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Executives

John Nesbett – IMS, IR

Barry Gilbert – Chairman and CEO

Susan Topel-Samek – Vice President and CFO

Analysts

Mark Jordan – Noble Financial

Jay Kumar – Midsouth Investment Fund

Jennifer Wolfertz – Comstock Partners

Alan Leons – Private Investor

Steve Shaw – Sidoti & Company

IEC Electronics Corp. (IEC) Q3 2011 Earnings Call August 8, 2011 10:00 AM ET

Operator

Greetings. And welcome to the IEC Electronics Fiscal 2011 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A 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 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’d like to take a 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 those and other factors, including factors set forth in the company’s 2010 annual report on Form 10-K and other filings with the Securities and Exchange Commission.

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

Barry Gilbert

Good morning and thank you for joining us on our call. Despite a number of challenges facing the industry as a whole, we had another solid quarter. Overall revenue increased by 32% and our organic revenue growth was 14%. We are building a stronger company and have grown our technological capabilities over the past few years. Our expanded customer base has been reacting positively and we are seeing additional business from new customers and cross-selling activity.

We are a bigger company and we may occasionally be prone to having some quarter below our own expectation that was the case this quarter. As mentioned on a number of occasions our growth is not linear. We try to manage the company on a year-to-year basis and perspective. Revenue was $3 million below our plan, brought that by three unrelated events.

First, the delay in finalizing the federal defense budget cause the number of our programs to be delayed, while we ultimately got them all and expect to be on more platforms they were nonetheless delay. We have some unplanned downtime in certain equipment late in the quarter, early in the quarter we can catch up, late in the quarter we do the best we can.

We had an unusual number of late quarter customer change orders, some of these delayed revenue which will capture next quarter. The vast majority will be absorbed in future quarters. Our operating profit increased 15.7% compared to prior year, below our plan but still a solid quarter. In some industry and for many companies in our industry this level of growth would be viewed as excellent, but we are not satisfied.

At the same time, we are now in the mix of executing our plan to digest Southern California Braiding, a process mentioned during our January call would take fully 12 months and would not be an inexpensive process. This plan includes communication tool, information system and reengineering aspects of the business process to fully enable us to deliver the value we expect from this transaction. We are taking a private company and transforming it to meet public company standards.

Let me now turn the call over to Sue Topel, who will go over the numbers, after that I will give you a bit more operational texture before opening up the line for questions. Sue?

Susan Topel-Samek

Thank you, Barry, and good morning, everyone. As you have seen by now, we issued our press release this morning detailing our [second] quarter results. We will also issue our full 10-Q before August 15th. As Barry mentioned, we have overcome industry-wide and company challenges to deliver another quarter of strong topline growth.

Overall revenue increased 32% from the prior year quarter. The two businesses acquired since the end of last year’s third quarter accounted for 59% of this increase, while our continuing operations produced 41% of the growth that translate to organic growth of 14%, which was principally driven by execution of our diversification strategy.

We increase penetration into the medical, other, and industrial and communication sectors with sales into both growing faster than new era of quarter-over-quarter. Gross profit while up $1.5 million on sales volume remained steady year-over-year as a percentage of sales at 17.8% that was however up from 18, I’m sorry, up from 16.8% for the full year 2010.

I would like to address for you, why these impressive increases were not reflected in our results on a net income line and what we are doing about it. While decreasing of this sequentially, SG&A increased approximately $1.2 million over the prior year quarter that is 100 basis points from 9.2% to 10.2% of revenues.

Approximately 25% of that increase is associated with supporting organic growth in our continuing businesses, while 75% is associated with the two businesses we acquired after the third quarter 2010, Celmet and Southern California Braiding.

In addition to incurring costs generally associated with the integration of these businesses, we mentioned last quarter that SCB operates with somewhat higher cost structure compared with other parts of our company. We also mentioned last quarter that we have added some finance and IT desk of the headquarters level that is needed to run a larger more diversified and more complex public company. Based on the combination of these factors we anticipate maintaining SG&A at approximately 10% revenues in the near-term as the company grows and over the next few years, we’ll be looking to leverage that debt down towards the 9% level.

Our interest expense increased to $491,000 in the quarter just ended, up from $238,000 in the prior year quarter. Substantially all this increase is due to barrowing to finance the acquisition of Southern California Braiding. Beginning with the fourth quarter of 2011, our borrowing rates and our bank debt has dropped by 25 basis points. So our effective borrowing rate is now approximately 3.5% down from 3.7% during the quarter just ended. And we do expect our interest expense to be substantially reduced over the next couple of years as we focus on repaying debt.

