Attached files
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EX-32.1 - EX-32.1 - WHITE ELECTRONIC DESIGNS CORP | p16816exv32w1.htm |
EX-32.2 - EX-32.2 - WHITE ELECTRONIC DESIGNS CORP | p16816exv32w2.htm |
EX-31.2 - EX-31.2 - WHITE ELECTRONIC DESIGNS CORP | p16816exv31w2.htm |
EX-31.1 - EX-31.1 - WHITE ELECTRONIC DESIGNS CORP | p16816exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: December 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-4817
WHITE ELECTRONIC DESIGNS CORPORATION
(Exact name of registrant as specified in its charter)
Indiana (State or other jurisdiction of incorporation or organization) |
35-0905052 (I.R.S. Employer Identification No.) |
|
3601 East University Drive Phoenix, Arizona (Address of principal executive offices) |
85034 (Zip Code) |
(602) 437-1520
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of the registrants common stock on February 5, 2010 was
approximately 23,310,777.
WHITE ELECTRONIC DESIGNS CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Table of Contents
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 65,387 | $ | 64,170 | ||||
Accounts receivable, less allowance for doubtful accounts of
$196 and $47 |
10,747 | 10,136 | ||||||
Inventories |
14,054 | 15,642 | ||||||
Prepaid expenses and other current assets |
3,965 | 3,607 | ||||||
Deferred income taxes |
2,563 | 2,464 | ||||||
Assets held for sale |
| 174 | ||||||
Total Current Assets |
96,716 | 96,193 | ||||||
Property, plant and equipment, net |
10,992 | 11,677 | ||||||
Deferred income taxes |
1,145 | 1,100 | ||||||
Goodwill |
1,764 | 1,764 | ||||||
Other assets |
67 | 67 | ||||||
Assets held for sale |
| 796 | ||||||
Total Assets |
$ | 110,684 | $ | 111,597 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 2,350 | $ | 3,823 | ||||
Accrued salaries and benefits |
1,353 | 1,874 | ||||||
Other accrued expenses |
1,439 | 1,546 | ||||||
Deferred revenue |
1,048 | 923 | ||||||
Liabilities related to assets held for sale |
| 352 | ||||||
Total Current Liabilities |
6,190 | 8,518 | ||||||
Accrued pension liability |
412 | 434 | ||||||
Other liabilities |
743 | 755 | ||||||
Total Liabilities |
7,345 | 9,707 | ||||||
Commitments and Contingencies |
||||||||
Shareholders Equity |
||||||||
Preferred stock, 1,000,000 shares authorized, no shares issued |
| | ||||||
Common stock, $0.10 stated value, 60,000,000 shares authorized,
25,835,426 and 25,464,726 shares issued |
2,583 | 2,546 | ||||||
Treasury stock, 2,530,154 and 2,464,371 shares, at par |
(253 | ) | (247 | ) | ||||
Additional paid-in capital |
84,782 | 83,686 | ||||||
Retained earnings |
16,580 | 16,270 | ||||||
Accumulated other comprehensive loss |
(353 | ) | (365 | ) | ||||
Total Shareholders Equity |
103,339 | 101,890 | ||||||
Total Liabilities and Shareholders Equity |
$ | 110,684 | $ | 111,597 | ||||
The
accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share data)
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Net sales |
$ | 15,568 | $ | 13,295 | ||||
Cost of sales |
9,817 | 7,992 | ||||||
Gross profit |
5,751 | 5,303 | ||||||
Operating expenses: |
||||||||
Selling, general and administrative |
4,072 | 3,791 | ||||||
Research and development |
1,228 | 1,116 | ||||||
Impairment loss |
345 | | ||||||
Total operating expenses |
5,645 | 4,907 | ||||||
Operating income |
106 | 396 | ||||||
Interest income |
77 | 247 | ||||||
Income from continuing operations before income taxes |
183 | 643 | ||||||
Provision for income taxes |
(56 | ) | (150 | ) | ||||
Income from continuing operations |
127 | 493 | ||||||
Discontinued operations (Note 10): |
||||||||
Income from discontinued operations, net of tax |
| 332 | ||||||
Gain on sale of discontinued operations, net of tax |
183 | | ||||||
Income from discontinued operations |
183 | 332 | ||||||
Net income |
$ | 310 | $ | 825 | ||||
Income from continuing operations per common share: |
||||||||
Basic |
$ | 0.01 | $ | 0.02 | ||||
Diluted |
$ | 0.01 | $ | 0.02 | ||||
Income from discontinued operations per common share: |
||||||||
Basic |
$ | 0.01 | $ | 0.01 | ||||
Diluted |
$ | 0.01 | $ | 0.01 | ||||
Net income per common share: |
||||||||
Basic |
$ | 0.01 | $ | 0.04 | ||||
Diluted |
$ | 0.01 | $ | 0.04 | ||||
Weighted average number of common shares and
equivalents: |
||||||||
Basic |
23,116,201 | 22,754,984 | ||||||
Diluted |
23,353,343 | 23,015,291 |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
4
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
OPERATING ACTIVITIES: |
||||||||
Income from continuing operations |
$ | 127 | $ | 493 | ||||
Adjustments to reconcile income from continuing operations to
net cash (used in) provided by operating activities: |
||||||||
Depreciation |
794 | 643 | ||||||
Impairment loss |
345 | | ||||||
Deferred income tax |
(72 | ) | (154 | ) | ||||
Loss on disposition of property, plant, and equipment |
4 | | ||||||
Stock-based compensation expense related to employee stock awards |
139 | 170 | ||||||
Tax benefit related to stock awards |
157 | 243 | ||||||
Excess tax benefits from stock-based compensation |
(24 | ) | (188 | ) | ||||
Pension costs |
(10 | ) | 28 | |||||
Net changes in balance sheet accounts: |
||||||||
Accounts receivable |
(611 | ) | 2,145 | |||||
Inventories |
1,588 | (88 | ) | |||||
Prepaid expenses and other current assets |
(358 | ) | (617 | ) | ||||
Accounts payable |
(1,574 | ) | 843 | |||||
Accrued expenses and deferred revenue |
(549 | ) | (494 | ) | ||||
Other long-term liabilities |
(12 | ) | 1 | |||||
Net cash (used in) provided by operating activities |
(56 | ) | 3,025 | |||||
INVESTING ACTIVITIES: |
||||||||
Acquisition of property, plant and equipment |
(357 | ) | (680 | ) | ||||
Net cash used in investing activities |
(357 | ) | (680 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Common stock issued for exercise of options and restricted stock |
831 | 280 | ||||||
Excess tax benefits from stock-based compensation |
24 | 188 | ||||||
Net cash provided by financing activities |
855 | 468 | ||||||
Net change in cash and cash equivalents from continuing operations |
442 | 2,813 | ||||||
CASH FLOWS FROM DISCONTINUED OPERATIONS: |
||||||||
Net cash provided by operating activities |
217 | 3,146 | ||||||
Net cash provided by (used in) investing activities |
558 | (36 | ) | |||||
Net change in cash and cash equivalents from discontinued operations |
775 | 3,110 | ||||||
Net change in cash and cash equivalents |
1,217 | 5,923 | ||||||
Cash and cash equivalents at beginning of period |
64,170 | 52,604 | ||||||
Cash and cash equivalents at end of period |
$ | 65,387 | $ | 58,527 | ||||
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: |
||||||||
Transfer of
accrued liabilities from liabilities related to assets held for sale to continuing operations |
$ | 46 | $ | | ||||
Transfer of deferred tax asset from assets held for sale to continuing operations |
$ | 72 | $ | | ||||
Acquisition of property, plant and equipment in accounts payable |
$ | 101 | $ | 86 |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
Unless the context otherwise requires, the term Company, we, us, or our refers to White
Electronic Designs Corporation. The condensed consolidated balance sheet as of December 31, 2009,
the condensed consolidated statements of operations for the three months ended December 31, 2009
and January 3, 2009, and the condensed consolidated statements of cash flows for the three months
ended December 31, 2009 and January 3, 2009 have been prepared by the Company and are unaudited.
