Q3 2020 Earnings Call
[music].
For 2020 conference call all that's obviously summit to prevent any background noise. After the speaker's remarks, there will be question answer session.
If you would like I said, let's turn to wouldn't be Stein superstar did the number one I know telephone keypad. Thank you Mr. Alan Edrick Chief Financial Officer, you May begin your conference.
Well. Thank you good afternoon, and thank you for joining us I'm, Alan Edrick Executive Vice President and CFO Evault OSI systems.
And I'm here today, with Deepak Chopra, our president and CEO.
Welcome to the oversized systems fiscal 2023rd quarter Conference call.
We are glad that you can join US we hope you and your families are safe and healthy as our country and the global community Battle that many issues associated with the cobot 19 crisis.
Prioritizing safety, we're exercising social distancing and are all not in the same location while conducting this call.
Earlier today, we issued a press release announcing our third quarter fiscal year 2020 financial results.
Before we discuss the results I would like to remind everyone that today's discussion will include forward looking statements and the company wishes to take advantage of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995 with respect to all such statements.
All forward looking statements made on this call are based on currently available information and speak only as of today and the company undertakes no obligation to update any forward looking statements that becomes untrue because the subsequent events new information or otherwise.
During today's call, we refer to both GAAP and non-GAAP financial measures when describing the company's results.
For information regarding non-GAAP measures and comparable GAAP measures of the company's results.
And a quantitative reconciliation of those figures please refer to today's earnings release.
I will begin by taking a few minutes to discuss what we're seeing as a result of the cobot 19 outbreak.
And follow with a follow with a brief overview of our third quarter results.
I will then turn the call over to deep AUC to discuss the company's business before returning to discuss the third quarter results in more detail and also to provide our updated guidance.
Our teams are successfully addressing many of the operational challenges that have arisen due to cobot 19 and related shelter in place government orders.
We transitioned many of our employees to working from home and implement and changes in our work practices to promote the safety of those production employees, who continued to come into the factories.
So there has been and we'll continue to be a financial impact to the company as a result of the pandemic production in each of our operating divisions has been deemed essential and we continue to work to fulfill demand for those essential products in a safe and healthy way.
We believe we are well position to navigate these times at a relatively pleased with the outlook through the remainder of the fiscal year.
On the demand side, we've seen increased global activity in our health care division for patient monitoring products and supplies and accessories and this is expected to positively impact our fourth fiscal quarter.
And our security Division, we have experienced some delays unanticipated bookings as well as certain order request from customers to push out delivery or an installation of products to a later date.
This is most acute with respect to our aviation customers and our cargo customers has access to some locations is limited and certain government personnel are unavailable to perform final acceptance criteria.
And our Opto Division, we expect some adverse near term impact on net revenues as we are seeing some changes in demand from certain of our OEM customers. We continue to work through their requirements as well as actively engaged with our suppliers as we navigate this new landscape.
While we have experienced intermittent facility closures and governance government mandated limitations on are essential workforce. Currently all our manufacturing facilities are open except for one small location in Mexico, serving our opto business.
As the Cobot 19 situation continues to evolve we are monitoring the business environment for areas of concern.
We are committed to delivering the products and services needed for our customers into maintaining a safe and healthy workplace for our employees.
In terms of our quarterly financial results.
We reported Q3 revenues of 293 million, a 4% year over year decrease.
Gross margin expansion, coupled with lower borrowing costs led to record GAAP diluted earnings per share of a dollar six and record non-GAAP diluted earnings per share of $1.20.
Strong profits and working capital management led to solid operating cash flow of approximately 46 million in the quarter.
Our balance sheet a stronger.
And we ended the quarter with net leverage as measured under our credit facility of approximately 1.4.
With a 535 million dollar revolving credit facility and a consolidated net leverage Kappa 4.0, we believe we have ample liquidity for the foreseeable future.
Before diving more deeply into our financial results.
And discussing our updated fiscal 2020 guidance.
Let me turn the call over to the Buck.
Thank you Alan.
And again, good afternoon, and welcome to the ASI systems earnings Conference call for the third quarter fiscal 2020.
As Alan mentioned I'm going to start off commenting on the current environment.
