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6: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
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14: R1 Cover Page HTML 75K
15: R2 Condensed Consolidated Balance Sheets (Unaudited) HTML 104K
16: R3 Condensed Consolidated Balance Sheets HTML 42K
[Parenthetical]
17: R4 Condensed Consolidated Statements of Operations HTML 63K
(Unaudited)
18: R5 CONDENSED CONSOLIDATED STATEMENTS of CHANGES in HTML 90K
STOCKHOLDERS' EQUITY (Unaudited)
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(Unaudited)
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31: R18 Net Income Per Share HTML 85K
32: R19 Our Business and Summary of Significant Accounting HTML 111K
Policies (Policies)
33: R20 Our Business and Summary of Significant Accounting HTML 62K
Policies (Tables)
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36: R23 Inventories (Tables) HTML 36K
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45: R32 OUR BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING HTML 35K
POLICIES - Property, Plant and Equipment (Details)
46: R33 OUR BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING HTML 33K
POLICIES - Narrative (Details)
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Contracts with Customers by Market Sector
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49: R36 REVENUE RECOGNITION - Impact of Topic 606 on HTML 30K
Consolidated Balance Sheet (Details)
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Consolidated Income Statement (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i13-3458955
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
i105
Norton Street, iNewark, iNew Yorki14513
(Address
of Principal Executive Offices) (Zip Code)
i315-i331-7742
(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
iCommon Stock, $0.01 par value
iIEC
iNasdaq
Global Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYesx
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).
iYesx 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
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☒
Emerging growth company
i☐
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 i☐
No ☒
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 – i10,552,908 shares as of July 29, 2020
Net
cash flows provided by/(used in) operating activities
i7,756
(i9,242)
CASH
FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment
(i3,067)
(i1,119)
Proceeds
from disposal of property, plant and equipment
i—
i20
Net
cash flows used in investing activities
(i3,067)
(i1,099)
CASH
FLOWS FROM FINANCING ACTIVITIES
Advances from revolving credit facility
i55,523
i57,343
Repayments
of revolving credit facility
(i56,505)
(i46,331)
Borrowings
under other loan agreements
i—
i391
Repayments
under other loan agreements
(i3,904)
(i889)
Payments
under finance lease
(i284)
(i230)
Proceeds
received from lease financing obligation
i415
i—
Debt
issuance costs
(i84)
(i27)
Proceeds
from exercise of stock options
i161
i79
Proceeds
from employee stock plan purchases
i87
i53
Cash
paid for taxes upon vesting of restricted stock
(i98)
(i48)
Net
cash flows (used in)/provided by financing activities
(i4,689)
i10,341
Net
cash change for the period
i—
i—
Cash,
beginning of period
i—
i—
Cash,
end of period
$
i—
$
i—
Supplemental
cash flow information
Interest paid
$
i1,094
$
i1,183
Income
taxes paid
i20
i3
Property,
plant and equipment purchased with extended payment terms
90
130
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
IEC ELECTRONICS CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1—OUR BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
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 9001:2015, AS9100D, and ISO 13485, and we are Nadcap accredited. IEC is headquartered in Newark, NY and also has operations in Rochester, NY and Albuquerque, NM. Additional information about IEC can be found on its web site at www.iec-electronics.com. The contents of this website
are not incorporated by reference into this quarterly report.
i
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”).
The 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, for fiscal 2019, IEC California Holdings, Inc., which was dissolved as of September
18, 2019. The Rochester unit operates as a division of IEC. All intercompany transactions and accounts are eliminated in consolidation.
i
Unaudited Financial Statements
The accompanying unaudited condensed consolidated financial statements for the three and nine months ended June 26, 2020 and June 28, 2019 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, 2019.
Cash
The Company’s cash represents deposit accounts with Manufacturers and Traders Trust Company (“M&T
Bank”), a banking corporation headquartered in Buffalo, NY. The Company’s cash management system provides for the funding of the disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks in excess of the bank balance create a book overdraft. Book overdrafts are presented in accounts payable in the condensed consolidated balance sheets. Book overdrafts were $0.2 million and $i0.3 million as of June 26, 2020 and
September 30, 2019, respectively. Changes in the book overdrafts are presented within net cash flows provided by operating activities within the condensed consolidated statements of cash flows.
8
i
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.
i
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 improvementii./
PP&E Lives
Estimated
Useful Lives
(years)
Land improvements
10
Buildings and improvements
5 to 40
Machinery and equipment
3 to 10
Furniture and fixtures
3 to 7
Software
3
to 10
i
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. iNo impairment charges were recorded by IEC for long-lived assets during the three and nine months ended June 26, 2020 and June 28, 2019.
/
i
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.
i
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.
i
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.
9
i
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 the three and nine months ended June 26, 2020 and June 28, 2019.
i
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.
i
Income
Taxes and Deferred Taxes
ASC 740 (Income Taxes) requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns, but not in both. Deferred tax assets are also established for tax benefits associated with tax loss and tax credit carryforwards. Such deferred tax balances reflect tax rates that are scheduled to be in effect, based on currently enacted legislation, in the years the book/tax differences reverse and tax loss and tax credit carryforwards are expected to be realized. An allowance is established for any deferred tax asset for which realization is not likely.
ASC 740 also prescribes the manner in which a company measures, recognizes, presents and discloses in its financial statements uncertain tax positions that the
company has taken or expects to take on a tax return. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the position will be sustained following examination by taxing authorities, based on technical merits of the position. The Company believes that it has no material uncertain tax positions.
Any interest incurred is reported as interest expense. Any penalties incurred are reported as tax expense. The Company’s income tax filings are subject to audit by various tax jurisdictions and current open years are the fiscal year ended September 30, 2014 through
fiscal year ended September 30, 2019.
i
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 Sixth Amended and Restated
Credit Facility Agreement with M&T Bank includes certain restrictions on paying cash dividends, as more fully described in Note 6—Credit Facilities.
10
i
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: 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.
i
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.
i
Segments
The Company’s results of operations for the three and nine months ended June 26, 2020 and June 28, 2019 represent a single operating and reporting segment,
referred to as contract manufacturing within the EMS industry. The Company strategically directs production between its various manufacturing facilities based on a number of considerations to best meet its customers’ requirements. The Company shares resources for sales, marketing, engineering, supply chain, information services, human resources, payroll and corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources. The Company’s operations as a whole reflect the level at which the business is managed
and how the Company’s chief operating decision maker assesses performance internally.
Leases
At contract inception, the Company determines if the new contractual arrangement is a lease or contains a leasing arrangement. If a contract contains a lease, the Company evaluates whether it should be classified as an operating lease or a finance lease. Upon modification of the contract,
the Company will reassess to determine if a contract is or contains a leasing arrangement.
The Company records lease liabilities based on the future estimated cash payments discounted over the lease term, defined as the non-cancellable time period of the lease, together with all the following:
•Periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; and
•Periods
covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option.
Leases may also include options to terminate the arrangement or options to purchase the underlying lease property. Lease components provide the Company with the right to use an identified asset, which consist of real estate properties and equipment. Non-lease components consist primarily of maintenance services.