The condensed consolidated balance sheet as of September 30, 2009 was derived from the audited
consolidated financial statements included in the Companys Annual Report on Form 10-K for the year
ended September 30, 2009.
Certain information and footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles in the United States of
America (GAAP) have been condensed or omitted. It is the opinion of management that all
adjustments (which include normal recurring adjustments) necessary for a fair statement of
financial results are reflected in the interim periods presented. Accordingly, these condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal
year ended September 30, 2009. The results of operations for the three months ended December 31,
2009 are not necessarily indicative of the operating results for the full year.
The preparation of financial statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements, as well as net sales
and expenses reported for the periods presented. The most significant estimates relate to revenue
recognition, inventory obsolescence, bad debts, long-lived assets, stock-based compensation,
warranty, income taxes and the gain or loss on the sale of discontinued operations. The Company
regularly assesses these estimates and, while actual results may differ, management believes that
the estimates are reasonable.
During fiscal 2008, the Company made a strategic decision to exit all commercial electronics
markets and focus its operation in the defense electronics market where the Company has superior
technical knowledge, specialized manufacturing capabilities and an ongoing commitment to research
and development. As a result of this decision, during fiscal 2009, the Company disposed of its
operations in the Interface Electronics Division (IED), commercial microelectronic product lines
and Display System Division (DSD). All three operations are being reported as discontinued
operations and the assets and liabilities of the discontinued operations are classified as assets
and liabilities held for sale.
2. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted EPS is computed by
giving effect to all potential dilutive common shares that were outstanding during the period
unless they are antidilutive. Potential dilutive common shares consist of the incremental common
shares that would be issued upon exercise of stock awards.
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows:
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Income from continuing operations |
$ | 127,000 | $ | 493,000 | ||||
Income from discontinued operations |
183,000 | 332,000 | ||||||
Net income |
$ | 310,000 | $ | 825,000 | ||||
Weighted average common shares outstanding basic shares |
23,116,201 | 22,754,984 | ||||||
Dilutive effect of stock options and restricted stock (1) |
237,142 | 260,307 | ||||||
Weighted average common and common share equivalents
outstanding diluted shares |
23,353,343 | 23,015,291 | ||||||
Basic EPS |
||||||||
Income per share from continuing operations |
$ | 0.01 | $ | 0.02 | ||||
Income per share from discontinued operations |
$ | 0.01 | $ | 0.01 | ||||
Net income per share |
$ | 0.01 | $ | 0.04 | ||||
Diluted EPS |
||||||||
Income per share from continuing operations |
$ | 0.01 | $ | 0.02 | ||||
Income per share from discontinued operations |
$ | 0.01 | $ | 0.01 | ||||
Net income per share |
$ | 0.01 | $ | 0.04 | ||||
(1) | Shares excluded from the calculation of Diluted EPS were 799,632 and 1,450,830 for the three months ended December 31, 2009 and January 3, 2009, respectively, as the exercise prices were greater than the average share prices for the periods. |
3. INVENTORIES
Inventories consisted of the following (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Raw materials |
$ | 8,516 | $ | 9,719 | ||||
Work-in-process |
4,335 | 4,444 | ||||||
Finished goods |
1,203 | 1,479 | ||||||
Total inventories |
$ | 14,054 | $ | 15,642 | ||||
Raw materials included approximately $0.4 million at December 31, 2009 and September 30, 2009 for
which the
Company has received advance payment from customers. These advance payments are recorded as
deferred revenue until the finished goods are delivered.
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment consisted of the following (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Land |
$ | 179 | $ | 247 | ||||
Buildings and improvements |
762 | 1,006 | ||||||
Machinery and equipment |
15,376 | 14,636 | ||||||
Furniture and fixtures |
4,837 | 4,794 | ||||||
Leasehold improvements |
7,362 | 7,337 | ||||||
Construction in progress |
724 | 1,168 | ||||||
Total, at cost |
29,240 | 29,188 | ||||||
Less accumulated depreciation |
(18,248 | ) | (17,511 | ) | ||||
Property, plant, and equipment, net |
$ | 10,992 | $ | 11,677 | ||||
Construction in progress typically represents either assets received and not yet in service or
leasehold improvements not yet completed. Depreciation expense was $0.8 million and $0.6 million
for the three months ended December 31, 2009 and January 3, 2009, respectively.
During the three months ended December 31, 2009, the Company experienced a loss from operations on
its electromechanical assembly product line, which represents its Ft. Wayne, Indiana operations. Based on current and
projected market factors, an impairment analysis was
performed. The estimated undiscounted future cash flows generated by this asset group were less
than its carrying value. The carrying values of the property, plant and equipment were reduced to
estimated fair value. As a result, during the three months ended December 31, 2009, the Company
recorded a pre-tax impairment charge of $0.3 million. The Company estimated the fair value based
upon our assumptions that market participants would use in pricing the assets.
5. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following major categories (in thousands):
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Sales commissions |
463 | 431 | ||||||
Warranty reserve |
297 | 296 | ||||||
Professional fees |
463 | 617 | ||||||
Other accruals |
216 | 202 | ||||||
Total other accrued expenses |
$ | 1,439 | $ | 1,546 | ||||
The Company estimates potential warranty obligations for its products based on annual product sales
and historical customer product claims data. Based on this data, the Company records estimated
warranty reserves and expense needed to account for the estimated cost of product returns.
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in the warranty reserve (in thousands):
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Warranty reserve, beginning of period |
$ | 296 | $ | 42 | ||||
Net provision for warranty claims |
(29 | ) | 10 | |||||
Reclassification from discontinued to continuing operations (Note 10) |
31 | | ||||||
Warranty claims charged against the reserve |
(1 | ) | (6 | ) | ||||
Warranty reserve, end of period |
$ | 297 | $ | 46 | ||||
In connection with the sale of DSD, $0.3 million of warranty reserve was retained by the Company
and reclassified to continuing operations as of April 3, 2009. During the three months ended
December 31, 2009, the Company reduced the DSD warranty provision by $53,000 due to the expiration
of the warranty period.
