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IEC > SEC Filings for IEC > Form 10-Q on 7-May-2014All Recent SEC Filings

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Form 10-Q for IEC ELECTRONICS CORP


7-May-2014

Quarterly Report


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 consolidated financial statements and notes. All references to Notes are to the accompanying consolidated financial statements and Notes included in this Quarterly Report on Form 10-Q ("Form 10-Q").

Forward-Looking Statements

References in this report to "IEC", the "Company", "we", "our", or "us" mean IEC Electronics Corp. and its subsidiaries except where the context otherwise requires. This 10-Q contains certain statements that are, or may be deemed to be, forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934, and are made in reliance upon the protections provided by such Acts for forward-looking statements. These forward-looking statements (such as when we describe what we "believe", "expect" or "anticipate" will occur, and other similar 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 different from any future results, performance or achievements expressed or implied by these statements.

The following important factors, among others, could affect future results and events, causing those results and events to differ materially from those views expressed or implied in our forward-looking statements: business conditions and growth or contraction in our customers' industries, the electronic manufacturing services industry and the general economy; variability of our operating results; our ability to control our material, labor and other costs; our dependence on a limited number of major customers; the potential consolidation of our customer base; availability of component supplies; dependence on certain industries; variability and timing of customer requirements; uncertainties as to availability and timing of governmental funding for our customers; the types and mix of sales to our customers; our ability to assimilate acquired businesses and to achieve the anticipated benefits of such acquisitions; unforeseen product failures and the potential product liability claims that may be associated with such failures; the availability of capital and other economic, business and competitive factors affecting our customers, our industry and business generally; failure or breach of our information technology systems; natural disasters; and other factors that we may not have currently identified or quantified. Additional risks and uncertainties resulting from the restatement of our financial statements included in our Annual Report on Form 10-K/A and in our Quarterly Report on Form 10-Q/A filed on July 3, 2013 could, among others,
(i) cause us to incur substantial additional legal, accounting and other expenses, (ii) result in additional shareholder, governmental or other actions, or adverse consequences from the consolidated shareholder action or the formal investigation being conducted by the Securities and Exchange Commission ("SEC"),
(iii) cause our customers, including the government contractors with which we deal, to lose confidence in us or cause a default under our contractual arrangements, (iv) cause a default under the Company's arrangements with M&T Bank with respect to which, if the Bank chooses to exercise its remedies, the Company may not be able to obtain replacement financing or continue its operations, (v) result in delisting of the Company's stock from NYSE MKT (the "Exchange") if the Company fails to meet any Exchange listing standard, or fails to comply with its listing agreement with the Exchange, during the twelve months ending July 9, 2014, or (vi) result in additional failures of the Company's internal controls if the Company's remediation efforts are not effective. Any one or more of such risks and uncertainties could have a material adverse effect on us or the value of our common stock.

All forward looking statements included in this Form 10-Q are made only as of the date of this Form 10-Q. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. New risks and uncertainties arise from time to time and we cannot predict those events or how they may affect us. When considering these risks, uncertainties and assumptions, you should keep in mind the cautionary statements contained elsewhere in this report and in any documents incorporated herein by reference. In particular, you should consider the Risk Factors identified in Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and in the Company's subsequently filed SEC reports. You should read this document and the documents that we incorporate by reference into this Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

Overview

IEC Electronics Corp. conducts business directly, as well as through its subsidiaries and divisions, Wire and Cable, Albuquerque, SCB, Celmet and DRTL described in Note 1 - Our Business and Summary of Significant Accounting Policies - Our Business and Consolidation.


We specialize in the custom manufacture of high reliability, complex circuit boards and system-level assemblies; a wide array of cable and wire harness assemblies capable of withstanding extreme environments; and precision metal components. We primarily serve the aerospace & defense (previously discussed as military & aerospace), medical, industrial and communications markets. We focus on developing relationships with customers who manufacture advanced technology products and who are unlikely to utilize offshore suppliers due to the proprietary nature of their products, governmental restrictions or volume considerations.

IEC is ISO 9001:2008 certified. Four of our units (IEC and Wire and Cable in Newark, NY; Albuquerque in NM; and SCB in Bell Gardens, CA) are AS9100 certified to serve the military and commercial aerospace market sector, and are ITAR registered. In addition, the Company's locations in Newark, NY and Albuquerque, NM are Nadcap accredited for electronics manufacturing to support the most stringent quality requirements of the aerospace industry and the Newark, NY location is ISO 13485 certified to serve the medical market sector. Our Newark, NY location is also an NSA approved supplier under the COMSEC standard and its environmental systems are ISO 14001:2004 certified. DRTL in Albuquerque, NM is ISO 17025 accredited, which is the international standard covering testing and calibration laboratories. Albuquerque and SCB also perform work per NASA-STD-8739 and J-STD-001ES space standards.

