EMCORE Q4 2021 Earnings Call Transcript

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Provided by Quartr
November 30, 2021

There are 6 speakers on the call.

Operator

Good day, and welcome to the EMCOR 4th Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Tom Minichiello. Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone, and welcome to our conference call to discuss EMCOR's fiscal 2021 Q4 results. The news release we issued yesterday afternoon is posted on our website, emkor.com. On this call, Jeff Rittichter, EMCOR's President and Chief Executive Officer, will begin with a discussion of our business highlights. Call over to Mr.

Speaker 1

President. I will then update you on our financial results and will conclude by taking questions. Before we begin, We would like to remind you that the information provided herein may include forward looking statements within the meaning of Section 27A the operator to discuss the financial results of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. Call over to Mr. Chairman.

Speaker 1

These forward looking statements are largely based

Speaker 2

on our

Speaker 1

current expectations and projections about future events and trends affecting the business. Call over to Mr. Chairman. Such forward looking statements include, in particular, projections about future results, statements about plans, the operator to discuss our financial results and the financial results. Call over to Mr.

Speaker 1

Chairman. Management cautions that these forward looking statements relate to future events or future financial performance and are subject to business, call over to Mr. Chairman. Thank you, Mr. Chairman.

Speaker 1

Thank you, Mr. Chairman. Thank you, Mr. Chairman. Thank you, performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward looking statements.

Speaker 1

Call over to Mr. President. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business, the company's Annual Report on Form 10 ks. The company assumes no obligation to update any forward looking statements the operator to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. Call over to Mr.

Speaker 1

President. In addition, references will be made during this call to non GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods. Investors. Investors are encouraged to review these non GAAP measures as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release.

Speaker 1

I'll now turn the call over to Jeff.

Speaker 3

Thank you, John, and good morning, everyone. Call over to EMCOR's 4th fiscal quarter reached a high point for the year coming in at $44,000,000 Non GAAP earnings were 6 to $800,000 and adjusted EBITDA was $7,800,000 Semiconductor and supply chain challenges affected our gross margins just a little bit, call over to the operator for the call. Still generating a solid 39%. EMCOR continued to perform well despite supply chain headwinds and continued to demonstrate the operator to discuss the strong operating leverage in our business. Semiconductor availability was largely adequate during the quarter, but as additional logistic call over to the operator.

Speaker 3

Thank you. Thank you. Thank you. Thank you. Our next question

Speaker 2

comes from the line of John C. Murphy. Please go ahead. Thank you.

Speaker 3

Thank you. Our next question comes from the line

Speaker 2

of John C. Murphy. Please go ahead.

Speaker 3

Good morning, everyone. Call over to Mr. President. However, we've seen surprise delays in receipts of materials ranging from special purpose epoxies to sheet metal components and everything in between. Call over to Mr.

Speaker 3

President. Call over to the operator. The shutdown of transmitter builds in China and their transfer to Thailand call over to the operator for the call. We've recently fielded questions regarding power outages in Beijing the operator to discuss the

Speaker 2

financial results and how those have affected production. We're pleased to report that our

Speaker 3

Chinese manufacturing operations have been almost completely unaffected call back over to the operator. And we've also managed to steer clear of any COVID problems as well. Entry restrictions for foreign workers into Thailand call over to Mr. Chairman. We now have a Chinese team in Bangkok working on technology transfer and expect us to transition call over to Kaizen operations through the March quarter.

Speaker 3

The most important takeaway is that we will sell our remaining inventory call over to the operator and the operator to begin the call over to the operator to provide a brief update on our financial results. Call over to Steve. Turning to our individual business areas. Cable TV continued to drive strong performance in the broadband unit. Call over to Mr.

Speaker 3

President. We continue to enjoy strong backlog in cable TV, although we will always be cautious about the cyclical nature of the business. Chips, Wireless and sensing taken together were roughly flat with the previous quarter. The most important thing to note about the broadband business call over to the operator. The growing number of chip development contracts we've received along with the total level of customer funding so far the call over to Mr.

