Q4 2019 Earnings Call
Good day and welcome to the end and incorporated fourth quarter and full year 2019 earnings Conference call. Today's conference is being recorded at this time I would now like turn todays conference over to Mr., Mark Sherman Vice President Treasurer.
Investor Relations. Please go ahead Sir.
Thank you operator, good morning, everyone and thank you for joining us for the call I'd like to welcome you to in fourth quarter and full year 2019 earnings conference call. Our presenters. This morning, we'll be vice President and Chief Executive Officer weren't Goldman also turning the call, it's Tom the bio SVP and Chief financial.
Yes, Sir if anyone needs a copy of the press release or the supplemental presentation. Please contact abernathy Mcgregor to 12371, 50, 999, and they will help you with a copy before we begin as you take notice cautionary language regarding forward looking statements contained in todays press release.
Supplemental presentation, and then the risk factor section and this Companys 10-K for the year ended December 31st 20 T. The company's quarterly reports on form 10-Q for the three months ended September Thirtyth 29 gene and once filed the company's annual report on form 10-K for the fiscal year ended December through.
The first 2019.
Language applies to comments made on today's conference call, including the kidney session as well as a live webcast.
Our presentation today will contain forward looking statements regarding sales margins foreign exchange rates cash flow tax rate acquisition synergies synergies future operating results. The first a worldwide markets and other topics. These statements should be used with caution and are subject to various risks and uncertainties.
Maybe as many of which are outside the company's control.
Presentation also includes certain non-GAAP measures as defined by the FCC rules reconciliations of such non-GAAP measures is contained in the tables in the financial section in the final section of the press release in the supplemental presentation.
Foreign Tom will provide a business update and review our results and then we will open the lines for questions with that said, yeah, I'll turn the call over to you.
Thanks, Mark and good morning to everyone.
I'd like to start today's call with a brief overview of the numerous actions our management team is working on since our third quarter conference call.
During that call I indicated we would we were committed to establishing a capital structures that aligned with our strategic plan in December 2019, we completed two significant actions that resulted in improvements in our capital structure first we issued $100 million of preferred stock and utilize the proceeds from that issuance to retire.
All outstanding borrowings on our revolver as a result of this action our net debt was reduced to 757 million at December 30, Onest 2019 from 855 million at September 32019.
Second we amended our existing credit agreement to extend the maturities of both the revolving credit facility and the April 2021 term no be maturities. These maturities have been extended to July 2022 in October 2022, respectively. The result of these actions are improved liquidity.
And enhanced flexibility from a timing perspective to evaluate and pursue options associated with our announced strategic review.
We also made some significant changes to our management structure during the fourth quarter with the goal of transforming our organizational culture, improving our operational efficiency and reducing our overhead structure I appointed Chris cultures to lead our life Sciences group and John Buck and took over responsibilities for the power solutions group along with it.
As existing roll the GDP of the mobile solutions group.
Chris has over 30 years of experience in various commercial and operational roles and his track record of excellent execution will be invaluable as we continue to grow our life Sciences platform. Likewise, Johnny has significant experience and leading operations and participating as a senior executives, helping shape and organization strategic direct.
John's management and operational skills are well suited to maximize the potential synergies and growth opportunities that can be realized through the combination of power and mobile solutions. We've made significant progress on the cost reduction initiatives, we announced in October 2019.
To date, we have eliminated 12.9 million in cost throughout the company and have identified an additional 3 million in cost reductions that are in process.
I will discuss in more detail later in the presentation.
Lastly, we announced its a strategic review, where the company will evaluate a broad range of operational financial and strategic options with the goal of reducing leverage and enhancing shareholder value.
The strategic review remains in process subject to an ongoing evaluation of market conditions and global economic stability. We have previously indicated that we would not comment on this process and less further disclosure is necessary and consequently, we will not be commenting are speculating about the timetable for potential.
Outcomes. During this call we appreciate your understanding and patients.
As we move onto our financial performance you can see their fourth quarter sales were 198.6 million roughly flat with 2018 after consideration of foreign exchange differences.
Our life Sciences group reported sales of 88.4 million.
8.9 million or 11% from year ago.
