IEC Electronics Corp.
Q3 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Greetings, and welcome to the IEC Electronics’ Fiscal 2013 Third Quarter Financial Results. 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 Jennifer Belodeau with Institutional Marketing Services. Thank you, Mr. Belodeau. Belodeau, you may begin.

[Jennifer Belodeau:]

Thank you. Thank you for calling in. On the call this morning, we have Barry Gilbert, Chairman and CEO, as well as Vincent Leo, 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 statements that are or maybe deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are made in reliance upon the protections provided by such acts for forward-looking statements. These forward-looking statements such as when we describe what we intend, expect, anticipate, or estimate will occur and other similar statements include, but are not limited to all statements that are not based on historical facts but rather reflect our current expectations concerning future results and events. The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events and is subject to various uncertainties and other factors that may cause our actual results, performance, or achievements to be different from any future results, performance or achievements expressed or implied by these statements. Specific risks and uncertainties include, but are not limited to, those set forth in the Risk Factors section of the company’s latest Annual Report on Form 10-K/A and subsequent Quarterly Reports on Form 10-Q/A and Form 10-Q. Additional risks and uncertainties resulting from the restatement of our financial statements included in our Quarterly Report on Form 10-Q/A for the quarter ended December 28, 2012 and our Annual Report on Form 10-K/A for the fiscal year ended September 30, 2012 could, among others, cause us to incur substantial additional legal, accounting and other expenses, result in additional shareholder, governmental or other actions, cause our customers, including the government contractors with which we deal, to lose confidence in us or cause a default under our contractual arrangements, cause a default under the company’s arrangements with M&T Bank with respect to which, if the Bank chooses to exercise its remedies, the company may not be able to obtain replacement financing or continue its operations, result in delisting of the company’s stock from the Exchange if the company fails to meet any Exchange listing standard, or fails to comply with its listing agreement with the Exchange, during the 12 months ending July 9, 2014 or result in additional failures of the company’s internal controls if the company’s remediation efforts are not effective. Any one or more of such risks and uncertainties could have a material adverse effect on us with the value of our common stock. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. 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 at iecelectronics.com. I will now turn the call over to Barry Gilbert. Please go ahead, Barry.

[Barry Gilbert:]

Thank you. Good morning everyone. I’d like to start by thanking our shareholders for their patience as we work through, but it’s only been a challenging period for IEC. IEC is a great company and this period tested us. I have seen the quality and the result of the team as we worked through the restatement and some of the issues we have been confronting. The good news is that the restatements have been filed and we are making progress on the operational front. This was more than a little bump in the road, this was a pothole, but the customers have not been impacted. The employees have done a terrific job. I understand the last statement sounded like a commercial it was. I am very excited about getting the organization focused back on being a premier supplier to our customers in the military, medical, industrial, and communication space and at times return to delivering industry leading financial results. This morning, we issued a press release detailed our third quarter results, which I hope you had a chance to review. Turning to third quarter, IEC reported revenue of $35 million, a 2.4% decrease from last year. We had a decrease in our industrial sector which offset the improvement we saw in military and aerospace as well as the medical sector. Gross margins decreased from 19% to 14.7%, more than a reflection of the small sales decline mentioned above. Vince will discuss both a relatively flat sales and margin decline shortly. Our SG&A was considerably higher for the quarter than in the comparative period of fiscal 2012, it was 12.9% of sales versus 10.8% of sales for Q3 of 2012. During the quarter we incurred $1.1 million in legal and accounting expenses related to the restatement. In the second quarter release, we pointed to three items which I will talk were hampering our profitability in addition to revenues. And I want to give you an update on each of these items. We have a new telecom customer and have been experiencing cost, excess costs necessary to complete each unit. We are making improvements with the profitability of this customer, but business is still inefficient relative to other customers. This is an important customer for us. However, we continued to review whether we can gain the efficiencies necessary for them to be a long run viable customer, time will tell. We have been experiencing inefficiencies in our Southern California operation. We have far too much direct labor. This has been corrected. That said and despite all the issues we faced SEB is strategically very important for us as we move the company forward. During the third quarter we made progress in improving the performance at Southern California braiding. We realigned our manufacturing in Newark, our largest facility from one large operation to three smaller operations focused on specific end market. The realignment has created some challenges associated with the learning curve for the managers we’ve asked to accept new responsibilities. They are doing a good job with the additional focus and recognizing the importance of the change. That said our customers seem to like and understand the change especially some of the new ones. I just want to take a moment to discuss the recent restatement. As you know on July 3rd we filed with the SEC our restated financial statement for the fiscal year end September 30, 2012 and for the quarter ended December 28, 2012. The earnings restatement corrected an error in accounting for work in progress inventory at our Southern California braiding subsidiary that resulted in an understatement of cost of sales and corresponding overstatement of gross profit for all of the period – for all of the periods of approximately $2.2 million. One important point about the restatement, this restatement had no impact on our liquidity it was non-cash. I will now turn the call over the Vince to review the financials.

