Attached files
file | filename |
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EX-31.1 - IEC ELECTRONICS CORP | v191545_ex31-1.htm |
EX-10.2 - IEC ELECTRONICS CORP | v191545_ex10-2.htm |
EX-32.1 - IEC ELECTRONICS CORP | v191545_ex32-1.htm |
EX-31.2 - IEC ELECTRONICS CORP | v191545_ex31-2.htm |
EX-10.1 - IEC ELECTRONICS CORP | v191545_ex10-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
quarterly period ended June 25, 2010
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
transition period from ____ to ____
Commission
File Number 0-6508
IEC ELECTRONICS
CORP.
(Exact
name of registrant as specified in its charter.)
Delaware
|
13-3458955
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
105
Norton Street, Newark, New York 14513
(Address
of Principal Executive Offices) (Zip Code)
Registrant's
telephone number, including area code: (315) 331-7742
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (sec. 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
YES ¨ NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check one)
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
Non-Accelerated
filer
|
¨
|
Smaller
Reporting Company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES ¨ NO x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date (excludes treasury
shares):
Common
Stock, $0.01 Par Value – 9,087,029 shares as of July 23, 2010.
Page
|
||||
Number
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||||
PART
I
|
FINANCIAL
INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
|||
Consolidated
Balance Sheets as of: June 25, 2010 (Unaudited) and September 30,
2009
|
3
|
|||
Consolidated
Statements of Operations for the three months ended: June 25, 2010
(Unaudited) and June 26, 2009 (Unaudited)
|
4
|
|||
Consolidated
Statements of Operations for the nine months ended: June 25, 2010
(Unaudited) and June 26, 2009 (Unaudited)
|
5
|
|||
Consolidated
Statements of Cash Flows for the nine months ended: June 25, 2010
(Unaudited) and June 26, 2009 (Unaudited)
|
6
|
|||
Notes
to Consolidated Financial Statements (Unaudited)
|
7
|
|||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
18
|
||
Item
4.
|
Controls
and Procedures
|
19
|
||
PART
II
|
OTHER
INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
19
|
||
Item
1A.
|
Risk
Factors
|
19
|
||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
19
|
||
Item
3.
|
Defaults
Upon Senior Securities
|
19
|
||
Item
4.
|
(Removed
and Reserved)
|
19
|
||
Item
5.
|
Other
Information
|
19
|
||
Item
6.
|
Exhibits
|
19
|
||
Signatures
|
|
20
|
2
Item
1. Financial Statements
IEC
ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JUNE 25,
2010 AND SEPTEMBER 30, 2009
(in
thousands, except share and per share data)
June 25,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
(see cash note)
|
$ | 1,274 | $ | - | ||||
Accounts
receivable (net of allowance for doubtful accounts of $130 and $85,
respectively)
|
16,070 | 10,354 | ||||||
Inventories
|
10,281 | 6,491 | ||||||
Deferred
income taxes
|
2,050 | 2,050 | ||||||
Other
current assets
|
273 | 110 | ||||||
Total
current assets
|
29,948 | 19,005 | ||||||
Non-current
assets:
|
||||||||
Fixed
assets:
|
||||||||
Land
and land improvements
|
1,556 | 742 | ||||||
Buildings
and improvements
|
9,594 | 4,339 | ||||||
Machinery
and equipment
|
13,461 | 10,335 | ||||||
Furniture
and fixtures
|
4,601 | 4,131 | ||||||
Total
fixed assets, at cost
|
29,212 | 19,547 | ||||||
Less:
Accumulated depreciation
|
(17,844 | ) | (17,156 | ) | ||||
Net
fixed assets
|
11,368 | 2,391 | ||||||
Intangible
asset (net of $20 accumulated amortization)
|
340 | - | ||||||
Deferred
income taxes
|
11,473 | 13,026 | ||||||
Other
assets
|
104 | 47 | ||||||
Total
non-current assets
|
23,285 | 15,464 | ||||||
Total
assets
|
$ | 53,233 | $ | 34,469 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of long-term debt
|
$ | 2,494 | $ | 1,147 | ||||
Accounts
payable
|
6,495 | 4,183 | ||||||
Accrued
payroll and related expenses
|
1,926 | 1,564 | ||||||
Other
accrued expenses
|
1,245 | 531 | ||||||
Customer
deposits (see inventories note)
|
115 | 190 | ||||||
Total
current liabilities
|
12,275 | 7,615 | ||||||
Long-term
debt
|
17,278 | 6,600 | ||||||
Total
liabilities
|
29,553 | 14,215 | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Preferred
stock, $.01 par value: 500,000 shares authorized; Issued and
outstanding-none
|
- | - | ||||||
Common
Stock, $.01 par value: 50,000,000 shares authorized; 10,103,759 and
9,747,283 shares issued
|
101 | 97 | ||||||
Treasury
stock, at cost: 1,012,873 shares
|
(1,413 | ) | (1,413 | ) | ||||
Additional
paid-in capital
|
41,027 | 40,632 | ||||||
Accumulated
deficit
|
(16,035 | ) | (19,062 | ) | ||||
Total
shareholders' equity
|
23,680 | 20,254 | ||||||
Total
liabilities and shareholders' equity
|
$ | 53,233 | $ | 34,469 |
The
accompanying notes are an integral part of these consolidated financial
statements.