This increase was substantially offset by year over year reduction in sales in the mobile solutions group of 8.2 million due to overall slowness in the auto sector and the general Motors strike, which adversely impacted most of October 2019.
Our 2019 sales totaled 847.5 million versus 770.7 million in 2018. The majority of this sales increase is attributable to the life Sciences businesses acquired in 2018 and organic growth of 9.8 million.
Our reported fourth quarter EBITDA was 19.2 million and adjusted EBITDA was 33.2 million adjusted EBITDA was slightly down from the fourth quarter, a year ago, but in line with the guidance we have provided on the quarter.
Consistent with the sales performance EBITDA for the life Sciences group was up 2.9 million from a year ago, while mobile solutions adjusted EBITDA was down 1.9 million.
The fourth quarter operating income and EPA asking both improved over Q4, 2018, due primarily to $182 million write down of goodwill in the fourth quarter of 2018.
GAAP EPS is reported loss of 35 cents a share while adjusted non-GAAP EPS is income of 14 cents per share.
Our free cash flow for the fourth quarter was $2.3 million. This result is less than our previous expectations near the ended the year. We made the appropriate decision to keep our current payment terms with suppliers instead of lengthening payment terms at year end as it as has been done in prior years. Consequently, our account.
Payable were 8.4 million less at December 31, 2019 versus the previous year. This action was appropriate given our supply base is concern surrounding certain agent rate rating agency reports and the going concern language that was included in our third quarter form 10-Q.
We expect to see a free cash flow benefit in our 2021st quarter cash flow as we will not have to use cash flows to reduce a higher year end accounts payable balance.
Reducing working capital will continue to be a focus in 2020, as we expect to reduce inventory levels and we'll manage lengthy content customer payment terms through cost effective customer accounts receivable programs.
On page five we have a summary of our efforts to reduce costs and improved cash flow.
Our 32 million dollar goal announced in October 2019 of improving cash flow consisted of three components, one eliminating our quarterly cash dividend, thereby saving the company $12 million per year. This was done in 2019.
Okay, reducing overall costs, including SDN, a savings of $10 million per year, and third reducing the annual spend on capital expenditures saving another $10 million annually.
We achieved that 10 million dollar cost reduction by eliminating 12.9 million in annual expenses, consisting primarily of 5.9 million and 4.9 million associated with personnel reductions in our corporate office and three operating groups respectively. In addition, we have agreed to terminate.
Our lease on two thirds of our Charlotte office space saving $1.7 million annually.
We will incur $4.3 million in total cost to terminate our least consisting of real litter fees landmark termination costs, including $800000 for six months rat and tenant improvement incentives.
We expect that this cash outlay will be split 50 50 between the first and second quarters, we're still focused on additional opportunities for cost reductions associated with professional fees travel and potential facility consolidations synergies.
The annual reduction in capital expenditures fall slightly shy of our 10 million dollar goal with an $8.3 million reduction in comparison to our 2019 cash spend as 2020 unfolds. We will continue to look for opportunities to capture the balance of this call.
Turning to slide six which details our fourth quarter revenues by segment.
On a consolidated basis total revenues decreased 0.4% for the fourth quarter versus the prior year, primarily due to foreign exchange losses life Sciences grew over a <unk> percent and power solutions was down 3.5% and mobile solutions posted 11% reduction in sales due to go.
We will economic automotive headwinds coupled with the GM strike.
Foreign exchange continued to do reduce sales as the U.S. dollar strengthened against most of our foreign currencies.
On a year to date basis overall sales also grew 10% driven primarily by the acquisition of Paragon in May 2018, organic growth within life Sciences and to a lesser extent sales growth in power solutions overall organic growth was 1.3% acquisitions accounted for nine point.
8% of growth and foreign exchange was a headwind of 1.1%.
Now I'd like to turn it over to Tom to buy also Tom can provide a more in depth review of our financial performance for the quarter.
Thanks worn.
Please turn to slide seven which includes our fourth quarter results on a GAAP non-GAAP, excluding special items and that total adjusted non-GAAP basis.
As I did in the prior quarter I further breakdown or adjustments into two categories were better transparency.
One category is special items, which are onetime unusual expenses and number two transition and integration expenses. The company has historically captured due to the number of acquisition and integration activities made over the past few years.