As an implicit discount rate is not readily available in the Company’s lease agreements, the Company
uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. For certain leases with original terms of twelve months or less, the Company recognizes lease expense as incurred and does not recognize any lease liabilities. Short-term and long-term portions of operating lease liabilities are classified as other current liabilities and other long-term liabilities, respectively.
A right-of-use (“ROU”) asset is measured as the amount of the lease liability with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by the Company to implement the lease and lease
incentives. ROU assets are classified as other long-term assets, on the Company’s condensed consolidated balance sheets. The Company evaluates the carrying value of ROU assets if there are indicators of potential impairment, and performs the analysis concurrent with the review of the recoverability of the related asset group. If the carrying value of the asset group is determined to not be fully recoverable and is in excess of its estimated fair value, the Company will record the impairment loss in its condensed consolidated statements of operations. The Company did not recognize an impairment loss during the three and nine months ended June 26,
2020.
Fixed lease expense payments are recognized on a straight-line basis over the lease term. Variable lease payments vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time, and are often due to changes in an external market rate or the value of an index (e.g. Consumer Price Index). The Company did not incur variable lease payments during the three and nine months ended June 26, 2020.
11
i
Recently
Adopted Accounting Standards
FASB Accounting Standards Update (“ASU”) 2016-02, “Leases” (Topic 842) was issued in February 2016. The guidance was effective for the Company beginning with the first quarter of fiscal 2020. As a result of this adoption, the following accounting policies were implemented or changed.
The Company elected the optional transition method to initially apply the new lease standard at the adoption date and not adjust its comparative period consolidated financial statements. The Company has elected the package of three practical expedients, which permits the
Company not to reassess prior conclusions about lease identification, lease classification and initial direct costs. The Company has not elected the use-of-hindsight or the practical expedient in determining lease term or impairment of ROU assets. In addition, the Company has elected a short-term lease exemption policy that permits the Company to not apply the recognition requirements of the new lease standard to leases with a term of 12 months or less. The Company has also elected an accounting policy to not separate lease and non-lease components for certain classes of leases.
Adoption
of Topic 842 resulted in recognition of additional net lease assets of approximately $i0.3 million and net lease liabilities of approximately $i0.3 million as of October
1, 2019 based on the present value of remaining minimum rental payments and corresponding ROU assets based upon the operating lease liabilities. The adoption did not impact our beginning stockholders’ equity and did not have a material impact on the condensed consolidated statements of operations or cash flows.
Recently Issued Accounting Updates
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this standard apply only to contracts and hedging relationships
that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities. The Company is evaluating the expedients and exceptions provided by the amendments in this standard to determine their impact on the Company's condensed consolidated financial statements..
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 i51.4% and 50.4% of the Company's revenue for the three and nine months ended June 26, 2020, respectively.
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 i48.6% and 49.6% of our revenue for the three and nine months ended June 26, 2020, respectively. 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
/
12
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 i2%
of total revenue in each of the three and nine months ended June 26, 2020 and June 28, 2019.
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 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
i
The tables below show net sales from contracts with customers by market sector. See additional information regarding market sectors in Note 10—Market Sectors and Major Customers.
Customer deposits are recorded when cash payments are received or due in advance of revenue recognition from contracts with customers. The timing of revenue recognition may differ from the timing of billings to customers. The changes in customer deposits from the Company's custom manufacturing services
are as follows:
For each of the three and nine months ended June 26, 2020 and June 28, 2019, less than 2% of net sales were shipped to locations outside the United States.
i
NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS
i
A
summary follows of activity in the allowance for doubtful accounts during the nine months ended June 26, 2020 and June 28, 2019:
Effective as of June 4, 2020, the Company and M&T Bank entered into the Sixth Amended and Restated Credit Facility Agreement (the “Credit Facility”) which replaced the Fifth Amended and Restated Credit Facility Agreement dated as of December 14, 2015, as amended by various amendments (collectively, the “Prior Credit Facility, as amended”).
Pursuant to the Credit Facility, the Company increased its revolving credit facility to an aggregate principal amount of $45.0 million and added provisions that allow the
Company, subject to certain requirements, to request further increases, in minimum amounts of $5.0 million, up to $55.0 million. Some of the proceeds from the Credit Facility were used to repay the existing outstanding Term Loan B and Equipment Line Term Note. The Credit Facility also amended the financial covenant, Fixed Charge Coverage Ratio, and set a Minimum Fixed Charge Coverage Ratio. In addition, the Credit Facility modified the definition of Applicable Margin used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and modified the definition of Permitted Acquisitions. The Credit Facility also established a LIBOR floor of 1% and included a mechanism for adoption of a different benchmark rate in the event LIBOR is discontinued. During the three months ended June 26, 2020, the Company
paid fees of approximately $i84 thousand related to this Credit Facility.
Also on June 4, 2020, the Company and M&T Bank entered into a master equipment lease (the “Master Lease”) for a lease line of up to $10.0 million in lease value of equipment to the Company. The Master
Lease contains terms and provisions customary for transactions of this type, including obligations relating to the use, operation and maintenance of the equipment. The Master Lease also contains customary events of default, including nonpayment of amounts due under the lease and assignments for the benefit of creditors, bankruptcy or insolvency. In the event that an event of default occurs, M&T Bank may exercise one or more remedies specified in the Master Lease. At the conclusion of the lease term, the Company will have the right to purchase the equipment under the Master Lease. The Master Lease will renew automatically for additional 12-month terms until the Company provides M&T Bank with notice of non-renewal.
The Credit Facility 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 of June 26, 2020, and Prior Credit Facility, as amended, as of September 30, 2019, are described below:
a)Revolving Credit Facility (“Revolver”): At June 26, 2020, up to $45.0 million was available under the Credit Facility. At September 30, 2019, up to $i35.0
million was available through iMay 5, 2022 under the Prior Credit Facility, as amended. The maximum amount the Company may borrow is determined based on a borrowing base calculation described below.
b)Master Lease: At June 26, 2020, we had available a lease line of up to $10.0 million in lease value of equipment pursuant to the Master Lease that was entered
into as of June 4, 2020.
c)Term Loan B: As of September 30, 2019, $i14.0 million was borrowed on January 18, 2013. Principal was being repaid in i120
equal monthly installments of $i117 thousand. As part of an amendment to the Credit Facility, as amended, the
/
16
principal was modified from $i8.0
million to $i6.0 million and principal is being repaid in equal monthly installments of $i71 thousand plus a balloon payment of
$i0.6 million. The maturity date of the loan was iMay 5, 2022. Some of the proceeds from the Credit Facility
were used to repay the existing outstanding Term Loan B and no amounts remained outstanding as of June 26, 2020.
d)Equipment Line Term Note: On July 26, 2018, $i0.8 million was converted from an Equipment Line Advance, principal was being repaid in 36 equal monthly installments of $i21
thousand and was set to mature on July 26, 2021. On September 27, 2018, $i0.1 million was converted from an Equipment Line Advance, principal was being repaid in 36 equal monthly installments of $i2
thousand and was set to mature on September 27, 2021. On March 18, 2019, $i0.3 million was converted from an Equipment Line Advance, principal was being repaid in 36 equal monthly installments of $i9
thousand and was set to mature on March 18, 2022. On May 6, 2019, $i0.4 million was converted from an Equipment Line Advance, principal was being repaid in 36 equal monthly installments of $i11
thousand and was set to mature on May 6, 2022. Some of the proceeds from the Credit Facility were used to repay the existing outstanding Equipment Line Term Note and no amounts remained outstanding as of June 26, 2020.
