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Edited Transcript of IEC earnings conference call or presentation 22-Nov-19 3:00pm GMT

Q4 2019 IEC Electronics Corp Earnings Call

NEWARK Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of IEC Electronics Corp earnings conference call or presentation Friday, November 22, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Audra Gavelis

IEC Electronics Corp. - Director of Marketing & IR

* Jeffrey T. Schlarbaum

IEC Electronics Corp. - President, CEO & Director

* Thomas L. Barbato

IEC Electronics Corp. - CFO & Senior VP

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Conference Call Participants

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* Joichi Sakai

Singular Research, LLC - Equity Research Analyst

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the IEC Electronics Fourth Quarter and Year-End 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Audra Gavelis, Director of Marketing and Investor Relations. Thank you. You may begin.

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Audra Gavelis, IEC Electronics Corp. - Director of Marketing & IR [2]

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Thank you for calling in. On the call this morning, we have Jeff Schlarbaum, President and CEO; and Tom Barbato, CFO.

Before we get started, I would like to take a moment to read the safe harbor statement. This conference call contains certain statements that are or may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements, such as when the company describes what it believes, expects or anticipates, will occur and other similar statements include, but are not limited to, statements regarding future sales, backlog and operating results, future prospects, strategic initiatives, turnaround efforts, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical fact, but rather reflect the company's current expectations concerning future results and events. The ultimate accuracy of these forward-looking statements is dependent upon a number of risks and uncertainties that may cause the company's actual results or performance to be different than as expressed or implied by these statements. Specific risks and uncertainties include, but are not limited to, those set forth in the company's earnings release issued immediately before this call and in the company's most recent annual report on Form 10-K, our quarterly report on Form 10-Q, and our other reports filed with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or correct any of the forward-looking statements made during this call, whether as a result of new information, future events or otherwise, except as required by law.

Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures. Reconciliations of such supplemental information to the comparable GAAP measures are included as part of the earnings release the company issued today.

I will now turn the call over to Jeff Schlarbaum. Please go ahead, Jeff.

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [3]

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Thank you, Audra, and good morning, everyone. We're pleased to have closed out a strong 2019 fiscal year with an outstanding fiscal fourth quarter with our revenue of $43.9 million, which represents year-over-year growth of 28.4%. We had gross margins at 14.6%, which is an increase of 150 basis points compared to the same quarter last year and operating income of $2.7 million, which is 70% higher compared to the same quarter last year and net income of $1.8 million or $0.17 per share.

The fiscal fourth quarter marks our fifth consecutive quarter of revenue growth and our second sequential quarter of revenues over $40 million. These revenue levels represent our ability to leverage our resources more efficiently while converting our backlog, which allows us to deliver margins that we believe are some of the best in our industry. This growth momentum is particularly gratifying because we believe is a direct result of the investments we've made to scale the business, which are resulted in extended customer commitments, including a significant number of new, higher-value and longer-duration awards.

Our growth is rooted in our strategic customer relationships, which we believe has improved our ability to win new programs more consistently among both new and existing customers. These relationships are the result of our ability to consistently perform for our customers that trust us to manufacture their life-saving and mission-critical products.

Additionally, our vertically integrated portfolio of offerings remain a competitive advantage for IEC, as it allows us to control the cost, the quality and the lead time of critical components, which at the same time allows our customers to minimize the number of manufacturing partners they need to manage.

In addition, with marketplace recognition of our capabilities steadily growing, we are also excited about the many opportunities we're seeing to onboard new customers. Over the past 3 fiscal quarters, we have seen over 10% of revenue come from these new customers.

Turning to the full year results, I'm pleased to report our fiscal 2019 revenue of $157 million, a 34% increase compared to our prior year results and operating income of $7.6 million, a 178% increase compared to the prior year result. In a moment, I will turn the call over to Tom to discuss the financial results in greater detail. But before I do, I would also like to highlight our backlog of $212 million, which represents the net result of booking more than $230 million in new orders during the fiscal year, which represents growth of 59% in our backlog since the close of fiscal 2018. Clearly, our bookings were strong for the fiscal year, and I'm exceptionally pleased with our book-to-bill ratio of 1.5:1, knowing our annual sales were up more than 30% year-over-year.

Our backlog composition is also changing and now includes a greater number of longer-term contracts. For example, less than 10% of our backlog at the start of fiscal 2019 represented order commitments greater than 1 year in comparison to our starting backlog this year, 2020, in which approximately 30% of the orders are deliverable in time periods greater than 1 year, which ultimately enhances our ability to better plan for the future.