There are three key points I would like to get across today first.
Gross profits are improving in total dollars and as a percent of sales improvements in gross profit relate to the focus on higher margin value added programs with our customers.
Continuous improvement efforts integration and managing cost based upon market conditions.
Second operating income on a non-GAAP basis, excluding special items showed a loss of 2.2 million and was essentially flat year over year.
Considering the increase in depreciation and amortization expense of 3.5 million and approximately 2 million of management bonus reversals in Q4 of 2018 versus 2019.
Note that there were no executive annual cash bonuses paid neither year.
Last item is that EBITDA percent of sales circled the column titled non-GAAP, Excluding special items, you can see EBITDA improved year over year.
Let's go to slide eight which provides a bridge was more granularity between reported GAAP non-GAAP, excluding special items in total adjusted non-GAAP.
There are a lot of moving parts on this page and I will try to hit the high plains.
First let's focus our attention on the upper portion of the bridge.
The large dollar tax affected special items in the quarter were <unk> point 8 million for severance and point 5 billion for write off of debt issuance costs.
In the prior year, the large tax affected special items for 4.1 million for fixed asset impairment 199.1 million of goodwill and JV impairment charges and 7.2 million related to divesting prior precision bearing components segment.
Now, let's turn our attention to the lower section of the bridge in Q4 2019 large dollar tax affected non operational adjustments for 1.6 million for capacity and capabilities development.
Professional fees of 2.1 million.
Integration and transformation.
4.6 million and 9.9 million of amortization of intangible and deferred financing costs.
A large dollar tax affected non operational adjustments in the prior year were 2.5 million for capacity and capabilities development 2.5 million for professional fees.
Integration and transformation of 4.9 million and 7.6 million of amortization of intangibles and deferred financing costs.
Please turn to slide nine.
2019 was a year of transition as we continue to integrate the large acquisitions made over the years.
I'm not going to spend too much time on this page. However, I will point out a few things first sales were up 10% for the year, primarily due to a partial year carryover of acquisitions and organic growth in life Sciences.
Second similar to the fourth quarter gross profit moved in the right direction in 2019 as our margin focused activities previously mentioned read through our results.
Management bonuses were zeroed out as mentioned earlier in the prior year, causing a drag on earnings in 2019 of 3.5 million year over year. As previously mentioned there were no executive annual cash bonuses paid in either year.
On page 10 is our full year bridge.
Again, there are lot of moving parts on this bridge and I will hit important ones.
The large dollar tax affected special items in the year for 1 million for sovereigns.
2.6 million for write off of debt issuance costs, and 6 million for discrete tax items related to prior divestiture of the precision bearing components segment.
In the prior year large dollar tax affected special items were 4.1 million for fixed asset impairment 199.1 million of goodwill and JV impairment charges.
7.2 million related to divesting prior precision bearing components segment.
Now, let's turn our attention to the lower section of the bridge.
2019, the large dollar tax affected non operational adjustments were 7.3 million.
Pass the and capabilities development.
Professional fees of 3.6 million integration and transformation of 17.5 million.
And 41.3 million of amortization of intangibles and deferred financing costs.
The large dollar tax affected non operational adjustments in the prior year for 6.5 million a capacity and capabilities development professional fees of 8.5 million integration and transformation of 13.4 million.
29.9 million of amortization of intangibles and deferred financing costs.
Note that the three categories under transition in acquisition expenses of capabilities and capacity development professional fees and integration and transformation our plan to come down over 50% in 2020 and be minimal in 2021.
There are a key focus of management should reduce these expenses as we put the integration behind us.
Turning to slide 11, net working capital at the end of the fiscal fourth quarter was 192.9 million compared with 188.7 million in the prior year, an increase of 4.3 million.
Working capital turns were 4.1 versus 4.2 in the prior year.
Yes, all improved versus prior year inventory turns were flat and accounts payable days decreased in the fourth quarter as Warren mentioned, we made a strategic decision to pay our suppliers on time in order to maintain good relationships.
2020, we will focus our on reducing working capital through accelerated collection efforts.
Auctions in inventory and improve payable terms.
Please turn to slide 12 net debt at the end of the fourth quarter was 757.6 million versus 833.4 million in the prior year, a decrease of 75.8 million.
