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| WEDC > SEC Filings for WEDC > Form 10-Q on 12-Aug-2009 | All Recent SEC Filings |
12-Aug-2009
Quarterly Report
• the inability to transition to high volume manufacturing of integrated circuit cards;
• the inability to procure required components and raw materials;
• any downturn in the defense, aerospace, semiconductor or other markets in which we operate, which could cause a decline in selling unit prices or volume;
• reductions in military spending or changes in the acquisition requirements for military products;
• the inability to develop, introduce and sell new products or the inability to develop new manufacturing technologies;
• the failure of customers to accept our anti-tamper processing or the development of improved anti-tamper processing by competitors;
• the inability to locate appropriate purchase candidates for our discontinued operations being held for sale and/or to negotiate an appropriate sales price;
• the ability to locate appropriate acquisition candidates, negotiate an appropriate purchase price, obtain the necessary financing and integrate into our business the people, operations, and products from acquired businesses, or implement other strategic alternatives;
• changes or restrictions in the practices, rules and regulations relating to sales in international markets; and/or
• changes resulting from severe economic downturns that affect our customers, suppliers and lenders.
In addition, new factors, other than those identified in this Form 10-Q or our
most recent Annual Report on Form 10-K, may emerge from time to time and it is
not possible for management to predict all such factors, nor can we assess the
impact of each factor on our business or the extent to which any one factor, or
combination of factors, may cause actual results to differ materially from
forward-looking statements. We do not undertake, and we specifically disclaim,
any obligation to publicly update or revise any forward-looking statement
contained in this Form 10-Q or in any document incorporated herein by reference,
whether as a result of new information, future events or otherwise, except as
required by applicable law.
Overview of Business
We are a defense electronics manufacturer and supplier that designs, develops
and manufactures innovative electronic components and systems for inclusion in
high technology products for the defense and aerospace markets. Our defense
electronics solutions include advanced semiconductor and state of the art
multi-chip packaged components, components which include our proprietary process
for applying anti-tamper ("AT") protection, integrated circuit card assemblies
with AT components and electromechanical assemblies. Our customers, which
include military prime contractors and the contract manufacturers who work for
them in the United States, Europe and Asia, outsource many of their defense
electronic components and systems to us as a result of the combination of our
design, development and manufacturing expertise.
Executive Summary
Continuing Operations
Our net sales for the third quarter ended July 4, 2009 increased $1.8 million to
$16.6 million, compared to $14.8 million for the third quarter ended June 28,
2008. During the first nine months of fiscal 2009, net sales increased
$5.5 million to $47.0 million from $41.5 million during the first nine months of
fiscal 2008. The increase in sales was due to the increase in sales of modules
and integrated circuit card assemblies with AT components, which more than
offset a decrease in AT component only sales. While AT component bookings have
increased, customer requirements determine the timing of shipments.
Income from continuing operations for the third quarter ended July 4, 2009 was
$0.4 million, or $0.02 per diluted share, compared to income of $1.7 million, or
$0.07 per diluted share, for the third quarter in fiscal 2008. The decrease was
primarily due to increased operating expenses and lower interest income. Our
results were negatively impacted by expenses of approximately $0.3 million
related to system, process and organizational revisions as part of the
structural upgrade of the business in support of higher volume manufacturing, as
well as $0.2 million associated with the retirement of our founder and former
Chairman Edward A. White, $0.2 million in increased board and outside advisor
fees related to the completion of the Strategic Alternatives Committee's work
and other general increases. Additionally, the dramatic decrease in interest
rates reduced our interest income by $0.2 million from the prior year. Income
from continuing operations for the nine months ended July 4, 2009 was
$2.0 million, or $0.09 per diluted share, compared to $3.6 million, or $0.16 per
diluted share, for the nine months of fiscal 2008. The decrease was due to
increased operating expenses and lower interest income, which more than offset
the increase in sales and gross profit.
Including the loss in connection with the disposal of the product lines
discussed below, net income for the third quarter ended July 4, 2009 was
$0.2 million, or $0.01 per diluted share, compared to a net loss of $(2.0)
million, or $(0.09) per diluted share, for the third quarter in fiscal 2008. For
the nine months ended July 4, 2009, net income was $1.2 million, or $0.05 per
diluted share, compared to a net loss of $(3.4) million, or $(0.15) per diluted
share, for the first nine months of fiscal 2008.
A key indicator of our future sales is the amount of new orders received
compared to current net sales, known as the book-to-bill ratio. During the third
quarter ended July 4, 2009, we received new orders of $18.2 million, which
equates to a book-to-bill ratio of 1.09:1.0. Bookings during the third quarter
of fiscal 2008 totaled $11.6 million, yielding a book-to-bill ratio of 0.79:1.0.
