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 July 1, 2005
Commission file Number 0-6508
IEC ELECTRONICS CORP.
-----------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 13-3458955
----------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
105 Norton Street, Newark, New York 14513
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices (Zip Code)
(315) 331-7742
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Registrant's telephone number, including area code:
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 is an accelerated filer (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 practical date:
Common Stock, $0.01 Par Value - 8,258,722 shares as of July 22, 2005.
Page 1 of 15
PART 1 FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
Consolidated Balance Sheets as of:
July 1, 2005 (Unaudited) and September 30, 2004................3
Consolidated Statements of Operations for the three months
ended: July 1, 2005 (Unaudited) and June 25, 2004
(Unaudited)....................................................4
Consolidated Statements of Operations for the nine months
ended July 1, 2005 (Unaudited) and June 25, 2004 (Unaudited)...5
Consolidated Statements of Cash Flows for the nine months
ended: July 1, 2005 (Unaudited) and June 25, 2004
(Unaudited)....................................................6
Notes to Consolidated Financial Statements (Unaudited).........7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....13
Item 4. Controls and Procedures........................................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...14
Item 3. Defaults Upon Senior Securities...............................14
Item 4. Submission of Matters to a Vote of Security Holders...........14
Item 5. Other Information.............................................14
Item 6. Exhibits .....................................................15
Signatures............................................................15
Page 2 of 15
Part 1. Financial Information
Item 1 -- Financial Statements
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSJULY 1, 2005 AND SEPTEMBER 30, 2004
(in thousands)
SEPTEMBER
JULY 1, 30,
2005 2004
---------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 459 $ 0
Accounts receivable (net of allowance for 2,173 3,710
doubtful accounts of $500 and $500 respectively)
Inventories 1,064 1,882
Deferred income taxes 250 250
Other current assets 269 338
-------- --------
Total current assets 4,215 6,180
-------- --------
FIXED ASSETS:
Land and land improvements 702 768
Building and improvements 4,080 3,995
Machinery and equipment 37,691 40,951
Furniture and fixtures 5,328 5,283
-------- --------
SUB-TOTAL GROSS PROPERTY 47,801 50,997
LESS ACCUMULATED DEPRECIATION (46,172) (48,761)
-------- --------
1,629 2,236
OTHER NON-CURRENT ASSETS 90 114
-------- --------
$ 5,934 $ 8,530
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term borrowings $ 308 $ 1,905
Accounts payable 1,162 2,253
Accrued payroll and related expenses 383 549
Other accrued expenses 494 747
-------- --------
Total current liabilities 2,347 5,454
-------- --------
LONG TERM VENDOR NOTES 79 227
LONG TERM BANK DEBT 638 233
-------- --------
TOTAL LIABILITIES 3,064 5,914
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, Authorized
- 500,000 shares; None issued or outstanding -- --
Common stock, $.01 par value, Authorized
- 50,000,000 shares; Issued - 8,275,960 and
8,215,458 shares (net of 573 treasury shares) 71 71
Additional paid-in capital 38,526 38,507
Accumulated deficit (35,636) (35,870)
Accumulated translation adjustments (91) (92)
-------- --------
Total shareholders' equity 2,870 2,616
-------- --------
$ 5,934 $ 8,530
======== ========
The accompanying notes are an integral part of these financial statements.
Page 3 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 1, 2005 AND JUNE 25, 2004
(in thousands, except share and per share data)
3 MONTHS ENDED 3 MONTHS ENDED
JULY 1, 2005 JUNE 25, 2004
-------------- ---------------
(Unaudited) (Unaudited)
Net sales $ 4,040 $ 6,168
Cost of sales 3,336 6,362
-------------- --------------
Gross profit 704 (194)
-------------- --------------
Selling and administrative expenses 492 704
Restructuring charge 65 160
-------------- --------------
Operating profit 147 (1,058)
Interest and financing expense (79) (90)
Gain on sale of fixed assets 10 --
Other income -- 2
-------------- --------------
Net income (loss) before income taxes 78 (1,146)
Provision for income taxes -- --
-------------- --------------
Income (loss) from continuing operations 78 (1,146)
Discontinued operations:
Income of IEC-Mexico net of -- --
Income tax of $0
Net Income (loss) 78 (1,146)
============== ==============
Net income per common and common equivalent share:
Basic
Income from continuing operations $ 0.01 $(0.14)
Income from discontinued operations $ 0.00 $ 0.00
Income available to shareholders $ 0.01 $(0.14)
Diluted
Income from continuing operations $ 0.01 $(0.14)
Income from discontinued operations $ 0.00 $ 0.00
Income available to shareholders $ 0.01 $(0.14)
Weighted average number of common and common equivalent shares outstanding:
Basic 8,270,266 8,139,937
Diluted 8,539,802 8,139,937
The accompanying notes are an integral part of these financial statements.
