Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John Nesbett – Investor Relations

Barry Gilbert – Chairman and Chief Executive Officer

Susan Topel-Samek – Vice President and Chief Financial Officer

Analysts

Mark Jordan – Noble Financial

Jennifer Wolfertz – Comstock Partners

Roger Mantissa – Private Investor

Robert Littlehale – JP Morgan Chase

Robert Behr – Moloney Securities

IEC Electronics Corp. (IEC) Q2 2011 Earnings Call May 3, 2011 10:00 AM ET

Operator

Greetings and welcome to the IEC Electronics Second Quarter Earnings Conference 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. Thank you Mr. Nesbett, you may now 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 Susan Topel-Samek, Vice President and Chief Financial Officer.

Before we get started, I would like to take a quick moment to read the Safe Harbor statement. This conference call 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; and satisfactory relationships that matters.

The company's actual results of operations may differ significantly from those contemplated by any forward-looking statements as a result of these and other factors including factors set forth in the company's 2010 annual report on Form 10-K and in other filings with the Securities and Exchange Commission.

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

Barry Gilbert

Good morning. Thank you for joining us this morning. This is our second investor call. Last quarter, I mentioned I was not [ready] to the idea of regular quarterly calls. We don’t view our business on a quarter-to-quarter basis and don’t want our investors to either.

However, two things happened since our last call that prompted us to have a call this quarter. First, a devastation in Japan and during the quarter, I noticed excellent industry peers specifically Benchmark and Plexus along with IEC, we’re experiencing volatility in their equity price.

I realized it was inevitable for there to be questions as to how the damage from the earthquake and this Tsunami would impact our ability to get electronic components. Coupled, there were numerous media reports on how different industries were impacted or negatively impacted especially automotive and consumer electronics.

In summary, we were modestly impacted. IEC is experiencing limited component shortages from Japan and while they do exist are being replaced by other sources. Now, we continue to monitor the situation on a daily basis.

The second reason was a thoughtful conversation I had with an investor from Wyoming. When I asked him his thoughts on quarterly call, he said having quarterly call gives all investors big and small a chance to ask their question. It puts everyone on the same footing, and I agreed. And so with that said, let me continue.

IEC had a strong quarter. Over our financial metrics, operating income, gross profit, net income before tax, net income after tax all improved. We grew organically over 20% over the same period year-over-year. And with the acquisition that we have made, all this past year, our sales for comparable period increased 39%.

Specifically, operating margins improved to 9.5% versus 7.9% for the same period. These are some of the best margins in the industry and a testament to the value we provide our customers, the way we conduct our business as the markets we serve. I will now turn the call over to Sue Topel-Samek, who will review our financial information and then I will provide you with more detail from an operating perspective before we take questions. Sue.

Susan Topel-Samek

Thank you, Barry and good morning, everyone. As you have seen by now, we issued a press release this morning detailing our second quarter results. We will also issue our full 10-Q before May 15.

As Barry mentioned, IEC’s top line growth in the second quarter improved fully 39% over the level of sales generated in the second quarter of 2010. The two businesses we acquired during past nine month accounted for just under 50% of that increase. While our continuing operations accounted for just over 50%.

IEC’s organic sales increase is fueled by the expansion of our product offering and by increased sales in the medical sector, which in addition to growth also results in a healthy diversification among market sector.

Our second quarter growth profit was well above prior year performance, increasing from 16% in 2010 to just over 19% in 2011. This is due in part to operating efficiencies and product mix this quarter and in part to our newly acquired Southern California Grading or SCB as you will hear us refer to it, which typically operates this somewhat higher growth profit.

Selling and administrative expense increased during the second quarter as a percentage of sale from 8% in 2010 to 10% in the current year. This increase reflects the addition of the two new businesses during the past nine months and the incremental expenses we have incurred to integrate those new businesses.

We have invested in information technology and added certain staff needed to execute the company’s growth strategy. In the case of these two acquisitions, we have added staff in the finance area to provide the additional oversighting control required of a subsidiary of a public company.

In addition, certain of our acquisitions operate with somewhat higher cost structure but also produce more favorable profit margins. We remain focused on cost control and believe that near-term targets for consolidated SG&A expense in the range of 10% compared to sale will enable us to meet our commitments to investors, employees and other stakeholders.

Our interest cost increased from $260,000 in the second quarter of last year to $480,000 for the same period this year, as a result of incremental borrowings to fund our acquisitions. This increase interest expense was partially mitigated by a reduction in our effective interest rate from 5% one-year ago to just under 4% in the second quarter of this year.