Borrowing Base
At June 26, 2020, under the Credit Facility, the maximum amount the Company can borrow under the Revolver was the lesser of (i) i85%
of eligible receivables plus (ii) up to 90% of eligible investment grade accounts plus (iii) a percentage of eligible inventories (up to a cap of $i30.0 million). At September 30, 2019, under the Prior Credit Facility, as amended, the maximum amount the Company could borrow under the Revolver was the lesser of (i) 85% of eligible receivables plus a percentage
of eligible inventories (up to a cap of $30.0 million) or (ii) $35.0 million.
At June 26, 2020, the upper limit on Revolver borrowings was $37.0 million and $11.3 million was available. At September 30, 2019, the upper limit on Revolver borrowings was $i35.0 million and $i8.4
million was available. Average Revolver balances amounted to $25.2 million and $20.0 million during the nine months ended June 26, 2020 and June 28, 2019, respectively.
Interest Rates
Under the Credit Facility, 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 26, 2020, the applicable marginal interest rate was 1.75% for the Revolver. At September 30, 2019, the applicable marginal interest rate
was i2.25% for the Revolver and i2.50% 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 i0.25% to i0.375%
of the excess of $i45.0 million over average borrowings under the Revolver. For the fiscal quarter ending June 26, 2020, the unused commitment fee was fixed at 0.25%. Fees incurred amounted to $5.8 thousand and $18.3 thousand during the three and nine months ended June 26, 2020, respectively. Fees incurred amounted to $2.6 thousand and $15.3 thousand during the three and nine months ended June 28,
2019, respectively. The fee percentage varies based on the Company’s Fixed Charge Coverage Ratio, as defined below.
Financial Covenants
The Credit Facility contains various affirmative and negative covenants including financial covenants. As of June 26, 2020, 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 26, 2020 as a minimum of i1.10 times. The Fixed Charge Coverage Ratio was the only covenant in effect at June 26, 2020. 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.
A summary of contractual principal payments under IEC’s borrowings at June 26, 2020 for the next three years taking into consideration the Credit Facility is as follows:
i
Debt Repayment Schedule
Contractual
Principal Payments
(in thousands)
Twelve months ending June
2021
$
i—
2022
i—
2023
¹
i25,664
$
i25,664
/
1
Includes Revolver balance of $25.7 million at June 26, 2020.
i
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.
i
A summary of additions to and charges against IEC’s warranty reserves during the period follows:
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, i840,360
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 iten 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 $0.2 million and $0.5 million for the three and nine months ended June 26, 2020, respectively. Stock-based compensation expense recorded under the 2010 Plan and the 2019 Plan, totaled $i0.1 million and $i0.4 million
for the three and nine months ended June 28, 2019, respectively.
/
18
At June 26, 2020, there were i613,869
shares of common stock remaining available to be issued under the 2019 Plan and i74,718 shares of common stock remaining available to be issued under the ESPP.
Expenses relating to stock options that comply with certain U.S. income tax rules are neither deductible by the Company nor
taxable to the employee. Further information regarding awards granted under the 2010 Plan and ESPP is provided below.
Stock Options
When options are granted, IEC estimates fair value using the Black-Scholes option pricing model and recognizes the computed value as compensation cost over the vesting period, which is typically four years. The contractual term of options granted under the 2010 Plan and 2019 Plan is generally seven years. The volatility rate is based on the historical volatility of IEC's common stock.
Assumptions used in the Black-Scholes model and the estimated value of options granted iduring
the nine months ended June 26, 2020 and June 28, 2019 follows:
Weighted
average remaining contractual term, in years
i3.1
i3.4
Intrinsic
value (000s)
$
i3,442
$
i1,306
For
exercisable options
Number exercisable
i538,645
$
i4.15
i533,645
$
i4.18
Weighted
average remaining contractual term, in years
i1.7
i2.7
Intrinsic
value (000s)
$
i2,761
$
i1,132
For
non-exercisable options
Expense not yet recognized (000s)
$
i345
$
i232
Weighted
average years to be recognized
i2.9
i3.1
For
options exercised
Intrinsic value (000s)
$
i93
$
i77
/
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 ifive years (ithree
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.
20
i
A
summary of restricted stock activity, together with related data, follows:
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.
i
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.
21
A
summary of restricted stock unit activity, together with related data, follows:
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.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the three and nine months ended June 26, 2020, there were no material tax impacts to our condensed consolidated financial statements as it relates to COVID-19 measures. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
The CARES Act includes a provision which accelerates the refund of alternative minimum tax (“AMT”) credits to allow a full utilization or refund of the remaining credits beginning in tax year 2019. As the Company expects to have net operating loss
carryforward to offset its 2019 taxable income in full, the AMT credit should be refundable in full. As such, at June 26, 2020, the Company reclassified the remaining portion of its AMT credit from deferred income tax to federal income tax receivable in the condensed consolidated balance sheet.
/
The Company's estimated annual effective tax rate for fiscal 2020 is comprised of the federal tax rate of i21%
plus the state tax rate of i1.58%, which is adjusted for permanent book tax differences. During the three and nine months ended June 26, 2020, 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 26, 2020.
22
i
NOTE
10—MARKET SECTORS AND MAJOR CUSTOMERS
i
A summary of sales, according to the market sector within which IEC’s customers operate, follows:
iFour
individual customers represented 10% or more of sales for the three months ended June 26, 2020. iThree of these customers were from the aerospace & defense sector and represented 27%, 11% and 10% of sales. The fourth customer was from the medical sector and represented i17%
of sales for the three months ended June 26, 2020. Four individual customers represented 10% or more of sales for the nine months ended June 26, 2020. Three of these customers were from the aerospace & defense sector and represented 26%, 11% and 10% of sales. The fourth customer was from the medical sector and represented 16% of sales for the nine months ended June 26, 2020
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 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 represented 10% or more of receivables and accounted for 43% of the outstanding balance at June 26, 2020. iTwo individual customers represented 10% or more of receivables and accounted for i38%
of the outstanding balance at September 30, 2019.
/
Credit risk associated with individual customers is periodically evaluated by analyzing the entity’s financial condition and payment history. Customers generally are not required to post collateral.
i
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.
ii
NOTE
12—LEASES
Operating Leases
IEC has a lease portfolio that consists of operating leases for equipment, and has remaining terms from less than one year to up to approximately ifive years, with contractual terms expiring from 2020 to 2024. None of these leases contain residual value guarantees, substantial restrictions, or covenants.
i
Supplemental
balance sheet information related to the Company’s operating leases were as follows:
Weighted average remaining lease term for operating leases (in years)
i4.0
Weighted
average discount rate for operating leases
i5.47
%
/
Finance Leases
IEC's lease portfolio also consists of finance leases for equipment
and real estate, and has remaining terms of five years up to approximately thirteen years, with contractual terms expiring in 2024 through 2033.