6. CREDIT FACILITY
On March 31, 2009, the Company entered into a Third Modification Agreement to its revolving line of
credit agreement with JPMorgan Chase Bank, N.A. (Revolving Line of Credit). The amendment reduced
the amount available under this line of credit from $30.0 million to $10.0 million and made certain
other adjustments to (i) the interest rates charged in connection with borrowings under the line of
credit, (ii) the commitment fee charged on the unused portion of the line and (iii) certain
financial covenants and restricted payments. The borrowings, if any, under the Revolving Line of
Credit bear interest at the lower of the London Interbank Offered Rate (LIBOR) plus 2.5%, or the
JPMorgan Chase Bank, N.A. prime rate. A commitment fee of 0.5% is charged on the unused portion
of the line. The Revolving Line of Credit expires on March 31, 2011. The Company is in compliance
with all debt covenant requirements related to this Revolving Line of Credit. As of December 31,
2009, there were no borrowings against the Revolving Line of Credit. The Company has not borrowed
against any credit facility since April 2003.
7. STOCK-BASED COMPENSATION
At December 31, 2009, the Company had share-based employee compensation plans which are described
in Notes 2 and 9 of the consolidated financial statements included in our Annual Report on Form
10-K for the year ended September 30, 2009. Option awards are granted with an exercise price equal
to the market price of our stock at the date of grant. We recognize stock compensation expense over
the requisite service period of the individual grantees, which generally equals the vesting period.
For the three months ended December 31, 2009 and January 3, 2009, the Company recorded compensation
expense of $139,000 and $170,000, respectively. The compensation cost for share-based payment
awards is included in selling, general and administrative expenses on the consolidated statements
of operations. There were no stock option grants during the three months ended December 31, 2009
and January 3, 2009. The Company granted 15,000 restricted stock units on November 6, 2009 to its
new director Kenneth J. Krieg which will vest over three years.
8. INCOME TAXES
The Companys effective tax rate differs from the federal statutory tax rate of 34% due to the
incremental impact of state income taxes offset by a reduction for
the manufacturer's deduction and research and development tax
credit currently available for federal
and state income tax purposes. The Companys effective tax rate was 31% and 23% for the three
months ended December 31, 2009 and January 3, 2009, respectively. The increase in the effective
rate is primarily due to the benefit recorded in the three months
ended January 3, 2009 for the
reinstatement of the research and development credit. The research and development credit expired
on December 31, 2007 and was retroactively reinstated on October 3, 2008. The credit again expired
December 31, 2009. Accordingly, we recorded a benefit of $72,000
in the three months ended January 3, 2009 for this reinstatement back to January 1, 2008.
Additionally, our fiscal 2010 provision only includes one quarter of our expected annual credit.
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company uses a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
Differences between tax positions taken in a tax return and amounts recognized in the financial
statements are recorded as adjustments to income taxes payable or receivable, or adjustments to
deferred taxes, or both. The Company accounts for uncertain tax positions by recognizing the
financial statement effects of a tax position only when, based on technical merits, it is more
likely than not that the tax position will be sustained upon examination.
As of December 31, 2009, the Company had unrecognized tax benefits of $339,000, $246,000 of which
would favorably impact the Companys effective tax rate if subsequently recognized. As of September
30, 2009, the Company had unrecognized tax benefits of $331,000, $240,000 of which would favorably
impact the Companys effective tax rate if subsequently recognized. The Company does not anticipate
a significant change in the total amount of unrecognized tax benefits during the next twelve
months.
The Companys policy is to recognize potential accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense. As of December 31, 2009, the
Company had accrued $16,000 of interest related to uncertain tax positions. As of September 30,
2009, the Company had accrued $15,000 of interest related to uncertain tax positions.
The Company and its subsidiaries are subject to the following significant taxing jurisdictions:
U.S. federal, Arizona, Indiana, Ohio and Oregon. The statute of limitations for a particular tax
year for examination by the Internal Revenue Service is three years, and three to four years for
the states of Arizona, Indiana, Ohio and Oregon. Accordingly, there are multiple years open to
examination.
9. PENSION PLAN
The Company has a non-contributory pension plan for eligible union employees at its Fort Wayne,
Indiana facility. The following table summarizes the components of net periodic benefit cost
recognized (in thousands):
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Service cost |
$ | 20 | $ | 10 | ||||
Interest cost |
54 | 39 | ||||||
Expected return on plan assets |
(63 | ) | (30 | ) | ||||
Amortization of unrecognized prior service cost |
14 | 9 | ||||||
Total net periodic benefit cost |
$ | 25 | $ | 28 | ||||
The Company contributed $49,000 to the pension plan during the three months ended December 31,
2009. There were no contributions to the pension plan during the three months ended January 3,
2009.
10. DISCONTINUED OPERATIONS
On March 28, 2008, the Board of Directors authorized the disposal of the IED and the commercial
microelectronic product lines. On September 26, 2008, the Board of Directors authorized the
disposal of DSD. These decisions resulted from an effort to streamline the Companys businesses to
focus on product lines where the Company has superior technical knowledge, specialized
manufacturing capabilities and an ongoing commitment to research and development. The Company
believes this course of action has and will continue to increase shareholder value and allow it to
focus on growing its business. As a result of its decision to dispose of these businesses, the
Company has accounted for them as discontinued operations for all
periods presented in the accompanying condensed consolidated
financial statements and the assets and liabilities of the
discontinued operations are classified as assets and liabilities held
for sale. It ceased depreciation of the assets of discontinued operations upon
committing to the disposal plans.
On April 3, 2009, the Company completed the sale of DSD to the U.S. subsidiary of VIA optronics
GmbH, a German company (VIA). The Company sold the operating assets of DSD, primarily consisting
of inventory, equipment and intellectual property, for approximately $2.3 million. As of the date
of the sale, other non-operating
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
net assets of approximately $0.9 million, consisting primarily of accounts receivable and residual
liabilities, were retained to be settled in the normal course of business. Other non-operating
liabilities of $(0.2) million and $(0.3) million remained as of December 31, 2009 and September 30,
2009, respectively. These non-operating net assets (liabilities) are included as part of continuing
operations. For the three months ended December 31, 2009 and January 3, 2009, respectively, the
Company recorded $0 and ($0.2) million of loss from discontinued operations, net of tax, for DSD.
The disposal of IED was consummated through three disposal groups. The Company sold a group of
assets, primarily equipment and a patent, in the third quarter of fiscal 2009. The second group of
IED assets, which consisted of the remaining equipment, was disposed of in the fourth quarter of
fiscal 2009. The land and the building, which comprised the third disposal group of IED assets,
were sold during December 2009 for $0.6 million. All production and shipments by IED were completed
in the third quarter of fiscal 2009. As of December 31, 2009, other non-operating net assets
(liabilities) of approximately $(46,000), consisting of fully reserved accounts receivable and
accrued liabilities, were retained to be settled in the normal course of business. These
non-operating net assets (liabilities) are included as part of continuing operations. For the
three months ended December 31, 2009 and January 3, 2009, respectively, the Company recorded $0 and
$0.3 million of income from discontinued operations, net of tax, for IED. For the three months
ended December 31, 2009 and January 3, 2009, respectively, the Company recorded $0.2 million and $0
of gain on sale of discontinued operations, net of tax, for IED.
