UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~June 28,~~December 27, 2019

¨ 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	~~NYSE American~~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 – ~~10,334,583~~10,386,883 shares as of ~~August 1, 2019~~January 27, 2020

TABLE OF CONTENTS

Part I FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

~~JUNE 28,~~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



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.

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)

June 28,
2019 September 30,
2018
ASSETS
Current assets:
Cash $ —
$ —
Accounts receivable, net of allowance 26,612
25,168
Unbilled contract revenue 7,305
—
Inventories 44,889
34,126
Other current assets 1,893
1,747
Total current assets 80,699
61,041

Property, plant and equipment, net 19,331
20,110
Deferred income taxes 7,999
8,855
Other long-term assets 862
442
Total assets $ 108,891
$ 90,448

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 1,371
$ 1,449
Current portion of capital lease obligation 331
306
Accounts payable 29,510
28,689
Accrued payroll and related expenses 3,165
1,796
Other accrued expenses 543
458
Customer deposits 9,750
7,595
Total current liabilities 44,670
40,293

Long-term debt 26,622
16,002
Long-term capital lease obligation 6,772
7,027
Other long-term liabilities 1,558
1,750
Total liabilities 79,622
65,072
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: 11,387,974 and 11,304,393 shares, respectively
Outstanding: 10,332,486 and 10,248,905 shares, respectively 103
102
Additional paid-in capital 47,824
47,326
Accumulated deficit (17,069 ) (20,463 )
Treasury stock, at cost: 1,055,488 shares (1,589 ) (1,589 )
Total stockholders’ equity 29,269
25,376
Total liabilities and stockholders’ equity $ 108,891
$ 90,448

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

~~IEC ELECTRONICS CORP.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~THREE and NINE MONTHS ENDED JUNE 28, 2019 and JUNE 29, 2018~~

~~(unaudited; in thousands, except share and per share data)~~


	Three Months Ended				Nine Months Ended					Three Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018			December 27, 2019		December 28, 2018

Net sales	$	40,324	$	29,782	$	113,059	$	82,706		$	44,734	$	35,441
Cost of sales	34,719		26,423		97,808		73,045			39,495		30,382
Gross profit	5,605		3,359		15,251		9,661			5,239		5,059

Selling and administrative expenses	3,721		2,833		10,402		8,543			3,299		3,352
Operating income	1,884		526		4,849		1,118			1,940		1,707

Interest and financing expense	452		322		1,160		834			415		323
Income before income taxes	1,432		204		3,689		284			1,525		1,384

Income tax expense/(benefit)	221		—		736		(1,005		)
Income tax expense										336		312

Net income	$	1,211	$	204	$	2,953	$	1,289		$	1,189	$	1,072

Net income per common share:
Basic	$	0.12	$	0.02	$	0.28	$	0.12		$	0.11	$	0.10
Diluted	$	0.11	$	0.02	$	0.28	$	0.12		0.11		0.10

Weighted average number of shares outstanding:	Weighted average number of shares outstanding:									Weighted average number of shares outstanding:
Basic	10,332,548		10,243,286		10,294,173		10,221,869			10,365,766		10,262,397
Diluted	10,642,403		10,556,764		10,556,953		10,467,112			10,695,977		10,495,429

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~~THREE MONTHS ENDED ~~JUNE 28,~~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			Number of Shares Outstanding	Common Stock, par $0.01		Additional Paid-In Capital			Accumulated Deficit			Treasury Stock, at cost			Total Stockholders’ Equity
Balances, October 1, 2018	10,248,905	$	102	$	47,326		$	(20,463	)	$	(1,589	)	$	25,376

Impact of adoption of ASC 606, net of taxes	—	—		—			441			—			441
Balances, September 30, 2019																10,338,548	$	103	$	48,001		$	(15,275	)	$	(1,589	)	31,240

Net income	—	—		—			1,072			—			1,072			—	—		—			1,189			—			1,189
Stock-based compensation	—	—		146						—			146			—	—		152						—			152
Restricted stock vested, net of shares withheld for payment of taxes	4,439	—		—			—			—			—			6,367	—		(24		)	—			—			(24		)
Exercise of stock options, net of shares surrendered	2,553	—		—			—			—			—			24,000			130									130
Employee stock plan purchases	5,674	—		20			—			—			20			6,449	—		40			—			—			40

Balances, December 28, 2018	10,261,571	102		47,492			(18,950		)	(1,589		)	27,055

Net income	—	—		—			670			—			670
Stock-based compensation	—	—		152						—			152
Restricted stock vested, net of shares withheld for payment of taxes	38,636	1		—			—			—			1
Exercise of stock options, net of shares surrendered	11,654	—		51			—			—			51

Balances, March 29, 2019	10,311,861	103		47,695			(18,280		)	(1,589		)	27,929

Net income	—	—		—			1,211			—			1,211
Stock-based compensation	—	—		117			—			—			117
Restricted stock vested, net of shares withheld for payment of taxes	2,458	—		(14		)	—			—			(14		)
Restricted stock units vested, net of shares withheld for payment of taxes	5,277	—		(34		)	—			—			(34		)
Exercise of stock options, net of shares surrendered	7,500	—		27			—			—			27
Employee stock plan purchases	5,390	—		33			—			—			33

Balances, June 28, 2019	10,332,486	$	103	$	47,824		$	(17,069	)	$	(1,589	)	$	29,269
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.

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS’ EQUITY

~~NINE~~THREE MONTHS ENDED ~~JUNE 29,~~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			Number of Shares Outstanding	Common Stock, par $0.01		Additional Paid-In Capital		Accumulated Deficit			Treasury Stock, at cost			Total Stockholders’ Equity

Balances, October 1, 2017	10,197,078	$	102	$	46,789	$	(30,873	)	$	(1,589	)	$	14,429
Balances, September 30, 2018															10,248,905	$	102	$	47,326	$	(20,463	)	$	(1,589	)	25,376

Net loss	—	—		—		(494		)	—			(494		)
Stock-based compensation	—	—		69		—			—			69
Restricted stock vested, net of shares withheld for payment of taxes	3,498	—		—		—			—			—
Employee stock plan purchases	5,483	—		24		—			—			24

Balances, December 29, 2017	10,206,059	102		46,882		(31,367		)	(1,589		)	14,028

Impact of adoption of ASC 606, net of taxes															—	—		—		441			—			441
Net income	—	—		—		1,579			—			1,579			—	—		—		1,072			—			1,072
Stock-based compensation	—	—		129		—			—			129			—	—		146					—			146
Restricted stock vested, net of shares withheld for payment of taxes	30,530	—		—		—			—			—			4,439	—		—		—			—			—

Balances, March 30, 2018	10,236,589	102		47,011		(29,788		)	(1,589		)	15,736

Net income	—	—		—		204			—			204
Stock-based compensation	—	—		149		—			—			149
Restricted stock vested, net of shares withheld for payment of taxes	3,529	—		—		—			—			—
Exercise of stock options	1,400	—		—		—			—			—
Exercise of stock options, net of shares surrendered															2,553	—		—		—			—			—
Employee stock plan purchases	6,565	—		26		—			—			26			5,674	—		20		—			—			20

Balances, June 29, 2018	10,248,083	$	102	$	47,186	$	(29,584	)	$	(1,589	)	$	16,115
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.

