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EX-32.1 - EXHIBIT 32.1 - IEC ELECTRONICS CORPa10-qx20191227xex321.htm
EX-31.2 - EXHIBIT 31.2 - IEC ELECTRONICS CORPa10-qx20191227xex312.htm
EX-31.1 - EXHIBIT 31.1 - IEC ELECTRONICS CORPa10-qx20191227xex311.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 December 27, 2019
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 001-34376
 
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)
  
315-331-7742
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
IEC
Nasdaq Global Market

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer x
 
Smaller reporting company x
Emerging growth company ¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨

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:

Common Stock, $0.01 par value – 10,386,883 shares as of January 27, 2020




TABLE OF CONTENTS
 
 

2




Part I     FINANCIAL INFORMATION
 
Item 1.  Condensed Consolidated Financial Statements
 
IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 2019 and SEPTEMBER 30, 2019
(unaudited; in thousands, except share and per share data)
 
December 27,
2019
 
September 30,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$

 
$

Accounts receivable, net of allowance
28,514

 
27,618

Unbilled contract revenue
10,003

 
9,529

Inventories
44,959

 
44,267

Federal income tax receivable
517

 
517

Other current assets
2,065

 
1,454

Total current assets
86,058

 
83,385


 
 
 
Property, plant and equipment, net
19,000

 
19,433

Deferred income taxes
6,834

 
7,154

Operating lease right-of-use assets, net of accumulated amortization
293

 

Other long-term assets
861

 
860

Total assets
$
113,046

 
$
110,832


 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
1,371

 
$
1,371

Current portion of operating lease obligation
63

 

Current portion of finance lease obligation
411

 
338

Accounts payable
25,505

 
23,690

Accrued payroll and related expenses
2,120

 
3,174

Other accrued expenses
647

 
668

Customer deposits
15,098

 
13,229

Total current liabilities
45,215

 
42,470

 
 
 
 
Long-term debt
26,432

 
28,910

Long-term operating lease obligation
230

 

Long-term finance lease obligation
6,946

 
6,685

Other long-term liabilities
1,496

 
1,527

Total liabilities
80,319

 
79,592

Commitments and contingencies (Note 11)
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, $0.01 par value:
 
 
 
500,000 shares authorized; none issued or outstanding

 

Common stock, $0.01 par value:
 
 
 
Authorized: 50,000,000 shares
 
 
 
Issued: 11,430,852 and 11,394,036 shares, respectively
 
 
 

3



Outstanding: 10,375,364 and 10,338,548 shares, respectively
103

 
103

Additional paid-in capital
48,299

 
48,001

Accumulated deficit
(14,086
)
 
(15,275
)
Treasury stock, at cost: 1,055,488 shares
(1,589
)
 
(1,589
)
Total stockholders’ equity
32,727

 
31,240

Total liabilities and stockholders’ equity
$
113,046

 
$
110,832

The accompanying notes are an integral part of these condensed consolidated financial statements.

4




IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 27, 2019 and DECEMBER 28, 2018
(unaudited; in thousands, except share and per share data)
 
Three Months Ended
 
December 27,
2019
 
December 28,
2018
 
 
Net sales
$
44,734

 
$
35,441

Cost of sales
39,495

 
30,382

Gross profit
5,239

 
5,059

 
 
 
 
Selling and administrative expenses
3,299

 
3,352

Operating income
1,940

 
1,707

 
 
 
 
Interest and financing expense
415

 
323

Income before income taxes
1,525

 
1,384

 
 
 
 
Income tax expense
336

 
312

 
 
 
 
Net income
$
1,189

 
$
1,072

 
 
 
 
Net income per common share:
 
 
 
Basic
$
0.11

 
$
0.10

Diluted
0.11

 
0.10

 
 
 
 
Weighted average number of shares outstanding:
 
 
Basic
10,365,766

 
10,262,397

Diluted
10,695,977

 
10,495,429

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5




IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED DECEMBER 27, 2019
(unaudited; in thousands, except share data)
 
 
Number of Shares Outstanding
 
Common
Stock,
par $0.01
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Treasury
Stock,
at cost
 
Total
Stockholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, September 30, 2019
 
10,338,548

 
$
103

 
$
48,001

 
$
(15,275
)
 
$
(1,589
)
 
31,240

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
1,189

 

 
1,189

Stock-based compensation
 

 

 
152

 
 
 

 
152

Restricted stock vested, net of shares withheld for payment of taxes
 
6,367

 

 
(24
)
 

 

 
(24
)
Exercise of stock options, net of shares surrendered
 
24,000

 
 
 
130

 
 
 
 
 
130

Employee stock plan purchases
 
6,449

 

 
40

 

 

 
40

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 27, 2019
 
10,375,364

 
$
103

 
$
48,299

 
$
(14,086
)
 
$
(1,589
)
 
$
32,727


The accompanying notes are an integral part of these condensed consolidated financial statements.


6




IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS’ EQUITY
THREE MONTHS ENDED DECEMBER 28, 2018
(unaudited; in thousands, except share data)
 
 
Number of Shares Outstanding
 
Common
Stock,
par $0.01
 
Additional
Paid-In
Capital
 
Accumulated Deficit
 
Treasury
Stock,
at cost
 
Total
Stockholders’
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, September 30, 2018
 
10,248,905

 
$
102

 
$
47,326

 
$
(20,463
)
 
$
(1,589
)
 
25,376

 
 
 
 
 
 
 
 
 
 
 
 
 
Impact of adoption of ASC 606, net of taxes
 

 

 

 
441

 

 
441

Net income
 

 

 

 
1,072

 

 
1,072

Stock-based compensation
 

 

 
146

 
 
 

 
146

Restricted stock vested, net of shares withheld for payment of taxes
 
4,439

 

 

 

 

 

Exercise of stock options, net of shares surrendered
 
2,553

 

 

 

 

 

Employee stock plan purchases
 
5,674

 

 
20

 

 

 
20

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 28, 2018
 
10,261,571

 
$
102

 
$
47,492

 
$
(18,950
)
 
$
(1,589
)
 
$
27,055


The accompanying notes are an integral part of these condensed consolidated financial statements.



7



IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
THREE MONTHS ENDED DECEMBER 27, 2019 and DECEMBER 28, 2018
(unaudited; in thousands) 
 
 
Three Months Ended
 
 
December 27,
2019
 
December 28,
2018
 
 
 
 

CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
1,189

 
$
1,072

Non-cash adjustments:
 
 
 
 
Stock-based compensation
 
152

 
146

Depreciation and amortization
 
776

 
651

Change in reserve for doubtful accounts
 
28

 
26

Change in inventory reserve and warranty reserve
 
1,063

 
112

Deferred tax expense
 
320

 
312

Amortization of deferred gain
 
(29
)
 
(29
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(924
)
 
2,426

Unbilled contract revenue
 
(474
)
 
(1,770
)
Inventories
 
(1,742
)
 
(6,934
)
Other current assets
 
(611
)
 
220

Other long-term assets
 
(1
)
 
(255
)
Accounts payable
 
1,531

 
1,932

Change in book overdraft position
 
284

 
(2,010
)
Accrued expenses
 
(1,088
)
 
462

Customer deposits
 
1,869

 
1,078

Net cash flows provided by/(used in) operating activities
 
2,343

 
(2,561
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchases of property, plant and equipment
 
(324
)
 
(511
)
Net cash flows used in investing activities
 
(324
)
 
(511
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Advances from revolving credit facility
 
15,809

 
20,608

Repayments of revolving credit facility
 
(17,965
)
 
(17,589
)
Borrowings under other loan agreements
 

 
391

Repayments under other loan agreements
 
(343
)
 
(283
)
Payments under finance lease
 
(81
)
 
(75
)
Proceeds received from lease financing obligation
 
415

 

Proceeds from exercise of stock options
 
130

 

Proceeds from employee stock plan purchases
 
40

 
20

Cash paid for taxes upon vesting of restricted stock
 
(24
)
 

Net cash flows (used in)/provided by financing activities
 
(2,019
)
 
3,072

 
 
 
 
 
Net cash change for the period
 

 

Cash, beginning of period
 

 

Cash, end of period
 
$

 
$

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Interest paid
 
$
405

 
$
347

Income taxes paid
 
16

 


The accompanying notes are an integral part of these condensed consolidated financial statements.

8



IEC ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1—OUR BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Our Business
 
IEC Electronics Corp. (“IEC,” or the “Company”) provides electronic manufacturing services (“EMS”) to advanced technology companies that produce life-saving and mission critical products for the medical, industrial, aerospace and defense sectors. The Company specializes in delivering technical solutions for the custom manufacture of complex full system assemblies by providing on-site analytical testing laboratories, custom design and test engineering services combined with a broad array of manufacturing services encompassing electronics, interconnect solutions, and precision metalworking.  As a full service EMS provider, IEC holds all appropriate certifications for the market sectors it supports including ISO 9001:2015, AS9100D, and ISO 13485, and we are Nadcap accredited.  IEC is headquartered in Newark, NY and also has operations in Rochester, NY and Albuquerque, NM.  Additional information about IEC can be found on its web site at www.iec-electronics.com. The contents of this website are not incorporated by reference into this quarterly report.
 