The discontinued operations generated $0 in revenues in the three months ended December 31, 2009
compared to $6.5 million in the three months ended January 3, 2009. Gross profit from discontinued
operations for the three months ended December 31, 2009 was $0 compared to $1.8 million, or 29%
gross margin, in the three months ended January 3, 2009. Income from discontinued operations, net
of tax, was $0 in the three months ended December 31, 2009 compared to $0.3 million in the three
months ended January 3, 2009. Gain on sale of discontinued operations, net of tax, increased to
$0.2 million for the three months ended December 31, 2009 from $0 for the three months ended
January 3, 2009.
Income from discontinued operations consists of direct revenues and direct expenses of the
commercial microelectronic product line, the IED and the DSD business. General corporate overhead
costs were not allocated to discontinued operations.
A summary of the operating results included in discontinued operations in the accompanying
consolidated statements of operations is as follows:
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Net sales |
$ | | $ | 6,459 | ||||
Cost of sales |
| 4,614 | ||||||
Gross profit |
| 1,845 | ||||||
Total operating expenses |
| 1,425 | ||||||
Income from operations, before income taxes |
| 420 | ||||||
Provision for income taxes |
| (88 | ) | |||||
Income from discontinued operations, net of tax |
| 332 | ||||||
Gain on sale of discontinued operations, net of tax |
183 | | ||||||
Net income |
$ | 183 | $ | 332 | ||||
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of the assets and liabilities related to the discontinued operations classified as assets
held for sale and liabilities related to assets held for sale in the accompanying consolidated
balance sheets is as follows:
December 31, | September 30, | |||||||
2009 | 2009 | |||||||
Assets held for sale (current): |
||||||||
Accounts receivable, net |
$ | | $ | 174 | ||||
Total |
$ | | $ | 174 | ||||
Assets held for sale (long-term): |
||||||||
Property, plant and equipment, net |
$ | | $ | 486 | ||||
Deferred income taxes |
| 310 | ||||||
Total |
$ | | $ | 796 | ||||
Liabilities related to assets held for sale (current): |
||||||||
Accounts payable |
$ | | $ | 26 | ||||
Accrued expenses |
| 317 | ||||||
Deferred income taxes |
| 9 | ||||||
Total |
$ | | $ | 352 | ||||
11. CONCENTRATIONS
A significant portion of the Companys net sales were shipped to foreign customers. Export sales as
a percentage of total net sales for the three months ended December 31, 2009 and January 3, 2009
were 16% and 32%, respectively.
A summary of net sales by geographic region follows (in thousands):
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
United States |
$ | 13,037 | $ | 9,085 | ||||
Europe and Middle East |
1,361 | 1,624 | ||||||
Asia Pacific |
1,041 | 2,438 | ||||||
Other |
129 | 148 | ||||||
Net sales |
$ | 15,568 | $ | 13,295 | ||||
A
significant portion of our net sales are derived from a small number of customers. The Companys
five largest customers accounted for 69% of net sales during the three months ended December 31,
2009 and 40% of net sales during the three months ended January 3, 2009.
The Company maintains cash balances in excess of Federal Deposit Insurance Corporation (FDIC)
insured limits. Approximately $65.1 million was not insured as of September 30, 2009.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2008, the Financial
Accounting Standards Board (FASB) issued additional disclosure
requirements for plan assets of defined benefit pension or other postretirement plans. Required
disclosures provide information on how investment allocation decisions are made, the major
categories of plan assets, the inputs and valuation techniques used to measure the fair value of
plan assets, the effect of fair value measurements using significant unobservable inputs on changes
in plan assets and significant concentrations of risk within plan assets. The disclosures about
plan assets shall be provided for fiscal years ending after December 15, 2009. Upon initial
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WHITE ELECTRONIC DESIGNS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
application, the provisions are not required for earlier periods that are presented for
comparative purposes. Earlier application of the provisions is permitted. We will incorporate
these additional disclosures in our consolidated financial statements for the year ended September
30, 2010. Their adoption does not change the accounting treatment for postretirement benefit plans.
In October 2009, the FASB issued authoritative guidance on revenue recognition. Under the new
guidance on arrangements that include software elements, tangible products that have software
components that are essential to the functionality of the tangible product will no longer be within
the scope of the software revenue recognition guidance, and software-enabled products will now be
subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative
guidance on revenue arrangements with multiple deliverables that are outside the scope of the
software revenue recognition guidance. Under the new guidance, when vendor specific objective
evidence or third party evidence for deliverables in an arrangement cannot be determined, a best
estimate of the selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method affects the timing and
amount of revenue recognition. This guidance will become effective for the Companys fiscal year
2011 beginning October 1, 2010, with earlier adoption permitted. The Company has no application for
this guidance at the present time.
13. COMMITMENTS AND CONTINGENCIES
Contingencies
From time to time, the Company is subject to claims and litigation incident to its business. There
are currently no such pending proceedings to which the Company is a party that it believes will
have a material adverse effect on its consolidated results of operations, liquidity, or financial
condition.
14. SUBSEQUENT EVENTS
On January 13, 2010, the management of the Company committed the Company to an exit and disposal of
the Ft. Wayne, Indiana operations, which is included in its defense electronics segment. The
Company has a continuing effort to streamline the Companys business to focus on product lines
where the Company has superior technical knowledge, specialized manufacturing capabilities and an
on-going commitment to research and development. Management has determined that the Companys
operations in Ft. Wayne, Indiana are not consistent with the Companys long-term strategy. No
other significant subsequent events requiring disclosure were noted through February 9, 2010, the
filing date of the Companys Quarterly Report on Form 10-Q for the period ended December 31, 2009.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following managements discussion and analysis of financial condition and results of operations
(MD&A) regarding the three month period ended December 31, 2009 compared to the three month
period ended January 3, 2009 should be read in conjunction with our unaudited consolidated
financial statements and related notes for the same periods included elsewhere in this report and
our audited consolidated financial statements and related notes for the fiscal year ended September
30, 2009 included in our most recent Annual Report on Form 10-K.
Note Regarding Forward-Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q, including the MD&A, contains forward-looking statements
including financial projections regarding future events and our future results that are within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). The Private Securities Litigation Reform Act
of 1995, as amended, provides a safe harbor for such forward-looking statements which we intend
to comply with. The words believe, expect, estimate, anticipate, intend, may, might,
will, would, could, project and predict, or similar words and phrases regarding
expectations, generally identify forward-looking statements.