Our upward trend in pre-tax income produced a corresponding increase in income tax expense as compared to the prior year quarter. However, as most of you know, we have a large several net operating loss carryforward, which at the beginning of fiscal 2011 amounted to approximately $33.2 million, estimated future cash benefit associated with the NOL carryforward at quarter end amount to approximately $11.9 million. So this is a considerable benefit to us going forward.

We saw a slight increase in our tax rate this quarter, because our NOl carryforward do not apply to state income taxes in New Mexico or California, where two of our recent acquisitions are based.

Finally, earnings per share of $0.17 is based on approximately 10 million fully diluted share, reflecting our ability to maintain a fairly constant share count over the past year in spite of our acquisitions.

Moving to the balance sheet, you heard us repeatedly that we are committed to managing working capital to maximize cash flow for investment in growth, reduce our debt and minimize interest expense.

While we have invested approximately $28 million in acquisitions since the end of the second quarter of 2010, our borrowings have only increased by approximately $26 million during the same period. This quarter we invested $2.5 million to support growth.

This significant and important investment for IEC includes the addition of capacity for one of our new customer and support for some emerging opportunities. We are planting the seeds for 2012 and beyond.

For the balance of this fiscal year, our cash flow from operations will be used to pay down debt, which we intend to reduce markedly by the end of the year. Our debt it is to repay approximately $1 million per month on average for the balance of this fiscal year.

Our inventories have increased from $12.1 million one-year ago to $19.8 million at the end of our second quarter this year. Approximately $4.1 million of this increase is associated with the acquisition of Southern California Braiding and Celmet.

The remaining $3.6 million represents an increase in inventories to support organic growth over the same period, including our response to request since several of our important customers to establish [cadence] for them. As a result, we will be very focused during the balance of this fiscal year on reducing inventory to reduce debt.

With that, I will now turn the call back to Barry.

Barry Gilbert

As mentioned few minutes ago, we had a healthy combination of both organic and acquired growth in the quarter. Looking at our sales growth from a different perspective, our organic sales growth was 20% for the second quarter in a row. Our goal has been and remained 17% year-over-year organic growth.

We are not forecasting lower quarterly sales for the balance of this year, hardly. What we are saying to new investors and to those familiar with the contract manufacturing industry 17% is what our [lands] enabled us to see for year-over-year growth in any acquisitions will be accretive to that. Some quarters will be higher, some quarters will be lower. When we are higher, we’re not [stand begging] and we are lower, we are not projecting doom. We’re identifying what we see.

Our acquisitions have performed nicely, both Celmet, our metals operation and Southern California Braiding, our second cable business are enabling us to expand our cross-selling activity bringing new capabilities to our existing customers and a broader offering to new customers.

Market sectors have shifted this past quarter. We experience particular strength in our medical and other sector, they grew from 13% to 20%, and that growth was driven by our medical customers.

Military, aerospace it represented 53% of our sales, down from 58% comparatively last year at this time – at the end of the year. However, the decrease reflects growth in the balance of the company, not a loss of either customers or programs.

Industrial, communication sectors stayed relatively flat at 27% as compared previously to 29%.

This quarter we invested $2.5 million in capital to support our current growth, emerging opportunities and as Sue mentioned, planting the seeds for 2012 and beyond. All investments have an element of risk, however, we believe our decisions are in the long run best interest of the company as a shareholder.

As Sue mentioned for the balance of the year, our intention to use our cash flow from operations to pay down debt which you should see markedly reduced by the end of the year. I am not a fan of debt, however, it is an ends to our means and has enabled us to accomplish some of the acquisitions that we have recently brought to the company.

As you know, we do not report backlog during the year. We do provide a mid-year update, a directional statement which is consistent with our position that the business should be viewed from a long run perspective.

Our backlog reported at the end of the year in our 10-K with a little over $90 million at the end of this quarter, our backlog is nicely over $90 million and this figure does not include the backlog acquired with Southern California Grading.

It is also important to note that some of our backlog extends out to 2014 consistent with what we have reported at the end of last year and what we expect to be the case going forward. Some of our military customers place their orders years in advance to assure capacity and to enable us time to secure some very long lead items.

Looking forward, we expect our previously stated goal of a $130 million of revenue for this year to be exceeded. And we expect our operating income to be in a range between 9.5% and 10%.

I’ll now turn the call over to the operator and she will ask those participating on this call, if they have any questions. I will ask you to state your name and unless you are an individual investor, so please state the firm you represent. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Mark Jordan from Noble Financial.

Mark Jordan – Noble Financial

Good morning everyone. Question -- question from the balance sheet, looking at the December quarters balance sheet and this one ends specifically at intangibles and goodwill and [PPNE] in the December quarter of intangibles and goodwill were 21.6 million this quarter, there are 18.4 looks like PPNE has gone up, is that a function of just finalizing the books that you shifted some of the goodwill to actual intangible assets and then also increase PPNE like that amount and in addition to the larger addition to the CapEx, is that the moving pieces?

