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IEC Electronics Corp. (NYSEMKT:IEC)

Q1 2012 Earnings Call

February 8, 2012 10:00 a.m. ET

Executives

W. Barry Gilbert – Chairman and CEO

Jennifer Belodeau – IMS

Analysts

Mark Jordan – Noble Financial

Steve Shaw – Sidoti & Company

Bill Bloom – Comstock Partners

William Jones – Singular Research

Robert Littlehale – JPMorgan Chase

Alan Lyon

Operator

Greetings, and welcome to IEC’s Fiscal 2012 First Quarter Financial Results 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)

It is now my pleasure to introduce your host, Ms. Jennifer Belodeau. Thank you, Ms. Belodeau, you may begin.

Jennifer Belodeau

Thank you. Thanks everybody for calling in. On the call this morning, we have Barry Gilbert, Chairman and CEO, as well as Vincent Leo, Interim 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 volume of sales to principal customers; competition and technological change; the ability of the company to control manufacturing and operating costs 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 2011 Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission. References to Non-GAAP financial measures in this presentation are reconciled to GAAP measures on our website iecelectronics.com.

With that out of the way, I will turn the call over to Barry Gilbert. Go ahead, please Barry.

Barry Gilbert

Thank you for joining us this morning. This was a most challenging quarter for IEC. We thought we might see some softness in this quarter and that is in fact the case. Key sections of the company continues to perform well, revenue did grow 18% with 12% coming from organic growth in line with our guidance.

The growth was in the medical and industrial sector. Our business supporting medical equipment sector has nearly doubled compared to the first quarter of last year and represents approximately 28% of our sales in the first quarter. That said, we experienced a decrease in revenue from the military and aerospace market caused by continued delays in military funding.

Southern California Braiding has had a difficult quarter with sales remaining below what we expected. They’re a most important acquisition for us strategically. However, lower revenues and higher cost structure at SCB are currently impacting our consolidated results.

Importantly during negotiation of the SCB acquisition agreement, we protected ourselves upfront against sales shortfall. As a result we recognized a favorable adjustment of $907,000 in other income for the first quarter. We’re very committed and excited about SCB and some of their opportunities. I’ll provide increased granularity in a few minutes.

Normally, Vince Leo, our Interim CFO would review the numbers. As I speak he is flat on his back in bed. I’ll read his material and then I’ll proceed to the balance of my material before opening up for questions.

On behalf of Vince Leo, good morning. This morning we issued a press release detailing our first quarter’s results which I hope you’ve had a chance to review. During the first quarter IEC realized revenue of $33.9 million compared to $28.6 million in the first quarter of 2011. Of that 18% increase 12% was attributable to organic growth.

Gross profit margin in the quarter stayed relatively consistent at 16.2% of sales compared to 16.8% sales in the prior year period. Overall, gross profit was impacted by our unfavorable sales volume and product mix.

SG&A was $4.5 million or 13.4% of sales in the quarter just ended compared to $2.8 million or 9.9% of sales in the prior year. A substantial portion of this increase is attributable to experiencing of four quarter of expense from SCB. We previously indicated that SCB has a higher cost structure then our other units due to the nature of the product line and markets it serves coupled with that SCB sales were weaker than expected which made SG&A a greater percentage of sales.

As a result of the increased borrowing to fund our acquisition, interest expense increased to $353,000 in the first quarter of 2012 compared to $244,000 in the prior year period. We did benefit from a lower weighted average interest rate and a decreasing principal balance which during the first quarter of fiscal 2012 compared to the same period of prior year.

IEC’s taxable income has been and is benefitted by Federal net operating loss carry forward. These NOLs substantially offset tax payments which would otherwise would have been or maybe required. The company's Federal NOL carry-forward at the end of fiscal 2011 amounted to approximately $24.5 million and do not start to expire until 2012.

Net income for the first quarter was $948,000 or $0.09 per diluted share which included the clawback and this compares with $1 million or a $0.11 per diluted share in the prior period. Our balance sheet remains solid with $17 million in working capital and we’ve reduced our debt by $1.3 million from $35.1 million to $33.8 million. We’re still on track to reduce our debt in the range of $7 million to $9 million as previously mentioned.

At this point this would be reintroducing me and so let me continue. I’ll discuss revenue, acquisitions, balance sheet and looking forward. We saw sales growth in our medical and industry sectors continue. The medical and other sectors now represent 28% of our business, we expect this sector to continue to grow and as noted by our press release this morning mentioned a new $17 million order from one of our major medical customers.

