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IEC Electronics Corporation (NYSEMKT:IEC)

F1Q2011 Earnings Conference Call

February 3, 2011 10:00 AM ET

Executives

John Nesbett – President, IMS

Barry Gilbert – Chairman and CEO

Susan Topel-Samek – VP and CFO

Analysts

Mark Jordan – Noble Financial

Jennifer Welford – Comstock Partners

John Walthausen – Walthausen and Company

Robert Little – Morgan Chase

Garry Palmer – Retirement Solutions

Stephen Shaper – Narromine

Gerard McLean – Private Investor

Operator

Greetings and welcome to the IEC Electronics Fiscal 2011 First Quarter Earnings Call. 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, President of IMS. Thank you Mr. Nesbett, you may begin.

John Nesbett

Good morning and thank you for calling in. On the call at this morning, we have Barry Gilbert, Chairman and Chief Executive Officer as well as Sue Topel-Samek, Vice President and Chief Financial Officer.

Before we get started, I’d like to take a quick moment to read the Safe Harbor Statement. This conference call including any discussion regarding the company’s future prospects, contains certain forward-looking statements that involve risks and uncertainties, including uncertainties associated with economic conditions in the electronics industry, particularly in the principal industry sectors served by the company, changes in the customer requirements and in the 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 investors sorry with bankers and the ability of the company to efficiently integrate acquired companies into its business.

The company’s actual results and operations may differ materially from those contemplated by any forward-looking statements as a result of these and other factors, including risk factors and Safe Harbor cautionary statements set forth in the company’s 2010 Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission.

We will also be discussing EBITDA, a non-GAAP financial measure that has reconciled to GAAP financial measures in our earnings press release and posted in the Investors Relations section of our website.

Okay. I will now turn the call over to Barry Gilbert. Please go ahead, Barry.

Barry Gilbert

Thank you for joining us this morning. We are committed to communicating with our shareholders through investor presentations and making ourselves available to all shareholders that contact us. With that said, I have held-off of quarterly calls largely because I don’t view our business on a quarter-to-quarter basis. The plan we’ve been executing has taken time to develop and might not have unfolded the way it has if we had been concentrating on quarterly calls and subsequent reactions. We make business decisions based on what is best for the long-term value of the shareholders.

We have not determined if we will do these calls quarterly and we will evaluate that question going forward. However, I can assure you that we are going to do what is right for our shareholders and the owners of the company with respect to communications.

A brief overview of the call and subsequent discussions; we had a strong quarter, healthy growth in sales, healthy growth in earnings. And we continued to extent our capabilities for our customers when we acquired the Southern California Braiding operation and broadened our geographic footprint. I’ll turn the call over to Sue to review the numbers and then I’ll provide you with a bit more operational color before we open the lines for questions.

Susan Topel-Samek

Thank you, Barry and good morning everyone. As you know this morning we issued a press release detailing our first quarter results and we will issue our full report on form on 10-Q before February 15th.

In the meantime, I’m happy to report that IEC continue to experience solid top-line growth. Our first quarter revenue increased 59% year-over-year. These results included the acquisition of General Technology Corporation in December 2009, Celmet in July 2010 and 10 days of Southern California Braiding acquired on December 17th, 2010.

Excluding these acquisitions, our organic growth was a healthy 26%. First quarter growth profit improved to 16% from 15.6% in the prior year period and 10.3% in December 2008. That is after as we indicated in the press release, we incurred approximately $70,000 of net startup expenses of Southern California Braiding. And this after taking into account approximately $200,000 impact on our results of temporarily inefficiencies associated with a number of new projects advanced during the quarter and a higher than usual level of product mix variations.

The progress made in recent years is a direct result of our continued focused on improving efficiency for training, investing in cost affective capital equipment and adopting continues improvement and lien manufacturing principles. As our workforce has expanded, we have achieved these increases in both productivity and capability that have enabled us to further penetrate profitable market sectors.

