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| MEAD > SEC Filings for MEAD > Form 10-Q on 14-Jan-2013 | All Recent SEC Filings |
14-Jan-2013
Quarterly Report
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this Form 10-Q. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed in "Risk Factors" in the Company's annual report on Form 10-K. Those risk factors expressly qualify all subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf. We do not have any intention or obligation to update forward-looking statements included in this Form 10-Q after the date of this Form 10-Q, except as required by law.
Overview of the Company
Meade Instruments Corp. is engaged in the design, manufacture, marketing and sale of consumer optics products, primarily telescopes, telescope accessories and binoculars. We design our products in-house or with the assistance of external consultants. Most of our entry level products are manufactured overseas by contract manufacturers in Asia, while our high-end telescopes are manufactured and assembled at our Mexico facility. Sales of our products are driven by an in-house sales force as well as a network of sales representatives throughout the U.S. and through distributors internationally. We currently operate out of two primary locations: Irvine, California and Tijuana, Mexico. Our California facility serves as the Company's corporate headquarters, research and development facility and U.S. distribution center; our Mexico facility contains our manufacturing, assembly, repair, packaging, and other general and administrative functions. Our business is highly seasonal and our financial results have historically varied significantly on a quarter-by-quarter basis each year.
We believe that the Company holds valuable brand names and intellectual property that provide us with a competitive advantage in the marketplace. The Meade® brand name is ubiquitous in the consumer telescope market, while the Coronado® brand name represents a unique niche in the area of solar astronomy.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012 describes the significant accounting policies and methods used in the preparation of our Condensed Consolidated Financial Statements. Our critical accounting estimates, discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 29, 2012, include revenue recognition, estimates for allowances for doubtful accounts, inventories, property and equipment, intangible assets, accounting for income taxes, shipping and handling costs, advertising, research and development, loss per share, concentration of credit risk, fair value of financial instruments, use of estimates in preparation of consolidated financial statements, product warranties, and stock-based compensation. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of our Consolidated Financial Statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.
Our management discusses the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board of Directors at least annually. Our management also internally discusses the adoption of new accounting policies or changes to existing policies at interim dates, as it deems necessary or appropriate.
New Accounting Pronouncements
From time to time, the Financial Accounting Standards Board or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.
Results of Operations
The Company's business is seasonal. Historically, sales in the third quarter ending November 30th each year have been higher than sales achieved in each of the other three fiscal quarters. Thus, expenses and, to a greater extent, results from operations vary significantly by quarter. Therefore, caution is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year.
Three Months Ended November 30, 2012 Compared to Three Months Ended November 30, 2011
The Company reported net sales of $5.7 million for the quarter ended November 30, 2012, a decrease of $1.5 million or 21% compared to net sales of $7.2 million in the same period in the prior year. This decrease in net sales was generally attributable to a reduction in net sales of low-end telescopes, spotting scopes and microscopes which was due to increased competition from the Company's Chinese-owned competitors and a reduction in the amount of demand for the products by consumers.
Gross profit during the three months ended November 30, 2012 was $0.3 million or 6.2% of net sales, a decrease of $1.2 million or 78% compared to gross profit of $1.6 million or 21.5% of net sales during the three months ended November 30, 2011. The decrease in gross profit was principally due to the decrease in net sales and the fact that relatively fixed manufacturing overhead costs represented a larger percentage of net sales.
Selling expenses for the third quarter ended November 30, 2012 were $0.6 million, compared to $0.7 million during the same quarter in the prior year. Selling expenses were consistent, at 10%, as a percentage of net sales during each of the fiscal quarters ended November 30, 2012 and 2011.
General and administrative expenses for the third quarter ended November 30, 2012 were $0.9 million or 15% of net sales compared to $0.8 million or 12% of net sales in the same quarter in the prior year. The increase in general and administrative expenses relative to the prior year was mainly due to higher professional fees. The Company's general and administrative expenses are more fixed than selling expenses; as a result, such expenses do not typically decrease as much as selling expenses do when net sales decline and are therefore higher as a percentage of net sales than the prior year.
Research and development expenses in the third quarter ended November 30, 2012 increased $19 thousand or 9% compared to the same period in the prior year due to increased efforts at new product development.
No provision for income taxes was recorded in the current period presented due to the significance of the Company's net loss and expected net loss for its fiscal year ending February 28, 2013. A provision for income taxes of approximately $14 thousand was recorded in the prior year.
