Company Quick10K Filing
Quick10K
IEC Electronics
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$6.45 10 $67
10-Q 2019-06-28 Quarter: 2019-06-28
10-Q 2019-03-29 Quarter: 2019-03-29
10-Q 2018-12-28 Quarter: 2018-12-28
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-29 Quarter: 2018-06-29
10-Q 2018-03-30 Quarter: 2018-03-30
10-Q 2017-12-29 Quarter: 2017-12-29
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-30 Quarter: 2016-12-30
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-07-01 Quarter: 2016-07-01
10-Q 2016-04-01 Quarter: 2016-04-01
10-Q 2016-01-01 Quarter: 2016-01-01
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-26 Quarter: 2015-06-26
10-Q 2015-03-27 Quarter: 2015-03-27
10-Q 2014-12-26 Quarter: 2014-12-26
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-27 Quarter: 2014-06-27
10-Q 2014-03-28 Quarter: 2014-03-28
10-Q 2013-12-27 Quarter: 2013-12-27
8-K 2019-08-07
8-K 2019-07-08
8-K 2019-06-04 Regulation FD, Exhibits
8-K 2019-05-08
8-K 2019-03-14
8-K 2019-03-11
8-K 2019-02-06
8-K 2019-01-22
8-K 2019-01-22
8-K 2019-01-09
8-K 2018-12-07
8-K 2018-11-28
8-K 2018-09-04
8-K 2018-08-08
8-K 2018-08-02
8-K 2018-06-04
8-K 2018-06-01
8-K 2018-04-20
8-K 2018-03-14
8-K 2018-03-01
8-K 2018-01-26
AMAT Applied Materials 38,870
ATUS Altice 16,570
CVI CVR Energy 4,410
RH RH 2,090
FI Frank's 1,350
PEBO Peoples Bancorp 678
ESTE Earthstone Energy 442
APRN Blue Apron 172
OVAS Ovascience 0
AMHI Ameri Holdings 0
IEC 2019-06-28
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1-Our Business and Summary of Significant Accounting Policies
Note 2-Revenue Recognition
Note 3-Allowance for Doubtful Accounts
Note 4-Inventories
Note 5-Property, Plant and Equipment, Net
Note 6-Credit Facilities
Note 7-Warranty Reserves
Note 8-Stock-Based Compensation
Note 9-Income Taxes
Note 10-Market Sectors and Major Customers
Note 11-Commitments and Contingencies
Note 12-Capital Lease
Note 13-Net Income per Share
Note 14-Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.2 a10-qx20190628xex102.htm
EX-10.3 a10-qx20190628xex103.htm
EX-10.4 a10-qx20190628xex104.htm
EX-10.5 a10-qx20190628xex105.htm
EX-10.6 a10-qx20190628xex106.htm
EX-31.1 a10-qx20190628xex311.htm
EX-31.2 a10-qx20190628xex312.htm
EX-32.1 a10-qx20190628xex321.htm

IEC Electronics Earnings 2019-06-28

IEC 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a10-qx20190628.htm 10-Q Document
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, 2019
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to ____
 
Commission File Number 001-34376
 
IEC ELECTRONICS CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
 
13-3458955
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
  
 
 
105 Norton Street, Newark, New York   14513
(Address of Principal Executive Offices) (Zip Code)
  
315-331-7742
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

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 shares as of August 1, 2019






3



TABLE OF CONTENTS
 
 

4




Part I     FINANCIAL INFORMATION
 
Item 1.  Condensed Consolidated Financial Statements
 
IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 28, 2019 and SEPTEMBER 30, 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.

5



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
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
 
 
 
 
Net sales
$
40,324

 
$
29,782

 
$
113,059

 
$
82,706

Cost of sales
34,719

 
26,423

 
97,808

 
73,045

Gross profit
5,605

 
3,359

 
15,251

 
9,661

 
 
 
 
 
 
 
 
Selling and administrative expenses
3,721

 
2,833

 
10,402

 
8,543

Operating income
1,884

 
526

 
4,849

 
1,118

 
 
 
 
 
 
 
 
Interest and financing expense
452

 
322

 
1,160

 
834

Income before income taxes
1,432

 
204

 
3,689

 
284

 
 
 
 
 
 
 
 
Income tax expense/(benefit)
221

 

 
736

 
(1,005
)
 
 
 
 
 
 
 