I'll also discuss some of our third quarter highlights and then donate back over to Alan to provide a part of the detail on our financial performance.
First I want to thank all of our employees across the world for working through the over 19 pandemic that has impacted everyday life and business activity.
These time further cruddas crystallize odd longstanding mission to make the award safer and healthcare with our solutions and actions.
As a corporate 19 vida spread around the world. Our global team has been focused on executing through rapidly evolving government measures all the while prioritizing the safety and the health of our employees.
To accomplish this we implemented significant measures to protect our employees, which have enabled the company continue to operate effectively throughout this pandemic.
Avenues for 4% lower than the Q3 in the bride here.
Due to the global nature of our customers many of our operations are impacted by the over in 19 stockings in late March.
However.
Each business enhanced his communications internally and externally.
Moved into trouble shooting mode and responded well under the unforeseen circumstances.
Which strong execution.
Delivered at a record Q.T.E.P.S. and strong cash flow.
Bookings in each apart up and healthcare to divisions were strong however, the timing of security Division bookings was impacted by Goldman 19.
Doing or side book to Bill of 0.9, and a backlog of 863 million.
That's what I'm doing each business starting with security.
Revenues 187 million on about 3% lower than the bratty or guilt free.
During the quarter, we collaborated with our customers at airports boats and borders to handle the change in business Temple and other short term requirements that resulted from government actions in various regions to slow the writers spread yet we also continue.
To support long dumb infrastructure initiatives for these customers.
You're also continuing to develop solutions that could help improve the checkpoints screening and overall passenger flow.
You see potential for solutions utilizing the more screening automated thread it on systems and active present intelligence to lessen the burden on operators.
Shortly after the quarter end, we acquired a small A.I. solution that utilizes deep learning and computer vision.
Assist with image analysis and threat detection on X. Ray based detection platforms, we expect to utilize these.
Tools across so to know for detection platforms for people baggage and cargo.
At boats and borders are garden projects and done contracts continued to the core.
We are currently in discussions with Mexico government for the next agreement as the current agreements dumb and shortly in discourse.
You can understand that we cannot comment further at this time as we are in active discussions.
Although the goal lives for a decent don't keep programs for Guatemala, and say Lanka have been delayed for various factors, including covert 19, we expect both of these programs to become operational and the next few much.
Looking for what we have adjusted our guidance somewhat downwards to reflect the expectation in our security division that there will be some delays in the delivery up products to customers most notably in <unk> given the recent slow down for travel as well as a delay in.
Relation of certain contracts.
The timing of revenue could also be impacted you to go over 19, as we may experience potential delays in revenue recognition.
The difficulty of scheduling on site custom what acceptance for the Liberty for testing.
Odd pipeline continues to be robust all over the globe.
Specially on some of the U.S. government.
Moving to the healthcare Division.
Spacelabs revenues, what about 7% lower than the prior years <unk> <unk>.
<unk> the division continued to in Blue operations and delivered operating margin expansion, resulting in comparable operating income to the <unk>.
Towards the end of few tree and late March.
We saw increased demand for fish and monitoring blacks once.
We expect that trend to continue in Q. for as health care facilities increase their to bed capacity to handle growth in corporate 19 patient volume.
Entered queue for that very solid backlog in this division that combined with overall order activity gives us confidence for a strong queue for for health care.
Moving toward Optoelectronics, and manufacturing division and cute tree.
Overall revenues were 70 million down 1%, including intercompany from the bride here with continued robust operating margin improvement.
During the quarter, we made an acquisition of a provider up higher liability high reliability transistors and optical sensors for defense and space applications. They're small acquisition is consistent with our strategy to expand capabilities for <unk> electronic components for the space Defense Mark.
Segment.
Given the geographic diversification up this divisions operations that are located in the U.S., Mexico, U.K. Indian Malaysia, and Indonesia, we had to deal with various regional reactions to the pandemic that impacted the activity of businesses, but could be remained mostly operational.
Yup route that our customers are light on us as we came to the unforeseen challenges and delivered looking ahead in Q. for we expect our operational performance and up to be somewhat adversely impacted by the Kobe 19 as certain facilities are now.
Not at full normal staffing levels, you to government jurisdictions and being responsive to the timing of what evolving customer needs.