3
IEC
ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THREE
MONTHS ENDED JUNE 25, 2010 AND JUNE 26, 2009
(in
thousands, except share and per share data)
3 Months Ended
|
||||||||
June 25,
|
June 26,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Net
sales
|
$ | 26,095 | $ | 17,346 | ||||
Cost
of sales
|
21,439 | 14,556 | ||||||
Gross
profit
|
4,656 | 2,790 | ||||||
Selling
and administrative expenses
|
2,388 | 1,463 | ||||||
Operating
profit
|
2,268 | 1,327 | ||||||
Interest
and financing expense
|
238 | 90 | ||||||
Other
(income)/expense
|
17 | (151 | ) | |||||
Income
before provision for income taxes
|
2,013 | 1,388 | ||||||
Provision
for income taxes:
|
||||||||
Currently
payable
|
124 | 30 | ||||||
Tax
expense/(offset by NOL carryforwards)
|
651 | 455 | ||||||
Total
provision for income taxes
|
775 | 485 | ||||||
Net
income
|
$ | 1,238 | $ | 903 | ||||
Net
income per common and common equivalent share:
|
||||||||
Basic
|
$ | 0.14 | $ | 0.11 | ||||
Diluted
|
$ | 0.13 | $ | 0.10 | ||||
Weighted
average number of common and common equivalent shares
outstanding:
|
||||||||
Basic
|
9,055,280 | 8,524,317 | ||||||
Diluted
|
9,629,326 | 9,322,368 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
IEC
ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR NINE
MONTHS ENDED JUNE 25, 2010 AND JUNE 26, 2009
(in
thousands, except share and per share data)
9 Months Ended
|
||||||||
June 25,
|
June 26,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
Net
sales
|
$ | 69,387 | $ | 49,538 | ||||
Cost
of sales
|
57,900 | 41,908 | ||||||
Gross
profit
|
11,487 | 7,630 | ||||||
Selling
and administrative expenses
|
5,922 | 4,214 | ||||||
Operating
profit
|
5,565 | 3,416 | ||||||
Interest
and financing expense
|
594 | 304 | ||||||
Other
(income)/expense
|
205 | (217 | ) | |||||
Income
before provision for income taxes
|
4,766 | 3,329 | ||||||
Provision
(benefit) for income taxes:
|
||||||||
Currently
payable
|
186 | 70 | ||||||
Tax
expense/(offset by NOL carryforwards)
|
1,553 | (794 | ) | |||||
Total
provision (benefit) for income taxes
|
1,739 | (724 | ) | |||||
Net
income
|
$ | 3,027 | $ | 4,053 | ||||
Net
income per common and common equivalent share:
|
||||||||
Basic
|
$ | 0.34 | $ | 0.46 | ||||
Diluted
|
$ | 0.32 | $ | 0.43 | ||||
Weighted
average number of common and common equivalent shares
outstanding:
|
||||||||
Basic
|
8,955,212 | 8,745,240 | ||||||
Diluted
|
9,606,748 | 9,386,616 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
IEC
ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR NINE
MONTHS ENDED JUNE 25, 2010 AND JUNE 26, 2009
(thousands)
9 Months Ended
|
||||||||
June 25,
|
June 26,
|
|||||||
2010
|
2009
|
|||||||
(Unaudited)
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 3,027 | $ | 4,053 | ||||
Non-cash
adjustments:
|
||||||||
Stock-based
compensation
|
183 | 121 | ||||||
Depreciation
and amortization
|
725 | 215 | ||||||
Directors'
fees paid in stock
|
21 | 27 | ||||||
(Gain)/loss
on sale of fixed assets
|
(10 | ) | (5 | ) | ||||
Deferred
tax expense
|
1,553 | (724 | ) | |||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,771 | ) | 369 | |||||
Inventories
|
654 | (361 | ) | |||||
Other
current assets
|
(94 | ) | (55 | ) | ||||
Accounts
payable
|
1,201 | (1,911 | ) | |||||
Accrued
expenses
|
(81 | ) | (42 | ) | ||||
Customer
deposits
|
(75 | ) | (373 | ) | ||||
Net
cash flows from operating activities
|
5,333 | 1,314 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases
of fixed assets
|
(1,004 | ) | (1,301 | ) | ||||
Proceeds
from sale of fixed assets
|
10 | 11 | ||||||
Acquisition
of GTC (see acquisition note)
|
(15,111 | ) | - | |||||
Net
cash flows from investing activities
|
(16,105 | ) | (1,290 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Increase
(decrease) in borrowings under line of credit
|
4,127 | (79 | ) | |||||
Repayments
under loan agreements and notes
|
(1,518 | ) | (852 | ) | ||||
Borrowings
under loan agreements
|
9,316 | 828 | ||||||
Proceeds
from exercise of stock options
|
195 | 79 | ||||||
Financing
costs capitalized
|
(74 | ) | - | |||||
Net
cash flows from financing activities
|
12,046 | (24 | ) | |||||
Net
cash flows for the period
|
1,274 | 0 | ||||||
Cash
and cash equivalents, beginning of period
|
0 | 0 | ||||||
Cash
and cash equivalents, end of period
|
$ | 1,274 | $ | 0 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 543 | $ | 337 | ||||
Income
taxes
|
116 | 18 | ||||||
Supplemental
disclosure of non-cash adjustments:
|
||||||||
Deferred
tax adjustment relating to seller notes
|
$ | - | $ | 844 | ||||
Deferred
tax adjustment relating to shares returned
|
- | 1,050 | ||||||
Return
of exercised options to treasury stock
|
- | 140 |
The
accompanying notes are an integral part of these consolidated financial
statements.
6
IEC
ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 25,
2010
NOTE
1. OUR BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our
Business
IEC
Electronics Corp.("IEC", "we", "our", “us”, the “Company”) is a premier provider
of electronic manufacturing services (“EMS”) to advanced technology companies.
We specialize in the custom manufacture of high reliability, complex circuit
cards, system level assemblies and a wide array of custom cable/wire harness
assemblies. We excel where quality is of paramount importance and
when low to medium volume, high mix production is the norm. We
utilize state-of-the art, automated circuit card assembly equipment together
with a full complement of high reliability manufacturing stress testing
technologies. With our customers at the center of everything we do,
we have created a high intensity, responsive culture capable of reacting and
adapting to their ever-changing needs. Our customer centric approach
offers a high degree of flexibility while simultaneously complying with rigorous
quality and on-time delivery standards. As a true extension of our
customer’s operation, we have applied industry-leading Six Sigma and Lean
Manufacturing principles to eliminate waste and reduce our customers’ total cost
of ownership. While many EMS services are viewed as commodities, we believe we
set ourselves apart through an uncommon mix of capabilities,
including:
|
·
|
A
world class Technology Center that combines dedicated prototype
manufacturing with an on-site Materials Analysis Lab (headed by two staff
PhD’s) enabling the seamless transition of complex electronics from design
to production
|
|
·
|
In-house
custom functional test development supporting complex system-level
assembly, test, troubleshooting and end-order
fulfillment
|
|
·
|
A
sophisticated Lean/Six Sigma continuous improvement program supported by
five certified Six Sigma Blackbelts delivering best-in-class
results
|
|
·
|
An
industry-leading Web Portal providing customers real-time access to a wide
array of critical data
|
Acquisition
On
December 16, 2009 the Company acquired all of the stock of General Technology
Corporation (“GTC”) from Crane International Holdings, Inc. The
acquired business employs complementary technologies and serves markets similar
to IEC’s. GTC occupies an important niche in the military and defense
market, helping its customers manage their legacy products and
programs. The acquisition broadens IEC’s product mix and further
diversifies our customer base. The operation is located in
Albuquerque, New Mexico and is led by a solid management team.
The
purchase price for the GTC acquisition was $15.1 million, and the transaction
was funded by senior bank debt. The purchase price may be increased
or decreased subject to a final working capital reconciliation. That
final reconciliation is the subject of a dispute between IEC and the seller, and
has been referred to binding arbitration for resolution.
Under the
acquisition method of accounting the Company is required to measure and record
the fair value of assets acquired and liabilities assumed, and any excess of
purchase price over the fair value of net assets would be recorded as
goodwill. Based on information available as of June 2010, we do not
expect a goodwill asset to be recorded in connection with this
acquisition. Fair values as of the acquisition date are indicated in
the following table:
December 16, 2009
|
||||
(thousands)
|
||||
Accounts
receivable, net
|
$ | 3,945 | ||
Inventories
|
4,444 | |||
Other
current assets
|
69 | |||
Land
|
813 | |||
Building
|
5,087 | |||
Equipment
|
2,761 | |||
Intangible
asset
|
360 | |||
Total
assets acquired
|
17,479 | |||
Accounts
payable
|
$ | 1,111 | ||
Accruals
and other liabilities
|
1,157 | |||
Long-term
debt
|
100 | |||
Total
liabilities acquired
|
2,368 | |||
Net
assets acquired/purchase price (Purchase price funded with bank
debt)
|
$ | 15,111 |
7
The
following table represents IEC’s pro forma consolidated results of operations as
if the acquisition of GTC had occurred at the beginning of each period
presented. These pro forma results have been prepared by adjusting
the historical IEC results to include GTC results of operations, as well as
incremental interest and other expenses related to the acquisition
debt. The pro forma results do not include any cost savings or
additional sales that may result from the combination of IEC and GTC
operations. The pro forma results may not necessarily reflect the
consolidated operations that would have resulted from consummating the
acquisition at the beginning of such periods, nor are they necessarily
indicative of future results.
