Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

OR

Commission file number 0-9321

(714) 368-2300

Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

PRINTRONIX, INC.

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

PRINTRONIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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PRINTRONIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of June 25, 2004 and March 26, 2004 continued
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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PRINTRONIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

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PRINTRONIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

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PRINTRONIX, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

		The unaudited, consolidated financial statements included herein have been prepared by Printronix, Inc., pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures are adequate to make the information presented not misleading.
		In the opinion of management, the consolidated financial statements reflect all adjustments (which include only normal recurring adjustments) considered necessary for a fair statement of the financial position and results of operations and cash flows as of and for the periods presented. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our latest Annual Report on Form 10-K for the fiscal year ended March 26, 2004, as filed with the Securities and Exchange Commission. The consolidated balance sheet as of March 26, 2004, presented herein has been obtained from the audited consolidated balance sheet contained in our latest Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
		Unless the context otherwise requires, the terms “we,” “our,” “us,” “company” and “Printronix” refer to Printronix, Inc. and its consolidated subsidiaries.

Note 2 Inventories

		We record a provision to value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory, or the current estimated market value of the inventory, based upon assumptions about future demand and market conditions. We also perform regular reviews of our inventory and record a provision for estimated excess and obsolete items based upon forecasted demand, and any other known factors at the time. Inventories, which include material, labor and overhead costs, are valued at the lower of cost (first-in, first-out method) or market.
		Raw materials, subassemblies and work in process inventory balances at June 25, 2004 and March 26, 2004 were as follows:

Note 3 Bank Borrowings And Debt Arrangements

		Secured Note
		As of June 25, 2004, we have a $14.7 million note with a United States bank secured by our Irvine facility. The note contains customary default provisions, no restrictive covenants and requires monthly principal and interest payments, with a balloon payment of $12.6 million due June 1, 2007. Interest on the note is at variable rates based upon the London Interbank Offered Rate (“LIBOR”) plus 1.25%, and is reset for periods from one month up to one year, at our discretion. The interest rate on the note at June 25, 2004 was 2.5% and the weighted average interest rate on the note for the current quarter was 2.4%. Total interest expense on the note was $0.1 million for both the current and year ago

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PRINTRONIX, INC. AND SUBSIDIARIES

		quarter. The note consisted of $14.0 million long-term debt and $0.7 million for the current portion of long-term debt, as of June 25, 2004.
		Lines of Credit
		At June 25, 2004, one of our foreign subsidiaries maintained unsecured lines of credit for $1.8 million with foreign banks, which included a standby letter of credit of $1.5 million. These credit facilities are subject to certain standard financial covenants. We were in compliance with these financial covenants for all fiscal periods presented. The parent company guarantees any amounts outstanding on these lines of credit. There were no cash borrowings against these lines of credit for the fiscal periods presented. No fees are charged for the unused portion of the lines of credit. Any borrowings on the lines of credit would be subject to interest rates at approximately 0.25% to 1.0% above the prime lending rate.
		In conjunction with our workers’ compensation insurance program, we obtained a standby letter of credit on December 19, 2003, from a United States bank for $0.2 million secured by a cash deposit. The standby letter of credit expires on December 20, 2004, but is subject to an automatic renewal. There were no cash borrowings against this letter of credit for the fiscal periods presented. Any borrowings would be subject to interest rates at 2.0% above the prime lending rate, subject to certain maximum limits.
		Credit Agreement For Hedging Activity
		We have a credit agreement for $2.4 million with a major foreign bank to support our hedging activities. This credit agreement has no restrictive covenants and is available to fund any forward currency contracts should we be unable to satisfy our obligations. The agreement automatically renews annually, subject to certain compliance requirements. There are no annual fees under this agreement if no amounts are borrowed. Any borrowings under this agreement would be subject to interest rates available at that time. No amounts were borrowed under this credit agreement for the fiscal periods presented.
		The components of interest and other expenses, net, in the consolidated statement of operations for the three months ended June 25, 2004 and June 27, 2003 were as follows:

Note 4 Net Income Per Share

Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common stock outstanding and potential shares outstanding during the period, if dilutive.

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PRINTRONIX, INC. AND SUBSIDIARIES

Net income per share for the three months ended June 25, 2004 and June 27, 2003, is as follows:

The dilutive weighted average shares outstanding does not include the antidilutive impact of 38,250 and 799,517 shares for the three months ended June 25, 2004 and June 27, 2003, respectively, because the exercise price of the stock options exceeded the average market value of the stock for the periods presented.

