IEC ELECTRONICS CORP files 10-K in a filing on Sat, Nov 23.
At March 29, 2019, the last business day of the registrant’s second quarter for the fiscal year ended September 30, 2019, the aggregate market value of the shares of common stock held by non-affiliates of the registrant was $61,931,836 (based on the closing price of the registrant’s common stock on the NYSE American on such date). Shares of common stock held by each executive officer and director and by each person and entity who beneficially owns more than 10% of the outstanding common stock have been excluded in that such person or entity may be deemed to be an affiliate for purposes of this calculation. Such exclusion should not be deemed a determination or admission by the registrant that such individuals or entities are, in fact, affiliates of the registrant.
For the year ended September 30, 2019 (‘fiscal 2019’), IEC obtained 23% of the materials used in production from two vendors, Avnet, Inc. and Arrow Electronics Inc. If either of these vendors were to cease supplying us with materials for any reason, we would be forced to find alternative sources of supply. A change in suppliers could cause a delay in availability of products and a possible loss of sales, which could adversely affect operating results.
One individual customer in the aerospace and defense sector, ViaSat Inc., at 23% represented 10% or more of sales in fiscal 2019. In the year ended September 30, 2018 (‘fiscal 2018’), two customers represented 10% or more of sales, ViaSat, Inc. in the aerospace and defense sector represented 23% and Baxter in the medical sector represented 11%.
Two customers represented 10% or more of receivables at September 30, 2019. Both customers are in the aerospace and defense sector, and together accounted for 38% of the outstanding balances at September 30, 2019. Three customers represented 10% or more of receivables at September 30, 2018. One customer each in the aerospace and defense sector, medical sector, and industrial sector together accounted for 55% of the outstanding balances at September 30, 2018.
Our backlog at the end of fiscal 2019 was $212.0 million, which is 58.6% higher than $133.7 million at the end of fiscal 2018. Backlog consists of two categories: purchase orders and firm forecasted commitments. In addition to fulfilling orders and commitments contained in quarter-end backlog reports, we also receive and ship orders within each quarter that do not appear in the period end backlog reports. Variations in the magnitude and duration of contracts as well as customer delivery requirements may result in fluctuations in backlog from period to period. Approximately $151.3 million of our backlog at September 30, 2019 is expected to be shipped within the fiscal year ending September 30, 2020 (‘fiscal 2020’), with the remainder expected to ship in future years. This compares to $122.3 million that was expected to be shipped within 12 months from year-end as of September 30, 2018, with the remainder at such time that was expected to be shipped greater than 12 months from the prior year-end.
A relatively small number of customers are responsible for a significant portion of our net sales. During fiscal 2019 and fiscal 2018, our five largest customers accounted for 51% and 55% of net sales, respectively. The percentage of our sales to our major customers may fluctuate from period to period, and our principal customers may also vary from year to year. Significant reduction in sales to any of our major customers, or the loss of a major customer, could have a material adverse effect on our results of operations and financial condition.
During fiscal 2019 and fiscal 2018, our sales to customers serving the aerospace and defense industries approximated 60% and 57% of our sales, respectively. Because these products and services are ultimately sold to the U.S. government by our customers, these sales are affected by, among other things, the federal budget process, which is driven by numerous factors beyond our control, including geo-political, macroeconomic and political conditions. The contracts between our direct customers and their government customers are subject to political and budgetary constraints and processes, changes in short-range and long-range strategic plans, the timing of contract awards, the congressional budget authorization and appropriation processes, the government’s ability to terminate contracts for convenience or for default, as well as other risks such as contractor suspension or debarment in the event of certain violations of legal and regulatory requirements.
The medical sector represented approximately 22% and 23% of our sales during fiscal 2019 and fiscal 2018, respectively. Medical device industries are intensely competitive and heavily regulated. Medical businesses must operate within an evolving regulatory and risk environment, with ongoing pricing and cost pressures, and adoption of new business models driven by scientific and technological advances. Any significant change in production rates or any restructuring by customers in this sector would likely have a material effect on our results of operations. There is no assurance that our customers will continue to buy products from us at current levels, that we will retain any or all of our existing customers or that we will be able to form new relationships with customers upon the loss of one or more of our existing customers in this market. Any material reduction in sales, consolidation or slowdowns in the medical sector could have a negative impact on our business and financial results.
