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TAIT > SEC Filings for TAIT > Form 10-Q on 15-May-2013All Recent SEC Filings

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Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, appearing in Item 1 of Part 1of this quarterly report on Form 10-Q, as well as our most recent annual report on Form 10-K for the year ended December 31, 2012.

This document contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 which are subject to risks and uncertainties. Forward-looking statements usually are denoted by words or phrases such as "believes," "expects," "projects," "estimates," "anticipates," "will likely result" or similar expressions. We wish to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on forward-looking statements, which speak only as of the date made, and to advise readers that actual results could vary due to a variety of risks and uncertainties. We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

References to "Taitron," the "Company," "we," "our" and "us" refer to Taitron Components Incorporated and its wholly owned and majority-owned subsidiaries, unless the context otherwise specifically defines.

Critical Accounting Policies and Estimates

Use of Estimates - Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States. These estimates have a significant impact on our valuation and reserve accounts relating to the allowance for sales returns, doubtful accounts, inventory reserves and deferred income taxes. Actual results could differ from these estimates.

Revenue Recognition - Revenue is recognized upon shipment of the merchandise, which is when legal transfer of title occurs. Reserves for sales allowances and customer returns are established based upon historical experience and our estimates of future returns. Sales returns for the quarters ended March 31, 2013 and 2012, aggregated $6,000 and $15,000, respectively. The allowances for sales returns and doubtful accounts at March 31, 2013 and 2012 aggregated $74,000 and $86,000, respectively.

Inventory - Inventory, consisting principally of products held for resale, is recorded at the lower of cost (determined using the first in-first out method) or estimated market value. We had inventory balances in the amount of $10,634,000 and $10,986,000 at March 31, 2013 and December 31, 2012, respectively, which is presented net of valuation allowances of $5,266,000 and $5,108,000, respectively. We evaluate inventories to identify excess, high-cost, slow-moving or other factors rendering inventories as unmarketable at normal profit margins. Due to the large number of transactions and the complexity of managing and maintaining a large inventory of product offerings, estimates are made regarding adjustments to the cost of inventories. Based on our assumptions about future demand and market conditions, inventories are carried at the lower of cost or estimated market value. If our assumptions about future demand change, or market conditions are less favorable than those projected, additional write-downs of inventories may be required. In any case, actual amounts could be different from those estimated.


We distribute both brand name electronic components and private labeled original designed and manufactured electronic components ("ODM Components") and provide integrated services and solutions to support original equipment manufacturers ("OEMs") and original design manufacturers ("ODMs"). Our product offerings range from discrete semiconductors (transistors, diodes, etc.), optoelectronic devices and passive components to small electronic devices.

Due to ongoing economic recession and related decreased product demand, we are placing emphasis on increasing our sales to existing customers through further expansion of the number of different types of discrete components and other integrated circuits in our inventory and by attracting additional contract electronic manufacturers ("CEMs"), OEMs and electronics distributor customers. In addition, over the last four years we have developed our ODM service capabilities and added products developed through partnership agreements with offshore solution providers (OEMs and CEMs).

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Our core strategy of electronic components fulfillment, however, consists of carrying a substantial quantity and variety of products in inventory to meet the rapid delivery requirements of our customers. This strategy allows us to fill customer orders immediately from stock on hand. Although we believe better market conditions may return, we are focused on lowering our inventory balances and increasing our cash holdings. Our long-term strategy is to rely not only on our core strategy of component fulfillment service, but also the value-added engineering and turn-key services.

In accordance with Generally Accepted Accounting Principles, we have classified inventory as a current asset in our March 31, 2013, condensed consolidated financial statements representing approximately 75% of current assets and 53% of total assets. However, if all or a substantial portion of the inventory was required to be immediately liquidated, the inventory would not be as readily marketable or liquid as other items included or classified as a current asset, such as cash. We cannot assure you that demand in the discrete semiconductor market will increase and that market conditions will improve. Therefore, it is possible that further declines in our carrying values of inventory may result.

Our gross profit margins are subject to a number of factors, including product demand, strength of the U.S. dollar, our ability to purchase inventory at favorable prices and our sales product mix.

Results of Operations

First quarter of 2013 versus 2012.

Net sales in the first quarter of 2013 totaled $1,632,000 versus $1,684,000 in the comparable period for 2012, a decrease of $52,000 or 3.1% over the same period last year.

Gross profit for the first quarter of 2013 was $352,000 versus $354,000 in the comparable period for 2012, and gross margin percentage of net sales was 21.6% in the first quarter of 2013 versus 21% in the comparable period for 2012.

Selling, general and administrative expenses in the first quarter of 2013 totaled $604,000 versus $637,000 in the comparable period for 2012. The decrease of $33,000 or 5.2% was primarily attributed to decreases in salaries and benefits in our overseas divisions due to personnel reductions.

Interest expense, net of interest income, was $8,000 for the first quarter of 2013 and $9,000 in the comparable period for 2012.

Other income, net of other expense, in the first quarter of 2013 was $32,000 versus $18,000 in the comparable period for 2012. Other income was primarily derived from the rental income of available excess office space within our headquarters' facility in Valencia, CA.

Income tax provision was $1,000 for both the first quarter of 2013 and the comparable period for 2012, as we do not expect significant taxable income.

Net loss was $229,000 for the first quarter of 2013 versus $275,000 in the comparable period for 2012, a decrease of $46,000 resulting from the reasons discussed above.

Liquidity and Capital Resources

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility.

Cash flows provided by operating activities was $444,000 compared to $231,000 for the three months ending March 31, 2013 and 2012, respectively. The increase of $213,000 resulted from changes in operating assets and liabilities, primarily from decreases to accounts receivable and smaller reductions of accounts payables.

Cash flows used in investing activities were $0 and $355,000 for the three months ending March 31, 2013 and 2012, respectively, primarily attributed to our 2012 investment in joint ventures (see Note 5).

Inventory is included in current assets; however, it will take over one year for the inventory to turn. Hence, inventory would not be as readily marketable or liquid as other items included in current assets, such as cash.

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We believe that funds generated from, or used in operations, in addition to existing cash balances are likely to be sufficient to finance our working capital and capital expenditure requirements for the foreseeable future. If these funds are not sufficient, we may secure new sources of short-term commercial loans, asset-based lending on accounts receivables or issue debt or equity securities.

Off-Balance Sheet Arrangements

As of March 31, 2013, we had no off-balance sheet arrangements.

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