IEC Electronics Corp.
Q2 2014 Earnings Call Transcript

Published: 5 Aug 2014

[Operator:]

Greetings and welcome to the IEC Electronics third quarter 2014 financial results conference call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. I will now like to turn the conference over to your host, Jen Belodeau. Thank you, Ma’am you may begin.

[Jennifer Belodeau:]

Good morning and thank you for calling in. On the call this morning we have Barry Gilbert, Chairman and CEO, as well as Michael Williams, 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 may be deemed to be forward- looking statements within the meaning of Section 27A of the Securities Act 1933 and Section 21E of the Securities Exchange Act of 1934 and are made in reliance upon the protections provided by such acts for the forward-looking statements. These forward-looking statements, 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, may be subject to various uncertainties and other factors that may cause the Company’s 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 part 1 including the Risk Factors and Management's discussion and analysis, financial conditions and results of operation section and the Company’s Form 10-K for the fiscal year ended September 30, 2013 filed with the SEC on December 24, 2013 and the Company’s subsequently filed SEC reports and its earnings release immediately before this call. The Company undertakes no obligation to publicly update or correct any forward-looking statements, whether as a result of new information, future events, or other otherwise. I will now turn the call over to Barry Gilbert. Go ahead, Barry.

[Barry Gilbert:]

Good morning. Let me start by saying that I am pleased we returned to net profitability this quarter. I’m not yet celebrating, but it is an important step in the right direction as we position ourselves to return to more profitable growth. We continue to make progress, adding new customers and new programs from existing customers, as we slowly get out from under some of the difficult circumstances we’ve encountered over the past year. I’ll have more to say about our progress towards the end of the call. IEC has a diverse mix of revenue from a variety of industries. As pointed out in the past 50% of our revenue is derived from the aerospace and defence market. Continued delays in government funding have impacted us in the form of program delays and some cancellation. We currently envision some of the discontinued programs to take five years to reach conclusion. Some may last as long as ten years, others lasting as short as three years. We are somewhat optimistic that as the calendar begins to wrap up and world events continue to unfold, there will be some urgency surrounding some of the delayed programs. This however creates a build-up [ph] effect and related inefficiencies as we try to ramp production and bring suppliers back on line quickly. The medical market this quarter was lacklustre. One of our customers is experiencing much higher demand. This was offset by delays in production with some of our newer customers who have initiated engineering changes with some products we manufactured for them. Some positive news is that our customers that was on FDA hold has been released to ship. They have been conducting their own internal quality systems review and we expect to commence shipping in the fourth quarter, moving towards full production as the quarter progresses. Our industrial sector generated lower sales compared to last quarter, and as discussed last quarter – last year sorry -- and as we discussed last quarter is likely to stay that way throughout the balance of the year. With that said we see some macro events possibly shifting the market for our customers. However it is too soon to understand that these market shifts will actually take place and if they do it would influence the start of fiscal 2015. As we work our way back, we’re hitting some bumps in the road, but we are making progress and working through them, actually I’m encouraged by the sales picture. I will now turn the call over to our CFO, Mike Williams to review the numbers.

[Mike Williams:]

Thank you, Barry. Revenue for the third quarter of fiscal 2014 was $33 million as compared to $35.2 million in the same quarter of last year. For the nine months year-to-date revenue was down 1.9% and $99.9 million versus $101.8 million. As with any contract manufacturer we had many customers and programs growing and declining due to the stage of our product life cycle. However the main driver of the year-over-year declines were due to the previously mentioned customer being on FDA hold until late this quarter and converting one customer from turnkey manufacturing to customer furnished materials program. Gross profit for the third quarter of fiscal 2014 was 11.8% of sales as compared to 14.7% of sales in the third quarter of the prior fiscal year [indiscernible] of this impact of the first quarter cost reductions. Selling and administrative expense decreased by approximately $250,000 to 9.7% of sales as compared to 9.8% of sales in the third quarter of the prior fiscal year. For the nine months year-to-date selling and administrative expenses were 10.9% of sales versus 11.6% for the same period in 2013. The decrease was driven by lower wage and related expense, as we continued to better manage our overhead structure. Restatement and related expenses for the quarter were approximately $100,000. This represents roughly $500,000 in third party legal fees directly attributable to the restatement as well as other matters arising from the restatement, partially offset by an initial reimbursement from our insurance carrier for these related expenses. We anticipate continued legal and related expense due to the restatement for the foreseeable future. Interest expense increased for the third quarter of fiscal 2014 by approximately $500,000 compared to the third quarter of fiscal 2013. Average borrowings were slightly higher but the main difference was due to roughly $400,000 favourable impact of adjusting the interest rate swap to fair value in the third quarter of 2013. Net income for the third quarter was $22,000 or less than a penny per basic and diluted share compared to $382,000 or $0.04 per basic and dilute share in the third quarter of fiscal 2013. Our balance sheet remained solid with approximately $27 million of working capital as of the end of the quarter. Our total bank debt less cash as of June 27, 2014 was approximately $33.8 million, down from $34.3 million at the end of our prior fiscal year. With that I will now turn the call back over to Barry.