As previously mentioned, our sales in our military aerospace segment are behind due to continued delays in military funding. However, we’re seeing signs the funding is being released. With that said, we expect some continued softness for the second quarter as well.

One of the things I feel very strongly about and its important to discuss that our need to continue to think long term and we move along our strategic path and innovative trial. These have been the key in getting IEC to where it is today.

During our shareholder meeting we mentioned the new Counterfeit Detection & Avoidance Lab that we started in the second quarter of last year. We’re building upon technology and analytical skills which reside inside IEC. It is part of our fabric as a company. We view this type of development and others we are considering as an integral part of a growing organization. We view this program and others to be big issues in our industry and the markets we serve.

We believe the acquisitions we’ve made and the companies we’ve started are the right ones for our business. Our customers are telling us that they want to give a larger percentage of their work to fewer more capable providers, as we believe we’re positioned to benefit from this strength particularly from these acquisitions as described to investors in our annual meeting over the past few years we’ve added such capabilities as cable and wire harness, sheet metal fabrication and sophisticated cables for the military aerospace industry.

SCB is an important part of this broad and capability set for our customers. It has had a very difficult six months and has not performed to our expectations, but it is important for us to recognize that in the long run we believe SCB will improve IEC’s strategic position in key markets and the overall financial performance of the company.

From the balance sheet perspective, our balance sheet continues to improve as was mentioned a moment ago, we paid down $1.3 million of our debt and we’re in line to pay down between $7 million to $9 million which is the guidance we previously provided, reduced debt remains an important priority.

Looking forward, we believe that the first half of this year is going to be challenging. From the sales perspective, we see nothing that changes our long term organic sales growth goal of 17% and as previously mentioned for this year, we believe organic growth is more likely to be in the range of between 9% and 14%. As the year progresses we want to see how some of the issues creating a weak global economy and a muddled US economy unfold.

We expect operating income weakness to continue in the second quarter and expect to return to more normal levels in the back half of the year. We believe our business is moving in the right direction and while we anticipate that the next few months will hold some challenges we’re confident in our ability to continue to drive long term value for our shareholders.

At this point, I’ll ask the operator to open the floor for questions, thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Mark Jordan from Noble Financial, please proceed with your question.

Mark Jordan – Noble Financial

Good morning, Barry. First question relates to the absolute level of SG&A in the current quarter, I know that it was up over $400,000 sequentially and up about $900,000 from the sort of average of the second and third quarters of last year, which included the first two quarters of the SCB acquisition. I guess my question is one why the sequential increase from what I thought was a somewhat inflated level at the end of the fourth quarter relative to compensation issues and then secondly, where does this start to stabilize, where is the normalized rate for SG&A in the second fiscal quarter and moving through the balance of the year?

Barry Gilbert

Good morning, Mark. And this comes back to a point that you’ve identified firstly, probably for the last two or three calls, concerns and questions about SG&A. There are really a couple of factors which have taken place over the course of this quarter. Southern California Braiding does have a higher SG&A as a percent of sales and with the collapse of their sales this past quarter it exacerbated the problem substantially that’s element number one.

Element number two, we did have the one-time expense that was associated with the departure of our former CFO, which has been properly discussed and properly announced and so when I go ahead and I look at the combination of things and there are too many hits in there because one of the hits is predicated on will SCB completely bounce back and we see it belting back a little bit in the second quarter, but not really hitting their stride again until the third quarter. My guess is that SG&A as a percent of sales is probably going to stay in that 11.5%, 12% range and then we just have to continue to work it down over the course of time. I don’t think we have changed our commitment that for the long run we should be around 9%, but right now, we’re struggling. Does that answer your question?

Mark Jordan – Noble Financial

Yes.

Barry Gilbert

Okay, thank you.

Mark Jordan – Noble Financial

Relative to gross margin again, large sequential decline, was that a specific issue of mix or was there some problems with specific contracts that negatively impacted the quarter vis-à-vis the fourth?

