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IEC Electronics Corp. (NYSEMKT:IEC)

F4Q 2011 (09/30/11) Earnings Conference Call

December 8, 2011 10:00 AM EST

Executives

John Nesbett – IMS

Barry Gilbert – Chairman and CEO

Susan Topel-Samek – VP and CFO

Analysts

Mark Jordan – Noble Financial

Scott Hodgson – MSI Fund

Steve Shaw – Sidoti & Company

Robert Littlehale – JPMorgan Chase

Operator

Greetings, and welcome to the IEC Electronics Fiscal 2011 Fourth Quarter and Year-End 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, Mr. 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 would 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 timing and volume of sales to principal customers; competition and technological change; the ability of the company to control manufacturing and operating costs; unforeseen product failures; and satisfactory relationships with vendors.

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 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 and thank you for joining us this morning. We had another solid year. Revenue growth was up 38%, with half of that coming from organic growth, particularly in the medical sector. Our medical sector inroads in the past two years have resulted both in growth of sales, but also just as important of the diversification of our customer base.

Backlog at the end of fiscal 2011 was over a $121 million compared to $91 million at the end of fiscal 2010. We are pleased since 20% of the backlog growth was organic, the balance is attributable to the SCB acquisition, and this puts us in a decent position as we head into our new fiscal year.

Finally, a key goal in the back half of the year has been debt reduction. We’ve discussed this on previous calls. We’ve reduced our debt $10.2 million in the fourth quarter and by $12.2 million since acquiring SCB last December. Su will expand upon my statements in a moment.

Our operating margin for the year was 7.8%, slightly below what we’ve historically achieved, but still industry-leading margins. We have not yet achieved the earning power we envisioned, and I’ll discuss more about that a little later.

Our Southern California Braiding acquisition is strategically very important to us. With that said, their sales have been below what we expected. During negotiations of the acquisition agreement, we’ve protected ourselves upfront against sales shortfall. As such, we recognized a favorable adjustment of $1.1 million in our other income for both the fourth quarter and our year-end.

I’ll turn the call over to Su to review the numbers and then I’ll provide you a bit more operational color before we open up for questions. Su?

Susan Topel-Samek

Thank you, Barry, and good morning, everyone. This morning we issued a press release detailing our fourth quarter and year-end 2011 results, which I hope you’ve had a chance to review. We will issue the full 10-K within the next couple of weeks.

I’d like to begin this morning by providing a brief overview of fiscal 2011 results and then I’ll address the fourth quarter details.

Top-line growth for the year was strong, even allowing for the fact that acquisitions accounted for half of the 38% increase. 2011 revenues were $133.3 million compared to $96.7 million in prior year.

Organic growth was driven primarily by expansion of our participation in the medical segment and also by expanding our relationships with some existing customers.

Gross margins were approximately 8.2% in the year just ended compared to 16.8% in the prior year. Contributing to this improvement were changes in product mix, improved labor efficiencies due to training, investments in capital equipment, lien process improvements, and accretive acquisitions.

2011 net income after-tax was $6.8 million or $0.68 per diluted share compared to net income after-tax of $4.7 million or $0.48 per diluted share in fiscal 2010. You will also note that net income for the year just ended included an adjustment related to our acquisition of Southern California Braiding which Barry mentioned earlier.

As we’ve indicated in prior calls, IEC used bank borrowings to fund 98% of the purchase price of our two most recent acquisitions. As a result, 2011 interest expense increased to $1.6 million compared with $815,000 in the prior year. Having said that, we are also pleased to report that as indicated in our last quarterly call, aggressive attention to working capital management enabled us as Barry already mentioned to reduce our outstanding debt by $10.2 million. This was well ahead of our internal plan and brought our total indebtedness at September 30th to $35.1 million from the high of more than $45 million, following our acquisition of Southern California Braiding. Through reduction in our leverage ratio, we have just achieved another 25-basis point reduction in our variable interest rate. This reduction was expected last month and reduces our effective borrowing rate to less than 3.5%.

Turning to the fourth quarter, IEC realized revenues of $34.9 million compared to $27.3 million in the fourth quarter of 2010. Of this, 28% increase almost 16 percentage points were attributable to organic growth.

