IEC ELECTRONICS CORP. The information in this Management's Discussion and Analysis of Financial Condition and Results of Operations 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").
Cautionary Note Regarding Forward-Looking Statements
References in this report to "IEC," the "Company," "we," "our," or "us" mean
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
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
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.
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Overview
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
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%
our
? 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.
complex metal chassis and assemblies. In
? additional industrial and office building, the Jetview building, located in
of fiscal 2021.
? 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.
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We proactively invest in areas we view as important for our continued long-term
growth. Excluding the recently acquired Jetview building, all of our remaining
locations are ISO 9001:2015 certified and ITAR registered. We are Nadcap
accredited and AS9100D certified at our
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").
Entry into Merger Agreement
On
Under the terms of the Merger Agreement, our Board of Directors, with the
assistance of its financial advisor, will conduct a 35-day "go-shop" expiring
Under the terms of the Merger Agreement, Purchaser will commence a tender offer
to purchase all of the outstanding shares IEC common stock for
See Item IA. Risk Factors for further discussion of the risks related to the
Transaction.
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COVID-19 Pandemic
The COVID-19 pandemic continues to disrupt supply chains and affect production and sales across a range of industries. The ultimate 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 and variants, the effectiveness of vaccines and speed of distribution, as well as the impact on our customers, employees and vendors all of which remain uncertain and cannot be predicted.
In accordance with the
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 has created a level of uncertainty around the availability of raw material components in future periods. We are aware of some component manufacturers that have continued to temporarily shut down, 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 were given certain priority ratings, which helped ensure the required supply of material.
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 have remained fully operational throughout the pandemic, 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
We have also developed contingency plans in the event that one of our employees tests positive for COVID-19. During the first quarter of fiscal 2021, we experienced employee absenteeism across several of our manufacturing facilities due to COVID-19, largely related to contact tracing precautions rather than positive cases. This resulted in underutilization on the production floor for a portion of the first quarter of fiscal 2021. During the third quarter of fiscal 2021, however, we saw employee absenteeism remain at more normal levels. We expect to continue to align practices to remain in conformance with state and federal guidelines.
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Customer Demand
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 have remained operational throughout the pandemic. At a macro level, we have seen some indices of demand normalizing to pre-COVID-19 pandemic levels. However, certain customers have requested that a portion of their demand be moved out to future periods beyond fiscal 2021. 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:
Three Months Ended
July 2, June 26,
Income Statement Data 2021 2020
(in thousands)
Net sales $ 49,370 $ 47,364
Gross profit 5,235 6,642
Selling and administrative expenses 3,357 3,678
Interest expense 587 300
Income before provision for income taxes 1,291 2,664 Provision for income taxes
265 550
Net income $ 1,026 $ 2,114
A summary of sales, according to the market sector within which our customers
operate, follows:
Three Months Ended
July 2, June 26,
Percent of Sales by Sector 2021 2020
Aerospace and Defense 76 % 59 %
Medical 14 % 28 %
Industrial 10 % 13 %
100 % 100 %
Revenue increased in the third quarter of fiscal 2021 by
Various increases and decreases in sales to our aerospace & defense customers
resulted in a net increase of
The medical sector saw a decrease of
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The net decrease in the industrial sector of
Gross profit for the third quarter of fiscal 2021 was
Selling and administrative expenses decreased
Interest expense increased by
With respect to tax payments, in the near term, we expect to benefit from
sizable net operating loss ("NOL") carryforwards for federal income tax
purposes. During the third quarter of fiscal 2021, we paid minimal taxes. At the
end of fiscal 2020, the gross NOL carryforwards amounted to approximately
Year to Date Results
A summary of selected income statement amounts for the nine months ended
follows:
Nine Months Ended
July 2, June 26,
Income Statement Data 2021 2020
(in thousands)
Net sales $ 142,211 $ 136,269
Gross profit 14,287 17,384
Selling and administrative expenses 10,362 10,194
Interest expense 1,589 1,111
Income before provision for income taxes 2,336 6,079 Provision for income taxes
121 1,253
Net income $ 2,215 $ 4,826
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A summary of sales, according to the market sector within which our customers
operate, follows:
Nine Months Ended
July 2, June 26,
% of Sales by Sector 2021 2020
Aerospace & Defense 69 % 60 %
Medical 20 % 26 %
Industrial 11 % 14 %
100 % 100 %
Revenue increased in the first nine months of fiscal 2021 by
Various increases and decreases in sales to our aerospace & defense customers
resulted in a net increase of
The medical sector saw a decrease of
The net decrease in the industrial sector of
Gross profit for the first nine months of fiscal 2021 was
Selling and administrative expenses increased
Interest expense increased by
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debt was approximately
With respect to tax payments, in the near term, we expect to benefit from
sizable NOL carryforwards for federal income tax purposes. During the first nine
months of fiscal 2021, we paid minimal taxes. At the end of fiscal 2020, the
gross NOL carryforwards amounted to approximately
Non-GAAP Financial Measures
In addition to reporting net income, gross profit, gross margin and net income
per basic and diluted share,
Nine Months Ended
June 26, 2020
Reconciliation of adjusted gross profit:
Gross profit $ 17,384
Non-cash charge (1) 987
Adjusted gross profit $ 18,371
Reconciliation of adjusted gross margin:
Gross margin 12.8 %
Non-cash charge (1) 0.7 %
Adjusted gross margin 13.5 %
Reconciliation of adjusted net income:
Net income $ 4,826
Non-cash charge (1) 987
Income tax effect (2) (207)
Adjusted net income $ 5,606
Reconciliation of adjusted net income per common share: Net income per common share, basic
$ 0.46
Non-cash charge, per common share, 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, per common share, 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%.
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(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
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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