We intend to qualify both our written and/or oral forward-looking statements made from time to time
in connection with our filings with the Securities and Exchange Commission (the SEC) or in public
news releases for protection under the safe harbors discussed above. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, they are based largely
on managements expectations and because they are estimates, such statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or quantified and are beyond our
control. Future events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements, each of which speaks only as of the
date the statement is made. Statements in this Form 10-Q, including those set forth in the Notes
to the Unaudited Consolidated Financial Statements, the section entitled Managements Discussion
and Analysis of Financial Condition and Results of Operations and the section entitled Risk
Factors in this Form 10-Q and our most recent Annual Report on Form 10-K describe factors that
could contribute to or cause actual results to differ materially from our expectations. Some
factors that could cause actual results to differ materially from those expressed in such
forward-looking statements include, but are not limited to, the following:
| the loss of one or more principal customers or delays or cancellations of orders due to the impact of adverse business conditions on one or more principle customers; | ||
| the inability to procure required components and raw materials; | ||
| any downturn in the defense, aerospace, semiconductor or other markets in which we operate, which could cause a decline in selling unit prices or volume; | ||
| reductions in military spending, shifts of funding allocations or changes in the acquisition requirements for military products; | ||
| the inability to develop, introduce and sell new products or the inability to develop new manufacturing technologies; | ||
| the inability to dispose of our Ft. Wayne, Indiana operations at a desireable sales price, if at all; | ||
| the failure of customers to accept our anti-tamper (AT) processing or the development of improved AT processing by competitors; |
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| the ability to locate appropriate acquisition candidates, negotiate an appropriate purchase price, obtain the necessary financing, and integrate into our business the people, operations and products from acquired businesses, or implement other strategic alternatives; | ||
| changes or restrictions in the practices, rules and regulations relating to sales in international markets; and/or | ||
| changes resulting from severe economic downturns that affect our customers, suppliers and lenders. |
In addition, new factors, other than those identified in this Form 10-Q or our most recent Annual
Report on Form
10-K, may emerge from time to time and it is not possible for management to predict all such
factors, nor can we assess the impact of each factor on our business or the extent to which any one
factor, or combination of factors, may cause actual results to differ materially from
forward-looking statements. We do not undertake, and we specifically disclaim, any obligation to
publicly update or revise any forward-looking statement contained in this Form 10-Q or in any
document incorporated herein by reference, whether as a result of new information, future events or
otherwise, except as required by applicable law.
Overview of Business
We are a defense electronics manufacturer and supplier that designs, develops and manufactures
innovative electronic components and systems for inclusion in high technology products for the
defense and aerospace markets. Our defense electronics solutions include advanced semiconductor and
state of the art multi-chip packaged components, integrated circuit card assemblies with AT
components and electromechanical assemblies, as well as our proprietary process for incorporating
AT protection to mission critical semiconductor components. Our customers, which include military
prime contractors and the contract manufacturers who work for them in the United States, Europe and
Asia, outsource many of their defense electronic components and systems to us as a result of the
combination of our design, development and manufacturing expertise.
Executive Summary
Continuing Operations
Our net sales for the three months ended December 31, 2009 increased $2.3 million to $15.6 million,
compared to $13.3 million for the three months ended January 3, 2009. The increase in sales was due
to the increase in sales of integrated circuit card assemblies with AT components and AT component
only sales offset by decreases in the sales of standard ball grid arrays (BGA) and modules.
Income from continuing operations for the three months ended December 31, 2009 was $0.1 million, or
$0.01 per diluted share, compared to income from continuing operations of $0.5 million, or $0.02
per diluted share, for the three months ended January 3, 2009. The decrease was primarily due to an
impairment charge of $0.3 million in relation to our electromechanical assembly product line
combined with increased operating expenses and lower interest income, which more than offset the
increase in gross profit.
Including
the income in connection with the disposal of the IED land and
building discussed below, net
income for the three months ended December 31, 2009 was $0.3 million, or $0.01 per diluted share,
compared to net income of $0.8 million, or $0.04 per diluted share, for the three months ended
January 3, 2009.
A key indicator of our future sales is the amount of new orders received compared to current net
sales, known as the book-to-bill ratio. During the three months ended December 31, 2009, we
received new orders of $18.4 million, which equates to a book-to-bill ratio of 1.18:1.0. Bookings
during the three months ended January 3, 2009 totaled $19.5 million, yielding a book-to-bill ratio
of 1.47:1.0. We continue to experience positive bookings and expect the book-to-bill ratio for
fiscal year 2010 to end greater than 1.0:1.0. Total AT bookings, which include bookings for AT
components as well as integrated circuit cards with AT components, were $9.1 million and $6.1
million for the three months ended December 31, 2009 and January 3, 2009, respectively. Total
backlog as of December 31, 2009 was $40.7 million, compared to $37.8 million as of September 30,
2009.
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Our gross margins from continuing operations during the three months ended December 31, 2009
decreased to 37% from 40% during the three months ended January 3, 2009. The decrease was primarily
due to decreased sales of our electromechanical assemblies
combined with a higher cost of sales due to the lower volume of activity of these assemblies. Based on our current business, which includes both custom and
standard microelectronic components, military circuit card assemblies and electromechanical
assemblies, we expect overall margins for fiscal 2010 to center around 40%.
Discontinued Operations
On March 28, 2008, the Board of Directors authorized the disposal of our Interface Electronics Division (IED) and commercial
microelectronic product lines. On September 26, 2008, the Board of Directors authorized the
disposal of our Display Systems Division (DSD). These decisions resulted from an effort to streamline our businesses to focus on
product lines where we have superior technical knowledge, specialized manufacturing capabilities
and an ongoing commitment to research and development. We believe this course of action has and
will continue to increase shareholder value and allow us to focus on growing our business. As a
result of our decision to dispose of these product lines, we have accounted for them as
discontinued operations for all periods presented in the accompanying unaudited condensed consolidated
financial statements and the assets and liabilities of the discontinued operations are classified
as assets and liabilities held for sale.
On
April 3, 2009, we completed the sale of DSD to the U.S. subsidiary of VIA optronics GmbH, a German company. We sold the operating assets of DSD,
primarily consisting of inventory, equipment and intellectual property, for approximately $2.3
million. As of the date of the sale, other non-operating net assets of approximately $0.9 million,
consisting primarily of accounts receivable and residual current liabilities, were retained to be
settled in the normal course of business. Other non-operating liabilities of $(0.2) million and
$(0.3) million remained as of December 31, 2009 and September 30, 2009, respectively. These
non-operating net assets (liabilities) are included as part of continuing operations. For the
three months ended December 31, 2009 and January 3, 2009, respectively, we recorded $0 and ($0.2)
million of loss from discontinued operations, net of tax, for DSD.
The disposal of IED was consummated through three disposal groups. We sold a group of assets,
primarily equipment and a patent, in the third quarter of fiscal 2009. The second group of IED
assets, which consisted of the remaining equipment, was disposed of in the fourth quarter of fiscal
2009. The land and the building, which comprised the third disposal group of IED assets, were sold
during December 2009. All production and shipments by IED were completed in the third quarter of
fiscal 2009. As of December 31, 2009, other non-operating net assets (liabilities) of
approximately $(46,000), consisting of fully reserved accounts receivable and accrued liabilities,
were retained to be settled in the normal course of business. These non-operating net assets
(liabilities) are included as part of continuing operations. For the three months ended December
31, 2009 and January 3, 2009, respectively, we recorded $0 and $0.3 million of income from
discontinued operations, net of tax, for IED. For the three months ended December 31, 2009 and
January 3, 2009, respectively, we recorded $0.2 million and $0 of gain on sale of discontinued
operations, net of tax, for IED.