Speaker 3

President. With 3 such contracts in place and 2 others that are expected to close within the next couple of months,

Speaker 2

call over

Speaker 3

to Mr. President. EMCORE has firmly planted the seeds of growth in broadband. Furthermore, the first of these new chip products are expected

Speaker 2

call over to

Speaker 3

Eric to discuss our financial results. Thank you. Thank you. Our next question comes from the line of Robert C.

Speaker 2

Murphy. Please go ahead. Thank you. Thank you. Thank you.

Speaker 2

Our next question comes from the line of Robert C. Murphy. Please go ahead. Thank you. Thank you.

Speaker 2

Our next question comes from

Speaker 3

the line of the call by 2025. These development agreements represent an important milestone for EMCOR because they are expected to drive consistent fab utilization, which will counteract cable TV's cyclical nature. This is an important area of focus for the company, call over to Mr. President and CEO, and we're confident we can put the additional capacity in place to take full advantage of these opportunities. Aerospace and Defense declined slightly due to continued supply chain delays with the new EMS provider in our Defense Optoelectronic business.

Speaker 3

Call over to the operator. QMEMS and FOG taken together were roughly flat with FOG being up slightly. QMEMS margins were affected by a large shift in mix call towards a notoriously difficult product that we make for the U. S. Navy.

Speaker 3

We're seeing improvement on that IMU the operator to discuss our financial results during the quarter and expect to see continued progress beyond that. Our new automated assembly tools the operator to discuss the financial results.

Speaker 2

Call over to Mr.

Speaker 3

President. Multiple negotiations with international defense contractors are underway for our SDI-one hundred and seventy IMU call over to discuss annual target volumes ranging from 1,000 to 4000 units per year, most of which will be used in precision guided munitions. Call over to Mr. President. We fully expect this application will be a primary growth driver for EMCORE's Aerospace and Defense business within the next 2 years, call over to Kevin.

Speaker 3

Driving incremental revenue in excess of $20,000,000 a year. The SDC 500 is also undergoing qualification testing for several domestic and international programs with a serviceable market of 1,000 to 2000 units per year. Taken together, these results demonstrate the growing momentum for our QMEMS navigation products and future growth beginning this year. Call over to John. Beyond the short term in QMEMS, the test results that Emcore presented at the Joint Navigation Conference call over to Judge Best in Conference, demonstrating our ability to drive fog level performance into our QMEMS technology.

Speaker 2

Call over to Mr.

Speaker 3

President. These improvements in performance and size will create significant new opportunities in the market and are already being designed into call to questions. This product will be used in interceptor missiles where accuracy and size, weight and power are crucial to success. Call over to Mr. President.

Speaker 3

Our FOG products are also gaining traction in the market. We expect to deliver the remainder of preproduction units in the first phase call over to Mr. President for a new airborne pod, which will start low level production in the next year. The total value of this program is now estimated at $70,000,000 over the next 7 years. We expect to be awarded one more nonrecurring engineering contract call over to the operator to complete some modest engineering changes for production before everything is completely locked down.

Speaker 3

The newly ruggedized EN-three hundred IMU the operator to discuss the question and answer session. Thank you, operator. Thank you, operator. Thank you, operator.

Speaker 2

Thank you, operator.

Speaker 3

Thank you, operator.

Speaker 4

Thank you, operator. Thank you, operator.

Speaker 2

Thank you, operator.

Speaker 3

Thank you, operator.

Speaker 2

Thank you, operator. Thank you, operator.

Operator

Thank you, operator. Thank you, operator.

Speaker 3

Thank you, operator. Thank you, operator.

Speaker 2

Call over to the operator.