Selling and administrative expenses remain under 10% of sales, but were 80 basis points higher during the first three months of fiscal 2011 and in the prior year period. Approximately one half of the increase results from the rising cost of providing healthcare and other benefits to our employees, which we view as important to maintaining a top slide workforce. The remainder of the increase is attributable to adding the appropriate talent to support the size and scope of a growing organization, both today’s IEC and the larger company we are working to become.

Investments in our sales and marketing team have accompanied our expansion into medical market and continued penetration into the military, aerospace and industrial markets. And finally, some of the increased SG&A costs are integration expenses associated with the Southern California Braiding acquisition.

Nevertheless, operating income for the quarter were 6.9% of sales, a strong performance compared to our peers in contract manufacturing. EBITDA declined as earnings before interest, taxes, depreciation and amortization which we believe is a useful measure of the cash available to service our debt, increased 75% from the year ago period to $2.4 million for the quarter ended December 2010.

Interest expense was $244,000 for the quarter, up from $95,000 in the prior year. This is a function of our choice to take advantage of the continuing low interest rate environment by using debt to finance our recent acquisitions. Our current cost of capital for these acquisitions is a very attractive 3.75% through M&T Bank. And overall long-term effective borrowing rate was approximately 3.8% for the quarter.

Finally, on a fully diluted basis, our earnings per share of $0.11 for the quarter increased 38% from $0.08 in the first quarter of 2010.

Moving to the balance sheet, we remained very focused on managing working capital to maximize cash flow, pay down our debt and minimize interest expense. As you know during fiscal 2010, we borrowed $17 million to fund the acquisitions of GTC and Celmet. Through the year we repaid 6 million of that $17 million.

In December 2010, we borrowed $26 million to fund the acquisition of Southern California Braiding resulting in total debt at December 31st of $47.3 million. As of yesterday, I am happy to report that we had repaid 2 million of that $47 million. Our inventories have increased from $11.2 million one year ago to 18.8 million at December 2010. Approximately 3.7 million of this increase is associated with the acquisitions of Southern California Braiding and settlement. The remaining 3.9 million represents a 35% increase in inventory to support a 59% increase in sales over the same period.

We have a lot of net operating loss carry-forwards with approximately 33.2 million remaining at September 30, 2010. We estimate that future benefits to that NOL to be approximately $11.9 million and are pleased to be successful returning what was the significant liability into an important asset. With that, I’ll turn the call back over to Barry.

Barry Gilbert

As mentioned earlier, we had healthy growth for the quarter. Fueled by the expansion of our product offerings and by diversification among market sectors. Absolutely, positively perfect and on time, a silly phrase to investors is music to our customers. Our customers have rewarded us with extending ongoing programs and additional programs and referring us to other operations that they control. With that in mind, we discussed our backlog twice a year. Once the year end, where we mentioned our backlog increased from 43 million to 91 million. And mid-year where we affirm if our backlog has expanded or contracted.

Repeating my earlier comments, we run the business on the long-run best interest of our shareholders and not based on quarter-to-quarter movement of one figure or another, we focused on trends.

We enjoyed a diverse mix of customers. Military and aerospace increased to 54% of our sales up from 49% last year and that’s without Southern California Braiding. Medical and other increased to 17%, up from the 11% last year. Industrial and Communication was 29% versus 40% last year. Industrial is absolutely rebounding, and rebounding rapidly. However, we have not sort additional communication engagements, sales in that sector are in fact increasing not at the same rate as the total business.

We have made three acquisitions over the course of the year, most recently Southern California Braiding, a great company and it makes a lot of sense for us. SCB has strong margins and is immediately accreted to our shareholders. They participate in important niches in the military and defense market, they specialize in providing customers and military ‘primes’ and NASA was complex highly reliable, high reliable cables and wire harnesses built with standards to support extreme environments. SCB broadened our relationship with the primes that we gained from our GTC acquisition last year and IEC’s wire and cable business purchased two years ago.