[Vincent Leo:]

Thank you, Barry and good morning everyone. This morning we issued a press release detailing our third quarter results which I hope you had a chance to review. During the third quarter of 2013 IEC recorded revenues of approximately $35 million, as Barry mentioned a 2.4% decrease as compared to approximately $36 million in the third quarter of 2012. The revenue decline is attributable to aggregate revenue decreases in the industrial and communications and other market sectors of approximately $1.7 million partially offset by an increased revenue in the military and aerospace market sectors of approximately $800,000. Gross profit in the third quarter of 2000 – fiscal year – current fiscal year decreased to 14.7% of sales as compared to 19% of sales in the third quarter of the prior fiscal year. Gross profit was impacted primarily by a lower sales volume and changes in the mix to increased telecom and some military customers where we experienced lower margins. SG&A increased approximately $700,000 to 12.9% of sales in the quarter just ended as compared to 9.8% of sales in Q3 of the prior fiscal year primarily driven by legal and other restatement expenses of approximately $1.1 million. The increase was partially offset by lower rates and related expenses as a result of changes in the company’s organizational structure made during Q2 of the current fiscal year as well as decreased bonus expense based on operating results. During the third quarter of fiscal 2013, interest expense decreased to approximately $10,000 compared to $285,000 from third quarter of the prior fiscal year. The decrease in interest expense was primarily due to the increase in the fair value of the interest rate swap of approximately $300,000 during the current year. Net income for the third quarter was approximately $382,000 or $0.04 per basic and diluted share compared with approximately $1.8 million or $0.19 per basic and $0.18 per diluted share in the prior year. It’s important to note that legal and other costs related to the restatement reduced our Q3 2013 earnings by approximately $0.07 per share. Our balance sheet remains strong with approximately $27 million of working capital. Total bank debt less cash at June 28, 2013 was approximately $30.3 million and remains consistent with that of the prior fiscal year and increased however, by approximately $5.3 million compared to September 30, 2012. Principal payments made during the current fiscal year were offset by increased borrowings due to legal and other costs related to restatement as well as increased inventory levels and our required fixed asset additions. The increase in inventory was primarily due to purchases during the third quarter of fiscal 2013 to support expected revenue. While the inventory levels are expected to decrease in the fourth quarter of 2013, we do anticipate slightly higher levels in inventory in the fourth quarter of 2013 compared to the same quarter of the prior fiscal year due to additional safety stock at the request of two customers and longer lead times for one of our telecom customers. Finally, as a result of the restatement mentioned earlier, we have implemented certain remedial measures as described in our filings. With that, I’ll turn it back over to Barry.

[Barry Gilbert:]