Gross profit margin in the fourth quarter increased to 18.8% of sales, up from 17.5% of sales in the prior-year period. This increase is primarily the result of a favorable change in product mix.

SG&A was $4.1 million or 11.7% of sales in the quarter just ended, compared to $2.6 million or 9.7% of sales in the prior-year period. This increase reflects the addition of two new businesses since the beginning of fiscal 2010. We’ve also previously indicated that SCB has a higher cost structure than other of our units, due to the nature of the product line and market to service. However, its operating margins are similar to IEC as a whole. Nevertheless, SG&A remains higher than we would like it to be, and this is something that we are addressing in 2012.

As a result of the increased borrowing to fund our acquisitions, interest expense increased to $387,000 in the fourth quarter of 2011, compared with $220,000 in the prior-year period. Interest expense benefited modestly from an earlier fourth quarter rate reduction at 25 basis points on our variable rate borrowing.

For 2012, we expect to continue repaying debt at the rate of $500,000 to $750,000 per month on average. IEC's Federal and New York state taxable income has been and is sheltered by federal net operating loss carry-forward flowing losses incurred prior to 2005. These NOLs substantially offset payments that would otherwise have been or maybe required. The company's Federal net operating loss carry-forward at the end of fiscal 2011 amounted to approximately $24.5 million. IEC also has a New York state net operating loss carry-forward and we estimate that the Federal and state NOLs together will produce future cash tax benefits totaling $8.9 million or approximately $0.89 per share.

Net income for the fourth quarter was $2.6 million or $0.26 per diluted share compared with $1.6 million or $0.16 per diluted share in the prior-year period. Again during the current quarter, approximately $1.1 million or $0.11 per share is attributable for the adjustment associated with our acquisition of SCB.

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

Barry Gilbert

Thank you, Su. We have seen sales growth across all of our markets. However, our two largest sectors have treated the company well. Revenue growth in the medical equipment sector during the past two years has been significant, benefiting our business as mentioned previously, both in volume and diversification. The medical sector now represents approximately 22% of our business and we do envision that sector continuing to grow.

Our military and aerospace sector remained strong through most of the year, but tapered off at the end of the year, while our programs and platforms were not subject to Federal budget cuts, funding for a number of the programs have not been released. At the moment, we anticipate funding release will be an issue for the first half of 2012. We do not envision any programs being cancelled.

Overall, we are pleased with the acquisition we made in fiscal 2011 with Southern California Braiding and have spent time integrating Southern California Braiding for much of the year and envision doing so for the balance of this year. SCB has improved IEC’s strategic position by broadening our product offering and diversifying our customer base. SCB has not yet performed to our expectation. In the SCB closing document, as Su mentioned, we provided for adjustment, a claw-back, in the case of sales shortfall. In that regard, we recognized $1.1 million in other income. And I do want to repeat, it did impact our fourth quarter and our fiscal year-end results. We believe that SCB will be an outstanding asset for IEC, and their future is quite bright. We’ll continue to work through the issues that have affected its performance so far. As Su mentioned, we continued to improve our balance sheet. Our debt was paid down $10 million in the fourth quarter, $12.2 million in the SCB acquisition. We will continue to reduce our debt, and I’ll discuss more in a moment.

But I’d like to talk about 2012 and our goals for 2012. Our long-term organic growth goal is 17%. For this upcoming year, this will be difficult to achieve. We are not comfortable with the broad economic outlook and the political paralysis facing the company. From what we can see, organic growth is more likely to be in the range of 9% to 14%. We are on solid military and aerospace platforms. However, they have seen delays in release of Federal funding. Repeating, we do not see this changing for the first half and may last all the way through the election next year. Earnings growth; we see our earnings improving consistent with our sales. Our internal target is to double our percentage sales growth with our earnings growth.

With our concerns about the economy, we are focused on continuing to pay down our debt, maintaining and enhancing our strong balance sheet will remain a top priority. Debt reduction will not be as aggressive as it has been during this past quarter. We have some capital expenditures which are important to the business. With that said, we continue to evaluate acquisitions, acquisitions that add capability to the company. We believe our business is moving in the right direction and we’re confident about our ability to continue driving long-term value for our shareholders.

We’ll now turn the call over to you, so that you can ask us questions.