//
23
Supplemental balance sheet information related to the Company’s finance leases were as follows:
Finance lease right-of-use assets, net of accumulated amortization (included in PP&E) (in thousands)
$
6,473
Weighted average remaining lease term for finance leases (in years)
11.4
Weighted average discount rate for finance leases
4.83
%
Lease
Expense
i
The components of lease expense, recorded in cost of sales, selling and administrative expenses and interest and financing expense in the condensed consolidated statements of operation, during the three and nine months ended June 26, 2020 were as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Cash paid for operating lease ROU assets
$
i65
Interest
paid on finance leases
i261
Financing cash flows from finance leases
—
Lease liabilities arising from obtaining ROU assets:
Operating
leases
33
/
24
Contractual Lease Payments
i
A summary
of operating lease payments for the next five years follows:
Operating Lease Payment Schedule
Contractual Lease Payments
(in thousands)
Twelve months ending June
2021
$
i73
2022
i73
2023
i72
2024
i71
2025
and thereafter
i1
Total operating lease payments
i290
Less:
amounts representing interest
(i30)
Total operating lease obligation
$
i260
/
i
A
summary of finance lease payments for the next five years follows:
Finance Lease Payment Schedule
Contractual Lease Payments
(in thousands)
Twelve months ending June
2021
$
i764
2022
i778
2023
i792
2024
i805
2025
and thereafter
i6,276
Total finance lease payments
i9,415
Less:
amounts representing interest
(i2,261)
Total finance lease obligation
$
i7,154
/
Disclosures
Related to Periods Prior to Adoption of the New Lease Standard
i
As previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019 and under the previous lease accounting standard, the maturities of lease liabilities at September 30, 2019 were as follows:
As
of June 26, 2020, the Company has one outstanding lease agreement that has not yet commenced for certain property located in Newark, New York that will include a new manufacturing facility and administrative offices. The lease is expected to commence in late fiscal 2020 or early fiscal 2021 when construction of the asset is complete.
25
i
NOTE
13—NET INCOME PER SHARE
i
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 itwo-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.
i
A summary of shares used in the EPS calculations follows (in thousands except share and per share data):
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information in this Management’s Discussion and Analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and notes. All references to “Notes” are to the accompanying condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”).
References in this report to “IEC,” the “Company,”“we,”“our,” or “us” mean IEC Electronics Corp. and its subsidiaries except where
the context otherwise requires. This Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,”“will,”“should,”“expects,”“plans,”“anticipates,”“could,”“intends,”“targets,”“projects,”“contemplates,”“believes,”“estimates,”“predicts,”“potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements include, but are not limited to, statements regarding future sales and operating results, future prospects, the capabilities and capacities of business operations, any financial or other guidance and all statements that are not based on historical fact, but rather reflect our current
expectations concerning future results and events. The ultimate correctness of these forward-looking statements is dependent upon a number of known and unknown risks and events and is subject to various uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.
The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those views expressed or implied in our forward-looking statements: the impact of the coronavirus (“COVID-19”) pandemic on our business, including our supply chain, workforce and customer demand; business conditions and growth or contraction in our customers’ industries, the electronic manufacturing services industry and the general
economy; our ability to control our material, labor and other costs; our dependence on a limited number of major customers; uncertainties as to availability and timing of governmental funding for our customers; the impact of government regulations, including FDA regulations; unforeseen product failures and the potential product liability claims that may be associated with such failures; technological, engineering and other start-up issues related to new programs and products; variability and timing of customer requirements; the potential consolidation of our customer base; availability of component supplies; dependence on certain industries; the ability to realize the full value of our backlog; the types and mix of sales to our customers; litigation and governmental investigations; intellectual property litigation; variability of our operating results; our ability to maintain effective internal controls over financial reporting; the availability of capital and other
economic, business and competitive factors affecting our customers, our industry and business generally; failure or breach of our information technology systems; and natural disasters. Any one or more of such risks and uncertainties could have a material adverse effect on us or the value of our common stock. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in this Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, and our other filings with the Securities and Exchange Commission (the “SEC”).
All forward-looking statements
included in this Form-10-Q are made only as of the date indicated or as of the date of this Form 10-Q. We do not undertake any obligation to, and may not, publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or which we hereafter become aware of, except as required by law. New risks and uncertainties arise from time to time and we cannot predict these events or how they may affect us and cause actual results to differ materially from those expressed or implied by our forward-looking statements. Therefore, you should not rely on our forward-looking statements as predictions of future events. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained in this report and any documents incorporated herein by reference. You should read this document and the documents that we reference in this Form 10-Q
completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
27
Overview
IEC Electronics Corp. (“IEC,”“we,”“our,”“us,” or the “Company”) conducts business directly, as well as through its subsidiaries, IEC Electronics Corp-Albuquerque (“Albuquerque”), and IEC Analysis & Testing Laboratory,
LLC (“ATL”). Our former subsidiary, IEC California Holdings, Inc., was dissolved as of September 18, 2019. Our Rochester unit operates as a division of IEC.
We are a premier provider of electronic manufacturing services (“EMS”) to advanced technology companies that produce life-saving and mission critical products for the medical, industrial, aerospace and defense sectors. We specialize in delivering technical solutions for the custom manufacturing, product configuration, and verification testing of highly engineered complex products that require a sophisticated level of manufacturing to ensure quality and performance.
Within the EMS sector, we have unique capabilities which allow our customers to rely on us to solve their complex challenges, minimize their supply chain risk and deliver
full system solutions for their supply chain. These capabilities include, among others:
•Our engineering services include the design, development, and fabrication of customized stress testing platforms to simulate a product’s end application, such as thermal cycling and vibration, in order to ensure reliable performance and avoid catastrophic failure when the product is placed in service.
•Our vertical manufacturing model offers customers the ability to simplify their supply chain by utilizing a single supplier for their critical components including complex printed circuit board assembly (“PCBA”), precision metalworking, and interconnect solutions. This service model allows us to control the cost, lead time, and quality of these critical components which are then integrated into full system assemblies
and minimizes our customers’ supply chain risk.
•We provide direct order fulfillment services for our customers by integrating with their configuration management process to obtain their customer orders, customize the product to the specific requirements, functionally test the product and provide verification data, and direct ship to their end customer in order to reduce time, cost, and complexity within our customer’s supply chain.
•We believe we are the only EMS provider with an on-site laboratory that has been approved by the Defense Logistics Agency (“DLA”) for their Qualified Testing Supplier List (“QTSL”) program which deems the site suitable to conduct various QTSL and military testing standards including counterfeit component analysis and environmental testing to qualify a part fit for use. In addition, this advanced
laboratory is utilized for complex design analysis and manufacturing process development to solve challenges and accelerate our customers’ time to market.
