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Executives

Jennifer Belodeau - Institutional Marketing Services

Barry Gilbert - Chairman and CEO

Vincent Leo - CFO

Analysts

Mark Jordan - Noble Financial Group

Mike Crawford - B. Riley & Company

Steve Shaw - Sidoti & Company

IEC Electronics Corporation (IEC) F4Q 2013 Earnings Call December 19, 2013 10:00 AM ET

Operator

Greetings, and welcome to the IEC Electronics’ Fiscal 2013 Fourth Quarter and Year-End 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 Jennifer Belodeau. Thank you, Ma’am, please go ahead.

Jennifer Belodeau

Good morning. Thank you for calling in. On the call this morning, we have Barry Gilbert, Chairman and CEO, 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 statements that are or may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made in reliance upon the protections provided by such acts for forward-looking statements.

These forward-looking statements such as when the Company describes what it believes, expects, or anticipates, will occur and other statements include, but are not limited to statements regarding future sales and operating results, future prospects, the capabilities of business operations, any financial or other guidance and all statements that are not based on historical facts but rather reflect the Company’s current expectations concerning future results and events.

The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events which will be subject to various uncertainties and other factors that may cause the Company’s actual results, performance, or achievements to be different from any future results, performance or achievements expressed or implied by these statements.

Specific risks and uncertainties include, but are not limited to, those set forth in the Risk Factors section of the Company’s latest Annual Report on Form 10-K/A and subsequent Quarterly Reports on Form 10-Q/A and Form 10-Q, as well as in our earnings release.

Additional risks and uncertainties resulting from the restatement of the Company’s financial statements included in the Company’s Annual Report on Form 10-K/A filed with the Securities and Exchange Commission, SEC on July 3, 2013 and in the Company’s Form 10-Q/A filed on the same date could among others, one; cause the Company to incur substantial additional legal, accounting and other expenses; two, result in additional shareholder, governmental or other actions, or adverse consequences from the now consolidated shareholder action or the now formal investigation being conducted by the SEC; three, cause the Company's customers, including government contractors with which the Company deals, to lose confidence in the Company or cause a default under its contractual arrangements; four, cause a default under the Company's arrangements with M&T Bank with respect to which, if the Bank chooses to exercise its remedies, the Company may not be able to obtain replacement financing or continue its operations; five, result in delisting of the Company's stock from NYSE MKT, the Exchange, if the Company fails to meet any Exchange listing standard, or fails to comply with its listing agreement with the Exchange, during the 12 months ending July 9, 2014; or sixth, result in additional failures of the Company's internal controls if the Company's remediation efforts are not effective.

Any one or more of such risks and uncertainties could have a material adverse effect on the Company or the value of its common stock. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new 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 this quarter, which also can be found in the Investor Relations section of the Company’s website at iecelectronics.com.

With that, I’ll hand the call over to Barry.

Barry Gilbert

Good morning. During the fourth quarter, we saw increased sales preliminarily from our military, medical, industrial sectors over the same period a year ago. Revenues were $39 million in the fourth quarter, 5.6% increase as compared to revenues of $37 million in the same quarter last year and 11% increase sequentially. In fact revenue in the fourth quarter was the highest quarter of revenue in more than 10 years. I am going to come back to this later in the call.

However, as you know from our press release issued earlier this morning, during the fourth quarter IEC took a $14.2 million impairment charge related to our Southern California Braiding Company which significantly impacted earnings. The charge largely stems from a goodwill impairment at SCB.

In previous quarters, we’ve discussed the challenges at SCB. SCB has not met our expectations and frankly has been a disappointment from a profitability growth and cash flow perspective. However, SCB is a strategically important part of the Company. They provide us with increased access to the military segment particularly the prime defense contractors. While it has been a difficult year, we remain committed to widening this portion of our business as we’ve made several operational changes at SCB and it is very much a work in progress.