Speaker 3

The EN300 has demonstrated 10x improvement in bias stability and noise performance at the same cost points is the main competing Northrop Grumman LN200. We are also working to push the EN300 to short term navigation grade specs call over to the operator to discuss the company's financial performance. At the high end of our product line, call over to

Speaker 2

the operator. The

Speaker 3

EN2000 INS has met all of its required specifications on a confidential Navy program. The call over to the operator. The EN2000 achieved better than 0.01 degree per hour bias stability and will be our main platform to address call over to our operator for questions. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 2

Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 3

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 2

Call over to Mr. President.

Speaker 3

We're very encouraged that we've been able to finally get in front of our defense customers for face to face meetings over the last month call over to the next quarters, we expect to make more multiple important announcements about the growth of our navigation business. Call over to Mr. President. Moving on to overall guidance for the Q1, we're expecting to see increased revenue from aerospace and defense product lines call over to Mark. And a little bit less in cable TV, largely because of the holidays.

Speaker 3

Our biggest notes of caution remain tied to surprises in the supply chain.

Speaker 2

Call over to Tom.

Speaker 3

Taking all this into consideration, we currently expect revenue to be in the range of $41,000,000 to $43,000,000 With that, I will turn the call back over to Tom. Call over to Steve. Thank you, Jeff.

Speaker 1

As you may have seen in our news release yesterday afternoon, we delivered very strong results for the fiscal Q4. Call over to David. Consolidated revenue was $44,000,000 which was at the high end of our guidance range. Revenue for quarter increased $1,300,000 or 3 percent when compared to the $42,700,000 in the fiscal Q3. Call over to the operator.

Speaker 1

Broadband segment revenue was $32,200,000 an increase of $1,900,000 or 6% when compared to the $30,300,000 last quarter. Call over to Chris. The broadband performance was driven by continued strong customer demand for our cable TV products.

Speaker 2

Call over to the operator.

Speaker 1

Aerospace and Defense segment revenue was $11,700,000 this quarter compared to $12,300,000 in the prior quarter. Call over to the operator. The sequential A and D revenue change was attributable to our Q MEMS product line, primarily due to a mix shift to a product with lower production yields call over to the operator and defense optoelectronics, primarily due to an ongoing supply chain transition. Partially offsetting these changes was higher FOG revenue, driven by an increase in orders for our single access gyro. For the full 2021 fiscal year, consolidated revenue the operator.

Speaker 1

The $158,400,000 for the year was an increase of $48,300,000 or 44 percent when compared to the $110,100,000 during the prior fiscal year. Let me now turn to the rest of the operating results, the focus of which will be on a non GAAP basis. Call over to the operator. Consolidated gross margin was 39% for both 4Q and the year. On a sequential quarter basis, 39% compares to 41% in the 3rd quarter, largely due to the A and D segment's gross margin in 4Q, call over to Steve.

Speaker 1

We're a combination of lower revenue, a year end physical inventory adjustment and lower than normal production yields at our Concord operation impacted margin. Call over to Chris. On the broadband side, the increased revenue and higher over absorption of fixed costs drove a sequential quarter increase to its gross margin. Call over to Eric. For the full year, the 39% consolidated gross margin was a 6 percentage point increase when compared to the 33% in fiscal 2020, driven largely by broadband's 10 percentage point year over year expansion.

Speaker 1

Call over to the operator. Operating expenses were $10,500,000 in fiscal 4Q compared to $9,600,000 in the prior quarter. Call over to the operator. The sequential movement was due to increased R and D expense as a result of lower customer funded R and D and increased project material usage. Call over to Chris.

Speaker 1

While SG and A was higher in 4Q, also due primarily to a couple of lumpy items, namely business taxes and professional services fees. Call over to Mr. President. For the year, OpEx decreased to $38,200,000 in fiscal 2021 compared to $39,700,000 the year before, Driven by lower R and D expenses for the A and D business. In addition, OpEx as a percent of revenue was well below the 30% mark for the year, call over to the bottom line.