A key competitive advantage for IEC is our ability to efficiently support the life-saving, mission-critical programs we manufacture, which requires that we have trained staff to be ready well in advance of a program ramp-up. We are continually looking for opportunities to introduce automation into our manufacturing processes to reduce our dependency on adding incremental resources and to improve quality. However, with that said, developing the skills of our workforce remains a priority and is essential for our high complexity, assembly and test processes that are required to manufacture our customer's final product. During fiscal 2019, we on-boarded 151 new employees.

Also related to our ability to convert projects from backlog to production is the availability of raw materials. As you know, our industry has continued to grapple with the global component shortages for approximately 2 years now. Components used in consumer products are becoming more readily available, but we continue to see some tightness in the supply chain for the highly engineered, sole source components we use on behalf of our customers operating in these highly regulated markets.

The shortage situation has been a reality for us for some time now, and we're focused on balancing the need for efficient inventory management with ensuring we have the right parts on hand to meet our customer commitments as they are released to go into production.

Fiscal 2019 was an exceptionally strong year for IEC, and we believe our performance this year is indicative of what our future holds. We believe the growth we've delivered is due to our strategic customer relationships and enhanced reputation in the marketplace. As we move into fiscal 2020, we have a strong platform to build from and believe we are well positioned to continue this momentum and expand our leadership position.

Now I'll turn the call over to Tom to provide more detail around our fiscal fourth quarter and year-ending financial performance. Tom?

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Thomas L. Barbato, IEC Electronics Corp. - CFO & Senior VP [4]

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Good morning, everyone. Revenue for the fourth quarter of fiscal 2019 was $43.9 million, an increase of 28.4% as compared to the fourth quarter of fiscal 2018 and a sequential increase of 9% compared to the third quarter of 2019.

Gross profit for the fiscal fourth quarter -- of fiscal 2019 was $6.4 million compared to gross profit of $4.5 million in the fourth quarter of fiscal 2018. Gross margin of 14.6% in the fourth quarter of fiscal 2019 increased 150 basis points compared to gross margins of 13.1% in the fourth quarter of fiscal 2018.

Selling and administrative expenses increased $800,000 to $3.7 million or 8.4% of sales as compared to $2.9 million or 8.5% of sales in the fourth quarter of fiscal 2018. The increase was primarily due to higher wage and related expenses.

The company recorded net income of $1.8 million in the fourth quarter of fiscal 2019 or $0.17 per basic and diluted share compared to net income of $9.1 million or $0.89 per basic share and $0.87 per diluted share in the fourth quarter of fiscal 2018. Net income for the fiscal 2018 fourth quarter included a onetime tax benefit of $7.8 million related to the company adjusting its deferred tax asset allowance, which we believe reflects confidence that the deferred tax assets will be utilized in future periods. On a non-GAAP basis, excluding the onetime tax benefit, fiscal fourth quarter 2018 net income was $1.3 million or $0.13 per basic share. We believe it is important to include these non-GAAP measures to evaluate our performance from period to period. I encourage you to look at the provided reconciliation of the non-GAAP measures to the closest GAAP measures, which, for us, are net income and net income per common share included in the earnings release associated with this call.

Looking at the results for the full fiscal year 2019. Revenue increased 34.3% to $157 million compared to $116.9 million in the prior fiscal year.

Looking at our market sectors for fiscal 2019, we saw revenue distribution of aerospace and defense at 60%, medical at 22% and industrial at 18%. Various increases and decreases for aerospace and defense customers resulted in a net increase in sales of $27.8 million for fiscal 2019 compared to fiscal 2018. Programs frequently fluctuate in demand or end and are replaced by new programs. Aggregate increases in sales in fiscal 2019 were due to net increase in customer demand, was $13.3 million. We saw an increase in sales of $18.8 million from production ramp-ups. However, these increases were partially offset by ending customer relationships, contracts reaching the end of their term and other customer delays, which caused a decrease in sales of $4.3 million during fiscal 2019.

The net increase of $7.5 million in sales in the medical sector was primarily due to programs ramping up of $7.3 million. The remaining changes were the result of changes in customer demand.

The net increase in sales in the industrial market sector of $4.7 million resulted primarily from the production ramp-up of new programs with 3 customers, which amounted to $5.2 million. The remaining increase was due to several customers whose end markets have grown, partially offset by decreases in demand from other customers.

Gross profit increased $7.5 million and improved by 170 basis points from 12.1% of sales in fiscal 2018 to 13.8% of sales in fiscal 2019.

Selling and administrative expenses increased $2.6 million and decreased as a percentage of sales to 9% in fiscal 2019 compared to $11.4 million or 9.8% of sales in the prior fiscal year. The increase in selling and administrative expenses was primarily due to higher wage and related expenses.