With that said, we’ll continue to evaluate and make changes as necessary to help SCB deliver on the promise we anticipated when we made this acquisition. After a slow start to this year, in the end, we finished with numerous new customers or additional locations from existing customers, just as important these customers were across all of our various businesses. Many of these customers are marquee names in their respective industries. We remain optimistic that these customers will be an important part of IEC's future.

We understand that the main question from shareholders is when we will we monetize these opportunities. Over time, these customers will migrate from start-up to full production, in some cases it could take longer than a year and in the case of some of our military customers it could take multiple years. That's okay, in order to create the long-term shareholder value. To me the key element in gaining all of the new relationships was the ability of IEC to be attractive to some world-class organizations.

Early in fiscal 2013, we had some managerial changes discussed last quarter. One of these changes was the realignment of our manufacturing operation in north, from one large operation to three small operations focused on specific markets. That realignment had some teething pain, but I'm pleased with what we are seeing and the changes appear to be positive for the long run.

I will now turn the call over to our CFO, Vince Leo to review the numbers.

Vincent Leo

Thank you Barry and good morning everyone. This morning we issued a press release detailing our fourth quarter results which I hope you’ve had a chance to review. During the fourth quarter of 2013, IEC reported revenues of approximately $39.1 million, a 5.6% increase as compared to approximately $37.1 million in the fourth quarter of 2012. Gross profit in the fourth quarter decreased to 13.9% of sales as compared to 16.7% of sales in the fourth quarter of the prior fiscal year.

Gross profit was impacted by changes in the product mix. In addition throughout fiscal 2013 we maintained adequate overhead to support higher expected sales in the future periods. We obtained a number of orders -- we obtained orders from a number of new customers or additional operating locations for existing customers during the second half of fiscal 2013 which resulted in higher overhead due to the upfront investment required to establish new programs. Most programs become more profitable after they ramp-up and we expect that trend to continue.

Selling and administrative expenses exclusive of restatement and related expenses increased approximately $200,000 and represent 9.6% of sales in the fourth quarter of fiscal 2013, compared with 9.7% of sales in the same quarter of the prior fiscal year. During the fourth quarter of fiscal 2013, we recorded an impairment charge of approximately $14.2 million, relating to our SCB reporting unit, 11.8 million of the impairment charge relates to goodwill and approximately 2.4 million relates to a customer relationship intangible asset.

The impairment analysis and resulting charge are due to slower than anticipated growth and poor operating performance at SCB, as well as market uncertainties and strategic changes made by the Company. While the strategic change to direct future military and aerospace revenue growth to our Albuquerque reporting unit contributed to the impairment for our SCB reporting unit it is intended to improve the overall profitability of the consolidated company.

Although uncertainties in the military and aerospace market sector will likely continue, the majority of our military and aerospace customers participate in complex advanced technology programs including unmanned vehicles, safe defense and safe exploration which we expect to be continued over the long-term.

Restatement and related expenses of approximately $625,000 in the fourth quarter of fiscal 2013, represented third-party legal fees directly attributable to the restatement and as well as other matters arising from the restatement, including a now formal SEC investigation and consolidated class actions. We anticipate elevated levels of legal expenses due to the restatement and other matters for the foreseeable future.

During the fourth quarter of fiscal 2013 interest expense increased to approximately $522,000 compared to $279,000 in the fourth quarter of the prior fiscal year. The increase in interest expense was primarily due to the increased borrowings and covenant waiver fees.

Net loss for the fourth quarter was approximately $8.7 million or $0.89 per basic and diluted share as compared to net income of approximately $1.6 million or $0.16 per basic and diluted share in the prior year. Impairment expenses reduced our Q4 earnings by approximately $0.93 per share.

As for our balance sheet, we ended the fiscal year with approximately 31.6 million of working capital. Total bank debt less cash at September 30, 2013 was approximately 34.3 million compared to approximately 25.0 million in the prior fiscal year. In the quarter principal payments made were offset by increased borrowings due to the restatement related expenses, as well as increased accounts receivable from the increased revenue in Q4 as compared to Q3.