Speaker 1

Operating profit was very strong again in the September quarter at 6 call over to the operator for an operating margin of 16%. For the year, operating profit was $24,100,000 for a margin of 15%. Call over to Steve. Adjusted EBITDA was $7,800,000 in 4Q $28,100,000 for the year call over to the operator for the Q1 of 2019. Net income and EPS for the quarter was 6,800,000 call over to the operator.

Speaker 1

Shifting to the GAAP results for a moment. Net income and EPS for the quarter was $5,100,000 and $0.13 the operator for the call. Thank you. Thank you. Our next question comes from the line of call over to the

Speaker 2

2 non recurring gains

Speaker 1

totaling $7,500,000 that were reported in the 3rd fiscal quarter. Excluding those one time items, call back to the operator for the Q1. Full year GAAP net income and EPS would have been $18,200,000 and $0.51 per diluted share, still a call over to the financials. Turning to the balance sheet. We had cash of $71,700,000 at to September 30 compared to $68,300,000 at June 30.

Speaker 1

The quarterly cash increase of $3,400,000 consisted of $5,400,000 of call over

Speaker 2

to our financial results.

Speaker 1

Operating cash flow, less $2,400,000 used for CapEx, plus $300,000 from financing activities. Not only was this the 6th consecutive quarter of positive cash from operations, on a year over year basis, EMCOR's cash generated from operations call back to the operator. So with that, we are now opening up the call for your questions.

Operator

Call over to

Speaker 2

call over

Operator

to you. And our first question comes from Paul Silverstein from Cowen. Please go ahead.

Speaker 2

Call over to Tom,

Speaker 4

can you just go over the margin outlook, both what drove the short call and more importantly, what your expectations are over the course of the next 12 months and beyond? Call

Speaker 2

over to Steve.

Speaker 3

Yes, let me try and tackle that to begin with. So if we break things into 2 chunks and we look at broadband. I think things are going to stay pretty similar to where we are right now. Remember, the move to EMS call. Essentially allows us to buy at a fully landed cost that's call back to the call back to the call.

Speaker 3

It's been negotiated and so I don't see margins moving around very much from where they are right now. I was called the low 40s. For the Aerospace and Defense Business, we need to essentially what's happening is, As the A and D business, especially navigation cranks up a bit, we're going to see stronger absorption in the

Speaker 2

call back to the operator.

Speaker 3

In A and D, and as that happens, margins are going to rise quite a bit from where they are. Call back over to the operator. There's a lot of moving parts in that. But overall, I would say we're going to see something stable on a broadband call

Speaker 4

back to questions. Can I push you a little bit on that, Jeff, in terms of you expect call back over to the next 4 quarters? Any range you can put on that? By meaningful, is that a couple of points? Is it more than that?

Speaker 4

Anything, Any granularity you can offer?

Speaker 3

I would say it's more than a couple of points. Call. Right. But it's a little bit dependent on mix, Paul. Could we see, I don't know, Tom, 5 to 10?

Speaker 3

Call Yes, you could. 5 to 10 seems reasonable over an A and D.

Speaker 1

Yes, it will always be a mix factor between the two business segments as well, Paul. Call.

Speaker 4

All right. And obviously, I trust it goes without saying, that's you all take into account the current supply chain environment. So it's not That 5% to 10% improvement is not dependent upon improvement in supply chain. That's what you're expecting to do independent of any improvement.

Speaker 3

Call. Yes, that's true. Realistically, what we've got in supply chain issues, one of them, the biggest one is a transition issue call back to exit or complete the work on that within the current quarter. Call back over to Mark. We're going to buy a little bit more material to solve some other problems where, again, we get these surprise push outs.

Speaker 3

I don't think it's going to be very much maybe $1,000,000 or $2,000,000 And beyond that, we feel like we're in good shape on semiconductors. The The crazy place where you can get hit is like connectors of all things. So we're taking steps To deal with that, but I wouldn't see it as a major impediment going forward.