3 Months Ended
|
9 Months Ended
|
|||||||||||||||
June 25,
|
June 26,
|
June 25,
|
June 26,
|
|||||||||||||
(Proforma)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
(in thousands, except share and per share data)
|
||||||||||||||||
Net
sales
|
$ | 26,095 | $ | 24,090 | $ | 75,025 | $ | 66,686 | ||||||||
Income
before income taxes
|
2,013 | 1,852 | 4,976 | 3,534 | ||||||||||||
Net
income
|
1,238 | 1,196 | 3,160 | 4,183 | ||||||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | 0.14 | $ | 0.14 | $ | 0.35 | $ | 0.48 | ||||||||
Diluted
|
0.13 | 0.13 | 0.33 | 0.45 | ||||||||||||
Weighted
average common and common equivalent shares:
|
||||||||||||||||
Basic
|
9,055,280 | 8,524,317 | 8,955,212 | 8,745,240 | ||||||||||||
Diluted
|
9,629,326 | 9,322,368 | 9,606,748 | 9,386,616 |
Fiscal
Calendar
The
Company’s fiscal year begins on October 1st and each quarter ends on the last
Friday of the final month of such quarter, with the exception of the fourth
quarter, which ends on September 30th.
Consolidation
The
consolidated financial statements include the accounts of IEC and its wholly
owned subsidiaries, IEC Electronics Wire and Cable, Inc. (“Wire and Cable”) and,
since December 16, 2009, GTC. All significant intercompany
transactions and accounts have been eliminated.
Cash
and Cash Equivalents
Cash and
cash equivalents include highly liquid investments with original maturities of
three months or less. The Company's cash and cash equivalents are principally in
deposits with M&T Bank Corp.
Allowance
for Doubtful Accounts
The
Company establishes an allowance for doubtful or uncollectible trade accounts
receivable based on the age of outstanding invoices and management’s evaluation
of collectability of outstanding balances.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost and are depreciated over various
estimated useful lives using the straight-line method. Maintenance
and repairs are charged to expense as incurred; renewals and improvements are
capitalized. At the time of retirement or other disposition of
property, plant and equipment, the cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in other
income.
Depreciable
lives generally used for various assets are as follows:
Estimated
|
|||
Useful Lives
|
|||
(years)
|
|||
Land
improvements
|
10 | ||
Building
and improvements
|
5
to 40
|
||
Machinery
and equipment
|
3
to 5
|
||
Furniture
and fixtures
|
3
to 7
|
8
Intangible
Asset
GTC’s
building and land were acquired subject to an Industrial Revenue Bond
("IRB") that exempts the property from real estate taxes for the term of
the IRB. At date of acquisition, the $360 thousand estimated value of
the tax abatement was recorded as an intangible asset that is being amortized on
a straight-line basis over the remaining term of the IRB, which matures March 1,
2019.
Long-Lived
Assets
FASB ASC
360-10 (prior authoritative literature, Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets”) requires that the Company test long-lived assets for
recoverability whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment charges were
recorded during the three or nine month periods ending June 25, 2010 and June
26, 2009.
Fair
Value of Financial Assets and Liabilities
Under
FASB ASC 825 (prior authoritative literature, FASB SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments”) the Company is required to disclose
the fair value of financial instruments for which it is practicable to estimate
value.
The
Company’s financial instruments consist of cash, accounts receivable, accounts
payable, accrued liabilities and debt. IEC believes that the carrying
amounts approximate fair value for all such instruments.
FASB ASC
820 (prior authoritative literature: SFAS No. 157, “Fair Value Measurements”)
defines fair value, establishes a framework for measurement, and expands
disclosure about fair value measurements. Topic No. 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (exit price). Topic No. 820 classifies the inputs
used to measure fair value into the following hierarchy:
Level
1:
|
Quoted
prices for identical assets or liabilities in active
markets.
|
Level
2:
|
Quoted
market prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in markets that are
not active; and model-derived valuations whose inputs are observable or
whose significant value drivers are
observable.
|
Level
3:
|
Pricing
inputs are unobservable for the assets and liabilities, including
situations in which there is little to no market
activity.
|
Fair
values assigned to GTC’s acquired fixed assets were determined using Level 2,
and the fair value associated with GTC’s intangible asset was based on Level 3
inputs. The inputs used to determine fair value require significant
management judgment and estimation.
Revenue
Recognition
Revenue
from sales is recognized when goods are shipped or title and risk of ownership
have passed, the price to the buyer is fixed or determinable, and realization is
reasonably assured. Service revenues are recognized upon completion
of the services. The Company’s net revenue is principally derived from the sale
of electronic products built to customer specifications. The Company
also derives revenue from design services and repair work. Provisions
for discounts and rebates to customers, estimated returns and allowances and
other adjustments are recorded in the period the related sales are
booked.
Stock-Based
Compensation
FASB ASC
718 (prior authoritative literature, FASB SFAS No. 123(R) “Share-Based
Payment”), requires that measurement of the cost of employee services received
in exchange for an award of equity instruments be based on the grant-date fair
value of the award. Such costs are recorded over the periods employees are
required to render services in exchange for the awards.
Income
Tax/Deferred Tax Policy
FASB ASC
740 (prior authoritative literature, FASB SFAS No. 109, “Accounting for
Income Taxes”) requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are based on the differing treatment of certain items
between the Company’s financial records and tax returns. Deferred tax
assets are also established for tax benefits associated with tax loss and tax
credit carryforwards. Such deferred balances reflect tax rates by tax
jurisdiction that are scheduled to be in effect, based on currently enacted tax
laws, in the years the book/tax differences reverse and tax loss and tax credit
carryforwards are expected to be realized. An allowance is
established for any deferred tax asset that is not expected to be
realized.
9
FASB ASC
740 also prescribes a comprehensive model for how a company should measure,
recognize, present, and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on a tax
return. The Company recognizes the tax benefits from uncertain tax
positions only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial
statements from such positions are measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate
settlement. Interest and penalties, if incurred, are included in
interest and financing expense. The Company’s income tax filings are
subject to audit by various taxing authorities. The Company’s open
audit periods are 2007 – 2009. The Company does not believe it has
any material uncertain tax positions.
Earnings
Per Share
Basic
earnings per common share are calculated by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for
each period. Diluted earnings per common share are calculated by
adding to weighted-average shares outstanding the incremental shares resulting
from the assumed exercise of all potentially dilutive stock
options.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses during the reporting period. Actual
results may differ from management’s estimates.
Unaudited
Financial Statements
The
accompanying unaudited financial statements for the three and nine months ended
June 25, 2010 have been prepared in accordance with generally accepted
accounting principles for interim financia1 information. In the
opinion of management all adjustments considered necessary for a fair
presentation, which consist of normal recurring adjustments, have been
included. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's September 30, 2009 Annual Report on Form 10-K.
