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IEH CORPORATION - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Statements contained in this report, which are not historical facts, may be considered forward-looking information with respect to plans, projections, or future performance of the Company as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. The words "anticipate," "believe", "estimate", "expect," "objective," and "think" or similar expressions used herein are intended to identify forward-looking statements. The forward-looking statements are based on the Company's current views and assumptions and involve risks and uncertainties that include, among other things, the effects of the Company's business, actions of competitors, changes in laws and regulations, including accounting standards, employee relations, customer demand, prices of purchased raw material and parts, domestic economic conditions, including housing starts and changes in consumer disposable income, and foreign economic conditions, including currency rate fluctuations. Some or all of the facts are beyond the Company's control. The following discussion and analysis should be read in conjunction with our audited financial statements and related footnotes included elsewhere in this report, which provide additional information concerning the Company's financial activities and condition. Overview The Company designs, develops and manufactures printed circuit connectors for high performance applications. We have also developed a high performance plastic circular connector line. All of our connectors utilize the HYPERBOLOID contact design, a rugged, high-reliability contact system ideally suited for high-stress environments. We are the only independent producer of HYPERBOLOID in the United States. Our customers consist of OEM's (Original Equipment Manufacturers), companies manufacturing medical equipment, and distributors who resell our products to OEMs. We sell our products directly and through 16 independent sales representatives located in all regions of the United States, Canada, Israel, India, various Pacific Rim countries, South Korea and the European Union (EU). The customers we service are in the Government, Military, Aerospace, Medical, Automotive, Industrial, Test Equipment and Commercial Electronics markets. We appear on the Military Qualified Product Listing "QPL" to MIL-DTL-55302 and supply customer requested modifications to this specification. Sales to the commercial electronic and military markets were 35% and 58%, respectively, of the Company's net sales for the year ended March 28, 2014. Our offering of "QPL" items has recently been expanded to include additional products. Critical Accounting Policies The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company believes the following are the critical accounting policies, which could have the most significant effect on the Company's reported results and require the most difficult, subjective or complex judgments by management. 13 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Critical Accounting Policies (continued) · Impairment of Long-Lived Assets: The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. The Company makes estimates of its future cash flows related to assets subject to impairment review. · Inventory Valuation: Raw materials and supplies are valued at the lower of first-in, first-out cost or market. Finished goods and work in process are valued at the lower of actual cost, determined on a specific identification basis, or market. The Company estimates which materials may be obsolete and which products in work in process or finished goods may be sold at less than cost, and adjusts their inventory value accordingly. Future periods could include either income or expense items if estimates change and for differences between the estimated and actual amount realized from the sale of inventory. · Income Taxes: The Company records a liability for potential tax assessments based on its estimate of the potential exposure. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. Income tax expense in future periods could be adjusted for the difference between actual payments and the Company's recorded liability based on its assessments and estimates. · Revenue Recognition: Revenues are recognized at the shipping date of the Company's products. The Company has historically adopted the shipping terms that title merchandise passes to the customer at the shipping point (FOB Shipping Point). At this juncture, title has passed, the Company has recognized the sale, inventory has been relieved, and the customer has been invoiced. The Company does not offer any discounts, credits or other sales incentives. The Company's policy with respect to customer returns and allowances as well as product warranty is as follows: The Company will accept a return of a defective product within one year from shipment for repair or replacement at the Company's option. If the product is repairable, the Company at its own cost will repair and return it to the customer. If not repairable, the Company will either offer an allowance against payment or will reimburse the customer for the total cost of the product deemed defective. Most of the Company's products are custom ordered by customers for a specific use. The Company provides engineering services as part of the relationship with its customers in developing the custom product. The Company is not obligated to provide such engineering service to its customers. The Company does not charge separately for these services. 