Barry Gilbert

No, actually, well two things. The mix was not good and if you go back to the second quarter of last year, our mix was absolutely outstanding, all the stars were lined, our operating margins as a percentage of sales was really substantial, our gross profit was substantial and we’re going to talk more about this next quarter. And repeating all the stars are lined, in this particular quarter all the stars went exactly in the opposite direction and it was just rough right across the board, the mix part of our industry most of the time it’s balanced. From the general perspective of did any one program impact them, no they were expecting a program to be released, well actually, the program is starting to get released now as I am speaking. Our question becomes whether we can get all the material in in-time, we were not prepared to buy the material in advance that was just sitting out a lot of asset and until our major customer which is one of the top two or three in the mil aerospace was prepared to release the program, we weren’t prepared to go ahead and bring in the asset. And so, that impacted them in Q1 and it’s yet to be determined how much it’s going to impact them in Q2.

Mark Jordan – Noble Financial

Okay. Final question, relative to sort of the methodology or the method by which defense clients release programs, one because of the funding possibly the CRU, you had post four months of these releases, once their program is released should you then assume a fairly predictable and steady execution of that program for 12 months timeframe or how cyclical are these releases that we’re delayed?

Barry Gilbert

So, I’m about to offer you a lousy answer. As some of the crimes are most predictable when they release the program, the call offs or like a Swiss watch. Others are not predictable, this particular program or one of the programs I am thinking is a multiyear program, it is for many millions of dollars. There is a renewal factor after it, but at the end of the day they’re calling off 200,000, two weeks later it will be 300,000 and then it will be another 400,000 possibly a month after that and that’s until they get their rhythm with their end customer and that’s the DOD. So, that’s the best I can answer right now.

Mark Jordan – Noble Financial

Okay, thank you, Barry.

Barry Gilbert

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 how are you doing?

Barry Gilbert

Good morning, Steve.

Steve Shaw – Sidoti & Company

Looks like questions were already asked by Mark. Do you have the military revenue number for the quarter?

Barry Gilbert

We do not go ahead and provide that sector information, we provide it once a year and so I don’t have that, I can only tell you that it is down from last year.

Steve Shaw – Sidoti & Company

And then, the softness in the military market is that going to affect the balance sheet in any abnormal way, whether regulatory or any other item?

Barry Gilbert

No, I don’t think so. We’ve been pretty good about managing the assets, I mean, we’re pretty rigorous about making sure we’re not bringing in assets and then in turn paying for these assets and then sitting on these assets for four or five and six months. All I’m going to say was an absolute, it doesn’t happen every once in a while in an odd situation where we’re given permission by our customers to go out and they become responsible for the material in the end. But they will go out and tell us, look not by the non-cancelable, non-returnable stuff, we’re fully responsible and then all of a sudden the order will end up sliding to the right three, six months, those odd situations where we sort of get caught, but by and large we’re pretty good and I do not envision any asset disruption.

Steve Shaw – Sidoti & Company

All right, thanks Barry.

Barry Gilbert

You’re welcome, take care.

Operator

Our next question comes from the line of Bill Bloom from Comstock Partners, please proceed with your question.

Bill Bloom – Comstock Partners

Hi, Barry how are you doing?

Barry Gilbert

Good morning.

Bill Bloom – Comstock Partners

Regarding the military delays, how much time does the company need in order to ramp up when the funding starts to be released?

Barry Gilbert

Thank you for your question. It is a range for some of the items it can be as short as six weeks and that’s great, it falls inside the quarter and we’re in good position. There are some items which are required and sometimes these are specialty connectors, these things could take as much as 20 weeks and sometimes longer. And, we tried to work with our suppliers to expedite that but sometimes there was trade-off between significant increased cost for that expediting and the willingness of the customer to expect the expediting charge and in some cases customer isn’t willing to accept the expediting charge and in turn we’re not prepared to bear those costs. And so, we’re in the midst of those discussions now.

Bill Bloom – Comstock Partners

Right, thank you.

Barry Gilbert

Thank you.

Operator

Our next question comes from the line of William Jones from Singular Research, please proceed with your question.

William Jones – Singular Research

Hi, Barry good morning.

Barry Gilbert

Good morning, Bill.

William Jones – Singular Research

I wanted to ask you had mentioned earlier on the call and there was a press release this morning about the medical order for $17 million.

Barry Gilbert

Yes.

William Jones – Singular Research

And, I was wondering if you can give us a little bit more color on that and the significance in the nature of that order?

Barry Gilbert

Well, we certainly are pleased to receive that order, we needed quite the reaffirmation that for this large customer we’re doing the right stuff for them. This is in order that will probably commence in third quarter of our fiscal year and so the third quarter and it will be the end of it and so that’s really looking towards the month of June. And then, might try into July and it will probably last for about a year after that. And again, I’m repeating it is from medical customer and we do not discuss or disclose any of our customers, but they’re quite a solid organization to say the least. Did that answer your question or you need more character.