IEC ELECTRONICS CORP.

CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS

~~NINE~~THREE MONTHS ENDED ~~JUNE 28,~~DECEMBER 27, 2019 and ~~JUNE 29,~~DECEMBER 28, 2018

(unaudited; in thousands)


	Nine Months Ended						Three Months Ended
	June 28, 2019			June 29, 2018			December 27, 2019			December 28, 2018

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,953		$	1,289		$	1,189		$	1,072
Non-cash adjustments:
Stock-based compensation	415			347			152			146
Depreciation and amortization	2,047			1,708			776			651
Change in reserve for doubtful accounts	(30		)	(42		)	28			26
Change in inventory reserve and warranty reserve	19			143			1,063			112
Deferred tax expense/(benefit)	732			(1,010		)
Deferred tax expense							320			312
Amortization of deferred gain	(85		)	(54		)	(29		)	(29		)
Changes in assets and liabilities:
Changes in operating assets and liabilities:
Accounts receivable	(1,414		)	(1,739		)	(924		)	2,426
Unbilled contract revenue	(2,972		)	—			(474		)	(1,770		)
Inventory	(14,485		)	(10,612		)
Inventories							(1,742		)	(6,934		)
Other current assets	(146		)	(204		)	(611		)	220
Other long-term assets	(436		)	4			(1		)	(255		)
Accounts payable	1,293			3,268			1,531			1,932
Change in book overdraft position	(602		)	1,268			284			(2,010		)
Accrued expenses	1,389			1,171			(1,088		)	462
Customer deposits	2,155			790			1,869			1,078
Other long-term liabilities	(75		)	(75		)
Net cash flows used in operating activities	(9,242		)	(3,748		)
Net cash flows provided by/(used in) operating activities							2,343			(2,561		)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment	(1,119		)	(2,001		)	(324		)	(511		)
Proceeds from disposal of property, plant and equipment	20			5
Proceeds from sale-leaseback	—			1,947
Net cash flows used in investing activities	(1,099		)	(49		)	(324		)	(511		)

CASH FLOWS FROM FINANCING ACTIVITIES
Advances from revolving credit facility	57,343			47,402			15,809			20,608
Repayments of revolving credit facility	(46,331		)	(41,609		)	(17,965		)	(17,589		)
Borrowings under other loan agreements	391			836			—			391
Repayments under other loan agreements	(889		)	(2,665		)	(343		)	(283		)
Repayments under capital lease	(230		)	(172		)
Debt issuance costs	(27		)	(45		)
Payments under finance lease							(81		)	(75		)
Proceeds received from lease financing obligation							415			—
Proceeds from exercise of stock options	79			—			130			—
Proceeds from employee stock plan purchases	53			50			40			20
Cash paid for taxes upon vesting of restricted stock	(48		)	—			(24		)	—
Net cash flows provided by financing activities	10,341			3,797
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	$	1,183		$	807		$	405		$	347
Income taxes paid	3			4			16			—
Property, plant and equipment additions financed through capital lease	—			2,000

Non-cash transactions:
Property, plant and equipment purchased with extended payment terms	$	130		$	—

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

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:~~2008, AS9100C,~~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. ~~For the fiscal year ended September 30, 2018 (“fiscal 2018”), the fiscal quarters ended on December 29, 2017, March 30, 2018 and June 29, 2018.~~

Consolidation

The ~~condensed~~ 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 ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~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, ~~2018.~~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 ~~$2.0~~$0.6 million and ~~$2.6~~$0.3 million as of ~~June 28,~~December 27, 2019 and September 30, ~~2018,~~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.

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 510
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 ~~or nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~December 28, 2018.

~~Leases~~

At the inception of a lease covering equipment or real estate, the lease agreement is evaluated under criteria discussed in ASC 840 (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 (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.

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 ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~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.

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 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 ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~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.

Recently Issued Accounting Standards Adopted

FASB ~~Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASC 606”)~~ASU 2016-02, “Leases” (Topic 842) was issued in May 2014 and updated the principles for recognizing revenue. This ASU superseded most of the existing revenue recognition requirements in GAAP. Under the new standard, revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. The standard creates a five-step model that generally requires companies to use more judgment and make more estimates than under previous guidance when considering the terms of contracts along with all relevant facts and circumstances. These include the identification of customer contracts and separating performance obligations, the determination of the transaction price that potentially includes an estimate of variable consideration, allocating the transaction price to each separate performance obligation, and recognizing revenue in line with the pattern of transfer. Additionally, disclosures required for revenue recognition include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from costs to obtain or fulfill a contract. Such disclosures are more extensive than what was required under previous GAAP.

February 2016. The guidance was effective for the Company beginning with the first quarter of fiscal ~~2019.~~ 2020. As a result of this adoption, the following accounting policies were implemented or changed.

The Company ~~evaluated~~elected the ~~guidance and approved a~~optional transition method ~~during fiscal 2018.~~to initially apply the new lease standard at the adoption date and not adjust its comparative period consolidated financial statements. The Company ~~assessed~~has elected the ~~impact~~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 ~~guidance, which resulted in a change of the Company’s revenue recognition model for electronics manufacturing services from “point in time” upon physical delivery~~lease standard to an “over time” model. The Company implemented ASC 606 using the modified retrospective approach with the cumulative effect on accumulated deficit on adoption of $0.4 million, net of taxes recognized on October 1, 2018. The implementation of ASC 606 is more fully described in Note 2—Revenue Recognition.

~~Recently Issued Accounting Standards Not Yet Adopted~~

FASB ASU 2016-02, “Leases” (Topic 842) was issued in February 2016. This update supersedes ASC 840 (Leases) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the

principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease for finance leases and operating leases, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of ~~greater than twelve months regardless of classification. Leases with a term of twelve~~12 months or ~~less will be accounted~~less. The Company has also elected an accounting policy to not separate lease and non-lease components for ~~similar to existing guidance for operating~~certain classes of leases. ~~In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to~~

Adoption of Topic 842 ~~(Leases),”~~resulted in recognition of additional net lease assets of approximately $0.3 million and ~~ASU 2018-11, “Leases (Topic 842),” Targeted Improvements, which provide (i) narrow amendments to clarify how to apply certain aspects~~net lease liabilities of approximately $0.3 million as of December 27, 2019 based on the ~~new~~present value of remaining minimum rental payments and corresponding ROU assets based upon the operating lease ~~standard, (ii) entities with an additional transition method to adopt~~liabilities. The adoption did not impact our beginning stockholders’ equity and did not have a material impact on the ~~new standard, and (iii) lessors with a practical expedient for separating components~~condensed consolidated statements of a contract. In December 2018, the FASB issued ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides certain narrow-scope improvements to Topic 842 as it relates to lessors. The ASUs related to Topic 842 will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is in the process of finalizing the analysis of its lease portfolio, implementing systems and processes and updating its accounting policies to comply with Topic 842.operations or cash flows.