14 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Critical Accounting Policies (continued) · Research & Development: The Company provides personalized engineering services to its customers by designing connectors for specific customer applications. The employment of electromechanical engineers is the anticipated cornerstone of the Company's future growth. The Company maintains a testing laboratory where its engineers experiment with new connector designs based on changes in technology and in an attempt to create innovative, more efficient connector designs. The Company did not expend any funds on, nor receive any revenues related to, customer sponsored research and development activities relating to the development of new designs, techniques and the improvement of existing designs during the years ended March 28, 2014 and March 29, 2013, respectively. Results of Operations Year End Results: March 28, 2014 vs. March 29, 2013 The following table sets forth for the periods indicated, percentages for certain items reflected in the financial data as such items bear to the revenues of the Company: Relationship to Total Revenues March 28, March 29, 2014 2013 Operating revenues (in thousands) $ 15,432 $ 13,330 Operating expenses: (as a percentage of operating revenues) Costs of products sold 64.1 % 68.1 % Selling, general and administrative 17.5 % 16.7 % Interest expense .1 % .2 % Depreciation and amortization 1.8 % 1.8 % TOTAL COSTS AND EXPENSES 83.5 % 86.8 % Operating income 16.5 % 13.2 % Other income .4 % - Income before income taxes 16.9 % 13.2 % Income taxes (7.4 %) (6.4 %) Net income 9.5 % 6.8 % 15 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Year End Results: March 28, 2014 vs. March 29, 2013 (continued) Net sales for the year ended March 28, 2014 amounted to $15,431,944, reflecting a $2,101,847 increase versus the year ended March 29, 2013 net sales of $13,330,097. The increase in net sales is a direct result of the Company's efforts in increasing sales in the commercial aerospace and oil and gas sectors. The Company is primarily a manufacturer and its products are essentially basic components of larger assemblies of finished goods. Approximately 96% of the Company's net sales for the fiscal years ended March 28, 2014 and March 29, 2013, respectively, were made directly to manufacturers of finished products with the balance of the Company's products sold to distributors. Distributors often purchase connectors for customers who do not require large quantities of connectors over a short period of time but rather require small allotments of connectors over an extended period of time. In the fiscal year ended March 28, 2014, three customers of the Company accounted for $5,124,060 constituting approximately 33% of the Company's net sales. Two of those customers accounted for 26% of the Company's net sales. During the fiscal year ended March 29, 2013, four customers accounted for $4,505,000 constituting 34% of the Company's net sales. Two of those customers accounted for 21% of the Company's net sales. The Company currently employs 16 independent sales representatives to market its products in all regions of the United States as well as in Canada, Israel, India, various Pacific Rim countries, South Korea and the European Union (EU). These sales representatives accounted for approximately 95% of the Company's net sales for the year ended March 28, 2014, with the balance of net sales being generated by direct customer contact. For the fiscal year ended March 28, 2014, the Company's principal customers included manufacturers of commercial electronic products, military defense contractors and distributors who service these markets. Sales to the commercial electronic and government markets comprised 93% and 94% of the Company's net sales for the years ended March 28, 2014 and March 29, 2013, respectively. Approximately 7% and 6% of net sales were made to international customers for the years ended March 28, 2014 and March 29, 2013, respectively. Cost of products sold amounted to $9,887,351 for the fiscal year ended March 28, 2014, or 64.1% of operating revenues. This reflected a $821,779 or 9.1% increase in the cost of products sold of $9,065,572 or 68.1% of operating revenues for the fiscal year ended March 29, 2013. This increase in cost of products sold is due primarily to the increased cost of production associated with the increase necessary to support the increase in sales. 