Page 4 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 1, 2005 AND JUNE 25, 2004
(in thousands, except share and per share data)
9 MONTHS ENDED 9 MONTHS ENDED
JULY 1, 2005 JUNE 25, 2004
-------------- --------------
(Unaudited) (Unaudited)
Net sales $ 14,946 $ 19,985
Cost of sales 12,829 18,876
-------------- --------------
Gross profit 2,117 1,109
-------------- --------------
Selling and administrative expenses 1,708 1,876
Restructuring charge 120 160
-------------- --------------
Operating profit 289 (927)
Interest and financing expense (278) (275)
Gain on sale of fixed assets 195 293
Other income -- 19
-------------- --------------
Net income (loss) before income taxes 206 (890)
Provision for income taxes -- --
-------------- --------------
Income (loss) from continuing operations 206 (890)
Discontinued operations:
Income of IEC-Mexico net of 28 --
Income tax of $0
Net Income (loss) 234 (890)
============== ==============
Net income per common and common equivalent share:
Basic
Income from continuing operations $ 0.03 $(0.11)
Income from discontinued operations $ 0.00 $ 0.00
Income available to shareholders $ 0.03 $(0.11)
Diluted
Income from continuing operations $ 0.03 $(0.11)
Income from discontinued operations $ 0.00 $ 0.00
Income available to shareholders $ 0.03 $(0.11)
Weighted average number of common and common equivalent shares outstanding:
Basic 8,251,586 8,094,502
Diluted 8,524,227 8,094,502
The accompanying notes are an integral part of these financial statements.
Page 5 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 1, 2005 AND JUNE 25, 2004
(in thousands)
9 MONTHS ENDED 9 MONTHS ENDED
JULY 1, 2005 JUNE 25, 2004
-------------- ---------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 234 $ (890)
Non-cash adjustments:
Depreciation 761 851
Gain on sale of fixed assets (195) (293)
Issuance of director's fees in stock 16 12
Changes in operating assets and liabilities:
Accounts receivable 1,538 1,012
Inventories 818 (2,046)
Other current assets 18 79
Accounts payable (1,092) 1,039
Accrued expenses (406) (160)
---------- ----------
Net cash flows from operating activities 1692 (396)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 195 293
Purchases of plant, property & equipment (130) (109)
---------- ----------
Net cash flows from investing activities 65 184
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under loan agreements (316) (1,060)
Borrowings (payments) on line of credit (1,025) 599
Proceeds from exercise of stock options 5 8
---------- ----------
Net cash flows from financing activities (1,336) (453)
---------- ----------
Cash from discontinued operations 38 48
---------- ----------
Change in cash and cash equivalents 459 (617)
Cash and cash equivalents at beginning of period -- 793
---------- ----------
Cash and cash equivalents at end of period $ 459 $ 176
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 200 $ 275
Income taxes $ - $ -
The accompanying notes are an integral part of these financial statements.
Page 6 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2005
(1) Business and Summary of Significant Accounting Policies
IEC Electronics Corp. ("IEC", the "Company") is an independent electronics
manufacturing services ("EMS") provider of complex printed circuit board
assemblies and electronic products and systems. The Company provides high
quality electronics manufacturing services with state-of-the-art manufacturing
capabilities and production capacity. Utilizing automated manufacturing and test
machinery and equipment, IEC provides manufacturing services employing surface
mount technology ("SMT") and pin-through-hole ("PTH") interconnection
technologies. As an independent full-service EMS provider, the Company offers
its customers a wide range of manufacturing services, on either a turnkey or
consignment basis. These services include product development, prototype
assembly, material procurement, volume assembly, test engineering support,
statistical quality assurance, order fulfillment, and repair services. The
Company's strategy is to cultivate strong manufacturing relationships with
established and emerging original equipment manufacturers.