NOTE 2—REVENUE RECOGNITION

ASC 606: Revenue from Contracts with Customers

~~General Description of the New Guidance~~

Effective October 1, 2018, the Company applied the modified retrospective approach for its adoption of ASC 606. The primary impact of the new standard resulted in a change in the timing of the Company’s revenue recognition for some customer contracts for our custom manufacturing services to recognizing revenue over time as products are manufactured, as opposed to the prior revenue recognition of point in time. The transitional adjustment resulted in the recognition of unbilled revenue with a corresponding reduction in finished goods and work-in-process inventory (“WIP inventory”). The Company recognized the cumulative effect of initially applying the new revenue standard, totaling $0.4 million, net of tax, as an adjustment to its opening accumulated deficit balance at October 1, 2018 included in stockholders’ equity. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

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 ~~50.8%~~48.7% of the Company's revenue for the three ~~and nine~~ months ended ~~June~~December 27, 2019 and December 28, ~~2019,~~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 ~~49.2%~~51.3% of our revenue for the three ~~and nine~~ months ended ~~June~~December 27, 2019 and December 28, ~~2019,~~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 3%2% of total revenue in each of the three ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~December 28, 2018.

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						Nine Months Ended						Three Months Ended
	June 28, 2019						June 28, 2019						December 27, 2019						December 28, 2018
	Point in Time		Over Time		Net Sales		Point in Time		Over Time		Net Sales		Point in Time		Over Time		Net Sales		Point in Time		Over Time		Net Sales
(in thousands)
Aerospace & Defense	$	11,300	$	13,298	$	24,598	$	30,950	$	35,755	$	66,705	$	14,014	$	13,273	$	27,287	$	7,565	$	11,147	$	18,712
Medical	5,127		3,744		8,871		12,441		12,432		24,873		4,198		6,986		11,184		3,685		5,474		9,159
Industrial	4,657		2,198		6,855		14,063		7,418		21,481		5,192		1,071		6,263		6,014		1,556		7,570
	$	21,084	$	19,240	$	40,324	$	57,454	$	55,605	$	113,059	$	23,404	$	21,330	$	44,734	$	17,264	$	18,177	$	35,441

~~Impact of adoption of ASC 606~~Customer Deposits

Customer deposits are recorded when cash payments are received or due in advance of revenue recognition from contracts with customers. The ~~following table presents~~timing of revenue recognition may differ from the ~~impacted financial statement line items~~timing of billings to customers. The changes in customer deposits from the ~~condensed consolidated balance sheet~~Company's custom manufacturing services are as ~~of October 1, 2018:~~ follows:

Balances Without Adoption of ASC 606 Effect of Change Adjusted
(in thousands)
Assets:
Unbilled contract revenue $ —
$ 4,333
$ 4,333
Inventories 34,126
(3,768 ) 30,358
Deferred income taxes 8,855
(124 ) 8,731

Stockholders’ Equity:
Accumulated deficit (20,463 ) 441
(20,022 )



	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

~~The following table presents~~Sales Outside the ~~impacted financial statement line items in the condensed consolidated balance sheet as of June 28, 2019:~~

Balances Without Adoption of ASC 606 Effect of Change As Reported
(in thousands)
Assets:
Unbilled contract revenue $ —
$ 7,305
$ 7,305
Inventories 51,086
(6,197 ) 44,889
Deferred income taxes 8,242
(243 ) 7,999

Stockholders’ Equity:
Accumulated deficit (17,934 ) 865
(17,069 )

The following table presents the impacted financial statement line items under ASC 605 "Revenue Recognition" and ASC 606 in the condensed consolidated statements of operations for the three and nine months ended June 28, 2019:

Three Months Ended Nine Months Ended
June 28, 2019 June 28, 2019
Balances
Without
Adoption of
ASC 606 Effect
of
Change As Reported Balances
Without
Adoption of
ASC 606 Effect
of
Change As Reported

Net sales $ 39,062
$ 1,262
$ 40,324
$ 110,087
$ 2,972
$ 113,059
Cost of sales 33,604
1,115
34,719
95,379
2,429
97,808
Gross profit 5,458
147
5,605
14,708
543
15,251
Income tax expense 189
32
221
617
119
736
Net income 1,096
115
1,211
2,529
424
2,953
United States

For each of the three ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~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 ~~nine~~three months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~December 28, 2018:


	Nine Months Ended						Three Months Ended
Allowance for doubtful accounts	June 28, 2019			June 29, 2018			December 27, 2019		December 28, 2018
(in thousands)
Allowance, beginning of period	$	85		$	75		$	71	$	85
Change in provision for doubtful accounts	(30		)	(42		)
Increase in provision for doubtful accounts							28		26
Write-offs	—			—			—		—
Allowance, end of period	$	55		$	33		$	99	$	111

NOTE 4—INVENTORIES

A summary of inventory by category at period end follows:


Inventories	June 28, 2019		September 30, 2018		December 27, 2019		September 30, 2019
(in thousands)
Raw materials	$	28,737	$	21,323	$	28,890	$	25,393
Work-in-process	12,793		11,263		12,766		15,928
Finished goods	3,359		1,540		3,303		2,946
Total inventories	$	44,889	$	34,126	$	44,959	$	44,267

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	June 28, 2019			September 30, 2018			December 27, 2019			September 30, 2019
(in thousands)
Land and improvements	$	788		$	788		$	788		$	788
Buildings and improvements	7,397			7,314			7,421			7,411
Building under capital lease	7,750			7,750			7,750			7,750
Machinery and equipment	31,593			30,969			32,219			31,708
Furniture and fixtures	7,923			7,877			8,059			8,047
Software	5,215			—			5,215			5,215
Construction in progress	557			5,360			950			1,173
Total property, plant and equipment, at cost	61,223			60,058			62,402			62,092
Accumulated depreciation	(41,892		)	(39,948		)	(43,402		)	(42,659		)
Property, plant and equipment, net	$	19,331		$	20,110		$	19,000		$	19,433

Depreciation expense during the three ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~December 28, 2018 follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Depreciation Expense									December 27, 2019		December 28, 2018
(in thousands)
Depreciation expense	$	707	$	567	$	2,008	$	1,729	$	757	$	654