Generally Accepted Accounting Principles
 
IEC’s financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”).
 
Fiscal Calendar
 
The Company’s fiscal year ends on September 30th and the first three quarters generally end on the Friday closest to the last day of the calendar quarter. For the fiscal year ending September 30, 2020 (“fiscal 2020”), the fiscal quarters end on December 27, 2019, March 27, 2020 and June 26, 2020. For the fiscal year ended September 30, 2019 (“fiscal 2019”), the fiscal quarters ended on December 28, 2018, March 29, 2019 and June 28, 2019.
 
Consolidation
 
The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiaries: IEC Electronics Corp-Albuquerque (“Albuquerque”); IEC Analysis & Testing Laboratory, LLC (“ATL”); and IEC California Holdings, Inc., which was dissolved as of September 18, 2019. The Rochester unit operates as a division of IEC. All intercompany transactions and accounts are eliminated in consolidation. 

Unaudited Financial Statements
 
The accompanying unaudited condensed consolidated financial statements for the three months ended December 27, 2019 and December 28, 2018 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include certain of the information the footnotes require by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, required for a fair presentation of the information have been made.  The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
  
Cash
 
The Company’s cash represents deposit accounts with Manufacturers and Traders Trust Company (“M&T Bank”), a banking corporation headquartered in Buffalo, NY. The Company’s cash management system provides for the funding of the disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks in excess of the bank balance create a book overdraft. Book overdrafts are presented in accounts payable in the condensed consolidated balance sheets. Book overdrafts were $0.6 million and $0.3 million as of December 27, 2019 and September 30, 2019, respectively. Changes in the book overdrafts are presented within net cash flows provided by operating activities within the condensed consolidated statements of cash flows.
 

9



Allowance for Doubtful Accounts
 
The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability.  Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that the likelihood of collection is remote.
 
Inventory Valuation
 
Inventories are stated at the lower of cost or net realizable value under the first-in, first-out method.  The Company regularly assesses slow-moving, excess and obsolete inventory and maintains balance sheet reserves in amounts required to reduce the recorded value of inventory to the lower of cost or net realizable value.
 
Property, Plant and Equipment
 
Property, plant and equipment (“PP&E”) 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, while renewals and improvements are capitalized.  At the time of retirement or other disposition of PP&E, cost and accumulated depreciation are removed from the accounts and any gain or loss is recorded in earnings.
 
Depreciable lives generally used for PP&E are presented in the table below.  Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the improvement.
PP&E Lives
 
Estimated
Useful Lives
 
 
(years)
Land improvements
 
10
Buildings and improvements
 
5 to 40
Machinery and equipment
 
3 to 10
Furniture and fixtures
 
3 to 7
Software
 
3 to 10
  
Reviewing Long-Lived Assets for Potential Impairment
 
ASC 360 (Property, Plant and Equipment) requires the Company to test long-lived assets (PP&E and definite lived assets) for recoverability whenever events or circumstances indicate that the carrying amount may not be recoverable.  If carrying value exceeds undiscounted future cash flows attributable to an asset, it is considered impaired and the excess of carrying value over fair value must be charged to earnings.  No impairment charges were recorded by IEC for long-lived assets during either of the three months ended December 27, 2019 and December 28, 2018.
 
Legal Contingencies
 
When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, ASC 450 (Contingencies) requires the Company to determine whether it is probable that an asset has been impaired or a liability has been incurred.  If such impairment or liability is probable and the amount of loss can be reasonably estimated, the loss must be charged to earnings. 
 
When it is considered probable that a loss has been incurred but the amount of loss cannot be estimated, disclosure but not accrual of the probable loss is required.  Disclosure of a loss contingency is also required when it is reasonably possible, but not probable, that a loss has been incurred. 

Legal Expense Accrual

The Company records legal expenses as they are incurred, based on invoices received or estimates provided by legal counsel. Future estimated legal expenses are not recorded until incurred.

Customer Deposits

Customer deposits represent amounts invoiced to customers for which the revenue has not yet been earned and therefore represent a commitment for the Company to deliver goods or services in the future. Deposits are generally short term in nature and are recognized as revenue when earned.

10



 
Fair Value Measurements
 
Under ASC 825 (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 borrowings.  IEC believes that recorded value approximates fair value for all cash, accounts receivable, accounts payable, accrued liabilities and borrowings.
 
ASC 820 (Fair Value Measurements and Disclosures) defines fair value, establishes a framework for measurement, and prescribes related disclosures.  ASC 820 defines fair value as the price that would be received upon sale of an asset or would be paid to transfer a liability in an orderly transaction.  Inputs used to measure fair value are categorized under the following hierarchy:
 
Level 1: Quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.
 
Level 2: Quoted 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 in which all significant inputs are observable market data.
 
Level 3: Model-derived valuations in which one or more significant inputs are unobservable.
 
The Company deems a transfer between levels of the fair value hierarchy to have occurred at the beginning of the reporting period.  There were no such transfers during each of the three months ended December 27, 2019 and December 28, 2018.

Stock-Based Compensation
 
ASC 718 (Stock Compensation) requires that compensation expense be recognized for equity awards based on fair value as of the date of grant.  For stock options, the Company uses the Black-Scholes pricing model to estimate grant date fair value.  Costs associated with stock awards are recorded over requisite service periods, generally the vesting period.  If vesting is contingent on the achievement of performance objectives, fair value is accrued over the period the objectives are expected to be achieved only if it is considered probable that the objectives will be achieved.  The Company also has an employee stock purchase plan (“ESPP”) that provides for the purchase of Company common stock at a discounted stock purchase price.

Income Taxes and Deferred Taxes
 
ASC 740 (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, but not in both.  Deferred tax assets are also established for tax benefits associated with tax loss and tax credit carryforwards.  Such deferred tax balances reflect tax rates that are scheduled to be in effect, based on currently enacted legislation, 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 for which realization is not likely.
 
ASC 740 also prescribes the manner in which a company measures, recognizes, presents and discloses in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the position will be sustained following examination by taxing authorities, based on technical merits of the position.  The Company believes that it has no material uncertain tax positions.
 
Any interest incurred is reported as interest expense. Any penalties incurred are reported as tax expense. The Company’s income tax filings are subject to audit by various tax jurisdictions and current open years are the fiscal year ended September 30, 2014 through fiscal year ended September 30, 2018.
 
Dividends
 
IEC does not pay dividends on its common stock as it is the Company’s current policy to retain earnings for use in the business.  Furthermore, the Company’s Fifth Amended and Restated Credit Facility Agreement, as amended, with M&T Bank includes certain restrictions on paying cash dividends, as more fully described in Note 6—Credit Facilities


11



Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and the disclosure of contingent assets and liabilities. Significant items subject to such estimates include: excess and obsolete inventory reserve, warranty reserves, the valuation of deferred income tax assets and revenue recognition related to the accounts for over time contracts. Actual results may differ from management’s estimates.
 
Statements of Cash Flows
 
The Company presents operating cash flows using the indirect method of reporting under which non-cash income and expense items are removed from net income. 

Segments

The Company’s results of operations for the three months ended December 27, 2019 and December 28, 2018 represent a single operating and reporting segment, referred to as contract manufacturing within the EMS industry. The Company strategically directs production between its various manufacturing facilities based on a number of considerations to best meet its customers’ requirements. The Company shares resources for sales, marketing, engineering, supply chain, information services, human resources, payroll and corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.  The Company’s operations as a whole reflect the level at which the business is managed and how the Company’s chief operating decision maker assesses performance internally.

Leases

At contract inception, the Company determines if the new contractual arrangement is a lease or contains a leasing arrangement. If a contract contains a lease, the Company evaluates whether it should be classified as an operating lease or a finance lease. Upon modification of the contract, the Company will reassess to determine if a contract is or contains a leasing arrangement.

The Company records lease liabilities based on the future estimated cash payments discounted over the lease term, defined as the non-cancellable time period of the lease, together with all the following:

Periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; and
Periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option.

Leases may also include options to terminate the arrangement or options to purchase the underlying lease property. Lease components provide the Company with the right to use an identified asset, which consist of real estate properties and equipment. Non-lease components consist primarily of maintenance services.

As an implicit discount rate is not readily available in the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. For certain leases with original terms of twelve months or less, the Company recognizes lease expense as incurred and does not recognize any lease liabilities. Short-term and long-term portions of operating lease liabilities are classified as other current liabilities and other long-term liabilities, respectively.