Last thought, with respect to Southern California Braiding despite forecast of military setbacks, Southern California Braiding supports programs that should be maintained and continued to grow, that is the best lands that we have today.

Margins continue to be among the strongest in this sector, not linear, reflected a bit in this quarter. We did bump our nose as Sue mentioned with the inefficiencies associated with the number of new programs and we are moving forward. We see no reason to change our projection, our goal remains $130 million in revenue for the year with 13 million in operating income, up or down predicated on the integration costs associated with Southern California Braiding. Any one that has acquired a company knows its integration is more than a 5 minute test. I can’t snap my fingers and make it happen, I tried. Clearly, to get there we will need to drive margins higher and we are confident that we’re able to do that.

With that we’ll turn the phone over – or the line over to the operator and take your questions. Thank you for listening.

Question-and-Answer Session

Operator

We will now be conducting a question and answer session. (Operator instructions) Thank you. Our first question is from Mark Jordan with Noble Financial. Please proceed with your question.

Mark Jordan – Noble Financial

Good morning, my name is Allen Toll (ph). I’m sitting here for mark today. First question I would like to ask is, could you give us some idea of the timeline on any improving margins from the Southern California acquisition?

Barry Gilbert

The margins will start to appear in Q2 and then for the balance of the year, the integration that I was referring to starts to deal with systems and the tools that we need to be able to communicate effectively between both organizations.

Mark Jordan – Noble Financial

Okay. And secondly could you give us an idea of your strategy going ahead as far as additional acquisitions?

Barry Gilbert

We are regularly looking for additional acquisitions, but we are not interested in just adding sales for the sake of sales. We are interested in adding in some kind of technical capability or expanding in an area of market sector that we believe wants additional attention. So, I think repeating the first sentence, we are still regularly looking at new opportunities.

Mark Jordan – Noble Financial

Okay. Thank you.

Barry Gilbert

Thank you.

Operator

Our next question comes from the line of Jennifer Welford (ph) with Comstock Partners. Please proceed with your questions.

Jennifer Welford – Comstock Partners

Hi good morning, again a question about the margins, so the margins were down a bit last year and sequentially. How much of this is related to the one-time issues, please give us a little more detail on that.

Barry Gilbert

Sure, so that I think that if you go ahead and you added back a little bump in the nose that we took to what we did report, you’ll in fact see that the margins are pretty close to what we’ve been running consistently. The question then become since we’ve done ahead in forecast, 13 million in operating income, then that means that we see improvements in our co-business and we also see improvements associated – in margins associated with the Southern California Braiding acquisition.

Jennifer Welford – Comstock Partners

Okay. Thank you.

Operator

Our next question comes from the line of John Walthausen with Walthausen and Company. Please proceed with your questions.

John Walthausen – Walthausen and Company. Yes, good morning. Thank you for addressing the issue of the inventory growth right up front. I wanted to ask a question a little bit differently because you compared it year-over-year, but actually sequentially you were I think about 12 million of inventory at year-end and accrued 18 (ph) you said 3.8 of that was due to the acquisitions sort of coming from your braiding, can you talk with or just to normal variation or some of the startup inefficiencies that caused inventory to build or give a little bit more that color on what’s going on the inventories?

Barry Gilbert

Okay. So, the net change that you identified is more or less $6 million and I believe as Sue mentioned that, and I’m rounding my numbers for the sake of this discussion, but you’ve identified them accurately, that approximately $3 million is associated with Southern California – the inventory associated with Southern California braiding, the remaining three is really associated with what was required to go ahead and support the bills for this quarter. I would like the world to be linear but it is not linear. And we had some early customer demands which were effectively for our fiscal month of January that warranted the soft being in late last year. And that’s what you saw in the numbers. So that – are you comfortable.

John Walthausen – Walthausen and Company

I should expect to see a few million dollars of variation even without acquisitions in yours as in versus what I would look as to normal turnover in your business.