Note 5 Stock-Based Compensation

		We account for stock-based compensation issued to employees using the intrinsic-value-based method as prescribed by the Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under the intrinsic-value-based method, compensation is the excess, if any, of the fair market value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Compensation expense, if any, is recognized over the applicable service period, which is usually the vesting period. No stock-based employee compensation cost was recorded for the periods presented as all options granted under the stock-based compensation plan had an exercise price equal to the market value of the underlying common stock on the date of grant.
		The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation and is provided in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”

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Note 6 Common Stock

		In the fourth quarter of fiscal year 2002, the Board of Directors authorized the company to purchase up to 500,000 shares of the company’s outstanding common stock. Purchases may be made from time-to-time in the open market. During fiscal years 2002 and 2003, 165,905 shares of common stock were repurchased at prices ranging from $9.03 to $11.87 for a total cost of $1.7 million. We repurchased 106,700 shares of common stock at prices ranging from $9.70 to $10.61 per share for a total cost of $1.1 million during fiscal year 2004. No shares of common stock were repurchased during the first quarter of fiscal year 2005. Future purchases of 227,395 shares of common stock may be made at our discretion.
		Stock options exercised totaled 4,787 and 24,977 for the three months ended June 25, 2004 and June 27, 2003, respectively. Cash generated from the exercise of employee stock options was $28 thousand and $161 thousand for the three months ended June 25, 2004 and June 27, 2003, respectively.

Note 7 Stock Incentive Plan

		Under our 1994 Stock Incentive Plan, options may be granted to purchase shares of our common stock. As of June 25, 2004, there were 688,589 stock options outstanding and 509,381 stock options available to grant.
		During the first quarter of fiscal year 2005, 56,722 and 310,000 shares under the Stock Incentive Plan were reserved for future issuance as restricted stock. The 56,722 shares were reserved for future issuance to the non-employee Board of Directors members and key employees. As of June 25, 2004, none of the 56,722 shares were issued and outstanding.
		During the first quarter of fiscal year 2005, 290,000 of the 310,000 reserved shares were granted to certain officers of the company and other employees and are issued and outstanding. These shares are performance based and vest only if the company achieves certain financial targets over the next 6 fiscal years. In addition, 20,000 shares are not issued and outstanding but may be purchased by an employee if the performance criteria are met.

Note 8 Product Warranties and Guarantees

		Product Warranties
		Our financial statements reflect reserves for potential warranty claims based upon our evaluation of our claims experience. Printronix generally offers either a 90-day on-site or a 12-month return-to-factory standard parts-and-labor warranty on printer and verifier products to most customers. Defective printers and verifiers can be returned to us for repairs or replacement in the applicable warranty period at no cost to the customer. Supplies are warranted for the shelf life of the products, which can be up to two years. Estimated costs of future warranty obligations are charged to cost of sales in the period in which the products are sold.
		A summary of our accrued warranty obligation for the periods presented is as follows:

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

		Guarantees
		In the normal course of business to facilitate sales of its products, the company may indemnify customers and hold them harmless against losses arising from intellectual property infringement claims. The term of these indemnification agreements is generally perpetual any time after execution of the agreement subject to statute of limitations restrictions. The maximum potential amount of future payments we could be required to make under these agreements is unlimited. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal and have not recorded a liability for these agreements. The company has also agreed to hold harmless a former officer of the company in the event of an unfavorable outcome of ongoing litigation. We believe the fair value of the resolution of this litigation is minimal and have not recorded a liability for it. In addition, in connection with the standby letter of credit agreement obtained for our workers’ compensation insurance program, we have agreed to indemnify the bank from any third party claims related to its performance on our behalf. The term of this indemnification agreement extends beyond the term of the standby letter of credit agreement. We believe the fair value of this indemnification agreement is minimal and have not recorded a liability for it.

Note 9 Commitments And Contingencies

		Contractual Obligations And Commercial Commitments
		We are obligated under certain borrowing and lease commitments. Additional information on our borrowing obligations can be found in Note 3. There were no material changes in our borrowing and operating lease agreements as of June 25, 2004 from that reported in our Annual Report on Form 10-K.
		Operating Leases
		With the exception of Singapore, we conduct our foreign operations, Memphis operations and United States sales offices using leased facilities under non-cancelable operating leases that expire at various dates from fiscal year 2005 through fiscal year 2008. We own the building in Singapore and have a land lease that expires in fiscal year 2057. In June 2004, management announced they will close the Memphis facility. We do not expect the closure of this facility to have a material impact on our financial position or results of operations. Related expenditures are expected to be approximately $340 thousand.
		Environmental Assessment
		In January 1994 and March 1996, we were notified by the California Regional Water Quality Control Board - Santa Ana Region (the “Board”) that ground under one of our former production plants and ground adjacent to property previously occupied by us was thought to be contaminated with various chlorinated volatile organic compounds (“VOCs”). Evidence adduced from site studies undertaken to date indicates that compounds containing the VOCs were not used by Printronix during our tenancy, but were used by the prior tenant during its long-term occupancy of the site.
		In August 2002, we responded to an inquiry from the California Department of Toxic Substance Control (the “Department”) regarding our operations at the site of our former production plant. In February 2004, the Department submitted a proposed Corrective Action Consent Agreement to Printronix, which would require Printronix to perform an investigation of the site which would be used as a basis to determine what, if any, remediation activities would be required of Printronix. We are convinced that we bear no responsibility for any contamination at the site and we intend to defend vigorously any action that might be brought against us with respect thereto.
		As of June 25, 2004, we continued to maintain an accrual for $0.2 million, included in accrued liabilities other, which we believe is a reasonable estimate for additional expenses related to environmental tests that could be requested by the Board or the Department. Furthermore, we believe that we have adequately accrued for future expenditures in connection with environmental matters and that such expenditures will not have a materially adverse effect upon our financial condition or results of operations.