A right-of-use (“ROU”) asset is measured as the amount of the lease liability with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by the Company to implement the lease and lease incentives. ROU assets are classified as other long-term assets, on the Company’s condensed consolidated balance sheets. The Company evaluates the carrying value of ROU assets if there are indicators of potential impairment, and performs the analysis concurrent with the review of the recoverability of the related asset group. If the carrying value of the asset group is determined to not be fully recoverable and is in excess of its estimated fair value, the Company will record the impairment loss in its condensed consolidated statements of operations. The Company did not recognize an impairment loss during the three months ended December 27, 2019.

Fixed lease expense payments are recognized on a straight-line basis over the lease term. Variable lease payments vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time, and are often due to changes in an external market rate or the value of an index (e.g. Consumer Price Index). The Company did not incur variable lease payments during the three months ended December 27, 2019.


12



Recently Issued Accounting Standards Adopted
 
FASB ASU 2016-02, “Leases” (Topic 842) was issued in February 2016. The guidance was effective for the Company beginning with the first quarter of fiscal 2020. As a result of this adoption, the following accounting policies were implemented or changed.

The Company elected the optional transition method to initially apply the new lease standard at the adoption date and not adjust its comparative period consolidated financial statements. The Company has elected the package of three practical expedients, which permits the Company not to reassess prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the use-of-hindsight or the practical expedient in determining lease term or impairment of ROU assets. In addition, the Company has elected a short-term lease exemption policy that permits the Company to not apply the recognition requirements of the new lease standard to leases with a term of 12 months or less. The Company has also elected an accounting policy to not separate lease and non-lease components for certain classes of leases.

Adoption of Topic 842 resulted in recognition of additional net lease assets of approximately $0.3 million and net lease liabilities of approximately $0.3 million as of December 27, 2019 based on the present value of remaining minimum rental payments and corresponding ROU assets based upon the operating lease liabilities.  The adoption did not impact our beginning stockholders’ equity and did not have a material impact on the condensed consolidated statements of operations or cash flows.

NOTE 2—REVENUE RECOGNITION

ASC 606: Revenue from Contracts with Customers

Satisfaction of Performance Obligations
 
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Many of the Company's contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company primarily provides contract manufacturing services to its customers. The customer provides a design, the Company procures materials and manufactures to that design and ships the product to the customer. Revenue is derived primarily from the manufacturing of these electronics components that are built to customer specifications.

The Company's performance obligations are satisfied at a point in time or over time as work progresses. Revenue from goods and services transferred to customers at a point in time accounted for 52.3% and 48.7% of the Company's revenue for the three months ended December 27, 2019 and December 28, 2018, respectively. Revenue on these contracts is recognized when obligations under the terms of the customer contract are satisfied; generally this occurs with the transfer of control upon shipment. If there is no enforceable right to payment for work completed to date, or the Company does not recapture costs incurred plus an applicable margin, then the Company records revenue upon shipment to the customer.

Revenue from goods and services transferred to customers over time accounted for 47.7% and 51.3% of our revenue for the three months ended December 27, 2019 and December 28, 2018, respectively. For revenue recognized over time, the Company uses an input measure to determine progress towards completion. Under this method, sales and gross profit are recognized as work is performed generally based on the relationship between the actual costs incurred and the total estimated costs at completion. If the Company has an enforceable right to payment for work completed to date, with a recapture of costs incurred plus an applicable margin, and the goods do not have an alternative future use once the manufacturing process has commenced, then the Company records an unbilled revenue associated with non-cancellable customer orders.

The Company derives revenue from engineering and design services. Service revenue is generally recognized once the service has been rendered.  For material management arrangements, revenue is generally recognized as services are rendered.  Under such arrangements, some or all of the following services may be provided: design, bid, procurement, testing, storage or other activities relating to materials the customer expects to incorporate into products that it manufactures.  Value-added support services revenue, including material management and repair work revenue, amounted to less than 2% of total revenue in each of the three months ended December 27, 2019 and December 28, 2018.
 

13



Returns and Discounts

The Company does not offer its customers a right of return. Rather, the Company warrants that each unit received by the customer will meet the agreed upon technical and quality specifications and requirements. Only when the delivered units do not meet these requirements can the customer return the non-compliant units as a corrective action under the warranty. The remedy offered to the customer is repair of the returned units or replacement if repair is not viable. Accordingly, the Company records a warranty reserve and any warranty activities are not considered to be a separate performance obligation. Historically, warranty reserves have not been material.

Provisions for discounts, allowances, estimated returns and other adjustments are recorded in the period the related sales are recognized.

Shipping and Handling Costs

Amounts billed to customers for shipping and handling activities after the customer obtains control are treated as a promised service performance obligation and recorded in net sales in the accompanying condensed consolidated statements of operations. Shipping and handling costs incurred by the Company for the delivery of goods to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying condensed consolidated statements of operations.

Contract Assets

Contract assets consist of unbilled contract amounts resulting from sales under contracts when the revenue recognized exceeds the amount billed to the customer.

Practical Expedients and Exemptions

The Company generally expenses incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in selling and administrative expense in the condensed consolidated statements of operations.

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

Disaggregated Revenue

The table below shows net sales from contracts with customers by market sector. See additional information regarding market sectors in Note 10—Market Sectors and Major Customers.
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
 
 
Point in Time
 
Over Time
 
Net Sales
 
Point in Time
 
Over Time
 
Net Sales
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Aerospace & Defense
 
$
14,014

 
$
13,273

 
$
27,287

 
$
7,565

 
$
11,147

 
$
18,712

Medical
 
4,198

 
6,986

 
11,184

 
3,685

 
5,474

 
9,159

Industrial
 
5,192

 
1,071

 
6,263

 
6,014

 
1,556

 
7,570

 
 
$
23,404

 
$
21,330

 
$
44,734

 
$
17,264

 
$
18,177

 
$
35,441



14



Customer Deposits

Customer deposits are recorded when cash payments are received or due in advance of revenue recognition from contracts with customers. The timing of revenue recognition may differ from the timing of billings to customers. The changes in customer deposits from the Company's custom manufacturing services are as follows:
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
(in thousands)
 
 
 
 
Beginning balance
 
$
13,229

 
$
7,595

Recognition of deferred revenue
 
(5,041
)
 
(2,585
)
Deferral of revenue
 
6,910

 
3,664

Ending balance
 
$
15,098

 
$
8,674


Sales Outside the United States

For each of the three months ended December 27, 2019 and December 28, 2018, less than 1% of net sales were shipped to locations outside the United States.

NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary follows of activity in the allowance for doubtful accounts during the three months ended December 27, 2019 and December 28, 2018:
 
 
Three Months Ended
Allowance for doubtful accounts
 
December 27,
2019
 
December 28,
2018
(in thousands)
 
 
 
 
Allowance, beginning of period
 
$
71

 
$
85

Increase in provision for doubtful accounts
 
28

 
26

Write-offs
 

 

Allowance, end of period
 
$
99

 
$
111

 
NOTE 4—INVENTORIES  

A summary of inventory by category at period end follows:
Inventories

December 27,
2019

September 30,
2019
(in thousands)

 



Raw materials
 
$
28,890

 
$
25,393

Work-in-process
 
12,766

 
15,928

Finished goods
 
3,303

 
2,946

Total inventories
 
$
44,959

 
$
44,267



15



NOTE 5—PROPERTY, PLANT AND EQUIPMENT, NET  

A summary of property, plant and equipment and accumulated depreciation at period end follows:
Property, Plant and Equipment
 
December 27,
2019
 
September 30,
2019
(in thousands)
 
 
 
 
Land and improvements
 
$
788

 
$
788

Buildings and improvements
 
7,421

 
7,411

Building under capital lease
 
7,750

 
7,750

Machinery and equipment
 
32,219

 
31,708

Furniture and fixtures
 
8,059

 
8,047

Software
 
5,215

 
5,215

Construction in progress
 
950

 
1,173

Total property, plant and equipment, at cost
 
62,402

 
62,092

Accumulated depreciation
 
(43,402
)
 
(42,659
)
Property, plant and equipment, net
 
$
19,000

 
$
19,433

 
Depreciation expense during the three months ended December 27, 2019 and December 28, 2018 follows:
 
 
Three Months Ended
Depreciation Expense
 
December 27,
2019
 
December 28,
2018
(in thousands)
 
 
 
 
Depreciation expense
 
$
757

 
$
654


NOTE 6—CREDIT FACILITIES  

A summary of borrowings at period end follows:   
 
 

 
 
 
December 27, 2019
 
September 30, 2019
Credit Facility Debt
 
Fixed/Variable Rate
 
Maturity Date
 
Balance
 
Interest Rate
 
Balance
 
Interest Rate
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
M&T Bank credit facilities:
 
 
 
 
 
 
 
 
 
 
 
 
Revolving Credit Facility
 
v
 
5/5/2022
 
$
24,490

 
4.06
%
 
$
26,646

 
4.31
%
Term Loan B
 
v
 
5/5/2022
 
2,565

 
4.21

 
2,779

 
4.59

Equipment Line Term Note
 
v
 
Various
 
997

 
4.31

 
1,125

 
4.56

Total debt, gross
 
 
 
 
 
28,052

 
 
 
30,550

 
 
Unamortized debt issuance costs
 
 
 
 
 
(249
)
 
 
 
(269
)
 
 
Total debt, net
 
 
 
 
 
27,803

 
 
 
30,281

 
 
Less: current portion
 
 
 
 
 
(1,371
)
 
 
 
(1,371
)
 
 
Long-term debt
 
 
 
 
 
$
26,432

 
 
 
$
28,910

 
 

M&T Bank Credit Facilities

Effective as of July 8, 2019, the Company and M&T Bank entered into the Ninth Amendment to the Fifth Amended and Restated Credit Facility Agreement, which amended the Fifth Amended and Restated Credit Facility Agreement dated as of December 14, 2015, as amended by various amendments (collectively, the “Credit Facility, as amended”).