 
Net income
$
1,211

 
$
204

 
$
2,953

 
$
1,289

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.02

 
$
0.28

 
$
0.12

Diluted
$
0.11

 
$
0.02

 
$
0.28

 
$
0.12

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
Basic
10,332,548

 
10,243,286

 
10,294,173

 
10,221,869

Diluted
10,642,403

 
10,556,764

 
10,556,953

 
10,467,112

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

6




IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED JUNE 28, 2019
(unaudited; in thousands, except share data)

 
 
Number of Shares Outstanding

 
Common
Stock,
par $0.01

 
Additional
Paid-In
Capital

 
Accumulated Deficit

 
Treasury
Stock,
at cost

 
Total
Stockholders’
Equity

Balances, 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

Net income
 

 

 

 
1,072

 

 
1,072

Stock-based compensation
 

 

 
146

 
 
 

 
146

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

 

 

 

 

 

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

 

 

 

 

 

Employee stock plan purchases
 
5,674

 

 
20

 

 

 
20

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 28, 2018
 
10,261,571

 
102

 
47,492

 
(18,950
)
 
(1,589
)
 
27,055

 
 
 
 
 
 
 
 
 
 
 
 
 
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


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


7




IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENT of CHANGES in STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED JUNE 29, 2018
(unaudited; in thousands, except share data)

 
 
Number of Shares Outstanding

 
Common
Stock,
par $0.01

 
Additional
Paid-In
Capital

 
Accumulated Deficit

 
Treasury
Stock,
at cost

 
Total
Stockholders’
Equity

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, October 1, 2017
 
10,197,078

 
$
102

 
$
46,789

 
$
(30,873
)
 
$
(1,589
)
 
$
14,429

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
1,579

 

 
1,579

Stock-based compensation
 

 

 
129

 

 

 
129

Restricted stock vested, net of shares withheld for payment of taxes
 
30,530

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 

 

 

Employee stock plan purchases
 
6,565

 

 
26

 

 

 
26

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, June 29, 2018
 
10,248,083

 
$
102

 
$
47,186

 
$
(29,584
)
 
$
(1,589
)
 
$
16,115

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

8



IEC ELECTRONICS CORP.
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
NINE MONTHS ENDED JUNE 28, 2019 and JUNE 29, 2018
(unaudited; in thousands) 
 
 
Nine Months Ended
 
 
June 28,
2019
 
June 29,
2018
 
 
 
 

CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
2,953

 
$
1,289

Non-cash adjustments:
 
 
 
 
Stock-based compensation
 
415

 
347

Depreciation and amortization
 
2,047

 
1,708

Change in reserve for doubtful accounts
 
(30
)
 
(42
)
Change in inventory reserve and warranty reserve
 
19

 
143

Deferred tax expense/(benefit)
 
732

 
(1,010
)
Amortization of deferred gain
 
(85
)
 
(54
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(1,414
)
 
(1,739
)
Unbilled contract revenue
 
(2,972
)
 

Inventory
 
(14,485
)
 
(10,612
)
Other current assets
 
(146
)
 
(204
)
Other long-term assets
 
(436
)
 
4

Accounts payable
 
1,293

 
3,268

Change in book overdraft position
 
(602
)
 
1,268

Accrued expenses
 
1,389

 
1,171

Customer deposits
 
2,155

 
790

Other long-term liabilities
 
(75
)
 
(75
)
Net cash flows used in operating activities
 
(9,242
)
 
(3,748
)
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
Purchases of property, plant and equipment
 
(1,119
)
 
(2,001
)
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
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
Advances from revolving credit facility
 
57,343

 
47,402

Repayments of revolving credit facility
 
(46,331
)
 
(41,609
)
Borrowings under other loan agreements
 
391

 
836

Repayments under other loan agreements
 
(889
)
 
(2,665
)
Repayments under capital lease
 
(230
)
 
(172
)
Debt issuance costs
 
(27
)
 
(45
)
Proceeds from exercise of stock options
 
79

 

Proceeds from employee stock plan purchases
 
53

 
50

Cash paid for taxes upon vesting of restricted stock
 
(48
)
 

Net cash flows provided by financing activities
 
10,341

 
3,797

 
 
 
 
 
Net cash change for the period
 

 

Cash, beginning of period
 

 

Cash, end of period
 
$

 
$

 
 
 
 
 
Supplemental cash flow information
 
 
 
 
Interest paid
 
$
1,183

 
$
807

Income taxes paid
 
3

 
4

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.