We are a 100% U.S. manufacturer which attracts customers who are unlikely to utilize offshore suppliers due to the proprietary nature of their products, governmental restrictions or volume considerations. Our locations include:
•Newark, New York - Located approximately one hour east of Rochester, New York, our Newark location is our corporate headquarters and is our largest manufacturing location providing complex circuit board manufacturing, interconnect solutions, and system-level assemblies along with an on-site material analysis laboratory for advanced manufacturing process development.
•Rochester,
New York - Focuses on precision metalworking services including complex metal chassis and assemblies.
•Albuquerque, New Mexico - Specializes in the aerospace and defense markets with complex circuit board and system-level assemblies along with a state of the art analysis and testing laboratory which conducts root cause failure analysis, reliability, inspection and authenticity testing.
We excel at complex, highly engineered products that require sophisticated manufacturing support where quality and reliability are of paramount importance. With our customers at the center of everything we do, we have created a high-intensity, rapid response culture capable of reacting and adapting to their ever-changing needs. Our customer-centric approach offers a high degree of flexibility while simultaneously complying with rigorous quality and on-time delivery
standards.
We proactively invest in areas we view as important for our continued long-term growth. All of our locations are ISO 9001:2015 certified and ITAR registered. We are Nadcap accredited and AS9100D certified at our Newark and Albuquerque locations to support the stringent quality requirements of the aerospace industry. Our Newark location is ISO 13485 certified to serve the medical sector and is an approved supplier by the National Security Agency (“NSA”) under the COMSEC standard regarding communications security. Our analysis and testing laboratory in Albuquerque is ISO 17025 accredited, an IPC-approved Validation Services Qualified Test Laboratory, and we believe is the only on-site EMS laboratory that has been approved by the DLA for their QTSL program which deems the site suitable to conduct various QTSL and military testing standards including counterfeit component analysis and environmental
testing to qualify a part fit for use. Albuquerque also performs work per NASA-STD-8739 and J-STD-001ES space standards.
28
The technical expertise of our experienced workforce enables us to build some of the most advanced electronic, wire and cable, interconnect solutions, and precision metal systems sought by original equipment manufacturers (“OEMs”).
Employees
Employees are our single greatest resource. Our total employees numbered 867, all of which are full time employees, at June 26, 2020. Some of our full-time employees are temporary employees. We make a concerted effort
to engage our employees in initiatives that improve our business and provide opportunities for growth, and we believe that our employee relations are good. We have access to large and technically qualified workforces in close proximity to our operating locations in Rochester, NY and Albuquerque, NM.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. The World Health Organization determined that the outbreak constituted a “Public Health Emergency of International Concern” and declared a pandemic. The COVID-19 pandemic is disrupting supply chains and affecting production and sales across a range of industries. The extent of the impact of the COVID-19 pandemic on our supply chain, workforce, customer demand, operations and financial performance will depend on certain developments, including
the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted.
In accordance with the Department of Defense guidance issued in March 2020, designating the Defense Industrial Base as a critical infrastructure workforce, our production facilities have continued to operate in support of essential products and services required to meet national security commitments to the U.S. government and the U.S. military.
Please see Item 1A. Risk Factors in this report for additional information regarding certain risks associated with the COVID-19 pandemic.
Supply Chain
The COVID-19 pandemic presents a level of uncertainty around the availability of raw material
components in future periods. We are aware of some component manufacturers that have been required to shut down temporarily, as a result of COVID-19 related illnesses impacting their employee populations or to comply with government mandates. Due to the lifesaving and mission critical nature of the products we support, many of our suppliers and the related programs are given certain priority ratings, which helps to ensure the required supply of material will continue.
We are continually assessing potential supply chain impacts and working with our distribution partners to identify existing, on hand stock that we can access. We are also working with our customer base to determine their interest in participating in inventory pre-purchase arrangements, which would be funded through additional customer deposits.
Workforce
The
safety and well-being of our employees has been, and continues to be, our top priority, especially during the COVID-19 pandemic. Although we are deemed an essential business based on the lifesaving and mission critical products we support, and we remain fully operational, we chose early on to ask our non-essential employees to work from home in order to reduce the employee density in our facilities. As circumstances have allowed and in accordance with applicable guidelines, we have assigned non-essential employees into two groups, working alternating weeks in the office to maintain social distancing. In support of those working on site, we have taken numerous actions to help provide for a safe work environment and allow for appropriate social distancing, where possible. Some examples of the actions we have taken include, but are not limited to, the following:
•Adjusted shift
start and end times to limit the number of people entering and exiting our facilities simultaneously;
•Adjusted break and lunch times to reduce the number of people in common areas;
•Designated stairwells and walkways as one-way to ensure employees are not passing each other in tight quarters; and
•Implemented additional cleaning protocols to ensure work surfaces, high touch areas and common spaces are routinely cleaned and disinfected in accordance with guidelines from the Centers for Disease Control and Prevention.
We have also developed contingency plans in the event that one of our employees tests positive for COVID-19. We expect to continue to enhance our practices to remain aligned with state and federal
guidelines.
Customer Demand
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Due to the nature of the lifesaving and mission critical products that we support, the majority of our customers are also deemed to be essential businesses and remain operational. At a macro level, we have seen increases in demand from some of our existing customers, especially those in the medical sector. However, certain customers have requested that a portion of their demand be moved out to future periods beyond fiscal 2020. To date, these requests represent a small percentage of our current backlog and we do not expect to see a material impact from these requests. We continue to work in partnership with our customers to continually assess any potential impacts
from the pandemic and opportunities to mitigate risk.
Three Months Results
A summary of selected income statement amounts for the three months ended follows:
Revenue
increased in the third quarter of fiscal 2020 by $7.0 million or 17% as compared to the third quarter of the prior fiscal year. Revenues from the aerospace & defense sector increased $3.4 million, revenue from the medical sector increased $4.4 million and revenue from the industrial sector decreased $0.7 million.
Various increases and decreases in sales to our aerospace & defense customers resulted in a net increase of $3.4 million in the third quarter of fiscal 2020. Production ramp up of various customers resulted in an increase of revenue of $6.0 million, and there was also an additional $0.4 million of increase in customer demand. These increases were partially offset by reductions to revenue from various customers due to decreases in demand of $0.8 million, disengagements of $0.8 million, programs ending of $0.1 million and program delays of $0.9 million.
The
medical sector saw an increase of $4.4 million in the third quarter of fiscal 2020 compared to the same period of the prior fiscal year. We saw increases related to new programs ramping up with one customer amounting to $5.3 million and various net increases in customer demand of $0.4 million. These increases were partially offset by decreases of $1.4 million from a program being on hold from one customer. We continue to expect some volatility in the medical sector going forward.
The net decrease in the industrial sector of $0.7 million resulted primarily from the decreases in customer demand of $1.2 million. These decreases were partially offset by increase in customer demand of $0.5 million from various customers.
Gross margin percent for the third quarter of fiscal 2020 increased slightly to 14.0% of sales versus 13.9% of sales in the third
quarter of the prior fiscal year. Customer mix had the most significant impact on gross profit.
Selling and administrative (“S&A”) expenses remained flat in the third quarter of fiscal 2020, but represented 7.8% of sales in the third quarter of fiscal 2020 compared to 9.2% of sales in the same quarter of the prior fiscal year.