The Credit Facility, as amended, is secured by a general security agreement covering the assets of the Company and its subsidiaries, a pledge of the Company’s equity interest in its subsidiaries, a negative pledge on the Company’s real property, and a guarantee by the Company’s subsidiaries, all of which restrict use of these assets to support other financial instruments.


16



Individual debt facilities provided under the Credit Facility, as amended, are described below:

a)
Revolving Credit Facility (“Revolver”): At December 27, 2019, up to $35.0 million is available through May 5, 2022. The maximum amount the Company may borrow is determined based on a borrowing base calculation described below.
b)
Term Loan B: $14.0 million was borrowed on January 18, 2013. Principal was being repaid in 120 equal monthly installments of $117 thousand. As part of an amendment to the Credit Facility, as amended, the principal was modified from $8.0 million to $6.0 million and principal is being repaid in equal monthly installments of $71 thousand plus a balloon payment of $0.6 million. The maturity date of the loan is May 5, 2022.
c)
Equipment Line Advances: Up to $1.5 million is available through May 5, 2022. Interest only is paid until maturity. Principal is due in three or six months after borrowing or can be converted to an Equipment Line Term Loan.
d)
Equipment Line Term Note: On July 26, 2018, $0.8 million was converted from an Equipment Line Advance, principal is being repaid in 36 equal monthly installments of $21 thousand and matures July 26, 2021. On September 27, 2018, $0.1 million was converted from an Equipment Line Advance, principal is being repaid in 36 equal monthly installments of $2 thousand and matures September 27, 2021. On March 18, 2019, $0.3 million was converted from an Equipment Line Advance, principal is being repaid in 36 equal monthly installments of $9 thousand and matures March 18, 2022. On May 6, 2019, $0.4 million was converted from an Equipment Line Advance, principal is being repaid in 36 equal monthly installments of $11 thousand and matures May 6, 2022.

Borrowing Base

At December 27, 2019 and September 30, 2019, under the Credit Facility, as amended, the maximum amount the Company can borrow under the Revolver was the lesser of (i) 85% of eligible receivables plus a percentage of eligible inventories (up to a cap of $14.0 million) or (ii) $35.0 million.

At December 27, 2019, the upper limit on Revolver borrowings was $35.0 million and $10.5 million was available. At September 30, 2019, the upper limit on Revolver borrowings was $35.0 million and $8.4 million was available. Average Revolver balances amounted to $24.5 million and $15.0 million during the three months ended December 27, 2019 and December 28, 2018, respectively.

Interest Rates

Under the Credit Facility, as amended, variable rate debt accrues interest at LIBOR plus the applicable marginal interest rate that fluctuates based on the Company’s Fixed Charge Coverage Ratio, as defined below. At December 27, 2019 and September 30, 2019, the applicable marginal interest rate was 2.50% for the Revolver and 2.75% for Term Loan B and Equipment Line Advances. Changes to applicable margins and unused fees resulting from the Fixed Charge Coverage Ratio generally become effective mid-way through the subsequent quarter.

The Company incurs quarterly unused commitment fees ranging from 0.25% to 0.375% of the excess of $27.0 million over average borrowings under the Revolver. Fees incurred amounted to $5.8 thousand and $8.2 thousand during the three months ended December 27, 2019 and December 28, 2018, respectively. The fee percentage varies based on the Company’s Fixed Charge Coverage Ratio, as defined below.

Financial Covenants

The Credit Facility, as amended, contains various affirmative and negative covenants including financial covenants. As of December 27, 2019, the Company had to maintain a minimum fixed charge coverage ratio (“Fixed Charge Coverage Ratio”). The Fixed Charge Coverage Ratio compares (i) EBITDAS minus unfinanced capital expenditures minus income tax expense, to (ii) the sum of interest expense, principal payments, payments on all capital lease obligations and dividends, if any (fixed charges). “EBITDAS” is defined as earnings before interest, income taxes, depreciation, amortization and non-cash stock compensation expense. The Fixed Charge Coverage Ratio was measured for a trailing twelve months ended December 27, 2019 as a minimum of 1.10 times. The Fixed Charge Coverage Ratio was the only covenant in effect at December 27, 2019. The Credit Facility, as amended, also provides for customary events of default, subject in certain cases to customary cure periods, in which the outstanding balance and any unpaid interest would become due and payable.

The Company was in compliance with the financial debt covenant at December 27, 2019.

17




Contractual Principal Payments

A summary of contractual principal payments under IEC’s borrowings at December 27, 2019 for the next three years taking into consideration the Credit Facility, as amended, is as follows:
Debt Repayment Schedule
 
Contractual
Principal
Payments
(in thousands)
 
 

Twelve months ending December
 
 

2020

 
$
1,371

2021

 
1,260

2022
(1) 
 
25,421

 
 
 
$
28,052

(1) Includes Revolver balance of $24.5 million at December 27, 2019.

NOTE 7—WARRANTY RESERVES  

IEC generally warrants its products and workmanship for up to twelve months from date of sale.  As an offset to warranty claims, the Company is sometimes able to obtain reimbursement from suppliers for warranty-related costs or losses.  Based on historical warranty claims experience and in consideration of sales trends, a reserve is maintained for estimated future warranty costs to be incurred on products and services sold through the balance sheet date. The warranty reserve is included in other accrued expenses on the condensed consolidated balance sheets.
 
A summary of additions to and charges against IEC’s warranty reserves during the period follows: 
 
 
Three Months Ended
Warranty Reserve
 
December 27,
2019
 
December 28,
2018
(in thousands)
 
 

 
 

Reserve, beginning of period
 
$
165

 
$
173

Provision
 
13

 
34

Warranty costs
 
(23
)
 
(32
)
Reserve, end of period
 
$
155

 
$
175

 
NOTE 8—STOCK-BASED COMPENSATION  

The 2019 Stock Incentive Plan (the “2019 Plan”) was approved by the Company’s stockholders at the March 2019 Annual Meeting. The 2019 Plan replaced the 2010 Omnibus Incentive Compensation Plan (“2010 Plan”) that was approved by the Company’s stockholders at the January 2011 Annual Meeting.  The 2019 Plan, like the 2010 Plan, is administered by the Compensation Committee of the Board of Directors and provides for the following types of awards: incentive stock options, nonqualified options, stock appreciation rights, restricted shares, restricted stock units, performance compensation awards, cash incentive awards, director stock and other equity-based and equity-related awards.  Awards are generally granted to certain members of management and employees, as well as directors.  The Company also has an ESPP, adopted in 2011, that provides for the purchase of Company common stock at a discounted stock purchase price. Under the 2019 Plan, 840,360 shares of common stock, plus any shares that are subject to awards granted under the 2010 Plan that expire, are forfeited or canceled without the issuance of shares (other than shares used to pay the exercise price of a stock option under the 2010 Plan and shares used to cover the tax withholding of the award under the 2010 Plan) may be issued over a term of ten years. Under the ESPP, 150,000 shares of common stock may be issued over a term of ten years.

Stock-based compensation expense recorded under the 2010 Plan and the 2019 Plan, totaled $0.2 million and $0.1 million for the three months ended December 27, 2019 and December 28, 2018, respectively.

At December 27, 2019, there were 726,775 shares of common stock remaining available to be issued under the 2019 Plan and 83,252 shares of common stock remaining available to be issued under the ESPP.

Expenses relating to stock options that comply with certain U.S. income tax rules are neither deductible by the Company nor taxable to the employee.  Further information regarding awards granted under the 2010 Plan and ESPP is provided below.