NOTE 6—CREDIT FACILITIES

A summary of borrowings at period end follows:


			June 28, 2019					September 30, 2018							December 27, 2019					September 30, 2019
Debt	Fixed/Variable Rate	Maturity Date	Balance			Interest Rate		Balance			Interest Rate
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	$	24,008		4.94	%	$	12,996		5.26	%	v	5/5/2022	$	24,490		4.06	%	$	26,646		4.31	%
Term Loan B	v	5/5/2022	2,993			5.19		3,636			5.36		v	5/5/2022	2,565			4.21		2,779			4.59
Equipment Line Advances	v	Various	—			—		314			5.56
Equipment Line Term Note	v	Various	1,254			5.28		794			5.56		v	Various	997			4.31		1,125			4.56
Total debt, gross			28,255					17,740							28,052					30,550
Unamortized debt issuance costs			(262		)			(289		)					(249		)			(269		)
Total debt, net			27,993					17,451							27,803					30,281
Less: current portion			(1,371		)			(1,449		)					(1,371		)			(1,371		)
Long-term debt			$	26,622				$	16,002						$	26,432				$	28,910

M&T Bank Credit Facilities

~~During the quarter ended March 29,~~Effective as of July 8, 2019, the Company and M&T Bank entered into the ~~Seventh and Eighth Amendments~~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”). Among other things, the Seventh Amendment increased the Company’s revolving credit commitment to $27.0 and added a monthly information requirement for backlog conversion ratio metrics. The Eighth Amendment modified the definition of “Borrowing Base” to increase the amount of certain availability limits contained within the definition.

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.

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


a)	Revolving Credit Facility (“Revolver”): At ~~June 28,~~December 27, 2019, up to ~~$27.0~~$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.

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.

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. On September 18, 2018, $0.3 million was borrowed and upon maturity at March 18, 2019, was converted into an Equipment Line Term Loan. On November 6, 2018, an additional $0.4 million was borrowed and upon maturity at May 6, 2019, was converted into an Equipment Line Term Note.

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 ~~29,~~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 ~~June 28,~~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) $27.0 million. At September 30, 2018, 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 $8.0 million) or (ii) $22.0$35.0 million.

At ~~June 28,~~December 27, 2019, the upper limit on Revolver borrowings was ~~$27.0~~$35.0 million ~~with $3.0~~and $10.5 million was available. At September 30, ~~2018,~~2019, the upper limit on Revolver borrowings was ~~$22.0~~$35.0 million ~~with $9.0~~and $8.4 million was available. Average Revolver balances amounted to ~~$20.0~~$24.5 million and ~~$11.8~~$15.0 million during the ~~nine~~three months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~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 ~~June 28,~~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~~. ~~At September 30, 2018, the applicable marginal interest rate was 3.00% for the Revolver and 3.25%~~ 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 ~~$2.6~~$5.8 thousand and ~~$15.3~~$8.2 thousand during the three ~~and nine~~ months ended ~~June~~December 27, 2019 and December 28, ~~2019, respectively. Fees incurred amounted to $5.3 thousand and $16.5 thousand during the three and nine months ended June 29,~~ 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 ~~June 28,~~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 ~~June 28,~~December 27, 2019 as a minimum of 1.10 times. The Fixed Charge Coverage Ratio was the only covenant in effect at ~~June 28,~~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 ~~June 28,~~December 27, 2019.

Contractual Principal Payments

A summary of contractual principal payments under IEC’s borrowings at ~~June 28,~~December 27, 2019 for the next three years taking into consideration the Credit Facility, as amended, is as follows:


Debt Repayment Schedule	Debt Repayment Schedule	Contractual Principal Payments		Debt Repayment Schedule	Contractual Principal Payments
(in thousands)	(in thousands)			(in thousands)
Twelve months ending June
Twelve months ending December				Twelve months ending December
2020		$	1,371		$	1,371
2021		1,371			1,260
2022	⁽¹⁾	25,513		⁽¹⁾	25,421
		$	28,255		$	28,052

⁽¹⁾ Includes Revolver balance of ~~$24.0~~$24.5 million at ~~June 28,~~December 27, 2019.

As more fully described in Note 14—Subsequent Events, effective as of July 8, 2019, the Company and M&T Bank entered into the Ninth Amendment to Fifth Amended and Restated Credit Facility Agreement (the “Ninth Amendment”), that amended the Credit Facility, as amended.

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:


	Nine Months Ended						Three Months Ended
Warranty Reserve	June 28, 2019			June 29, 2018			December 27, 2019			December 28, 2018
(in thousands)
Reserve, beginning of period	$	173		$	153		$	165		$	173
Provision	65			213			13			34
Warranty costs	(89		)	(199		)	(23		)	(32		)
Reserve, end of period	$	149		$	167		$	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 ~~$0.1~~$0.2 million and ~~$0.4~~$0.1 million for the three ~~and nine~~ months ended ~~June~~December 27, 2019 and December 28, ~~2019, respectively. Stock-based compensation expense recorded under the 2010 Plan and the 2019 Plan, totaled $0.1 million and $0.3 million for the three and nine months ended June 29,~~ 2018, respectively.

At ~~June 28,~~December 27, 2019, there were ~~776,775 remaining~~726,775 shares of common stock remaining available to be issued under the 2019 Plan and ~~89,701 remaining~~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.

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.

~~Assumptions used in the Black-Scholes model and the estimated value of~~There were no options granted during the ~~nine~~three months ended ~~June 28,~~December 27, 2019 and ~~June 29, 2018 follows in the table below.~~December 28, 2018.

Nine Months Ended
Valuation of Options June 28,
2019 June 29,
2018
Assumptions for Black-Scholes:
Risk-free interest rate 2.35 % 2.31 %
Expected term in years 5.5
5.5
Volatility 37 % 38 %
Expected annual dividends none
none

Value of options granted:
Number of options granted 20,000
20,000
Weighted average fair value per share $ 2.33
$ 1.53
Fair value of options granted (000s) $ 47
$ 31

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


	Nine Months Ended								Three Months Ended
	June 28, 2019				June 29, 2018				December 27, 2019				December 28, 2018
Stock Options	Number of Options		Wgtd. Avg. Exercise Price		Number of Options		Wgtd. Avg. Exercise Price		Number of Options		Wgtd. Avg. Exercise Price		Number of Options		Wgtd. Avg. Exercise Price

Outstanding, beginning of period	737,145		$	4.33	743,045		$	4.27	743,145		$	4.54	737,145		$	4.33
Granted	20,000		6.12		20,000		4.00		—		—		—		—
Exercised	(34,000	)	4.46		(1,400	)	4.08		(24,000	)	5.42		(11,500	)	3.99
Forfeited	(24,250	)	3.70		(90,000	)	4.75		(10,000	)	3.58		(17,500	)	3.61
Expired	(5,750	)	4.06		(10,500	)	5.24		(5,000	)	6.91		(5,000	)	4.08
Outstanding, end of period	693,145		$	4.40	661,145		$	4.18	704,145		$	4.51	703,145		$	4.35