Recently
Issued Accounting Standard
FASB ASC
805 (prior authoritative literature: FASB SFAS No. 141(R), “Business
Combinations”), establishes principles and requirements for how an acquirer:
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. FASB ASC 805 was effective
for fiscal years, as well as interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company adopted these
provisions at the beginning of the current fiscal year, and the GTC acquisition
was recorded in accordance with FASB ASC 805.
NOTE
2. INVENTORIES
Inventories
are stated at the lower of weighted average cost (first-in, first-out) or
market. The Company regularly assesses slow-moving, excess and
obsolete inventory and maintains a balance sheet reserve to adjust the value of
its inventories as needed. The major classifications of inventories
are as follows at period end:
June 25,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
(thousands)
|
||||||||
Raw
materials
|
$ | 6,049 | $ | 3,365 | ||||
Work-in-process
|
3,819 | 2,555 | ||||||
Finished
goods
|
413 | 571 | ||||||
$ | 10,281 | $ | 6,491 |
From time
to time the Company receives deposits from customers to mitigate inventory risk
resulting from the customer’s delay of shipping date. When received,
the deposits are carried as other current liabilities but relate to a portion of
the Company’s raw material inventory. Customer deposits totaled $.1
million and $.2 million at June 25, 2010 and September 30, 2009,
respectively.
10
NOTE
3. CREDIT FACILITIES
M&T
Bank Credit Facilities
On
December 16, 2009 the Company entered into an Amended and Restated Credit
Facility Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust
Company (“M&T”), a New York banking corporation (the “Lender”). The
Lender has agreed to provide the Company $25.5 million in aggregate senior
secured credit facilities (the “2009 Senior Secured Credit Facilities”). These
facilities modify and replace the prior Revolving Credit Facility, modify and
replace the prior Equipment Line while continuing the term debt outstanding, and
are in addition to the existing energy loan, the existing Term Loan and the
existing M&T Sale-Leaseback as outlined in the original Credit Facility
Agreement dated May 30, 2008 between the Company and the Lender (the “Prior
Credit Agreement”).
The
following summarizes the various tranches of the 2009 Senior Secured Credit
Facilities:
|
§
|
A
$15 million Revolving Credit Facility (the “Revolver”) available for
direct borrowings. Borrowings under the Revolver cannot exceed the lesser
of the Borrowing Base or $15 million. The Borrowing Base is the sum of 85%
of eligible receivables plus 35% of eligible inventories, as those terms
are defined in the Credit Agreement. Borrowings under the Revolver bear
interest at LIBOR plus the Applicable Margin, which varies based on the
Company's ratio of Debt/EBITDARS (as that ratio is defined in the Credit
Agreement). The Credit Agreement prescribes a minimum threshold for the
LIBOR component of interest, which is above the current market level of
LIBOR. As a result, variable interest rates paid by the Company do not at
present fluctuate with a decrease in LIBOR interest rates. At inception,
the Revolver interest rate was 4.25% and interest is paid monthly. The
Company incurs a small quarterly commitment fee based on the unused
portion of the Revolver. As of June 25, 2010, outstanding borrowings under
the Revolver were $8.0 million, and the interest rate was 4.25%. The
Revolver matures on December 16,
2012.
|
|
§
|
A
$5 million Term Loan (the “GTC Term Loan”) amortized over 60 months
beginning December 16, 2009. The principal amount of the term loan is
being repaid in equal monthly installments of $83,333. Borrowings under
the GTC Term Loan bear interest at LIBOR plus the Applicable Margin, which
varies based on the Company's ratio of Debt/EBITDARS. The Credit Agreement
prescribes a minimum threshold for the LIBOR component of interest, which
is above the current market level of LIBOR. As a result, variable interest
rates paid by the Company do not at present fluctuate with a decrease in
LIBOR. The GTC Term Loan currently bears interest at the rate of 4.5%. The
outstanding principal balance was $4.5 million as of June 25, 2010. The
GTC Term Loan matures on December 16,
2014.
|
|
§
|
A
$4 million Commercial Mortgage Term Loan (the “Mortgage Loan”). The
principal amount of the Mortgage Loan is being repaid in 60 equal monthly
installments of $22,222, plus a balloon payment due at maturity on
December 16, 2014. Similar to the other M&T credit facilities,
borrowings under the Mortgage Loan bear interest at LIBOR plus the
Applicable Margin, which varies based on the Company's ratio of
Debt/EBITDARS. Because the minimum LIBOR threshold is above the current
market level of LIBOR, variable interest rates paid by the Company do not
fluctuate at present with a decrease in LIBOR. The Mortgage Loan currently
bears interest at the rate of 4.5%. The outstanding principal balance was
$3.9 million as of June 25, 2010.
|
|
§
|
A
$1.5 million Equipment Line of Credit (the “Equipment Line”). Borrowings
under this facility are available to the Company at the discretion of the
Lender until December 16, 2010 or such later date as may be agreed upon by
the Company and the Lender. Borrowings under the Equipment Line cannot
exceed $1.5 Million in aggregate, including any borrowings under the Prior
Credit Agreement. Of the $1.5 million, as of June 25, 2010 the Company had
borrowed $0.8 million under the Prior Credit Agreement in three tranches:
$.1 million in November, 2008, $.2 million in November 2008, and $.5
million in June 2009. These three tranches bear interest at the rate of
3.83%, 3.25%, and 2.85% respectively, and borrowings are being repaid in
48 equal monthly installments plus interest. Any new borrowings under the
Equipment Line would currently bear interest at
4.5%.
|
In
addition to the Senior Secured Credit Facilities, the Company’s other
outstanding credit facilities with M&T are summarized as
follows:
|
§
|
A
$1.7 million term loan amortized in equal monthly installments over 60
months beginning June, 2008. The interest rate is fixed at 6.7%. As a
result of a $.5 million partial prepayment in September, 2008, the
remaining balance as of June 25, 2010 was $0.5
million.
|
|
§
|
A
$2.0 million sale-leaseback of a portion of the Company’s fixed assets,
with the five year lease commencing June 27, 2008. Annual lease payments
are fixed at $.39 million, and, as of June 25, 2010, the aggregate
remaining lease payments were $1.1 million. While this transaction is
reported as an operating lease in the Company’s financial statements, it
is included with debt for the purposes of calculating covenant compliance
under the Senior Secured Credit
Facilities.
|
The
Credit Agreement is secured by, among other things, a security interest in the
assets of the Company, including Wire and Cable and GTC, and a mortgage
encumbering GTC’s interest in property and improvements located in Albuquerque,
New Mexico. The Credit Agreement also contains various affirmative and negative
covenants including financial covenants. The Company is required to maintain
quarterly and annual minimum EBITDARS (defined as net income plus interest
expense, tax expense, depreciation, amortization of intangible assets,
sale-leaseback rent payments, and non-cash stock option expense, minus cash
taxes paid) thresholds, a maximum debt-to-EBITDARS ratio, and a minimum fixed
charge coverage ratio. These are calculated on a three and twelve month trailing
basis, as applicable. The Company was in compliance with all these covenants as
of June 25, 2010. (See Liquidity and Capital Resources section of Management’s
Discussion and Analysis.)