[Barry Gilbert:]

Thank you, Mike. Mike discussed our financial results. I’d like to discuss some of the events that could impact our future. We may be entering a new phase of our growth. I use the word “may” because as you can see from this quarter’s announcement and what we have presented over the past six quarters, we’ve had numerous moving pieces. We have entered the space marketplace. When we purchased Southern California Braiding, SCB, we were aware that they were doing some development work for NASA and that SCB was NASA’s small business subcontractor of the year in 2010. However at the time it was clear if the programs would continue. We and they were optimistic. Over the last four years we’ve had our challenges with SCB. Challenges which have been well documented and discussed and I have certainly addressed my fair share of questions as to the quality of acquisitions. Despite all the issues we continue funding the space program development work, to prematurely discuss the program would have been a mistake. We’re entering the phase for one of the programs where the cable wire harnesses IEC has been developing are starting to enter production. We are a supplier to primes supporting NASA and the SLS strategic launch system program. This program like all aerospace and defence programs are subject to Congressional budget approval. With that said this program could last decades. The SLS program is one of the two key programs we support and expect the program to start to unfold as 2015 progresses. The second program is still in development stage, albeit [ph] at final development. We expect development to continue for another year or so. However we expect this program to receive funding as well. Medical revenue as mentioned earlier has been inconsistent. Regardless, we continue to add customers and new programs. One of the keys to our success is how we support our customers when they have challenges. We don’t make any money during the engineering change phase of our program. However we are rewarded with strengthened relationships and new programs just the way it should be. Hence we wait for our customers to resolve their issues and it looks like they are doing so. As Mike mentioned earlier, we have moved from turnkey manufacturing to customer supply of material for one of our communication customers. The relationship we have with our customer is not balanced. We are working to resolve the issues and think we are on a good path. However the path has to make sense for both parties. Last Thursday we announced that the company had put a tax benefit preservation plan into place. Historically the company generated large net operating losses NOLs. Under certain circumstances tax code section 382, our results back on track and to continue attracting a diverse group of marquee customers and new programs from existing customers. I’ll be turning the phone back over to the operator in a moment and I’ll open the phones to take some questions. Before I do I’d like to remind callers that -- consistent with the last couple quarters that we will not be answering any questions giving the ongoing nature of our litigation and SEC investigation. I’d like now like to open the phones for questions.

[Operator:]

(Operator Instructions) Our first question today is coming from Mark Jordan from Noble Financial. Please proceed with your question.

[Mark Jordan:]

Good Morning, Barry. A question relative to SG&A in the third quarter. Obviously very low number, just 3.2 million, but it was down sequentially from 3.95 in the second fiscal quarter. Is this a function of development programs which were being – the expenses were flowing through SG&A going into production and it going up into cost of goods sold or has there been a fundamental change in the cost of the SG&A function?

[Barry Gilbert:]

Good morning, Mark. No, it really deals with the fact that some of the insurance refund is in that category and there is some element of SG&A cost reduction.

[Mark Jordan:]

Okay, so could you quantify the – I guess what I thought that that would have been in the restructuring line netting out at the 102, but that refund is in the SG&A?

[Barry Gilbert:]

Well no. Now that you’re saying it is in the restructuring line, but it’s in that broad category.