Nine Months Ended November 30, 2012 Compared to Nine Months Ended November 30, 2011
The Company reported net sales of $13.8 million for the nine months ended November 30, 2012, a decrease of $3.8 million or 22% from net sales of $17.6 million in the same period in the prior year. Approximately $2.9 million or 77% of this decrease was attributable to reduced net sales of low-end telescopes, spotting scopes and microscopes to mass retail customers due to increased competition from the Company's Chinese-owned competitors and reduced demand for these products by consumers. Approximately $0.4 million or 10% of the decrease in net sales was attributable to a reduction in net sales of high-end telescopes due to delays in shipments of the Company's new LX800 and LX600 products, which are still under development, and the impact that delay has had on net sales of other high-end telescope products, offset partially by increased demand for solar telescopes. Approximately $0.5 million or 13% of the decrease in net sales was due to a reduction in sales of other products due to decreased demand for those products.
Gross profit of $1.8 million during the nine months ended November 30, 2012 decreased $2.5 million or 59% compared to the same period in the prior year. Approximately $2.0 million or 80% of this decrease in gross profit was attributable to a reduction in net sales and approximately $0.5 million or 20% was attributed to lower fixed cost absorption and unfavorable fluctuations in indirect manufacturing costs, such as labor and material variances, compared to the prior year.
Selling expenses for the nine months ended November 30, 2012 and 2011 were approximately $1.3 million and $1.8 million, respectively, and were consistent at 10% of net sales during each of those periods. The decline in selling expenses was attributable to lower variable selling expenses.
General and administrative expenses for the nine months ended November 30, 2012 and 2011 were $2.7 million or 19% of net sales and $2.6 million or 15% of net sales, respectively. General and administrative expenses are comprised mostly of fixed costs and generally do not vary with net sales as much as selling expenses.
Research and development expenses for the nine months ended November 30, 2012 of $0.8 million increased $0.2 million or 21% compared to $0.6 million during the same period in the prior year due to increased efforts to complete product development of the LX800 and LX600 products.
Release of warranty liability of $0.3 million during the nine months ended November 30, 2012 pertained to a reduction in the Company's warranty accrual which was recorded based upon an agreement which released the Company of its remaining warranty liability associated with those products. No such adjustment applied to the prior year.
No provision for income taxes was recorded during the nine months ended November 30, 2012 due to the significance of the Company's net loss and expected net loss for its fiscal year ending February 28, 2013. A provision of approximately $29 thousand was recorded in the prior year.
Seasonality
The Company has experienced, and expects to continue to experience, substantial fluctuations in its sales, gross margins, working capital requirements and results from operations from quarter to quarter. Factors that influence these fluctuations include the volume and timing of orders received, changes in the mix of products sold, market acceptance of the Company's products, competitive pricing pressures, the Company's ability to meet fluctuating demand and delivery schedules, the timing and extent of research and development expenses, the timing and extent of product development activities and the timing and extent of advertising expenditures. Historically, a substantial portion of the Company's net sales and results from operations typically occurred in the second and third quarter of the Company's fiscal year primarily due to the higher customer demand for less-expensive telescopes during the holiday season. Mass merchandisers, along with specialty retailers, purchase a considerable amount of their inventories to satisfy seasonal customer demand. These purchasing patterns have caused the Company to increase its level of inventory during its second and third quarters in response to such demand or anticipated demand. As a result, the Company's working capital requirements have correspondingly increased at such times. The Company continues to experience significant sales to mass merchandisers. Accordingly, the Company's net sales, working capital requirements and results from operations are expected to be higher in its second and third quarters than in the first and fourth quarters of its fiscal year.
Liquidity and Capital Resources
The Company has incurred significant recurring losses and negative cash flows from operations which have resulted in reduced liquidity and a weakened financial position as of November 30, 2012. The Company also has endured working capital problems caused by product development delays during the past twelve months. In addition, in January 2013, the Company's largest customer, and one additional customer, notified the Company that they had unilaterally, and without prior notice, decided to indefinitely hold payment of approximately $0.6 million in accounts receivable, which will further reduce the Company's already limited liquidity. Due to these issues, the Company's management now believes substantial doubt exists about the Company's ability to continue as a going concern and that it must modify the Company's business model and operations to reduce spending to a sustainable level. Such actions could cause the Company to be unable to execute its business plan, take advantage of future opportunities, respond to competitive pressures or customer requirements. It may also cause the Company to delay, scale back or eliminate some or all of its research and development programs, seek opportunities in a strategic relationship or business combination, or to reduce or cease operations.
