Dropping Coverage

Will they really be able to convert this backlog efficiently?

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Bookings Momentum Accelerates into 2019

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Technology

Hardware

IEC Electronics

Q4 Results
Revenue in fourth quarter was $34.2 million,&nbsp;which is the highest quarterly revenue number since Q4 of 2013. Fourth quarter revenue also&nbsp;represents a 24% increase over this period last year as well as a sequential increase of 15% over last quarter. While impressive, this figure is not so surprising when you consider the growth in backlog discussed later in this report. Net income for Q4 was $9.1 million or&nbsp;$0.89 per share. This beat our estimate of $2.2 million or $0.20 per share and was an increase over the fourth quarter last year, which had a net income of $0.8 million, or $0.07 per share. However, this Q4 net income figure was skewed by a one time&nbsp;adjustment to the company&#8217;s deferred tax asset allowance of&nbsp;$7.8 million. On the balance sheet, both inventory and accounts payable have crept up a bit this year. This is largely due to inventory increases necessary to service the backlog, as well as, an increase in customer deposits as customers work with IEC to mitigate the impact of the electronic component shortage.
2018: A Solid Turnaround Year
 Full year 2018 revenue was $116.9 million, a 21% increase over last year. Full year 2018 gross and operating margins of 12.1% and 2.3% respectively were both an improvement over 2017&#8217;s gross and operating margins of 11.7% and 1.1%. Net income of $10.4 million was also an improvement, though this figure should be adjusted to compensate for a one time&nbsp;adjustment to the company&#8217;s deferred tax asset allowance of&nbsp;$7.8 million.
Overall, 2018 was a solid year for IEC and will ideally serve to mark the conclusion of the company&#8217;s turnaround phase. Given the complex and highly engineered nature of IEC&#8217;s products, which can have lead times of 18 to 24 months, it takes a while to revamp this type of business. Now that it&#8217;s been about two years since Jeff Schlarbaum was appointed as CEO and was able to initiate the turnaround efforts to rebuild the new business pipeline, IEC is finally beginning to reap the benefits of these early efforts. The fundamental changes at the company can most visibly be seen by taking a look at backlog growth over the last few years (illustrated below). Management&#8217;s turnaround efforts made this backlog growth possible by&nbsp;expanding opportunities with existing clients and rebuilding the new customer sales funnel.
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/image.png" style="width: 334px;height: 200px;float: none" /> 
 
2019 Outlook: A Lot to Look Forward to
High Revenue Growth Expectations.&nbsp;As mentioned earlier fourth quarter 2018 revenues of $34.2 are the highest they&#8217;ve been in five years. Additionally, management does not expect the typical sequential dip in revenue levels going into the first quarter next year, and the backlog suggests sequential quarterly improvements throughout the year. For these reasons, we are forecasting that IEC will maintain this revenue level in the first quarter of 2019 and then increase revenue sequentially from there. We are raising our full year fiscal 2019 estimate to $155 million up from our previous estimate of $134 million. This revised revenue estimate reflects a return to the revenue growth rates that the company experienced in the high-growth period between 2005 to 2013, which saw a compound average growth rate of 32%. This represents a significant expansion in the revenue growth rate experienced in 2018, which was 21.2% on a year-over-year basis. Even though this forecast reflects a relatively aggressive expansion in the growth rate from this past year, this estimate still incorporates a high degree of conservatism given the current size of the backlog at $133 million of which $124 million is expected to be shipped in the next 12 months. Nevertheless, we have determined this conservatism is warranted based on certain industry factors that could hinder sales growth including the industry-wide electronic component shortages and potential labor constraints as the company searches for technical talent to support its growth. That said, there is certainly room for upside from our estimates if these issues abate in future quarters.
Modest Margin Enhancements Ahead. There are multiple reasons to expect modest improvements in margins over the course of 2019. First, we expect gross profit margins will benefit from higher volume, which can be attributed to past business development efforts whose costs have already been absorbed. Furthermore, as part of the turnaround efforts IEC management made it priority to deliberately focus the new business pipeline on the right customers with highly engineered and high-value work while phasing out of lower-margin basic contract manufacturing work. As these newer programs are converted to revenue, it is reasonable to expect to see positive improvements in revenue. Additionally, as the current backlog is converted to sales the sector mix of revenue will likely slightly shift toward the medical and industrial side, which will also likely have a positive impact on margins. We expect full year 2019 gross profit margins to make a slight improvement over 2018 maintaining levels seen in the second and fourth quarter of this year. It is also important to note that the supply constraints related to the electronic component shortages will likely have minimal impact on gross profit margins because these costs can generally be passed on to the customer. We are also forecasting operating margins of 5%. This is only a modest improvement, however, there is ample room for improvements here as additional margin gains can be achieved as operations are streamlined in the ramp up of the many new programs.

IEC Electronics (IEC)

All Systems Go, Ready for Revenue to Takeoff

Fundamental Analysis:

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Dropping Coverage (IEC)

Will they really be able to convert this backlog efficiently? (IEC)

Can margins keep up with this organic growth machine? (IEC)

Bookings Momentum Accelerates into 2019 (IEC)

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