[Mark Jordan:]

Yeah, I was just looking at the specific line of SG&A. That being 3.195 compared to 3.952 in the second quarter. Quite a significant decline obviously.

[Mike Williams:]

Yeah, Mark, this is Mike. Yeah, most of the reduction is due to our continued efforts to reduce our overhead. But there was a favourable adjustment to our bad debt reserve in this fiscal quarter as opposed to last quarter where we had increase in our bad debt reserve. We’ve been able to recapture some old invoices this past quarter and that favourably impacted our SG&A number. But we’ve also been able to reduce our total overhead costs.

[Mark Jordan:]

Could you give us a normalized SG&A level then?

[Barry Gilbert:]

Mark, I’m not comfortable doing that. We want to [indiscernible] that we can put a couple docs to get, couple quarters together so that we can get a straight line.

[Mark Jordan:]

Okay. I guess hopefully this doesn’t get into your forward looking area. But you’re holding that down, you’re petting it down a little bit, but longer term --

[Barry Gilbert:]

We’ve had a number of moving pieces this year and some of the moving pieces went ahead and actually made reducing the debt a little bit more challenging. But we have a very decent goal. As we work our way through the budget process with the board, we’ll discuss in the future.

[Mark Jordan:]

Okay, a final question for me. SG&A you had a tough mix, a little bit lower sales volumes. So probably the lower end of a reasonable gross profit range over the near term here being the next two or three quarters. If you were to look at sort of the 11 ages [ph], sort of the lower end, low volume bad mix. What could be the higher end if you had a little bit better volume in a more favourable mix? What would be a reasonable high end range that you could shoot for?

[Barry Gilbert:]

I don’t want to go ahead and develop a calculation. But I think it is fair to say that we are expecting our gross profit to move forward or advance or get better, whichever way you want to look that first.

[Mark Jordan:]

Okay. Thank you Mike and Barry.

[Barry Gilbert:]

Thank you, Mark.

[Operator:]

(Operator Instructions). Our next question is coming from Mike Crawford from B. Riley. Please proceed with your question.

[Mike Crawford:]

Thank you. Barry, it sounds like you are on [tier end] of working through some of these engineering changes on your new medical customers, is that correct?

[Barry Gilbert:]

That is correct.

[Mike Crawford:]

Okay great, and then with those programs presumably running at better margins next year plus the return of your existing medical customer, how much mix increase would you be happy with next year in terms of medical as a percent of revenue, compared with 20% range where it has been running or low 20s.

[Barry Gilbert:]

It’s not – that’s a very fair question. Part of that really deals with whether some of the market shift takes place in industrial, and it also deals with how quickly some of the military aerospace programs that we talked about earlier come on board, and how slowly some of the other aerospace programs decline. And so I don’t want to hazard a guess.

[Mike Crawford:]

Okay, what about just relative to medical itself in terms of what --

[Barry Gilbert:]

Mike, we think it’s going to be stronger. But we just at the moment don’t want to go speculate how much stronger.

[Mike Crawford:]

Okay, and in terms of – the astronauts work with NASA and then you’re also hoping to get on some kind of digital [ph] cable system as well?

[Barry Gilbert:]

We haven’t discussed the cable system specifically. I can only say that we’re on a number of places. I just don’t want to get involved in the vehicular discussion.

[Mike Crawford:]

For next year, following anything on toward relative to resolving SEC investigation or suits related thereto. Is this a business that you expect should be able to have double digit EBITDA margins or – in fact, or do you think a high single digit EBITDA margin is more where this business you would expect to be running long term?

[Barry Gilbert:]

Your questions are fair and reasonable, and all of them by the way. But at the end of the day – question becomes when we get there, and so to pinpoint it to what I think will happen in 2015 or 2016 or any one of the other executives, I think it’s just challenging until we see a couple more things unfold.

[Mike Crawford:]

Okay, thank you.

[Barry Gilbert:]

Thank you.

[Operator:]

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

[Barry Gilbert:]

Effectively I’d like to thank everyone for calling in and thank you for your continued support of the company. I look forward to speaking with you next quarter. Take care.

[Operator:]

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.