With that, I will now turn it back over to Barry.

Barry Gilbert

Thank you, Vince. I mentioned earlier on this call I would revisit our revenue growth in the fourth quarter. It was very gratifying and demonstrates the diversity of our mix and the strength in each one of our end-markets. We did not bring as much down to our bottom-line as we would have liked. That said, I’ve always run this Company with a view towards the long-term and believe that our cost structure is appropriate for the long-term business. However, it is not appropriate for a Company with the issues we are facing. We have adjusted our workforce and our overhead accordingly. When we resume our growth we’ll add back the appropriate staff.

Changing subjects briefly, at the end of the fiscal year, our revenue breakdown was 51% military and aerospace, 21% industrial, 20% medical, and the balance communication and others. The sector breakdown is very similar to our position at the end of last year. We believe that our position as the U.S.-based manufacturer of high complexity products from some of the most discriminating customers in the world provides much opportunity for growth of our business.

Looking forward, we expect the next two quarters to be flat for fiscal 2014 as compared to the six months of fiscal 2013. By the end of the first quarter of fiscal 2014, we’ll have a clear perspective as to the impact from the operational changes we have made. However, net income is difficult to estimate due to the difficulty in forecasting additional legal and accounting costs.

Though a number of variables can impact earnings, one of our medical customers is on FDA hold. And this will have some effect on our Q1 and Q2 results for fiscal 2014. We believe the issue of our medical customer -- that our medical customer is facing, will mitigate itself during the second half of the year but nonetheless it will impact the first half of the year.

I will turn the call over to the operator. Before I do, I understand that you may have questions about our restatement previously discussed and disclosed, the legal proceedings or the SEC investigation described in our filings. I hope you can appreciate that we cannot discuss these matters further.

At this time, I’ll ask the operator to open the lines and we will take a few questions.

Question-and-Answer Session

Operator

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

Mark Jordan - Noble Financial

Barry first you have stated that you see the first half being relatively flat year-over-year with ’13. I guess my question would be with the restructuring that you have done excluding the unpredictable legal and accounting expenditures are you structured to be profitable on that revenue run rate?

Barry Gilbert

One of the things that becomes important is after you make the changes that we have we want to be able to understand whether these changes are sufficient [and balanced] [ph]. And I think that I’ll have a better answer to that question at the end of the first quarter and I’ll ask you to come back and give me that question at the end of the first quarter.

Mark Jordan - Noble Financial

Can we talk a little bit about your bank relationship and how you see it, obviously the September quarter was a difficult one for everybody, what is the normalized fully loaded rate on your debt currently, and how comfortable are you with your banking relationship at this point in time?

Barry Gilbert

So I am going to work backwards with that in the following sense. We’re very comfortable with our banking relationship. They have been very good to us all the way. And I am working from an estimate, and so please allow me the broad inaccuracy of not having that piece of information in front of me. But a broad estimate is that we’re roughly at a 4% interest rate may be it needn’t be as much as 4.5% or 5% interest rate, but that to me most reasonable.

Mark Jordan - Noble Financial

Final question from me, relative to SCB, you noted that you have shifted some business at Albuquerque. Do you see, is SCB long-term strategy is it in place to be a significant manufacturing site or will that evolve to being more of a customer relationship point and more of the work will be done in Albuquerque over time.

Barry Gilbert

SCB in California is clearly migrating toward a customer relationship what I’ll call core product development, NPI, new program introduction kind of center. However, with that said, they have got some outstanding unique, industry unique capabilities out there that we are not likely to move to Albuquerque any quickly. We would have to transfer a fair bit of knowledge. The best I can say right now is that that is broadly a discussion item, but it’s not happening tomorrow.

Mark Jordan - Noble Financial

And one more question if I may, could you talk about inventory levels a little bit what your goals are there in terms of over the next 12 months where you think you can -- what kind of cash you might be able to free up from that?

