UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

or

For the transition period from ____ to ____

 

Commission File Number 001-34376

 

IEC ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

 

 

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)

 

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.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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. (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

TABLE OF CONTENTS

 

 

 

IEC ELECTRONICS CORP.

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

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED JUNE 30, 201729, 2018

 

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

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS

(unaudited; in thousands) 

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

IEC ELECTRONICS CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Our Business

 

 

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, 2018 (“fiscal 2018”), the fiscal quarters ended on December 29, 2017, March 30, 2018 and June 29, 2018. For the fiscal year ended September 30, 2017 (“fiscal 2017”), the fiscal quarters ended on December 30, 2016, March 31, 2017 and June 30, 2017. For the fiscal year ended September 30, 2016 (“fiscal 2016”), the fiscal quarters ended on January 1, 2016, April 1, 2016 and July 1, 2016.

 

Consolidation

 

The consolidated financial statements include the accounts of IEC and its wholly-owned subsidiaries: IEC Electronics Wire and Cable, Inc. (“Wire and Cable”) thatwhich merged into IEC on December 28, 2016; IEC Electronics Corp-Albuquerque (“Albuquerque”); IEC Analysis & Testing Laboratory, LLC (“ATL”), formerly Dynamic Research and Testing Laboratories, LLC;; and IEC California Holdings, Inc. The Rochester unit, formerly Celmet, 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 and nine months ended June 29, 2018 and June 30, 2017 and July 1, 2016 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, 2016.2017.

  

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. Changes in the book overdrafts are presented within net cash flows provided by operating activities within the condensed consolidated statements of cash flows.

 

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 marketnet 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 market.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.

  

Reviewing Long-Lived Assets for Potential Impairment

 

ASC 360-10 (Property, Plant and Equipment) and ASC 350-30 (Intangibles) requirerequires the Company to test long-lived assets (PP&E and definitive 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 identified or recorded by IEC for PP&E or intangiblelong-lived assets during the three and nine months ended June 29, 2018 and June 30, 2017 and July 1, 2016.2017.

 

Leases

 

At the inception of a lease covering equipment or real estate, the lease agreement is evaluated under criteria discussed in ASC 840-10-25 (Leases).  Leases meeting one of four key criteria are accounted for as capital leases and all others are treated as operating leases.  Under a capital lease, the discounted value of future lease payments becomes the basis for recognizing an asset and a borrowing, and lease payments are allocated between debt reduction and interest.  For operating leases, payments are recorded as rent expense.  Criteria for a capital lease include (i) transfer of ownership during the lease term; (ii) existence of a bargain purchase option under terms that make it likely to be exercised; (iii) a lease term equal to 75 percent or more of the economic life of the leased property; and (iv) minimum lease payments that equal or exceed 90 percent of the fair value of the property.

Legal Contingencies

 

When legal proceedings are brought or claims are made against the Company and the outcome is uncertain, ASC 450-10 (Contingencies) requires that the Company 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. 

Customer Deposits

 

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 and accrued liabilities. See Note 6—Fair Value of Financial Instruments for a discussion of the fair value of IEC’s 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:

 

 

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 and nine months of fiscal 2017 or fiscal 2016.ended June 29, 2018 and June 30, 2017.

 

Revenue Recognition

 

The Company’s revenue is principally derived from the sale of electronic products built to customer specifications, but also from other value-added support services and repair work.  Revenue from product sales is recognized when (i) goods are shipped or title and risk of ownership have passed, (ii) the price to the buyer is fixed or determinable, and (iii) realization is reasonably assured. Service revenue is generally recognized once the service has been rendered.  ServiceFor 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 design and repair work revenue, amounted to less than 5% of total revenue in each of the three and nine months ended June 29, 2018 and June 30, 2017 and July 1, 2016.2017.

 

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

 

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. Compensation expense related to the discount is recognized as employees contribute to the plan.

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 a companythe 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, 2016.2017. The federal income tax audit for the fiscal year ended September 30, 2013 concluded during the first nine months of fiscal 2017 and resulted in no change to reported tax.

 

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 5—Credit Facilities. 

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: allowance for doubtful accounts, excess and obsolete inventory, warranty reserves and the valuation of deferred income tax assets. 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.income/(loss). 

Recently Issued Accounting Standards Not Yet Adopted

 

The guidance is effective for annual periodsthe Company beginning after December 15, 2017, including interim periods within that period.  Early adoption is permitted for annual periods beginning after December 15, 2016. The Company is continuing to evaluatein the effect this guidance will have on its consolidated financial statements, including potential impacts onfirst quarter of the amount and timing of revenue recognition and additional information that may be necessary

FASB ASU 2016-02, “Leases” was issued in February 2016. The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. For public entities, the new guidance is effective for annual periods beginning after December 15, 2018, or the Company's fiscal year ending September 30, 2020, and interim periods within those annual periods. Early adoption is permitted for all entities. The Company is evaluating the impact this ASU will have on its consolidated financial statements.

 

NOTE 6—FAIR VALUE OF FINANCIAL INSTRUMENTS  

Financial Instruments Carried at Historical Cost

 

The Company’s long-term debt is not quoted.  Fair value was estimated using a discounted cash flow analysis based on Level 2 valuation inputs, including borrowing rates the Company believes are currently available to it for loans with similar terms and maturities.