9



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, 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, 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. 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, 2019 and June 29, 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.
  
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 million and $2.6 million as of June 28, 2019 and September 30, 2018, respectively. Changes in the book overdrafts are presented within net cash flows provided by operating activities within the condensed consolidated statements of cash flows.
 

10



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 5
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, 2019 and June 29, 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. 


11



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, 2019 and June 29, 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.
 

12



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, 2019 and June 29, 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.
 
Recently Issued Accounting Standards Adopted
 
FASB Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASC 606”) 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.

The guidance was effective for the Company beginning with the first quarter of fiscal 2019. The Company evaluated the guidance and approved a transition method during fiscal 2018. The Company assessed the impact 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 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

13



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 months or less will be accounted for similar to existing guidance for operating leases. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842 (Leases),” and ASU 2018-11, “Leases (Topic 842),” Targeted Improvements, which provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional transition method to adopt the new standard, and (iii) lessors with a practical expedient for separating components 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.

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% of the Company's revenue for the three and nine months ended June 28, 2019, 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% of our revenue for the three and nine months ended June 28, 2019, 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% of total revenue in each of the three and nine months ended June 28, 2019 and June 29, 2018.

14



 
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
 
 
June 28, 2019
 
June 28, 2019
 
 
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

Medical
 
5,127

 
3,744

 
8,871

 
12,441

 
12,432

 
24,873

Industrial
 
4,657

 
2,198

 
6,855

 
14,063

 
7,418

 
21,481

 
 
$
21,084

 
$
19,240

 
$
40,324

 
$
57,454

 
$
55,605

 
$
113,059



15



Impact of adoption of ASC 606

The following table presents the impacted financial statement line items in the condensed consolidated balance sheet as of October 1, 2018: 
 
 
 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
)

The following table presents 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


For each of the three and nine months ended June 28, 2019 and June 29, 2018, less than 1% of net sales were shipped to locations outside the United States.


16



NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS

A summary follows of activity in the allowance for doubtful accounts during the nine months ended June 28, 2019 and June 29, 2018:
 
 
Nine Months Ended
Allowance for doubtful accounts
 
June 28,
2019
 
June 29,
2018
(in thousands)
 
 
 
 
Allowance, beginning of period
 
$
85

 
$
75

Change in provision for doubtful accounts
 
(30
)
 
(42
)
Write-offs
 

 

Allowance, end of period
 
$
55

 
$
33

 
NOTE 4—INVENTORIES  

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

June 28,
2019

September 30,
2018
(in thousands)

 



Raw materials
 
$
28,737

 
$
21,323

Work-in-process
 
12,793

 
11,263

Finished goods
 
3,359

 
1,540

Total inventories
 
$
44,889

 
$
34,126


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
(in thousands)
 
 
 
 
Land and improvements
 
$
788

 
$
788

Buildings and improvements
 
7,397

 
7,314

Building under capital lease
 
7,750

 
7,750

Machinery and equipment
 
31,593

 
30,969

Furniture and fixtures
 
7,923

 
7,877

Software
 
5,215

 

Construction in progress
 
557

 
5,360

Total property, plant and equipment, at cost
 
61,223

 
60,058

Accumulated depreciation
 
(41,892
)
 
(39,948
)
Property, plant and equipment, net
 
$
19,331

 
$
20,110

 
Depreciation expense during the three and nine months ended June 28, 2019 and June 29, 2018 follows:
 
 
Three Months Ended
 
Nine Months Ended

 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
(in thousands)
 
 
 
 
 
 
 
 
Depreciation expense
 
$
707

 
$
567

 
$
2,008

 
$
1,729



17



NOTE 6—CREDIT FACILITIES  

A summary of borrowings at period end follows:   
 
 

 
 
 
June 28, 2019
 
September 30, 2018
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
%
Term Loan B
 
v
 
5/5/2022
 
2,993

 
5.19

 
3,636

 
5.36

Equipment Line Advances
 
v
 
Various
 

 

 
314

 
5.56

Equipment Line Term Note
 
v
 
Various
 
1,254

 
5.28

 
794

 
5.56

Total debt, gross
 
 
 
 
 
28,255

 
 
 
17,740

 
 
Unamortized debt issuance costs
 
 
 
 
 
(262
)
 
 
 
(289
)
 
 
Total debt, net
 
 
 
 
 