18




Stock Options
 
When options are granted, IEC estimates fair value using the Black-Scholes option pricing model and recognizes the computed value as compensation cost over the vesting period, which is typically four years.  The contractual term of options granted under the 2010 Plan and 2019 Plan is generally seven years.  The volatility rate is based on the historical volatility of IEC's common stock.
 
There were no options granted during the three months ended December 27, 2019 and December 28, 2018.
 
 
 
 
 
A summary of stock option activity, together with other related data, follows:
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
Stock Options
 
Number
of Options
 
Wgtd. Avg.
Exercise
Price
 
Number
of Options
 
Wgtd. Avg.
Exercise
Price
 
 
 
 
 
 
 
 
 
Outstanding, beginning of period
 
743,145

 
$
4.54

 
737,145

 
$
4.33

Granted
 

 

 

 

Exercised
 
(24,000
)
 
5.42

 
(11,500
)
 
3.99

Forfeited
 
(10,000
)
 
3.58

 
(17,500
)
 
3.61

Expired
 
(5,000
)
 
6.91

 
(5,000
)
 
4.08

Outstanding, end of period
 
704,145

 
$
4.51

 
703,145

 
$
4.35

 
 
 
 
 
 
 
 
 
For options expected to vest
 
 
 
 
 
 

 
 

Number expected to vest
 
695,555

 
$
4.49

 
693,289

 
$
4.34

Weighted average remaining contractual term, in years
 
3.5

 
 
 
3.8

 


Intrinsic value (000s)
 
 
 
$
3,283

 
 

 
$
1,008

 
 
 
 
 
 
 
 
 
For exercisable options
 
 
 
 
 
 

 
 

Number exercisable
 
541,645

 
$
4.16

 
420,858

 
$
4.24

Weighted average remaining contractual term, in years
 
2.4

 
 
 
3.1

 
 

Intrinsic value (000s)
 
 
 
$
2,738

 
 

 
$
664

 
 
 
 
 
 
 
 
 
For non-exercisable options
 
 
 
 
 
 

 
 

Expense not yet recognized (000s)
 
 
 
$
304

 
 
 
$
269

Weighted average years to be recognized
 
3.0

 
 
 
2.9

 
 

 
 
 
 
 
 
 
 
 
For options exercised
 
 
 
 
 
 
 
 
Intrinsic value (000s)
 
 
 
$
64

 
 

 
$
23

 
Restricted (Non-vested) Stock
 
Certain holders of IEC restricted stock have voting and dividend rights as of the date of grant, and, until vested, the shares may be forfeited and cannot be sold or otherwise transferred.  At the end of the vesting period, which is typically four or five years (three years in the case of directors), holders have all the rights and privileges of any other common stockholder of the Company.  The fair value of a share of restricted stock is its market value on the date of grant, and that value is recognized as stock compensation expense over the vesting period. 
 

19



A summary of restricted stock activity, together with related data, follows: 
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
Restricted (Non-vested) Stock
 
Number of Non-vested Shares
 
Wgtd. Avg. Grant Date Fair Value
 
Number of Non-vested Shares
 
Wgtd. Avg. Grant Date Fair Value
 
 
 
 
 
 
 
 
 
Outstanding, beginning of period
 
82,707

 
$
5.25

 
103,233

 
$
4.08

Granted
 

 

 

 

Vested
 
(10,000
)
 
3.60

 
(7,500
)
 
3.60

Forfeited
 

 

 
(1,400
)
 
4.13

Outstanding, end of period
 
72,707

 
$
5.48

 
94,333

 
$
4.12

 
 
 
 
 
 
 
 
 
For non-vested shares
 
 

 
 
 
 

 
 
Expense not yet recognized (000s)
 
 
 
$
295

 
 

 
$
274

Weighted average remaining years for vesting
 
1.9

 
 
 
1.5

 
 
 
 
 
 
 
 
 
 
 
For shares vested
 
 

 
 
 
 

 
 
Aggregate fair value on vesting dates (000s)
 
 

 
$
66

 
 

 
$
40

 
Stock Issued to Board Members
 
In addition to annual grants of restricted stock, included in the table above, board members may elect to have their meeting fees paid in the form of shares of the Company’s common stock.   The Company has not paid any meeting fees in stock since May 21, 2013. 

Restricted Stock Units

Holders of IEC restricted stock units do not have voting and dividend rights as of the date of grant, and, until vested, the unit may be forfeited and cannot be sold or otherwise transferred.  At the end of the vesting period, which is typically three years, holders will receive shares of the Company's common stock and have all the rights and privileges of any other common stockholder of the Company.  The fair value of a restricted stock unit is the market value of the underlying shares of the Company's stock on the date of grant and that value is recognized as stock compensation expense over the vesting period.

A summary of restricted stock unit activity, together with related data, follows:
 
 
Three Months Ended
 
 
December 27, 2019
 
December 28, 2018
Restricted Stock Units
 
Number of Non-vested Units
 
Wgtd. Avg. Grant Date Fair Value
 
Number of Non-vested Units
 
Wgtd. Avg. Grant Date Fair Value
 
 
 
 
 
 
 
 
 
Outstanding, beginning of period
 
153,186

 
$
5.36

 
170,492

 
$
3.96

Granted
 

 

 

 

Vested
 

 

 

 

Forfeited
 

 

 

 

Outstanding, end of period
 
153,186

 
$
5.36

 
170,492

 
$
3.96

 
 
 
 
 
 
 
 
 
For non-vested shares
 
 

 
 
 
 

 
 

Expense not yet recognized (000s)
 
 
 
$
603

 
 

 
$
322

Weighted average remaining years for vesting
 
2.0

 
 
 
2.1

 
 

20



NOTE 9—INCOME TAXES  

The income tax expense during each of the three months ended December 27, 2019 and December 28, 2018 follows:
 
 
Three Months Ended

 
December 27,
2019
 
December 28,
2018
(in thousands)
 
 

 

Income tax expense
 
$
336

 
$
312

 
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income, changes in tax laws, business reorganizations, and settlements with taxing authorities, if any.

The Company's estimated annual effective tax rate for fiscal 2020 is comprised of the federal tax rate of 21% plus the state tax rate of 1.58%, which is adjusted for permanent book tax differences. During the three months ended December 27, 2019, the permanent items included meals and entertainment and stock based compensation. There were no material discrete items recognized in the three months ended December 27, 2019.

NOTE 10—MARKET SECTORS AND MAJOR CUSTOMERS  

A summary of sales, according to the market sector within which IEC’s customers operate, follows: 
 
 
Three Months Ended
% of Sales by Sector
 
December 27,
2019
 
December 28,
2018
 
 
 
 
 
Aerospace & Defense
 
61%
 
53%
Medical
 
25%
 
26%
Industrial
 
14%
 
21%
 
 
100%
 
100%

Three individual customers represented 10% or more of sales for the three months ended December 27, 2019. Two of these customers were from the aerospace & defense sector and represented 27% and 12% of sales, respectively. One customer was from the medical sector and represented 15% of sales for the three months ended December 27, 2019.

Two individual customers each represented 10% or more of sales for the three months ended December 28, 2018. One customer was from the aerospace & defense sector and represented 18% of sales, while one was from the medical sector and represented 14% of sales for the three months ended December 28, 2018.

Two individual customer represented 10% or more of receivables and accounted for 38% of the outstanding balance at December 27, 2019. Two individual customers represented 10% or more of receivables and accounted for 38% of the outstanding balance at September 30, 2019.

Credit risk associated with individual customers is periodically evaluated by analyzing the entity’s financial condition and payment history.  Customers generally are not required to post collateral.

NOTE 11—COMMITMENTS AND CONTINGENCIES
Litigation

From time to time, the Company may be involved in legal actions in the ordinary course of its business, but management does not believe that any such proceedings, individually or in the aggregate, will have a material adverse effect on the Company’s condensed consolidated financial statements.


21



NOTE 12—LEASES

Operating Leases

IEC has a lease portfolio that consists of operating leases for equipment, and has remaining terms from less than one year to up to approximately five years, with contractual terms expiring from 2020 to 2024. None of these leases contain residual value guarantees, substantial restrictions, or covenants.

Supplemental balance sheet information related to the Company’s operating leases were as follows:

 
December 27,
2019
 
 
 
Weighted average remaining lease term for operating leases (in years)
 
4.4

Weighted average discount rate for operating leases
 
5.48
%

Finance Leases

IEC's lease portfolio also consists of finance leases for equipment and real estate, and has remaining terms of five years up to approximately thirteen years, with contractual terms expiring in 2024 through 2033.

