weight to growth. And also, on its set of compensation plans, attempt to match not the plans themselves, but our accounting for those plans attempts to match the expense with the revenue and the earnings that are generating the liability at the end of the year. So one of the reasons that it’s as a high as it is, is because the quarter loss is as good as it is. So that does not go on forever, so I would not expect that that percentage would be consistent through the year.

Paul Mammola – Sidoti & Company

Okay. And on Eclipse, is there anything new from them in terms of their financing situation?

Craig LaBarge

Let me touch on that. With respect to Eclipse, we are – continue to be – are basically on hold or shut down with respect to our production. Eclipse is in the process of attempting to secure equity financing. The reports we’re getting still lead us to be cautiously optimistic about that. If they’re able to achieve that, we would expect to be beginning production again sometime shortly after the first of the year – of the calendar year.

Paul Mammola – Sidoti & Company

Okay. That’s helpful. And then, is the natural resource segment of the business the biggest weight on that part right now, would such fair to say?

Craig LaBarge

I’m sorry will you ask that again, Paul?

Paul Mammola – Sidoti & Company

Yes. I guess with the natural resource market be the biggest weight on that month right now and in terms of pulling it down from where it was a year ago, would that be fair to say?

Craig LaBarge

Yes, yes.

Paul Mammola – Sidoti & Company

Okay. And finally, can you make a testament to, I guess from some your chip suppliers for PCPs, even a few new species out there, I guess saying that there are faulty chips coming into government related manufacturing contracts, and then making in to jets, radar systems, and they are then failing. I guess, again, is there a testament you can make to some of your suppliers out there?

Craig LaBarge

Well, we’ve actually seen some of those ourselves. And not only on military programs, it’s been – actually, where we’ve really seen it more is on certain commercial programs where there are some older designs that are no longer available. And you have to go to certain brokers, as such, wouldn’t call them a distributor so much, but just brokers, to find parts. And we’ve had some experience in finding – getting parts that are clearly counterfeit.

We do incoming inspection on parts that come in. And we’re actually in the process of talking about how we can beat that up and try to catch some of these as early as possible. But it’s a very legitimate real problem that we, and I think almost all electronic manufacturers, are facing right now.

Paul Mammola – Sidoti & Company

Okay. Great. Thanks a lot.

Operator

Thank you. And our next question is from the line of Matthew Crews with Noble Financials. Please go ahead.

Matthew Crews – Noble Financials

Thank you. Good morning.

Craig LaBarge

Good morning.

Matthew Crews – Noble Financials

Most of the questions have been answered. Thank you. One of the questions I did have was in terms of existing contracts, things in the backlog. What’s the risk, at least, on the industrial customers and the national resource customers that some of those – the ship dates might flip to the right? So are those ship dates, delivery dates, how firm are they? Or is there a concern not only maybe on new bookings but also on flippage of existing contracts?

Craig LaBarge

To date we really haven’t experienced any kind of a major impact. Typically, what we have in our backlog is pretty firm. There’s always a chance that there’d be some rescheduling and some push out. But most of our – the vast majority of our contracts have provisions in them. They give us some protection there that – so at this stage, we’re not seeing cancellations, certainly, of orders, anything out of the ordinary, I would say.

What we’re seeing is caution and concern about future forecasts and future – and releases and orders against those forecasts. But it’s just that it – literally it’s – everybody, all of our customers, other than on the defense side of course, but all of our customers are trying to evaluate any possible impacts that they may feel due to these sudden change in global economics. They’re evaluating, I’m sure, in a daily basis just like we are. So there’s just certainly a bit of caution out there on the part of many of our customers.

Don Nonnenkamp

Led me add also that the commercial business, the non-military businesses is not as backlog-dependent as the military is, the military side. So when we see changes in – you’re not as likely to see real significant changes in our reported backlog numbers because of changing business profile on the commercial side because that is more of a build to forecast, build and ship business that doesn’t have a lot of plague in the backlog.

Matthew Crews – Noble Financials

Okay. Great. And just sort of curious, given the drop in natural resources, would the mining customers as well as the 33% increase in the industrial side, is there some lumpiness in the order flow for the quarter overlaying the forward-looking forecast for those two segments? Natural resource being down 28% as just as more – when is it going to rebound? And do you expect this as more of a one-time event, more lumpy in nature? Or is this as well as the industrial being up 33%, is that a little bit more on the high side for the quarter and you expect more normalized trends there?

Craig LaBarge

Yes. I think. Let me try to explain some of those numbers a little bit and give you a little color on those numbers. The big increase in industrial over last year is at least significantly attributable to this new outsourcing package of products that we’ve picked up from old ones, which a year ago was in its – we’re just really in the early stages to get a little production and ramping up. So a good part of that growth in our first quarter in industrial was attributable to that new piece of business. So to compare – again, as compared to last year, on the natural resources side, it’s – it was largely attributable to the weakness that has shown up in some of the – in some of the mining areas. So I don’t know that it’s necessarily – I wouldn’t call it lumpiness or excessive lumpiness. Does that help?

Matthew Crews – Noble Financials

Okay. Great. Yes. Yes, it helps a lot.

Craig LaBarge

Okay. Great.