16 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Year End Results: March 28, 2014 vs. March 29, 2013 (continued) Selling, general and administrative expenses were $2,702,742 and $2,220,444 or 17.5% and 16.7% of net sales for the fiscal years ended March 28, 2014 and March 29, 2013, respectively. This category of expenses increased by $482,298 or 21.7% from the prior year. The increase can be attributed to an increase in salaries, commissions and travel. Interest expense was $21,349 for the fiscal year ended March 28, 2014 or 0.1% of net sales. For the fiscal year ended March 29, 2013, interest expense was $28,412 or 0.2% of net sales. The decrease of $7,063 or 24.9% reflects the slight decrease in interest rates. Depreciation and amortization of $273,899 or 1.8% of net sales was reported for the fiscal year ended March 28, 2014. This reflects an increase of $38,563 or 16.4% from the prior year ended March 29, 2013 of $235,336 or 1.8% of net sales. The increase is due primarily to additional new equipment being put in use during the current fiscal year. The Company reported net income of $1,453,707 for the year ended March 28, 2014 representing basic earnings of $.63 per share as compared to net income of $929,930 or $.40 per share for the year ended March 29, 2013. The increase in net income for the current year can be attributed primarily to the reported increase in sales in the commercial aerospace and oil and gas sectors. 17 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Year End Results: March 28, 2014 vs. March 29, 2013 (continued) Liquidity and Capital Resources The Company reported working capital of $8,458,143 as of March 28, 2014 compared to a working capital of $7,116,644 as of March 29, 2013. The increase in working capital of $1,341,499 was attributable to the following items: Net income $ 1,453,707 Depreciation and amortization 273,899 Capital expenditures (352,684 ) Other transactions (33,423 ) $ 1,341,499 As a result of the above, the current ratio (current assets to current liabilities) was 10.16 to 1 at March 28, 2014 as compared to 13.43 to 1 at March 29, 2013. Current liabilities at March 28, 2014 were $922,911 compared to $572,303 at March 29, 2013. The Company reported $352,684 in capital expenditures for the year ended March 28, 2014 and recorded depreciation expense of $273,899 for the year ended March 28, 2014. The net income of $1,453,707 for the year ended March 28, 2014 resulted in an increase in stockholders' equity to $10,080,903 as compared to stockholders' equity of $8,627,196 at March 29, 2013. The Company has an accounts receivable financing agreement with a non-bank lending institution ("Factor") whereby it can borrow up to 80 percent of its eligible receivables (as defined in such financing agreement) at an interest rate of 2 ½% above JP Morgan Chase's publicly announced rate with a minimum interest rate of 12% per annum. The financing agreement has an initial term of one year and will automatically renew for successive one-year terms, unless terminated by the Company or its lender upon receiving 60 days prior notice. Funds advanced by the Factor are secured by the Company's accounts receivable and inventories. As of March 28, 2014 the Company had reported excess payments to the Factor of $630,059 as compared to March 29, 2013, when the Company had reported excess payments to the Factor of $36,916. Management is constantly reviewing its collection practices and policies for outstanding receivables and has revised its collection procedures to a more aggressive collection policy. As a consequence of this new policy the Company's experience is that its customers have been remitting payments on a more consistent and timely basis. The Company reviews the collectability of all accounts receivable on a monthly basis. The reserve is less than 2% of average gross accounts receivable and is considered to be conservatively adequate. 18 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Year End Results: March 28, 2014 vs. March 29, 2013 (continued) Liquidity and Capital Resources (continued) The Company has a collective bargaining multi-employer pension plan ("Multi-Employer Plan") with the United Auto Workers of America, Local 259. Contributions are made in accordance with a negotiated labor contract and are based on the number of covered employees employed per month. With the passage of the 1990 Act the Company may become subject to liabilities in excess of contributions made under the collective bargaining agreement. Generally, these liabilities are contingent upon the termination, withdrawal, or partial withdrawal from the Multi-Employer Plan. The Company has not taken any action to terminate, withdraw or partially withdraw from the Multi-Employer Plan nor does it intend to do so in the future. Under the 1990 Act, liabilities would be based upon the Company's proportional share of such Plan's unfunded vested benefits, which is currently not available. The amount of accumulated benefits and net assets of such Plan also is not