William Jones – Singular Research

Okay, cool, that’s helpful. And I suppose that’s already kind of factored into your outlook, you had previously said, 9% to 14% growth?

Barry Gilbert

Well, some of it is factored into our outlook, I mean, the parts that were, we certainly were aware that an order was coming, what we don’t know is when the actual order will show up and then in turn the actual size of the order. With that said, we do know that a portion of this order is going to flop out of our fiscal year into 2013 and so some of the variables, the pieces are still moving around and we won’t have greater definition for another month or so. But, at the moment its incorporated in the 9% to 14%.

William Jones – Singular Research

Okay, great. And one more question if I may, given that worth beginning of the year, could you just give us a little maybe perhaps guidance on your capital expenditure expectations for the year or any just or anything we should back into our model?

Barry Gilbert

Sure. One of things that we’ve mentioned, and I think we mentioned it last quarter that our capital expenditures are in the range of $4 million to $4.5 million the year. We have spent on about a $1 million so far this year and we’re moving forward with our plans, because there are some very specific things that we’re after that we believe will not only improve the efficiency over the organization, but also provide us with the ability to broaden our portfolio of offerings to some of our major customers.

William Jones – Singular Research

Okay that’s helpful, thank you. I think that’s all I have.

Barry Gilbert

Cool, thank you, take care.

Operator

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

Robert Littlehale – JPMorgan Chase

Just a couple of quick questions, headcount currently up down same as it has been the last couple of quarters?

Barry Gilbert

Good morning, Bob, the headcount is probably up, we’re probably in the 800 employee range, you got to buy me 25 on either side but that’s not a bad number. And the New York operation which is the business center for most and Rochester per say, is the business center for most of our medical activity has been experiencing solid growth and so we’ve been adding employees to support the demand.

Robert Littlehale – JPMorgan Chase

In terms of the reduction in debt, this $7 million and $9 million does that include the $1.3 million just announced or is that respectively?

Barry Gilbert

It does include the $1.3 million.

Robert Littlehale – JPMorgan Chase

It does, okay.

Barry Gilbert

Yeah that’s for the quarter and as we look at our cash flow we envision that we will be inside that range.

Robert Littlehale – JPMorgan Chase

And then in terms of finding a permanent CFO, could you just update us there in terms of what the official policy is at this point, what the objective is?

Barry Gilbert

Sure, we have an excellent Interim CFO you may if you've heard the replay of the shareholder meeting you will have heard his presentation. He is the most thoughtful individual. With that said we've started a search, we are in the process of engaging a major firm to help us and I suspect it will take a good four months. I would say if we get lucky we will conclude the search in three months, but what I can envision that as I said here, it will be probably closer to four or five months.

Robert Littlehale – JPMorgan Chase

Thank you.

Barry Gilbert

Thank you.

Operator

Our next question comes from the line of Alan Lyon, Private Investor, please proceed with your question.

Alan Lyon

Just wanted to know if you could update us on the potential acquisitions in the serious mode, did you see something happening this year or you seeing obviously, I know you are always looking so anything you could share on process?

Barry Gilbert

Good morning Alan, I don't think very much is changed from the last quarter or so, we've looked at two opportunities and we set them to one side for a host of reasons, some of it they really weren't bringing a lot to the company in the way of either new capabilities or deeper penetration in the markets that we choose to serve. And those are in many cases the prime consideration. From the perspective certainly for this current quarter, we are focusing on making sure that SCB is back on track and moving more in line with what our investors are expecting and the company that we acquired and so I don't envision much activity in the acquisition area probably for a good four or five months and they will start to look again. There are some things we are absolutely looking for, we are very specific in what we are looking for and keep hoping that we find the right opportunities and then we will make sense out of them.

Alan Lyon

Okay thanks for the update.

Barry Gilbert

Thank you, take care.

Operator

Mr. Gilbert there are no further questions at this time, I would now like to turn the call back over to you for closing comments.

Barry Gilbert

I want to thank everyone for taking the time this morning to participate in this call. I want to thank those that asked questions, for their thoughtful questions. In conclusion, we've got a great assembly of companies and capabilities and we look forward to being back on track over the course of the next six months and on that note I wish everyone well. Take care and thank you.

Operator

This concludes today’s teleconference, you may disconnect your lines at this time. Thank you for your participation.

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