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IEC Electronics Corp. (NYSEMKT:IEC)

F1Q13 Earnings Call

February 5, 2013 10:00 am ET

Executives

John Nesbett – Institutional Marketing Services

W. Barry Gilbert – Chairman and Chief Executive Officer

Vincent A. Leo – Chief Financial Officer

Analysts

Mark Jordan – Noble Financial

Steve Shaw – Sidoti & Company

Bhakti Pavani – C.K. Cooper and Company

Operator

Greetings and welcome to IEC Electronic’s Fiscal 2013 First Quarter Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Nesbett of IMS. Thank you, Mr. Nesbett, you may begin.

John Nesbett

Good morning and thank you for calling in. On the call this morning, we have Barry Gilbert, Chairman and Chief Executive Officer, as well as Vincent Leo, Chief Financial Officer.

Before we get started, I would like to take a moment to read the Safe Harbor statement. This conference call contains certain forward-looking statements related to company’s expectations and prospects that involve risks and uncertainties including uncertainties associated with economic conditions in the electronics industry, particularly in the principal industry sector served by the company; changes in customer requirements and volume of sales to principal customers; competition and technological change; the ability of the company to control manufacturing and operating costs, the ability of the company to develop and maintain satisfactory relationships with vendors, the ability of the company to efficiently integrate acquired company’s into its business.

The company’s actual results of operations may differ significantly from those contemplated of any forward-looking statements as a result of these or other factors, including factors set forth in the company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, all of which may be found on the Investor Relations section of the company’s website at iec-electronics.com.

The company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information, future events or otherwise. In addition, references to non-GAAP financial measures in this presentation are reconciled to GAAP measures in the earnings release for the quarter, which also can be found in the Investor Relations section of the company’s website.

I would now turn the call over to Barry Gilbert. Go ahead, Barry.

W. Barry Gilbert

Good morning. Thank you for joining us. As you’ve likely seen from our press release earlier today, our results for the first quarter were not good. I would like to spend our time together this morning providing you with the details around what transpired during the quarter and focus on the primary causes of our disappointing performance. In addition, I would like to provide you with analysis as to the timeframe we currently believe we can mitigate the issues that negatively impacted our business this past quarter.

During the quarter, several of our customers experienced weak demand for some of their products or had too much inventory on hand as a result of inaccurate forecast or supply chain practices. I will go into more detail later in the call.

For the last few quarter, we have been quietly working on ramping up production for a new telecom network customer, a customer we believe can become a large customer for IEC. During the quarter, we experienced technical delays which impacted both revenue and efficiency. The good news is the technical problems impacting the quarter have been resolved. The bad news is that it took us longer than expected to fix the problems.

During the quarter, we also completed the move of our Victor New York cable operation and consolidated it into our Newark facility. We knew that we’ve encountered costs associated with the move with modest inefficiencies related to meeting our customer needs. We planned accordingly. In the long term, the move from the Victor facility will result in savings of $200,000 in rent experience a year, possibly would do some overhead support plus.

That was a brief overview of some of the factors that led to our difficult first quarter. I will turn the call over to Vince. We have to go through the financial results and after he has completed his report, I’ll discuss our business segment performance in greater detail.

Vincent A. Leo

Thank you, Barry, and good morning everyone. As Barry mentioned this morning, we issued a press release detailing our first quarter results. During the first quarter, IEC reported revenues of approximately $33 million, which was a 2.6% decrease as compared to approximately 33.9% in the first quarter of 2012. The revenue decline is attributable to aggregate revenue decreases in the medical, industrial, communication and other factors of approximately $8.3 million, partially offset by increased revenue in the military, aerospace sector of approximately $4.7 million.

Gross profit in the first quarter decreased to 14.3% as compares to 16.2% of sales in the prior year period.

Gross profit in the first quarter decreased to 14.3% as compared to 16.2% of sales in the prior year period. Gross profit was impacted primarily by lower sales volume and unfavorable changes in the product mix.

SG&A decreased approximately $1.5 million to 12.3% of sales in the quarter just added compared to 13.4% of sales in the prior year period. The decrease is primarily attributable to decreased payroll and bonus cost.

As we mentioned in prior calls, IEC used bank borrowings to fund the purchase price of our two most recent acquisitions and since integrating those acquisitions, we have been focused on using our cash flow from operation to reduce our debt to a more manageable level. As a result, during the first quarter of fiscal 2013, interest expense decreased to $279,000 compared with $353,000 in the prior year period. The decrease is primarily the result of reductions in our debt.