Matthew Crews – Noble Financials

Thanks very much.

Operator

(Operator instructions) And our next question comes from the line of Tom Spiro with Spiro Capital. Please go ahead.

Tom Spiro – Spiro Capital

Good morning.

Craig LaBarge

Hi. Good morning, Tom.

Don Nonnenkamp

Good morning.

Tom Spiro – Spiro Capital

Very strong quarter, particularly with respect to cash flow. It’s really nice to see the receivables come down.

Craig LaBarge

Yes. And we still of course on the receivable side have – well for $3.5 million out there from Eclipse. So if we can get that paid off, it would have been much, much stronger.

Tom Spiro – Spiro Capital

I’m keeping my fingers crossed.

Craig LaBarge

Yes. Yes. And so are we.

Tom Spiro – Spiro Capital

I was curious about the progress over the quarter month-by-month, July, August, September. Did it gradually weaken as you moved through the quarter? Did it suddenly drop off at some point? How did it look?

Craig LaBarge

From a sales – production sales shipment standpoint, we certainly haven’t seen that. From a booking standpoint, I would say that’s pretty much what we’ve seen. It’s just been – and even – just in the last 30 to 45 days is where we’ve seen some slowing.

Tom Spiro – Spiro Capital

I see.

Craig LaBarge

Just in those markets we mentioned.

Tom Spiro – Spiro Capital

How is the medical market looking?

Craig LaBarge

Medial market looks good. Sales continued to grow there. We we’re up about nearly 50% over last year. We still like that market. And the customers that we’re working with continue to pay pretty upbeat and bullish about the year. So we’re not really seeing any real slowdown there at all. And expect that’ll continue to grow for us.

Tom Spiro – Spiro Capital

You don’t have much net debt left. Any further free cash flow, will that be devoted to just reducing that to zero? Or might you refer to shares? How are the acquisition opportunities?

Craig LaBarge

Well, we are continuing to look at a number of acquisition opportunities. Let’s say, if anything, we see more opportunities today, more and better opportunities today than we’ve seen in some time. We’re serious about our acquisition strategy. And I would hope that during this fiscal year, we’ll be able to find the company that is a good fit, and that has a good customer base, and has a good management team that we can – that we can actually acquire.

Tom Spiro – Spiro Capital

And your CapEx plan for the fiscal year, has it changed or it’s still on target?

Craig LaBarge

We were forecasting – budgeting about $9 million of capital expenditures this year. In the first quarter, we spent very little in new capital expenditures. I don’t know Don if you can–?

Don Nonnenkamp

It was only about a little less than $300,000 in the quarter.

Craig LaBarge

So we have a couple of larger expenditures that were in the plan that we’re reevaluating. I would think that the odds are pretty good. Actually depending upon business, that we’d probably spend less that what we have budgeted this year.

Tom Spiro – Spiro Capital

Thanks much. And good luck.

Craig LaBarge

Okay. Thanks.

Don Nonnenkamp

Thank you.

Operator

Thank you. Our next question is a follow up question from the line of Fred Buonocore. Please go ahead.

Fred Buonocore – CJS Securities

Yes. I was just wondering if you were seeing any benefits from declining raw material prices for things like copper and others?

Craig LaBarge

A little bit, but for the most part – and I think some – there was some better material pricing impact in the margins this past quarter. However, most of our contracts are structured in a way that we fix our – to the extent that we give our customers a fixed price. We are fixing our prices with our suppliers. So where we see that is on more spot kind of buys where we’ve got some additional material to buy or certain of the lower dollar items that we don’t – were we just buy as needed. But yes, it’s helpful. It’s not a huge amount for us, not a significant amount, but is one of the factors that contributed to the margin improvement.

Fred Buonocore – CJS Securities

Does it stand to act as a negative for you given that you’re fixed on some supplier contracts, which–?

Craig LaBarge

No, no. It wouldn’t be a negative because comprised – we really matched our costs, our material costs, if you will, our contracts with our suppliers with our contracts with our customers. So the extent that we have a one year purchase of this given item from a customer that’s a firm fixed price, we will go out and contract on a firm fixed basis for those parts with our suppliers.

Fred Buonocore – CJS Securities

Of course.

Craig LaBarge

And those costs are built in to our bids and our proposals that we make to our customers.

Fred Buonocore – CJS Securities

Right. Got it. Okay. Thank you very much.

Craig LaBarge

Good.

Operator

Thank you. And at this time there are no further questions. I’d like to turn it back to Craig LaBarge.

Craig LaBarge

Well thank you everyone for joining us today. I appreciate your continued interest in LaBarge. And we hope that you’ll join us when we announce results for our fiscal 2009 second quarter in late January. If you have any other questions, please feel free to contact us. Colleen Clements is always available. Colleen’s our Director of Corporate Communications, and she can help you get answers to any questions you might have. With that, I want to thank you again, and have a good day.

Operator

Thank you, ladies and gentlemen. This concludes the LaBarge fiscal 2009 conference call. This conference will be available for replay after 12 p.m. Central Standard Time today though November 13th, 2008 at midnight. You may access the access replay system at any time by dialing 303-590-3030 or 1-800-406-7325, and entering the access code of 3928190. Thank you for your participation. You may now disconnect.

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