The Company's debt is carried at historical cost on the condensed consolidated balance sheet. The fair value and carrying value of the Celmet Building Term Loan at June 30, 2017 were both $0.8 million.sheets. The fair value and carrying value of the Celmet Building Term Loan as of September 30, 20162017 were both $0.9each $0.8 million. As described in Note 12—Capital Lease, the Celmet Building Term Loan was repaid on May 11, 2018.

 

The fair value of the remainder of the Company’s debt approximated carrying value at June 30, 201729, 2018 and September 30, 20162017 as it is variable rate debt.

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 consolidated balance sheet.

 

A summary of additions to and charges against IEC’s warranty reserves during the period follows: 

 

 

 

Restricted (Non-vested) Stock

 

Certain holders of IEC restricted stock have voting and dividend rights as of the date of grant, butand 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 IEC common stockholder.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. 

 

A summary of restricted stock activity, together with related data, follows: 

 

Stock Issued to Board Members

 

In addition to annual grants of restricted stock, included in the table above, Boardboard 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. 

NOTE 9—INCOME TAXES  

Provision for income taxes during each of the three and nine months ended June 29, 2018 and June 30, 2017 and July 1, 2016 follows:

 

TheExcept as described below related to the federal Alternative Minimum Tax (“AMT”), the Company has recorded a full valuation allowance on all deferred tax assets.assets as of June 29, 2018. Although a full valuation allowance has been recorded for all deferred tax assets, including net operating loss carryforwards (“NOLs”), these NOLs remain available to the Company to offset future taxable income and reduce cash tax payments. IEC had federal gross NOLs for income tax purposes of approximately $31.7$32.9 million at September 30, 2016,2017, expiring mainly in years 2022 through 2025 and 2034 through 2035. The Company also has additional state NOLs available in several jurisdictions in which it files state tax returns.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax reformby, among other things, lowering U.S. corporate income tax rates. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in an expected U.S. statutory federal rate tax of approximately 24.5% for fiscal 2018, and approximately 21% for subsequent fiscal years.  The Tax Act eliminates the domestic manufacturing deduction and moves to a territorial system. In addition, previous paid federal AMT will now be refundable regardless of whether there is future income tax liability before AMT credits. For the nine months ended June 29, 2018, the impact of the Tax Act resulted in the reductionCompany recording a net tax benefit of approximately $1 million, resulting from the release of the business income base rate for qualified manufactures in New York State to 0% beginning in fiscal 2015 for IEC. At September 30, 2016,valuation allowance on the Company’s AMT credits. In addition, because the Company had $1.2 million of New York State investmentrecorded a full valuation allowance on its historical NOLs, the resulting change in the deferred tax and other credit carryforwards, expiring in various years through 2030.  The credits cannot be utilized unlessasset from the New York statelower corporate tax rate is no longer 0%.was fully offset by the resulting change in the Company’s valuation allowance and did not have any impact on the Company’s income tax provision for the quarter ended June 29, 2018.  

One individual customer represented 10% or more of sales for the three months ended June 30, 2017.  This customer was from the medical sector, and represented 18% of sales for the three months ended June 30, 2017. Two individual customers each represented 10% or more of sales for the nine months ended June 30, 2017. One customer was from the Medicalmedical sector, and

represented 15% of sales, while the otherand one customer was from the Aerospaceaerospace & Defensedefense sector and represented 12% of sales for the nine months ended June 30, 2017. Two individual customers each represented 10% or more of sales for the nine months ended July 1, 2016.  Both customers were from the Medical sector, and represented 17% of sales each.

Three individual customers represented 10% or more of receivables and accounted for 39%45% of the outstanding balance at June 30, 2017. Four29, 2018. Three individual customers represented 10% or more of receivables and accounted for 44%42% of the outstanding balances at July 1, 2016.September 30, 2017.

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.

Leases

On November 18, 2016, the Company entered into a sale-leaseback agreement, pursuant to the terms of the Purchasea purchase and Sale Agreement (the “PSA”),sale agreement, with Store Capital Acquisitions, LLC, a Delaware limited liability company (the “Purchaser”), for the sale of certain property, including the manufacturing facility located in Albuquerque, New Mexico (the “Property”). Albuquerque (the “Seller”) completed the sale of the Property to the Purchaser for an aggregate purchase price of approximately $5.8 million including a $0.1 million holdback held subject to a holdback of funds agreement. The net book value of assets sold was $4.6 million and the value of the assets acquired under the lease is $5.8 million. The Company recorded a deferred gain of $1.1 million related to the transaction, which is recorded in other long-term liabilities section of the condensed consolidated balance sheet. The proceeds from the transaction were used to pay off the Albuquerque Mortgage Loan and pay down Term Loan A. As part of the transaction, a Lease Agreement dated as of November 18, 2016 was entered into between the Seller and the Purchaser (the “Lease”).  Pursuant to the Lease, the Seller is leasing the Property for an initial term of 15 years, with two renewal options of five years each. The initial base annual rent iswas approximately $0.5 million and is subject to an annual increase equal to the lesser of two percent or 1.25 times the change in the Consumer Price Index. Late payments incur a charge of 5% and bear interest at a rate of 18% or the highest rate permitted by law. If an event of default occurs under the terms of the Lease, among other things, all rental amounts accelerate and become due and owing, subject to certain adjustments.

The Company applies the two-class method to calculate and present net income income/(loss) 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 income/(loss) 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. As the Company incurred a net loss for the nine months ended June 30, 2017, and losses are not allocated to participating securities under the two-class method, such method is not applicable for the aforementioned interim reporting period.

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. 

A summary of shares used in the earningsEPS calculations follows (in thousands except share and per share (“EPS”) calculations follows:data):