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IEC Electronics Corp. (NYSEMKT:IEC)

F3Q 2012 Earnings Call

July 31, 2012 10:00 am ET

Executives

W. Barry Gilbert – Chairman and Chief Executive Officer

Vincent A. Leo – Chief Financial Officer

John Nesbett – Investor Relations, Institutional Marketing Services

Analysts

Mark Jordan – Noble Financial Capital Markets

Steve Shaw – Sidoti & Company

William Jones – Singular Research

Jennifer Wolfertz – Comstock Partners

Allan Williams - Private Investor

Operator

Greetings, and welcome to the IEC Electronics Fiscal 2012 Third 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) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, John Nesbett of IMS. Thank you sir, you may 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 Vincent Leo, 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 related to the Company’s expectations and prospects that involve risks and uncertainties including uncertainties associated with economic conditions in the electronics industry, particularly in the principal industry sector served by the Company; changes in the customer requirements and in the volume of sales to principal customers; competition and technological change; the ability of the Company to control manufacturing and operating costs, the ability of the Company to develop and maintain satisfactory relationships with vendors, and the ability of the Company to efficiently integrate acquired companies into its business.

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.

All of which may be found in the Investor Relations section of the company’s website at iec-electronics.com. The company undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new, updated information and future events or likewise.

In addition, references to non-GAAP financial measures in this presentation are reconciled to GAAP measures in the earnings release for this quarter, which also can be found in the Investor Relations section of the company’s website.

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

W. Barry Gilbert

Thank you for joining us this morning. We’re pleased to report a strong third quarter. This quarter can be characterized by a few key items. Our margins were very good. This is the second quarter in a row where our results were well above our historic averages. Gross profit was in excess of 20% and operating income in excess of 9.5%. Vince Leo will discuss our results in greater detail in a few minutes.

During our second quarter’s shareholder call, we discussed that it would take us 18 months to achieve these levels. In a sustained manner, we are working to achieve these goals as that we set out on that call. Our balance sheet remained strong and liquid. We’ve reduced some of our debt not as much in previous quarters, but this is the timing issue and we expect to continue reducing our debt in the fourth quarter. Revenue growth was just over 4%, disappointing. There is little we can do when we have last minute reschedule then as the business we are in, our long term growth rate is far higher. However periodically we will have lower growth. We expect this quarter our fourth quarter to show more appropriate growth.

Let me stand back for a second and a very high level, we are strategically in a good place. The trend toward outsource manufacturing continues, within the broad market some sectors will experience turbulence. We have 44% of our business in the military and aerospace markets. As you have all been reading in the paper, they are concerns about the debated congressional reductions in defense spending. There was certainly turbulence in that sector. We are not experiencing any real cuts in programs we are involved in, a lot of shifting of priorities actually we have been gaining programs and in a few minutes, I’ll expand those thoughts.

We are 100% U.S. manufacturer and we service low volume high value-add sectors. We have made four acquisitions and started a fifth company. The acquisitions over the past few years have enabled us to put together a suite of services for U.S. company that solve a unique set of problems. We also benefit from a diverse customer base. Our sectors are well balanced. Our medical sector has remained relatively constant at 20% of sales for the quarter. Industrial, represents approximately 26% of our business and mentioned about our military, aerospace sector; our largest represents 44% of our revenue.

I will now turn the call over to Vince Leo, CFO who’ll review the numbers. After Vince completes his report, I’ll provide you with more of an operational discussion, before we turn it over to questions, Vince?

Vincent A. Leo

Thank you, Barry, and good morning everyone. This morning we issued a press release detailing our first quarter results. I hope you had enhanced review on it. During the third quarter, IEC realized revenues of approximately $36 million that was compared to $34.6 million in the third quarter of 2011. All of this growth was organic growth. Gross profit margins in the third quarter increased to 20.6% of sales, up slightly from 19.0% of sales in the prior period quarter. Gross profit was impacted primarily by increased revenues for the quarter as well as a favorable change in product mix.

SG&A expenses were consistent at $3.9 million or approximately 10.8% of sales in the third quarter of 2012 as compared to 11.4% of sales in the third quarter of the prior year. We have been very focused on our SG&A costs and we’ll continue our efforts throughout 2012.

As we mentioned in prior calls IEC use bank financing to fund approximately 98% of the purchase price of our two most recent acquisitions. During the third quarter of 2012, interest expense decreased to $285,000 compared to $491,000 in the prior period year. The decrease is primarily the result of decreased average borrowings of approximately $14.7 million. Borrowings were significantly higher in the third quarter of the prior fiscal year primarily due to the incremental borrowings of approximately $20 million to fund the SCB acquisition in December of 2010.