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Interest and financing expense decreased by $0.2 million in the third quarter of fiscal 2020 compared to the same quarter of the prior fiscal year. The weighted average interest rate on our debt was 2.22% lower during the third quarter of fiscal 2020 compared to the third quarter of the prior fiscal year. Our average outstanding debt balances increased by $0.5
million in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 because of higher balances on our revolving credit facility, offset by lower balances on equipment line term notes to fund capital purchases. Cash paid for interest on credit facility debt was approximately $0.2 million and $0.3 million for the third quarter of fiscal 2020 and fiscal 2019, respectively. Detailed information regarding our borrowings is provided in Note 6—Credit Facilities.
With respect to tax payments, in the near term, we expect to be largely sheltered by sizable net operating loss (“NOL”) carryforwards for federal income tax purposes. In the quarter ended June 26, 2020, we paid minimal taxes. At the end of fiscal 2019, the gross NOL carryforwards amounted to approximately $23.4 million. The NOL carryforwards expire in varying amounts between 2023
and 2035, unless utilized prior to these dates.
Year to Date Results
A summary of selected income statement amounts for the nine months ended follows:
Revenue
increased in the first nine months of fiscal 2020 by $23.2 million or 21% as compared to the first nine months of the prior fiscal year. Revenues from the aerospace & defense sector increased $15.8 million, revenue from the medical sector increased $9.7 million and revenue from the industrial sector decreased $2.3 million.
Various increases and decreases in sales to our aerospace & defense customers resulted in a net increase of $15.8 million in the first nine months of fiscal 2020. Net increases in customer demand resulted in a $19.4 million increase in revenue. These increases were partially offset by disengagements with customers resulting in a decrease of $3.6 million in the first nine months of fiscal 2020.
The medical sector saw an increase of $9.7 million in the first nine months of fiscal 2020 compared to the same period of
the prior fiscal year. We saw increases related to new programs ramping up with three customers amounting to $15.2 million. These increases were partially offset by decreases of $4.6 million from a program being on hold from one customer and also net decreases in demand from various customers of $0.9 million. We continue to expect some volatility in the medical sector going forward.
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The net decrease in the industrial sector of $2.3 million resulted primarily from the decreases in customer demand of $2.0 million in the first nine months of fiscal 2020. There was also a decrease of $2.0 million from a program being on hold from two customers. These decreases were partially offset by increase in customer demand of $1.7 million from various customers.
Due
to the Chapter 11 bankruptcy filing of a customer, we incurred a $1.0 million pre-tax non-cash charge during the first nine months of fiscal 2020, related to the increase in our excess and obsolete inventory reserve. The customer communicated to its vendors to “cease providing all products” under its court-supervised process. No portion of the impairment charge is anticipated to result in future cash expenditures. We intend to preserve all rights and pursue available legal remedies to recover any losses suffered as a result of the customer’s Chapter 11 bankruptcy filing. These charges impacted our GAAP financial results. Net income in the first nine months was $4.8 million, and, adjusted for the $1.0 million pre-tax impact from the one-time inventory reserve, adjusted net income was $5.6 million. Information regarding this non-GAAP measure and a reconciliation of net income to adjusted net income is provided below under “Non-GAAP Financial Measures.”
Gross
margin for the first nine months of fiscal 2020 decreased to 12.8% of sales versus 13.5% of sales in the first nine months of the prior fiscal year. The customer bankruptcy filing had the most significant impact on gross profit, in addition to customer mix. Excluding the non-cash charge related to the customer's Chapter 11 bankruptcy filing, our adjusted gross margin would have been 13.5% of sales. Information regarding this non-GAAP measure and a reconciliation of gross profit and gross margin to adjusted gross profit and adjusted gross margin percent are provided below under “Non-GAAP Financial Measures.”
Selling and administrative (“S&A”) expenses decreased $0.2 million and represented 7.5% of sales in the first nine months of fiscal 2020 compared to 9.2% of sales in the first nine months of the prior fiscal year. The decrease in S&A expenses was primarily due to lower payroll and
related expenses.
Interest and financing expense remained flat in the first nine months of fiscal 2020 compared to the same period of the prior fiscal year. The weighted average interest rate on our debt was 1.54% lower during the first nine months of fiscal 2020 compared to the first nine months of the prior fiscal year. Our average outstanding debt balances increased by $4.5 million in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019 because of higher balances on our revolving credit facility, offset by lower balances on equipment line term notes to fund capital purchases. Cash paid for interest on credit facility debt was approximately $0.8 million and $0.9 million for the first nine months of fiscal 2020 and fiscal 2019, respectively. Detailed information regarding our borrowings is provided in Note 6—Credit Facilities.
With
respect to tax payments, in the near term, we expect to be largely sheltered by sizable NOL carryforwards for federal income tax purposes. In the first nine months of fiscal 2020, we paid minimal taxes. At the end of fiscal 2019, the gross NOL carryforwards amounted to approximately $23.4 million. The NOL carryforwards expire in varying amounts between 2023 and 2035, unless utilized prior to these dates.
Non-GAAP Financial Measures
In addition to reporting net income, gross profit, gross margin and net income per basic and diluted share, U.S. GAAP measures, we present adjusted net income, adjusted gross profit, adjusted gross margin, adjusted net income per common share, basic and adjusted net income per common share, diluted, which are non-GAAP measures, to reflect the impact of a one-time inventory reserve related to a customer’s bankruptcy.
We believe these non-GAAP measures are important measures of our performance because they allow management, investors and others to evaluate and compare our performance from period to period by removing the impact of the one-time inventory reserve related to a customer's bankruptcy. Adjusted net income, adjusted gross profit, adjusted gross margin, adjusted net income per common share, basic and adjusted net income per common share, diluted are not measures of financial performance under GAAP and are not calculated through the application of GAAP. As such, they should not be considered as a substitute for the GAAP measures of net income gross profit, gross margin and net income per basic and diluted share, and therefore, should not be used in isolation of, but in conjunction with, the GAAP measures. These non-GAAP measures may produce results that vary from the GAAP measures and may not be comparable to a similarly titled non-GAAP measure used by other companies.
Reconciliation to adjusted net income per common share:
Net
income per common share, basic
$
0.46
Non-cash charge, net of tax (1)(2)
0.08
Adjusted net income per common share, basic
$
0.54
Net
income per common share, diluted
$
0.45
Non-cash charge, net of tax (1)(2)
0.07
Adjusted net income per common share, diluted (3)
$
0.52
(1)
A non-cash charge related to the increase in our excess and obsolete inventory reserve due to the Chapter 11 bankruptcy filing of a customer of IEC.
(2) The income tax effect related to the non-cash charge was calculated using an effective tax rate of 21%.
(3) Adjusted net income per common share, diluted is calculated based on adjusted net income and reflects the dilutive impact of shares, where applicable, based on adjusted net income.
Liquidity and Capital Resources
Capital Resources
As of June 26,
2020, there were $2.5 million of outstanding capital expenditure commitments for manufacturing equipment. We generally fund capital expenditures with cash flows from operations, our revolving credit facility and our equipment line advances. Based on our current expectations, we believe that our projected cash flows provided by operations and potential borrowings under the revolving credit facility and equipment line advances, are sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months.