currently available to the Company. The total contributions charged to operations under the Plan were $118,695 for the year ended March 28, 2014 and $119,745 for the year ended March 29, 2013. On September 15, 2008, the Company was notified by the State of New York Workers' Compensation Board (the "WC Board") that the Trade Industry Workers' Compensation Trust for Manufacturers (the "Trust") had defaulted. As a member of this self-insured group, the Company was assessed on an estimated basis by the WC Board for its allocable share necessary to discharge all liabilities of the Trust. The assessed amount for the years 2002 through 2006 was $101,362. The assessed amount for each year is detailed as follows: 2002 $ 16,826 2003 24,934 2004 31,785 2005 14,748 2006 13,069 $ 101,362 The Company did have the option of paying this assessment as a lump sum amount or paying off the assessment over a 60 month period. The Company elected the deferral option, and was obligated to making monthly payments of $1,689 for 59 months, and $1,711 for the 60th and final month. The Company had recorded this assessment as a charge to Cost of Sales in the quarter ended December 26, 2008. The Company was subsequently notified that it was being assessed an additional $146,073 covering the years 2002 through 2007, bringing the total deficit allocation assessment to $247,435. 19 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Year End Results: March 28, 2014 vs. March 29, 2013 (continued) Liquidity and Capital Resources (continued) The total revised assessment for the years 2002 to 2007 is as follows: 2008 $ 23,445 2009 43,797 2010 51,381 2011 38,309 2012 46,477 2013 44,026 $ 247,435 Effective as of May 31, 2013, the Company and the WC Board executed a settlement agreement pursuant to which the Company entered into a final settlement of the outstanding liability to the Trust and paid a lump-sum settlement amount equal to $7,771. The Company has no further liability to the Trust. In connection with this final settlement, the WC Board executed and issued a general release to the Company. On August 31, 2011, the Company's shareholders approved the adoption of the Company's 2011 Equity Incentive Plan ("2011 Plan") to provide for the grant of stock options and restricted stock awards to purchase up to 750,000 shares of the Company's common stock to all employees, consultants and other eligible participants including senior management and members of the Board of Directors of the Company. The 2011 Plan replaced the prior 2002 Employee Stock Option Plan which had expired in accordance with its terms. Options granted to employees under the 2011 Plan may be designated as options which qualify for incentive stock option treatment under Section 422A of the Internal Revenue Code, or options which do not qualify (non-qualified stock options). Under the 2011 Plan, the exercise price of an option designated as an incentive stock option shall not be less than the fair market value of the Company's common stock on the day the option is granted. In the event an option designated as an incentive stock option is granted to a ten percent (10%) or greater shareholder, such exercise price shall be at least 110 percent (110%) of the fair market value of the Company's common stock and the option must not be exercisable after the expiration of five years from the day of the grant. The 2011 Plan also provides that holders of options that wish to pay for the exercise price of their options with shares of the Company's common stock must have beneficially owned such stock for at least six months prior to the exercise date. 20 Index IEH CORPORATION PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) Year End Results: March 28, 2014 vs. March 29, 2013 (continued) Liquidity and Capital Resources (continued) Exercise prices of non-incentive stock options may be less than the fair market value of the Company's common stock. The aggregate fair market value of shares subject to options granted to a participant(s), which are designated as incentive stock options, and which become exercisable in any calendar year, shall not exceed $100,000. As of March 28, 2014, no options or restricted stock awards had been granted under the 2011 Plan. Effects of Inflation The Company does not view the effects of inflation to have a material effect upon its business. Increases in costs of raw materials and labor costs have been offset by increases in the price of the Company's products, as well as reductions in costs of production, reflecting management's efforts in this area. While the Company has in the past increased its prices to customers, it has maintained its relatively competitive price position. However, significant decreases in government and military subcontractor spending have provided excess production capacity in the industry, which in turn has tightened pricing margins. Off Balance Sheet Arrangements The Company does not have any off balance sheet arrangements within the meaning of Item 303 of Regulation S-B. |