Speaker 4

All right. And Jeff, the funds that you're referencing, I trust you're call back to the line. I'm just saying specifically gross margin, which begs the question, is there also some operating leverage to be had above and beyond that 5 to 10 percentage point improvement in AMD and the contribution that makes overall. Is there operating leverage should be had as revenue improves?

Speaker 3

Absolutely. And can you quantify that? Call back over to Paul. Moving parts. Again, let me describe it this way, Paul, and then I'll see if Tom wants to add anything.

Speaker 3

We're very volume sensitive for production volumes in both Alhambra and And so as volume picks up, absorption is very efficiently dealt with. And so that's what moves the needle on the P and L. As far as a range for that, again, it's a little bit mix dependent. Call back over to you. And there are a series of issues as far as, the For example, what becomes the rate limiting step in what facility for product that generates ex margin?

Speaker 3

Call. And the answer to that isn't completely crisp. But I think Tom, do you have any color on the operating leverage piece?

Speaker 1

Call. Well, I think we've got the operating leverage overall in the business is pretty evident by the results in the past year. That's going to continue because on the OpEx side, we don't really need to move the OpEx up with revenue increases Yes. Going forward in the near term. So OpEx is, call it, dollars 10,000,000,000 plus or minus on a quarterly basis, which is where we've been pretty much.

Speaker 1

And the growth in A and D call back over to Paul. Yes. One important thing

Speaker 3

to note, Paul, call. One important thing is that the growth in OpEx was not a headcount issue at all.

Speaker 4

Call over to Jeff, to Tom's statement, you're expecting to hold OpEx at around $10,000,000 per quarter throughout fiscal 'twenty two. Is that correct?

Speaker 1

Call back

Speaker 2

over to you.

Speaker 1

Yes. All right. Will there be no, go

Speaker 4

ahead, Paul. Call.

Speaker 1

No, I said, will there be items that are lumpy a little bit from quarter to quarter? Yes. But the $10,000,000 plus or minus is call. A good way to think about it.

Speaker 4

And Tom, in the event of meaningful revenue upside, you don't expect to Flex OpEx meaningfully up from that $10,000,000 level.

Speaker 1

Not in the near term.

Speaker 3

No. Call

Speaker 4

back over to you.

Speaker 2

Call

Operator

over to Chris. Our next question comes from Richard Shannon from Craig Hallum. Please go ahead. Call over to Steve.

Speaker 5

Hi, guys. Thanks for taking my questions as well. I guess I need to ask on the A and D gross margins here. I'm call back to your question. As we look at your gross margins here for the call to the operator.

Speaker 5

On quarter, it went down. It went down from 33% in June to 18% in September. So you commented about increasing 5 to 10 points. Was it from that point and over what time will you expect that to happen? And I guess my question is, when does it get back up to that 33% number from June?

Speaker 3

Okay. Now I understand what you're saying. We saw the so first of all, the 33% down to 18% We've really, let's just call it a transitory effect. I think we'll be back into those kinds of numbers. Certainly, if it's not this quarter, it'll be next.

Speaker 3

And then the improvement will happen from there. Call over

Speaker 5

to you. Okay. I know that you've been asked this on past calls and even offline from me, but what is your view on A and D margins the call over time, especially as you've talked about some growth here from a number of programs. I mean, is this a business with a certain level of scale that can get to 40% or even higher?

Speaker 3

Call over to you. Absolutely. If I mean, there's no question about that, Richard. You're volume sensitive In a high fixed cost manufacturing facility or facilities, so all it takes is a bit of volume and call to the call to the call. The flow through in the P and L is really quite good.

Speaker 3

So if you increased A and D by 50%, you probably get back up by you get up over 40%. So it's not a bill of material issue. It's not a pricing issue. It's strictly an absorption question.

