Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
VIDE > SEC Filings for VIDE > Form 10-Q on 15-Jul-2013All Recent SEC Filings

Show all filings for VIDEO DISPLAY CORP

Form 10-Q for VIDEO DISPLAY CORP


15-Jul-2013

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 attached interim condensed consolidated financial statements and with the Company's 2013 Annual Report to Shareholders, which included audited condensed consolidated financial statements and notes thereto for the fiscal year ended February 28, 2013, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

Overview

The Company is a worldwide leader in the manufacturing and distribution of a wide range of display devices, encompassing, among others, industrial, military, medical, and simulation display solutions. The Company is comprised of one segment - the manufacturing and distribution of displays and display components. The Company is organized into two interrelated operations aggregated into one reportable segment pursuant to the aggregation criteria of FASB ASC Topic 280 "Segment Reporting":

Monitors - offers a complete range of CRT, flat panel and projection display systems for use in training and simulation, military, medical, entertainment and industrial applications.

Data Display CRT - offers a wide range of CRTs for use in data display screens, including computer terminal monitors and medical monitoring equipment.

During fiscal 2014, management of the Company is focusing key resources on strategic efforts to consolidate unprofitable operations and seek to integrate acquisition opportunities that enhance the profitability and sales growth of the Company's more profitable product lines. The Company continues to seek new products through acquisitions and internal development that complement existing profitable product lines. Challenges facing the Company during these efforts include:

Liquidity - As of May 31, 2013, the Company was not in compliance with the fixed charge coverage ratio, the senior funded debt to EBITDA ratio (which the Company believes is the most restrictive covenant) and permitted share repurchases covenants as defined by the Banks credit line agreements. The breach of these covenants resulted in a default under our debt agreement and a current classification of the loans in fiscal 2013. This default could prompt the lender to declare all amounts outstanding under the debt agreement to be immediately due and payable and terminate all commitments to extend further credit; however, the Banks have given no current indication of any intention of calling the loans. If the debts were called and the Company was unable to repay those amounts, the lender could proceed against the collateral granted to secure that indebtedness. If the lender under the debt agreement accelerates the repayment of the borrowings, there can be no assurance that the Company will have sufficient assets and funds to repay the borrowings under its debt agreements.

Inventory management - The Company continually monitors historical sales trends as well as projected future needs to ensure adequate on hand supplies of inventory and to mitigate the risk of overstocking slower moving, obsolete items. The Company's inventories increased particularly in the monitor division due to new product lines it is carrying and due to requirements to fulfill contracts.

Certain of the Company's divisions maintain significant inventories of CRTs and component parts in an effort to ensure its customers a reliable source of supply. The Company's inventory turnover averaged over 200 days during 1Q 2014, although in many cases the Company would anticipate holding 90 to 100 days of inventory in the normal course of operations. This level of inventory is higher than some of the Company's competitors because it sells a number of products representing older, or trailing edge, technology that may not be available from other sources. The market for these trailing edge technology products is declining and, as manufacturers for these products discontinue production or exit the business, the Company may make last time buys. In the monitor operations of the Company's business, the market for its products is characterized by fairly rapid change as a result of the development of new technologies, particularly in the flat panel display area. If the Company fails to anticipate the changing needs of its customers and accurately forecast their requirements, it may accumulate inventories of products which its customers no longer need and which the Company will be unable to sell or return to its vendors. Because of this, the Company's management monitors the adequacy of its inventory reserves regularly, and at May 31, 2013 and February 28, 2013, believes its reserves to be adequate.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

Interest rate exposure - The Company had outstanding debt of $15.4 million as of May 31, 2013, all of which is subject to interest rate fluctuations by the Company's lenders. Higher rates applied by the Federal Reserve Board could have a negative effect on the Company's earnings. The interest rate on the PNC loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, default rate 9%, as defined in the loan documents. The Company is in breach of covenants; therefore, the 9% rate applies. It is the intent of the Company to continually monitor interest rates and consider converting portions of the Company's debt from floating rates to fixed rates should conditions be favorable for such interest rate swaps or hedges.