EBITDA as measured by the credit agreement to funded debt was at 4.65 times versus 4.74 times in the prior year.
Several positive things happened in the corridor as one matched me.
We improved our financial flexibility.
For the company, we issued preferred stock of 100 million and paid off our revolver.
And we extended the revolver and term being loans.
The loves US time to continue our efforts to Delever the company.
Slide 13 shows our free cash flow for the quarter and full year, we generated free cash flow of 2.3 million for the fourth quarter 2019, compared to an adjusted free cash flow of 2.7 million in the fourth quarter of 2018.
For come from work compare ability is important to point out that the prior year had to 34.4 million tax refunds related to the sale of the precision bearing components segment for the year free cash flow was a negative 4.8 billion and 2018 adjusted free cash flow was a negative.
57.5 million.
Looking forward, we are concentrating on improving our free cash flow by reducing working capital cost reductions limiting capital expenditures and proving productivity to drive bottom line results.
Slide 14 summarizes our capital spending depreciation and amortization trends.
Cash capital expenditures were approximately 12.6 million in the fourth quarter compared with 17 million in the prior year.
For the quarter, the company's capital spending was 6.3% of sale down from prior years percentage of 8.5%.
There was lower spending in Q4 2019 across all business units compared to the prior year.
On a year to date basis. The company spent 53.3 billion or 6.3% of sale versus 64 million or 8.3% of sales in the prior year.
And then anticipate spending 45 million in capital in 2000, each one.
With that I'll turn the call back to war.
Thanks, Tom.
We go to page 16, we presented some additional information there for our life Sciences group, the 11% year over year sales increase has been driven primarily by our orthopedic and delivery system or case and trade products using an improvement in margins over the prior year.
Good operating profit has increased to 20.2% from 19.7% for the prior year period.
Please note that 62% of the adjustments from GAAP operating income our duty intangibles amortization.
We've also seen expansion of our reported and adjusted EBITDA margins are <unk> are positive margin trend is the result of continuous process improvement installation of automation and improved performance in our international operations.
Our backlog is 149 billion, a 36 million dollar reduction from Q3 as we discussed last quarter. We have recently launched their new sales and ops planning application that allows us to proactively interact with our customers and improved process.
And improve the process a matching product requirements with expected delivery dates we expected than a byproduct of a more full implementation of this application would be a reduction in the total backlog.
Looking forward, our 2020 focus will be on continuous improvement managing the impact of the Corona virus on our business and targeting growth of our med search products, we expect growth in the orthopedics segment to be modest in 2020 due to the significant 2019 product introductions that will not repeat in two three.
I was in 20, we expect orthopedic related sales to expand in 2021, when the next round of new product introductions our schedule.
The mobile solutions business summaries included on page 17.
Mobile sales are down 10.9% from a year ago due primarily to sales declines in North America due to programs moving to enter production delays in new business launches and unfriendly taxing tariff environment and the impact of the you idea W. strike against General Motors, which started in mid September and Didnt.
I conclude until the end of October.
In spite of this sales reductions reported EBITDA increased from 4.5 million after neutralizing the goodwill impairments to 7.9 million due primarily due to a write down of idle and obsolete equipment in 2018.
The EBITDA declined from 10.8 million to 8.9 million, reflecting the lost margin on sale on the sales variance, partially offset by significant reductions in indirect labor and related benefits and bonuses.
Through the end of December 2019, indirect labor, asking a labor and related benefits were reduced by $7.3 million on an annualized basis.
We expect modest growth for this group in 2020 due to started production of some new programs and the focus will be on margin improvement through manufacturing process improvements and additional reductions of fixed costs, including the carryover impact as some of the completed 2019 indirect labor reductions in addition.
Improved free cash flow is expected from reduced capital expenditures in.
Yeah and improvement in working capital management, including reduced inventory levels.
Moving on to power solutions on page 18.
Powers fourth quarter sales decreased 3.5% year over year, due primarily relate primarily to lower sales to customers that exports to China. The direct sales on electrical electrical products to China, both due primarily to increase China Chinese tariffs customers have also chosen to reduce inventory levels as ever.
Reaction to these lower sales volumes.