11
The
Company has an energy loan (the "NYSERDA Loan") from M&T in the original
principal amount of $0.2 million. The NYSERDA Loan is a low interest loan,
subsidized by New York State, to facilitate energy conservation projects. The
NYSERDA Loan bears interest at 2.08% and is being repaid in 60 equal monthly
installments of $3,400 until maturity in April 2013. The outstanding
principal balance was $.1 million as of June 25, 2010. The NYSERDA
Loan is subject to the same financial covenants
as those contained in the Credit Agreement.
Other
Credit Facilities
As part
of the GTC purchase, the Company assumed responsibility for an Industrial
Revenue Bond (the “IRB”) issued by the City of Albuquerque. The IRB
matures in March, 2019, bears interest at a rate of 5.625%, and had an
outstanding principal balance of $0.1 million as of June 25, 2010.
A portion
of the May, 2008 acquisition of Wire and Cable was financed by three
subordinated promissory notes (the "Seller Notes") in the aggregate principal
amount of $3.8 million. The Seller Notes bear interest at 4% and are
being repaid in 20 equal quarterly installments of $.5 million through April,
2013. As a result of a $.16 million partial prepayment in March 2008
the aggregate principal balance of the Seller Notes outstanding at June 25, 2010
was $1.8 million. Each of the Seller Notes is subordinated to the
indebtedness of the Company under the Credit Agreement.
Aggregate
debt maturities for the five twelve-month periods subsequent to June 25, 2010
are provided below.
Years ending
|
Debt
|
|||
in June,
|
Maturities
|
|||
(thousands)
|
||||
2011
|
$ | 2,494 | ||
2012
|
2,357 | |||
2013*
|
10,154 | |||
2014
|
1,330 | |||
2015
|
3,437 |
*Includes
Revolver balance of $8.0 million as of June 25, 2010.
NOTE
4. INCOME TAXES
The
provisions for (benefits from) income taxes for the three and nine-month periods
ended June 25, 2010 and June 26, 2009 are summarized as follows.
3 Months Ended
|
9 Months Ended
|
|||||||||||||||
June 25,
|
June 26,
|
June 25,
|
June 26,
|
|||||||||||||
(thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Current
tax expense:
|
||||||||||||||||
Federal
|
$ | 40 | $ | 28 | $ | 95 | $ | 66 | ||||||||
State/other
|
84 | 2 | 91 | 4 | ||||||||||||
Deferred
tax expense (benefit):
|
||||||||||||||||
Federal
|
697 | 444 | 1,572 | (549 | ) | |||||||||||
State/other
|
(46 | ) | 11 | (19 | ) | (245 | ) | |||||||||
Total
income tax provision
|
$ | 775 | $ | 485 | $ | 1,739 | $ | (724 | ) |
12
The
following table displays deferred tax assets by category as of June 25, 2010 and
September 30, 2009.
June
25,
|
September 30,
|
|||||||
2010
|
2009
|
|||||||
(thousands)
|
||||||||
Net
operating loss and AMT credit carryovers
|
$ | 12,593 | $ | 13,940 | ||||
Accelerated
depreciation
|
527 | 546 | ||||||
New
York State investment tax/other credits
|
2,676 | 3,265 | ||||||
Inventories
|
110 | 140 | ||||||
Other
|
252 | 292 | ||||||
Total
before allowance
|
16,158 | 18,183 | ||||||
Valuation
allowance
|
(2,635 | ) | (3,107 | ) | ||||
Deferred
tax asset (current and deferred)
|
$ | 13,523 | $ | 15,076 |
IEC has a
net operating loss carryforward for income tax purposes of approximately $34.5
million (estimated tax benefit is $12.3 million), expiring in various years
through 2025. In addition, $2.7 million of New York State investment
tax and other credits are available to the Company through various expiration
dates ending in 2017. FASB ASC 740 requires the Company to establish
an asset on the balance sheet to reflect the future value associated with these
tax loss and tax credit carryforwards.
At June
25, 2010, a valuation allowance of $2.6 million offsets deferred tax assets
established for New York State investment tax and other
credits. These credits expire in 2017 and cannot be utilized until
the New York net operating loss carryforward is fully exhausted.
NOTE
5. STOCK-BASED COMPENSATION
Stock
Option Plan
In
February 2002, shareholders approved IEC's 2001 Stock Option and Incentive Plan
(the "2001 Plan"). As amended from time to time, the number of shares of
common stock authorized for issuance
under the Plan is 3,100,000. Under the 2001 Plan, officers, key
employees, directors and other key individuals may be granted stock options,
restricted stock and other types of equity awards. As of June 25,
2010, there were 466,712 shares available for issuance under the 2001
Plan.
The
Company issued 54,000 and 105,382 options during the three and nine-month
periods ending June 25, 2010, respectively, and 20,000 and 78,000 options during
similar periods ending June 26, 2009. The fair value of each option
issued was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions.
3 Months Ended
|
9 Months Ended
|
|||||||||||||||
June 25,
|
June 26,
|
June 25,
|
June 26,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Assumptions for
Black-Scholes:
|
||||||||||||||||
Risk-free
interest rate
|
2.42%
|
2.53%
|
2.35%
|
2.30%
|
||||||||||||
Expected
term in years
|
4.9%
|
4.9%
|
4.9%
|
4.7%
|
||||||||||||
Volatility
|
54%
|
54%
|
54%
|
54%
|
||||||||||||
Expected
annual dividends
|
none
|
none
|
none
|
none
|
||||||||||||
Value of options
granted:
|
||||||||||||||||
Number
of options granted
|
54,000
|
20,000
|
105,382
|
78,000
|
||||||||||||
Weighted
average fair value/share
|
$ |
2.16
|
$ |
1.59
|
$ |
2.27
|
$ |
0.80
|
||||||||
Fair
value of options granted
|
$ |
116,640
|
$ |
31,800
|
$ |
239,217
|
$ |
62,400
|
13
Restricted
Stock Awards
The
Company granted 12,500 and 145,351 shares of restricted stock during the three
and nine month periods ending June 25, 2010, respectively. Of the
145,351, 68,000 shares were awarded to the GTC management team for retention
purposes, 68,261 shares were part of the Company’s senior management incentive
plan, and the remaining 9,090 shares were granted to the board of directors. As
a result of subsequent management changes 20,000 shares of the GTC management
awards and 5,753 of senior management awards were forfeited. The range of share
prices and vesting periods are as follows:
3 Months Ended June 25, 2010
|
||||||||||||
|
# Shares
|
Share Price
|
Vesting
|
|||||||||
Restricted
Shares Granted:
|
||||||||||||
GTC
management retention
|
- | |||||||||||
Senior
management incentive plan
|
12,500 |
$4.42-$5.02
|
2011-2014
|
|||||||||
Board
of Directors
|
- | |||||||||||
|
12,500 | |||||||||||
|
||||||||||||
|
9 Months Ended June 25, 2010
|
|||||||||||
|
# Shares
|
Share Price
|
Vesting
|
|||||||||
Restricted
Shares Granted:
|
||||||||||||
GTC
management retention
|
68,000 |
$3.49
|
2011-2014
|
|||||||||
Senior
management incentive plan
|
68,261 |
$4.32-$5.02
|
2011-2014
|
|||||||||
Board
of Directors
|
9,090 |
$4.76
|
2011-2013
|
|||||||||
|
145,351 | |||||||||||
Prior
year grants outstanding
|
10,000 | |||||||||||
Grants
forefeited
|
(25,753 | ) | ||||||||||
Grants
outstanding at June 25, 2010
|
129,598 |
NOTE
6. MAJOR CUSTOMER CONCENTRATIONS
The
Company’s top two customers represented 23.7% and 28.6% of total sales for the
quarters ended June 25, 2010 and June 26, 2009, respectively.