We will continue to rub status late for our customers and leave us collaborate with local authorities to help take actions to keep our employees safe in the areas, where we operate.
This division so lies sub assemblies and components into that healthcare industry and defense in aerospace.
In summary, we begin out because <unk> and then you will the challenges that we believe our trajectory.
The visibility than we do have compels us to adjust our physical 20 financial guidance to end range reflective of the current environment.
The solutions that'd be polite our customers in aerospace defense security and health care.
Crucial to each industry and the people it so.
As we deal with this challenging business environment, we will continue to focus on execution and remain edge on the capture longer don't opportunities as all this I.
I would like to thank God employees customers in stock holders for continuing support with that I'm worked on the call back over to Alan Doc in more detail about our financial results.
Reopen the call for questions. Thank you.
Thank you D. puck.
No I will review the finance results for our 2023rd fiscal quarter in greater detail.
Mentioned previously or revenues and Q3 for 293 million.
Revenues in the security Division 187 million a year over year decrease in 3%.
Part driven by the impact of the pandemic on our aviation and cargo customers.
I'll throw division sales were roughly flat on a year over year basis.
Increased intercompany sales to support the security Division were countered by a 3% reduction in external sales.
While healthcare division revenues of 46 million represented a sales reduction of 7% year over year.
It did represent a 9% sequential sales increase and led to significantly improved health care adjusted operating income.
Two three compared to Q. too.
Or Q3 gross margin of 37.3% was up 70 basis points from the same for your quarter in up sequentially from 36.3% reported in Q2 of fiscal 20.
We saw a margin expansion in each of our security and healthcare divisions due to a favorable revenue mix and operating efficiencies.
Partially offset by a small gross margin reduction in the opted division, which experience some operational disruptions late in the quarter due to cope in 19 related government restrictions.
As mentioned on previous calls or gross margin will fluctuate from period of period based on revenue mixing volume among other factors.
[noise] moving the operating expenses.
We have historically shown the ability to manage costs and this past quarter was no exception as S.G.N.A. expenses decreased 3% year over year.
We worked diligently across each of our divisions to improve efficiencies imprudently manage our costs structure.
Or in D. expenses, and Q3 were 15.4 million.
12% from Q3 of the prior year.
Driven to a large degree by increased investments in the security Division.
We remain focused on innovative product development, which we view as vital to the long term success of our business.
<unk> fiscal 20, we recorded a 4.5 million impairment restructuring and other charge.
Discharged was primarily related to reductions in our workforce and impairment assets associated with the exit of a product line in our healthcare Division.
Moving to interest in taxes.
Net interest and other expense and Q3 of fiscal 20 decreased to 4.7 million from 5.6 million in the same prior year period as a result of reduced average levels of borrowings under a revolving credit facility in lower average interest rates.
On the tax side, excluding the impact of discrete tax items.
Are effective tax rate and Q2 of fiscal 20 was 23.7% compared to 28.6% into three of fiscal 19.
We recognized discrete tax benefits 5.1 million compared to 0.7 million in the comparable prior year period.
As a result, we reported a tax benefit under gap of 3.4% and Q3 of fiscal 20 compared to a tax revision of 26% and Q3 of fiscal 19.
For the nine months ended March 31, 20, or normalized effective tax rate, excluding discrete items was 26.7%.
Let's now turned to a discussion of our non gap adjusted operating margin, which excludes impairment restructuring and other charges and amortization expense of acquired intangible assets.
Each of our three divisions reported adjusted operating margin expansion in Q3.
Adjusted operating margin in our security division improved to 14.9% <unk>.
Compared to 14.4% and the per year, driven by gross margin expansion from a favorable mixed up revenues in operational efficiency.
Or healthcare division adjusted up operating margin.
Also driven by gross margin expansion as well as reduced our backs improved to 11.8% from 11.1% during the same period last year.
And the adjusted operating margin in or Opto Division grew to 12% up 30 basis points year over year, representing the seven consecutive quarter of year over year Opera you marching gross.
Our corporate cost increased however, primarily as <unk> as a result of the recording of noncash mark to market changes, resulting from the Q3 stock market decline.
This resulted in a slight overall reduction in the consolidated adjusted operating margin.