Barry Gilbert

I think that’s a fair statement. But I believe that you’re going to start to see the numbers over the course of the next couple of quarters starts to level off. Part of this is, also understanding the pulse in the rhythm associated with Southern California Braiding. And candidly after six weeks we just don’t have that – we don’t understand that yet.

John Walthausen – Walthausen and Company

Okay, that’s fair enough. The other question I had with, you told $200,000 is approximately starting up the efficiencies, now starting up the new program by definition has the main efficiencies. With that, 200,000 more when you have planned for already just to say no there were new start-ups and therefore there was some of the efficiencies?

Barry Gilbert

Okay. So we weren’t dealing with our new program, we were dealing with multiple new programs. And we certainly planned on some new programs. But I think some of the changes that came about were materially more rapid than we had in vision. Anyone that’s involved in the contract manufacturing business clearly understands that the initial first few lots, you lose money. You’re literally chasing money to the boxes as they go out the door. And that’s well understood. It takes a while to be able to not only again capture rhythm but to make sure that everything is moving the way it should on the line consistent with what the customer is looking for when the final product is delivered. And it was just the large number of new programs, on the one side it was negative this quarter, on the other side it was bright going forward.

John Walthausen – Walthausen and Company

Great. Thank you very much. That’s helpful.

Barry Gilbert

You’re welcome. Thank you.

Operator

Our next question comes from the line of Robert Little from Morgan Chase. Please proceed with your question.

Robert Little – Morgan Chase

Good morning Barry.

Barry Gilbert

Good morning.

Robert Little – Morgan Chase

Thank you for having this call. Just, a couple of quick questions. I think Stuart mentioned the cost of your debt at 3.75, is that the average for the entire 47 million?

Barry Gilbert

That’s correct.

Robert Little – Morgan Chase

Okay.

Barry Gilbert

It’s a touch more than that I mean in the sense that we got some, our subject which is little bit higher than that from the value of that acquisition. But effectively 3.8, I mean, 3.75, 3.8, we were in the same area. Yeah.

Robert Little – Morgan Chase

Okay. And then in terms of Southern California Braiding, in terms of providing an on-trade into a certain company that perhaps you were not strong with before. Is it fairly broad or are there any particular times that they are giving and you went on trade to that you were not with before?

Barry Gilbert

So we were not with the north of government before and they advanced that. We didn’t have a very strong relationship. We had a very small relationship with Razion (ph) and that has been materially increased. And we have a very small relationship with Honeywell and that too has been substantially increased.

Robert Little – Morgan Chase

Thank you very much.

Barry Gilbert

You’re welcome. Thank you.

Operator

Our next question comes from the line of Garry Palmer with Retirement Solutions. Please proceed with your question.

Garry Palmer – Retirement Solutions

Good morning Barry.

Barry Gilbert

Good morning. Thanks for the great job you’re doing with our company.

Garry Palmer – Retirement Solutions

My question, is there any thought on your part to secondary offering, finances with the way you were going, was that 3 point, was that cost to money and is it available in that?

Barry Gilbert

The whole issue as to whether a secondary is required for further acquisitions or was it the banks will continue to support us. There is a constant discussion. But I’d like to, not only between the board and management and the bank. But with that said let me let me lift the conversation to another level if I can. And that is really the fact that we looked at our debt equity or debt of total capitalization. And as long as we are comfortable with that ratio we are likely to use debt. We clearly understand that on the one hand by issuing new shares we’ve increased liquidity and that will be very advantageous for the shareholders. We also understand on the other side that when we issue additional shares that we have diluted the shareholders’ position and in the last variable to go ahead and see is that the new opportunity is going to significantly increase. The value with company such as the shareholders, have enabled to go ahead and accept that dilution and the company is still going. And we’re going to think long and high about that. But we are absolutely recognizing that there’s a clearly an important and strategic alternative that we’re regularly considering. Long answer but I hope you get there.

Barry Gilbert

Thank you. I think we can keep going the way we’re going as far as I’m concerned.

Garry Palmer – Retirement Solutions

Thank you. I appreciate that.