Supplemental balance sheet information related to the Company’s finance leases were as follows:
 
 
December 27, 2019
 
 
 
Finance lease right-of-use assets, net of accumulated amortization (included in PP&E) (in thousands)
 
$
6,761

Weighted average remaining lease term for finance leases (in years)
 
11.9

Weighted average discount rate for finance leases
 
4.83
%

Lease Expense

The components of lease expense, recorded in cost of sales, selling and administrative expenses and interest and financing expense in the condensed consolidated statements of operation, during the three months ended December 27, 2019 were as follows:
 
 
 
 
Three Months Ended
Lease Expense
 
Classification
 
December 27, 2019
(in thousands)
 
 
 
 
Operating lease expense
 
 
 
 
Fixed payment operating lease expense (1)
 
Cost of sales
 
$
26

Fixed payment operating lease expense
 
Selling and administrative expenses
 
15

Variable payment operating lease expense
 
 
 

Finance lease expense
 
 
 
 
Depreciation of ROU assets
 
Cost of sales
 
129

Interest
 
Interest and financing expense
 
85

Total lease expense
 
 
 
$
255

(1) Includes short-term leases which are not material.

22



Supplemental Cash Flow Information

Supplemental cash flow information related to the Company's leases during the three months ended December 27, 2019 were as follows:
 
 
Three Months Ended
Supplemental Cash Flow
 
December 27, 2019
(in thousands)
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Cash paid for operating lease ROU assets
 
$
32

Interest paid on finance leases
 
85

Financing cash flows from finance leases
 

 
 
 
Lease liabilities arising from obtaining ROU assets:
 
 
Operating leases
 
19


Contractual Lease Payments

A summary of operating lease payments for the next five years follows:
Operating Lease Payment Schedule
 
Contractual
Lease
Payments
(in thousands)
 
 

Twelve months ending December
 
 

2020
 
$
77

2021
 
73

2022
 
72

2023
 
72

2024 and thereafter
 
37

Total operating lease payments
 
331

Less: amounts representing interest
 
(38
)
Total operating lease obligation
 
$
293


A summary of finance lease payments for the next five years follows:
Finance Lease Payment Schedule
 
Contractual
Lease
Payments
(in thousands)
 
 

Twelve months ending December
 
 

2020
 
$
757

2021
 
770

2022
 
785

2023
 
798

2024 and thereafter
 
6,683

Total capital lease payments
 
9,793

Less: amounts representing interest
 
(2,436
)
Total finance lease obligation
 
$
7,357



23



Disclosures Related to Periods Prior to Adoption of the New Lease Standard

As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and under the previous lease accounting standard, the maturities of lease liabilities at September 30, 2019 were as follows:

Capital Lease Payment Schedule
 
Contractual
Payments
(in thousands)
 
 

Twelve months ending September 30,
 
 

2020
 
$
673

2021
 
686

2022
 
700

2023
 
714

2024 and thereafter
 
6,720

Total capital lease payments
 
9,493

Less: amounts representing interest
 
(2,470
)
Present value of minimum lease payment
 
$
7,023


As of December 27, 2019, the Company has one outstanding lease agreement that has not yet commenced for certain property located in Newark, New York that will include a new manufacturing facility and administrative offices. The lease is expected to commence in late 2020 when construction of the asset is complete.

NOTE 13—NET INCOME PER SHARE

The Company applies the two-class method to calculate and present net income per share. Certain of the Company's restricted (non-vested) share awards contain non-forfeitable rights to dividends and are considered participating securities for purposes of computing net income per share pursuant to the two-class method. Under the two-class method, net earnings are reduced by the amount of dividends declared (whether paid or unpaid) and the remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends.

Basic earnings per common share are calculated by dividing income available to common stockholders by the weighted average number of shares outstanding during each period.  Diluted earnings per common share add to the denominator incremental shares resulting from the assumed exercise of all potentially dilutive stock options, as well as unvested restricted stock and restricted stock units.  Options, restricted stock and restricted stock units are primarily held by directors, officers and certain employees. 

The Company uses the two-class method to calculate net income per share as both classes share the same rights in dividends. Therefore, basic and diluted earnings per share (“EPS”) are the same for both classes of ordinary shares.


24



A summary of shares used in the EPS calculations follows (in thousands except share and per share data):
 
 
Three Months Ended
Earnings Per Share
 
December 27,
2019
 
December 28,
2018
(in thousands, except share and per share data)
 
 
 
 
Basic net income per share:
 
 
 
 
Net income
 
$
1,189

 
$
1,072

Less: Income attributable to non-vested shares
 
10

 
10

Net income available to common stockholders
 
$
1,179

 
$
1,062

 
 
 
 
 
Weighted average common shares outstanding
 
10,365,766

 
10,262,397

 
 
 
 
 
Basic net income per share
 
$
0.11

 
$
0.10

 
 
 
 
 
Diluted net income per share:
 
 
 
 
Net income
 
$
1,189

 
$
1,072

Shares used in computing basic net income per share
 
10,365,766

 
10,262,397

Dilutive effect of non-vested shares
 
330,211

 
233,032

Shares used in computing diluted net income per share
 
10,695,977

 
10,495,429

 
 
 
 
 
Diluted net income per share
 
$
0.11

 
$
0.10


The diluted weighted average share calculations do not include the following shares, which are not dilutive to the EPS calculations.
 
 
Three Months Ended
 
 
December 27,
2019
 
December 28,
2018
 
 
 
 
 
Anti-dilutive shares excluded
 

 
17,000



25




Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The information in this Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes.  All references to “Notes” are to the accompanying condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”).
 
Cautionary Note Regarding Forward-Looking Statements

References in this report to “IEC,” the “Company,” “we,” “our,” or “us” mean IEC Electronics Corp. and its subsidiaries except where the context otherwise requires. This Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements include, but are not limited to, statements regarding future sales and operating results, future prospects, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical fact, 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 materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.

The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those views expressed or implied in our forward-looking statements: business conditions and growth or contraction in our customers’ industries, the electronic manufacturing services industry and the general economy; our ability to control our material, labor and other costs; our dependence on a limited number of major customers; uncertainties as to availability and timing of governmental funding for our customers; the impact of government regulations, including FDA regulations; unforeseen product failures and the potential product liability claims that may be associated with such failures; technological, engineering and other start-up issues related to new programs and products; variability and timing of customer requirements; the potential consolidation of our customer base; availability of component supplies; dependence on certain industries; the ability to realize the full value of our backlog; the types and mix of sales to our customers; litigation and governmental investigations; intellectual property litigation; variability of our operating results; our ability to maintain effective internal controls over financial reporting; the availability of capital and other economic, business and competitive factors affecting our customers, our industry and business generally; failure or breach of our information technology systems; and natural disasters. Any one or more of such risks and uncertainties could have a material adverse effect on us or the value of our common stock. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and our other filings with the Securities and Exchange Commission (the “SEC”).

All forward-looking statements included in this Form-10-Q are made only as of the date indicated or as of the date of this Form 10-Q. We do not undertake any obligation to, and may not, publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or which we hereafter become aware of, except as required by law. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Overview

IEC Electronics Corp. (“IEC,” “we,” “our,” “us,” “Company”) conducts business directly, as well as through its subsidiaries, IEC Electronics Corp-Albuquerque (“Albuquerque”), and IEC Analysis & Testing Laboratory, LLC (“ATL”). Our former subsidiary, IEC California Holdings, Inc., was dissolved as of September 18, 2019. Our Rochester unit operates as a division of IEC.

We are a premier provider of electronic manufacturing services (“EMS”) to advanced technology companies that produce life-saving and mission critical products for the medical, industrial, aerospace and defense sectors. We specialize in delivering

26



technical solutions for the custom manufacturing, product configuration, and verification testing of highly engineered complex products that require a sophisticated level of manufacturing to ensure quality and performance.

Within the EMS sector, we have unique capabilities which allow our customers to rely on us to solve their complex challenges, minimize their supply chain risk and deliver full system solutions for their supply chain. These capabilities include, among others:

Our engineering services include the design, development, and fabrication of customized stress testing platforms to simulate a product’s end application, such as thermal cycling and vibration, in order to ensure reliable performance and avoid catastrophic failure when the product is placed in service.
Our vertical manufacturing model offers customers the ability to simplify their supply chain by utilizing a single supplier for their critical components including complex printed circuit board assembly (“PCBA”), precision metalworking, and interconnect solutions. This service model allows us to control the cost, lead time, and quality of these critical components which are then integrated into full system assemblies and minimizes our customers’ supply chain risk.
We provide direct order fulfillment services for our customers by integrating with their configuration management process to obtain their customer orders, customize the product to the specific requirements, functionally test the product and provide verification data, and direct ship to their end customer in order to reduce time, cost, and complexity within our customer’s supply chain.
We believe we are the only EMS provider with an on-site laboratory that has been approved by the Defense Logistics Agency (“DLA”) for their Qualified Testing Supplier List (“QTSL”) program which deems the site suitable to conduct various QTSL and military testing standards including counterfeit component analysis and environmental testing to qualify a part fit for use. In addition, this advanced laboratory is utilized for complex design analysis and manufacturing process development to solve challenges and accelerate our customers’ time to market.

