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| WEX > SEC Filings for WEX > Form 10-Q on 13-Aug-2009 | All Recent SEC Filings |
13-Aug-2009
Quarterly Report
OVERVIEW
Winland Electronics, Inc. is a manufacturer providing a variety of products to customers predominantly within the transportation, industrial, instrumentation, medical, telecom and consumer market sectors primarily in North America. The Company operates in two business segments: Electronic Manufacturing Services (EMS) and Proprietary Products. EMS provides complete product realization services to OEM customers by providing value-added services which include product concept studies, product design, printed circuit board design, design for manufacturing, higher level assembly and box build, and legacy support. Proprietary Products develops and markets an established family of environmental security products that can monitor critical environments. The Companys' security products include simple and sophisticated microprocessor and mechanically controlled sensors and alarms that monitor and detect critical environmental changes, such as changes in temperature or humidity, water leakage and power failures.
EXECUTIVE SUMMARY
During the second quarter ended June 30, 2009, Winland continued to experience reduced demand from three out of its four largest EMS customers and the lingering effect of a weakened economy resulting in cautious customer order patterns. Sales during the quarter reflect both early stage production activities for several new customers, as well as the conclusion of our manufacturing relationship with Select Comfort Corporation, a transition process that began during the first quarter this year. During the quarter, Winland experienced continued expansion of manufacturing volume from a medical customer acquired during 2008. Similarly, Winland received a qualification build from a new customer, as well as initial production orders from customers whose projects were transitioning from the Company's design engineering department into production. Subsequent to quarter-end, Winland disclosed receipt of a 700-piece production order from a leading diversified provider of advanced transportation safety equipment.
Each of the new customer manufacturing projects undertaken during the second quarter better fit an evolving customer profile which aligns with operational and quality improvements that Winland has been establishing during the past several quarters. Winland continues to implement its Lean/Six Sigma methodology throughout manufacturing and operations, and during the second quarter expanded the number of certified Winland Six Sigma Black Belt employees from one to five. Having played a lead design role in three out of the last five new customer relationships, Winland's design engineering department continues to strengthen existing OEM customer relationships and has become a valuable, cost-effective resource for new customers who are seeking to optimize product designs for transition to manufacturing. The Company's belief is that investments in people, systems and value added services that are designed to improve customer quality and delivery performance are vital to Winland's ability to grow organically, acquire new customers and substantially exceed customer performance of its peer group.
Liquidity positions were also maintained during the second quarter as Winland renewed its line of credit with Marshall and Ilsley ("M&I") Bank, extending the borrowing facility to June 28, 2010. We believe the cost and terms our line of credit are favorable and reflect the both the transparency of our relationship and the bank's understanding of our business plan.
RESULTS OF OPERATIONS
Three and six months ended June 30, 2009 vs. Three and six months ended June 30, 2008
The Company reported a net loss of $714,000 or $0.19 per basic and diluted share for the three months ended June 30, 2009 compared to a net loss of $765,000 or $0.21 per basic and diluted share for the same period in 2008. The Company reported a net loss of $839,000 or $0.23 per basic and diluted share for the six months ended June 30, 2009 compared to a net loss of $1,146,000 or $0.31 per basic and diluted share for the same period in 2008.
Net Sales
Net sales for the three months ended June 30, 2009 were $5,734,000, down $1,132,000 from the same period in 2008. EMS net sales of $5,005,000 were down $961,000 compared to the same period last year, a 16% decrease. Customer A sales were down $254,000. Customer B, a medical customer whose product was designed by and transitioned from our engineering services during 2008, were up $819,000. Customer C sales were consistent with the same period a year ago. Sales to Customer D, who allowed their contract to expire at the end of the prior quarter, were down $1,204,000. Net sales of Proprietary Products decreased $171,000 or 19% to $729,000 compared to a year ago primarily due to sales to our two largest distributors being down 19%.
Net sales for the six months ended June 30, 2009 were $12,886,000, down $1,012,000 from the same period in 2008. EMS net sales of $11,448,000 were down $692,000 compared to the same period last year, a 6% decrease. Customer A sales were up $471,000. Customer B sales were up $1,685,000. Customer C sales were down $593,000 compared to last year same period. Sales to Customer D were down $1,217,000. Net sales of Proprietary Products decreased $320,000 or 18% to $1,438,000 compared to a year ago primarily due to sales to our two largest distributors being down 20%.
Operating Loss
The Company reported an operating loss of $565,000 and $617,000 for the three months ended June 30, 2009 and 2008, respectively. Gross margins decreased from 9.8% to 8.5% for the three months ended June 30, 2009 compared to the same period in 2008. The Company's EMS segment reported an operating loss of $65,000 for the three months ended June 30, 2009 compared to operating income of $40,000 reported a year ago. EMS gross margins were 1.4% for the three months ended June 30, 2009 down from 3.7% in 2008 due to under utilization of fixed overhead expenses which were partially offset by reduced warranty expense of $89,000, reduced indirect wages and benefits of $86,000, and reduced obsolescence expense of $74,000. Operating expenses were also reduced $42,000 compared to last year primarily due to wages and benefits. The Company's Proprietary Products segment operating income was $43,000 for the three months ended June 30, 2009 compared to an operating loss of $81,000 last year. The $124,000 of increased income was driven by improved gross margins based on product mix, $282,000 reduction in new product developments offset by $76,000 of increased wages and benefits relating to increased sales and marketing staff.