Consolidation
The consolidated financial statements include the accounts of IEC and its
wholly-owned subsidiary, IEC Electronicos de Mexico ("Mexico"), (collectively,
"IEC"). Operations in Mexico were closed in July 2002. All significant
intercompany transactions and accounts have been eliminated.
Revenue Recognition
Revenue on product sales is recognized when persuasive evidence of an
agreement exists, the price is fixed or determinable, delivery has occurred and
there is reasonable assurance of collection of the sales proceeds. The Company
generally obtains written purchase authorizations from its customers for a
specified amount of product, at a specified price and considers delivery to have
occurred at the time title to the product passes to the customer. Title passes
to the customer according to the shipping terms negotiated between the Company
and the customer.
Allowance for Doubtful Accounts
The Company establishes an allowance for uncollectable trade accounts
receivable based on the age of outstanding invoices and management's evaluation
of collectibility of open balances.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. The Company's cash and cash equivalents are
held and managed by institutions that follow the Company's investment policy.
The fair value of the Company's financial instruments approximates carrying
amounts due to the relatively short maturities and variable interest rates of
the instruments, which approximate current market interest rates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The major classifications of inventories are as follows at period end
(in thousands):
July 1, 2005 September 30, 2004
(Unaudited)
Raw materials $ 831 $ 1,162
Work-in-process 229 711
Finished goods 4 9
----------------- ----------------
$ 1,064 $ 1,882
Reclassifications
Certain amounts in 2004 have been reclassified to conform with the 2005
presentation.
Unaudited Financial Statements
The accompanying unaudited financial statements as of July 1, 2005, and
for the nine months ended July 1, 2005 have been prepared in accordance with
generally accepted accounting principles for interim financia1 information. In
the opinion of management, all adjustments considered necessary for a fair
presentation, which consist solely of normal recurring adjustments, have been
included. The accompanying financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
September 30, 2004 Annual Report on Form 10-K.
Page 7 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2005
Earnings Per Share
Net income per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". Basic earnings per share is
calculated by dividing income available to common shareholders by the
weighted-average number of shares outstanding for each period. Diluted earnings
per common share is calculated by adjusting the weighted-average shares
outstanding, assuming conversion of all potentially dilutive stock options.
New Pronouncements
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure". SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, the Statement amends the previous disclosure
requirements of SFAS 123 to require prominent disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported financial results and require these disclosures in interim
financial information. IEC continues to account for stock-based employee
compensation under APB Opinion 25, but has adopted the new disclosure
requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs" (SFAS
151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges. In addition,
this Statement requires that allocation of fixed production overheads to costs
of conversion be based upon the normal capacity of the production facilities.
The provisions of SFAS 151 are effective for inventory cost incurred in fiscal
years beginning after June 15, 2005. As such, the Company is required to adopt
these provisions at the beginning of fiscal 2006. The Company is currently
evaluating the impact of SFAS 151 on its consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies to
measure and recognize compensation expense for all stock-based payments at fair
value. SFAS 123R is effective for all fiscal years beginning after June 15, 2005
and, thus, will be effective for the Company beginning with the first quarter of
fiscal 2006. Retroactive application of the provisions of SFAS 123R to the
beginning of the fiscal year that includes the effective date is permitted, but
not required. The Company is currently evaluating the impact of SFAS 123R on its
financial statements.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 replaces
the exception from fair value measurement in APB Opinion No. 29 for nonmonetary
exchanges of similar productive assets with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is to be applied prospectively, and is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after the date
of issuance of SFAS No. 153. The Company has not yet determined the effect of
adopting this standard.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. These requirements apply to all
voluntary changes and changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition
provisions. SFAS 154 is effective for fiscal years beginning after December 15,
2005. As such, the Company is required to adopt these provisions for the fiscal
year beginning October 1, 2006. The Company is currently evaluating the impact
of SFAS 154 on its consolidated financial statements.
(2) Financing Agreements
The Company's financing agreements contain various affirmative and
negative covenants including, among others, limitations on the amount available
under the revolving line of credit relative to the borrowing base, capital
expenditures, fixed charge coverage ratios, and minimum earnings before
interest, taxes, depreciation and amortization (EBITDA). The Company was
compliant with these covenants on July 1, 2005.