Operator

(Operator Instructions). And the next question comes from the line of Stephen Shaper with Narromine, please proceed with your question.

Stephen Shaper – Narromine

Barry.

Barry Gilbert

Good morning.

Stephen Shaper – Narromine

Hi, terrific quarter. You guys are doing a great job. Could you talk a little bit about what you’ve seeing in the market in terms of acquisition opportunities or the opportunities flowing? And how do you see in terms of what the $130 million you are looking for, how do you break that down between organic and acquisition, do you

Barry Gilbert

Okay. I’m going to move in into the quarter if we can. And so in (inaudible) I’m not quite sure whether I would like picking is, I hope this is not disrupting the call on your end. But with that said, we said to the shareholders that we’re envisioning organic growth to be between 17% and 20%. And it’s close to the 20% and very little has changed from that standpoint. From the perspective of the acquisition we purchased a $19 million company. And we will work with them effectively three quarters of this fiscal year. We never looked for miracles in the first year of an acquisition. Because during this integration time we’re asking the management team to spend a lot of time bringing themselves closer to IEC which clearly removes them from doing they like to do best which is to go after new business and opportunities. And so with that said we’re not looking for more than $14 million or $15 million this year from that company and handsets the 130 that we’ve developed.

From the standpoint of acquisitions which was really the first part of your question. The acquisition, we’re seeing some very good acquisitions. It’s a little early for us right now since we think we’re still digesting the Southern California Braiding acquisition but nonetheless we are reading the documents that come to our attention. A number of them are, there are a few that are good and we’re trying to figure out how to make sense out of all of that. But there’s nothing imminent or immediate. I hope that answered to your question.

Stephen Shaper – Narromine

It does. Thanks very much.

Barry Gilbert

Thank you very much for the question. Take care.

Operator

(Operator Instructions) Our next question comes from Gerard McLean, a Private investor. Please proceed with your question.

Gerard McLean – Private Investor

Yeah. The question I had, it seems to me somewhere back in the past and certainly if I’m wrong about it, whether it is still the case or not. Due to the nature of your business the way you’ve structured it, it’s typical for competition to compete directly with you because of the way that you take things on you and various things that you do. And that sort of operation does not sell to things – or in competition as much as some business would be. Say correct or incorrect.

Barry Gilbert

Is that correct. Let me round out the simple statement of that’s correct. I mean, if we go back in IEC’s history they had, which was a wonderful history. They were involved with the telecommunications industry and with the computer industry. And both of those industries were forced to protect themselves during some very difficult times, and we all can remember to some degrees the Dotcom Bubble and so they were forced to go offshore. As IEC was rebuilding itself, the question became so what kind of business model would enable us to grow the business and protect the business without coming to all of those excruciating pressures. That doesn’t mean that we don’t have price pressure, we have some great competitors out there. And that doesn’t mean that there aren’t folks trying to go ahead and figure out how to take some of this work offshore but there are really three other dynamics which are coming to play at the exact same time.

One is that, many of our customers have their own proprietary technology and they are very low sum to go ahead and see this technology falling to hands, would say are seriously questioning we’ll be able to go ahead and protect that technology that’s one.

Two, we are also dealing with customers that traditionally don’t have very large, loss of work. And some of our lots will be 25, 50 or 100 maybe as much as 500, but there is very small loss, that becomes extremely costly to try to move that from a remote location back to the facility that’s consuming the product that we’ve manufactured.

And the last part of the deals was government restrictions, because a number of our customers but not all of them, but a number of our customers are restricted by a clear government guideline which simply says this work needs to be assembled on shore. So it’s the merger of those three items coupled with the Stark memory of IEC’s history that has built the organization that exists today. I hope that answered your question.

Gerard McLean – Private Investor

Yeah Barry, very good. I think it’s a good way to go. Thank you.

Barry Gilbert

Thank you very much.

Operator

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

Barry Gilbert

I would like to thank you everyone for joining us this morning on the call. And we will look forward to speaking to you again. Wish you all a good day. Take care. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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