Our discontinued operations generated $0 in revenues in the three months ended December 31, 2009
compared to $6.5 million in the three months ended January 3, 2009. Gross profit from discontinued
operations for the three months ended December 31, 2009 was $0 compared to $1.8 million, or 29%
gross margin, for the three months ended January 3, 2009. Income from discontinued operations, net
of tax, was $0 in the three months ended December 31, 2009 compared to $0.3 million in the three
months ended January 3, 2009. Gain on sale of discontinued operations, net of tax, increased to
$0.2 million for the three months ended December 31, 2009 from $0 for the three months ended
January 3, 2009.
Subsequent to the period ended December, 31, 2009, on January 13, 2010, management committed the
Company to an exit and disposal of the Ft. Wayne, Indiana operations, which is included in our
defense electronics segment. As noted above, we have a continuing effort to streamline our
business to focus on product lines where we have superior technical knowledge, specialized
manufacturing capabilities and an on-going commitment to research and development.
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Business Outlook
As part of our renewed focus on defense only electronics, we have developed a plan that builds on
our core competencies and expands beyond multichip components. The plan focuses on expanding
revenue opportunities in
three key areas: Aircraft, Missiles and Ordnance and Net Centric Operations. Programs that require
secure communications, guidance of munitions to minimize collateral damage and enhance war fighter
safety will be addressed by our GPS components with our AT protection and integrated circuit card
assemblies with AT components. Additionally, we believe that there are significant opportunities in
solid state technology which replaces mechanical storage devices. In the overall defense market,
we see participation in the broader GPS and information assurance environments as logical potential
extensions of our capability. Paths to participating in these markets include research and
development, strategic partnerships and acquisitions.
Critical Accounting Policies and Estimates
For a description of the Companys critical accounting policies and an understanding of the
significant factors that influenced the Companys performance during the quarters ended December
31, 2009 and January 3, 2009, this Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) should be read in conjunction with the consolidated financial
statements, including the related notes, appearing in Item 1 of this Report, as well as the
Companys Annual Report on Form 10-K for the year ended September 30, 2009.
Results of Operations
The following table sets forth certain financial data expressed as a percentage of net sales:
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Cost of sales |
63.1 | % | 60.1 | % | ||||
Gross profit |
36.9 | % | 39.9 | % | ||||
Operating expenses: |
||||||||
Selling, general and administrative |
26.2 | % | 28.6 | % | ||||
Research and development |
7.9 | % | 8.4 | % | ||||
Impairment loss |
2.2 | % | 0.0 | % | ||||
Total operating expenses |
36.3 | % | 37.0 | % | ||||
Operating income |
0.6 | % | 2.9 | % | ||||
Interest income |
0.5 | % | 1.9 | % | ||||
Income from continuing operations before income taxes |
1.1 | % | 4.8 | % | ||||
Provision for income taxes |
(0.4 | %) | (1.1 | %) | ||||
Income from continuing operations |
0.7 | % | 3.7 | % | ||||
Discontinued operations |
||||||||
Income from discontinued operations, net of tax |
0.0 | % | 2.5 | % | ||||
Gain on sale of discontinued operations, net of tax |
1.2 | % | 0.0 | % | ||||
Income from discontinued operations |
1.2 | % | 2.5 | % | ||||
Net income |
1.9 | % | 6.2 | % | ||||
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Three Months ended December 31, 2009 compared to the Three Months ended January 3, 2009
Net Sales
Net sales were $15.6 million for the three months ended December 31, 2009, an increase of $2.3
million, or 17%, from $13.3 million for the three months ended January 3, 2009. The increase in
sales was due to the increase in sales of integrated circuit card assemblies with AT components and
AT component only sales offset by decreases in the sales of standard BGA and modules.
During the three months ended December 31, 2009, L-3 Communications Corporation accounted for $2.8
million, or 18% of total net sales, ITT Corporation accounted for $2.6 million, or 17% of total net
sales, Arrow Electronics, Inc. accounted for $2.2 million, or 14% of total net sales, Raytheon
Company accounted for $1.6 million, or 10% of total net sales, and Avnet, Inc. accounted for $1.6
million, or 10%, of total net sales. During the three months ended January 3, 2009, the only
company accounting for 10% or more of our total net sales was Arrow Electronics, Inc., who
accounted for $1.7 million, or 13% of total net sales.
The majority of our sales are not subject to seasonal fluctuations over the course of a year.
However, as we move to a business base driven more by larger orders on major defense programs, we expect to experience more quarter-to-quarter fluctuations in bookings and revenues.
Gross Profit
Gross profit was $5.8 million for the three months ended December 31, 2009, an increase of $0.5
million, or 8%, from $5.3 million for the three months ended January 3, 2009. For the three months
ended December 31, 2009, gross margin as a percentage of net sales was 37%, compared to 40% for the
three months ended January 3, 2009. The increase in gross profit was primarily the result of an
increase in net sales, while the decrease in gross margin percentage was due to decreased sales of
our electromechanical assemblies combined with a higher cost of sales due to the lower volume of
activity of these assemblies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist mainly of compensation expense, selling
expenses, including commissions, information technology expenses and corporate administrative
expenses. Selling, general and administrative expenses were $4.1 million for the three months ended
December 31, 2009, an increase of $0.3 million, or 7%, from $3.8 million for the three months ended
January 3, 2009. The increase was primarily the result of an increase in general and administrative
expenses of $0.2 million due to increases in payroll expenses as a result of an increase in
headcount and an increase in consulting fees offset by a decrease in corporate audit and tax fees.
Selling, general and administrative expenses as a percentage of net sales decreased to 26% for the
three months ended December 31, 2009 from 29% for the three months ended January 3, 2009, primarily
due to a decrease in expenses offset by an increase in net sales for the period. We expect selling,
general and administrative expenses to average 25% to 27% of net sales in the future at the current
net sales level.
Research and Development Expenses
Research and development expenses consist primarily of compensation for our engineering personnel,
consulting expenses and project materials. Research and development expenses were $1.2 million for
the three months ended December 31, 2009, an increase of $0.1 million, or 10%, from $1.1 million
for the three months ended January 3, 2009. Research and development expenses increased due to an
increase in payroll expense as a result of an increase in headcount. We are committed to the
research and development of new and existing products. We expect research and development expenses
to average approximately 7% to 8% of net sales at the current net sales level.
Ongoing product development projects include new product designs for various types of memory
products including Double Data Rate (DDR) II, DDR III, FLASH and microprocessors and BGAs using
these semiconductors, continuing development of AT technology and integrated circuit card assembly
design, advanced development for solid state drives, and advanced custom designs for use in defense
markets.
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Impairment Loss
During the three months ended December 31, 2009, we experienced a loss from operations on our
electromechanical assembly product line, which represents our Ft. Wayne, Indiana operations, and the projected results for the balance of the year are
not favorable. This change required an impairment analysis to be performed. The estimated
undiscounted future cash flows generated by this asset group were less than its carrying value.