Question-and-Answer Session

Operator

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

Mark Jordan – Noble Financial

Yes. Good morning, Barry and Susan. Relative to SG&A, you had a sizeable $0.5 million sequential increase clearly more than I was looking for and looks like it was higher as a percent of revenue by 100 basis points to 150 basis points. Was there any specific one-time expenditures in that that inflated that number? Could you elaborate a little bit on why that increased so much?

Barry Gilbert

No – good morning, Mark. There were no abnormal one-time items or anything out of the ordinary. I think that as we work our way – you brought up the issue of our SG&A as a percent of sales on the last couple of calls and we mentioned the first time that it was presented that it’s going to take us two years to sort this out and I don’t see anything changing. In the short run, we have – we have grown, we have more companies, moving information around. It is just costing us more until we are able to go ahead and setup a smoother process from beginning to end that will eventually reduce cost as we are able to expand our system. That’s really about it. I don’t have much more to say beyond that.

And by the way, Mark, let me follow-on. I don’t envision that changing for the first couple of quarters of next year.

Mark Jordan – Noble Financial

Okay. Looking at the cash generation, obviously a very, very strong fourth quarter; part of that generation was a fact that you were able to or payables increased almost $5 million sequentially from $7.8 million in the third quarter. But the second quarter, I guess, is $11.2 million. So was your payable number abnormally low at the end of the third fiscal quarter and what would be kind of a normal rate for that? Should we assume that that comes down and be a drag on profit generation or a cash generation of first quarter?

Barry Gilbert

So that’s great observation on your part, because during the third quarter call one of the questions we had was should we go ahead and identify the fact that our payables came down substantially, but that our long-term debt hasn’t. And we decided, “You know what, that is something that was just not our cup of tea,” and we decided to make it clear, we didn’t pay down our loan debt as envisioned, and let the reader or investor interpret the information. It is now rebalanced and payables are higher. But at the end of the day one of the things that’s also come down and you can’t see it simply because you’re looking at two year-end periods. But if you end up comparing the inventory that existed at the end of this quarter, compare it to the inventory that existed at the end of the previous quarter, you’re also going to see an inventory fell substantially too. So there are a number of items that came into play from the standpoint of the success we had in – of paying down our debt.

Mark Jordan – Noble Financial

Okay. Let me just review your one statement relative to your – to the broad guidance and make sure I understand what you were saying. Specifically you said you saw revenues rolling in the 9% to 14% range, and I believe that you were trying to impart that a crude internal goal you had was to have the rate of growth of profitability be potentially twice that range, and of course that would be off of the base excluding the claw-back.

Barry Gilbert

That’s correct and thank you for being able to pick out that information as I stumbled over that sentence. But that is correct. That is our internal goal.

Mark Jordan – Noble Financial

Okay. Thank you very much.

Barry Gilbert

You’re welcome. Take care, Mark.

Operator

Our next question comes from the line of Jennifer Wolfertz [ph] from Comstock Partners. Please proceed with your question.

Jennifer Wolfertz – Comstock Partners

Hi, good morning, everybody, and great quarter and a good year. And I had a question regarding the margins. During the quarter, you guys reported 7% operating margins, which are good, but down a little bit from previous performance. Could you give us a little color on what you see moving forward and if you see earnings power resuming?

Barry Gilbert

Jen, thank you. Good morning and thank you for having listening to all of our calls. I recognize your name and your firm. And so one of these days, we’ll actually meet. But with that said, we do expect our earnings power to increase, but much of that is associated with the military and aerospace market. We are on very good platforms and we are on some successful platforms. And if they rebound to some degree then I believe our earnings power will increase. If not then our – then we’re likely to stay in the range that we’re in right now. I hope that I – did that answer your question?

Jennifer Wolfertz – Comstock Partners

It does, yes. Thank you.

Barry Gilbert

My pleasure. Take care, Jennifer.

Operator

Our next question comes from the line of Scott Hodgson from MSI Fund. Please proceed with your question.

Scott Hodgson – MSI Fund

Good morning. Just a quick question about your revenues in terms of SCB. Did you break that out for the year?

Barry Gilbert

In the K there is some disclosure that associates what they look like if they had been with us for the entire year. But we do not breakout any one operation per se.