Net income for the quarter was $239,000 or $0.02 per basic and diluted share compared with $948,000 or $0.10 per basic and $0.09 per diluted share in the prior year period. As you will recall, our 2012 operations in the first quarter included $907,000 related to the claw-back provision of purchased price led into our acquisition in California. Exclusive of the claw-back, our net income would have been $377,000 or approximately of $0.04 per diluted share in the prior period.

Our balance sheet remains strong with approximately $26 million in working capital. Our debt however did increase during the quarter compared to our September 30, 2012 balance sheet primarily due to an increase in our revolving line of credit. This increase was primarily the result of increased levels of inventory based on the timing of our sales and the timing of the payments due to some of our accounts payable compared to September 30.

Subsequent to year-end or subsequent to the quarter end, we announced that we had amended our credit facility with M&T Bank to convert a portion of our long-term and revolving debt-to term loan with fixed or effectively fixed rate. We were able to take advantage in lock-in at historically low fixed interest rates, the new term debt based on the strength of our balance sheet and our business.

In addition the amended agreement also lowers the interest rate range of certain existing and new advances, expense certain maturity dates, lower the range of unused line fees and eliminate excess cash flow prepayment requirement. Our revolving credit facility will continue provide for maximum of $20 million.

With that I will turn it back over to Barry.

W. Barry Gilbert

Thank you. I’d like to take a few minutes to dig a little deeper into some of the issues we faced during the first quarter, and also present some positive development.

The market issues I mentioned earlier in the call are not short run issues. We have industrial customers that had great success last year and the year before, shipping products overseas primarily Europe and Asia. These areas of the world are struggling and our customer shipments have slowed down. We have been impacted by this slow down and we anticipate we won’t see more normalized demand into the third quarter.

Having said that, we are currently discussing a new commercial arrangement with one of these customers to take on new work that this customer had historically done in-house. We believe this is an excellent program, but it might take the better part of the year to finalize. However, I think it's important that we communicate to you some of the seeds we are planting for fiscal 2014.

Our first quarter medical business was impacted by issues facing our medical customers, who have been dealing with challenges on a variety of fronts. Some of these items are to be expected with a number of them show up at once, it becomes challenging. One customer was just addressing questions about what is reimbursable under third quarter programs with slowdown their demand. Another was working through slower ramp of their products being introduced into their end market.

And the third was sorting out their own FDA issues. That created too much inventory on their shelf and poor demand for us as we speak a number of issues have been positively resolved and we expect the medical sector will get stronger in the back half of the year and marginal improve this next quarter.

Coming back to the network program which challenged us this quarter, we were cautious with our internal forecast we developed surrounding this program given our experience that sometimes dreams go up in smoke due to insurmountable technical reasons. With that in mind, we envision $4 million in revenue for fiscal 2013. But quietly we believe the program might even achieve $8 million in revenue for the year, if various technical obstacles dissolved quickly. It is now clear this program might go to $10 million for fiscal 2013. However, a lot of things need to go right. It has also become clearer to us that this program and sister programs will exist in various forms for a number of years.

Finally, we saw strong revenue growth in our military and aerospace sector of 65%. This growth related to the addition of new customers, new programs from existing customers and releases in militarily funding. We believe that we’ll continue to grow in this area over the balance of the year. You may recall last year, we discuss these markets being negatively impacted by appropriation delays in Congress. I mentioned we were on solid platforms as that we have a bright future. We still believe that way and in that regard as CEO of IEC Electronics, at times I struggle with how to best describe the uniqueness and the quality of what we do.

Last week, one of our customers issued a statement sighting our Southern California Braiding operation of IEC as an integral part of the development life cycle of the new booster rocket for NASA. All of the cabling is back in that system with IEC. That, they stated and I want to quote, “Our suppliers have been vital in the success of this program”. They will remain key contributor through the SLS flight test systems, space launch systems. We are fortunate to be able to support this program in a number of different ways. We have posted an authorized picture of this project on our website if you'd like to see it.

With all of the above said, the growth in the militarily aerospace sector was not enough to offset the weakness in the industrial and medical sector. Looking forward, we expect organic sales to increase between 6% to 9% this coming year. We are still concerned about the weak global economy and the modeled U.S. economy. We continue to keep a close eye on the Department of Defense appropriations. But it’s also important to point out that we will focus on a part of the defense sector in which we are seeing significant long-term attention from the military. We are also confident in the long-term success of the business.

With that said, my main item is to continue growing the company. I see it as a far larger organization than we are now and to restore our gross profit to the 19% level and operating income to the 9% level as soon as possible. However, we’ve looked critically at what went wrong, and we are taking steps to correct these issues within our control and position our business to best absorb things we can't control. We have an attractive business model, particularly for us in the industry and periodically we will have a bad quarter.