The Company reported an operating loss of $631,000 and $1,186,000 for the six months ended June 30, 2009 and 2008, respectively. Gross margins increased from 9.3% to 12.1% for the six months ended June 30, 2009 compared to the same period in 2008. The Company's EMS segment reported operating income of $433,000 for the six months ended June 30, 2009 compared to operating income of $81,000 reported a year ago. EMS gross margins were 5.90% for the six months ended June 30, 2009 up from 3.5% in 2008 due to reduced warranty expenses of $153,000, reduced indirect wages and benefits of $152,000, and reduced obsolescence expense of $89,000. Operating expenses were also reduced $100,000 compared to last year primarily due to wages and benefits. The Company's Proprietary Products segment operating income was $105,000 for the six months ended June 30, 2009 compared to an operating loss of $74,000 last year. The $179,000 of increased income was driven by improved gross margins based on product mix, $422,000 reduction in new product developments offset by $97,000 of increased wages and benefits relating to increased sales and marketing staff.
General and Administrative expenses were $543,000 and $1,169,000 for the three and six months ended June 30, 2009 which were comparable to the same period one year ago.
Interest Expense and Other, Net
Interest expense and other consists primarily of interest expense and miscellaneous income and expense. Interest expense for the three and six months ended June 30, 2009 was $23,000 and $46,000, respectively, compared to $31,000 and $65,000, respectively, during the same period a year ago. The Company had $386,000 outstanding on its revolving line-of-credit as of June 30, 2009 compared to $175,000 outstanding balance at June 30, 2008. During the six months ended June 30, 2009, the Company incurred a one time loss of $20,000 on a sale of manufacturing equipment.
Income Tax
As discussed in Note 8 to the Condensed Financial Statements, income tax benefits were calculated using an estimated annual blended federal and state income tax rate of -10% and 17% for the six months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009, the Company recognized an income tax expense of $150,000 due to recording $129,000 of unrecognized tax benefits related to tax positions previously taken and a $21,000 tax effect of provision to return differences identified subsequent to the filing of the 2008 Federal and state income tax returns. No income tax benefit has been provided for the three and six months ended June 30, 2009 due to a 100% valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used cash of $299,000 and $953,000 for the six months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009, the net loss of $839,000 was partially offset by depreciation expense of $412,000 and net changes in working capital of $61,000. For the six months ended June 30, 2008, the $1,146,000 net loss was the primary driver of cash used in operations along with reduced working capital of $477,000 offset by depreciation expense of $408,000 and non-cash stock compensation expense of $144,000. Cash used in investing activities was used to acquire capital equipment of $59,000 and $111,000 for the six months ended June 30, 2009 and 2008, respectively. Cash used in financing activities for the payment of long term debt was $213,000 for the six months ended June 30, 2009 compared to $283,000 for the same period in 2008. For the six months ended June 30, 2009 and 2008 cash was provided by borrowing against the revolving line of credit in the amount of $386,000 and $175,000, respectively.
The current ratio was 2.5 to 1 at June 30, 2009 and 2.8 to 1 at December 31, 2008 with working capital equaling $5.5 million and $6.0 million at June 30, 2009 and December 31, 2008. The Company had $386,000 outstanding on its revolving line-of-credit as of June 30, 2009 with $2,627,000 available for borrowings. The revolving line-of-credit expires on June 28, 2010, if not renewed prior to that date.
Management believes that its cash balance, availability of funds under the line-of-credit with M&I Bank, and anticipated cash flows from operations will be adequate to fund our cash requirements for working capital, investing and financing activities during the next twelve months. Current conditions in the capital markets are uncertain; however, management believes the Company will have adequate access to capital markets to fund such cash requirements.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q and other written and oral statements made from time to time by Winland do not relate strictly to historical or current facts. As such, they are considered "forward-looking statements" that provide current expectations or forecasts of future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "estimate," "expect," "intend," "may," "could," "possible," "plan," "project," "should," "will," "forecast" and similar words or expressions. Winland's forward-looking statements generally relate to its purchase order levels, building market share in the EMS market, growth strategies, financial results, product development, sales levels, sales efforts and sufficiency of capital. One must carefully consider forward-looking statements and understand that such statements involve a variety of risks and uncertainties, known and unknown, and may be affected by inaccurate assumptions. Consequently, no forward-looking statement can be guaranteed, and actual results may vary materially from results or circumstances described in such forward-looking statements. As provided for under the Private Securities Litigation Reform Act of 1995, Winland wishes to caution investors that its forward-looking statements in some cases have affected and in the future could affect Winland's actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by or on behalf of Winland.
Please refer to forward-looking statements as previously disclosed in our report on Form 10-K for fiscal year ended December 31, 2008.
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