In spite of the sales reduction reported EBITDA was 4.8 million an increase of 1.4 million over the 2018 fourth quarter.
Adjusted EBITDA was $7 million for both fourth quarter periods, but increased 16.1% of sales in 2019 versus 15.5% in 2018 margin improvement is primarily due to reductions in indirect and asking a labor and improved manufacturing efficiencies.
Facility consolidations are underway in this group, we finalized the move of our West coast operation into the Irvine, California facility and have ready to Fairfield, Ohio facility for closure. The construction of the talk facility is substantially complete and we expect to consolidate two other facilities there by early in the second quarter.
We expect moderate sales growth in 2020 coming from both electrical and aerospace and defense with continued margin expansion due to optimization of our facility footprint and continuous process improvement. We also expect that we will realize cost reductions through synergies created from common leadership of the mobile empower groups we.
Back to the power group will continue to generate significant free cash flow due to its low capital expenditure profile.
Lastly, we have summarized our guidance for the first quarter and 2020 on page 20.
Before we discuss our guidance, it's important to review and discuss the impact that Corona virus has had and continues to have on our global operations.
Our focus has been on securing the health of our employees mitigating potential weaknesses in our supply chain and striving to meet our customers volume requirements from an employee health standpoint, we have coordinated with governmental authorities to implement appropriate safety measures at our facilities, including a 14 day isolation period for Chinese employees that travel during the check.
He is new year.
We have also where appropriate removed any financial disincentive for an employee to miss work, thereby encouraging them to staying home if they are sick.
Within China, our operations have resumed and currently our staffing levels are at 92% or above and our customers are all ordering product at at less than full production levels. We currently estimate that Chinese customers will not returned to normal production normalized production levels until early may two.
Thousand 20.
On the supply side, we have seen some disruption from products sourced in China and are closely monitoring the situation in Italy due to the location of certain steel suppliers. We will continue our available ration of critical components for products necessary for our manufacturing operations versus safety stock levels and take the appropriate at.
Since to prevent outages.
We have delivered product to our customers consistent with their requirements, albeit at reduced volumes matter of fact, just this week. We received an award from a major Chinese customer recognizing the excellent support our team has delivered since the krona virus outbreak, we certainly will strive to continue this level of support.
As of today, we have seen the outbreak disrupt our supply chain and cause our customer requirements to fluctuate. However, the overall impact with the krona virus on our business in the global economy are highly uncertain and difficult to predict therefore the guidance included in this presentation is representative of our current knowledge.
Regarding our customer schedules, our ability to continue to secure appropriate materials and supplies and ongoing attendance of our employees. It does not contemplate any long term disruptions in European or North American economies or further disruption on the Asian continent are.
Management team will continue to remain diligent in our oversight of this ever changing landscape.
We estimate that our sales for Q1 with all of that in mind.
Range from 197 to 204 million generating EBITDA of 27 million to $31 million. This will result in earnings range of a two cents per share loss to a five cents per share of income.
This range is below our reported Q4 earnings per share on similar sales volume due to several factors, including one increased interest expense due to the recent amendment to our credit facility, which represents an additional cost of approximately 4.5 cents per share.
For the quarter.
Two and under absorption of overhead costs due to a reduction in inventory as part of our focus on working capital.
Three increased employee incentive compensation in Q1, 2020 over Q4 2019 and for the Corona virus impact on both the efficient efficiency of our international operations and the financial performance of our China Chinese joint venture.
Recall that the China JV sales are not consolidated in our reported financial statements and Q1 volumes for the joint venture are expected to be roughly 50% of what we saw in Q4 2019.
We expect that our free cash flow will be negative $4 million on the low side and positive $5 million on the high side.
This compares very favourably with a 17 million dollar cash outflow in the first quarter of 2019.
For the 2020 year, we expect sales of 825 million to 865 million with adjusted EBITDA of 145 million to 157 million.
Adjusted earnings per share are projected to be 53 to 75 cents per share with free cash flow in the range of 25 to 35 million.
That concludes our prepared remarks, and I will now turn the call back to the operator for questions.
Thank you if he would like to ask the question. Please signal by pressing star one on your telephone keypad, if you're using speakerphone. Please be sure. Your mute function has turned off to allow your signal to reach our equipment again that is still in one to asking audio question well pause for just a moment till now everyone the opportunity to signal for questions.