Reviewing our balance sheet, we’ve certainly seen that as of the end of the quarter we have not delivered on our promise to pay down approximately $1 million per month of debt. We view this shortfall as mostly of timing issue attributed to the bank factors as Barry mentioned earlier and as a matter of fact by the end of last week, our pending debt was just under $42 million, reflecting a $3 million reduction since the end of our third quarter. This is right where we expected to be at this point in the year, based on our internal debt reduction objective, we just didn’t get there by the end of the third quarter.

Continuing with the balance sheet, inventories decreased $2.3 million sequentially to $17.5 million from $19.8 million at the end of the second quarter, as we have said before, we are committed to managing working capital to maximize cash flow for investment and growth to reduce our debt and to minimize interest expense.

As a reminder, the company’s federal net operating loss carryforward at the beginning of fiscal 2011 amounted to approximately $33.2 million, which is a significant value to us. In the near-term, IEC’s federal and New York state taxable income itself inviting NOL, substantially offsetting tax payment, so would otherwise be required.

However, these carryforwards are not eligible to offset taxable income generated in the state of New Mexico and California by our Albuquerque and SCB operations, respectively. As a result, while our tax expense for the year will be approximately 37% of net income before tax we expect our cash taxes paid for fiscal 2011 to be approximately $350,000.

In summary, we believe we have a strong balance sheet, positive free cash flow generations and solid operating margins that continue to improve year-over-year and will enable us to invest in growth and further deleverage.

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

Barry Gilbert

Thank you. We have seen growth across all of our market sectors. Our revenue growth in recent period has come from an expansion into sectors within which we’re previously less active. Specifically, the military sector during the past two years has grown to be 20% of our business, that benefits us in both volume and in diversification from a broader perspective and in terms of absolute sales dollars, IEC’s business in all three key sectors, military aerospace, industrial, communication and the medical sector have grown in access of 20% during the past year.

From an acquisition perspective, we are please with the acquisition that we have made, well, there are bumps along the way, I’m increasingly optimistic about the acquisitions driving shareholder value. Our most recent acquisition Southern California Braiding, which recently received the $5 million order from one of their customer, was a privately held manufacturing company of high reliability wire and cable harness products for the military and defense market, and it was purchased in December of 2010, they have an immensely bright future. But it is choppy right now, as we work our way through integration issue.

Looking forward, we do not report our backlog during the quarter, it remains strong and it is increasing. We focus on long run perspective for the company and run our business with that perspective in mind. In spite of what you are reading the newspaper about military customer economy, we believe the segments of the military market, which we are participating in and some of the platform that we are on, are counter cyclical and not likely to be disrupted by the ongoing debt feeling debate. Actually, we continue to believe, that we will see an increase in our military of business and we put on more platform.

It is important to note, however, that with respect to our military backlog, some of the backlog extends out well passed 2040. Some military customers place their orders years in advance to assure we can secure the components and have the capacity to support their needs as our business grows. Our industrial and medical markets are growing, though we are starting to see a modest slowdown, within one of the sub-segments of the industrial market, but not the broad industrial market.

We remain on track to make our previously stated goal of more than $130 million revenue this year. We’re having a very good year. In the simple instance, our business is moving along very nicely, we’re growing rapidly and we are confident about our ability to continue to drive long-term value for our shareholders.

We’ll now turn the proceedings over to the operator, now we’ll take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Mark Jordan with Noble Financial. Please state your question.

Mark Jordan – Noble Financial

Good morning, everyone.

Barry Gilbert

Good morning, Mark.

Mark Jordan – Noble Financial

Barry, when do you see the bulk of the integration efforts that SCB being completed?

Barry Gilbert

It will take the balance of the fiscal year, which is we’re in our fourth quarter and tangibly it’s likely to go ahead and moved into the first quarter of next year. It is a long process for us.

Mark Jordan – Noble Financial

Okay. I guess, if you look at the last quarter and this quarter you perhaps sort of the good and the bad in terms of gross margin performance, as you continue to grow into the fiscal ‘12. Do you believe that on an average basis that you should be able to maintain of average gross margin, excuse me, the average operating margin the next step is 9%?

Barry Gilbert

We see that a range of between 9% and 9.5% is a very reasonable range for us. Mark, I think like everything else there maybe a quarter where it dropped down to 8%, there maybe a quarter where it strikes up to 10% and that doesn’t mean that we’re stand back as it move 10% and that we’re bloody unconfident when it falls backward to 8%. I just -- but I think it’s a range between 9% and 9.5% it’s a reasonable range.