For options expected to vest
Number expected to vest	685,354		$	4.39	653,922		$	4.18	695,555		$	4.49	693,289		$	4.34
Weighted average remaining contractual term, in years	3.4				3.7				3.5				3.8
Intrinsic value (000s)			$	1,306			$	1,009			$	3,283			$	1,008

For exercisable options
Number exercisable	533,645		$	4.18	450,358		$	4.28	541,645		$	4.16	420,858		$	4.24
Weighted average remaining contractual term, in years	2.7				3.4				2.4				3.1
Intrinsic value (000s)			$	1,132			$	721			$	2,738			$	664

For non-exercisable options
Expense not yet recognized (000s)			$	232			$	205			$	304			$	269
Weighted average years to be recognized	3.1				1.5				3.0				2.9

For options exercised
Intrinsic value (000s)			$	77			$	2			$	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.

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


	Nine Months Ended								Three Months Ended
	June 28, 2019				June 29, 2018				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		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	103,233		$	4.08	109,695		$	4.01	82,707		$	5.25	103,233		$	4.08
Granted	32,385		7.09		44,878		4.29		—		—		—		—
Vested	(49,511	)	4.08		(39,300	)	4.10		(10,000	)	3.60		(7,500	)	3.60
Forfeited	(1,400	)	4.13		(9,490	)	4.20		—		—		(1,400	)	4.13
Outstanding, end of period	84,707		$	5.23	105,783		$	4.09	72,707		$	5.48	94,333		$	4.12

For non-vested shares
Expense not yet recognized (000s)			$	365			$	353			$	295			$	274
Weighted average remaining years for vesting	2.2				1.9				1.9				1.5

For shares vested
Aggregate fair value on vesting dates (000s)			$	333			$	173			$	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:


	Nine Months Ended								Three Months Ended
	June 28, 2019				June 29, 2018				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		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	170,492		$	3.96	267,999		$	4.03	153,186	$	5.36	170,492	$	3.96
Granted	63,011		7.09		102,864		4.28		—	—		—	—
Vested	(12,258	)	4.64		—		—		—	—		—	—
Forfeited	—		—		(151,341	)	4.08		—	—		—	—
Outstanding, end of period	221,245		$	4.81	219,522		$	4.11	153,186	$	5.36	170,492	$	3.96

For non-vested shares
Expense not yet recognized (000s)			$	573			$	371		$	603		$	322
Weighted average remaining years for vesting	2.4				2.5				2.0			2.1

NOTE 9—INCOME TAXES

The income tax ~~expense/(benefit)~~expense during each of the three ~~and nine~~ months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~December 28, 2018 follows:


	Three Months Ended				Nine Months Ended					Three Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018			December 27, 2019		December 28, 2018
(in thousands)
Income tax expense/(benefit)	$	221	$	—	$	736	$	(1,005	)
Income tax expense										$	336	$	312

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 revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of approximately 24.2% for fiscal 2018, and 21% for subsequent fiscal years. The Tax Act eliminated the domestic manufacturing deduction and moved to a territorial system. In addition, previously paid federal alternative minimum tax (“AMT”) are now refundable regardless of whether there is future income tax liability before AMT credits.

The Company concluded that the Tax Act caused the Company’s U.S. deferred tax assets and liabilities to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are revalued and any change is adjusted through the provision for income tax expense in the reporting period of the enactment.

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.

For the nine months ended June 29, 2018, the impact of the Tax Act resulted in the Company recording a net tax benefit of approximately $1.0 million, resulting from the release of the valuation allowance on the Company’s AMT credits.

The Company's estimated annual effective tax rate for fiscal ~~2019~~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 ~~and nine~~ months ended ~~June 28,~~December 27, 2019, the permanent items included meals and entertainment and stock based compensation. There were no material discrete items recognized in the three ~~and nine~~ months ended ~~June 28,~~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		Nine Months Ended		Three Months Ended
% of Sales by Sector	June 28, 2019	June 29, 2018	June 28, 2019	June 29, 2018	December 27, 2019	December 28, 2018

Aerospace & Defense	61%	60%	59%	62%	61%	53%
Medical	22%	22%	22%	21%	25%	26%
Industrial	17%	18%	19%	17%	14%	21%
	100%	100%	100%	100%	100%	100%

~~One~~Three individual ~~customer~~customers represented 10% or more of sales for the three months ended ~~June 28,~~December 27, 2019. ~~This customer was~~Two of these customers were from the aerospace & defense sector and represented ~~24%~~27% and 12% of ~~sales.~~sales, respectively. One ~~individual~~ customer was from the medical sector and represented ~~10% or more~~15% of sales for the ~~nine~~three months ended ~~June 28,~~December 27, 2019. ~~This customer was from the aerospace & defense sector and represented 22% of sales.~~

Two individual customers each represented 10% or more of sales for the three months ended ~~June 29,~~December 28, 2018. One customer was from the aerospace & defense sector and represented ~~25%~~18% of sales, while one was from the medical sector and represented ~~11%~~14% of sales for the three months ended June 29, 2018. Two individual customers each represented 10% or more of sales for the nine months ended June 29, 2018. One customer was from the aerospace & defense sector and represented 23% of sales, while one customer was from the medical sector and represented 11% of sales for the six months ended June 29,December 28, 2018.

~~One~~Two individual customer represented 10% or more of receivables and accounted for ~~26%~~38% of the outstanding balance at ~~June 28,~~December 27, 2019. ~~Three~~Two individual customers represented 10% or more of receivables and accounted for ~~55%~~38% of the outstanding balance at September 30, ~~2018.~~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.

NOTE 12—~~CAPITAL LEASE~~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.

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 ~~capital~~operating lease payments for the next five years follows:


Capital Lease Payment Schedule	Contractual Principal Payments
Operating Lease Payment Schedule				Contractual Lease Payments
(in thousands)
Twelve months ending June
Twelve months ending December
2020	$	669		$	77
2021	683			73
2022	696			72
2023	711			72
2024 and thereafter	6,900			37
Total capital lease payments	9,659
Total operating lease payments				331
Less: amounts representing interest	(2,556		)	(38		)
Present value of minimum lease payment	$	7,103
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

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.