Results of Operations

The following table sets forth, for the three months ended May 31, 2013 and
2012, the percentages that selected items in the Statements of Operations bear
to total sales:



                                                  Three Months
                                                  Ended May 31,
                                               2013          2012
                 Sales
                 Monitors                        94.9 %        94.5 %
                 Data display CRT                 5.1           5.0
                 Entertainment CRT                0.0           0.1
                 Components parts                 0.0           0.4

                 Total Company                  100.0 %       100.0 %
                 Costs and expenses
                 Cost of goods sold              81.3 %        71.3 %
                 Selling and delivery            10.0          11.2
                 General and administrative      13.3          16.1

                                                104.6 %        98.6 %

                 Operating profit                (4.6 )%        1.4 %

                 Interest expense                (2.9 )%       (1.5 )%
                 Other income, net                4.4           1.6

                 Income before income taxes      (3.1 )%        1.5 %
                 Income tax expense              (1.3 )         0.2

                 Net income                      (1.8 )%        1.3 %

Net sales

Consolidated net sales were flat for the three months ended May 31, 2013 compared to the three months ended May 31, 2012. The Company's Aydin Visual Solutions division showed the best improvement with over a $1.0 million increase in revenues. We expect continued improvement throughout the year as their quoting activity has increased and they are becoming more recognized in the market. Lexel Imaging division sales increased $0.7 million or 39.2% due to increases with major customers in their foreign markets. The Display Systems division also showed an increase of 24.1% due to increases throughout their customer base. Aydin Displays was down 16% due to delays in releases on long-term contracts. Due to recent releases against these contracts and new business, we anticipate improvement for the Aydin division this year. Aydin CyberSecurity sales decreased due to fewer orders as the division's marketing and sales efforts were being reorganized and Z-Axis was down 32% due to a slow-down in orders from major customers, most of which were anticipated. Z-Axis's business with their major customers has leveled off and new business is being added to broaden the customer base. Their business is expected to increase as they have expanded their marketing efforts and have seen increases from new business.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

The Data Display division increase was primarily in flight simulation. We expect this business to remain steady throughout fiscal 2014. The Company closed its business in replacement CRTs for the consumer market and the Component Parts due to weaker demand for electron gun and stem sales.

Gross margins

Consolidated gross margins decreased from 28.7% for the three months ended May 31, 2012 to 18.7% for the three months ended May 31, 2013.

Gross margins within the Monitor division decreased to 19.1% for the three months ended May 31, 2013 from 29.3% for the three months ended May 31, 2012. All of the divisions which make up the Monitor division, except for Lexel Imaging, experienced lower gross margins. Lexel Imaging improved its sales, and its gross margins were flat compared to the prior year's comparative quarter. Aydin's gross margins are down 20% due to lower sales and product mix. Aydin's gross margins are expected to be approximately 34% for the year due to higher sales in second and third quarters. The Company's two new divisions, Aydin Visual Systems and Aydin CyberSecurity, had lower gross margins than the average in the Monitor division. Aydin Visual Solutions is a distributor of specialized displays, so it will consistently have lower margins than the other manufacturers in the group as distributors typically operate on smaller margins. The Data Display division gross margins decreased from 29.1% for the three months ended May 31, 2012 to 11.1% for the three months ended May 31, 2013, due to higher material costs relative to the sales price on the overseas shipments and product mix. The Data Display division had lower margin sales to overseas customers on slower moving products. They expect to have steady margins with their flight simulator customers while continuing to move slower moving items overseas at reduced margins. We would expect to see the margins remain below last year's levels.

Operating expenses

Operating expenses as a percentage of sales decreased from 27.3% for the three months ended May 31, 2012 to 23.3% for the three months ended May 31, 2013. This was primarily due to a decrease in salaries, commissions, and travel expense. The Company was able to control other fixed costs, such as rent and other administrative costs, on flat sales volumes. Overall expenses decreased by $0.5 million. The Company expects to continue to contain these costs while increasing revenues.