Mark Jordan – Noble Financial

Okay. Another question, relatively talking about extending DOD opportunities, are you seeing the OEM’s outsourcing for you of existing platforms, are you seeing new business comes from new projects?

Barry Gilbert

So we’re seeing a number of things, we are seeing only new projects and that I would say is probably the vast majority and this are special projects and these are platforms that are not likely to be collapse. They maybe stretch but not likely to be canceled and that’s from our understanding.

We are also seeing some come to us because some existing suppliers are just not performing and so we are picking up some work. And the last is, that we’re also picking up some legacy work, these are platforms that need to be maintain for many years and some of the primes are effectively saying, we like you guys to handle this for us.

Mark Jordan – Noble Financial

All right. And do you have a sense as to, how much of your DOD business is going into the reset markets?

Barry Gilbert

No. I don’t.

Mark Jordan – Noble Financial

Okay. Which would be…

Barry Gilbert

Probably not large amount.

Mark Jordan – Noble Financial

Okay. And then a final question relatively, can you give us a little more of an idea what that the equipment issue was that the machine or whatever that went down?

Barry Gilbert

I’d like to think it would be just a machine but it was a couple machine and they went ahead and impacted the company probably to the tune of $700,000 that’s particular event by itself. And there was nothing more than it was equipment that’s required an final test that after you’ve build the product, you’ve now got to go ahead and test it and some of that are functional tester and some of the functional testers are not necessarily things that we end up building or buying, prepared for us and whenever – they have a problem…

Mark Jordan – Noble Financial

Okay. Well, thank you very much.

Barry Gilbert

My pleasure. Thank you. Take care, Mark.

Operator

Our next question is coming from Jay Kumar with Midsouth Investment Fund.

Jay Kumar – Midsouth Investment Fund

Hi, guys. Question on that SG&A, do you think that it’s going up or it’s going to be flat at, what it is for this year?

Barry Gilbert

No, Jay. So, one of the things that we’ve done here and mentioned and it was during our last call, was the fact that we believe that it will take us two years to go ahead and bring that SG&A down to a more appropriate level towards a 9% level. We have a number of programs that we’re working on that warrant investments and these are things that we believe are going to make the company a lot stronger position us somewhat differently. And it’s going to take time to work through and make sure that we have exactly what we want.

Jay Kumar – Midsouth Investment Fund

Do you foresee any insiders of the company buying stock at this price…

Barry Gilbert

What a great question? But it’s one I can’t answer. But that is – but it is a really good questions.

Jay Kumar – Midsouth Investment Fund

Yeah. I mean, looking at the way the company is growing and on the number that this way to achieve that here.

Barry Gilbert

Well, I think, now, that part I can comment on and I can say that we agree with you, but I certainly can’t offer you any insight beyond -- offer you an agreement.

Jay Kumar – Midsouth Investment Fund

Yeah -- it sounds like -- I think the biggest thrust for an investor or a shareholder would be an insight as buying into the stock of these levels actually boost the confidence as opposed to you guys just doing a great job with the business.

Barry Gilbert

Well, thank you. I appreciate with Topel-Samek the small cap company you have two issues. One is that the business model, and two you get the jockey which is effectively the team in the board that is guiding the company, and I would like to think over the course of last six years we have been able to demonstrate as opposed to business models, and if a jockey were moving in the right direction. So thank you for your confidence, but I cannot discuss the intentions of any particular board member or even my own.

Jay Kumar – Midsouth Investment Fund

Okay. Thank you very much.

Operator

(Operator Instructions) Our next question is coming from Jennifer Wolfertz with Comstock Partners. Please state your question.

Jennifer Wolfertz – Comstock Partners

Good morning, Barry. Could you just, I guess, what’s a good gross margin number to you going forward for modeling purposes?

Barry Gilbert

Jennifer. Thank you. It’s a good question. We believe that similar to the question that was asked by Mark Jordan who focused on the operating margin line, the gross margin line is going to move in the range between 18% and 19.5%, and once again it’s the slip below 18 -- we are not liars or incompetent, and if it goes above 20% we are not sandbaggers, but that is the best that our lens show right now.

Jennifer Wolfertz – Comstock Partners

Okay. Great. Thank you.

Barry Gilbert

Thank you.

Operator

(Operator Instructions) Our next question is coming from Alan [Leons] a Private Investor. Please state your question.

Alan Leons – Private Investor

Hi, Barry. How are you?

Barry Gilbert

Good. Thank you. How are you?

Alan Leons – Private Investor

Good. Thanks. The question I had was -- I think you mentioned about EBITDA for the year, I presume the $15 million target is going to be difficult a to reach based upon the last’s quarter? Is that a fair assumption or -- ?