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


	Three Months Ended				Nine Months Ended				Three Months Ended
Earnings Per Share	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018		December 27, 2019		December 28, 2018
(in thousands, except share and per share data)
Basic net income per share:
Net income	$	1,211	$	204	$	2,953	$	1,289	$	1,189	$	1,072
Less: Income attributable to non-vested shares	10		2		25		13		10		10
Net income available to common stockholders	$	1,201	$	202	$	2,928	$	1,276	$	1,179	$	1,062

Weighted average common shares outstanding	10,332,548		10,243,286		10,294,173		10,221,869		10,365,766		10,262,397

Basic net income per share	$	0.12	$	0.02	$	0.28	$	0.12	$	0.11	$	0.10

Diluted net income per share:
Net income	$	1,211	$	204	$	2,953	$	1,289	$	1,189	$	1,072
Shares used in computing basic net income per share	10,332,548		10,243,286		10,294,173		10,221,869		10,365,766		10,262,397
Dilutive effect of non-vested shares	309,855		313,478		262,780		245,243		330,211		233,032
Shares used in computing diluted net income per share	10,642,403		10,556,764		10,556,953		10,467,112		10,695,977		10,495,429

Diluted net income per share	$	0.11	$	0.02	$	0.28	$	0.12	$	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 Nine Months Ended
June 28,
2019 June 29,
2018 June 28,
2019 June 29,
2018
Anti-dilutive shares excluded 52,523
39,335
39,872
171,791

~~NOTE 14—SUBSEQUENT EVENTS~~

Effective as of July 8, 2019, the Company and M&T Bank entered into the Ninth Amendment to the Credit Facility, as amended. The Ninth Amendment increased the Company’s revolving credit commitment to $35.0 million. In addition, the Ninth Amendment modified the definition of “Borrowing Base” to increase the amount of certain availability limits contained within the definition.

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.~~“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; ~~variability of our operating results;~~ our ability to control our material, labor and other costs; our dependence on a limited number of major customers; the potential consolidation of our customer base; availability of component supplies; dependence on certain industries; variability and timing of customer requirements; technological, engineering and other start-up issues related to new programs and products; uncertainties as to availability and timing of governmental funding for our customers; the impact of government regulations, including FDA regulations; ~~risks~~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 ~~accuracy~~potential consolidation of our customer base; availability of component supplies; dependence on certain industries; the ~~estimates and assumptions we used~~ability to ~~revalue~~realize the full value of our ~~net deferred tax assets in accordance with the Tax Cuts and Jobs Act of 2017;~~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; ~~unforeseen product failures and the potential product liability claims that may be associated with such failures;~~ 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, ~~2018,~~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,” ~~the~~ “Company”) conducts business directly, as well as through its subsidiaries, IEC Electronics Corp-Albuquerque (“Albuquerque”);, and IEC Analysis & Testing Laboratory, LLC (“ATL”)~~; and~~. Our former subsidiary, IEC California Holdings, Inc. ~~The~~, 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

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~~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.~~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 ~~the~~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 ~~counterfeit component~~root cause failure analysis, reliability, inspection and ~~complex design analysis.~~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:~~2008~~2015 certified and ITAR registered. We are Nadcap accredited and AS9100D ~~and AS9100C~~ certified at our Newark and Albuquerque locations ~~respectively,~~ 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.~~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 ~~850,~~900, all of which are full time employees, at ~~June 28,~~December 27, 2019. Total employment increased by 5264 employees during the three months ended ~~June 28, 2019, our third quarter of fiscal~~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.

Three Months Results

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


	Three Months Ended				Three Months Ended
Income Statement Data	June 28, 2019		June 29, 2018		December 27, 2019		December 28, 2018
(in thousands)
Net sales	$	40,324	$	29,782	$	44,734	$	35,441

Gross profit	5,605		3,359		5,239		5,059
Selling and administrative expenses	3,721		2,833		3,299		3,352
Interest and financing expense	452		322		415		323
Income before income taxes	1,432		204		1,525		1,384
Income tax expense	221		—		336		312
Net income	$	1,211	$	204	$	1,189	$	1,072

A summary of sales, according to the market sector within which our customers operate, follows:


	Three Months Ended		Three Months Ended
% of Sales by Sector	June 28, 2019	June 29, 2018	December 27, 2019	December 28, 2018

Aerospace & Defense	61%	60%	61%	53%
Medical	22%	22%	25%	26%
Industrial	17%	18%	14%	21%
	100%	100%	100%	100%

Revenue increased in the ~~third~~first quarter of fiscal ~~2019~~2020 by ~~$10.5~~$9.3 million or ~~35%~~26% as compared to the ~~third~~first quarter of the prior fiscal year. Revenues from the aerospace & defense sector increased ~~$7.6~~$8.8 million, revenue from the medical sector increased ~~$1.9~~$1.8 million and revenue from the industrial sector ~~increased $1.0~~decreased $1.3 million.

Various increases and decreases in sales to our aerospace & defense customers resulted in a net increase of ~~$7.6~~$8.8 million in the ~~third~~first quarter of fiscal ~~2019.~~2020. Ramping up of production of various customers resulted in an increase of revenue of ~~$5.1~~$8.5 million and net increases in customer demand resulted in an additional ~~$3.2~~$0.3 million increase in revenue. ~~These increases were partially offset by decreases related to contracts ending of $0.5 million.~~

The medical sector saw an increase of ~~$1.9~~$1.8 million in the ~~third~~first quarter of fiscal ~~2019~~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 ~~$1.8 million. One~~$3.0 million and increases in customer ~~had material constraints removed during the period, which resulted in increased revenue~~demand of ~~$0.5~~$1.8 million. These increases were partially offset by net reductions of ~~$0.5~~$1.6 million in demand from multiple ~~customers.~~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 ~~increase~~decrease in the industrial sector of ~~$1.0~~$1.3 million resulted primarily from the ~~production ramp up~~decreases in customer demand of ~~new programs with two customers, which amounted to $1.0~~$2.0 million. ~~The remaining change~~There was ~~minimal and was due to several customers whose end markets have grown,~~also a decrease of $0.9 million from a program being on hold from one customer. These decreases were partially offset by ~~decreases~~increase in customer demand of $1.1 million from ~~other~~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.”

Gross ~~profit as a percent of sales~~margin for the ~~third~~first quarter of fiscal ~~2019 increased~~2020 decreased to ~~13.9%~~11.7% of sales versus ~~11.3%~~14.3% of sales in the ~~third~~first quarter of the prior fiscal year. ~~Customer mix~~The customer bankruptcy filing had the most significant impact on gross ~~profit. In~~profit, in addition to customer mix. Excluding the ~~growth in sales allowed for more absorption~~non-cash charge related to the customer's Chapter 11 bankruptcy filing, our adjusted gross margin would have been 13.9% of ~~overhead costs.~~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”) ~~expense increased $0.9~~expenses decreased $0.1 million and represented ~~9.2%~~7.4% of sales in the ~~third~~first quarter of fiscal ~~2019~~2020 compared to 9.5% of sales in the same quarter of the prior fiscal year. The ~~increase~~decrease in S&A ~~expense~~expenses was primarily due to higher ~~wage and related~~consulting expenses.