The weighted average interest rates on our debt this quarter was 0.44% lower than the third quarter of 2011. Cash required for IEC’s federal and New York State taxable income has been and is sheltered by federal operating loss carryforwards primarily incurred prior to 2005. These NOLs substantially offset tax payment that would otherwise have been required.

The company’s federal NOL carryforwards at the end of fiscal ’11 amounted to approximately $24.5 million. We also have significant state NOL carryforwards and we estimate that federal and state NOLs will produce cash future benefits of approximately $8.9 million.

Net income for the third quarter was $2.2 million or $0.22 per diluted share compared with $1.3 million or $0.13 per diluted share in the same period of 2011. I’d also like to point out in the third quarter of 2012 we recorded what we believe to be the final adjustment related our claw-back settlement with SCB.

Our balance sheet remains strong with $22.6 million of working capital and we reduced our debt by $637,000 million in the quarter from approximately $31.2 million to $30.5 million.

With that, I'll now turn the call back over to Barry. Thank you, Barry.

W. Barry Gilbert

Thank you, Vince. We continue to achieve some of the highest margins in the industry. These high margins are a function of the value we provide to our customers and our effort to deliver high quality products on time and exactly the specifications. You’ve heard me mention before, we live by the simple phrase Absolutely, Positively Perfect and On-Time.

We are continuously building up on our technology and analytical skills to grow the company and broaden our product offerings. Last year, we formed the company Dynamic Research and Testing Laboratories, DRTL for counterfeit chip testing and mitigation.

This year, we are considering in investing in other business in a niche area supporting sophisticated application in the military aerospace market. These niche activities lead us in an important direction. As mentioned above there were a lot of concerns about the future of military spending, we are being read onto more and more important programs, programs that will take time to unfold and we believe will last for years.

In our industry, customers are becoming more inclined to give a larger percentage of their work to fewer more capable providers and we believe we are well-positioned to capitalize on this industry wide trend. We will never be one of the largest contract manufacturers and nor that we want to be. We strive to be the best at providing differentiated valued solutions for our customers. We remain focused on seeking opportunities, to strategically improve and diversify our capabilities.

Over the past few years, we have added such capabilities at coax cable and wire assembly, sheet metal fabrication, sophisticated cables for the military aerospace industry, component obsolescence and counterfeit chip mitigation capabilities so that our product line and service offering have been broadened and strengthened. We believe it is time for us to continue moving forward and consider taking some larger steps expanding our business.

As Vince mentioned, our balance sheet continues to improve and we’ve paid down $630,000 of our debt during the third quarter. This is less debt reduction than we wanted however we view some of the difference as timing issues and bringing in some additional inventory to support our fourth quarter. We expect the fourth quarter to see increased debt reductions.

Look forward and summarizing, at our shareholder meeting earlier this year, we provided sales growth estimates of between 9% and 14% for fiscal 2012. We are currently at the low end of that range for the nine months. And at this time, we see no reason to change those estimates.

Our broad outlook has not changed. We’re still concerned about the weak global economy and the muddled U.S. economy. So we have – totally had success, some of this sectors was in the broad economy are not particularly strong. Our operating income margins were 9.8% well above our average for the last two years of approximately 8%. We believe our business is moving in the right direction and we are confident in our ability to continue driving long-term value for our shareholders.

I’ll now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

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

Mark Jordan – Noble Financial Capital Markets

Good morning, Barry. Relative to balance sheet movements, if you look at payables in the current quarter was down about $2.8 million from the preceding quarter flat year-over-year. Obviously, if that have been flat, you would have a couple of extra million dollars for debt reduction. Could you talk about what’s the normal level of payables for you and was that just the repeating quarter a little inflated and is this current level the more normal run rate for you?

W. Barry Gilbert

No, I don’t think – well, first, good morning, Mark. I don’t think that the preceding quarter was a little inflated though we did have some of the capital spending money that we had to pay. But I think that this is probably a little lower than we normally are. And so, I guess I would put the numbers some places in between as a more normal level.

Mark Jordan – Noble Financial Capital Markets

Okay. You are taking about sort of generically looking at larger steps here, are you alluding to the potential for having another acquisition essentially, you’ve been on the sidelines for a while with Southern California Braiding being the last one. And if so, what kind of capital do you think you have available to you if you’re looking on the acquisition front?

W. Barry Gilbert

Okay, we’ve been looking at acquisitions all along. We’ve not found anything that makes any sense. We are continuing to look, I think that that statement really is directed towards that we’re probably looking at some larger things and we’re smaller. That doesn’t mean that some of the smaller opportunities don’t make sense. It just means that we’re looking towards larger opportunities. From the standpoint of capital availability, we’re most fortunate because M&T Bank has been most supportive and we believe that they will be able to cover our needs. We certainly have spent some time modeling different scenarios with them and they are comfortable with what we have been presenting.

