IEC Electronics is an electronic manufacturing services (NYSE:EMS) company serving the military and aerospace, medical and industrial markets. Management has completely revamped its business model and is enjoying the fruits of its labors in the way of extraordinary revenue growth and steadily improving profit margins. The most remarkable fact about this transformation is that it continues successfully in the face of the most difficult business environment in the past 80 years.
HISTORY: Founded in 1967 and headquartered in Newark, NY, (not NJ), IEC went through a rough patch of declining revenues from around 2004 until it began a turnaround in 2007. During that period, it was servicing a list of well known “consumer” clients such as Compaq, Lucent, Motorola, JDS Uniphase and Tellabs. The problem was that these were all high volume, low margin accounts, and when pricing pressure befell them, moved their production from IEC to Mexico or overseas. Management, by its own admission was slow to respond. In 2005, computing made up 31% of revenues and by fiscal 2008 (September 30th), it accounted for almost no revenues. Communications was 40% of revenues then, and now it is only about 11%. And industrial, made up 28% or revenues, which now accounts for 30%. The big change came in IEC pursuing new markets with lower volumes but higher margins such as the military and medical markets. These are less prone to moving production to lower cost venues because of proprietary technologies or government restrictions. As such, military now accounts for 34% of revenue, aerospace, 11% and medical, approximately 9%, all up from virtually zero in 2005.
Additionally, IEC has increased its technical capabilities which make it a more respected and valuable business partner to its customers. In its Technology Center, established in 1998, the company offers services that provide its customers with new product design integration or re-design to achieve greater efficiency. For instance, IEC's Design Engineering Team offers PCB layout, test system development and sustaining engineering services that can help quickly solve customers’ design related issues. The Design Engineering Team supports system design all the way down to board level design. IEC's Prototype Lab is also located inside of its 10,000 square foot Technology Center. The Prototype Lab supports surface mount, through-hole and BGA technologies in quick-turn manufacturing. Many types of jobs can be performed the same or next day. It has a world class, high reliability materials analysis lab, capable of performing exotic tests that competitors many times are unable to perform. The Technology Center has proven to be a very effective sales and marketing tool for attracting new clients and extending existing client relationships.
CAPITAL INVESTMENTS: In fiscal 2008, IEC spent $1.4 million on capital spending to upgrade its ten manufacturing lines. The company plans to spend an additional $1.2 million in fiscal 2009 and almost $1.0 million in fiscal 2010 in order to completely upgrade all its manufacturing systems. This will continue to contribute to higher margins by reducing the need to rework products and also because of faster manufacturing, will increase overall capacity.
Most recently, IEC implemented the second phase of its changed business model, that of making acquisitions to further increase its product and service offering. In May 2008, IEC acquired Val-U-Tech, a private company manufacturing wire harness assemblies, a natural extension to its core business. Val-U-Tech had revenues of approximately $11 million at the time of its acquisition with double digit revenue and earnings growth and IEC paid $7.2 million in cash and 500,000 shares of stock for total consideration of $10 million.
RESULTS: So what has been the result of this continuing transformation? In FY 2008, revenues increased 24.9% to over $51 million, gross margin increased to 12.1% of revenues, up from 9.5% in 2007, operating margin rose to 4.7% from 2.4% (industry average is 2.9%) and backlog increased 81% to $40.5 million. IEC return on equity at the end of October 2008 stood at 13.8% as compared to an industry average of 9.5%. Revenues in Fiscal 2008 included approximately $4 million form Val-U-Tech ($1 million in FY Q3 and $3 million in FY Q4) and excluding it, revenues would have increased 15.1%.
However, the major challenge for IEC, as with all industrial companies, is the weakness of the US and world economy. The deterioration in the economy during the fourth quarter of 2008 appears to have had little effect on IEC’s first fiscal quarter ending December 26, 2008. The company recorded a revenue increase of 42% to $15.8 million, a gross margin of 14.1% as compared to 10.3% in the same period a year ago, an a 140% increase in operating income on a 6% operating margin. It should be noted that this fiscal year’s first quarter included revenue from the Val-U-Tech acquisition while last year’s first quarter did not. On a pro forma basis we estimate revenues grew about 17% in the first fiscal quarter still a very strong result given the deterioration of the economy in calendar Q4 2008.
FUTURE: IEC has tentatively set April 23rd as the date for reporting its fiscal Q2 and we expect another strong quarter. While management remains optimistic about the company’s prospects for the remainder of fiscal 2009 and into 2010, it also remains realistic about the mix of its business. It anticipates some softening in its existing customer base with respect to ongoing projects but believes that its intense approach to providing exemplary service to it clients will garner new programs, increased volume from existing programs and most important, new customers. As such, management believes total revenues in fiscal 2009 could increase 25% to 35% ($64 million to $69 million) and net income before taxes could increase as much as 50%.
Most importantly, IEC’s management believes that it has put in place the necessary infrastructure to fulfill its mantra “Absolutely, Positively Perfect and On-Time” and drive its revenues to $150 million by 2012. We believe that value oriented investors should consider IEC Electronics to their long-term portfolios.