Interest expense

Interest expense increased by $181 thousand for the three months ended May 31, 2013. Interest expense as a percent to sales increased to 2.9% from 1.5% of net sales as compared to the same period a year ago, due to the increase in the interest rate from our bank, PNC. The Company expects interest costs to remain at the current levels until a new bank agreement is reached. The level of the outstanding debt remained constant during first quarter due to a decreased cash flow from operations offset by the management of current assets and liabilities. The Company maintains various debt agreements with different interest rates, most of which are based on the prime rate or LIBOR.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

Income taxes

The effective tax rate for the three months ended May 31, 2013 and 2012 was 40.8% (benefit) and 15.9%, respectively. These rates differ from the Federal statutory rate primarily due to the effect of state taxes, the permanent non-deductibility of certain expenses for tax purposes, and research and experimentation credits. The disparity of the effective rate from May 31, 2013 compared to 2012 is due largely to the Company not qualifying for the Domestic Production Activities deduction and a reduction in state income taxes due to having a loss in earnings.

Liquidity and Capital Resources

As of May 31, 2013, the Company was not in compliance with the fixed charge coverage ratio, the senior funded debt to EBITDA ratio (which the Company believes is the most restrictive covenant) and permitted share repurchases covenants as defined by the Banks credit line agreements. The breach of these covenants resulted in a default under our debt agreement and a current classification of the loans during fiscal 2013. This default could prompt the lender to declare all amounts outstanding under the debt agreement to be immediately due and payable and terminate all commitments to extend further credit; however, the Banks have given no current indication of any intention of calling the loans. If the debts were called and the Company was unable to repay those amounts, the lender could proceed against the collateral granted to secure that indebtedness. If the lender under the debt agreement accelerates the repayment of the borrowings, there can be no assurance that the Company will have sufficient assets and funds to repay the borrowings under its debt agreements. Additionally, due to the activity generated by the chairman's remarks at the 2012 annual shareholder meeting concerning any potential mergers, spinoffs, sale of the Company as a whole or any other method (see 8-K), the Company put negotiations on hold with the current syndication of banks.

As the current syndication of banks has given no indication of calling the loans, management believes the most appropriate plan of action is to continue to operate the Company, while exploring those options mentioned by the chairman above, and to continue to make timely and current payments under the debt agreements. Management has forecast this plan and believes that in the absence of the current syndication calling the loans, it can operate in this manner. The Company believes conditions are improving and has seen significant activity in new quotes and business won. VDC Display Systems has a number of large quotes outstanding which we expect to win in the near future. Aydin Visual Solutions was profitable in the first quarter and has seen increased activity via a number of quotes which should become orders this fiscal year in third and fourth quarters.

Management, while operating as noted above, is exploring opportunities for potential mergers, spinoffs, sale of the Company as a whole, or other methods. In the absence of obtaining new funding and/or any potential mergers, spinoffs, sale of the Company as a whole or any other method, management believes continuing and newly generated business as well as the CEO's commitment to infuse additional capital, if needed, will sustain the Company going forward.

The Company continues to monitor its cash and financing positions, seeking to find ways to lower its interest costs and to produce positive operating cash flow. The Company examines possibilities to grow its business as opportunities present themselves, such as new sales contracts or niche acquisitions. There could be an impact on working capital requirements to fund this growth. As in the past, the intent is to finance such projects with operating cash flows or existing bank lines; however, more permanent sources of capital may be required in certain circumstances.

As of May 31, 2013, the Company had $0.4 million in cash. The Company maintains zero balance accounts which sweep and pay-down the line of credit each day. The Company's working capital was $22.1 million and $22.2 million at May 31, 2013 and February 28, 2013, respectively. In recent years, the Company has financed its growth and cash needs primarily through income from operations, borrowings under revolving credit facilities, advances from the Company's Chief Executive Officer and long-term debt. Liquidity provided by operating activities of the Company is reduced by working capital requirements (largely inventories and accounts receivable), debt service, capital expenditures, and product line additions.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

The Company specializes in certain products representing trailing-edge technology that may not be available from other sources, and may not be currently manufactured. In many instances, the Company's products are components of larger display systems for which immediate availability is critical for the customer. Accordingly, the Company enjoys higher gross margins on certain products, but typically has larger investments in inventories than those of its competitors.

On December 23, 2010, the Company and its subsidiaries executed a new Credit Agreement with RBC Bank and Community & Southern Bank (collectively, the "Banks") to provide new financing to the Company to replace the existing credit agreement with RBC Bank that terminated in conjunction with this Agreement. The new Agreement provided for a line of credit of up to $17.5 million and two term loans of $3.5 million and $3.0 million.

1st Amendment: On May 26, 2011, the Banks amended the Credit Agreement to reduce the revolver commitment to $15.0 million, restate the covenants to pertain to only continuing operations of the Company and to adjust the targets for the senior funded debt to EBITDA covenant for the Company's quarters ending May 31, 2011 and August 31, 2011.

2nd Amendment: On July 26, 2011, the Banks again amended the Credit Agreement to include a swing-line promissory note of $1.0 million that is included in the revised $15.0 million revolver commitment.

3rd Amendment: On September 1, 2011, the Banks amended the Credit Agreement to allow the Company to repurchase a limited amount of the Company's common stock, equal to ten percent of the Company's net earnings after taxes, subject to meeting certain share repurchase conditions and revised the definition of the fixed charge coverage ratio and total liabilities to tangible net worth to exclude such repurchases.

4th Amendment: On January 17, 2012, the Banks amended the Credit Agreement to allow the Company to purchase a promissory note, dated July 23, 2010, held by Hetra Secure Solutions Corporation on StingRay56.

5th Amendment: Additionally, on March 5, 2012, the Banks amended the Credit Agreement to allow the Company to acquire StingRay56, Inc.

The outstanding balance of the line of credit at May 31, 2012 was $12.5 million and the balances of the term loans were $2.5 million and $2.7 million, respectively. These loans are secured by all assets and personal property of the Company and a limited guarantee of the Chief Executive Officer of $3.0 million. The $3.0 million term loan is secured by real estate property of the Company and a building owned by Southeastern Metro Savings, LLC, a company in which the Company's Chief Executive Officer is a minority officer. The building will continue to be in the collateral pool until such time as the note is sufficiently paid down or it is replaced by other collateral.

The Agreement contains three covenants: a fixed charge coverage ratio, ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), and total liabilities to tangible net worth. The Agreement also includes restrictions on the incurrence of additional debt or liens, investments (including Company stock), divestitures and certain other changes in the business. The Agreement expires on December 1, 2013. The interest rate on these loans is a floating LIBOR rate based on a fixed charge coverage ratio, minimum 4.0%, default rate 9%, as defined in the loan documents. The Company is in breach of covenants; therefore, the 9% rate applies.

Cash used in operations for the three months ended May 31, 2013 was $0.6 million. Net loss from operations used $0.2 million and adjustments to reconcile net loss to net cash were $0.3 million including depreciation and reserves. Changes in working capital used $0.7 million, primarily due to a decrease in accounts payable and accrued liabilities of $1.2 million, an increase in costs on uncompleted contracts of $0.8 million, a decrease in inventory of $0.1 million and an increase in prepaid taxes of $0.3 million. This was offset by a decrease in accounts receivable of $1.7 million. Cash used in operations for the three months ended May 31, 2012 was $0.8 million.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

Investing activities provided cash of $0.5 million from the sale of the Company's Bossier City property during the three months ended May 31, 2013, compared to cash used of $0.5 million during the three months ended May 31, 2012 from the purchase of equipment.

Financing activities provided cash of $1.1 million for the three months ended May 31, 2012, due to net proceeds from the line of credit of $1.2 offset by the purchase of treasury stock of $0.1, compared to cash provided of $0.2 million for the three months ended May 31, 2013, reflecting net borrowings from the line of credit and the reissuance of treasury stock.