With that said, I will now turn it over to operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting our question-and-answer session. (Operator Instructions) Our first question comes from the line of Mark Jordan with Noble Financial. Please proceed with your question

Mark Jordan – Noble Financial

Good morning, Barry. Dab a little more into the specific one large program that you had problems in the December quarter. I know typically that or you can’t be involved in design or manufacturing with this customer. Where the issues that take place one that was sort of collaborative problem that you have to face or would that really the customers design issues that were given to you that had to be resolved?

W. Barry Gilbert

So Mark, Good morning Mark. I think you’ve mixed things in the sense that the technical issues that we have with a telecom customer, not an industrial customer. Am I correct?

Vincent A. Leo

Yes.

W. Barry Gilbert

Okay, close, the one who forward. It was dealing with signal noise issues, RF communication issues, shielding issues, some of them were design issues. We were not involved with the design. We absolutely because of some of the technical skills that reside within IEC, I believe most instrumental in helping them resolve those issues for what was a pretty cool product.

Mark Jordan – Noble Financial

Given the revised guidance that you’ve given 69% growth, obviously with the bad first quarter you’ve got to see some significant improvement here. Can we assume that there would be a pronounced snapback in second quarter and then sequentially much more modest growth or how does that ramp occurred through the year?

W. Barry Gilbert

You used a phrase pronounced snapback and the difficulty is there are probably 30 or 40 people in this call and I have no idea how many are going to read this transcript after we concluded the call and so it was not clear to me what pronounced snapback is? But perceptively you are saying we are going to achieve more normalized levels of revenue than I think we are looking at things the same way and then we see our business advancing from that point.

With that said, this telecommunications customer growth that we just talked about with respect to the previous question, I think it stumbles again. There is another technical problem that will absolutely give us and make it difficult for us to get towards that 6% number.

Mark Jordan – Noble Financial

Okay. Let me rephrase the question first. To take out the (inaudible) about definition of snapback, but if I would define snapback, I would say that, that is – will it be reasonable assume in the second quarter that the goal would be that you should be somewhere at least near year ago revenue level and then you would blend half of that sequentially through the balance of the year.

W. Barry Gilbert

So here I’m going ahead in hedging the answer. Firstly, as your assumption is a reasonable one, but when we are talking about some forward-looking items, because of some of the things that we stumbled over and because of what was clearly not understanding some of the concerns that our medical and our industrial customers are experiencing, I think I am far more comfortable saying we will be in a far stronger sales position this coming quarters than we were in the quarter that just transpired just past, but I really don’t want to go and make that statement just yet.

And the reason and so let me come into the following of 10 marks, I would love to be able to go ahead and there are a lot of philosophical folks or individuals of philosophical belief should be able to present a sales estimate that you can that just slammed down, I don’t do that. I don’t believe them yet. I believe in test passing through the shareholder, the best information and the same information that I have. And so that’s exactly what I’ve done and hence that’s the bracket I want to place around your statement.

Mark Jordan – Noble Financial

Okay. A final question if I may. Last year, you were reasonably exclusive in terms of your free cash flow generation goals and what you wanted to do relative to that repayment in fiscal ’12. Do you have similar goals and objectives for 2013?

W. Barry Gilbert

We do. And we absolutely do, I don't want to use the word, do we have goals. We absolutely do, though we have free cash flow goals we do. The slumber in the first quarter, our inventory went up, our debt went up, and so I've got to bring those two things back in the line before I can start to move forward. But we do have goals that are consistent with what we have done in the past.

Mark Jordan – Noble Financial

Could you quantify that relative to say net income or in terms of free cash flow generation?

W. Barry Gilbert

No Mark, we had a tough first quarter. I appreciate the fact that you are trying to teach out of me a better response, but right now I want to go ahead and focus on getting our gross profit backwards along, the operating income were belongs, and candidly I get that backward belongs all rest of the big share of itself.

Mark Jordan – Noble Financial

All right. Thank you.

W. Barry Gilbert

Thank you.

Operator

Thank you. The next question comes from the line of Steve Shaw with Sidoti & Company. Please proceed with your question.

Steve Shaw – Sidoti & Company

Hello Barry, how are you’re doing?

W. Barry Gilbert

Good morning, Steve.

Steve Shaw – Sidoti & Company

Mark sort of couple of my sets, I have a one quick question, what can we expect the gross margin for the rest of the year based on the volume and we expect that package mix?

W. Barry Gilbert

I think the back half of the year can be a lot more consistent with what we have historically done. I think the quarter were currently in the second quarter things are still being sorted out, and I think there will be improvement over the quarter we just concluded, but it not be back up to what I do to be the par.

Steve Shaw – Sidoti & Company

All right. Thanks Barry.