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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

		Legal Matters
		We are involved in various claims and legal matters in the ordinary course of business. We do not believe that these matters will have a materially adverse effect upon our results of operations or financial condition.

Note 10 Other Comprehensive Income (Loss)

		Other comprehensive income (loss) represents unrealized gains and losses on our Euro foreign currency forward exchange contracts that qualify for hedge accounting. The aggregate amount of such gains or losses that have not yet been recognized in net income is reported in the equity portion of the consolidated balance sheets as accumulated other comprehensive income (loss).
		Under our foreign currency-hedging program, we can enter into foreign currency forward exchange contracts with maturities from 30 to 180 days with a major financial institution. We do not use the contracts for speculative or trading purposes. As of June 25, 2004, we had outstanding forward exchange contracts with an aggregate notional amount of $6.0 million. Based on the fair value of these contracts at June 25, 2004, we recorded a net asset of $0.1 million.
		The following table reconciles net income to comprehensive income for the fiscal periods presented:

Note 11 Segment And Customer Data

		We manufacture and sell a variety of printers and associated products that have similar economic characteristics as well as similar customers, production processes and distribution methods. We therefore have aggregated similar products and report one segment.
		For the year to date periods ended June 25, 2004 and June 27, 2003, we had two resellers, each of which represented a significant percentage of consolidated net sales. Sales to the largest reseller, IBM, represented 21.6% and 29.4% of net sales for the three months ended June 25, 2004 and June 27, 2003, respectively. Sales to the second largest reseller represented 7.8% of net sales for the current quarter compared with 7.5% of net sales for the year ago quarter. Sales to the top ten customers represented 52.6% and 53.1% of net sales for the three months ended June 25, 2004 and June 27, 2003, respectively.

Note 12 Income Taxes

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Accordingly, we record a valuation allowance to reduce our deferred tax assets when management believes that deferred tax assets more likely than not will not be realized. In assessing the need for a valuation allowance, we consider all available evidence, including the expected timing of reversals of existing temporary differences, estimated future taxable income, prudent and feasible tax planning strategies, and recent financial performance. Under SFAS No. 109, we must place greater weight upon our history of United States operating losses than on our projections of future United States operating income.

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We have subsidiaries in various countries and are therefore subject to varying income tax rates. We had a favorable pioneer tax status in Singapore which exempted income generated from manufacturing the Printronix P5000 Series line matrix products from income tax, resulting in a reduced consolidated effective tax rate. The pioneer status expired March 26, 2004. The tax provision for the three months ended June 25, 2004, reflects the tax provision of our foreign operations and a full valuation allowance against net operating loss carryforwards generated in the United States. The tax provision for the three months ended June 27, 2003, reflects the realization of certain deferred tax assets due to our ability to carryback and the lower income tax rates in foreign countries in which we operate.

Note 13 New Pronouncements

		In April 2003, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this statement did not have a material impact on our financial position or results of operations.
		In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how certain financial instruments with the characteristics of both liabilities and equity are classified and measured. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on our financial position or results of operations.
		In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” which superceded SAB 101, “Revenue Recognition in Financial Statements.” SAB 104 updated certain interpretative guidance included in SAB 101. The basic revenue recognition principles of SAB 101 were largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on our financial position or results of operations.

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PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

PRINTRONIX, INC. AND SUBSIDIARIES

Forward-Looking Statements

Except for historical information, this Form 10-Q contains “forward-looking statements” about Printronix, within the meaning of the Private Securities Litigation Reform Act of 1995. Terms such as “objectives,” “believes,” “expects,” “plans,” “intends,” “should,” “estimates,” “anticipates,” “forecasts,” “projections,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, including: adverse business conditions and a failure to achieve growth in the computer industry and in the economy in general; the ability of the company to achieve growth in the Asia Pacific market; adverse political and economic events in the company’s markets; a worsening of the global economy due to general conditions; a worsening of the global economy resulting from terrorist attacks or risk of war; a worsening of the global economy resulting from a resurgence of SARS (Severe Acute Respiratory Syndrome); the ability of the company to maintain our production capability in our Singapore plant or obtain product from our Asia Pacific suppliers should a resurgence of SARS occur; the ability of the company to hold or increase market share with respect to line matrix printers; the ability of the company t