27,993

 
 
 
17,451

 
 
Less: current portion
 
 
 
 
 
(1,371
)
 
 
 
(1,449
)
 
 
Long-term debt
 
 
 
 
 
$
26,622

 
 
 
$
16,002

 
 

M&T Bank Credit Facilities

During the quarter ended March 29, 2019, the Company and M&T Bank entered into the Seventh and Eighth Amendments 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, 2019, up to $27.0 million is available through May 5, 2022. The maximum amount the Company may borrow is determined based on a borrowing base calculation described below.
b)
Term Loan B: $14.0 million was borrowed on January 18, 2013. Principal was being repaid in 120 equal monthly installments of $117 thousand. As part of an amendment to the Credit Facility, as amended, the principal was modified from $8.0 million to $6.0 million and principal is being repaid in equal monthly installments of $71 thousand plus a balloon payment of $0.6 million. The maturity date of the loan is May 5, 2022.
c)
Equipment Line Advances: Up to $1.5 million is available through May 5, 2022. Interest only is paid until maturity. Principal is due in three or six months after borrowing or can be converted to an Equipment Line Term Loan. 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.
d)
Equipment Line Term Note: On July 26, 2018, $0.8 million was converted from an Equipment Line Advance, principal is being repaid in 36 equal monthly installments of $21 thousand and matures July 26, 2021. On September 27, 2018, $0.1 million was converted from an Equipment Line Advance, principal is being repaid in 36 equal monthly installments of $2 thousand and matures September 29, 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.



18



Borrowing Base

At June 28, 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 million.

At June 28, 2019, the upper limit on Revolver borrowings was $27.0 million with $3.0 million available. At September 30, 2018, the upper limit on Revolver borrowings was $22.0 million with $9.0 million available. Average Revolver balances amounted to $20.0 million and $11.8 million during the nine months ended June 28, 2019 and June 29, 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, 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 thousand and $15.3 thousand during the three and nine months ended June 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, 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, 2019 as a minimum of 1.10 times. The Fixed Charge Coverage Ratio was the only covenant in effect at June 28, 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, 2019.

Contractual Principal Payments

A summary of contractual principal payments under IEC’s borrowings at June 28, 2019 for the next three years taking into consideration the Credit Facility, as amended, is as follows:
Debt Repayment Schedule
 
Contractual
Principal
Payments
(in thousands)
 
 

Twelve months ending June
 
 

2020

 
$
1,371

2021

 
1,371

2022
(1) 
 
25,513

 
 
 
$
28,255

(1) Includes Revolver balance of $24.0 million at June 28, 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.

19




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
Warranty Reserve
 
June 28,
2019
 
June 29,
2018
(in thousands)
 
 

 
 

Reserve, beginning of period
 
$
173

 
$
153

Provision
 
65

 
213

Warranty costs
 
(89
)
 
(199
)
Reserve, end of period
 
$
149

 
$
167

 
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 million and $0.4 million for the three and nine months ended June 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, 2019, there were 776,775 remaining shares of common stock available to be issued under the 2019 Plan and 89,701 remaining shares of common stock 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.
 

20



Assumptions used in the Black-Scholes model and the estimated value of options granted during the nine months ended June 28, 2019 and June 29, 2018 follows in the table below.
 
 
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
 
 
June 28, 2019
 
June 29, 2018
Stock Options
 
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

Granted
 
20,000

 
6.12

 
20,000

 
4.00

Exercised
 
(34,000
)
 
4.46

 
(1,400
)
 
4.08

Forfeited
 
(24,250
)
 
3.70

 
(90,000
)
 
4.75

Expired
 
(5,750
)
 
4.06

 
(10,500
)
 
5.24

Outstanding, end of period
 
693,145

 
$
4.40

 
661,145

 
$
4.18

 
 
 
 
 
 
 
 
 
For options expected to vest
 
 
 
 
 
 

 
 

Number expected to vest
 
685,354

 
$
4.39

 
653,922

 
$
4.18

Weighted average remaining contractual term, in years
 
3.4

 
 
 
3.7

 


Intrinsic value (000s)
 
 
 
$
1,306

 
 

 
$
1,009

 
 
 
 
 
 
 
 
 
For exercisable options
 
 
 
 
 
 

 
 

Number exercisable
 
533,645

 
$
4.18

 
450,358

 
$
4.28

Weighted average remaining contractual term, in years
 
2.7

 
 
