I am glad I held off on writing this piece on IEC Electronics (IEC). I was ready to rain some serious praise on the company after their glowing Q4 earnings report. The company reported decent year-over-year top-line growth of 6 percent and really solid growth in income before taxes, excluding one-time gains in the prior period. Not only that, IEC decided to put some cash on the balance sheet and guided for increasing that cash balance over time - only repaying the minimum on its bank debt in FY2013 now that debt has been reduced to a more manageable 1.5x EBITDA. Operating Guidance was solid as well, with revenues expected to grow 9-14% during the fiscal year and diluted EPS to grow to between $0.88 and $0.93. At the low-end of that range, EPS would grow 24 percent (excluding one-time gains in the prior period). I was also encouraged by the CEO, Barry Gilbert, downplaying further acquisitions on the conference call. Things were looking up - so I decided to dip my toes back into the stock.
And then the Noble Financial investor conference on January 22nd happened - just two months after CEO Barry Gilbert guided for revenue increasing 9-14%, he lowered that target to 6-9%. Yes, he did. Apparently he has never heard of under promising and over delivering. No explanation was given. This is pretty inexcusable in my book. If you don't have visibility into your book of business 12 months out, don't give that guidance. When you do this, you lose a tremendous amount of credibility with the investment community. If anyone knows of a "How to Run a Public Company 101" book that exists please send it to IEC headquarters in Newark, NY. Honesty goes a long way. The investment community will respect a CEO's candor above all else. Guessing at targets is not a smart thing to do when there is a distinct possibility (whether you realized it at the time or not) you may have to revise that target just two months later. Ugh. Thanks for knocking 5 percent off the stock price with that news.
Enough of the negative - time for some positive. I was pleased to see the company restructured its balance sheet last week. The vast majority of its variable rate debt is now fixed at rates less than 4 percent. While the interest rates increased from prior levels, I agree that it is a good idea to lock in low rates now and extended the maturities for ten years. I am a bit concerned about the level of debt as of January 18th however - the date listed in the 8-K as being the date the credit agreements were modified. If you add up the amount outstanding for new Term Loan A ($10M), Term Loan B ($14M), the Albuquerque Mortgage (3.18M) and the revolving line of credit ($3.656M), total debt is $30.8M as of January 18. This gives you an idea of how IEC is using its working capital intra-reporting periods. If I am reading this wrong, someone please correct me. Total debt as of 9-30-2012 was reported to be $27.6M (see 10-K). I would hope it was lower on December 31 (Q1 earnings not yet released).
Anyone that believes this refinancing is a negative probably does not understand the cash dynamics of this company. Cash generated from operations during FY2012 was $12.97M. Capital expenditures totaled $2.97M during the same period, so free-cash-flow was $9.94M. Required debt repayments were approximately $7M under the old credit agreements, leaving excess cash of approximately $3M in FY2012 for other purposes. Under the old credit agreements, debt repayments would continue at ~$7M for the next couple of years.
What IEC was likely concerned with when deciding to extend the maturities on its bank debt is the impending end of its Federal tax operating loss carryforwards. As of September 2012 (per 10-K released 11/26/2012), IEC's net operating loss carryforward was $4.5M. A year earlier it was $8.8M. Clearly the company is reaching an end of the benefits from its past losses. That means cash taxes will be a lot higher going forward once the prior operating losses are all gone. While IEC does provision for full taxes on its Income Statement (35 percent in FY2012), cash paid for taxes are significantly lower due to its tax loss carryforward (see the cash flow statement in FY2012 10-K). I do not pretend to be a tax accountant, but I do know IEC's cash Federal taxes will be significantly higher beginning in the next year or so when the operating loss carryforwards run out. That would put free-cash-flow dangerously close to required principal payments, with little or no cash left over (assuming no further growth of course). I believe the company did not want to be put in that position, so they rightfully extended the repayment term and fixed the interest rates to eliminate further uncertainty.
If IEC was a private company, the management might be adequate. However, as the face of this public company, Barry Gilbert has made several faux pas that are really inexcusable in my book. As a public company, you don't carry a zero cash balance and tell investors it's okay to rely on a bank for 100% of your liquidity (because it isn't). It will take a few quarters for investors to truly believe that the cash balance is here to stay, so that overhang on the stock will continue for a while still. And of course you do not provide guidance that you realize (just two months later) cannot be met!
Barry has done an excellent job turning around IEC. We all realize it was left for dead a decade ago and Barry deserves much of the credit for orchestrating the turnaround. However, I have to think that now might be the time to hand over the reigns to his groomed successor, Jeff Schlarbaum to take the company to the next level. Barry is now 65 years old. He has earned a nice retirement. Maybe it is time to start making the transition?
So do I like the stock or do I hate it? Overall, I like it. I will continue to hold my stock and add if we see a further 5-10 percent sell-off. I do believe they have a nice niche business model that might be attractive to an acquirer at some point. If they are able to grow the top-line 5-10 percent a year while maintaining or expanding margins, the business will remain a solid one and the stock should rise at a decent annual clip. I just do not have any tolerance for mistakes the likes of the one made by Mr. Gilbert when providing the investment community guidance for the fiscal year. As such, I think it might be time for some new leadership. What do you all think?
Disclosure: I am long IEC.