W. Barry Gilbert

My pleasure. Take care, Steve.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Bhakti Pavani with C.K. Cooper and Company. Please proceed with your question.

Bhakti Pavani – C.K. Cooper and Company

Hi, Barry.

W. Barry Gilbert

Good morning, Bhakti.

Bhakti Pavani – C.K. Cooper and Company

My question is related to – in your prepared remarks you mentioned that you have won some unannounced program and I believe those programs are in the aerospace and defense segment of the business?

W. Barry Gilbert

Correct.

Bhakti Pavani – C.K. Cooper and Company

Would you mind sharing some information on where do those categories or fallen into like – are those like unmanned medical programs or satellite or anything?

W. Barry Gilbert

So Bhakti we are showing you a picture on our website, which is with the customer that we have not discussed. He is an important customers that support NASA, we are involved in a number of those programs, but I’m not compared to go ahead and discuss some couple reasons, couple of the programs I can’t talk about and couple of programs not yet comfortable talking about when everything has been buttoned up I would be glad to discuss some.

Bhakti Pavani – C.K. Cooper and Company

Okay. And also the telecommunication customer that you had major issues with this quarter. Now that you are already in one month of the second quarter, how is that shaping up and how soon do you think that spin off recover or comeback?

W. Barry Gilbert

So to the point of how would shaping up, we're producing units on a daily basis and the number is increasing and it's a nice level and a nice pace. So I think that the bounce back in that regard has been pretty good. I wanted to be cautious with respect to claiming what will happen going forward only because once we have solidified the production model, we then start to move forward into a new phase and that phase really deals with advancing the efficiency. We are not there yet. We just want to make sure that what we are doing is absolutely repeatable and absolutely being supported by our customer and in churn their customer and their customers are the underliers in the telecom industry.

Bhakti Pavani – C.K. Cooper and Company

Okay. One last question, how was the sales distributed among the four segments for this quarter? Or what percentage distribution was it?

W. Barry Gilbert

I don't know – I don't believe that we disclosed that.

Bhakti Pavani – C.K. Cooper and Company

Okay.

W. Barry Gilbert

And I am not prepared to disclose that. I believe that Vincent, some of his prepared remarks, offered you insights of where things moved up and down.

Bhakti Pavani – C.K. Cooper and Company

Right.

W. Barry Gilbert

And I believe that you can get a pretty fair picture. But when he say the following, we clearly saw a very reasonable significant advance in the military aerospace arena. And that the industrial was down a bit, medical was flat to down, and the communications we’ve just talked about a number of times.

Bhakti Pavani – C.K. Cooper and Company

Okay. That’s it from my side. Thank you very much.

W. Barry Gilbert

Thank you very much Bhakti.

Operator

Thank you. (Operator Instructions) Thank you. We do have an additional question from the line of (inaudible). Please proceed with your question.

Unidentified Analyst

Hi, good morning. Thanks for the information on the quarter. I have more questions going out several years, when I look at your shareholder and investor presentations on the website, one of the things I think is interesting about this company is, it’s hard to get a sense of how big the overall market for your products and services it is looking out a few years and what kind of percentage of market share do you have in that? Is there any third-party studies or research reports to look at to kind of see, okay where is IEC Electronics within this high margin low volume business and how big is the overall market opportunity?

W. Barry Gilbert

Daniel, that’s a thoughtful question. The following, one, there are no real published reports per se, because when they start to talk about the military market, they are talking about hundreds of billions of dollars and it gets very confusing. And even when you start talking about the NASA budget, it gets equally as confusing. We have steadily shaped the company to participate in segments of this market which are not easily obtainable by others. I mean, we appreciate that it’s very really easy to copy, but I would like to think our competitors would have a hard time figuring out what to copy.

And another thing of being a really, really small player and make it up $100 billion market, I mean that just – you are just nothing. And so the areas that we are participating are areas that are important to all of the clients, and they have not been able to go ahead and get another supplier so there was one that was recently acquired. Another supplier was able to bring together all of the services and the technology that we bring together. That is a loose answer and I got it, but fundamentally there are no force out there to support a deeper dive.

Unidentified Analyst

Got you. Okay. Well, thank you, it’s good to hear how you think about it.

W. Barry Gilbert

Thank you. I appreciate the thoughtful question.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor over to management for any closing comments.

W. Barry Gilbert

I want to thank all of the shareholders and everyone for calling in and your support to the company. I appreciate that this was not the best quarterly review that you've read in a long time. Nonetheless, we have a very attractive business model and I believe the company has a most bright future.

With that said, I look forward to speaking to all of you next quarter and having brighter news. Thank you.

Operator

Thank you. 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.

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