For the
nine months ended June 25, 2010 and June 26, 2009, the Company’s top two
customers represented 22.1% and 29.8% of total sales, respectively.
On June
25, 2010, receivables from one customer accounted for 12.4% of total Company
accounts receivable. For the nine months ended June 25, 2010, sales
by market sector expressed as a percent of total Company sales were as
follows: Military/Aerospace – 49%; Industrial & Communications -
27%; and Medical/Other - 24%. For the same nine-month period ending
June 26, 2009, sales by market sector expressed as a percent of total Company
sales were: Military/Aerospace – 55%; Industrial & Communications – 31%; and
Medical/Other - 14%.
NOTE
7. LITIGATION
With the
exception of the binding arbitration proceeding discussed in the Acquisition section of Note
1., there are no legal proceedings pending to which IEC or its subsidiaries are
a party or of which any of their property is subject. To our
knowledge, there are no material legal proceedings to which any director,
officer or affiliate of IEC, or any beneficial owner of more than five percent
(5%) of common stock, or any associate of any of the foregoing, is a party
adverse to IEC or its subsidiaries.
NOTE
8. COMMITMENTS AND CONTINGENCIES
The
Company is obligated under non-cancelable operating leases, primarily for
manufacturing equipment, buildings, and office equipment. The Wire
and Cable buildings are leased under a non-cancelable operating lease which
expires in December 2012. These operating leases generally contain
renewal options and provide for payment of executory costs by the lessee (the
Company). Executory costs typically include taxes, maintenance and
insurance. Approximate annual minimum lease obligations are as
follows:
Year
ending
|
Annual lease
|
|||
September 30,
|
obligations
|
|||
(thousands)
|
||||
2010
|
$ | 685 | ||
2011
|
693 | |||
2012
|
693 | |||
2013
|
460 | |||
Total
minimum lease payments
|
$ | 2,531 |
14
Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
information in Management's Discussion & Analysis should be read in
conjunction with the accompanying consolidated financial statements and their
related notes.
Forward-looking
statements in this Form 10-Q include, without limitation, statements relating to
the Company's plans, future prospects, strategies, objectives, expectations,
intentions and adequacy of resources and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. These statements may be identified by their use of words like
"plans", "expects", "aims", "believes", "projects", "anticipates", "intends",
"estimates", "will", "should", "could", and other expressions that indicate
future events and trends. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include,
among others, the following: general economic and business
conditions, the timing of orders and shipments, availability of material,
product mix, changes in customer requirements and in the volume of sales to
principal customers, competition and technological change, the ability of the
Company to assimilate acquired businesses and to achieve anticipated benefits of
such acquisitions, the ability of the Company to control manufacturing and
operating costs, and satisfactory relationships with vendors. The
Company's actual results of operations may differ significantly from those
contemplated by such forward-looking statements as a result of these and other
factors, including factors set forth in the Company's Annual Report on Form 10-K
for the year ended September 30, 2009 and in other filings with the Securities
and Exchange Commission.
Results
of Operations - Three Months Ended June 25, 2010,
Compared
to the Three Months Ended June 26, 2009
3 Months Ended
|
||||||||||||
% Increase
|
June 25,
|
June 26,
|
||||||||||
(Decrease)
|
2010
|
2009
|
||||||||||
($ in thousands)
|
||||||||||||
Net
sales
|
50.4%
|
$ | 26,095 | $ | 17,346 | |||||||
Gross
profit
|
66.9%
|
$ | 4,656 | $ | 2,790 | |||||||
Gross
margin
|
1.8%
|
17.8 | % | 16.1 | % | |||||||
Selling
& administrative expense
|
63.2%
|
$ | 2,388 | $ | 1,463 | |||||||
S&A
expense as % of sales
|
0.7%
|
9.2 | % | 8.4 | % |
IEC’S
sales for the third quarter of 2010 significantly surpassed those for the same
quarter of the prior year. Net sales for the 2010 period were 50%
higher due partly to the acquisition of GTC in December, 2009. Sales
advanced 15% without the effect of GTC. The inconsistent national
economy has impacted some of IEC’s customers, others have continued to grow, and
the Company continues to experience solid new orders. IEC anticipates
continued growth during the remainder of 2010.
The
Company’s top two customers represented 24% of total sales for the quarter ended
June 25, 2010, with General Electric and DRS Technologies accounting for
approximately 12% each. For the comparable period ended June 26,
2009, Ultralife accounted for 15% and General Electric accounted for 13% of
total revenues. For the three months ended June 25, 2010 the military/aerospace
sector represented 56% of sales, the medical/other sector represented 22% of
sales, and the industrial & communications sector represented 22% of Company
sales. On June 24, 2010 the Company announced that it received an order from one
of its military customers valued at more than $6.1 million. Deliveries will
commence December 1, 2010 and will be completed by December 2012.
Gross
profit increased by $1.9 million over the same quarter of the prior year and was
significantly ahead of 2009 as a percentage of sales. As revenues
continue to grow, the Company maintains its focus on producing strong gross
margins through efficient labor utilization, a highly trained workforce,
realization of benefits associated with investments in capital equipment, and
Lean initiatives focused on driving operational efficiencies.
Selling
and administrative expenses increased as a percentage of sales in comparison to
the same three-month period of the prior fiscal year. This increase
is attributable to higher stock compensation expense in the current quarter, as
well as fees associated with our CFO transition. For additional
information about stock compensation expense, see “Stock-based Compensation”
Note 5 to the financial statements. Absent higher stock compensation
expense and expenses associated with transition of our CFO, the Company’s
selling and administrative costs would have remained constant as a percentage of
sales at 8.4%.
Interest
expense was $238 thousand for the quarter ended June 25, 2010, up from $90
thousand for the comparable 2009 quarter. Higher expense in 2010
reflects new borrowings to fund the GTC acquisition in the first quarter, and
the favorable interest rate realized in 2009 on IEC’s former revolving line of
credit. Further information regarding borrowings and applicable
interest rates is provided in the “Credit Facilities” Note 3 to the financial
statements. We continue to focus on managing working capital to
maximize cash flow, and reduce debt and interest expense.
15
Other
expense during the three months ending June 25, 2010 was $17 thousand, including
some final legal and professional services associated with the acquisition of
GTC. The Company recorded $150 thousand of other income during the comparable
period of the prior fiscal year due to a refund of sales tax, penalties and
accrued interest from the State of Alabama and one of its municipalities in
settlement of a long standing dispute over a previous use tax
assessment.