Net income for fiscal 2019 was $4.8 million or $0.46 per basic share and $0.45 per diluted share as compared to net income of $10.4 million or $1.01 per basic and diluted share in the prior fiscal year. Fiscal 2018 net income included a tax benefit of $8.8 million related to the previously mentioned deferred tax asset allowance adjustment as well as the first quarter of fiscal 2018 release of the valuation allowance on our alternative minimum tax credits as a result of the December 2017 U.S. Tax Cuts and Jobs Act. On a non-GAAP basis, excluding the onetime tax benefits, fiscal 2018 net income was $1.6 million or $0.15 per share. We believe it's important to include these non-GAAP measures to evaluate our performance from period to period. And again, I encourage you to look at the provided reconciliation of the non-GAAP measures to the closest GAAP measures, which, for us, are net income and net income per common share included in the earnings release associated with this call.

Now looking at our balance sheet for fiscal 2019. Our balance sheet remains strong with $40.9 million in working capital and $31.2 million in stockholders' equity. You'll see the inventories at September 30, 2019, were $44.3 million, up compared to $34.1 million at September 30, 2018. As we've discussed on prior calls, our inventory levels are directly associated with our ability to convert our backlog. We continue to see a willingness on the part of our customers to help mitigate the risks associated with the ongoing component shortages, resulting in customer deposits growing to $13.2 million, as we exited fiscal year 2019 in comparison to $7.6 million at the end of fiscal 2018.

In fact, when you look at inventories, net of customer deposits at the end of Q4, we saw a reduction in inventories as adjusted of $4 million in comparison to the inventories as adjusted at the end of fiscal Q3 2019. We believe that this is an important measure of our management of working capital considering our customer deposits and in light of our backlog and book-to-bill ratio. I encourage you to look at the provided reconciliation of the non-GAAP measures to the closest GAAP measures, which, for us, is inventories included in the earnings release associated with this call.

With that, I'll turn it back -- the call back to Jeff.

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [5]

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Thanks, Tom. When we began fiscal 2019, we identified 3 strategic initiatives: driving sustained growth, strengthen our balance sheet and improving our profitability. As we sit here today, our results show that our team has made excellent progress executing these strategies during the year. It's an exciting time for our company with our reputation as a top-performing manufacturing partner for highly complex, life-saving and mission-critical products, firmly established and growing. As we move into fiscal 2020, we are focused on capitalizing on this favorable market recognition to continue to expand our existing customer relationships and to add to our customer base. We are also very excited about the progress being made on the construction of our new state-of-the art facility, which we anticipate being completed during 2020.

I'd like to thank our employees for their continued hard work in our dynamic and busy environment. It's because of their efforts that our company is well positioned to win new awards and attract new partners. We are energized to expand our leadership position and drive continued growth and profitability.

Now with that, I will turn the call back over to the operator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [2]

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The -- you did say this at the beginning of the call, but I didn't catch it. How much of that $212 million backlog is for shipment within fiscal year '20?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [3]

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Roughly 30%. Oh, no, you're saying in 2020. So 70% of it for 2020 and 30% in outside a year.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [4]

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Got it. Okay. And so this backlog number is down Q-over-Q, which then implies that your orders was below your revenues. So I guess, around $38 million or so, no, $36 million, which is a little bit below -- you had a knockout bookings from the prior quarter from those big contracts that you guys had won. But this $38 million -- no, I'm sorry, $36 million is a bit below the prior run rate. Was that below your expectations? Or how would you characterize that?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [5]

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Yes. So what I would say, Nehal, and you're right when you look at the bookings that we achieved in Q3, far exceeded what we anticipated. And it's hard to always predict the timing, but what -- how I would look at those is really aggregating Q3 and Q4. And if you look at Q3 and Q4 and you aggregate it those 2 and took the average, I mean, it's better than $60 million in bookings. I mean, it's actually higher than that. But -- so I'm not pleased whatsoever. It's just more of a timing issue than anything.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [6]

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Okay. All right. And then thinking about the upcoming December quarter here. Over the past 15 years, I think, I counted about 70% of the times, you've had a Q-over-Q decline anywhere from a very small to up to a 10% Q-over-Q decline. Can you remind us why that has been the case? And that would help us understand whether or not we should expect that to be the case again for this upcoming quarter.