Barry Gilbert

So that’s exact – Mark, you’re just about right. At the end of the quarter, at the end of the first quarter, we had really been involved with Southern California Grading for about 14 days. And we had not completed our evaluation of the fair market value of the assets. And once that became known along with valuing a customer lift and other intangibles, it enables us then to take what we had as a lump figure and bring it back to the proper category.

Mark Jordan – Noble Financial

Okay. On the -- you mentioned, over the near term that SG&A should run at about 10% of sales over the longer term going out a year or two years. Do you have the ability to leverage that to the knock back to the 9% range or is it something where you investing in your future, you’ll probably say around the 10% level amount?

Barry Gilbert

No, I think it has a very fair perspective in your part. To answer, do we have the ability to do that, yes. So we want to go ahead and sacrifice future growth and our relationship with our customers. I think we’re going to figure that out over the course of the next couple of years, but to bring it from 10% to 9% is not an unreasonable goal or objective over the course of next couple of years.

Mark Jordan – Noble Financial

Final question and then all, we’ll relinquish here. The CapEx $2.5 million, I think you talked about $3 to $4 million for the year. With the addition that you made in this quarter, you did mention you’re adding capacity, did you also add any new feasibility with -- to service new customers?

Barry Gilbert

Well, so we have added some new capabilities for an emerging opportunity that we’re not prepared to discuss. But with that said, we have -- it is -- it was a -- a good portion of the capital was capacity driven along with what was necessary to make sure that we support our absolutely, positively perfected on time, vision with respect to the final products that we produce and ship. Does that answer your question?

Mark Jordan – Noble Financial

Yeah. Thank you.

Barry Gilbert

Welcome. Thank you. Take care, Mark.

Operator

Thank you. (Operator Instructions) Our next question comes from Jennifer Wolfertz from Comstock Partners.

Jennifer Wolfertz – Comstock Partners

Good morning.

Barry Gilbert

Good morning, Jennifer.

Jennifer Wolfertz – Comstock Partners

Could you talk a little bit about that -- the current acquisition strategy? I’m not sure, if you are still looking for acquisitions, kind of where you stand on that, on the acquisitions?

Barry Gilbert

We are looking for acquisitions. We are fortunate enough to be presented with a number of opportunities. Over the course of this past month, I’ve looked at four, to be precise and turned them all away. I think to go ahead and just add volumes -- for the sake of adding volume is not where we want to be.

We want to be able to go ahead and increase the capabilities that we are providing to our customers, or to take increase our position in some very specific market. And even though, the companies that have been presented to us are certainly respectable opportunities. They’re not opportunities that are fitting into that type of a grid that I just outlined. So, I guess in summary, yeah, we are still looking.

Jennifer Wolfertz – Comstock Partners

Makes sense. All right. Thank you.

Barry Gilbert

Thank you.

Operator

Thank you. (Operator Instructions)

Barry Gilbert

Well, on that note, we’ve had a couple of questions and on behalf of the Board of Directors, the management team and all of its employees, we want to thank you for your continued interest in IEC Electronics. What? I take that back. I apologize. We do have another call. You’ve already heard another question. You’ve already heard my conclusion, so. Can you guys, operator?

Operator

Yes. Our next question comes from [Roger Mantissa] and is a private investor.

Roger Mantissa – Private Investor

Good morning, sir. This is a -- I’m a private investor and one of the items that I acknowledged coming up quite frequently on [March], is the zero amount of cash on the balance sheet and how that might negatively effect potential shareholders and therefore restrict the trading of the stock, not being in the company but have no opinion on that and (inaudible).

Moment to answer question, that’s why I asked that final question.

Barry Gilbert

Roger, two things. First, I’ll answer the questions. Second, I do apologize. We have a screen in front of us and the screen goes ahead and provides when someone is asking a question and when it goes blank for a while, so hence, I move forward into my conclusion. And so, I do owe you that apology and everyone else. With that said, let me answer the following.

We look at -- we don’t believe that having cash on the balance sheet is a productive use of resources. It’s almost like window dressing. In the following sense, we can easily put money on how our balance sheet, so that is not a problem. We can put millions on our balance sheet at the end of any quarter. And all we are going to end up doing is or we are going to end up doing is, going ahead and increasing or temporarily increasing our revolver.

And so, to me that’s just moving air in a balloon. I believe that every dollar we receive should go to pay down debt. I don’t like debt. It is a tool to be wisely used and somehow window dressing on the balance sheet, I just think is not appropriate.