The carrying values of the property, plant and equipment were reduced to estimated fair value. As
a result, during the three months ended December 31, 2009, we recorded a pre-tax impairment charge
of $0.3 million. We estimated the fair value based upon our assumptions that market participants
would use in pricing the assets.
Interest Income
Interest income consists of interest earned on our cash balances invested primarily in money market
accounts. Interest income was $0.1 million for the three months ended December 31, 2009, a
decrease of $0.1 million, or 69%, from $0.2 million for the three months ended January 3, 2009. The
decrease is due to lower interest rates, offset slightly by a higher average invested balance. We
expect interest income to remain low in fiscal 2010 due to macroeconomic conditions.
Income Taxes
We recorded income tax expense of $0.1 million for the three months ended December 31, 2009,
compared to income tax expense of $0.2 million for the three months ended January 3, 2009. The
Companys effective tax rate was 31% for the three months ended December 31, 2009 and 23% for the
three months ended January 3, 2009. The Companys effective tax rate differs from the federal
statutory tax rate of 34% due to the incremental impact of state income taxes, offset by reductions
for the manufacturers deduction and research and development tax credits currently available for federal and state income tax
purposes.
The increase in the effective rate for the three months ended December 31, 2009 as compared to the
three months ended January 3, 2009 is primarily due to the benefit recorded in the first quarter of
fiscal 2009 for the reinstatement of the research and development credit. The research and
development credit expired on December 31, 2007 and was retroactively reinstated on October 3,
2008. The credit again expired on December 31, 2009. Accordingly, we recorded a benefit of
$72,000 in the first quarter of fiscal 2009 for this reinstatement of the research and development
credit back to January 1, 2008. Additionally, our fiscal 2010 provision only includes one quarter
of our expected annual credit.
Discontinued Operations
As a result of our decision to dispose of the IED, DSD and commercial microelectronic product
lines, we have accounted for these operations as discontinued operations. We also ceased
depreciation of the assets of discontinued operations upon committing to the disposal plans.
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Income from discontinued operations consists of direct revenues and direct expenses of the
commercial microelectronic, IED and DSD product lines. General corporate overhead costs have not
been allocated to discontinued operations. A summary of the operating results included in
discontinued operations in the accompanying unaudited consolidated statements of operations is as
follows:
Three Months Ended | ||||||||
December 31, | January 3, | |||||||
2009 | 2009 | |||||||
Net sales |
$ | | $ | 6,459 | ||||
Cost of sales |
| 4,614 | ||||||
Gross profit |
| 1,845 | ||||||
Total operating expenses |
| 1,425 | ||||||
Income from operations, before income taxes |
| 420 | ||||||
Provision for income taxes |
| (88 | ) | |||||
Income from discontinued operations, net of tax |
| 332 | ||||||
Gain on sale of discontinued operations, net
of tax |
183 | | ||||||
Net income |
$ | 183 | $ | 332 | ||||
Income from discontinued operations, net of tax, for the three months ended December 31, 2009
was $0 compared to $0.3 million for the three
months ended January 3, 2009. Income from discontinued operations, net of tax, decreased due to the
disposal of the commercial microelectronic product line in the second quarter of fiscal 2009, the
sale of DSD in the second quarter of fiscal 2009, and the closure of the IED facility in the third
quarter of fiscal 2009. Gain on sale of discontinued operations, net of tax, was $0.2
million in the three months ended December 31, 2009 compared to $0 for the three months ended
January 3, 2009. The increase resulted from the sale of the third disposal group for IED of the
land and building in December 2009 for $0.6 million.
Liquidity and Capital Resources
Cash and cash equivalents as of December 31, 2009 totaled $65.4 million and are primarily invested
in money market accounts. During the three months ended December 31, 2009, $0.1 million was used in
operating activities, compared to cash provided by operating activities of $3.0 million in the
prior year period. This is primarily the result of changes in accounts receivable, inventories and
accounts payable. Depreciation expense totaled $0.8 million in the three months ended December 31,
2009, compared to $0.6 million in the three months ended January 3, 2009. We expect depreciation to
remain consistent over the next few quarters. During the three months ended December 31, 2009, we
recorded an impairment loss of $0.3 million related to our electromechanical assembly product line.
Purchases of property, plant and equipment during the three months ended December 31, 2009 totaled
$0.5 million, with $0.1 million remaining in accounts payable at December 31, 2009.
Accounts receivable increased $0.6 million during the three months ended December 31, 2009,
primarily due to the timing of invoices and receipts as a result of a higher percentage of sales
were in the last month of the quarter. Days sales outstanding at December 31, 2009 was 63 days,
compared to 59 days at September 30, 2009. Our days sales outstanding typically approximates 68
days.
Inventories decreased $1.6 million during the three months ended December 31, 2009. Inventory of
$14.1 million at December 31, 2009 represented 131 days of inventory on hand, compared to the 150
days on hand at September 30, 2009. The levels of inventory fluctuate based on changes in expected
production requirements, the fulfillment of orders and availability of and timing of the receipt of
raw materials. Inventory amounts will generally take several quarters to adjust to significant
changes in future sales. Also, as lead times for raw materials increase, we are required to buy
larger amounts of inventory and to hold it for longer periods of time. This trend may increase our
days of inventory on hand. We expect to fund any increases in inventory caused by sales growth or
manufacturing planning requirements from our cash balances and operating cash flows.
Prepaid expenses and other current assets increased $0.4 million during the three months ended
December 31, 2009.
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This increase was primarily due to the timing of prepayments and amortization
expense.
Accounts payable decreased $1.6 million during the three months ended December 31, 2009, primarily
due to the timing of cash disbursements and receipts of goods and services, primarily inventory.
Accrued expenses and deferred revenue decreased $0.5 million during the three months ended December
31, 2009. The decrease was primarily due to a decrease in accrued salaries and benefits of
approximately $0.5 million as a result of a reduction in the number of payroll days accrued and a
decrease in accrued compensation.
On April 8, 2008, we announced our third stock repurchase program to acquire up to an additional
10%, or approximately 2.2 million shares, of our then outstanding common stock. The timing and
amount of any repurchases under the program will depend on market conditions and corporate and
regulatory considerations. No repurchases were made during the three months ended December 31,
2009. The Board of Directors suspended the program during the strategic alternatives review and
believes that, at this time, our cash should be used to enhance the technological capabilities of
the Company. The duration of the program is twenty-four months and any purchases will be funded
from our cash balances and operating cash flows.
On
March 31, 2009, we entered into a Third Modification Agreement
to our revolving line of credit agreement with JPMorgan Chase Bank,
N.A. (Revolving Line of Credit).
This amendment reduced the amount available under this line from $30.0 million to $10.0 million and made
certain other adjustments to (i) the interest rates charged in connection with borrowings under this
line of credit, (ii) the commitment fee charged on the unused portion
of the line and (iii) certain financial
covenants and restricted payments. The borrowings, if any, under this Revolving Line of
Credit bear interest at the lower of the LIBOR plus 2.5%, or the JPMorgan Chase Bank, N.A. prime
rate. A commitment fee of 0.5% is charged on the unused portion of the line. The Revolving Line of
Credit expires on March 31, 2011. We are in compliance with all debt covenant requirements with
respect to our Revolving Line of Credit. As of December 31, 2009, there were no borrowings against
the Revolving Line of Credit. We have not borrowed against any credit
facility since April 2003.