Mark Jordan – Noble Financial Capital Markets

Okay, do you have any specific technology targets that you would find attractive here and as to build your capabilities that you would like to add?

W. Barry Gilbert

We actually have some technology targets, but I am not going to discuss it in a public call. These are things that are helping to build this company to achieve the margins that we’ve been sharing with our shareholders. I see no particular advantage in providing that level of insight to the world.

Mark Jordan – Noble Financial Capital Markets

Okay. And finally, given the customers you have in the defense space and some turnovers, sequestration as we move into the new calendar year. Could you tell us how – what your customers are saying relative to potential order flow or variability of order flow in the last quarter?

W. Barry Gilbert

So actually some of our customers are clearly, all are large clients. And the large clients have been in the press probably a lot more than they would like to be. And many of them are deeply concerned about sequestration. Fortunately, we have been the successful beneficiary of some very large program awards, which would just accrue over the course of time. There is a difference between an award and actually getting an order. And the orders will unfold and they will bleed into our backlog over the course of time. But at the end of the day, we are aware that some of these programs are part of what – and this is a personal observation more so than anything than I have read, but it’s really more of a major shift that’s taking place from the standpoint of having a boot in the field to more of an electronic warfare. And I was struck for words, but are like more electronic warfare and we’re just participating in some of those solutions. And some of those solutions are proprietary or top secret, and though I don’t know the specific content, I do know that these are programs that are not likely to go away any time soon.

Mark Jordan – Noble Financial Capital Markets

Thank you very much.

W. Barry Gilbert

Thank you, Mark.

Operator

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

Steve Shaw – Sidoti & Company

Hi, guys, how are you?

W. Barry Gilbert

Good morning Steve, how are you?

Steve Shaw – Sidoti & Company

Good, thanks. Was the addition of inventory the only contributing factor to the payout of debt?

W. Barry Gilbert

Our receivables went up in the natural course of things. And I think like everything else, when – we had a lot of receivables went out towards the end of the quarter and they will just sit on the balance sheet until that cash washes through, which will be the beginning of this quarter, and we’ve already started to see that. With that said, it is the inventory and it’s the previous question identified, that our payables were a little bit lower than normal. So it’s that combination.

Steve Shaw – Sidoti & Company

Okay. And then, what’s the driving factor on the margins, was it medical sales?

W. Barry Gilbert

It was broad. It certainly was medical sales, there was also some of the military sales. The Southern California Braiding was performing at a higher level, not at the level we expect, but clearly at a far higher level. And so, you can start to see some of that contribution. But frankly, all of the companies, they all did well.

Steve Shaw – Sidoti & Company

And then that leads to me my last question Barry on SCB, any specific color on that performance?

W. Barry Gilbert

I think beyond what I just said, they have been – and what I noted in the text that I presented, they’ve been right on to a number of large program. And that these programs will take time to run full, but the important part is capability that they are providing along with some of the capabilities that DRTL is providing, that’s a lab that we have in Albuquerque, New Mexico. That combination is starting to yield fruit.

Steve Shaw – Sidoti & Company

Okay, thanks.

W. Barry Gilbert

Thank you.

Operator

Our next question comes from the line of Bill Jones with Singular Research. Please proceed with your question.

William Jones – Singular Research

Hi, guys. Great quarter again, once again.

W. Barry Gilbert

Thank you, Bill.

William Jones – Singular Research

Yeah, my question is on the – you had mentioned [SCB] kind of bit of the claw-back, and there is 201 million other income, does that...?

W. Barry Gilbert

That’s correct. That $200,000 that you identified is effectively the last trunk of claw-back. We initially thought that the claw-back and our best estimates was more or less $2 million and it turned out in the final analysis to be a little over $2,200,000. There is probably some legal expenses associated with our efforts in obtaining that last bit of the claw-back and netted in inside that number.

William Jones – Singular Research

Right, okay $201,000, thanks very much. Thank you. And then, I was going to ask you, on the press release you mentioning there was a little bit of softness in the industrial, medical sectors, but that appears to be back on track, may be you can give us a little color there?

W. Barry Gilbert

Yeah, so one of our major customers postpone things, just shift those things to the right. And as soon as they shifted things to the right and we proceeded to make sure that we didn’t bring in all of the inventory, especially since we aren’t going to built and shift, or probably about four weeks later or three weeks later they go in and call those up and we get. Could you bring all that stuff back in again, and so we certainly believe that it was just a timing issue between themselves and their end customers.

And as far as the medical is concerned, I think one of the things that we had mentioned over the course of time is that we have one large customer that was going through a bit of a transition. They went through a transition – one level loaded or a little lower at the exact same time that a customer who was going through bit of an FDA review was most successful with the FDA and they were ramping up. So, we had a switch take place overall and kept us whole, but just a little bit softer than we wanted to be and we think that everyone will be back on track to the fourth quarter.