Roger Mantissa – Private Investor

I can to agree with you, thinking that’s it an underutilized resource. However, it’s not the sophisticated is, are some of the other investors are concerned. They thought it might -- in essence to diminish or retard the growth of the -- price per share. Thank you very much for your response and I wish IEC and its employees much continued success.

Barry Gilbert

Well, Roger, let me go ahead and just stand for a second. I appreciate that you’ve sort of disconnected, but if this were a company then we are under financial stressed. To the point that wants further discussion, again, it absolutely makes sense that they would be cash on our balance sheet.

So that it would be able to protect us and while we were -- we were working our way out of any financial distress, we are experiencing. We are fortunately not in that decision. And so, as a result, we’ve chosen to pay down our debt with whatever cash we receive. So, thank you for your thoughtful question.

Roger Mantissa – Private Investor: Thank you.

Operator

We have another question. Our next questions is coming from Robert Littlehale from JP Morgan Chase.

Robert Littlehale – JP Morgan Chase

Good morning, guys.

Barry Gilbert

Good morning, Bob.

Robert Littlehale – JP Morgan Chase

In terms of your appearing into a crystal ball, does it relates to the destructions that are occurring in Japan do you have any sort of sense of when those issues might be resolved?

Barry Gilbert

As far as the suppliers for our component -- I want to say out of the thousands and thousands of different components that we purchase, we have probably 45, and that’s a guesstimate, that have given us some cause for concern. Of the 45, I want to say the better part of 40 of them have been either sourced through another source with our customer’s approval knowledge and endorsement or alternatively we have been able to go ahead to the point it’s too [bright], increase some of our inventory to be able to protect our customers.

So we have about 5 which gives us a little bit more concerns than not. Those 5 happen to deal with some of the chemistries associated with the manufacturer of some specific chips, our customers are well aware of it, they are far closer to the solutions than we are, and we believe they and coupled with some of our help making great strides in a newly arranging any of the issues associated with the remaining five. And now that is a long win to answer to say that we will be out of arms way, but my guess is, that it’s going to take the general supply chain, those involved in automotive and consumer products, the better part of this year to sort out their supply chain issues. I answered your question, Bob?

Robert Littlehale – JP Morgan Chase

It does. Thank you, Barry.

Barry Gilbert

You are welcome. Take care.

Operator

Thank you. At this time we have no further questions.

Barry Gilbert

Well, you’ve heard my conclusion, but I will correctly say it again. I am most appreciative on behalf of the Board of the Directors, the management team and all the employees that we continue -- while I take back, we do have one more question.

Operator

Our next question is coming from Robert Behr from Moloney Securities.

Barry Gilbert

We will be in full today.

Robert Behr – Moloney Securities

Hey, Barry -- congratulations on a stellar quarter.

Barry Gilbert

Thank you, Bob.

Robert Behr – Moloney Securities

Really outstanding. I just have a question relating to the military and aerospace business, which, I guess, decreased to 53% from 58% you said?

Barry Gilbert

Correct.

Robert Behr – Moloney Securities

Are you comfortable with the 53% number? Would you like to see that lower that -- do you feel you are too dependent on that sector or -- ?

Barry Gilbert

No. I think there are a couple of things that are important and nested inside this entire concept called military, and I believe that every time we read in the newspaper that the military budget is being adjusted and certainly currently there is a lot of pressure on Congress to do so, to adjust it downward, there seems to be this implication that lots of companies are -- or that we are losing a lot of our programs, and at the end of the day we really aren’t losing our programs.

Some of our programs are being expanded, and I think if you end up looking at the programs that are being cut or adjusted negligibly adjusted, the programs that have experienced significant overruns, there are programs that have been substituted with frankly better technology and better choices, and there are programs where the new technology isn’t as materially more robust or capable then some of the existing technology.

Now that was a broad paintbrush that I just used across a wide swamp of everything that existed in the military. But I believe in summary, the space that we are involved in has not been or the area of niche that we have been involved in has not been [cut] of anything it is actually expanding. And so, I am comfortable with not only our position but I think I am comfortable with the future of our position, and I don’t look to go ahead and reduce that percentage.

It might happen because every sectors of our business will outgrow that sector, but we are not making any conscious effort to diversify away from that the military, aerospace, defense and space itself sector.

Robert Behr – Moloney Securities

Okay. That’s good.

Barry Gilbert

Okay. Thank you. Take care, Bob. See you.

Operator

Thank you. (Operator Instructions) It appears we have no further question at this time.

Barry Gilbert

I would like to thank everyone for joining us on the call this morning, and I -- we look forward to speaking with you in the future. Take care. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: IEC's CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts