One of Thomas Lovelock's worst fears was realized last summer when a longtime customer failed to live up to its contractual obligations.
The unpaid invoices threatened IEC Electronics Corp.'s financial health and left the midtier Newark, N.Y., EMS provider holding an inventory of subassemblies and circuit cards that the customer, Acterna Corp., Germantown, Md., had ordered.
"They put us in jeopardy of going bankrupt," said Lovelock, IEC's president and chief executive. "We had no choice but to [legally] pursue them very seriously."
IEC is among a growing number of EMS providers that have taken delinquent customers to court. The economic downturn has strained relationships between EMS companies and their clients, which have canceled or pushed back orders.
Last month, electronics contractor XeTel Corp., Austin, Texas, settled its dispute with Ericsson Inc., a division of Swedish telecom equipment maker LM Ericsson. The dispute, settled through arbitration, arose from $17 million worth of inventory that XeTel was holding for Ericsson. Terms and conditions of the settlement were not disclosed.
Two weeks ago, a New York State court ordered Acterna to pay IEC $1.5 million. In its lawsuit filed last November, IEC was seeking to recover $7 million for breach of contract and the unpaid invoices.
"Right up until midsummer, Acterna was telling us that business was great and asked for volume price breaks," Lovelock said. "Then all of a sudden, they stopped paying us."
A spokeswoman for Acterna, a test management solutions maker for the telecom industry, declined to comment.
In December, auditors at Arthur Andersen LLP forced IEC to write off $7 million on its balance sheet because of the unpaid invoices. Doing so put IEC in violation of its bank covenant and the company's credit line has been restricted. IEC is negotiating with other lending institutions for a new credit arrangement. In the meantime, according to Lovelock, IEC will be able to conduct business as usual.
Aware of the mounting tensions between EMS providers and their customers over contractual agreements, IPC-the Association of Connecting Electronic Industries, Northbrook, Ill., is developing a standard manufacturing service agreement to make sure both parties understand their contractual obligations, said Lisa Griffin, the group's director of assembly-industry programs.
"Many people don't [realize] all the ramifications [of a broken contract]," Griffin said.
Meanwhile, Lovelock has learned an expensive lesson. IEC, whose sales totaled $160 million last year, will no longer take OEM forecasts at face value.
"We will challenge forecasts," he said. "We will ask our customers repeatedly to validate their [forecast] assumptions."