For fiscal 2019, IEC obtained 23% of the materials used in production from two vendors Avnet, Inc. and Arrow Electronics, Inc. If our vendors were to cease supplying us with materials for any reason, we would be forced to find alternative sources of supply. A change in suppliers could cause a delay in availability of products and a possible loss of sales, which could adversely affect operating results.
Years Ended September 30, 2019 2018 2017 2016 2015(amounts in thousands, except per share data) (a) (b) Net sales $156,981 $116,922 $96,455 $127,010 $126,999Gross profit 21,644 14,157 11,257 20,287 16,295Operating profit/(loss) 7,568 2,719 1,060 6,248 (1,660)Income/(loss) before income taxes 5,923 1,573 143 4,856 (3,770)Provision/(benefit) for income taxes 1,176 (8,837) 62 70 1Income/(loss) from continuing operations 4,747 10,410 81 4,786 (3,771)Loss from discontinued operations, net – – – – (6,415)Net income/(loss) $4,747$10,410$81$4,786$(10,186) Gross margin as % of sales 13.8%12.1%11.7%16.0%12.8 %Operating profit/(loss) as % of sales 4.8%2.3%1.1%4.9%(1.3)% Diluted net income/(loss) per common share: Earnings/(loss) from continuing operations $0.45 $1.01 $0.01 $0.47 $(0.37) Earnings/(loss) from discontinued operations – – – – (0.64) Net earnings/(loss) $0.45$1.01$0.01$0.47 $(1.01) Working capital $40,915 $20,748 $17,194 $19,772 $21,866Total assets 110,832 90,448 52,447 50,397 68,262Long-term debt (excluding current portion)28,910 16,002 14,023 16,732 28,323Long-term capital lease obligation (excluding current portion) 6,685 7,027 5,362 – -Stockholders’ equity 31,240 25,376 14,429 13,864 8,688(a) Fiscal year 2018 was impacted by the income tax benefit recorded to release the majority of the valuation allowance against the net deferred income tax assets. (b) Fiscal year 2015 was impacted by the 2014 restatement of our financial statements and related expenses.
Revenue increased 34.3%, or $40.1 million, during fiscal 2019 as compared to the prior fiscal year. The increase was driven by increases in sales in all sectors: aerospace and defense sector of $27.8 million, medical sector of $7.5 million and the industrial sector of $4.7 million.
Gross profit increased $7.5 million from 12.1% of sales in fiscal 2018 to 13.8% of sales in fiscal 2019. The growth in sales had the most significant impact on gross profit and allowed for more absorption of overhead costs.
Selling and administrative (‘S&A’) expenses increased $2.6 million and represented 9.0% of sales in fiscal 2019, compared to 9.8% of sales in the prior fiscal year. The increase in S&A expenses was primarily due to higher wage and related expenses of $2.2 million.
Interest expense increased by $0.5 million in fiscal 2019 compared to the prior fiscal year. The weighted average interest rate on our debt was 0.41% lower during fiscal 2019 than the prior fiscal year. Our average outstanding debt balances increased by $11.2 million in fiscal 2019 compared to fiscal 2018 because of higher balances on our revolving credit facility and equipment line advances to fund capital purchases. Cash paid for interest on credit facility debt was approximately $1.3 million and $0.9 million for fiscal 2019 and fiscal 2018, respectively. Detailed information regarding our borrowings is provided in Note 6-Credit Facilities.
