Saturday, October 25, 2014

My Trip to the IEHC Annual Meeting

IEHC just held their annual shareholder meeting on Thursday and I was there. I decided to trek 3000 miles to attend because IEHC is a tiny company with a $12M marketcap and, not surprisingly, has little coverage in media. The company went up 75% in the 1 1/2 years that I owned it, and I needed more information to decide what to do next. So, I went mainly to see the company and its people in the flesh. Besides, I badly needed a vacation, even if it was for just 4 days.

So on the day of the meeting, I found myself in a busy business area of Brooklyn with a huge prison or military type building on one side. As I walked towards the company address in the rain, I found that prison or military building is the company's location! And the building is huge, the lobby has a 10-story high ceiling that makes you feel like you are in a train station. As I entered, I paid careful attention to my surroundings, because every impression can be a clue about the company. Next I had to ask someone where is the IEHC suite in this mammoth building. The person told me to go through an atrium which evidently used to be a railway platform because there is still the railroad tracks on each side, and there is even a WW2 era train car on one of the tracks! I even took pictures just in case anyone doesn't believe me. See below. If you look closely you can see weeds on the tracks. Look even closer and you can see that the surroundings were wet. That is because the atrium ceiling was leaking!

Entrance to IEHC; the office is on the 8th floor on the left

Now I will move on to the meeting. It was in a small partitioned conference room. I was one of three shareholders present, the other two being local to the area. The CEO Michael Offerman and his son David were there, as well as Robert Knoth, the CFO, the legal counsel and Jerome Rosenberg the long-time auditor. We started the meeting with the boilerplate legalese and voting formalities, then we spent about an hour on questions and discussions. I didn't expect to get any material nonpublic information, and I didn't. But it was extremely informative at the same time. I saw the interaction between the David and Michael, which was harmonious. Michael was a sharp, hands-on and knowledgeable for a 73 year old CEO. David, who is the marketing VP, also was passionate and knowledgeable. He appeared to be a person who deserves his position and I would gladly see him take over from the elder Offerman someday.

In the meeting us shareholders raised the issue of dividends and Michael Offerman said he has considered it but he was non-committal. But I learned that the IRS apparently pressures companies to have a clear path to either use retained earnings for capex or to distribute it. I got the impression management is still developing the growth strategy for the next few years as the company builds up more and more cash. The company increased equity by $1.8M last fiscal year but spent only $0.35 M in capex. If the company continues to perform well as it has done in the last few years, I think the company will accelerate capex spending. But it will still be in the same ballpark as it is now, maybe $0.5M. So then, given the about $2 M dollar expected cash flow in the coming years, management will have no choice but to give out at least a token dividend. I think 2% will make investors very happy. It will make me very happy.

After the meeting David gave us a brief tour of the factory. At this point, I just wanted reassurance that this small company really makes what it says it makes, and that it does employ over 100 employees as stated on its 10K. But it was during this tour that I met a most interesting 90 year old woman. This petite woman has been an IEH employee for 67 years! She originally worked for David's grandfather in the 1940's and not only has she worked for IEH for her entire life, but she has also brought her children and grandchildren into the company. This woman's presence told me more about the company management than anything I learned so far that day. As a shareholder in a company where the CEO owns more than 50% of the company, my biggest worry besides the health of the company is whether the insiders are treating the minority shareholders fairly. I know that Michael Offerman is paid $240,000 per year. And the company has a stock option plan but that plan is totally untapped. So I know the management compensation is very reasonable. And, after I met this lady, I am sure that the insiders will not take advantage of minority shareholders. A boss who can get that kind of loyalty from employees will not be out to screw the minority shareholders!

So, when I left the company, I felt very good about my IEH investment. I met the management and liked them. I saw the operation and it appeared efficient, well managed and low-cost, which leads me back to the company's building. This building I found later was the Brooklyn Army Terminal used in WW1 and WW2 to supply ships bound for Europe. The building now belongs to the City of New York who rents it out to businesses. And while it sure doesn't look impressive for an office building, I like it because it must be cheap. To me a company's premises should be as cheap as possible so long as it doesn't scare the customers and potential employees away. Below is a picture of the Brooklyn Army Terminal from the outside.


  1. Love the post. Did you go to the 2015 annual meeting? Any news from that?


    1. Yes I did go. There wasn't a great deal of new information this time so I chose not to write about it. I saw the new machines. We (3 outside shareholders) questioned the company at length about expanding market share and the most recent quarter results.

      The management couldn't really discuss the future growth with any confidence. And that is understandable to me, the company is a niche player participating in huge industries. Their fate is determined by macro factors out of their control. Also this isn't a company that has huge untapped markets it can clearly go after.

      My biggest question was about their Q2 results, which showed that sales maintained the record setting pace Q1 but it was all negated by an gross margin increase from 62% to 68%. Management said they tend to aggressively expense long term expenditures, as opposed to to capitalizing it on the balance sheet. This can create bumps in manufacturing costs as it did in Q2.

      One final thing I noticed from the two meetings was how David Offerman appeared to be more keenly aware of company products and operations than his father, the CEO. If you look at the company fortunes, be the sales or stock price, it really took off in the last 10 years or so. That coincides with David Offerman's tenure at IEH; he started in 2004. If it is a lot of David Offerman's doing then it is a very plausible argument for why the company will be in good hands, when the elder Offerman steps down. Interestingly, David is working part-time on his MBA. I am very impressed that he is still hungry, and he lives in Manhattan. So the financial pressures of raising a family in such an expensive location is all the more reason for taking the company to the next level.