The Company's debt agreements with financial institutions contain affirmative and negative covenants, including requirements related to tangible net worth and debt service coverage and new loans. Additionally, dividend payments, capital expenditures, and acquisitions have certain restrictions. Substantially all of the Company's retained earnings are restricted based upon these covenants.

The Company has a stock repurchase program, pursuant to which it was originally authorized to repurchase up to 1,632,500 shares of the Company's common stock in the open market. On July 8, 2009, the Board of Directors of the Company approved a one time continuation of the stock repurchase program, and authorized the Company to repurchase up to 1,000,000 additional shares of the Company's common stock, depending on the market price of the shares. There is no minimum number of shares required to be repurchased under the program. For the quarter ended May 31, 2012, the Company repurchased 14,469 shares at an average price of $4.20 per share. The Company did not repurchase any shares in the quarter ended May 31, 2011. Under the Company's stock repurchase program, an additional 712,668 shares remain authorized to be repurchased by the Company at May 31, 2012. The Credit Agreement executed by the Company on December 23, 2010 included restrictions on investments that restricted further repurchases of stock under this program. On September 1, 2011, the Agreement was amended to allow the Company to repurchase a limited amount of the Company's common stock, equal to ten percent of the Company's net earnings after taxes subject to meeting certain share repurchase conditions.

Critical Accounting Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company's condensed consolidated financial statements. These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates and assumptions that affect amounts reported and disclosed in the condensed consolidated financial statements and related notes. The accounting policies that may involve a higher degree of judgments, estimates, and complexity include reserves on inventories, revenue recognition, the allowance for bad debts and warranty reserves. The Company uses the following methods and assumptions in determining its estimates:

Reserves on Inventories

Reserves on inventories result in a charge to operations when the estimated net realizable value declines below cost. Management regularly reviews the Company's investment in inventories for declines in value and establishes reserves when it is apparent that the expected net realizable value of the inventory falls below its carrying amount. Management considers the projected demand for CRTs in this estimate of net realizable value. Management is able to identify consumer-buying trends, such as size and application, well in advance of supplying replacement CRTs. Thus, the Company is able to adjust inventory-stocking levels according to the projected demand. The average life of a CRT is five to seven years, at which time the Company's replacement market develops. Management reviews inventory levels on a quarterly basis. Such reviews include observations of product development trends of the original equipment manufacturers, new products being marketed, and technological advances relative to the product capabilities of the Company's existing inventories. There were no significant changes in management's estimates in the first quarter of fiscal 2014 and 2013; however, the Company cannot guarantee the accuracy of future forecasts since these estimates are subject to change based on market conditions.


Table of Contents

Video Display Corporation and Subsidiaries

May 31, 2013

Revenue Recognition

Revenue is recognized on the sale of products when the products are shipped, all significant contractual obligations have been satisfied, and the collection of the resulting receivable is reasonably assured. The Company's delivery term typically is F.O.B. shipping point.

In accordance with FASB ASC Topic 605-45 "Revenue Recognition: Principal Agent Considerations", shipping and handling fees billed to customers are classified in net sales in the consolidated income statements. Shipping and handling costs incurred are classified in selling and delivery in the consolidated income statements.

A portion of the Company's revenue is derived from contracts to manufacture flat panel and CRTs to a buyers' specification. These contracts are accounted for under the provisions of FASB ASC Topic 605-35 "Revenue Recognition:
Construction-Type and Production-Type Contracts". These contracts are fixed-price and cost-plus contracts and are recorded on the percentage of completion basis using the ratio of costs incurred to estimated total costs at completion as the measurement basis for progress toward completion and revenue recognition. Any losses identified on contracts are recognized immediately. Contract accounting requires significant judgment relative to assessing risks, estimating contract costs and making related assumptions for schedule and technical issues. With respect to contract change orders, claims, or similar items, judgment must be used in estimating related amounts and assessing the potential for realization. These amounts are only included in contract value when they can be reliably estimated and realization is probable.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is determined by reviewing all accounts receivable and applying credit loss experience to the current receivable portfolio with consideration given to the current condition of the economy, . . .

  Add VIDE to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for VIDE - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.