Prior Restatement

The Company previously disclosed in its Annual Report on Form 10-K/A ("Form 10-K/A") and Quarterly Report on Form 10-Q/A ("Form 10-Q/A"), both filed with the Securities and Exchange Commission (the "SEC") on July 3, 2013, that it restated its financial statements for the periods described therein because the Company was incorrectly accounting for work-in-process inventory at one of its subsidiaries, SCB. The Company restated: (i) its previously issued consolidated financial statements for the fiscal year ended September 30, 2012 ("FY 2012"), as included in the Company's Annual Report on Form 10-K for FY 2012, as well as the unaudited interim consolidated financial statements as of and for the fiscal quarter and year-to-date periods ended December 30, 2011 ("Q1-2012"), March 30, 2012 ("Q2-2012") and June 29, 2012 ("Q3-2012") (collectively, the "2012 Restated Periods") as included in its Quarterly Reports on Form 10-Q for Q-1 2012, Q-2 2012 and Q-3 2012, and (ii) its previously issued financial statements for the quarter ended December 28, 2012 ("Q1-2013") as included in its Quarterly Report on Form 10-Q for Q1-2013.

Three Months Results

A summary of selected income statement amounts for the three months ended
follows:
                                              Three Months Ended
                                            March 28,     March 29,
          Income Statement Data               2014          2013
(in thousands)
Net sales                                  $  34,805     $  33,681

Gross profit                                   4,770         2,899
Selling and administrative expenses            3,952         4,311
Restatement and related expenses               1,258             -
Interest and financing expense                   492           359
Other expense/(income)                            (1 )          56
Income/(loss) before income taxes               (931 )      (1,827 )
Provision for/(benefit from) income taxes       (362 )        (683 )
Net income/(loss)                          $    (569 )   $  (1,144 )


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

                                                         Three Months Ended
                                                        March 28,   March 29,
                % of Sales by Sector                      2014        2013

Aerospace & Defense (previously Military & Aerospace)      47%         50%
Medical                                                    15%         18%
Industrial                                                 30%         24%
Communications & Other                                     8%          8%
                                                          100%        100%

Revenue increased in the second quarter of fiscal 2014 by $1.1 million or 3.3% as compared to the second quarter of the prior fiscal year. An increase in the industrial market sector of $2.2 million and the communications & other sector of $0.1 million were partially offset by decreases in the aerospace & defense and medical market sectors of $1.2 million.

The net increase in the industrial market sector of $2.2 million resulted from higher demand for two of our customers and revenue from new customers. Approximately $1.5 million of the increase was due to two new customers. The remaining increase of $1.8 million is primarily due to increases in demand for existing programs and to a lesser extent one new program. These increases were partially offset by a $1.1 million decrease due to lower end customer demand at one of our customers caused in part by market conditions.

Various increases and decreases for our aerospace & defense customers resulted in a net decrease $0.5 million. Decreases of $2.7 million resulted from decreased end customer demand for several of our customers, some of which were due to delays in government funding. Lower revenue of $0.9 million from another customer was due to our customer's design related issues. Additional decreases of $0.4 million were due to the loss of a program we supported for one of our customers and the decision to end a customer relationship. Increases of $3.5 million were primarily due to new programs with existing customers and to a lesser extent resulting from increased demand from existing customers.

Revenue for the medical market sector decreased $0.7 million primarily due to fluctuations in demand. Lower demand at one of our medical customers was due to the customer awaiting FDA approval for modifications to its existing programs which caused the programs to be put on hold. We do not expect revenue related to these programs to ramp up until late in the second half of the fiscal year. This decrease was partially offset by increases in demand from three other customers. These increases were the result of a new customer, a new program at one customer and volume increases from an existing program at a third customer.

Revenue for the communications & other market sector was relatively consistent compared to the second quarter of fiscal 2014.

Our second fiscal quarter gross profit increased $1.9 million to 13.7% of sales from 8.6% of sales in the second quarter of the prior fiscal year. Throughout fiscal 2013 and the majority of the first quarter of fiscal 2014, we maintained a level of overhead in our business to support higher revenue expected in future periods. Cost reductions implemented during the first quarter of fiscal 2014 decreased our labor and overhead expense. Sales volume and favorable changes in product mix at some locations also contributed to increased gross profit.