Barry Gilbert

We clearly have attention on inventory. And one of the things that we’re broadly looking to -- and I want to be careful with this, because some of our operations need to hold more inventory to support some of our larger customers that have got very stochastic demand. And we’re prepared to go ahead and do that in order to go ahead and support them. With that said, we were driving our inventory closer to the seven terms level and we’re working at it.

Operator

Thank you. And our next question comes from the line of Mike Crawford with B. Riley & Company. Please proceed with your question.

Mike Crawford - B. Riley & Company

Sticking with the balance sheet can you describe what happened with the accounts receivable and the DSOs increasing in the quarter?

Barry Gilbert

Sure. We have a lot of shipments at the very end of the quarter. And so if it were reversed you would have seen the cash come in and the receivables would have been less. But our historical shipments are such that everything that is shipped in the last six weeks or so gets trapped on the balance sheet and we have a lot throughout the last six weeks. Our customers place orders that way, we support our customers’ needs and that’s pretty much the program.

Mike Crawford - B. Riley & Company

So it’s been over 64 days since the end of that quarter, so I don’t know if you have a snapshot of what the balance sheet looks like today?

Barry Gilbert

I’m not going to go discuss that.

Mike Crawford - B. Riley & Company

Your leverage ratios I believe you’ve lengthened them out in your fourth amendment – to your fourth amendment [private] [ph] facility where you’re okay at 4.5x leverage for the next couple of quarters, but then drops pretty rapidly down to 2.75 to 1 by the time you get to the first quarter of next year. How comfortable are you with that debt to EBITDA?

Barry Gilbert

At the end of the day you’ve asked a, and Mike you’ve asked a forward-looking statement that we don’t want to make. We’ve got too many issues that we need to go ahead and work our way through and we’re not prepared to make that -- those statements.

Mike Crawford - B. Riley & Company

How about a backward forward-looking statement question, what’s the nature of your D&O insurance?

Barry Gilbert

I just know that the Board is adequately covered.

Mike Crawford - B. Riley & Company

Okay. Can we get back to the South Cal Braiding, so I believe back in 2010 or whenever you acquired it that, I believe one of the strategic goals in acquiring this business was getting some customer relationships. Is that true? And do you think - do you see any of those relationships harmed or have any of these customers walked away from the Company in the past year?

Barry Gilbert

Couple of things, not only and none of the customers have walked away. The relationships have been advanced. The number of locations that we’re supporting for the primes has increased substantially. But at the end - and some of that benefit has come to other sectors of IEC, but at the end of the day we felt this was the best treatment for SCB. Mike?

Mike Crawford - B. Riley & Company

Yes?

Barry Gilbert

I have another caller that I’d like to take questions from. Can I take your last question?

Mike Crawford - B. Riley & Company

Yes, I’ll step out of the queue at this time.

Operator

And our next question comes from the line of Steve Shaw with Sidoti & Company. (Operator Instructions) Please go ahead with your question.

Steve Shaw - Sidoti & Company

In regards to SCB, Barry, did you mention numbers of employees or dollar amount of what is being shifted over to Albuquerque are cut?

Barry Gilbert

No, we didn't. We don't discuss that information. I think the only thing that I can say is that we were very appropriate and balanced for not only respecting the future but the economic changes that needed to take place now.

Steve Shaw - Sidoti & Company

And then in terms of the gross profit I know Vince said some of that was product mix that impacted that. What were some of the lower margin products or across what business line were the lower margin products?

Barry Gilbert

We don't discuss that specifically, but I can say that one of the areas which is receiving a bit of attention is the telecom area.

Operator

And since we have no further questions at this time, I would like to turn the call back over for any closing comments.

Barry Gilbert

Thank you. This has not been an easy year, there are no excuses but we're committed to working our way through these difficulties and achieving a far brighter future. I’d like to thank everyone for calling in and for your support of the Company and wishing you a most happy healthy New Year. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this moment. Thank you for your participation.

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