We believe that our existing sources of liquidity, including expected cash flows from operating
activities, existing cash balances, existing credit facilities and other financing sources, will
satisfy our expected cash requirements for at least the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Contingencies
See Part II. Item 1. Legal Proceedings for an update on our current contingencies.
Recently Enacted Accounting Pronouncements
See Part I. Item 1. Notes to Unaudited Consolidated Financial Statements, Note 12, Recent
Accounting Pronouncements for an update on recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe that we are not generally subject to any material forms of market risk, such as foreign
currency exchange risk (our sales to foreign customers and purchases from foreign suppliers are
denominated in U.S. dollars) or commodity price risk.
We may, in the future, be subject to interest rate risk as a result of our Revolving Line of Credit
Agreement. In this regard, we may be specifically subject to changes in the prime rate based on
Federal Reserve actions and fluctuations in the LIBOR. As of December 31, 2009, we had no
borrowings on our revolving line of credit with JPMorgan Chase Bank, N.A. In the event we borrow
against our revolving line of credit, the interest charged on
these borrowings would be at the lower of the banks prime rate or the LIBOR plus 2.5%. During
the three months ended December 31, 2009, the banks prime rate averaged 3.25% and was 3.25% as
of December 31,
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2009. From September 30, 2009 to December 31, 2009, the banks prime rate has
remained unchanged. As of December 31, 2009, the LIBOR was 1.00%. In the event we begin borrowing
against our revolving line of credit, quarterly interest expense (at 3.25%) would be $8,125 for
every $1.0 million borrowed. A hypothetical interest rate increase of 100 basis points would
increase interest expense by $2,500 per $1.0 million borrowed on a quarterly basis. We believe that
moderate interest rate increases would not have a material adverse impact on our unaudited
consolidated results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Attached as exhibits to this Form 10-Q are
certifications of our President and Chief Executive Officer (CEO) and Senior Vice President and
Chief Financial Officer (CFO), which are required in accordance with Rule 13a-14 of the Exchange
Act. This Controls and Procedures section includes information concerning the controls and
controls evaluation referred to in the certifications and it should be read in conjunction with the
certifications for a more complete understanding of the evaluation process.
We have evaluated, under the supervision and with the participation of management, including our
CEO and CFO, the effectiveness of the design and operation of our disclosure controls and
procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
this evaluation, our management, including our CEO and CFO, concluded that as of December 31, 2009,
our disclosure controls and procedures were effective in ensuring that information required to be
disclosed in the reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms. Management,
including our CEO and CFO, has also concluded that our disclosure controls are designed to ensure
such information is accumulated and communicated to our management, including our CEO and CFO, as
appropriate, to allow timely decisions regarding required disclosure. Furthermore, our disclosure
controls include components of our internal control over financial reporting, which consists of
control processes designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements in accordance with GAAP in the
United States.
Changes in Internal Control over Financial Reporting. There were no significant changes in our
internal control over financial reporting that occurred during the three months ended December 31,
2009 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to claims and litigation incident to our business. There are
currently no such pending proceedings to which we are a party that we believe will have a material
adverse effect on our unaudited consolidated results of operations, liquidity, or financial
condition.
ITEM 1A. RISK FACTORS
We refer you to Item 1A. Risk Factors in our most recent Annual Report on Form 10-K for the year
ending September 30, 2009, which identifies important risk factors that could materially affect our
business, financial condition and future results. We also refer you to the factors and cautionary
language set forth in the sub-section entitled Note Regarding Forward-Looking Statements and
Associated Risks in the MD&A of this quarterly report on Form 10-Q. The MD&A and the unaudited
consolidated financial statements and related notes should be read in conjunction with such risks
and other factors for a full understanding of our operations and financial condition. The risks
described in our Form 10-K and herein are not the only risks facing the Company. Additional risks
and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition or operating results.
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Below we set forth a material update to the risk factors contained in Item 1A. Risk Factors in
our most recent Annual Report on Form 10-K:
We have a concentrated customer base and, as a result, our net sales could decline significantly if
we lose a major customer.
Historically, a large portion of our net sales have been derived from sales to a small number of
our customers and we expect this trend to continue for the foreseeable future. Our five largest
customers accounted for 69% of our net sales during the three months ended December 31, 2009 and
40% of our net sales during the three months ended January 3, 2009. Our customers are not subject
to any minimum purchase requirements and can discontinue the purchase of our products at any time.
In the event one or more of our major customers reduces, delays or cancels orders with us, and we
are not able to sell our services and products to new customers at comparable levels, our net sales
could decline significantly, which could adversely affect our financial condition and results of
operations. In addition, any difficulty in collecting amounts due from one or more key customers
would negatively impact our results of operations.
We maintain all of our cash and cash equivalents, some of which are not insured, at two depository
institutions.
We maintain all of our cash and cash equivalent accounts at two depository institutions. As of
December 31, 2009, our aggregate balances in such accounts were $65.6 million. Of such amount,
$500,000 was covered by Federal Deposit Insurance Corporation (FDIC) insurance. The remaining
amounts were not insured as of December 31, 2009.
Although we believe that the risk of loss associated with our uninsured deposit accounts is low
given the financial strength and reputation of our depository institutions, we could suffer losses
with respect to the uninsured balances if the depository institutions failed and the institutions
assets were insufficient to cover its deposits and/or the Federal government did not take actions
to support deposits in excess of existing FDIC insured limits. Any such losses could have a
material adverse effect on our liquidity, financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS
Exhibits
3.1
|
Amended and Restated Articles of Incorporation of White Electronic Designs Corporation (incorporated herein by reference to Appendix A on Definitive Proxy Statement filed on April 9, 2009). | |
3.2
|
Amended and Restated Code of By-Laws of White Electronic Designs Corporation dated July 27, 2009 (incorporated herein by reference to Exhibit 3.1 on Form 8-K filed July 31, 2009). | |
10.1
|
Amendment No. 2 to Shareholder Agreement dated November 16, 2009, by and among White Electronic Designs Corporation, Wynnefield Partners Small Cap Value, L.P., Caiman Partners, L.P., Kahn Capital Management LLC, Jack A. Henry, Paul D. Quadros, Thomas M. Reahard and Edward A. White (incorporated herein by reference to Exhibit 10.1 on Form 8-K filed November 17, 2009). | |
31.1*
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1##
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2##
|
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
## | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereto duly authorized.
WHITE ELECTRONIC DESIGNS CORPORATION | ||||
/s/ Gerald R. Dinkel | ||||
Gerald R. Dinkel | ||||
President and Chief Executive Officer | ||||
Date: February 9, 2010 | ||||
/s/ Roger A. Derse | ||||
Roger A. Derse | ||||
Senior Vice President and Chief Financial Officer | ||||
Date: February 9, 2010 | ||||
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