At November 30, 2012, the Company had cash of $0.3 million, compared to $3.9 million at February 29, 2012 and $1.2 million at November 30, 2011.
Net cash used in operating activities was approximately $4.2 million during the nine months ended November 30, 2012 and $3.8 million during the nine months ended November 30, 2011, an increase in net cash used of approximately $0.4 million compared to the prior year. This increase in net cash used in operating activities was attributed to the increase in the Company's net loss of approximately $2.0 million from a loss of approximately $0.7 million during the nine months ended November 30, 2011 compared to a loss of approximately $2.7 million during the nine months ended November 30, 2012, offset by favorable net fluctuations in working capital. Approximately $1.1 million or 65% of the net increase in inventories of approximately $1.7 million during the nine months ended November 30, 2012 was due to an increase in inventories relating to the Company's new LX800 and LX600 products which have taken longer to develop than expected and are not yet ready to be shipped.
The Company typically experiences increases in accounts receivable and inventories and a corresponding decrease in cash beginning with the end of its first fiscal quarter and culminating with the end of its third fiscal quarter. Receivables and inventories then typically decrease, and cash increases, at the end of the Company's fiscal year. The Company began making advances on its credit facility in September 2012 in order to meet its working capital requirements and continued to do so through the filing of this Form 10-Q. In addition, the Company has incurred substantial operating losses during the nine months ended November 30, 2012.
At November 30, 2012, the Company had in place a secured credit facility with FCC, LLC d/b/a First Capital Western Region, LLC ("First Capital") and owed approximately $0.7 million as of November 30, 2012 on that facility. Availability of funds under that credit facility was based on a percentage of eligible accounts receivable and inventory and amounted to approximately $0.3 million as of November 30, 2012, in addition to the $0.7 million owed, and was based solely on accounts receivable as substantially all the Company's inventory was deemed ineligible due to most of it being located in Mexico.
In December 2012, the Company repaid the balance owed to First Capital, then amended and terminated its credit facility with First Capital and subsequently replaced it with a new financing agreement ("the Agreement") with Rosenthal & Rosenthal, Inc. ("Rosenthal"). At the time the First Capital credit facility was replaced, both the Rosenthal and First Capital credit facilities allowed for a maximum of $3 million and were based solely upon advances on accounts receivable. As of the closing date of the financing arrangement, December 28, 2012, availability under the new credit facility was approximately $1.6 million. Rosenthal advanced to the Company the $1.6 million maximum available under the new credit facility subsequent to the closing of the Agreement.
While the Company's agreement with Rosenthal does not contain explicit financial covenants, the Agreement allows the Company's lender significant latitude to restrict, reduce or eliminate the Company's access to credit or require the Company to repay any and all amounts outstanding under the Agreement. If its lender restricts, reduces or eliminates the Company's access to credit, or requires immediate repayment of the amounts outstanding under the agreement, the Company would be required to pursue additional or alternative sources of liquidity such as equity financings, a new debt agreement with other creditors, seek strategic alternatives or liquidate assets. However, the Company cannot assure that any such additional sources of liquidity would be available on reasonable terms, if at all.
The initial term of the credit facility with Rosenthal is through November 30, 2015 and can be renewed thereafter. The credit facility can be terminated by the Company or Rosenthal with at least 60 days, but not more than 120 days, notice except in case of a default, in which case the Company's lender can terminate the Agreement at any time.
Capital expenditures were approximately $123 thousand and $31 thousand for the nine months ended November 30, 2012 and 2011, respectively. The increase in capital expenditures related primarily to purchases of tools, molds and dies associated with new product development. The Company had no material capital expenditure commitments at November 30, 2012. However, certain of the Company's machinery and equipment is old and fully depreciated. It is possible that certain of the Company's machinery and equipment could require replacement in the near future. Given the Company's weakened financial position and limited liquidity, the Company may not be able to pay for or finance a replacement for such equipment and therefore may be forced to reduce or cease operations until it is able to replace any necessary equipment.
Inflation
The Company does not believe that inflation has had a material effect on the results of operations during the past two years. However, there can be no assurance that the Company's business will not be affected by inflation in the remainder of fiscal 2013 and beyond.
Forward-Looking Information
The preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section contains various "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, which
represent the Company's reasonable judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially, including the
following: the Company being able to see continued progress in
its restructuring efforts, the timing of such restructuring efforts, and the fact that the restructuring efforts will result in positive financial results in the future; the Company's expectation that it will continue to experience fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; the Company's expectation that contingent liabilities will not have a material effect on the Company's financial position or results of operations.
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