William Jones – Singular Research

Got you. Make sense, and I was going to ask about the working capital whether that’s something to be concerned or whether it’s really a sign of strength and momentum in the business and I think you’ve already kind of addressed that, and also I guess you just reiterating your prior guidance. Is that correct?

W. Barry Gilbert

That’s correct.

William Jones – Singular Research

Okay, well thank you very much.

W. Barry Gilbert

Well thank you.

Operator

(Operator Instructions) Our next question comes from the line of Jennifer Wolfertz with Comstock Partners. Please proceed with your question.

Jennifer Wolfertz – Comstock Partners

Thanks good morning Barry, great quarter.

W. Barry Gilbert

Thank you, Jennifer.

Jennifer Wolfertz – Comstock Partners

I have a question regarding the gross profit, it was much higher, it was very high this quarter, and I'm wondering is that something, you think we're going to continue to see –will we see the gross profit continue at these levels or is it a one-time thing, or what is your thought?

W. Barry Gilbert

So, it’s not one-time, it’s really the second quarter in a row and I think from a broader perspective, and I think we tried to run the business and we discuss with our shareholders on a number of occasions. If we look at the business from a long-term prospective, and even though we’re certainly proud of this quarter, we really focus on a long-term, and we set out a goal to consistently have gross profits of between 20% and 21% at the end of an 18 month period, and so from our simple little way of looking at things, we’re three months into this journey and even though we have had some early success and some of that success as Vince mentioned a few minutes ago comes from a very enjoyable product mix. It’s also coming from some cost control activities and efforts. We still have a bit to go on our journey. And so I think our – of course profit margins will be higher than we have historically had. But I’m not prepared to say that we’ve achieved our goals just yet. But we are comfortable where we are.

Jennifer Wolfertz – Comstock Partners

Great, thank you.

W. Barry Gilbert

Thank you.

Operator

Our next question comes from the line of [Allan Williams](ph), a Private Investor. Please proceed with your question.

Allan Williams - Private Investor

Thank you. Good morning Barry and Vincent, congratulations on a very nice strong quarter.

W. Barry Gilbert

Thank you.

Allan Williams - Private Investor

My question is – yeah, I just wanted to – just a little more elaboration, I’d always get into this question and I know that Mark had talked about it. Growing the company either through acquisitions and starting new businesses, is it one of the other, or do you have a deadline in which if you don’t do an acquisition, you’re going to start a new business or you might do both?

W. Barry Gilbert

Yeah, so let me answer it as the both side. We look at things those two elements are not coupled together in our mind. I mean we are not dealing with infinite capital and I respect that. So these are niche businesses that cover very specific areas that provide unique opportunities for us. And so we see starting that business really more a function of, is this what our customers are regularly asking us for because they’re unable to capture that capability in the market in any logical way or they want to sort of bring it under the house of one trusted supplier and when I start receive consistent answers of yeah, that's exactly what they want, you wanted to verify that or audit it in some way, then we will move forward and start that venture of the business. From the standpoint of acquisition, as mentioned earlier, we are looking at acquisition, but we are starting to look at larger acquisitions now. And if we find something that makes sense to us, I don't want to say you’ll be the first to know, but I certainly would tell you that you will be one of the first to know along with everyone else on this call. Did that help you?

Allan Williams - Private Investor

Yeah, it does. I just think that it sounds like based on your customer needs, if you don’t – once you are looking for an acquisition, it does it necessarily tune into that situation where you might have to start a business to satisfy customer needs, it could be one of the other or could be both?

W. Barry Gilbert

I seriously doubt that we will be able to acquire what we’re looking for that that I think will prove to be very challenging. And that doesn't mean we are not looking and that doesn't – but I think that will be challenging. The acquisitions we are looking for are really a broadening and deepening of our general capabilities, but also the areas that we’ve chosen to focus on from a market sector. And so we are not likely to acquire a company that has large portions of its business outside of the areas military, aerospace, medical, industrial, high-end communications, we are not likely to acquire anything outside that area that has a large preponderance of its business in something beyond that.

Allan Williams - Private Investor

I understand. Thanks.

W. Barry Gilbert

Thank you. I knew there was a (inaudible) I just have to get it out.

Operator

(Operator Instructions)

W. Barry Gilbert

Operator, we have time for one more question, if there are any more.

Operator

Mr. Gilbert, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

W. Barry Gilbert

Thank you to everyone in the call. Thank you for taking the time to listen to what we have to say about IEC. We are proud of what we accomplished this quarter and we hope to make you equally as proud in our future quarters. Enjoy the balance of your day. Take care.

Operator

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

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