My first question will be from Daniel Moore from CJS Securities.
Good morning, gentlemen, appreciate it thanks for taking the questions in the color. This morning.
Wanted to start with you know obviously a challenging one you gave good color there in context around the guide wondering how <unk> as as you formulated and how that's changed over the last week.
If it has at all you said, it's based on your current thinking I'm just wondering.
You know if that's been adjusted relative to what how the world was operating maybe 510 days ago.
Yeah, Dan obviously, it's a very fluid situation and we have been.
Reflecting as best we can the results of what's going on globally in our forecasts I think the led the last update we really received from the teams I mean at some point in time, you've got to draw lines San right was.
Mid to late last week, so we could finalize everything and Formula light formulate our opinion and that's the nature for the Genesis of the you know the commentary regarding no future disruptions in the North America or the European caught that it's something that as I indicated we're very much focused on.
Especially on the supply side I mentioned, Italy, we have a a key supplier there that provides us some specialty steel. So we've actually ordered a had so we might actually take on some additional raw material and supplies inventories you know into first quarter early.
Second quarter as we evaluate.
How this thing is going to unfold because as you know it's changing every day.
Helpful and in the context of.
What's gone on China, you mentioned your customers you know not yet operating now back to sort of 92% staffing the customers not ordering at normal levels.
Roughly what percentage would you say that they're ordering out today relative to you know 1960 90 days ago and I guess you said early may is that right is that your best guess just yeah. So we saw.
Yes.
Sorry to interrupt so we saw we get schedules from our customers.
On the auto side, the Oems released a timing on when they expected to open their facilities back up but it was going to take them. The real drag there was getting all the employees back into the facilities after the Chinese new year, because if they travel out of state.
They were essentially traps trying to get back into the state or the province, where they were working and had to go through an isolation periods. So we're pretty much at full staff right now on a life Sciences side, we're at 92% on the mobile side and our facility there and I would tell you are cuts.
Summers are probably taking anywhere from 50.
Hence my comment on the joint venture to maybe 75% of what we would consider normalized production volumes right now.
And we expect that to you know improve.
Over the next four weeks four to five weeks.
And then looking at a may period, where we might be back to more normalized production levels.
Perfect I'm switching gears, a little life Sciences, and you mentioned, obviously you had a pretty big sell in you know of north so products last year I'm. So what does the guidance contemplate for overall growth in life Sciences. This year and maybe similar <unk> lot of questions on the supply chain.
That's where are we now and that continuum and how quickly does the guide expected we get back to normal.
Yeah on the life Sciences side, we've seen a couple of developments there when we talked last we had pegged that growth in that 5% to 9% range on an overall basis and what what we've seen in the Corona virus I think there's a couple other dynamics going on there one is the corona virus the impacted.
That number two is some of the consolidations in the life Sciences space have caused our customers to look harder and inventory levels. We've seen several large customers trim back.
Some of their production needs solely as it relates to them managing inventory levels.
So as we look at that business on an overall basis now we're actually looking at a lower growth profile, maybe marginally up to flat as we look at 2020 at this point in time.
Perfect and then lastly from me.
Just maybe talk about any.
Steps you wouldn't be contemplating to reduce costs and how much flexibility do you have to reduce costs further I'm, particularly in auto and.
In industrial you know if it does become a.
A little bit longer sustained disruption from a demand perspective.
Yeah. So so.
If you look on the auto side in North America, we have I think a pretty good track record of being able to flat. The all the variable cost of that business with production and one of the ways that we can do that as we typically run our facilities. There on a 50 hour work week. So we can dial back 20%.
Without any significant lay offs. It also you know affords us an opportunity too. If there is if there is any sort of health related issues that we have in production volumes are down it allows us to have.
You know a certain level of absenteeism.
On a go forward basis. So I think that we can I think that we have the ability to flocks on the variable side on the fixed side I think that we've done a very good job on the auto mobile group, reducing some of the fixed base cost in that business on the indirect side, we've taken that business back down to.
An 8% of sales range for indirect labor.