Page 8 of 15
IEC ELECTRONICS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2005
(3) Stock Option Plans
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized for its stock option plans. SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", requires disclosure of
pro forma net income per share as if the fair valued-based method had been
applied in measuring compensation cost for the stock-based awards. The following
table illustrates the effect on net earnings and earnings per share had the
Company adopted the fair value based method of accounting for stock-based
employee compensation for all periods presented.
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
JULY 1, 2005 JUNE 25, 2004 JULY 1, 2005 JUNE 25, 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- -------------- -------------
Net earnings, as reported $ 78 $ (1,146) $ 234 $ (890)
Deduct total stock-based
Compensation expense
determined under fair value
based method, net of tax $ (4) $ (16) $ (54) $ (48)
Pro forma net earnings $ 74 $ (1,162) $ 180 $ (938)
Earnings per share:
Basic - as reported $ 0.01 $ (0.14) $ 0.03 $ (0.11)
Basic - pro forma $ 0.01 $ (0.14) $ 0.02 $ (0.12)
Diluted - as reported $ 0.01 $ (0.14) $ 0.03 $ (0.11)
Diluted - pro forma $ 0.01 $ (0.14) $ 0.02 $ (0.12)
(4) Litigation
Except as set forth below, there are no material legal proceedings pending
to which the Company or any of its subsidiaries is a party or to which any of
the Company or its subsidiaries' property is subject. To our knowledge, there
are no material legal proceedings to which any director, officer or affiliate of
the Company, or any beneficial owner of more than 5 percent (5%) of Common
Stock, or any associate of any of the foregoing, is a party adverse to the
Company or any of its subsidiaries.
On August 13, 2003 General Electric Company ("GE") commenced an action in
the state of Connecticut against the Company and Vishay Intertechnology, Inc.
The complaint was amended on February 13, 2004. The action alleges causes of
action for breach of a manufacturing services contract, which had an initial
value of $4.4 million, breach of express warranty, breach of implied warranty
and a violation of the Connecticut Unfair Trade Practices Act. Vishay supplied a
component that the Company used to assemble printed circuit boards for GE that
GE contends failed to function properly requiring a product recall. GE claims
damages "in excess of $15,000" plus interest and attorneys' fees. The Company
has made a motion to dismiss the action in Connecticut for lack of jurisdiction
and the motion is pending. The position of the Company is that the contract with
GE was substantially completed and that it has meritorious defenses and basis
for a cross claim against Vishay. On April 5, 2005 GE, IEC and Vishay
participated in non-binding mediation, which did not result in a settlement.
(5) Restructuring
During May 2004, the Company commenced a restructuring initiative in an
attempt to more closely align resources to customer requirements. The Company
recorded $65,000 of expenses during the quarter ended July 1, 2005, and $120,000
of expenses during the nine month period ended July 1, 2005. Since May 2004, the
Company has recorded $376,000 in restructuring costs. To date, the restructuring
has resulted in the reduction of 57 employees. The annual savings to IEC will be
$1,865,000. The company believes that most of it's restructuring initiatives
have been completed, and that all payments will be made by September 30, 2005.
(6) New Financing Agreement
On January 7, 2005, IEC amended its Loan Agreement with Keltic Financial
Partners LP. The agreement included a new $750,000 term loan, payment of the
existing SunTrust Term Loan, a moratorium on principal payments until October 1,
2005, adjustments to the existing loan covenants, and a termination date of
January 14, 2009.
Page 9 of 15
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - Three Months Ended July 1,
2005, Compared to the Three Months Ended June 25, 2004.
Net sales for the three month period ended July 1, 2005, were $4.0
million, compared to $6.2 million for the comparable period of the prior fiscal
year, a decrease of 35 percent. The decrease in sales is due to a decline in
orders from two of our major customers that was not completely offset by the
addition of orders from new customers.
Our five largest customers accounted for 75% of our sales for the quarter
ended July 1, 2005, and 73% of our sales for the quarter ended June 25, 2004.