Scott Hodgson – MSI Fund

Okay. Let me ask it little bit more generally. Did you – in terms of organic growth, did you achieve your 17% goal for 2011?

Barry Gilbert

We did. Our organic growth, I believe Su mentioned that organic was 19% for the year.

Scott Hodgson – MSI Fund

Okay, great. And I’m sorry to be slow on this point, but I just wanted to make sure that I understood, because I missed the couple of questions ago. Are you saying that you expect your net income to grow at twice the rate of your revenues for 2012? Is that right, or – because it says commensurately in the press release, so I just wanted to –?

Barry Gilbert

Yes. No, that’s our internal goal. And we respect to the fact that it’s a challenging goal, but we also respect the fact that we should at least provide our shareholders with some insight as to – so what is exactly is the company trying to accomplish? And so that's what we are trying to do.

Scott Hodgson – MSI Fund

Well, we sure appreciate the visibility there, and good luck.

Barry Gilbert

Thank you. Take care.

Operator

Our next question comes from the line of Alan Lyons [ph], a Private Investor. Please proceed with your question.

Alan Lyons – Private Investor

Right, good morning, Barry and Su. I had a question. You had a modification to the M&T loan back on November 17th with the one-time exception of not having to pay excess cash flow for the current fiscal year. I’m trying to understand, because I don’t have the 10-K or the total cash and best to the fact that you paid off as much as you did. How much was that – what kind of dollars were you talking about and was that because of a desire to use the money for capital improvements or what?

Barry Gilbert

No. So Al, inside the agreement it effectively went ahead and said to the point that you raised, any excess cash flow they were able to sweep away half of that. And what that really was going to do was just move money to payoff some of the term loan and then adjust that extra money, because we don't keep cash on the balance sheet, would then end up being an increase to the revolver. The bank was most courteous and appropriate when we identified that look, we're literally moving from the money from one side of the table to the other doesn’t make a lot of a sense. And they said, no, it really didn’t make a lot of sense, they agreed with the points that we raised. And what it really did is it left us with more of our revolver and our ability to go ahead and use it for working capital or fixed asset investments. But there was no specific fixed asset investment in mind when we had those conversations with the bank.

Alan Lyons – Private Investor

Okay. So it was just one flat fee of the other type?

Barry Gilbert

That's correct.

Alan Lyons – Private Investor

And as far as acquisitions, I mean has there been a lot of opportunities or a lot of thing that you’ve been looking at and what’s your take of maybe winding up with something and presently looking at in terms of the next fiscal year. Are you just not seeing that much that it's worthwhile throwing down from a perspective of purchase price, et cetera, that it just doesn't make any sense for IEC to do that kind of acquisition?

Barry Gilbert

So there are a number of variables that we work our way through. To answer the first part of the question, I guess, over the course of the year, I have reviewed documents that have been sent to me or I’ve physically visited locations, probably the better part of 25times. You've got to give four or five times on each side. But that’s not a bad number. And at the end of the day we were confronted with a couple of things. One, the businesses in some cases just really weren’t sound. And I see the small-cap company really can’t take on an acquisition that does not generate either income or cash for it really from the beginning. Very large company, Fortune 100 companies can go ahead and buy a $10 billion operation and tell you that the shareholders it will be accretive in two years. We don’t have that luxury.

The second element, and so we felt determined to spend our energies turning the company around, was not in our best interest, especially if it did not have anything extraordinary in the way of technology that it was bringing to the party where at least I can explain it – we can explain it to ourselves and hopefully explain it to shareholders.

The second part of that question or the second part of the answer revolves around the fact that many of the companies that were for sale, the pricing was just absolutely out of line with what we view to be reality. And so, we wished a number of those companies to buy. And the last part of it, if a company isn’t going to add technology where we can find ways to create one and one becomes three, where we can start a new business inside our company, a new little branch of the tree, we don’t really want to do that, to buy scale for the sake of buying scale at this stage of our development just doesn’t make sense to us.

Did I answer your question?

Alan Lyons – Private Investor

Yes, that’s – I think that has been your philosophy. So obviously there's a lot of things to look at, but nothing that's getting even close to becoming reality.

Barry Gilbert

Not at this stage.

Alan Lyons – Private Investor

Right. Okay, thanks.

Barry Gilbert

Take care, Al. Thank you.