For the first nine months of fiscal 2009, we received new orders of
$55.1 million, which equates to a book-to-bill ratio of 1.17:1.0. We continue to
experience positive bookings and expect the book-to-bill ratio for the fiscal
year to end greater than 1.0:1.0. Total AT bookings for the three and nine
months ended July 4, 2009, which includes bookings for AT components as well as
integrated circuit cards with AT components, were $3.3 million and
$18.8 million, respectively. Total backlog as of July 4, 2009 was $45.7 million,
compared to $45.1 million at the end of the second quarter of fiscal 2009.
Our gross margins from continuing operations during the three months ended
July 4, 2009 decreased to 37% from 44% in the same period of fiscal 2008. Gross
margins during the nine months ended July 4, 2009 decreased to 40% from 41% for
the nine months ended June 28, 2008. The decrease was primarily due to higher
production yield costs related to our entrance into production volumes of
circuit card assemblies with AT components. Our gross margin historically has
been a blend of margins derived from custom and standard microelectronic
components and electromechanical assemblies. We have traditionally experienced a
range of margins between 40% and 43% depending on the custom versus standard
concentration. As we move vertical from a component only business to a business
including military grade circuit card assemblies, which may be more price
sensitive, we expect overall margins to center around 40%.
Discontinued Operations
On March 28, 2008, the Board of Directors authorized the disposal of the
Interface Electronics Division ("IED") and the commercial microelectronic
product lines. On September 26, 2008, the Board of Directors authorized the
disposal of the Display Systems Division ("DSD"). These decisions resulted from
an effort to streamline the Company's businesses to focus on product lines where
the Company has superior technical knowledge, specialized manufacturing
capabilities and an ongoing commitment to research and development. We believe
this course of action has and will continue to increase shareholder value and
allow us to focus on growing our business. As a result of our decision to
dispose of these product lines, we have accounted for them as discontinued
operations for all periods presented in the accompanying unaudited consolidated
financial statements and the assets and liabilities of the discontinued
operations are classified as assets and liabilities held for sale.
On April 3, 2009, we completed the sale of DSD to the U.S. subsidiary of VIA
optronics GmbH, a German company ("VIA"). We sold the operating assets of DSD,
primarily consisting of inventory, equipment and intellectual property, for
approximately $2.3 million. As of the date of sale, other non-operating net
assets of approximately $0.9 million, consisting primarily of accounts
receivable and residual current liabilities, were retained to be settled in the
normal course of business. Other non-operating liabilities of $(0.3) million
remained as of July 4, 2009. These non-operating net assets (liabilities) are
included as part of continuing operations. During the second quarter of fiscal
2009, we also concluded the disposition of our commercial microelectronic
product lines. We recorded a loss of $0 and $(0.7) million, net of tax, on these
disposals during the three and nine months ended July 4, 2009, respectively.
During the third quarter of fiscal 2009, we concluded that there was a change in
the plan for the disposal of IED and that, rather than one disposal group, there
were to be three disposal groups. We sold a group of assets, primarily equipment
and a patent, in the third quarter of fiscal 2009 for which we recorded a loss
on sale of ($0.1) million, net of tax. The second group, which consists of the
remaining equipment, is expected to be disposed of in the fourth quarter of
fiscal 2009. Land and the building comprise the third disposal group which is
expected to be sold in fiscal 2010. All production and shipments by IED were
completed in the third quarter of fiscal 2009.
Our discontinued operations generated $2.8 million in revenues in the third
quarter of fiscal 2009 compared to $9.3 million in the third quarter of fiscal
2008. Gross profit for the third quarter of fiscal 2009 was $0.5 million, or
18%, compared to $1.0 million, or 11%, for the third quarter of fiscal 2008.
Loss from discontinued operations was $(0.1) million in the third quarter of
fiscal 2009 compared to a loss of $(2.9) million in the third quarter of fiscal
2008. The
decrease in loss was a result of the three months of fiscal 2009 reporting
operations from only IED. In comparison, the three months of fiscal 2008
reported operations from IED, DSD and the commercial microelectronics product
lines. Loss on sale of discontinued operations, net of tax, decreased to $(0.1)
million from $(0.8) million for the three months ended July 4, 2009 and June 28,
2008, respectively. Additional write-downs of inventory and fixed assets were
taken in the third quarter of fiscal 2008 due to the deteriorating market
conditions.
For the nine months ended July 4, 2009, discontinued operations generated
$14.4 million in revenue compared to $32.2 million for the nine months ended
June 28, 2008. This was primarily due to the decline in sales for the DSD and
commercial microelectronic product lines. Gross profit for the first nine months
of fiscal 2009 was $3.2 million, compared to $4.8 million for the respective
period in fiscal 2008. Loss from discontinued operations was $(0.1) million for
the nine months ended July 4, 2009, compared to $(3.9) million for the nine
months ended June 28, 2008. The lower loss was due to the decrease in operating
expenses, driven by the savings realized from the reductions in labor force,
other cost savings measures and the disposal of DSD and the commercial
microelectronic product lines in the second quarter of fiscal 2009, which more
than offset the decrease in gross profit. The loss on sale of discontinued
operations, net of tax, was $(0.7) million for the first nine months of fiscal
2009, compared to $(3.0) million for the first nine months of fiscal 2008. The
decrease was due to the final disposition of DSD and the commercial
microelectronic product lines in fiscal 2009 resulting in a lower loss than the
write-off of customer relationships and existing technology intangibles, as well
as inventory and fixed assets in fiscal 2008.
We are continuing to actively market the two remaining IED disposal groups. We
own the remaining assets and expect to recover the carrying amount from the
disposition proceeds.
Business Outlook
As part of our renewed focus on defense only electronics, we have developed a
plan that builds on our core competencies and expands beyond multichip
components. The plan focuses on expanding revenue opportunities in three key
areas: Aircraft, Missiles and Ordnance and Net Centric Operations. Programs that
require secure communications, guidance of munitions to minimize collateral
damage and enhance war fighter safety will be addressed by our GPS components
with our AT protection and integrated circuit card assemblies with AT
components. We additionally expect to expand our integrated circuit card
assembly product offerings with the addition of radio frequency. Additionally,
we believe that there are significant opportunities in solid state technology
which replaces mechanical storage devices. We are committed to technology and
supporting programs that demand cyber security and information assurance in
defense platforms. We believe that these areas within the broad defense market
are those that will provide stable growth going forward.
Business Update
On June 17, 2009, we announced the completion of the previously discussed
exploration of strategic alternatives, the retirement of our founder and former
Chairman of the Board of Directors, Edward A. White, and the election of Brian
R. Kahn as Chairman of the Board of Directors.
The Strategic Alternatives Committee of the Board of Directors conducted the
strategic alternatives review with financial advisor Jeffries and Company and
special legal advisor, Wilson Sonsini Goodrich and Rosati. After careful
consideration of the available alternatives, the Board of Directors, upon
unanimous recommendation of the Strategic Alternatives Committee, determined
that shareholders' interest would be best served by continuing to operate as a
stand-alone entity.
The review process included, among other things, a consideration of the sale of
the Company. A broad universe of domestic and international industry
participants and private equity sources were solicited. While we received
several indications of interest, as well as formal offers for the sale of the
Company, after a deliberate and careful process, the Board of Directors
determined that the offers were not in the best interests of the shareholders
and that we would likely generate more long-term value with our current
stand-alone strategy.
We also are continuing to review potential buy-side alternative opportunities,
as they present themselves. While we have not identified an acquisition we
intend to pursue, we will continue to evaluate such opportunities as they arise.
Our founder and former Chairman, Edward A. White, also retired effective
June 16, 2009. In connection with his retirement, we incurred approximately
$0.2 million of expenses.
Our third stock repurchase program was announced on April 8, 2008, which allows
us to repurchase up to an additional 10%, or approximately 2.2 million shares,
of our then outstanding common stock. The Board of Directors suspended the
program during the strategic alternatives review and believes that, at this
time, our cash should be used to enhance the technological capabilities of the
Company.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of net sales and
expenses during the reporting period. Actual results could differ from those
estimates. The most significant accounting estimates inherent in the preparation
of our unaudited consolidated financial statements include the following items
described below.
Revenue Recognition
We sell defense electronic products primarily to military prime contractors and
the contract manufacturers who work for them. A portion of our products are also
sold through distributors or resellers. We recognize revenue on product sales
when persuasive evidence of an arrangement with the customer exists, title to
the product has passed to the customer (usually occurring at time of shipment),
the sales price is fixed or determinable, and collectibility of the related
billing is reasonably assured. Advance payments from customers are deferred and
recognized when the related products are shipped. Revenue relating to products
sold to distributors or resellers who either have return rights or where we have
a history of accepting product returns are deferred and recognized when the
distributor or reseller sells the product to the end customer. We also provide
limited design services pursuant to related customer purchase orders and
generally recognize the associated revenue as such services are performed.