The team understands the if sales contract below what we've targeted for our plan for this year that there's an expectation that they flux that indirect labor either even further and I think that theres an opportunity to do that the I think the vast opportunity for us right now exists.
And some of the facility consolidation.
Efforts that we have underway and in addition, we've looked very closely at how we can capture some synergies, especially on a asking a functional side with the combination of those two groups, we've already been working to kind of to bring the financial teams together.
To bring the human resource teams together and to capture some additional cost opportunities there as well. So you know I think everything that we can do we're focused on right now it's just a matter of of making sure that are our processes.
Our robust enough going forward to start taking the appropriate level of personnel reductions out.
As our improved processes afford us the ability to do that.
Okay very helpful. I appreciate the color investor.
Okay. Thank you. Thank you. Our next question will be from Rob Brown from Lake Street capital markets.
Hi, Good morning, Thank you for all the detailed information.
First question isn't in the power solutions business or the business overall, how much exposure do you have the commercial aero market and and what sort of the program activity you're doing at this point there.
Yeah, Rob that's a you know clearly it's a targeted growth area for us.
But when we look at that overall business on the aerospace and defense side, it's approximately 10% of the overall power solutions group. We spent you know a considerable amount of resources over the last year getting that business up and ready you've probably heard us talk about the fab.
Back that you know a year or so ago 18 months ago, we were on seven or eight approved supplier listened today that total is like 56 and they effort to do that was not minimal it entails a lot of development work with customers.
Manufacturing prototypes that type of thing none of that type of business early on is extremely profitable matter of fact, it's not profitable at all so.
We're by a lot of that at this point in time and looking to bring some some programs on that are actually contributing to the bottom line, but as it relates the total size of that business like I said, it's about 10% of the power solutions group today.
Okay. Thank you.
And then in terms of visibility on a on the the pipe or on the order flow how much visibility do typically QED and win when do you sort of see demand starting to tail off for pickup how much sort of head to heads up do you get there.
I think it really it really depends on the group if you take the mobile is an example, typically.
We would get a 12 week.
Look forward from our customers were four weeks might be from.
And that.
The next eight weeks are for planning related purposes, but I would tell you even though that is that as the theoretical case that everybody is operating too. It is not uncommon for our customers to zero out their demand and a relatively short timeframe.
So we're constantly watching that and trying to evaluate where our customers inventory levels are as well to make sure that we understand where their long term demand would be on the life Sciences side are you know we have we monitor very closely the backlog and with this new.
Supply and operations forecasting program that we put in place with our customer it's given us a better insight into what their expectations are with their inventory levels are and what their expectations are from a delivery standpoint going forward. So when we look at that from an from.
Best case scenario.
We would we would like to have that backlog at somewhere you know 12 to 14 weeks.
So we don't want to be able to that we don't want to deliver.
We don't want to have lead times that long, but it would be nice to understand exactly what our customers need for a 12.
Weak window and that's that's really what we're hoping to operate too.
Okay, great. Thank you I'll turn it over.
Thank you our next question will be fan.
He burger with Keybanc capital markets.
Hi, good morning, guys.
Hi, I'm Dave.
Oh, one most of the questions I got overnight, we're on the portfolio review and I get that you don't want to talk about specifics or predictions, but can you tell us if there are external talks taking place or if the review is still all internal.
Yeah. So I think that you know I will tell you that you know we're in the process right now Steve I'm not trying to be coy about this but we are and we are having some external conversations as well.
Okay.
And you detailed a lot of the balance sheet and maturity progress along with somebody aggressive cost save actions beyond some of the tactical things you already discussed can you talk about how your view on ends ability to manage through the current environment in a sustainable way has evolved.
Yeah, I mean, that's a good question I'd tell you that that.
You know as it relates to how we view the business and how we're gearing the management team our focus and this I think was pervasive throughout our commentary. This morning is very much on a cash flow side of the business. I mean were said we're focused on EPS, but given the uncertainty in the marketplace, we feel that.
Our our primary focus needs to be on generating cash flow and paying down debt and that's why in the first quarter. You know I talked about some under absorption of inventory in that type of thing. So we're trying to get this business down to a point, where we can still be.
At a minimum free cash flow neutral, even if we see a 10% reduction and and volume on where we're operating today.