Selling and administrative ("S&A") expense is presented excluding Restatement and related expenses discussed below. S&A expense decreased $0.4 million, and represented 11.4% of sales in the second quarter of fiscal 2014, compared to 12.8% of sales in the same quarter of the prior fiscal year. The decrease in S&A expense was primarily due to lower wage expense, which was the result of cost reductions implemented primarily during the first quarter of fiscal 2014.

There were no impairment charges during the second quarter of fiscal 2014 or the second quarter of the prior fiscal year. During the fourth quarter of fiscal 2013, we recorded impairment charges of $14.2 million relating to our SCB reporting unit. These charges are more particularly discussed in Note 6 - Intangible Assets and Note 7 - Goodwill.

Restatement and related expenses of $1.3 million in the second quarter of fiscal 2014 represent third party legal and accounting fees directly attributable to the restatement as well as other matters arising from the restatement including those more fully described in Note 17-Litigation. We anticipate elevated levels of legal expenses due to the restatement and other matters (including the formal SEC investigation and consolidated shareholder class action) for the foreseeable future.

Interest expense increased by $0.1 million compared to the same quarter of the prior fiscal year. IEC's average outstanding debt balances increased to $34.2 million for the second quarter of fiscal 2014 from $30.1 million for the same quarter of the


prior fiscal year. Average borrowings in the second quarter of fiscal 2014 were higher than the second quarter of the prior fiscal year due to the higher revolver borrowing and borrowing in connection with the Celmet building purchase. The weighted average interest rate on IEC's debt, excluding the impact of the interest rate swap, was 0.9% higher than in the second quarter of the prior fiscal year. The net impact of adjusting the swap to fair value also increased interest expense slightly in the second quarter of the current and prior fiscal years. Cash paid for interest in the second quarter of fiscal 2014 was approximately $0.4 million compared to $0.2 million in the second quarter of the prior fiscal year. Detailed information regarding our borrowings, including a summary of modifications in the Fourth Amended and Restated Credit Facility Agreement, is provided in Note 8 - Credit Facilities.

The benefit from income taxes was $0.4 million for the second quarter of fiscal 2014 as compared to a benefit of $0.7 million for the second quarter of the prior fiscal year, primarily resulting from a decrease in pretax loss. The effective tax rate for the second fiscal quarter increased slightly as a percent of pretax loss compared to the same quarter in the prior fiscal year due to a benefit taken in the second quarter resulting from a change in state and local tax strategy.

With respect to tax payments, in the near term IEC expects to be sheltered by sizable net operating loss ("NOL") carryforwards for federal and New York state income tax purposes. At the end of fiscal 2013, the carryforwards amounted to approximately $16.2 million and $26.1 million for federal and New York State, respectively. The carryforwards expire in varying amounts between 2021 and 2025 unless utilized prior to these dates.

Six Months Results

A summary of selected income statement amounts for the six months ended follows:
                                                Six Months Ended
                                             March 28,     March 29,
          Income Statement Data                2014          2013
(in thousands)
Net sales                                   $  66,942     $  66,671

Gross profit                                    8,380         7,065
Selling and administrative expenses             7,744         8,357
Restatement and related expenses                2,414             -
Interest and financing expense                    852           638
Other expense/(income)                             18            57
Income/(loss) before income taxes              (2,648 )      (1,987 )
Provision for/(benefit from) income taxes        (979 )        (742 )
Net income/(loss)                           $  (1,669 )   $  (1,245 )

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

                                                          Six Months Ended
                                                        March 28,   March 29,
                % of Sales by Sector                      2014        2013

Aerospace & Defense (previously Military & Aerospace)      50%         53%
Medical                                                    18%         19%
Industrial                                                 26%         20%
Communications & Other                                     6%          8%
                                                          100%        100%

Revenue increased in the first six months of fiscal 2014 by $0.3 million or 0.4% as compared to the first six months of the prior fiscal year. Increases in the industrial market sector aggregating $4.0 million were partially offset by decreases in the aerospace & defense, medical and communications & other market sectors of $3.7 million.

The net increase in the industrial market sector of $4.0 million resulted from fluctuations in demand for existing customers as well as new customers. Increases of $2.8 million were due to higher demand for existing programs at three customers and to a lesser extent one new program. Two new customers comprised $2.0 million of the increase. These increases were partially


offset by a $0.9 million decrease due to lower end customer demand at one of our customers caused in part by market conditions.