Gross profit was $0.7 million or 17 percent of sales for the three month
period ended July 1, 2005, versus ($0.2) million or (3) percent of sales in the
comparable period of the prior fiscal year. The prior period results included a
$394,000 charge for bad debts. The current quarter results include a reversal of
$41,000 of excess worker's compensation provisions (see below). Without these
items, gross profit increased from 3% in the prior period to 11% in the current
period. The increase was primarily due to our restructuring efforts.
Selling and administrative expenses were $0.5 million for the three month
period ended July 1, 2005, and $0.7 million for the comparable period of the
prior fiscal year. The reduction was primarily due to lower manufacturing
representative commissions. Selling and administrative expenses were 12 percent
of sales during the current period, compared to 11 percent of sales during the
same quarter of the prior fiscal year. The current quarter results include a
reversal of $9,000 of excess worker's compensation provisions (see below).
We reversed $50,000 from our worker's compensation accrual during the
current fiscal period. This reversal is due to a favorable buy-out offer we
received from our former (1993 - 1996) worker's compensation insurance provider.
Restructuring costs were $65,000 for the three month period ended July 1,
2005. The costs were due to severance of fourteen employees. The company expects
to save $380,000 annually due to this action.
Interest expense was $79,000 for the three month period ended July 1,
2005, down from $90,000 in the comparable period of the prior fiscal year.
Reported interest expense includes both interest on money that is being borrowed
at negotiated rates of interest ($21,000), plus fees and amortization of loan
origination costs (58,000).
Other income was $10,000 for the three month period ended July 1, 2005
versus $0 for the three month period ended June 25, 2004. The other income was
primarily due to gains on the sale of excess equipment.
Net income for the three months ended July 1, 2005 was $78,000 versus a
net loss of $(1,146,000) in the comparable quarter of the prior fiscal year.
Diluted income per share was $0.01 as compared to diluted income per share
of $(.14) in the comparable quarter of the prior fiscal year.
Page 10 of 15
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - Nine Months Ended July 1,
2005, Compared to the Nine Months Ended June 25, 2004.
Net sales for the nine month period ended July 1, 2005, were $14.9
million, compared to $20 million for the comparable period of the prior fiscal
year, a decrease of 25 percent. The decrease in sales is due to a decline in
orders from two of our major customers that was not completely offset by the
addition of orders from new customers.
Our five largest customers accounted for 72% of our sales for the nine
months ended July 1, 2005, and 81% of our sales for the nine months ended June
25, 2004.
Gross profit was $2.1 million or 14 percent of sales for the nine month
period ended July 1, 2005, versus $1.1 million or 6 percent of sales in the
comparable period of the prior fiscal year. The prior period results included a
$394,000 charge for bad debts. The current year results include a reversal of
$157,000 of excess worker's compensation provisions (see below). Without these
items, gross profit increased from 8% in the prior period to 13% in the current
period. The increase was primarily due to our restructuring efforts.
Selling and administrative expenses were $1.7 million for the nine month
period ended July 1, 2005, and $1.9 million for the comparable period of the
prior fiscal year. The reduction was primarily due to lower manufacturing
representative commissions. Selling and administrative expenses were 11 percent
of sales during the current period, compared to 9 percent of sales during the
same quarter of the prior fiscal year. The current quarter results include a
reversal of $39,000 of excess worker's compensation provisions (see below). The
percentage increase is due to fixed costs being spread over fewer sales.
We reversed $196,000 from our worker's compensation accrual during the
current fiscal period. This reversal is due to a favorable buy-out offer we
received from our former (1993 - 1996) worker's compensation insurance provider.
Restructuring costs were $120,000 for the nine month period ended July 1,
2005. The costs were due to severance of thirty eight employees. The company
expects to save $1,123,000 annually due to this action.
Interest expense was $278,000 for the nine month period ended July 1, 2005
versus $275,000 in the comparable period of the prior fiscal year. Reported
interest expense includes both interest on money that is being borrowed at
negotiated rates of interest ($91,000), plus fees and amortization of loan
origination costs ($187,000).
Other income was $195,000 for the nine month period ended July 1, 2005,
and $312,000 for the nine month period ended June 25, 2004. The other income for
both periods was primarily due to gains on the sale of excess equipment.
We reported $28,000 of income from discontinued operations during the
current fiscal period. This income was due to an asset tax refund that was
greater than what we had previously reported on our balance sheet.