Speaker 5

Call over to Mark. Okay. I think I heard you in your prepared comments talk about some automated assembly equipment and some yield ish or yields on products it to due to a mix here. So I mean, does the mix have to change here meaningfully in the next couple of quarters? Or is this just purely an absorption thing?

Speaker 3

Call over to Steve. It's really an absorption thing. I'll give you a little more color on this move to a notoriously difficult product to build requires a lot of screening for vibration performance. It goes into a torpedo. Call.

Speaker 3

And occasionally, we have these events which occur that we just Screening takes out more of them than we'd expect. And that was pretty much what happened. There was a bit of a cycle count thing call over to Tom indicated, again, transitory. But no, normally, we can make that product with better margins been 33%. Just when you ship that much of production into it, you end up with more variability than you want.

Speaker 3

Call back over to Eric.

Speaker 5

Got it. Okay. That makes sense. That's very helpful. Maybe a couple of other questions here.

Speaker 5

On cable TV, I think your comments whether the backlog has extended continued to extend out here. And I know you obviously have said time and time again you remain cautious on this. But can Can you mention how far the backlog is going out here and any other permutations or detail on where that's improving?

Speaker 3

Call over to you. Well, the thing is that it's a little hard to say, right? And let me explain why. Call Because what we don't know, for example, is exactly what customers are going to want to take delivery of, say, in the March quarter. Certainly know what they're going to take delivery of now.

Speaker 3

When we get into March and every year this happens, part of the U. S. Is not friendly to installs. And so we frequently get requests to push things out of March and into June. And so It's a little hard to say, well, geez, you're at 1 quarter visibility, you're at 2 quarters of visibility.

Speaker 3

What I will say is we're substantially better than normal call back over to the operator for this time of year where you don't have the benefit of real guidance on CapEx for the year from Comcast and Charter. Call over to you. You're heading into the winter months. And so we're substantially better than we normally are. Call back to the line of Chris.

Speaker 3

As far as giving you a crisp answer about the backlog, the dollars have continued to flow in as far as new orders, But I can't give you a hard answer on that.

Speaker 5

Okay. All right. That's helpful. Call. My last question, I'll jump out of line here.

Speaker 5

The projects for chips within the broadband business sounds like you've You picked up a lot of pace here, both at number of engagements and maybe even visibility into this. I think you talked about tens of 1,000,000 of dollars out a few years. You can give us a little bit more color on what's driving this applications, etcetera, and kind of help us give a feel for the changes in the last quarter.

Speaker 3

Call over to you. Yes. So we've added 1 customer we had one project with. They've added a second call back to the operator. And maybe even add a third.

Speaker 3

These are customers that do not have the ability to fabricate their own indium phosphide, call to questions. Especially some of these very specialized devices, but are looking to build, the call Call it products for the data center and telecom applications. They don't want us talking about exactly what those are because of competitive reasons, call back to

Speaker 2

the line of John.

Speaker 3

Because it signals ahead of time what they're doing and can create their own problems for them. So it's mainstream data center and telco. It is

Speaker 2

call back over

Speaker 3

to Mark. These are high margin, strongly differentiated products as opposed to doing something like 10 gs PON or Something like that, although we certainly supply some parts into those applications. And that's really about all I'm allowed call back to Richard. I'd love to tell you more, but I'm just not allowed to because of NDAs.

Speaker 5

I certainly understand that. Well, it sounds like things are going well in that area and we look forward to hear more

Speaker 3

about that. That is all

Speaker 5

the questions for me guys. Thank you.

Operator

Call over

Speaker 2

to call over to Mr. President.

Speaker 3

All right. I'd like to thank all of you for your interest in EMCOR, And I would like to close by recognizing our team for a great quarter and an outstanding year of financial results. Please stay safe, everyone, and goodbye.

Operator

Call over to Mr. This concludes today's call. Thank you for your participation. You can now disconnect.

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