And I think the teams are geared up to do that we've been very focused on the.
Capital expenditures side and and the other thing that I think that we've done is we're trying to create a better communication platform between the three operating groups and by having John a buck in lead power and mobile together and Chris over at.
Life Sciences, I think that from a communication standpoint, we've significantly improve that in the business I know that Johnny Chris talked frequently I'm engaged with those guys I'm talking to them daily.
So I think that from that standpoint, there's been a significant improvement you know I knew when when I came into this it was going to be you know a difficult situation. We have a good team here.
I think that we made some substantial progress that puts the company I'm more sound footing going forward and I'm pretty excited about you know, where we're going and that we've got a plan in place this year to pay down $25 million to $30 million at that.
Yeah, we got about that right I think thats a great segue into my next question. You know obviously there has not been a great track record of forecasting EPS and free cash flow over the last few years. So now that you and Tom are there in the seats and can you just talk about your confidence in a line of sight to these numbers do you feel like this is a re.
Reasonable forecast, but still conservative enough that you can hit you know midpoint or better on the on the ranges.
That's our goal that's our goal definitely I mean, we have levers to pull and we're focused on it its a.
It's it's definitely a point where we have.
Ways to improve our receivables for example in working capital and warrant talks about inventory. There's you know once you start we can focus more on.
Our suppliers consolidated in our suppliers like building a payable terms stuff like that.
Controllables of capital spending really making sure that we get the payback on the I are that we that we.
Signed up for and then.
Of course ongoing cost reductions continuous improvement because everything can be improved upon.
So right. So I agree with everything Tom said, Steve and I would tell you that we were as diligent I think as we could possibly be and trying to put this is the this range together, but I would just take you back to some of the comments the lead into that as it relates to the uncertainty in the environment today. So.
You know if theres some if there's stability as it relates to volumes.
Automotive volumes go from 16 to 12, I mean, obviously, that's going to impact our guidance. We did not project anything like that a significant disruption because of Corona in North America. So we did we did incorporate what we've seen the first quarter and what we expect to see in.
First couple of months into second quarter, but beyond that.
It's difficult to predict where this thing is going to go at this point in time.
Right No. That's that's really understandable last question for me as you think about the growth rates on the three segments talking about lower gross on on life Sciences, and some capex for for startups and then what's happening with mobile do you expect positive free cash flow in all three segments. This year.
Yes.
Okay.
That's great. Thanks.
Yes.
Thank you and once again that a star one to ask an audio question. Our next question will come from Paris Shah from Telos asset management.
Yeah, Good morning, and thanks for taking my question you know that one of the things I guess every lender is concerned I noticed the liquidity or the company. So you know as of today is this something that you you could discuss in terms of.
What is the.
Cash and the balance sheet and what is there will likely be.
So do you have those covenants and backlogs and everything else.
Sure I mean, we finished the year with $31 million a cash on the balance sheet and no borrowings on the revolver at two by December 30, Onest 2019, and you know our guidance shows that our expectation is that we're going to be cash flow a negative in the first quarter.
From 4 million and on the upside to 5 million positive and and I guess, it's important to understand that in the first quarter is typically a cash intensive quarter for us as we come out of what is a slower December period, and we have to build our receivables balance back up and usually.
Some inventory build as well so.
We feel I would tell you from a liquidity standpoint, I think that we feel pretty good Tom you want to add something on that well it just in it and just saw the financing that we put in place with the preferred giving us room and so we feel pretty good about our liquidity, we feel good about where our cash balances are and a path forward.
So in some ways like if I had to estimate DRD liquidity today are you, saying that the spin or do you all are borrowings at this point and.
The cash would be in that 25 to 30 million dollar range.
We're still on a positive net cash position.
Okay significant positive net cash position.
And in North America, where we have the revolver, we're still even in a positive net cash position today.
I would I was classified that borrowings on the revolver isn't minimal at this point.
Okay. That's helpful.
Yep.
Thank you.
Thank you yeah.
Thank you once again that is star one to ask an audio question now.
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Thank you operator with that will bring the call from close thank you for joining us for any further information pretty sure. Please reach out to Merck Sherman and Investor relations or Abernathy Mcgregor. Thank you again and have a good weekend.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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