Barry Gilbert

No. I think that when we characterize the $15 million of EBITDA, and that was discussed literally in the very -- I want to say in the very -- right after we purchased Southern California Braiding. So it was in that late December time period and so that -- our wins that’s what our lens saw at the time.

I believe that when I discussed it with anyone, it was always the range saying that again, if it falls to 14 it doesn’t make us either liars or incompetent and if it runs to 16, we are not playing games with the numbers it was a just the best wins that we had. And so I don’t think that we are prepared to go ahead and change that number but that I do believe it is certainly more challenging to achieve, but I think it will be within the range that was stated.

Alan Leons – Private Investor

Okay. Thanks, Barry.

Barry Gilbert

Pleasure. Take care, Al.

Operator

Our next question is coming from Steve Shaw with Sidoti & Company. Please state our question.

Steve Shaw – Sidoti & Company

Hey, Barry.

Barry Gilbert

How are you?

Steve Shaw – Sidoti & Company

I’m good. How are you?

Barry Gilbert

Thank you.

Steve Shaw – Sidoti & Company

When do you see integration would be complete for SCB?

Barry Gilbert

Though, it was mentioned a little bit earlier in the call and you may have missed it, normally the integration would take -- it will clearly take a full year, and so our year was down will close at the end of Q1 of 2012, and I think it’s -- we have about six more months of work. It might drift into a little beyond that, but six months isn’t a bad figure.

Steve Shaw – Sidoti & Company

Okay. And then any of those issues that you guys faced in the third quarter or both, still well into the fourth well?

Barry Gilbert

So, well -- so of the issues, I certainly don’t believe that the signing of the defense budget and the issues associated with the negotiations with the debt dealing the signing of the defense budget has had, negotiating a debt dealing -- I really do believe that we are on platform which is going to bypass much of – if not all of that discussion.

With that said, we can have equipment issues at any time, and in the beginning of the quarter we are in great shape, at the end of the quarter we close our eyes and just do the best we can. Do Ii think it’s going to happen again? No, I don’t, but I can’t ignore that probability.

From the standpoint of customer changes, it was a unusual and we don’t see that again this quarter, but again it’s coming from a couple of customers and these couple of customers are doing well, but they are grinding and they are seeing things in their own market. And at the end of the day, we agree with one of them and we completely disagree with the other from a standpoint of their perspective of their end market.

Now you would think that they would know more then we would, but we have a way of keeping an eye on some of their end market, and so I think in one case is exaggerated and the other case it’s spot on. That’s a long answer, did I answer your question?

Steve Shaw – Sidoti & Company

Yeah. Thank you. And finally do you guys have a CapEx number handy for the quarter?

Barry Gilbert

We believe that our CapEx is getting run -- hope for the quarter, so we look at it annually, and so our annual number are about $4 million we -- this quarter had a very little CapEx, maybe about $1 million. Last quarter, I know, it was $2.5 million, but we see about $4 million to $4.2 million for the year. So, again, we look at things from an annual perspective.

Steve Shaw – Sidoti & Company

Fine. Thanks Barry.

Barry Gilbert

Okay, take care.

Operator

(Operator Instructions) We have a follow-up question coming from Mark Jordan with Noble Financial.

Mark Jordan – Noble Financial

Very good morning again. Question relative to, taking away business, you mentioned that there were a few of your competitors who are having difficulty performing, I guess, another question would lead to mind is, do you think that the recent purchase of [Lafarge by Orascom] gives an opportunities for you to stand business, along for that company?

Barry Gilbert

Lafarge is a very creditable competitor and I see that no reason why they would instantly start to deteriorate and their performance would evaporate in the short-term. I think in the long-term a lot of this can be predicated on the common strategy for the company because when you look at the common overall, you don’t see a company that has participated in as many -- non military market such as industrial and medical, and I think only they can sort out the strategy whether that presents opportunity for --

Mark Jordan – Noble Financial

Thank you.

Barry Gilbert

My pleasure.

Operator

Gentlemen, there are no further question at this time. I would now like to turn the floor over to management for any closing comments.

Barry Gilbert

I would like thank all of you for joining us this quarter. We did as a solid quarter, it was not what we wanted it to be and probably not what you want it to be, but we go ahead and we look at the last six years of growth and we look at the number of quarters in which we have gone ahead and improved comparatively over the previous quarter, my guess is it’s running on a string of previous, I’m sorry, the same quarter the previous year, my guess is it’s a string of pretty close to 24 quarters. Thank you for your interest in IEC, and we sincerely look forward to talking to you at the end of next quarter. Take care.

Operator

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

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