Operator

Our next question comes from the line of Steve Shaw from Sidoti & Company. Please proceed with your question.

Steve Shaw – Sidoti & Company

Hi Barry, forgive me I got on a little bit late, so you may have mentioned this. That $1.1million for the SCB, is there any potential for that in the first quarter or is that done?

Barry Gilbert

So we end up going through a calculation and the calculation established was – we thought was a fair value at this time. At the end of next quarter, we will go through that calculation again and we will see if the amount is – goes up or down predicated on that calculation, but we’ve not looked at it at this point.

Steve Shaw – Sidoti & Company

Okay.

Barry Gilbert

Not any serious degree.

Steve Shaw – Sidoti & Company

All right. And then do you guys have the operating cash and the CapEx numbers for the year on hand?

Barry Gilbert

When you say – this past year or going forward?

Steve Shaw – Sidoti & Company

No, this past year.

Barry Gilbert

Yes. So the CapEx for this past year was $4.9 million. And when you talk about operating cash, I can really talk about the debt we paid down to cash – the operating cash flow debt, which what we stated earlier was $12.2 million. Is that what you’re referring to?

Steve Shaw – Sidoti & Company

Yes, that’s fine.

Barry Gilbert

Okay. And if you’re looking for on the cash flow statements, that section was talked about cash flow from operations, and that was $14 million. But again I may not have understood your question.

Steve Shaw – Sidoti & Company

That’s good, thank you.

Barry Gilbert

You’re welcome.

Operator

(Operator Instructions). Our next question comes from the line of Robert Littlehale from JPMorgan Chase. Please proceed with your question.

Robert Littlehorn – JPMorgan Chase

Good morning, Barry and Su. In terms of the capital expenditures that you envisioned for 2012, can you elaborate a little further in terms of the directions that those monies will be aimed?

Barry Gilbert

I can. I just – I’m not going to discuss the amount, because as we were just working our way. We’re being conservative. But it is driven towards equipment, productivity, and lab analysis, nested inside IEC, and it's been here for a while, is an analytical lab, and they need some new equipments. And we are expanding or buying some equipment that’s associated with some specific orders that requires certain processes that historically we had sent out to third parties, but we now realize we’re better off going ahead and dealing with it ourselves, because it actually could create a decent business for us. And so it’s something that we want to look at.

Robert Littlehorn – JPMorgan Chase

Great.

Barry Gilbert

Did that help you, Bob?

Robert Littlehorn – JPMorgan Chase

Yes, thank you, Barry.

Barry Gilbert

Thank you and take care.

Operator

Our next question comes from the line of David Grosvenor [ph], a Private Investor. Please proceed with your question.

David Grosvenor – Private Investor

Good morning, Barry. It’s Dave Grosvenor. How is the – what is your total employment rate now for the total – for all the companies that you have and what do you envision for 2012?

Barry Gilbert

I'll give you the answer to what we have right now. I’m not going to do the part about what we envision in 2012. But – and I’ll explain that in a second. We have approximately as I speak 800 employees. That’s not a perfect number. I’m going from memory. But that’s a pretty fair number. From the standpoint of the employees for 2012, as we grow, we’re going to need hire new employees to support our factory efforts, and there are some specific engineers that we’re trying to bring to IEC. But I hesitate providing you with the number or a forecast of what our total employment would be by the end of 2012.

David Grosvenor – Private Investor

Barry, it’s a long way from about a 100 back about seven years ago.

Barry Gilbert

It was a 118 to be precise, but who's counting?

David Grosvenor – Private Investor

I presume people are including you and it's been a good run.

Barry Gilbert

Well, thank you very much. I don't think our run is over by a long shot.

David Grosvenor – Private Investor

No, no.

Barry Gilbert

I think we’re going to be an awful lot larger tomorrow than we are today. But we got to walk before we run. Thank you.

David Grosvenor – Private Investor

Thank you. Happy Holidays.

Barry Gilbert

To you too.

Operator

(Operator Instructions).

Barry Gilbert

What I’d like to do in conclusion, I would like to thank everyone for calling in, and I’d like to wish everyone an enjoyable Holiday Season, a happy, healthy and prosperous New Year. We’ll look forward to talking to you at the end of the first quarter. Take care and thank you.

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