Our cash management system provides for the funding of the disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks in excess of the bank balance create a book overdraft.
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Summary
of Cash Flows
A summary of selected cash flow amounts for the nine months ended June 26, 2020 and June 28, 2019 follows:
Cash flows from operations, before considering changes in our working capital accounts, provided $10.8 million and
$6.1 million for the first nine months of fiscal 2020 and fiscal 2019, respectively. Net income of $4.8 million in the first nine months of fiscal 2020 improved compared to the same period of the prior fiscal year mainly due to increased sales. Net income was $3.0 million during the first nine months of the prior fiscal year.
Working capital used cash flows of $3.0 million in the first nine months of fiscal 2020 and $15.3 million in the first nine months of fiscal 2019. The change in working capital in the first nine months of fiscal 2020 was due to increases in accounts receivable of $2.8 million, increases in unbilled contract revenue of $1.0 million, increases in inventories of $3.8 million, decreases in accounts payable of $1.2 million and increases in customer deposits of $7.2 million. Inventory and customer deposit
increases were driven by the higher customer demand to meet increased backlog and securing materials for future production. The increase in accounts receivable was primarily due to the timing of sales and billings. The decrease in accounts payable was due to timing.
Investing activities
Cash flows used in investing activities were $3.1 million and $1.1 million for the first nine months of fiscal 2020 and 2019, respectively. Cash flows used in each of the first nine months of fiscal 2020 and fiscal 2019 consisted of purchases of equipment.
Financing activities
Cash flows used in financing activities were $4.7 million for the first nine months of fiscal 2020 compared to inflows of $10.3 million for the first nine
months of fiscal 2019. During the first nine months of fiscal 2020, net repayments under all credit facilities were $4.9 million, with $1.0 million of net repayments under the Revolver, as defined below, and repayments of $3.9 million for term debt. During the first nine months of fiscal 2019, net borrowings under all credit facilities were $10.5 million, with $11.0 million of net borrowings under the Revolver, repayments of $0.9 million for term debt and $0.4 million of new borrowings related to equipment line advances.
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Credit Facilities
At June 26, 2020, borrowings outstanding under the revolving credit facility (the “Revolver”)
under the Sixth Amended and Restated Credit Facility Agreement (the “Credit Facility”) which replaced the Fifth Amended and Restated Credit Facility Agreement dated as of December 14, 2015, as amended by various amendments (the “Prior Credit Facility, as amended”) amounted to $25.7 million, and the upper limit was $37.0 million. We believe that our liquidity is sufficient to satisfy anticipated operating requirements during the next twelve months.
The Credit Facility contains various affirmative and negative covenants including financial covenants. As of June 26, 2020, we had to maintain a minimum fixed charge coverage ratio (“Fixed Charge Coverage Ratio”). The Fixed Charge Coverage Ratio compares (i) EBITDAS minus unfinanced capital expenditures minus tax expense, to (ii) the sum of interest
expense, principal payments, payments on all capital lease obligations and dividends, if any (fixed charges). “EBITDAS” is defined as earnings before interest, taxes, depreciation, amortization and non-cash stock compensation expense. The Fixed Charge Coverage Ratio was measured for a trailing twelve months ended June 26, 2020. The Credit Facility also provides for customary events of default, subject in certain cases to customary cure periods, in which events, the outstanding balance and any unpaid interest would become due and payable.
Pursuant to the Credit Facility, the Fixed Charge Coverage Ratio covenant of a minimum of 1.10 was the only covenant in effect at June 26, 2020. The Fixed Charge Coverage Ratio was calculated as 2.45 at June 26, 2020.
The Company was in compliance with the financial debt covenant at June 26, 2020.
Detailed information regarding our borrowings at June 26, 2020 is provided in Note 6—Credit Facilities.
Off-Balance Sheet Arrangements
IEC is not a party to any material off-balance sheet arrangements.
Application of
Critical Accounting Policies
Our application of critical accounting policies is disclosed in our Annual Report on Form 10-K filed for the fiscal year ended September 30, 2019.
Recently Issued Accounting Standards
See Note 1—Our Business and Summary of Significant Accounting Policies for further information concerning recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
As a result of its financing activities, the Company is exposed to changes in interest rates that may adversely affect operating results. The Company actively monitors its exposure to interest rate risk and from time to time may use derivative financial instruments to manage the impact of this risk. The Company may use derivatives only for the purpose of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the interest rate nor does the
Company use derivatives instruments where it does not have underlying exposure. The Company did not have any derivative financial instruments at June 26, 2020 or September 30, 2019.
At June 26, 2020, the Company had $25.7 million of debt, all comprised of variable interest rates. Interest rates on variable loans are based on London interbank offered rate (“LIBOR”). The credit facilities are more fully described in Note 6—Credit Facilities. Interest rates based on LIBOR currently adjust daily, causing interest on such loans to vary from period to period. A sensitivity analysis as
of June 26, 2020 indicated that a one-percentage point increase or decrease in our variable interest rates, which represents more than a 10% change, would increase or decrease the Company’s annual interest expense by approximately $0.3 million.
The Company is exposed to credit risk to the extent of non-performance by M&T Bank under the Credit Facility. M&T Bank’s credit rating is monitored by the Company, and IEC expects that M&T Bank will perform in accordance with the terms of the Credit Facility.
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Item
4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial
Officer (our principal financial officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 26, 2020, the end of the period covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of June 26, 2020, our disclosure controls and
procedures were effective.
Changes in internal control over financial reporting
The Company is in the process of implementing a financial reporting system, Epicor ERP Software (“Epicor”), as part of a multi-year plan to integrate and upgrade our systems and processes. During the year ended September 30, 2019, the Company began implementation of Epicor by converting one legacy ERP system to Epicor. The implementation of Epicor is occurring in phases and is expected to be fully completed after fiscal 2020.
As part of the Epicor implementation, certain changes to our
processes and procedures have and will continue to occur. These changes will result in changes to our internal control over financial reporting. While Epicor is designed to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolve.
In response to the COVID-19 pandemic, some of our employees worked remotely during the third quarter of fiscal 2020. Management has taken measures to ensure that our internal controls over financial reporting remained effective and were not materially affected by these changes to the working environment during this period. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating
effectiveness.
During the quarter ended June 26, 2020, there have been no other changes in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the effectiveness of control systems
IEC’s management does not expect that our disclosure controls and internal controls will prevent all errors and fraud. Because of inherent limitations in any such control system (e.g. faulty judgments, human error, information technology system error, or intentional circumvention), there can be no assurance that the objectives of a control system will be met under all circumstances. Moreover, projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The benefits of a control system also must be considered relative to the costs of the system and management’s judgments regarding the likelihood of potential events. In summary, there can be no assurance that any control system will succeed in achieving its goals under all possible future conditions, and as a result of these inherent limitations, misstatements due to error or fraud may occur and may or may not be detected.
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Part II OTHER INFORMATION
Item
1. Legal Proceedings
From time to time, we may be involved in legal actions in the ordinary course of our business, but management does not believe that any such proceedings individually or in the aggregate, will have a material effect on our condensed consolidated financial statements.