 
3.4

 
 

Intrinsic value (000s)
 
 
 
$
1,132

 
 

 
$
721

 
 
 
 
 
 
 
 
 
For non-exercisable options
 
 
 
 
 
 

 
 

Expense not yet recognized (000s)
 
 
 
$
232

 
 
 
$
205

Weighted average years to be recognized
 
3.1

 
 
 
1.5

 
 

 
 
 
 
 
 
 
 
 
For options exercised
 
 
 
 
 
 
 
 
Intrinsic value (000s)
 
 
 
$
77

 
 

 
$
2

 

21



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
 
 
June 28, 2019
 
June 29, 2018
Restricted (Non-vested) Stock
 
Number of Non-vested Shares
 
Wgtd. Avg. Grant Date Fair Value
 
Number of Non-vested Shares
 
Wgtd. Avg. Grant Date Fair Value
Outstanding, beginning of period
 
103,233

 
$
4.08

 
109,695

 
$
4.01

Granted
 
32,385

 
7.09

 
44,878

 
4.29

Vested
 
(49,511
)
 
4.08

 
(39,300
)
 
4.10

Forfeited
 
(1,400
)
 
4.13

 
(9,490
)
 
4.20

Outstanding, end of period
 
84,707

 
$
5.23

 
105,783

 
$
4.09

 
 
 
 
 
 
 
 
 
For non-vested shares
 
 

 
 
 
 

 
 
Expense not yet recognized (000s)
 
 
 
$
365

 
 

 
$
353

Weighted average remaining years for vesting
 
2.2

 
 
 
1.9

 
 
 
 
 
 
 
 
 
 
 
For shares vested
 
 

 
 
 
 

 
 
Aggregate fair value on vesting dates (000s)
 
 

 
$
333

 
 

 
$
173

 
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.


22



A summary of restricted stock unit activity, together with related data, follows:
 
 
Nine Months Ended
 
 
June 28, 2019
 
June 29, 2018
Restricted Stock Units
 
Number of Non-vested Units
 
Wgtd. Avg. Grant Date Fair Value
 
Number of Non-vested Units
 
Wgtd. Avg. Grant Date Fair Value
Outstanding, beginning of period
 
170,492

 
$
3.96

 
267,999

 
$
4.03

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

 
 
 
 
 
 
 
 
 
For non-vested shares
 
 

 
 
 
 

 
 

Expense not yet recognized (000s)
 
 
 
$
573

 
 

 
$
371

Weighted average remaining years for vesting
 
2.4

 
 
 
2.5

 
 
NOTE 9—INCOME TAXES  

The income tax expense/(benefit) during each of the three and nine months ended June 28, 2019 and June 29, 2018 follows:
 
 
Three Months Ended
 
Nine Months Ended

 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
(in thousands)
 
 

 

 
 
 
 
Income tax expense/(benefit)
 
$
221

 
$

 
$
736

 
$
(1,005
)
 
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 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, 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, 2019.


23



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
% of Sales by Sector
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Aerospace & Defense
 
61%
 
60%
 
59%
 
62%
Medical
 
22%
 
22%
 
22%
 
21%
Industrial
 
17%
 
18%
 
19%
 
17%
 
 
100%
 
100%
 
100%
 
100%

One individual customer represented 10% or more of sales for the three months ended June 28, 2019. This customer was from the aerospace & defense sector and represented 24% of sales. One individual customer represented 10% or more of sales for the nine months ended June 28, 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, 2018. One customer was from the aerospace & defense sector and represented 25% of sales, while one was from the medical sector and represented 11% 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, 2018.

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

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

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

Twelve months ending June
 
 

2020
 
$
669

2021
 
683

2022
 
696

2023
 
711

2024 and thereafter
 
6,900

Total capital lease payments
 
9,659

Less: amounts representing interest
 
(2,556
)
Present value of minimum lease payment
 
$
7,103



24



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
Earnings Per Share
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Basic net income per share:
 
 
 
 
 
 
 
 
Net income
 
$
1,211

 
$
204

 
$
2,953

 
$
1,289

Less: Income attributable to non-vested shares
 
10

 
2

 
25

 
13

Net income available to common stockholders
 
$
1,201

 
$
202

 
$
2,928

 
$
1,276

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
10,332,548

 
10,243,286

 
10,294,173

 
10,221,869

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.12

 
$
0.02

 
$
0.28

 
$
0.12