We are a 100% U.S. manufacturer which attracts customers who are unlikely to utilize offshore suppliers due to the proprietary nature of their products, governmental restrictions or volume considerations. Our locations include:

Newark, New York - Located approximately one hour east of Rochester, New York, our Newark location is our corporate headquarters and is our largest manufacturing location providing complex circuit board manufacturing, interconnect solutions, and system-level assemblies along with an on-site material analysis laboratory for advanced manufacturing process development.
Rochester, New York - Focuses on precision metalworking services including complex metal chassis and assemblies.
Albuquerque, New Mexico - Specializes in the aerospace and defense markets with complex circuit board and system-level assemblies along with a state of the art analysis and testing laboratory which conducts root cause failure analysis, reliability, inspection and authenticity testing.

We excel at complex, highly engineered products that require sophisticated manufacturing support where quality and reliability are of paramount importance. With our customers at the center of everything we do, we have created a high-intensity, rapid response 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.

We proactively invest in areas we view as important for our continued long-term growth. All of our locations are ISO 9001:2015 certified and ITAR registered. We are Nadcap accredited and AS9100D certified at our Newark and Albuquerque locations to support the stringent quality requirements of the aerospace industry. Our Newark location is ISO 13485 certified to serve the medical sector and is an approved supplier by the National Security Agency (“NSA”) under the COMSEC standard regarding communications security. Our analysis and testing laboratory in Albuquerque is ISO 17025 accredited, an IPC-approved Validation Services Qualified Test Laboratory, and we believe is the only on-site EMS laboratory that has been approved by the DLA for their QTSL program which deems the site suitable to conduct various QTSL and military testing standards including counterfeit component analysis and environmental testing to qualify a part fit for use. Albuquerque also performs work per NASA-STD-8739 and J-STD-001ES space standards.

The technical expertise of our experienced workforce enables us to build some of the most advanced electronic, wire and cable, interconnect solutions, and precision metal systems sought by original equipment manufacturers (“OEMs”).

Employees are our single greatest resource. Our total employees numbered 900, all of which are full time employees, at December 27, 2019. Total employment increased by 64 employees during the three months ended December 27, 2019. Some of our full-time employees are temporary employees. We make a concerted effort to engage our employees in initiatives that improve our business and provide opportunities for growth, and we believe that our employee relations are good. We have access to large and technically qualified workforces in close proximity to our operating locations in Rochester, NY and Albuquerque, NM.

27




Three Months Results
 
A summary of selected income statement amounts for the three months ended follows:
 

Three Months Ended
Income Statement Data

December 27,
2019
 
December 28,
2018
(in thousands)

 
 

Net sales

$
44,734

 
$
35,441



 
 
 
Gross profit

5,239

 
5,059

Selling and administrative expenses

3,299

 
3,352

Interest and financing expense

415

 
323

Income before income taxes

1,525

 
1,384

Income tax expense
 
336

 
312

Net income
 
$
1,189

 
$
1,072

 
A summary of sales, according to the market sector within which our customers operate, follows:
 
 
Three Months Ended
% of Sales by Sector
 
December 27,
2019
 
December 28,
2018
 
 
 
 
 
Aerospace & Defense
 
61%
 
53%
Medical
 
25%
 
26%
Industrial
 
14%
 
21%
 
 
100%
 
100%
 
Revenue increased in the first quarter of fiscal 2020 by $9.3 million or 26% as compared to the first quarter of the prior fiscal year. Revenues from the aerospace & defense sector increased $8.8 million, revenue from the medical sector increased $1.8 million and revenue from the industrial sector decreased $1.3 million.
 
Various increases and decreases in sales to our aerospace & defense customers resulted in a net increase of $8.8 million in the first quarter of fiscal 2020. Ramping up of production of various customers resulted in an increase of revenue of $8.5 million and net increases in customer demand resulted in an additional $0.3 million increase in revenue.

The medical sector saw an increase of $1.8 million in the first quarter of fiscal 2020 compared to the same period of the prior fiscal year. We saw increases related to new programs ramping up with three customers amounting to $3.0 million and increases in customer demand of $1.8 million. These increases were partially offset by net reductions of $1.6 million in demand from multiple customers and decreases of $1.4 million from a program being on hold from one customer. We continue to expect some volatility in the medical sector going forward.

The net decrease in the industrial sector of $1.3 million resulted primarily from the decreases in customer demand of $2.0 million. There was also a decrease of $0.9 million from a program being on hold from one customer. These decreases were partially offset by increase in customer demand of $1.1 million from various customers.

Due to the Chapter 11 bankruptcy filing of a customer, we incurred a $1.0 million pre-tax non-cash charge, related to the increase in our excess and obsolete inventory reserve. The customer communicated to its vendors to “cease providing all products” under its court-supervised process.  No portion of the impairment charge is anticipated to result in future cash expenditures. We intend to preserve all rights and pursue available legal remedies to recover any losses suffered as a result of the customer’s Chapter 11 bankruptcy filing. These charges impacted our GAAP financial results. Net income in the first quarter was $1.2 million, and, adjusted for the $1.0 million impact from the one-time inventory reserve, adjusted net income was $2.0 million. Information regarding this non-GAAP measure and a reconciliation of net income to adjusted net income is provided below under “Non-GAAP Financial Measures.”


28



Gross margin for the first quarter of fiscal 2020 decreased to 11.7% of sales versus 14.3% of sales in the first quarter of the prior fiscal year. The customer bankruptcy filing had the most significant impact on gross profit, in addition to customer mix.  Excluding the non-cash charge related to the customer's Chapter 11 bankruptcy filing, our adjusted gross margin would have been 13.9% of sales. Information regarding this non-GAAP measure and a reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin are provided below under “Non-GAAP Financial Measures.”

Selling and administrative (“S&A”) expenses decreased $0.1 million and represented 7.4% of sales in the first quarter of fiscal 2020 compared to 9.5% of sales in the same quarter of the prior fiscal year. The decrease in S&A expenses was primarily due to higher consulting expenses.

Interest and financing expense increased by $0.1 million in the first quarter of fiscal 2020 compared to the same quarter of the prior fiscal year. The weighted average interest rate on our debt was 1.19% lower during the first quarter of fiscal 2020 compared to the first quarter of the prior fiscal year. Our average outstanding debt balances increased by $9.3 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019 because of higher balances on our revolving credit facility and equipment line advances and term loans to fund capital purchases. Cash paid for interest on credit facility debt was approximately $0.3 million for the first quarter of each of fiscal 2020 and fiscal 2019. Detailed information regarding our borrowings is provided in Note 6—Credit Facilities.

With respect to tax payments, in the near term, we expect to be largely sheltered by sizable net operating loss (“NOL”) carryforwards for federal income tax purposes. In the quarter ended December 27, 2019, we did not pay any taxes. At the end of fiscal 2019, the gross NOL carryforwards amounted to approximately $23.4 million. The NOL carryforwards expire in varying amounts between 2023 and 2035, unless utilized prior to these dates.

Non-GAAP Financial Measures

In addition to reporting net income, gross profit and gross margin, U.S. GAAP measures, we present adjusted net income, adjusted gross profit and adjusted gross margin, which are non-GAAP measures, to reflect the impact of a one-time inventory reserve related to a customer’s bankruptcy. We believe these non-GAAP measures are important measures of our performance because they allow management, investors and others to evaluate and compare our performance from period to period by removing the impact of the one-time inventory reserve. Adjusted net income, adjusted gross profit and adjusted gross margin are not measures of financial performance under GAAP and are not calculated through the application of GAAP. As such, they should not be considered as a substitute for the GAAP measures of net income gross profit and gross margin, and therefore, should not be used in isolation of, but in conjunction with, the GAAP measures. These non-GAAP measures may produce results that vary from the GAAP measures and may not be comparable to a similarly defined non-GAAP measure used by other companies.
Reconciliation to net income:
 
 
Net income
 
$
1,189

Non-cash charge (1)
 
987

Income tax effect (2)
 
(207
)
Adjusted net income                                   
 
$
1,969

 
 
 
Reconciliation to gross profit:
 
 
Gross profit
 
$
5,239

Non-cash charge (1)
 
987

Adjusted gross profit                                    
 
$
6,226

 
 
 
Reconciliation to gross margin:
 
 
Gross margin
 
11.7
%
Non-cash charge (1)
 
2.2
%
Adjusted gross margin                                    
 
13.9
%
(1) A non-cash charge related to the increase in our excess and obsolete inventory reserve due to the Chapter 11 bankruptcy filing of a customer of IEC.
(2) The income tax effect related to the non-cash charge was calculated using an effective tax rate of 21%.