Interest and financing expense increased by $0.1 million in the ~~third~~first quarter of fiscal ~~2019~~2020 compared to the same quarter of the prior fiscal year. The weighted average interest rate on our debt was ~~consistent~~1.19% lower during the ~~third~~first quarter of fiscal ~~2019~~2020 compared to the ~~third~~first quarter of the prior fiscal year. Our average outstanding debt balances increased by ~~$7.8~~$9.3 million in the ~~third~~first quarter of fiscal ~~2019~~2020 compared to the ~~third~~first quarter of fiscal ~~2018~~2019 because of higher balances on ~~the~~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 ~~the third quarter of~~ fiscal ~~2019~~2020 and fiscal ~~2018.~~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 ~~June 28,~~December 27, 2019, we did not pay any taxes. At the end of fiscal ~~2018,~~2019, the gross NOL carryforwards amounted to approximately ~~$29.7~~$23.4 million. The NOL carryforwards expire in varying amounts between ~~2022~~2023 and 2035, unless utilized prior to these dates.

~~Year to Date Results~~Non-GAAP Financial Measures

~~A summary~~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 ~~selected~~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, ~~statement amounts~~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 ~~nine months ended follows:~~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.

Nine Months Ended
June 28,
2019 June 29,
2018
(in thousands)
Net sales $ 113,059
$ 82,706

Gross profit 15,251
9,661
Selling and administrative expenses 10,402
8,543
Interest and financing expense 1,160
834
Income before income taxes 3,689
284
Income tax expense/(benefit) 736
(1,005 )
Net income $ 2,953
$ 1,289



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%.

~~A summary of sales, according to the market sector within which our customers operate, follows:~~

Nine Months Ended
% of Sales by Sector June 28,
2019 June 29,
2018

Aerospace & Defense 59% 62%
Medical 22% 21%
Industrial 19% 17%
100% 100%

Revenue increased in the first nine months of fiscal 2019 by $30.4 million or 37% as compared to the first nine months of the prior fiscal year. Revenues from the aerospace & defense sector increased $16.3 million, revenue from the medical sector increased $7.8 million and revenue from the industrial sector increased $6.3 million.

Various increases and decreases in sales to our aerospace & defense customers resulted in a net increase of $16.3 million in the first nine months of fiscal 2019. We saw an increase of $11.1 million related to production ramp up from multiple customers. Various increases and decreases in demand from existing customers resulted in a net increase of $8.8 million. The remaining net decrease of $3.6 million was due to disengagement with two customers and additional programs ending.

Revenues in the medical sector increased by $7.8 million in the first nine months of fiscal 2019 compared to the same period of the prior fiscal year. We saw an increase of $7.2 million related to production ramp up for three customers and an increase in demand from another customer of $3.0 million. These increases were partially offset by volume reductions from multiple customers of $2.4 million. We expect some volatility in the medical sector going forward.

The net increase in the industrial sector of $6.3 million resulted primarily from the production ramp up of new programs with three customers, which amounted to $5.7 million. The remaining increase was due to several customers whose end markets have grown, partially offset by decreases in demand from other customers.

Gross profit for the first nine months of fiscal 2019 increased to 13.5% of sales versus 11.7% in the first nine months of the prior fiscal year. Customer mix had the most significant impact on gross profit. In addition, the growth in sales allowed for more absorption of overhead costs.

Selling and administrative (“S&A”) expense increased $1.9 million and represented 9.2% of sales in the first nine months of fiscal 2019 compared to 10.3% of sales in the first nine months of the prior fiscal year. The increase in S&A expense was primarily due to higher wage and related expenses.

Interest expense increased by $0.3 million in the first nine months of fiscal 2019 compared to the first nine months of the prior fiscal year. The weighted average interest rate on our debt was 0.64% higher during the first nine months of fiscal 2019 compared to the first nine months of the prior fiscal year. Our average outstanding debt balances increased by $6.1 million in the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 because of higher balances on the revolving credit facility and equipment line advances and term loans to fund capital purchases. Cash paid for interest on credit facility debt was approximately $0.9 million and $0.6 million for the first nine months of fiscal 2019 and fiscal 2018, respectively. 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 NOL carryforwards for federal income tax purposes. In the nine months ended June 28, 2019, we paid minimal taxes. At the end of fiscal 2018, the gross NOL carryforwards amounted to approximately $29.7 million. The NOL carryforwards expire in varying amounts between 2022 and 2035, unless utilized prior to these dates.

Liquidity and Capital Resources

Capital Resources

As of ~~June 28,~~December 27, 2019, there were ~~$0.9~~$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 ~~nine~~three months ended ~~June 28,~~December 27, 2019 and ~~June 29,~~December 28, 2018 follows:


	Nine Months Ended						Three Months Ended
Cash Flow Data	June 28, 2019			June 29, 2018			December 27, 2019			December 28, 2018
(in thousands)
Cash, beginning of period	$	—		$	—		$	—		$	—
Net cash provided by/(used in):
Operating activities	(9,242		)	(3,748		)	2,343			(2,561		)
Investing activities	(1,099		)	(49		)	(324		)	(511		)
Financing activities	10,341			3,797			(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 ~~$6.1~~$3.5 million and ~~$2.4~~$2.3 million for the first ~~nine~~three months of fiscal ~~2019~~2020 and fiscal ~~2018,~~2019, respectively. Net income of ~~$3.0~~$1.2 million in the first ~~nine~~three months of fiscal ~~2019~~2020 improved compared to the same period of the prior fiscal year mainly due to increased sales. Net income was ~~$1.3~~$1.1 million during the first ~~nine~~three months of the prior fiscal ~~year, largely due to the income tax benefit of $1.0 million as a result of the Tax Act.~~year.

Working capital used cash flows of ~~$15.3~~$1.2 million in the first ~~nine~~three months of fiscal ~~2019~~2020 and ~~used $6.1~~$4.9 million in the first ~~nine~~three months of fiscal ~~2018.~~2019. The change in working capital in the first ~~nine~~three months of fiscal ~~2019~~2020 was primarily due to increases in inventory of ~~$14.5~~$1.7 million, increases in accounts receivable of ~~$1.4~~$0.9 million, increases in unbilled contract revenue of ~~$3.0~~$0.5 million, ~~due to the implementation of ASC 606, and a decrease~~an increase in book overdraft of ~~$0.6 million. These changes were partially offset by increases in accounts payable of $1.3~~$0.3 million ~~increases~~and decreases in accrued expenses of ~~$1.4 million and increases in customer deposits of $2.2~~$1.1 million. Inventory ~~and customer~~ 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 ~~accounts payable was due primarily to an increase of inventory purchases, as well as timing of purchases and payments. 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 ~~$1.1~~$0.3 million and $0.5 million for the first ~~nine~~three months of fiscal ~~2019. Cash flows used in investing activities were minimal for the first nine months of fiscal 2018.~~2020 and 2019, respectively. Cash flows used in each of the first ~~nine~~three months of fiscal ~~2019~~2020 and fiscal ~~2018~~2019 consisted of purchases of equipment. Cash flows used in the first nine months of fiscal 2018 also consisted of capitalized software costs resulting from the ongoing implementation of a new enterprise resource planning (“ERP”) system, these purchases were offset by the proceeds from the Rochester sale-leaseback transaction.

