Q3 2023 Summary
Published Jan 23, 2025, 9:55 PM UTC- Strong performance and growth prospects in the rail market, with Q3 sales of $6.4 million, representing 9% of the Power segment. The company sees increased orders due to more investment in rail globally, especially in Europe and Asia.
- Record bookings in the commercial air market, with Q3 bookings of $15.7 million, a new quarterly record, indicating strong future demand despite lower sales in the quarter.
- Ongoing operational improvements and cost containment efforts, including facility consolidations, are expected to continue yielding benefits and improving profitability throughout next year.
- E-Mobility sales are not doubling as previously anticipated; although e-Mobility sales have exceeded last year's full-year sales of $20 million, reaching $22 million in the first nine months of this year, the company states they will not double this year, indicating growth in this key segment is less than expected.
- Elevated inventory levels in the distribution channel are affecting new orders, particularly in the circuit protection area, which is heavily reliant on distribution. The company expects this over-inventory situation to continue for another two quarters, potentially leading to sustained lower sales in certain segments.
- Inflationary pressures are impacting operations and the supply chain, affecting wages, suppliers, and customers. These inflationary challenges could erode profit margins and present difficulties in cost management.
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Capital Deployment and M&A Plans
Q: How will you deploy your growing cash balance?
A: Management reported a nice cash build this quarter and is on track to double last year's CapEx spend on growth avenues and investments. They're always on the hunt for M&A but note a slowdown in the M&A market due to global circumstances. They believe this will change and are looking for ways to invest in the business for the long term. -
E-Mobility Revenue Growth
Q: Will e-mobility revenue still double this year?
A: Last year's e-Mobility sales were around $20 million. For the first nine months of this year, sales are at $22 million, so they will not double but have already exceeded last year's full-year sales. They expect a strong finish in Q4 but not at doubling levels. -
Inflation Effects on Supply Chain
Q: Are you seeing inflation impacts in the supply chain?
A: Inflation is impacting wages, suppliers, and customers. Management is focusing on automation and streamlining to ensure efficient operations. Facility consolidations will help manage some of this inflation. -
Organic Revenue Growth and Low-Margin Business
Q: What's the organic revenue growth, excluding low-margin exits and surcharges?
A: Year-over-year for the nine-month period, non-GAAP adjusted net sales increased by $22 million, just under 5%. Management is deemphasizing low-margin business, treating it as regular SKU-level maintenance. -
Facility Consolidation Benefits
Q: How will facility consolidation benefits roll out in 2024?
A: Benefits started in Q2, increased in Q3, and more are expected in Q4. Some costs may extend into Q1 next year, but largely, the consolidation will be behind them in 2023, with benefits throughout all of next year. -
Sustainability of 35% Gross Margin
Q: Is the 35% gross margin level sustainable?
A: Management believes it's sustainable due to expected cost improvements and recovery across the business. They see room for improvement in Magnetics margins and are working through internal and external factors. -
Inventory Levels at Distributors
Q: What's the status of inventory at customers and distributors?
A: Distributors like Digi-Key and Avnet have excess inventory to work through. They hope most will be flushed out by the first or middle of the second quarter next year, returning to normal ordering. -
Commercial Air Revenues and Bookings
Q: What were the commercial air revenues this quarter?
A: Commercial air sales in Q2 were $15.9 million; in Q3, they were $11.3 million. They had a record bookings quarter in Q3 with bookings of $15.7 million, indicating healthy demand. -
Rail Applications Opportunity
Q: What's the opportunity in rail applications?
A: The rail business is growing, especially with investments in Europe and Asia. Q3 rail sales were $6.4 million, representing about 9% of the Power segment. They focus on passenger rail with applications in lighting, signaling, and other areas.