Income
tax expense for the 2010 quarter increased to $775 thousand from $485 thousand
in the prior year, due mainly to growth in the Company’s pretax
earnings. However, as a result of our net operating loss
carryforwards, we expect tax payments to be only a modest percentage of our
related financial statement expense for the foreseeable
future. Excluding income tax expense in both periods, pretax income
grew by 45.0%.
Basic and
diluted shares increased during the third quarter of 2010 versus the 2009
quarter as the result of the issuance of additional stock options and restricted
shares. In addition, IEC’s average stock price nearly doubled (1.9x)
as compared with the year-ago period. In computing diluted earnings
per share, a rising stock price increases the number of shares added to the
denominator to take into account the assumed exercise of options.
Results
of Operations - Nine Months Ended June 25, 2010,
Compared
to the Nine Months Ended June 26, 2009
9 Months Ended
|
||||||||||||
% Increase
|
June 25,
|
June 26,
|
||||||||||
(Decrease)
|
2010
|
2009
|
||||||||||
($
in thousands)
|
||||||||||||
|
||||||||||||
Net
sales
|
40.1%
|
$ | 69,387 | $ | 49,538 | |||||||
Gross
profit
|
50.6%
|
$ | 11,487 | $ | 7,630 | |||||||
Gross
margin
|
1.2%
|
16.6 | % | 15.4 | % | |||||||
Selling
& administrative expense
|
40.5%
|
$ | 5,922 | $ | 4,214 | |||||||
S&A
expense as % of sales
|
0.0%
|
8.5 | % | 8.5 | % |
IEC
produced three strong quarters in fiscal 2010, as net sales for the first nine
months of the year surpassed the revenue achieved in the same period of 2009 by
$19.8 million, or 40.1%. Net sales for the period advanced 16% without the
effect of GTC. While challenging economic conditions have
impacted some of IEC’s customers, others have continued to grow, and the Company
in turn continues to generate solid new orders and expects growth in both
revenue and profitability through the remainder of 2010.
For the
nine months ended June 25, 2010, General Electric accounted for 13.3% of the
Company’s total sales. For the comparable period ended June 26, 2009,
General Electric accounted for 16% and ViaSat, Inc. accounted for 14% of total
revenues. The military/aerospace sector remains strong. While it has
declined slightly in relative terms to 49% of sales for the first nine months of
this year versus 55% at fiscal year-end 2009 the military/aerospace sector
continues to grow in absolute terms, and we expect it to gain strength over the
balance of the year. The medical/other sector has increased from 14% at the
close of fiscal 2009 to 24% of total Company sales for the first nine months of
fiscal 2010. Although the challenging economy generally impacts the
industrial & communications sector more than the others, it has performed
well representing 27% of sales for the first nine months of this
year compared with 31% at fiscal year-end 2009, and the sector
continues to grow modestly in absolute terms.
Gross
profit increased by $3.9 million compared to the first nine months of fiscal
2009 and increased to 16.6% of sales during the period, a gain of 1.2 percentage
points. The improvement in the gross profit ratio at a materially
higher level of revenue demonstrates the Company’s success in generating
incremental sales with favorable margins. The improvement is also
attributable to realization of benefits associated with investments in capital
equipment, and Lean initiatives focused on driving operational efficiencies. The
addition of GTC has contributed favorably to our gross profit
percentage.
Selling
and administrative expenses, as a percentage of sales were constant in
comparison to the same nine-month period of the prior fiscal
year. Absent higher stock compensation expense and fees associated
with our CFO transition in the current quarter, selling and administrative
expenses would have decreased by 0.2% versus the comparable nine-month period of
the prior year.
Interest
expense was $594 thousand for the first nine months of fiscal 2010, up from $304
thousand in the comparable nine-month period of the prior fiscal
year. Total debt increased due to the GTC acquisition, which was
completed in mid-December 2009. Additionally, during the prior fiscal
year the Company benefited from a favorable interest rate on its
former revolving line of credit. Further information regarding debt
and applicable interest rates is included in the “Credit Facilities” Note 3 to
the consolidated financial statements. We continue to focus on
working capital management to limit our debt and related interest
expense.
16
Other
expense during the nine-month period ending June 25, 2010 was $205 thousand,
principally comprised of legal and professional services associated with the
acquisition of GTC. The Company recorded $150 thousand of other
income during the comparable period of the prior fiscal year due to a refund of
sales tax, penalties and accrued interest from the State of Alabama and one of
its municipalities in settlement of a long standing dispute over a previous use
tax assessment.
Income
tax expense for the nine-month period ended June 25, 2010 was $1.7
million. During the prior year, the Company recorded a net tax
benefit of $724 thousand mainly as a result of eliminating a portion of the
valuation allowance carried for deferred tax assets. The Company’s
pretax income increased by 43.2% in 2010 compared to the prior year nine-month
period.
Liquidity
and Capital Resources
Cash flow
provided by operating activities was $5.3 million for the nine-month period
ended June 25, 2010 compared to $1.3 million in the same period of
2009. The increase in cash was principally derived from substantially
higher pretax earnings and more favorable trends in the components of working
capital. The Company remains focused on effective working capital
management.
Cash used
in investing activities amounted to $16.1 million during the nine months ended
June 25, 2010, primarily as a result of the $15.1 million GTC
acquisition. Another $1.0 million was utilized to invest in
state-of-the-art production and quality testing equipment, compared with $1.3
million committed to similar investment in equipment during the 2009 nine-month
period. IEC remains committed to modernization, improving efficiency
and providing products of the highest quality.
Financing
activities generated $12.0 million of positive cash flow in the 2010 nine-month
period as the Company drew on bank term loans and its Revolver to fund the
purchase of GTC. IEC’s favorable operating environment enabled it to
pay down some of its outstanding debt as the year progressed. Absent
the GTC acquisition in 2009, repayments and new borrowings nearly offset one
another. The Company continues to utilize cash generated by
operations to reduce outstanding debt and the associated interest
charges.
At June
25, 2010, the Company had $8.0 million of borrowings outstanding under the
Revolver. The maximum borrowing under this credit facility is limited
to the lesser of (i) $15.0 million or (ii) an amount equal to the sum of 85% of
the receivables borrowing base and 35% of the inventory borrowing
base. Based on that metric, at June 25, 2010 the maximum borrowing
limit under the Revolver was $14.9 million. Credit facilities are
described in detail in the related Note 3 to the consolidated financial
statements. The Company believes it has adequate liquidity to support
its operating requirements for the next 12 months.
The
Company’s financing agreements contain various affirmative and negative
covenants, including financial covenants. The Company is required to
maintain quarterly and annual minimum EBITDARS (defined as net income plus
interest expense, tax expense, depreciation, amortization of intangible assets,
sale-leaseback rent payments, and non-cash stock option expense, minus cash
taxes paid) thresholds, a maximum debt to EBITDARS ratio, and a minimum fixed
charge coverage ratio. These are calculated on a three and twelve
month trailing basis as applicable. The Company was in compliance
with all these covenants as of June 25, 2010. The table below
provides details on the Company’s performance relative to each of the four
covenants for the quarter:
Actual at
|
||||||||
Covenant
|
Limit
|
June 25, 2010
|
||||||
Quarterly
EBITDARS (minimum, in thousands)
|
$ | 1,000 | $ | 2,773 | ||||
Annual
EBITDARS (minimum, in thousands)
|
$ | 5,000 | $ | 9,494 | ||||
Total
debt to EBITDARS (maximum)
|
3.50x | 2.20x | ||||||
Fixed
charge coverage (minimum)
|
1.25x | 1.78x |
Application
of Critical Accounting Policies
The
Company’s financial statements and accompanying notes are prepared in accordance
with accounting principles that are generally accepted in the United States of
America. Preparing financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. These estimates and assumptions are affected
by management's application of the Company’s accounting
policies. Critical accounting policies for IEC and relevant financial
accounting standards are discussed below.