The net decrease in aerospace & defense revenue was $2.5 million. Aggregate decreases in defense revenue of $7.6 million resulted from decreased end customer demand for several of our customers some of which were due to delays in government funding. A decrease of $1.9 million is due to a program at one of our customers that is being phased out over the next decade. In addition, strategic decisions regarding customer relationships caused decreases of $1.3 million. These decreases were partially offset by increased volume on existing programs and new programs from existing customers of $8.0 million. Revenue from new customers resulted in an increase of $0.7 million. Net aerospace revenue decreased $0.5 million due to decreased demand partially offset by a new program for an existing aerospace customer.

Lower demand at one of our medical customers partially offset by increases from three other customers resulted in a net decrease of $0.7 million. A decrease of $5.1 million was due to the customer awaiting FDA approval for modifications to its existing programs which caused the programs to be put on hold. We do not expect revenue related to these programs to ramp up until late in the second half of the fiscal year. Offsetting increases of $4.3 million were the result of volume increases from an existing program, a new program at one customer and a new customer.

The communications & other market sector revenue decreased approximately $0.5 million primarily due to a decrease in our customer's demand.

Gross profit in the first six months of fiscal 2014 increased $1.3 million over the first six months of the prior fiscal year, and represents 12.5% of sales compared to 10.6% of sales in the same period of the prior fiscal year. Sales volume and favorable changes in product mix at some locations in the second quarter of fiscal 2014 positively impacted gross margin and more than offset unfavorable product mix in the first quarter of the current fiscal year. Throughout fiscal 2013 and the majority of the first quarter of fiscal 2014, we maintained a level of overhead in our business to support higher revenue expected in future periods. Cost reductions implemented during the first quarter of fiscal 2014 began to decrease our labor and overhead expense during the second quarter.

Selling and administrative ("S&A") expense is presented excluding Restatement and related expenses discussed below. S&A expense decreased $0.6 million, and represents 11.6% of sales in the first six months of fiscal 2014, compared to 12.5% of sales in the same period of the prior fiscal year. The decrease in S&A expense was primarily due to lower wage and bonus expense. Lower wage expense was the result of cost reductions implemented primarily during the first quarter of fiscal 2014.

There were no impairment charges during the first six months of fiscal 2014 or the first six months of the prior fiscal year. During the fourth quarter of fiscal 2013, we recorded impairment charges of $14.2 million relating to our SCB reporting unit. These charges are more particularly discussed in Note 6 - Intangible Assets and Note 7 - Goodwill.

Restatement and related expenses of $2.4 million in the first six months of fiscal 2014 represent third party legal and accounting fees directly attributable to the restatement as well as other matters arising from the restatement including those more fully described in Note 17-Litigation. We anticipate elevated levels of legal expenses due to the restatement and other matters (including the formal SEC investigation and consolidated shareholder class action) for the foreseeable future.

Interest expense increased by $0.2 million compared to the first six months of the prior fiscal year. IEC's average outstanding debt balances increased to $35.4 million for the first six months of fiscal 2014 from $29.4 million for the same period of the prior fiscal year. Average borrowings in the first six months of fiscal 2014 were higher than the same period of the prior fiscal year due to higher revolver borrowings and a new building loan. The weighted average interest rate on IEC's debt for the first six months of the fiscal year, excluding the impact of the interest rate swap, was 0.55% higher than the same period of the prior fiscal year. The net impact of adjusting the swap to fair value did not have a significant impact on interest expense in the first six months of fiscal 2014 or the same period of the prior fiscal year. Cash paid for interest in the first six months of fiscal 2014 was approximately $0.8 million compared to $0.5 million in the same period of the prior fiscal year. Detailed information regarding our borrowings, including a summary of modifications in the Fourth Amended and Restated Credit Facility Agreement, is provided in Note 8
- Credit Facilities.

The benefit from income taxes was $1.0 million for the first six months of fiscal 2014 as compared to a benefit from income taxes of $0.7 million for the same period of the prior fiscal year. Three factors impacted the amount of the tax benefit. A larger pretax loss was incurred in fiscal 2014, which was partially offset by a lower effective tax rate. In addition, we recorded a benefit due to a change in state and local tax strategy in the first six months of fiscal 2014. Excluding this benefit, our effective tax rate is approximately 32%.


Liquidity and Capital Resources

Capital Resources

As of March 28, 2014 outstanding capital expenditure commitments were $0.8 million for manufacturing equipment and building improvements. We generally fund capital expenditures with cash flow from operations and our revolving credit facility.

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