However, it may be deferred until certain elements are completed. We may from
time to time enter into certain arrangements that contain multiple elements such
as performing limited design services accompanied with follow-on manufacturing
of related products. We allocate revenue to the elements based on relative fair
value, and recognize revenue for each element when there is evidence of an
arrangement, delivery has occurred or services have been rendered, the price is
fixed or determinable and collectibility is reasonably assured. Arrangements
with multiple elements that are not considered separate units of accounting
require deferral of revenue until certain other elements have been delivered or
the services have been performed. The amount of the revenue recognized is
impacted by our judgment as to whether an arrangement includes multiple elements
and whether the elements are considered separate units of accounting, as well as
management's judgments regarding the fair values of the elements used to
determine relative fair values.
Excess and Obsolete Inventory
Historically, we have experienced fluctuations in the demand for our products
based on cyclical fluctuations in the defense electronics markets. These
fluctuations may cause inventory on hand to lose value or become obsolete. In
order to present the appropriate inventory value on our financial statements, we
identify slow moving or obsolete inventories and record provisions to write down
such inventories to net realizable value. These provisions are based on our
comparison of the value of inventory on hand against expected future sales. If
future sales are less favorable than those projected by management, additional
inventory provisions may be required.
Accounts Receivable and Allowance for Doubtful Accounts
We record trade accounts receivable at the invoiced amount and they do not bear
interest. We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. These
estimates are based on an analysis of accounts receivable using available
information on our customers' financial status and payment histories.
Historically, bad debt losses have not differed materially from our estimates.
Defined Benefit Plan
We maintain a pension plan for eligible union employees at our Fort Wayne,
Indiana facility. To account for the cost of this plan, we make estimates
concerning the expected long-term rate of return on plan assets and discount
rates to be used to calculate future benefit obligations. Changes in the
expected long-term rate of return on plan assets affect the amount of investment
income expected to be earned in the future. We base our related estimates using
historical data on the rate of return from equities and fixed income
investments, as well as projections for future returns on such investments. If
the actual returns on plan assets do not equal the estimated amounts, we may
have to fund future benefit obligations with additional contributions to the
plan. Changes in the discount rate affect the value of the plan's future benefit
obligations. A lower discount rate increases the liabilities of the plan because
it raises the value of future benefit obligations. This will also cause an
increase in pension expense recognized. We use published bond yields to estimate
the discount rate used for calculating the value of future benefit obligations.
Due to the decrease in the market value of the plan's assets, we contributed
$0.5 million to the plan in the third quarter of fiscal 2009.
Goodwill
We account for goodwill in accordance with Statement of Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which
requires goodwill to be tested for impairment on an annual basis (and more
frequently in certain circumstances) and written down when impaired. Goodwill
recorded was $1.8 million both at July 4, 2009 and September 27, 2008.
We do not believe a triggering event requiring us to conduct an interim
impairment test had occurred as of July 4, 2009. We performed our annual
impairment test in the fourth quarter of fiscal 2008, which resulted in no
impairment charge. However, the swings in our stock price, while generally
consistent with the overall market and our industry, have caused our market
capitalization to fluctuate above and below our book value. While only one
indicator, a market value below book value could imply that our goodwill may not
be recoverable, thereby requiring an interim impairment test that may result in
a non-cash write-down of this asset, which could have a material adverse impact
on our unaudited consolidated financial statements.
Stock-Based Compensation Expense
We account for stock-based compensation in accordance with SFAS No. 123(R),
Accounting for Stock-Based Compensation, which requires that we record the fair
value of stock-based compensation awards as an expense. In order to determine
the fair value of stock options on the date of grant, the Company applies the
Black-Scholes option-pricing model. Inherent in this model are assumptions
related to expected stock price volatility, option life, risk-free interest rate
and dividend yield. While the risk-free interest rate and dividend yield are
less subjective assumptions, typically based on factual data derived from public
sources, the expected stock price volatility and option life assumptions require
a greater level of judgment. Consequently, expected stock price volatility and
option life assumptions are considered critical accounting estimates.
Warranty
Our products typically carry a warranty for a one year period. We record a
liability for product warranty obligations in the period the related revenue is
recorded based on historical warranty experience. Related costs are charged to
the warranty accrual as incurred.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. Deferred tax assets are recognized, net of any valuation allowance,
for deductible temporary differences and net operating loss and tax
credit carry forwards. We regularly review our deferred tax assets for
recoverability and, if necessary, establish a valuation allowance.
We also follow Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes ("FIN 48"), which became effective
for the Company on September 30, 2007. FIN 48 prescribes a recognition threshold
and a measurement attribute for the financial statement recognition of tax
positions taken or expected to be taken in a tax return. For those benefits to
be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The amount recognized is measured as the
largest amount of benefit that is 50 percent likely of being realized upon
ultimate settlement.
Results of Operations
The following table sets forth certain financial data expressed as a percentage
of net sales:
. . .
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