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'sRegistrant’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 registrantregistrant: (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, or a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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'sissuer’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 INCOME STATEMENTS OF OPERATIONS

 

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

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT of CHANGES in STOCKHOLDERS'STOCKHOLDERS’ EQUITY

 

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)

 

 

 

Generally Accepted Accounting Principles

 

IEC'sIEC’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'sBoard’s (“FASB”) Accounting Standards Codification (“ASC”).

 

Fiscal Calendar

 

The Company’s fiscal year ends on September 30th and the first three quarters generally end generally on the Friday closest to the last day of the calendar quarter. For the fiscal year ending 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 ownedwholly-owned subsidiaries: IEC Electronics Wire and Cable, Inc. (“Wire and Cable”); that merged into IEC on December 28, 2016; IEC Electronics Corp-Albuquerque (“Albuquerque”); and IEC Analysis & Testing Laboratory, LLC (“ATL”), formerly Dynamic Research and Testing Laboratories, LLC.LLC; and IEC California Holdings, Inc. The CelmetRochester unit, (“Celmet”)formerly Celmet, operates as a division of IEC. As further discussed in Note 2—SCB Divestiture and Discontinued Operations, the operations of our wholly-owned subsidiary, formerly known as Southern California Braiding, Inc. (“SCB”), were divested during the fourth quarter of fiscal 2015.  All significant 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 30, 2017 and July 1, 2016 and June 26, 2015 have been prepared in accordance withwithout 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 interimcomplete financial information.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'sCompany’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

  

Cash and Cash Equivalents

 

The Company’s cash and cash equivalents principally representrepresents deposit accounts with Manufacturers and Traders Trust Company (“M&T Bank”), a banking corporation headquartered in Buffalo, NY.

 

Allowance for Doubtful Accounts

 

The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management'smanagement’s evaluation of collectability.  Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote.

 

Inventory Valuation

 

Inventories are stated at the lower of cost or market 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.

 

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.

  

 

ASC 360-10 (Property, Plant and Equipment) and ASC 350-30 (Intangibles) require 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 property, plantPP&E or intangible assets during the three and equipment or intangibles in fiscalnine months ended June 30, 2017 and July 1, 2016.

 

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 usthe Company and the outcome is uncertain, ASC 450-10 (Contingencies) requires that wethe 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. 

 

Grants from Outside Parties

 

Grants from outside parties are recorded as other long-term liabilities and are amortized over the same period during which the associated fixed assetsPP&E are depreciated.

There were no deferred grants recorded during the three and nine months ended June 30, 2017. The Company manages its hedging positionoutstanding grant balance was $0.2 million and monitors the credit ratings of counterparties$0.3 million at June 30, 2017 and does not anticipate losses due to counterparty nonperformance.  However, the Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility.  The Company’s instruments are recorded in the consolidated balance sheets at fair value in other assets or other long-term liabilities.September 30, 2016, respectively.

 

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 borrowings and an interest rate swap agreement.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 20162017 or fiscal 2015.2016.

 

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.  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 servicesService revenue, including material management, design and repair work revenue, amounted to less than 5% of total revenue in each of the firstthree and nine months of fiscal 2016ended June 30, 2017 and fiscal 2015.July 1, 2016.

 

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. During fiscal 2015 and the first quarter of fiscal 2016, the ESPP was suspended in connection with the 2014 Restatements described below. The ESPP was reinstated as of the beginning of the second quarter of fiscal 2016.

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.

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 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 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 orincurred is reported as interest expense. Any penalties incurred are reported as interesttax expense. The Company’s income tax filings are subject to audit by various tax jurisdictions and current open years are the fiscal 2010year ended September 30, 2014 through fiscal 2014.year ended September 30, 2016. The Company is currently under federal income tax audit for the fiscal year ended September 30, 2013 and does not expectconcluded during the audit to have a material impact on the financial statements.

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 8—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.  Actual results may differ from management’s estimates.

 

 

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. 

 

Recently Issued Accounting Standards Not Yet Adopted

 

for the required expanded disclosures.  The Company has identified key personnel to evaluate the guidance and attended training, and started the process to formulate a significant impact upon adoption.time line to review the Company’s revenue streams, existing inventory contracts, and apply the five-step model to those contracts to evaluate the quantitative and qualitative impacts of the new standard.  The Company plans to adopt this ASU, as amended, in the first quarter of fiscal 2019.

FASB ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting” was issued in March 2016. This simplifies accounting for several aspects of share-based payment including income tax consequences, classification of awards as either equity or liability and classification on the statement of cash flows. For public entities, this update is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate a significant impact on its financial statements upon adoption.

FASB ASU 2016-13, “Financial Instruments - Credit Losses2016-15 “Statement of Cash Flows (Topic 326)”230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force” was issued in JuneAugust 2016. This ASU amendsclarifies how companies present and classify certain cash receipts and cash payments in the Board’s guidance on the impairmentstatement of financial instruments. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. This ASUcash flows. For public entities, this update is effective for fiscal years beginning after December 15, 2019. Early adoption will be permitted.2017, and interim periods within those fiscal years. The Company does not anticipate a significant impact on its financial statements upon adoption.

NOTE 10—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’sCompany's debt is carried at historical cost on the balance sheet. A summary of theThe fair value and carrying value of fixed rate debtthe Celmet Building Term Loan at period end follows:June 30, 2017 were both $0.8 million. The fair value and carrying value of the Celmet Building Term Loan as of September 30, 2016 were both $0.9 million.

The fair value of the remainder of the Company’s debt approximated carrying value at July 1, 2016June 30, 2017 and September 30, 20152016 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.

 

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

 

The 2010 Omnibus Incentive Compensation Plan (the “2010 Plan”), was approved by the Company’s stockholders at the January 2011 Annual Meeting. This planThe Company also has an ESPP, adopted in 2011, that provides for the purchase of Company common stock at a discounted stock purchase price. The 2010 Plan replaced IEC’s 2001 Stock Option and Incentive Plan (the “2001 Plan”), which expired in December 2011.  The 2010 Plan, which is administered by the Compensation Committee of the Board of Directors, 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.  Under the 2010 Plan, up to 2,000,000 shares of common stock may be issued over a term of ten years.

Stock-based compensation expense recorded under the 2010 and 2001 Plans, as well asincluding the ESPP, totaled $0.3$0.2 million and $2.0$0.5 million for the three and nine months ended June 30, 2017, respectively. Stock-based compensation expense recorded under the 2010 and 2001 Plans, including the ESPP, totaled $0.2 million and $0.3 million for the three and nine months ended July 1, 2016, and June 26, 2015, respectively. As further discussed in Note 17—Litigation, duringDuring the nine months ended July 1, 2016, incentive compensation shares were returned by the Company'sCompany’s former CEO resulting in a reduction to compensation expense of $60.0 thousand. 

At July 1, 2016June 30, 2017, there were 663,940231,541 shares available to be issued under the 2010 Plan.

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 2001 Plan, 2010 Plan and employee stock purchase planESPP is provided below.

Stock Options

 

When options are granted, IEC estimates the fair value of the option 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 is generally seven years.