At September 30, 2019, the Company had $30.5 million of debt, all with variable interest rates. Interest rates on variable loans are based on the 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 September 30, 2019, indicates 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.
leases. The Company will also elect the practical expedient to not separate lease and non-lease components from the ROU asset and lease liability as well as the practical expedient to not record leases with an initial term of 12 months or less (short-term leases) on the balance sheet. The Company is currently updating existing lease policies and developing new controls and business processes to comply with the new standard. The Company expects the ROU assets and lease liabilities to be less than 5% of total assets. During the first quarter of fiscal 2020 the Company will finalize its accounting assessment and quantification of the impact on the Company’s financial statements and corresponding disclosures. Based on work completed to date, the Company expects to recognize upon adoption an initial ROU asset and lease liability on its consolidated balance sheet of approximately $0.3 million.
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 51.2% of the Company’s revenue for the fiscal year ended September 30, 2019. 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 48.8% of the Company’s revenue for the fiscal year ended September 30, 2019. For revenue recognized over time, the Company uses an input measure to determine progress towards completion. Under this method, sales and gross profit are recognized as work is performed generally based on the relationship between the actual costs incurred and the total estimated costs at completion. If the Company has an enforceable right to payment for work completed to date, with a recapture of costs incurred plus an applicable margin, and the goods do not have an alternative future use once the manufacturing process has commenced, then the Company records an unbilled contract revenue associated with non-cancellable customer orders.
activities relating to materials the customer expects to incorporate into products that it manufactures. Value-added support services revenue, including material management and repair work revenue, amounted to less than 3% of total revenue in each of the fiscal years ended September 30, 2019 and September 30, 2018.
For each of the fiscal years ended September 30, 2019 and September 30, 2018, less than 1% of net sales were shipped to locations outside the United States.
At September 30, 2019, under the Credit Facility, as amended, the maximum amount the Company can borrow under the Revolver was the lesser of (i) 85% of eligible receivables plus a percentage of eligible inventories (up to a cap of $14.0 million) or (ii) $35.0 million at September 30, 2019. At September 30, 2018, under the 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 $8.0 million) or (ii) $22.0 million.
Under the Credit Facility, as amended, variable rate debt accrues interest at LIBOR plus the applicable marginal interest rate that fluctuates based on the Company’s Fixed Charge Coverage Ratio, as defined below. At September 30, 2019, the applicable marginal interest rate was 2.25% for the Revolver and 2.50% for Term Loan B and Equipment Line Advances. At September 30, 2018, the applicable marginal interest rate was 3.00% for the Revolver and 3.25% for Term Loan B and Equipment Line Advances. Changes to applicable margins and unused fees resulting from the Fixed Charge Coverage Ratio, as defined below, generally become effective mid-way through the subsequent quarter.
The Company incurs quarterly unused commitment fees ranging from 0.250% to 0.375% of the excess of $27.0 million over average borrowings under the Revolver. Fees incurred amounted to $20 thousand and $23 thousand during the fiscal years ended September 30, 2019 and September 30, 2018, respectively. The fee percentage varies based on the Company’s Fixed Charge Coverage Ratio, as defined below.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the ‘Tax Act’). The Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As the Company has a September 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal tax rate of approximately 24.2% for fiscal 2018, and 21% for subsequent fiscal years. The Tax Act eliminated the domestic manufacturing deduction and moved to a territorial system. In addition, previously paid federal AMT are now refundable regardless of whether there is future income tax liability before AMT credits.
New York state corporate tax reform has resulted in the reduction of the business income base rate for qualified manufacturers in New York State to 0% beginning in fiscal 2016 for IEC. At September 30, 2019, the Company has $1.4 million of New York State investment tax and other credit carryforwards, expiring in various years through 2032. The credits cannot be utilized unless the New York state tax rate is no longer 0%, and as such, the Company has recorded a valuation allowance against the full amount of these credit carryforwards (net of the federal benefit).
One individual customer represented 10% or more of sales for the year ended September 30, 2019. That one customer was in the aerospace and defense sector and totaled 23% of sales. In the prior fiscal year, two individual customers represented 10% or more of sales, one customer in the aerospace and defense sector totaled 23%, while the other customer in the medical sector totaled 11%.
Two individual customers represented 10% or more of receivables and accounted for 38% of outstanding balances at September 30, 2019. At September 30, 2018, three individual customers represented 10% or more of receivables and accounted for 55% of such outstanding balances.
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