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [7]

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Yes. So obviously, we have a significant amount of aerospace and defense business. And the government follows the same fiscal calendar that we do. So it's an October 1 through September 30. And so obviously, the end of our fiscal year is the end of the government calendar. And I think that has historically created lower demand in the first quarter. That continues to pick up throughout the year. Obviously, now as the bookings continue to increase and the diversity of our bookings continuing to be broader, and then you saw this last year, we didn't experience the seasonal softness in Q1. So I think that trend may continue as we look at a strong backlog with a greater amount of diversity. So I guess that's the best way to characterize it.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [8]

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Then in that case, would you see at 70% of the $212 million backlog, obviously, you still need to book more business within fiscal year '20 in order to drive good growth, I would say. Would that be a fair statement?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [9]

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Yes. And again, if you look at our bookings trend for the last 4 quarters in fiscal '19, that even if we fell short of those level of bookings, the amount that we need to book and ship during the year to add to the base that we have is not a significant amount to drive double-digit growth. So I'm very comfortable with the modest amount of book and shipped business that we anticipate to fall in during the year.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [10]

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Okay, okay. And I'm not sure if you did -- I'm sure you did talk about, but I didn't catch it. What were the drivers of the gross margin expansion on a Q-over-Q and then on a year-over-year basis?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [11]

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I think when you look at the margins, where earlier, let's say Q2, when you look at Q2, we were investing a lot in converting these newer programs, some of which were stranded in manufacturing. We had workforce in place. And those investments weren't completely absorbed. When you look at Q4, we saw nice absorption with the revenue levels that -- like I said before, we can get about $40 million, I felt a lot more confident that, that was the right revenue levels to effectively absorb the overhead investments we are making and to create solid gross profit margins. And I think that's what Q4 represented.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [12]

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Okay. Great. My final question is that -- would it be probably a fair way to think about the year-over-year revenue growth trajectory throughout fiscal year '20 as likely being at a high at the beginning of the fiscal year and potentially tapering off, not that it necessarily will, but that there is risk that, that could happen?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [13]

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I'm not sure I understand your question.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [14]

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I'll just throw out some theoretical numbers here. But let's say that December 2019 quarter, you might see 20% year-over-year growth. And as we go through the quarters of fiscal year '20, that year-over-year growth decelerates to say something like 10% year-over-year growth.

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [15]

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I don't know if it's going to play out that way. It's -- Nehal, our business fluctuates quarter-over-quarter because of the nature of the work that we do, right? So as an electronic manufacturing services provider for companies that outsource their manufacturing to us, there are customer-controlled dynamics that make it more difficult for me to predict precisely the flow of revenues from one quarter to the next. I can look at the aggregate year and with confidence, say I see double-digit growth again. I don't think it's as clean as what you just described. But we're going to be up year-over-year, and I think that's the best way I can state it for now.

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Operator [16]

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(Operator Instructions) Our next question comes from the line of Chris Sakai with Singular Research.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [17]

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My question was on the Chinese tariffs. I wanted to see if you're facing any headwinds there.

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [18]

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Yes. So nice talking to you, Chris. So the -- in terms of the tariffs, because we're a build-to-print supplier to OEM companies that specify the manufacturers for the components that we're supposed to acquire on their behalf to manufacturing the end product, the tariff issue is sort of a pass-through, in that when we experience the tariff expense, those are passed along to our customers for reimbursement. Now there may be a timing issue that in one quarter we hit the -- we get the expense and the next quarter we get the relief. But on the aggregate, those expenses that we're seeing as a relationship to the tariffs are largely covered by our customers reimbursing.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [19]

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Okay. But will there ever be a point where the demand -- you see lower demand because of the tariffs increasing costs on your end?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [20]

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No, no. I mean, the thing about it is that when you look at the products that we build, obviously, as Tom mentioned, we were over 60% aerospace and defense, and when you look at the life-saving medical devices we manufacture and the unique industrial products, they're -- obviously, we're manufacturing here. Most of the raw materials we're acquiring from the U.S., and there's very little dependence on China per se. For some of the discrete components that we buy, they're produced in China, and those are subject to the tariffs, but it's actually a very small percentage of the overall raw materials we procure.

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Joichi Sakai, Singular Research, LLC - Equity Research Analyst [21]

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Okay, great. And then you mentioned having additional costs to train workforce for the increase in backlog, and I guess, to specialize the workforce. Will that be -- how much cost will that add? Will it be a large amount or a noticeable amount?

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [22]

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I guess what I would say in that regard is, you saw some fluctuations in our gross profit margins in fiscal 2019. And you saw -- and when you aggregated the first 2 quarters versus the second 2 quarters, you saw in the second 2 quarters that our profit margins improved. Because of those revenue levels, we were able to absorb the investments in the workforce development initiatives and draw really nice margins. And so as we continue to climb the ladder, there could be some modest fluctuation from quarter-to-quarter. But I think at the gross margin rates we produced on average in 2019, we should be able to expect those going forward in 2020 as well.

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Operator [23]

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We have no further questions at this time. I would now like to turn the floor back over to management.

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Jeffrey T. Schlarbaum, IEC Electronics Corp. - President, CEO & Director [24]

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Well, great. Thank you, everyone, for calling in. We appreciate your continued interest in IEC, and we look forward to talking to everybody next quarter.

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Operator [25]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.