Financing activities

Cash flows ~~provided by~~used in financing activities were ~~$10.3~~$2.0 million for the first ~~nine~~three months of fiscal ~~2019 and $3.8~~2020 compared to inflows of $3.1 million for the first ~~nine~~three months of fiscal ~~2018.~~2019. During the first ~~nine~~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 ~~$10.5~~$3.1 million, with ~~$11.0~~$3.0 million of net borrowings under the Revolver ~~as defined below,~~ repayments of ~~$0.9~~$0.3 million for term debt, and $0.4 million of new borrowings related to equipment line advances. During the first nine months of fiscal 2018, net borrowings under all credit facilities were $4.0 million, with $5.8 million of net borrowings under the Revolver, as defined below, repayments of $2.7 million for term debt, and $0.8 million of new borrowings related to equipment line advances. Term debt repayments in the first nine months of fiscal 2018, included more than normal principal repayments as proceeds from the Rochester sale-leaseback transaction were used to pay down term debt.

Credit Facilities

At ~~June 28,~~December 27, 2019, borrowings outstanding under the revolving credit facility (the “Revolver”) under the ~~Eighth~~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,~~collectively, the “Credit Facility, as amended”) amounted to ~~$24.0~~$24.5 million, and the upper limit was ~~$27.0~~$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 ~~June 28,~~December 27, 2019, ~~the Company~~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 ~~June 28,~~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 ~~June 28,~~December 27, 2019. The Fixed Charge Coverage Ratio was calculated as ~~2.22~~2.55 at ~~June 28,~~December 27, 2019. The Company was in compliance with the financial debt covenant at ~~June 28,~~December 27, 2019.

Detailed information regarding our borrowings at ~~June 28,~~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, 2018. During the nine months ended June 28, 2019, the following critical accounting policies were updated as a result of the adoption of FASB Accounting Standard Update 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) and are affected significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

~~Revenue recognition:~~ Revenue is derived primarily from the sale of electronics components that are built to customer specifications. 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. Similarly, the Company records an unbilled revenue related to its WIP inventory when the manufacturing process has commenced and there is a non-cancellable customer purchase order.

~~Estimation of the percentage of completion in satisfying its performance obligation:~~ The Company records an unbilled contract revenue for revenue related to its WIP when the manufacturing process has commenced and there is a non-cancellable customer purchase order. The Company uses direct manufacturing labor inputs to estimate the percentage of completion in satisfying its performance obligation associated with WIP inventory. If assumptions change related to the estimate of the performance obligation associated with WIP inventory, this could have a material impact on the revenue and corresponding margin recognized.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 ~~June 28,~~December 27, 2019 or September 30, ~~2018.~~2019.

At ~~June 28,~~December 27, 2019, the Company had ~~$28.3~~$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 ~~June 28,~~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 ~~Agreement,~~Facility, as amended. M&T Bank’s credit rating ~~(reaffirmed A by Fitch in September 2018)~~ is monitored by the Company, and IEC expects that M&T Bank will perform in accordance with the terms of the Credit ~~Agreement,~~Facility, as amended.

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 ~~June 28,~~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 ~~June 28,~~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 ~~nine months~~year ended ~~June 28,~~September 30, 2019, the Company began implementation of Epicor by converting one legacy ERP system to Epicor. The implementation of ~~other legacy ERP systems to~~ Epicor is occurring in phases and is expected to be fully completed after fiscal ~~2019.~~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 ~~June 28,~~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.

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, ~~2018~~2019 filed with the SEC on November ~~29, 2018.~~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
~~10.1~~		Ninth Amendment to Fifth Amended and Restated Credit Facility dated as of July 9, 2019 (incorporated herein by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 10, 2019)
~~10.2*#~~		~~Form of Restricted Stock Award Agreement pursuant to the 2019 Stock Incentive Plan~~
~~10.3*#~~		~~Form of Incentive Stock Option Award Agreement pursuant to the 2019 Stock Incentive Plan~~
~~10.4*#~~		~~Form of Director Restricted Stock Award Agreement pursuant to the 2019 Stock Incentive Plan~~
~~10.5*#~~		~~Form of Restricted Stock Unit Award Agreement (Time Vesting) pursuant to the 2019 Stock Incentive Plan~~
~~10.6*#~~		~~Form of Performance Restricted Stock Unit Award Agreement pursuant to the 2019 Stock Incentive Plan~~
31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.

* Management contract or compensatory plan.

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)

~~August 7, 2019~~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)

3534



Part I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements	53
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3231
Item 4.	Controls and Procedures	3332
Part II	OTHER INFORMATION
Item 1.	Legal Proceedings	3433
Item 1A.	Risk Factors	3433
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3433
Item 3.	Defaults Upon Senior Securities	3433
Item 4.	Mine Safety Disclosures	3433
Item 5.	Other Information	3433
Item 6.	Exhibits	3433
SIGNATURES		3534



	Balances Without Adoption of ASC 606			Effect of Change			Adjusted
(in thousands)
Assets:
Unbilled contract revenue	$	—		$	4,333		$	4,333
Inventories	34,126			(3,768		)	30,358
Deferred income taxes	8,855			(124		)	8,731

Stockholders’ Equity:
Accumulated deficit	(20,463		)	441			(20,022		)



	Balances Without Adoption of ASC 606			Effect of Change			As Reported
(in thousands)
Assets:
Unbilled contract revenue	$	—		$	7,305		$	7,305
Inventories	51,086			(6,197		)	44,889
Deferred income taxes	8,242			(243		)	7,999

Stockholders’ Equity:
Accumulated deficit	(17,934		)	865			(17,069		)



	Nine Months Ended
Valuation of Options	June 28, 2019			June 29, 2018
Assumptions for Black-Scholes:
Risk-free interest rate	2.35		%	2.31		%
Expected term in years	5.5			5.5
Volatility	37		%	38		%
Expected annual dividends	none			none

Value of options granted:
Number of options granted	20,000			20,000
Weighted average fair value per share	$	2.33		$	1.53
Fair value of options granted (000s)	$	47		$	31

Three Months Ended

December 27,
2019

December 28,
2018

Anti-dilutive shares excluded