Item 1A. Risk Factors
For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019 filed with the SEC on November 22, 2019, and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. Other than as described below, there have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019.
Our business, results of operations and financial condition may be adversely impacted by the recent coronavirus (“COVID-19”) pandemic.
The COVID-19 pandemic has negatively
affected the U.S. and global economy, disrupted global supply chains, resulted in significant travel and transport restrictions, including mandated closures and orders to “shelter-in-place,” and created significant disruption of the financial markets. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business, including how it will impact our customers, employees, supply chain, and distribution network. While the COVID-19 pandemic did not have a material adverse effect on our reported results for our third quarter of fiscal 2020, we are unable to predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. Project disengagements and delays and decreases in customer demand in response to the pandemic, could adversely impact our business and results of operations. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future
developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown.
The impact of the COVID-19 pandemic may also exacerbate other risks discussed in Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, any of which could have a material effect on us. This situation is changing rapidly and additional impacts
may arise that we are not aware of currently.
Our business will be adversely affected if the COVID-19 pandemic, or similar health epidemics, negatively impacts our supply chain.
We depend on a limited number of suppliers for components that are critical to our manufacturing processes. The COVID-19 pandemic has resulted in significant governmental measures being implemented to control the spread of the virus, including, among others, restrictions on manufacturing and the movement of employees in many regions of the country and in regions worldwide. As a result of the pandemic and the measures designed to contain the spread of the virus, our suppliers may not have the materials, capacity, or capability to supply our components according to our schedule and specifications. Any reduction in production capacity or capacity at
our suppliers may reduce or even halt the supply of goods and necessary components for many of our customers’ products, which could result in product shortages and an increase in our inventory of unfinished products. Further, there may be logistics issues, including our ability and our supply chain’s ability to quickly ramp up production, and transportation demands that may cause further delays. If our suppliers’ operations are curtailed, we may need to seek alternate sources of supply, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. While the disruptions and restrictions on the ability to travel, quarantines, and any temporary closures of the facilities of our suppliers, as well as general limitations on movement are expected to be temporary, the duration of the production and supply chain disruption,
and related financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our supply chain could have a material adverse effect on our results of operations and cash flows.
The COVID-19 pandemic may significantly disrupt our workforce and internal operations.
The COVID-19 pandemic may significantly disrupt our workforce, including our ability to hire and onboard employees, if a significant percentage of our employees or any potential hires are unable to work due to illness, quarantines, government
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actions, facility closures in response to the
pandemic, fear of acquiring COVID-19 while performing essential business functions, or as a result of recent changes to unemployment insurance where unemployed workers can receive, in the short-term, benefits in excess of what would be offered for working for us. While we remain fully operational at this time, we cannot guarantee that we will be able to adequately staff our operations when needed, particularly as the COVID-19 pandemic progresses, which may strain our existing personnel, increase costs, and negatively impact our operations. As a result, our internal operations may experience disruptions. The pandemic may create additional challenges in attracting and retaining quality employees in the future. In addition, COVID-19 related-illness could impact members of our Board of Directors resulting in absenteeism from meetings of the directors or committees of directors, making it more difficult to convene the quorums of the full Board of Directors or its committees
needed to conduct meetings for the management of our affairs. We cannot predict the extent to which the COVID-19 pandemic may disrupt our workforce and internal operations.
We have taken certain precautions due to the COVID-19 pandemic that could harm our business.
In response to the COVID-19 pandemic, we have taken measures intended to protect the health and well-being of our employees, customers and our communities, which could negatively impact our business. These measures include temporarily requiring certain employees to work remotely, restricted employee travel, increasing the frequency and extent of cleaning and disinfecting facilities, developing social distancing plans, and cancelling in-person meetings, events and conferences. The health of our workforce, customers and others is of primary concern and we may take
further actions as may be required by government authorities or as we determine are in the best interests of our employees, customers and others. In addition, our management team has, and will likely continue to, spend significant time, attention and resources monitoring the COVID-19 pandemic and seeking to manage its effects on our business and workforce. The extent to which the pandemic and our precautionary measures may impact our business will depend on future developments, which are highly uncertain and cannot be predicted at this time.
The COVID-19 pandemic may decrease demand for our services and any such decrease in demand would adversely affect our backlog, revenues and results of operations.
The COVID-19 pandemic is creating uncertainty in the markets we serve and the duration, scope or impact of the outbreak cannot
be predicted. While we have experienced some increase in demand from the medical and aerospace & defense sectors, we may face decreased demand in these or other sectors in the future. Demand for our services may be affected by changes in demand from our customers as a result of the pandemic, including any heightened emphasis on shorter lead times which places increased demands on our capacity and may result in increased costs, or the ordering of smaller quantities which prevents us from acquiring component materials in larger volumes at lower costs. In addition, the COVID-19 pandemic may require customers to make unexpected changes to their product offerings which may adversely affect our business and operating results. Any material modifications, delays, payment defaults or cancellations on underlying contracts relating to the COVID-19 pandemic could reduce the amount of backlog
currently reported and, consequently, could inhibit the conversion of that backlog into revenues. In addition, worsening overall market conditions could result in further reductions of backlog, which will impact our financial performance. While the pandemic is expected to affect customer demand, it is difficult to predict such changes at this time and the impact that such changes will have on our revenues and operating margins. There can be no assurance that we will be successful in implementing effective strategies to counter any changes in demand. Any decrease in demand or disruption to our business resulting from the COVID-19 pandemic would adversely affect our revenues and results of operations.
We may be unable to meet the demands of our customers, including those in the aerospace & defense and medical sectors, as expected which may adversely and materially affect our business, results of operations
and financial conditions.
During the third quarter of fiscal 2020, the aerospace & defense sector represented 59% of our business and the medical sector represented 28% of our business. Due to the nature of the lifesaving and mission critical products provided by these markets, many of our customers in these sectors are deemed to be essential businesses. In response to the pandemic and the increased demand for aerospace & defense, medical and lifesaving products, we experienced some increases in demand from existing customers in the aerospace & defense and medical sectors. This demand has increased at the same time our supply chain has begun to face limitations, which may result in a shortage of supply, increased costs, and delays, requiring us in certain instances to pass through expenses or otherwise increase prices. Customers may reject any attempts to pass through expenses
or increase pricing which would negatively impact our business. Further, if we are unable to ramp up our production, hire and onboard sufficient staff to meet the increased demand, or if we are otherwise unable to timely meet the demand from our customers, our business and results of operations will be negatively affected. The realization of our backlog is affected by our performance and the late completion of a project may result in decreased revenues derived from those projects. In addition, the increase in demand we are currently experiencing from the medical sector as a result of the COVID-19 pandemic may not continue after the pandemic subsides. Moreover, the increase in demand may result in decreased demand for such products after the COVID-19 pandemic subsides because there may be a large surplus of such medical products after the pandemic subsides.
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Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
The following items from this Quarterly Report on Form 10-Q formatted in Extensible Business Reporting Language: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Income Statements (unaudited), (iii) Consolidated Statements of Changes in Stockholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements.
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.