Thank you. I’d like to take a few minutes and take a closer look at some of the points made in past calls and during this call. And yes, we have some positive development. First, we added a number of customers since we last spoke. We are excited about these customer additions and we are cautiously optimistic that these customers will be an important part of our IEC’s future. These are customers who we were working on or working with prior to the management adjustments previously discussed. However, the change in operational focus in our Newark facility influenced some of these customers. They gained a better appreciation for IEC’s technical capability and how their relationship with us would be managed. With that said, it will take between 6 to 9 months before we see some appreciable results. Almost all of our businesses received new customers sophisticated electronic assemblies, wire and cable, metal in our analytical lab. There was always a question, did you get the work by giving away margin. No, we don’t believe so. It was gained on a clear demonstration of focus and technical capability. The second phase of a $13 million to $16 million call off order from one of the primes was released during the quarter and is being produced in our California wire and cable operation. And we have received notice that the third release is on its way, yet we have not received it. This was an important award for a couple of reasons large orders were difficult for Southern California Braiding to capture prior to the acquisition because of their size. Second, by acquiring Southern California Braiding, it has enabled us to advance our relationship with the number of the primes because of the unique capabilities we offer. Every prime we support may not avail themselves of all aspects of our technological portfolio. However, they appreciate they are available for them to take advantage of as required. Finally, our sector performance has shifted somewhat over the past year. Our military and aerospace sector remained strong increasing as a percent of sales to 47% from 44% for the third quarter of last year. Our military business appears to be aligned with the government funding, we do not make guns and ammunition rather support sophisticated communication of electronic assemblies and cabling for the military space and aeronautical market which we believe is the Cornerstone of the evolution underway in our armed forces. We have an excellent blue chip medical customer base. Our medical sector remains at 20% of sales for the quarter, the same percentage as last quarter. As mentioned in the past the medical sector is one of the sectors we are focusing on. A few of the new customers identified earlier in this call are in the medical sector. And it is also the sector which can experience some wide swings in volume as some of our customers worked their way through FDA approval cycle. Our industrial sector declined to 22% of sales in the third quarter compared to 26% in the third quarter of last year. The $1.7 million decline in this sector was due to a strategic decision by one customer, the dual source product after the introduction in the marketplace. As mentioned earlier, much of this decline was offset by improvements in our military and medical sector. In closing IEC is moving forward getting back on track, we continue creating some unique solutions for our customers and I expect to see improvement next quarter regardless we have confidence in our long run strategy. I’ll turn the call over to the operator before I view – I understand that you may have questions about the restatement, but given the ongoing legal proceedings described in our filing. I hope you can appreciate that I cannot discuss this matter further. On that note, I want to open the phones for questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Steve Shaw with Sidoti & Company. Please proceed with your question.

[Steve Shaw:]

Hi, Barry, I know in your last comments what you just said, but any idea of how long you guys will deal with the added legal expenses?

[Barry Gilbert:]

Good morning, Steve. No, we don’t.

[Steve Shaw:]

Okay, and then I don’ know if I may have missed it but previously you guys replied on paying down debt around $1.5 billion per quarter I believe what’s the plan now would we have one?

[Barry Gilbert:]

We are – as Vince mentioned we brought in extra inventory for this coming quarter. We are still focused on bringing down the debt. And at this time I’m not going offer guidance beyond the directional statements that I just made is that we’re very focused on bringing down our debt.

[Steve Shaw:]

Okay. And lastly did you guys mention what the military sales were?

[Barry Gilbert:]

We didn’t, we said that it represented 47% of the quarter sales.

[Steve Shaw:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Mark Jordan with Noble Financial. Please proceed with your question.

[Unidentified Analyst:]

Hi, this is (Eric Sheriff) filling in for Mark Jordan. Excluding any non-operation – any non-legal or accounting expenses in the third quarter what was the operating margin for the quarter?

[Barry Gilbert:]

You have to add back the $1.1 million to the operating income that we have and do the division. We can’t do the division for you.

[Unidentified Analyst:]

Okay.

[Barry Gilbert:]

I apologize.

[Unidentified Analyst:]

So, could you probably answer the following quarter, fourth quarter and first quarter, excluding any non-operating expenses, which exclude the operating margins?

[Barry Gilbert:]

I apologize I did not catch the first part of your question.

[Unidentified Analyst:]

Excluding any non-operating expenses in the fourth quarter, in the first quarter for 2014, what should be a reasonable operating margin for (indiscernible)?

[Barry Gilbert:]

So, one of the things we had mentioned that what Vincent mentioned and somewhat that I had mentioned is the fact that we do believe that there will be ongoing legal expenses. We don’t believe it will be as large as what we have experienced, but we can’t really put balance around it right now. So, I am not really able to answer that question.

[Unidentified Analyst:]

Okay, thank you.

[Barry Gilbert:]

It’s my pleasure.

[Operator:]

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

[Barry Gilbert:]

Thank you. I would like to thank everyone for calling in and listening and for your support of our company, and I look forward to speaking with you next quarter. Take care.

[Operator:]

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