Net income for the nine months ended July 1, 2005 was $234,000 versus a
net loss of $(890,000) in the comparable period of the prior fiscal year.
Diluted income per share was $0.03 as compared to diluted loss per share
of $(0.11) in the comparable quarter of the prior fiscal year.
Page 11 of 15
Liquidity and Capital Resources
Cash flow provided by operating activities was $1.7 million for the nine
months ended July 1, 2005 compared to ($0.4) million for the nine months ended
June 25, 2004. The improved cash flow during fiscal 2005 versus 2004 is
primarily due to a reduction in accounts receivable and inventory.
Working capital on July 1, 2005 totaled $1.9 million, compared to $0.7
million in the same period of the prior year. At July 1, 2005, we had no
borrowings under our revolving credit facility. The maximum borrowing limit
under our revolving credit facility is limited to the lesser of (i) $3.8 million
or (ii) an amount equal to the sum of 85% of the receivables borrowing base and
35% of the inventory borrowing base. Availability under the line of credit was
$1.9 million on July 1, 2005. We believe that our liquidity is adequate to cover
operating requirements for the next 12 months.
We also have a term loan of $750,000 that is secured by a first mortgage
on the IEC plant in Newark, New York (the "Real Estate Loan"), and a second term
loan of $108,000, that is secured by machinery and equipment (the "Equipment
Loan"). The Real Estate Loan is payable in 39 monthly installments of $12,500
commencing October 1, 2005, and a final payment of the remaining balance on
January 1, 2009. The Equipment Loan is payable in 6 monthly installments of
$16,667 commencing October 1, 2005, and a final payment of the remaining balance
on April 1, 2006. Each loan has an interest rate of prime plus 2.0%.
The financing agreements contain various affirmative and negative
covenants including, among others, limitations on the amount available under the
revolving line of credit relative to the borrowing base, capital expenditures,
fixed charge coverage ratios, and minimum earnings before interest, taxes,
depreciation and amortization (EBITDA). We were compliant with these covenants
at July 1, 2005.
Application of Critical Accounting Policies
Our financial statements and accompanying notes are prepared in accordance
with generally accepted accounting principles in the United States. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue, and expenses. These
estimates and assumptions are affected by management's application of accounting
policies. Critical accounting policies for us include revenue recognition,
impairment of long-lived assets, accounting for legal contingencies and
accounting for income taxes.
We recognize revenue in accordance with Staff Accounting Bulletin No.101,
"Revenue Recognition in Financial Statements." Sales are recorded when products
are shipped to customers. Provisions for discounts and rebates to customers,
estimated returns and allowances and other adjustments are provided for in the
same period the related sales are recorded.
We evaluate our long-lived assets for financial impairment on a regular
basis in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." We evaluate
the recoverability of long-lived assets not held for sale by measuring the
carrying amount of the assets against the estimated discounted future cash flows
associated with them. At the time such evaluations indicate that the future
discounted cash flows of certain long-lived assets are not sufficient to recover
the carrying value of such assets, the assets are adjusted to their fair values.
We are subject to various legal proceedings and claims, the outcomes of
which are subject to significant uncertainty. Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies", requires that an estimated loss
from a loss contingency should be accrued by a charge to income if it is
probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated.
Disclosure of a contingency is required if there is at least a reasonable
possibility that a loss has been incurred. We evaluate, among other factors, the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. Changes in these factors could
materially impact our financial position or our results of operations.
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," establishes financial accounting and reporting standards for the
effect of income taxes. The objectives of accounting for income taxes are to
recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an entity's financial statements or tax returns.
Judgment is required in assessing the future tax consequences of events that
have been recognized in our financial statements or tax returns. Fluctuations in
the actual outcome of these future tax consequences could impact our financial
position or our results of operations.
Page 12 0f 15
Impact of Inflation
The impact of inflation on our operations has been minimal due to the fact
that we have been able to adjust our bids to reflect any inflationary increases
in costs.
New Pronouncements
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, "Accounting for Stock Based Compensation - Transition and
Disclosure". SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, the Statement amends the previous disclosure
requirements of SFAS 123 to require prominent disclosures about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported financial results and require these disclosures in interim
financial information. IEC continues to account for stock-based employee
compensation under APB Opinion 25, but has adopted the new disclosure
requirements of SFAS 148 beginning in the second quarter of fiscal 2003.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs" (SFAS
151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges. In addition,
this Statement requires that allocation of fixed production overheads to costs
of conversion be based upon the normal capacity of the production facilities.
