What a ride it has been for IEC Electronics (IEC) shareholders. Fiscal Year 2012 was a pretty decent year from an operations standpoint. The company managed to grow sales by nearly 9 percent, generate $13M in cash from operations, repay nearly $7M in debt, and for the first time in a very long time, show cash on the balance sheet. However since the end of FY2012, the wheels have completely fallen off at IEC. What happened? Let's review.
When year-end 2012 results were released in November of last year, IEC Chairman and CEO Barry Gilbert issued revenue guidance for fiscal year 2013, predicting growth of 9-14 percent..sounds pretty good! Two months later, at the Noble Financial Equity Conference on January 22nd, Barry lowered the revenue growth guidance to 6-9 percent; he did so without any explanation. Okay, well 6-9 percent still sounds pretty good. Then came first quarter earnings, which were released in early February. They were disappointing, with revenues declining 2.6 percent year over year. Profitability was also markedly weak as well; IEC earned just $0.02/share and generating negative cash flows from operations, leading to additional borrowings under its credit agreements. IEC blamed the bulk of the miss on a "major technical delay in one of (their) new customer product ramps." We later learned that new customer was Quintel. IEC maintained revenue growth guidance of 6-9 percent.
Oh, did I mention that in early January company VP, Donald Doody, sold 30,000 shares between $6.80 and $7 per share?
What's next? Oh yes, on February 14th, IEC issued a press release to announce that President of the Company, Jeffrey Schlarbaum's employment with IEC was essentially terminated two days before. What? What is that all about? I have no idea, but it cannot be good. No explanation is given ... business as usual I guess. Maybe he just wanted to spend more time with his family.
Things go quiet for several months, until IEC drops a bomb on May 1st. It will restate earnings going back to Q1, FY2012 due to an "error in accounting for work-in-process inventory at one of the Company's subsidiaries, Southern California Braiding, Inc. (SCB)" Overall, the restatement only totals $2.2M over a year and a half, but for an already slim profit margin business, it is fairly meaningful. The 8-K filed also included this gem: "The Company further cautions investors that all previously issued guidance related to fiscal year 2013 should no longer be relied upon." Where there is smoke, there is fire. I exited stage left at this point, selling my small stake (yes, I was long!). I had seen enough missteps by management to conclude that they could no longer be trusted. I booked a 15 percent loss.
At this point I figured that Q2 results would be delayed due to the restatement. When this type of thing occurs, auditors typically want extra time to review financials, not wanting to bless any further egregious errors. So I was very surprised to see that, while slightly delayed, IEC would announce Q2 earnings on May 20th and hold a conference call to discuss results the next day. Okay I thought! Things aren't that bad; they've got it cleaned up. Of course I should have stuck with my first instinct because on the 20th of May IEC announced that indeed, it would be another 45 days or so to become current on its 10-Q and revised 10-K/Qs and that it was canceling the conference call. Unbelievable! How, four days earlier, did IEC think they would be able to file their 10-Q? My mind was blown. They did provide some preliminary financial results for the quarter, which were disappointing to say the least. While up slightly on a sequential basis, revenues again declined year-over-year by 11 percent. The reasons for the decline were the most disturbing thing about the results, and seem to represent a fundamental shift and major concern for IEC going forward:
"Revenue for the medical market sector decreased $1.5 million primarily due to decreased demand from a customer upon completion of a recall program. Revenue for the industrial market sector decreased $2.4 million primarily due to a strategic decision by a customer to dual source product to mitigate risk. Revenue for the communications & other market sector also decreased by $1.2 million primarily due to decreased demand from two customers, one of which has moved some production in house, partially offset by revenue from a new customer. Military & aerospace revenue increased $1.2 million due primarily to revenue related to new programs from existing customers, revenue from a new customer and releases in military funding. These increases were partially offset by a $0.4 million decrease in revenue from one of the Company's aerospace customers that discontinued outsourcing a product to IEC and used its excess capacity, created by decreased end-customer demand, to manufacture the product in house."
Dual sourcing and in-house manufacturing are dirty words to IEC and things they have not had to worry about in the past, given their track record of "Absolutely. Positively, Percent and On-Time," right? This would deeply concern me if I was an IEC shareholder. I doubt it was something management planned for in their projections for 9-14 percent - I mean 6-9 percent revenue growth.
The stock price really took a beating with this news. There are now several law firms investigating IEC for possible disclosure issues - another headache and expense. So how did the wheels come off so quickly? The Southern California Braiding, Inc. acquisition has been nothing but a headache and was a total mistake - I don't know how anyone can conclude otherwise. It now appears that Schlarbaum took the fall for the accounting issues at SCB, rightly or wrongly; we may never know if SCB was Schlarbaum's idea or Barry's. It does appear that, based on the timing of Schlarbaum's firing, the accounting issue at SCB was known several months before it was communicated to shareholders. Shouldn't material changes in the company be reported as soon as known? Maybe the investigating law firms will get to the bottom of this issue.
So IEC's shareholders have certainly taken a big hit if they held on to the stock. I now firmly believe that current management and the board have zero credibility. Even with the large sell-off in price, I would not get back into the stock right now. Could the board decide to sell the company? Maybe but who is going to pay up for it? At this point: no one. The company has too much debt, too much uncertainty and a severe lack of credibility. I believe that IEC and IEC alone will need to dig itself out of this hole. Is Barry the man to do that? I don't think so. This publicly traded company grew out of an almost dead company that was essentially a private company. It takes a certain type of understanding to know how to run a public company and how to communicate to shareholders. Management must always remember that they work for shareholders, not the other way around. I don't think Barry has the skill set to a) effectively run a public company and b) dig the company out of the hole it created. Fighting tooth and nail to not have cash on the balance sheet, releasing unachievable guidance, then revising it quickly and with no explanation, announcing an earnings release and conference call and then canceling four days later are all examples of poor public company leadership. If I were on the board, I would push to clean house and bring in a management team that can turn around operations, sell off underperforming assets, reduce debt and sell the company, in that order. And please, as a first order of business, get rid of that "Absolutely, Positively, Perfect and On-Time." It is no longer relevant or valid.