FASB ASC
605-10 (prior authoritative literature, Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements"). Revenue is recognized
when title transfers or a service is completed, which is generally upon shipment
to the customer. Provisions for discounts and rebates to customers,
estimated returns and allowances and other adjustments are recorded in the same
period the related sales are recorded.
17
FASB ASC
360-10 (prior authoritative literature, FASB SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets”) requires the evaluation of
long-lived assets for financial impairment on a regular basis. We
evaluate the recoverability of long-lived assets not held for sale when a change
in circumstances indicates that the carrying value may not be recoverable. Such
changes in circumstances may include: a significant decrease in the market price
of similar long-lived assets; a significant change in the extent or manner in
which long-lived assets are being used; or a change in legal factors or in the
business climate that could affect the value of such assets. If
warranted by a change in circumstances, the carrying values of long-lived assets
are compared to the estimated undiscounted future cash flows associated with
them. If testing indicates the carrying amount is not recoverable,
the assets are adjusted to fair value.
FASB ASC
450-10 (prior authoritative literature, FASB SFAS No. 5, "Accounting for
Contingencies") requires that when, from time to time, the Company is subject to
various claims or legal proceedings, the outcomes of which may be subject to
significant uncertainty, an estimated loss should be accrued if it is probable
that an asset has been impaired or a liability has been incurred and the amount
of the loss can be reasonably estimated. Disclosure of a contingency
is required if there is a reasonable possibility that a loss has been
incurred. We evaluate, among other factors, the probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount
of loss. Changes in these factors could materially impact our
financial position or our results of operations.
FASB ASC
740 (prior authoritative literature, FASB SFAS No. 109, "Accounting for Income
Taxes") establishes financial accounting and reporting standards for the effect
of income taxes. The objectives are (a) to recognize the amount of
taxes payable or refundable for the current year and (b) to record deferred tax
assets and liabilities for the future tax consequences of events that have been
recognized in an entity's financial statements or tax
returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. If actual outcomes differ from
management’s judgments, there may be an impact on the Company’s financial
position or results of operations.
Impact
of Inflation
To date
the impact of inflation has been minimal due to the fact that we have been able
to adjust many of our bids to reflect increases in costs. However, it
is not clear this will continue and inflation could affect our
margins.
Recently
Issued Accounting Standard
FASB ASC
805 (prior authoritative literature, FASB SFAS No. 141(R), “Business
Combinations”) establishes principles and requirements for how the acquirer:
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree; recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and determines what information
to disclose to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. FASB ASC 805 was effective
for fiscal years, as well as interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company adopted these
provisions at the beginning of the current fiscal year, and the GTC acquisition
was recorded in accordance with FASB ASC 805.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company, as a result of its financing activities, is exposed to changes in
interest rates that may adversely affect its results of operations and financial
position. As of June 25, 2010 the Company had $19.8 million of debt.
Interest rates are fixed for $3.1 million of that debt and variable for the
remaining $16.7 million. However, the Credit Agreement prescribes a
minimum threshold for the LIBOR component of interest. That minimum
threshold is above the current market level of LIBOR rates, and as a result
variable interest rates do not at present fluctuate with a change in
LIBOR. However, at any time that market LIBOR is above the minimum
threshold prescribed in our Credit Agreement, interest rates will vary with the
market. A sensitivity analysis to measure the potential impact that a
change in interest rates would have on the Company's net income indicates that,
providing the market LIBOR rate is sufficiently above the LIBOR threshold
in our Credit Agreement, a one-percentage point decrease in interest rates,
which represents a greater than 10% change, would decrease the Company's annual
net financing expense by approximately $167 thousand as of June 25,
2010.
The
Company is exposed to credit risk to the extent of non-performance of M&T
Bank Corp. under the Credit Agreement. As such, the credit rating of M&T
Bank Corp. is monitored by the Company. Credit loss arising from
M&T Bank non-performance is not anticipated.
18
ITEM 4. CONTROLS
AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
An
evaluation was performed under the supervision and with the participation of
IEC's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the disclosure
controls and procedures associated with our business excluding the recently
acquired GTC operation (the “IEC Base Business”), as of the end of the period
covered by this Quarterly Report on Form 10-Q as required by Rule 13a-15 under
the Securities Exchange Act of 1934 (the "Exchange Act"). Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the business has disclosure controls and procedures which were
effective as of the end of the period covered by this Quarterly Report on Form
10-Q to provide reasonable assurance that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in
the SEC rules and forms and that such information is accumulated and
communicated to our management (including the Chief Executive Officer and Chief
Financial Officer) to allow timely decisions regarding
disclosures. The GTC operation will be evaluated in the same
manner and management will report on the effectiveness of controls for that
operation in the Form 10-Q filing for the first quarter of fiscal
2011.
(b)
Changes in Internal Control over Financial Reporting
During
the three months ended June 25, 2010, there were no changes in internal control
over financial reporting identified in connection with management’s evaluation
that have materially affected or are reasonably likely to materially affect the
Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item
1. Legal Proceedings
- With the exception of the binding arbitration proceeding discussed in
the Acquisition section
of Note 1. and Litigation Note 7., there are no material, legal proceedings
pending to which IEC or its subsidiaries are a party or of which any of their
property is subject. To our knowledge, there are no material legal
proceedings to which any director, officer or affiliate of IEC, or any
beneficial owner of more than five percent (5%) of Common Stock, or any
associate of any of the foregoing, is a party which would be adverse to IEC or
its subsidiaries.
Item 1A.
Risk Factors - There are no material changes to the Risk Factors
described in Item 1A. of our Annual Report on Form 10-K for the fiscal year
ended September 30,2009.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds –
None
Item 3.
Defaults Upon Senior Securities – None
Item
4. (Removed and Reserved)
Item
5. Other Information
- None
Item
6. Exhibits -
The following documents are filed as exhibits to this
Report:
10.1 Separation
Agreement between the Company and Michael Schlehr dated May 24, 2010 and
Appendix A thereto (Independent Consulting Agreement).
10.2 Offer
of Employment Letter Agreement between the Company and Susan E. Topel-Samek
dated May 19, 2010.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
19
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
IEC
ELECTRONICS CORP.
|
|
REGISTRANT
|
|
Dated:
July 28, 2010
|
/s/
W. Barry Gilbert
|
W.
Barry Gilbert
|
|
Chairman
and
|
|
Chief
Executive Officer
|
|
Dated:
July 28, 2010
|
/s/
Susan E. Topel-Samek
|
Susan
E. Topel-Samek
|
|
Vice
President and Chief Financial
Officer
|
20