The provisions of SFAS 151 are effective for inventory cost incurred in fiscal
years beginning after June 15, 2005. As such, the Company is required to adopt
these provisions at the beginning of fiscal 2006. The Company is currently
evaluating the impact of SFAS 151 on its consolidated financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies to
measure and recognize compensation expense for all stock-based payments at fair
value. SFAS 123R is effective for all fiscal years beginning after June 15, 2005
and, thus, will be effective for the Company beginning with the first quarter of
fiscal 2006. Retroactive application of the provisions of SFAS 123R to the
beginning of the fiscal year that includes the effective date is permitted, but
not required. The Company is currently evaluating the impact of SFAS 123R on its
financial statements.
On December 16, 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29". SFAS No. 153 replaces
the exception from fair value measurement in APB Opinion No. 29 for nonmonetary
exchanges of similar productive assets with a general exception from fair value
measurement for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is to be applied prospectively, and is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after the date
of issuance of SFAS No. 153. We have not yet determined the effect of adopting
this standard.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for and
reporting of a change in accounting principle. These requirements apply to all
voluntary changes and changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition
provisions. SFAS 154 is effective for fiscal years beginning after December 15,
2005. As such, the Company is required to adopt these provisions for the fiscal
year beginning October 1, 2006. The Company is currently evaluating the impact
of SFAS 154 on its consolidated financial statements.
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures about Market Risk represents the
risk of loss that may impact the consolidated financial position, results of
operations or cash flows of IEC due to adverse changes in financial rates. We
are exposed to market risk in the area of interest rates. One exposure is
directly related to our Term Loan and Revolving Credit borrowings under the
Credit Agreement, due to their variable interest rate pricing. Management
believes that interest rate fluctuations will not have a material impact on
IEC's results of operations.
Page 13 of 15
Item 4 -- Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15(d)-15(e)) as of July 1, 2005. Our disclosure controls and procedures are
designed to ensure that information required to be disclosed by the Company in
the reports filed by the Company under the Securities Exchange Act of 1934, is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Based on this
evaluation, our President and Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of July 1, 2005.
There were no significant changes in our internal control over financial
reporting during the quarter ended July 1, 2005, that have materially affected
or are reasonably likely to materially affect, our internal control over
financial reporting.
Forward-looking Statements
Forward-looking statements in this Form 10-Q include, without limitation,
statements relating to the Company's plans, future prospects, strategies,
objectives, expectations, intentions and adequacy of resources and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements may be identified by their use of words
like "plans", "expects", "aims", "believes", "projects", "anticipates",
"intends", "estimates", "will", "should", "could", and other expressions that
indicate future events and trends. These forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievement of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, among others,
the following: general economic and business conditions, the timing of orders
and shipments, availability of material, product mix, changes in customer
requirements and in the volume of sales to principal customers, competition and
technological change, the ability of the Company to control manufacturing and
operating costs, and satisfactory relationships with vendors. The Company's
actual results of operations may differ significantly from those contemplated by
such forward-looking statements as a result of these and other factors,
including factors set forth in the Company's Annual Report on Form 10-K for the
year ended September 30, 2004 and in other filings with the Securities and
Exchange Commission.
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings
The descriptions of the Company's legal proceedings set forth in Item 3 of
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2004 and in Part II --Item 1 of the Company's Quarterly Report on Form 10-Q for
the quarter ended April 1, 2005 are incorporated herein by reference. During the
quarter ended July 1, 2005, there were no material developments with respect to
the GE, IEC, Vishay legal proceeding that have not been reported.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None
Item 5 -- Other Information
None.
Page 14 of 15
Item 6 -- Exhibits
The following documents are filed as exhibits to this Report:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IEC ELECTRONICS CORP.
REGISTRANT
Dated: July 26, 2005 /s/ W. Barry Gilbert
---------------------------
W. Barry Gilbert
Chairman, President, and
Chief Executive Officer
Dated: July 26, 2005 /s/ Brian H. Davis
---------------------------
Brian H. Davis
Chief Financial Officer
and Controller
Page 15 of 15