29



Liquidity and Capital Resources
 
Capital Resources
 
As of December 27, 2019, there were $0.5 million of outstanding capital expenditure commitments for manufacturing equipment.  We generally fund capital expenditures with cash flows from operations, our revolving credit facility and our equipment line advances. Based on our current expectations, we believe that our projected cash flows provided by operations and potential borrowings under the revolving credit facility and equipment line advances, are sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months.

Our cash management system provides for the funding of the disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks in excess of the bank balance create a book overdraft.
 
Summary of Cash Flows
 
A summary of selected cash flow amounts for the three months ended December 27, 2019 and December 28, 2018 follows:
 
 
Three Months Ended
Cash Flow Data
 
December 27,
2019
 
December 28,
2018
(in thousands)
 
 
 
 
Cash, beginning of period
 
$

 
$

Net cash provided by/(used in):
 
 

 
 

Operating activities
 
2,343

 
(2,561
)
Investing activities
 
(324
)
 
(511
)
Financing activities
 
(2,019
)
 
3,072

Net cash change for the period
 

 

Cash, end of period
 
$

 
$

 
Operating activities
 
Cash flows from operations, before considering changes in our working capital accounts, provided $3.5 million and $2.3 million for the first three months of fiscal 2020 and fiscal 2019, respectively. Net income of $1.2 million in the first three months of fiscal 2020 improved compared to the same period of the prior fiscal year mainly due to increased sales. Net income was $1.1 million during the first three months of the prior fiscal year.

Working capital used cash flows of $1.2 million in the first three months of fiscal 2020 and $4.9 million in the first three months of fiscal 2019. The change in working capital in the first three months of fiscal 2020 was primarily due to increases in inventory of $1.7 million, increases in accounts receivable of $0.9 million, increases in unbilled contract revenue of $0.5 million, an increase in book overdraft of $0.3 million and decreases in accrued expenses of $1.1 million. Inventory deposit increases were driven by the higher customer demand to meet increased backlog and securing materials for future production. The increase in accounts receivable was primarily due to increases in sales. The increase in accrued expenses was due to an increase in payroll and related costs due to timing.

Investing activities
 
Cash flows used in investing activities were $0.3 million and $0.5 million for the first three months of fiscal 2020 and 2019, respectively.  Cash flows used in each of the first three months of fiscal 2020 and fiscal 2019 consisted of purchases of equipment.

Financing activities
 
Cash flows used in financing activities were $2.0 million for the first three months of fiscal 2020 compared to inflows of $3.1 million for the first three months of fiscal 2019.  During the first three months of fiscal 2020, net repayments under all credit facilities were $2.5 million, with $2.2 million of net repayments under the Revolver, as defined below, and repayments of $0.3 million for term debt. During the first three months of fiscal 2019, net borrowings under all credit facilities were $3.1 million, with $3.0 million of net borrowings under the Revolver repayments of $0.3 million for term debt, and $0.4 million of new borrowings related to equipment line advances.


30



Credit Facilities
 
At December 27, 2019, borrowings outstanding under the revolving credit facility (the “Revolver”) under the Ninth Amendment to the Fifth Amended and Restated Credit Facility Agreement (which amended the Fifth Amended and Restated Credit Facility Agreement dated as of December 14, 2015, as amended by various amendments, collectively, the “Credit Facility, as amended”) amounted to $24.5 million, and the upper limit was $35.0 million.  We believe that our liquidity is sufficient to satisfy anticipated operating requirements during the next twelve months.

The Credit Facility, as amended, contains various affirmative and negative covenants including financial covenants. As of December 27, 2019, we had to maintain a minimum fixed charge coverage ratio (“Fixed Charge Coverage Ratio”). The Fixed Charge Coverage Ratio compares (i) EBITDAS minus unfinanced capital expenditures minus tax expense, to (ii) the sum of interest expense, principal payments, payments on all capital lease obligations and dividends, if any (fixed charges). “EBITDAS” is defined as earnings before interest, taxes, depreciation, amortization and non-cash stock compensation expense. The Fixed Charge Coverage Ratio was measured for a trailing twelve months ended December 27, 2019. The Credit Facility, as amended, also provides for customary events of default, subject in certain cases to customary cure periods, in which events, the outstanding balance and any unpaid interest would become due and payable.

Pursuant to the Credit Facility, as amended, the Fixed Charge Coverage Ratio covenant of a minimum of 1.10 was the only covenant in effect at December 27, 2019. The Fixed Charge Coverage Ratio was calculated as 2.55 at December 27, 2019. The Company was in compliance with the financial debt covenant at December 27, 2019.

Detailed information regarding our borrowings at December 27, 2019 is provided in Note 6—Credit Facilities.

Off-Balance Sheet Arrangements
 
IEC is not a party to any material off-balance sheet arrangements.
 
Application of Critical Accounting Policies
 
Our application of critical accounting policies is disclosed in our Annual Report on Form 10-K filed for the fiscal year ended September 30, 2019

Recently Issued Accounting Standards
 
See Note 1—Our Business and Summary of Significant Accounting Policies for further information concerning recently issued accounting pronouncements.
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
 
As a result of its financing activities, the Company is exposed to changes in interest rates that may adversely affect operating results. The Company actively monitors its exposure to interest rate risk and from time to time may use derivative financial instruments to manage the impact of this risk.  The Company may use derivatives only for the purpose of managing risk associated with underlying exposures.  The Company does not trade or use instruments with the objective of earning financial gains on the interest rate nor does the Company use derivatives instruments where it does not have underlying exposure.  The Company did not have any derivative financial instruments at December 27, 2019 or September 30, 2019.
 
At December 27, 2019, the Company had $28.1 million of debt, all comprised of variable interest rates.  Interest rates on variable loans are based on London interbank offered rate (“LIBOR”). The credit facilities are more fully described in Note 6—Credit Facilities.  Interest rates based on LIBOR currently adjust daily, causing interest on such loans to vary from period to period.  A sensitivity analysis as of December 27, 2019 indicated that a one-percentage point increase or decrease in our variable interest rates, which represents more than a 10% change, would increase or decrease the Company’s annual interest expense by approximately $0.3 million.
 
The Company is exposed to credit risk to the extent of non-performance by M&T Bank under the Credit Facility, as amended.  M&T Bank’s credit rating is monitored by the Company, and IEC expects that M&T Bank will perform in accordance with the terms of the Credit Facility, as amended.
 

31



Item 4.    Controls and Procedures
 
Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial
Officer (our principal financial officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 27, 2019, the end of the period covered by this Form 10-Q.  Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 27, 2019, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

The Company is in the process of implementing a financial reporting system, Epicor ERP Software (“Epicor”), as part of a multi-year plan to integrate and upgrade our systems and processes.  During the year ended September 30, 2019, the Company began implementation of Epicor by converting one legacy ERP system to Epicor. The implementation of Epicor is occurring in phases and is expected to be fully completed after fiscal 2020.  

As part of the Epicor implementation, certain changes to our processes and procedures have and will continue to occur.  These changes will result in changes to our internal control over financial reporting.  While Epicor is designed to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolve.

During the quarter ended December 27, 2019, there have been no other changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the effectiveness of control systems

IEC’s management does not expect that our disclosure controls and internal controls will prevent all errors and fraud. Because of inherent limitations in any such control system (e.g. faulty judgments, human error, information technology system error, or intentional circumvention), there can be no assurance that the objectives of a control system will be met under all circumstances. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The benefits of a control system also must be considered relative to the costs of the system and management’s judgments regarding the likelihood of potential events. In summary, there can be no assurance that any control system will succeed in achieving its goals under all possible future conditions, and as a result of these inherent limitations, misstatements due to error or fraud may occur and may or may not be detected.

32



Part II         OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
From time to time, we may be involved in legal actions in the ordinary course of our business, but management does not believe that any such proceedings individually or in the aggregate, will have a material effect on our condensed consolidated financial statements.

Item 1A.   Risk Factors
 
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019 filed with the SEC on November 22, 2019.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.    Defaults Upon Senior Securities
 
None
 
Item 4.    Mine Safety Disclosures
 
Not Applicable
 
Item 5.    Other Information 

None
 
Item 6.    Exhibits
 
INDEX TO EXHIBITS
Exhibit No.
 
Description
31.1*
 
31.2*
 
32.1*
 
101
 
The following items from this Quarterly Report on Form 10-Q formatted in Extensible Business Reporting Language: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Income Statements (unaudited), (iii) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements. 

* Filed herewith.



33




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)
 
 
 
February 5, 2020
By:
/s/ Thomas L. Barbato
 
 
Thomas L. Barbato
 
 
Senior Vice President and Chief Financial Officer
 
 
(On behalf of the Registrant and as Principal Financial and Accounting Officer)
 

34