[noise] moving the cash flow.
Into three a fiscal 20, we generated 45.9 million an operating cash flow driven by strong profits and well managed inventory across each division as days inventory on hand decreased to 119 days in Q3 at fiscal 20 from 140 days and Q3 of fiscal 19.
This improvement was partially offset by an increase in days sales outstanding to 80 days and Q3 at the school 20.
Some customers are stretching out payments cycles in the current environment.
Cap X. and the third quarter was 4.5 million, while depreciation and amortization expense and the third quarter was 10.8 million.
Our cash flow conversion with strong.
The ratio of operating cash flow less cap X. two net income for the quarter in nine months was 212% and 146% respectively.
We were active in our stock buyback program.
Quiring approximately 296000 shares during the quarter, which completed the previously announced buyback program.
Aboard recently authorized a new program of up to 1 million shares.
As mentioned earlier.
Unless you to strong with conservative net leverage and no debt maturities until fiscal 23.
We have significant available borrowing capacity on our U.S. revolving credit facility.
Finally, turning the guidance.
For fiscal year 2020, we're reducing our sales guidance to arrange of 1.165 billion to 1.185 billion.
The reduction primarily reflects the expected adverse impacts of the cobin 19 pandemic on our security and opted divisions, which we believe it will be partially offset by increased demand and the healthcare division.
We are also updating or non gap earnings per diluted shared guidance to $4.45 to $4.65.
This non gap diluted E.P.S. range excludes potential impairment restructuring and other charges amortization of acquired intangible assets and noncash interest expense and their associated tax effects as well as discrete tax items.
We currently believe the sales a non gabardines guidance reflect reasonable estimates and we have reflected the anticipated impact other to cope it 19 pandemic, you know or guidance.
However, given uncertainties as to the duration and scope of the cobin 19 pandemic as well as other variables.
Extent to which cobin 19 may impact the company's finance results is difficult to predict it could vary materially from the anticipated impact reflected in our estimates and guidance.
Actual sales and non gap earnings could vary from the anticipated ranges do do other risks and uncertainties disgusting or S.C.C. filings as well.
In the face of these unusual times, we continue to remain fully focused on the growth of our business.
While investing and product development, making strategic acquisitions and managing our costs structure.
We believe these efforts will enable oversight to continue our leadership in providing innovative products and solutions.
Finally, we would like to take this final opportunity to recognize and think the entire oversize systems team around the world for its focus on safety dedication to supporting our customers in agility in the face of uncertainty all of which helps to create value for our stakeholders.
At this time, we'd be happy to open the call the questions.
At the spine I would like to them like every one.
Question. Please spar.
Oh, no telephone keypad again, that's a one on your telephone keypad. Yeah. First question. That's on the line <unk>, So no L.C.D.S. securities airline smelting.
Good afternoon, Deepak an island and.
Really a good to hear your voices and hopefully you in your family to doing relatively well a couple of questions on the on the security side. You you mentioned that on the book to Bill or.
0.9, and a quarter kept the have like a trailing 12 month to bill or an idea of what that is just to give it sort of a better gauge of.
Bookings overlap.
For the security Division, specifically, Larry Yeah, Yeah, Yeah.
Yeah for the security Division over the past 12 months, it's been just below a one point no. If you exclude turnkey it'd be a bit higher but I was just below a one point out.
So that's sort of portray sort of last year over year idea, where you would you X. Corona would you expect new orders is that more just a timer related thing.
Obviously, not corona coming on we never know, but just you know excluding.
<unk> you answer the questions I think you answer that top.
Are we sending before.
Some of the owners have being pushed to the right.
Especially U.S. government, where everybody's working from home.
And you know everybody has to get together, but the pipeline ended up quest continued to come and go he's drunk or stoned out there a couple of orders of large airport that we have water, but he got like again because of the sudden in each of these shut down it got pushed so we don't see longtime.
But which school, they and eat adoption and deep bike lane or Brookings insecurity.
<unk> and you mentioned nine sticking up team you mentioned sort of I think given last quarter. So there was you know appropriated dollars for the border, but it would just you know too too soon too much too soon so it took a while and they got pushed out a little bit <unk>, there's a potential outside of logistics and coated related.
Impacts, which you know who knows how long they go for but you know go on for but beyond.
Will impact how about in terms of government funding you know it seems like there's going to be a lot of areas that that the U.S. government, especially in you know other government. The two of course will have to sort of help.
Oh yeah.
Basically bail out several industries and whatnot.
We're a possibility that some of the funding that was dedicated for security could get a little bit pushed out because of that.
Obviously, you know nobody can be the answer but all indications we are seeing as there is no shortfall as a matter of fact that challenge for the U.S. government is continued to be they have too much and they don't have enough people do it at least the orders, but same time as a traffic goes back to normal.
Hopefully soon some of these things necessary all over the world and it will continue to grow.
But I remember you know a couple of years back are probably the few few years back now when you know oil fell out of bed somebody is a lot of the and it depends on economies had some issues, but you know and lowered securities expenses, a lot or expenditures.
That you not five years, but that forward into today is so you have a large percentage of those kinda orders coming in or is it sort of a different mix today.
Well you know the whole world is the point has different requirements are young middle East is very much oil dependent other places I'm more security depending on some other Asia Pacific and some other areas are more infrastructure investment glean <unk> manufacturing capability like Indian other places so it's all over the globe and we feel very strongly.
When the last day, even a decade, that's going to be ups and downs from one you had to the other but we have never looked at it as if oil industry has something globally has any impact negatively. It's it's it's all all positive.
Just switch it gets real fat just on the Opco segment again beyond the sort of <unk> temporarily impacts economy goes into sort of a pro along the <unk> wherever you want to call. It would I would assume that it would be the one segment that probably has some.
Direct economic impact on it is that fair to say.
Again, you know there's been no precedence none of US no I was going to work, but the good news is that even in our opto segment.
Very much correspond to the healthcare industry does the it'll spacing defense industry, and all that industry, especially from the U.S. government and the the western economies. They continue to have need for those products <unk> 19.
Good great. Okay, I appreciate that that call there okay. Great. Thanks again, thanks, a lot appreciate it thank you.
Your next question <unk>.
Ooh Jeffries your lifestyle pen.
Hi, Good afternoon, guys and thank you for the time.
Can you guys talk about <unk> you referred to this slide down in that anyone business given people are stuck working from home <unk>. How do you think about what percentage of your business has conceivable I think it's part of that <unk> <unk>.
You know how do you kind of think about that business coming back I would it seemed like the security is is kind of that quickly that can seem oppose maybe a little bit slower and then <unk>.
<unk> whatever percentage of the business expense stadiums and yeah concept sort of events is our last to come back can you talk about how you you're thinking about the aviation Ah.
Recovery.
She lives are there any recovery sorry.
Sure she let us now and let me take a stab at that I think your thesis is is right on point, however for us the consumable portion of our business and and security is really quite low. So the the impact is is pretty material for us and with respect to stadiums into like that's really a a small part of our business as well. So I think the thesis is right up.
Point, but for us from a an overall security business or overall oversight business. It's it's quite small okay.
Just to add on to what Adam Sandler primarily.
Definitely <unk>, Sean town that has an impact on any new additions that are being game getting bush and delayed.
But the one on the bright spots in this business has been even during this time anyway, because even dad before qubic 19, and it's going to continue if carnival air cargo is a very big growing opportunity for it and we have very much engaged with it even under these circumstances of packages delivery more afraid to come in.
<unk> has to be all done and done with automation and stuff. That's what got expertise is so that business has been very good for us.
Okay, and just on that point Deepak I think you mentioned you bought an A.I. company, how big was that and kind of how does that flow into what you're trying to do with putting less burden on actual people monitoring and screening and you know kind of automating this whole process.
It's in significant cost wise it was a strategic thing that we bought me right assets bathrooms, and I'd be and other things that can help division to put and go flashed on into the machine language and I didn't get again to make automation better.
They have had some luck working with the government, which we believe capitalize on it and put it on on on on machines and get faster to the end market.
Okay I got it and then just last one on health care I think he divested your health care Bye-bye ventilator business Awhile ago, and you mentioned another divestment can you just touch upon what that is and you also talked about patient monitoring seeing it demands optic you know should we expect it ever try undergrad pretty quickly.
Or that business I <unk> how're, you kind of thinking about healthcare.
Oh no. This is Alan I'll take that so your your first questions with respect to the product one that we got out of we fully got out of the anesthesia product line, you might recall, a year or so ago, well, we got out of a specific product called <unk>, which was our latest product in in anesthesia and following the final sales as manatees.
Seizure products towards the end of Q2 in a in a third quarter, we fully got out of anesthesia. So were 100% out of that business today, and that's what that charge related to.
With respect to the increased demand that we're seeing impatient monitoring.
<unk> and and we would expect to see growth occurring immediately as you just mentioned so we expect to see some an uptick in our fourth quarter. As a result, just just to add on to Adams <unk>. It's it's Google.
Are we seeing a lot of demand increased in Asia back in Latin America in E.M.B.A. and in the U.S. So it's not just the one region, it's ready global and we think that they would continue.
<unk>.
<unk> had have big was the divestment within a few points of grass or in significant in terms of that just the organic growth rate with in health care.
For fiscal 20, it was a in significant.
Okay.
I'll I'll jump back in the <unk>. Thank you guys they match.
<unk>.
Again, you feel like to ask questions. Please press star one on your telephone keypad. Your next question sounds from the line, Jack marking Oh God capitalize partner your life's open.
And it's good afternoon, the puck an hour and up to you and your loved ones are well.
Okay. Thank you Jeff.
Was curious you know.
Coming out of out of the you know work from home restriction.
If you see a potential for new technology implementation, new process see integration with.
Thanks for example at the airport you know checking temperatures and perhaps doing other testing that wouldn't need to be integrated here systems with them to be independent and I think broadly speaking you see opportunities coming out of this that my.
From new product lines on you know go up to me.
A very very astute very good question for comparative reasons, I won't say it but just touched on it yes, we are looking at.
And on things doing this challenging time, because they'll put install base and I said it was at the airports are we continue to look at it and beyond that I would be uncomfortable to talk on this.
Okay.
And was was curious what you're hearing with regards to the.
Well customs and border inspection related work that out of budget has increased.
Significantly over the course of 2019 could you give us an update on on what's going on there and at that remains an opportunity over the next you know six to 12 months, if you think that timeline pushed out.
Budget overall, it's impossible.
I think that that was <unk> before that budget is there my guess is quite significantly higher and I've said that before the challenge is that they need they need to find ways to spend it.
The it's not going anywhere and we have any better positioned we had an active discussions on multiple programs and we believe that as there's more.
People come back to work that is more continuity from this challenging time that the orders Woodstock.
We are very very positive about.
Okay.
One last question is relating to.
The feedback in the in quite your receding with regards to scheduling. Some of these orders that has been pushed are you getting any level of detail on a rough time lines of of when you might those might be rescheduled all day actually we scheduled on the calendar or is it just to you know dine out.
The situation still talk to him really you know start to put put data on the calendar.
Well you know that's one of those things that could what Alan as said, we have we have no. We're not guidance taking into account some of this uncertainty that we don't know.
Nothing is gone away, it's just push to the right and and each country's different each days different we continue to look at it diligently and we believe that all that stuff sooner or later when it gets done and we are hoping that'll be it really sooner, but I can't comment more than.
That be more definite Helen maybe just add on Jeff you know the you know the vast majority of projects. So it will continue on the sort of the same time lines that we anticipated, but there are selected projects that you know get pushed you know to the right and and that's what sort of changes a little bit the guidance and and stuff, but but the vast majority is.
Continues uninterrupted is our <unk>.
Very good thank you very much.
I can feel like they're asking questions. Please <unk> on the telephone keypad.
I know for good questions.
I mean convenient sir.
They didn't gentlemen, thank you once again for attending a conference call. We look forward to speaking with you own in August when we we discuss up fourth quarter in fully 'cause good performance.
The most safest for you when your family.
Dave and look up to yourself and your loved ones. Thank you.
<unk> Conference call you may not disconnect okay.
Oh.
[music].
Ooh.
Oh.
[music].
Yeah.
[music].
Yeah.
[music].
Oh.
[music].
Yeah.
Yeah.
[music].
Yeah.
[laughter].
[laughter].