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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q
(Mark one)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2011

or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission File No.  1-4978

SOLITRON DEVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
22-1684144
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)

 
3301 Electronics Way, West Palm Beach, Florida
 
33407
 
(Address of Principal Executive Offices)
 
(Zip Code)

(561) 848-4311
(Registrant’s 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  x    No  ¨
 
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  ¨    No  ¨
 
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. (Check one)
 
Large accelerated filer  ¨
Accelerated filer  ¨
   
Non-accelerated filer ¨
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨   No x
 
The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of January 9, 2012 was 2,267,775.
 
 
 

 

SOLITRON DEVICES, INC.

TABLE OF CONTENTS
 
     
Page No.
PART 1 - FINANCIAL INFORMATION
 
       
Item
1.
Financial Statements
 
       
   
Condensed Balance Sheets
3
   
November 30, 2011 and February 28, 2011
 
       
   
Condensed Statements of Income
4
   
Three and Nine months ended November 30, 2011 and 2010
 
       
   
Condensed Statements of Cash Flows
5
   
Nine months ended November 30, 2011 and 2010
 
       
   
Notes to Condensed Financial Statements
6-11
       
Item
2.
Management’s Discussion and Analysis of Financial Condition and
 
   
Results of Operations
12-16
       
Item
4.
Controls and Procedures
17
       
PART II – OTHER INFORMATION
 
       
Item
6.
Exhibits
17
       
Signatures
 
18
 
 
2

 

PART I – FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS

SOLITRON DEVICES, INC.
CONDENSED BALANCE SHEETS
AS OF NOVEMBER 30, 2011 AND FEBRUARY 28, 2011 (unaudited)
   
Nov 30,
   
Feb 28,
 
   
2011
   
2011
 
 
 
(in thousands, except for shares)
 
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 732     $ 539  
Treasury bills and CDs
    6,697       6,334  
Accounts receivable, less allowance for doubtful accounts of $2
    943       937  
Inventories, net (Note 5)
    2,965       3,031  
Prepaid expenses and other current assets
    122       102  
TOTAL CURRENT ASSETS
    11,459       10,943  
                 
PROPERTY, PLANT AND EQUIPMENT, net
    720       723  
                 
OTHER ASSETS
    45       46  
TOTAL ASSETS
  $ 12,224     $ 11,712  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable-Post-petition
  $ 227     $ 236  
Accounts payable-Pre-petition, current portion
    1,009       1,030  
Customer deposits
    101       102  
Accrued expenses and other current liabilities    (Note 8)
    495       726  
TOTAL CURRENT LIABILITIES
    1,832       2,094  
                 
LONG-TERM LIABILITIES, net of current portion
    128       138  
TOTAL LIABILITIES
    1,960       2,232  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, $.01 par value, authorized 500,000 shares, none issued
    -       -  
Common stock, $.01 par value, authorized 10,000,000 shares, 2,267,775 shares issued and outstanding, net of 173,287 shares of treasury stock
    23       23  
Additional paid-in capital
    2,736       2,735  
Retained earnings
    7,505       6,722  
TOTAL STOCKHOLDERS' EQUITY
    10,264       9,480  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 12,224     $ 11,712  

The accompanying notes are an integral part of the condensed financial statements.

 
3

 

SOLITRON DEVICES, INC.
CONDENSED STATEMENTS OF INCOME FOR THE
THREE AND NINE MONTHS ENDED NOVEMBER 30,
(Unaudited, in thousands except for share and per share amounts)

   
Three months
   
Nine Months
 
   
2011
   
2010
   
2011
   
2010
 
                         
NET SALES
  $ 2,112     $ 2,281     $ 6,412     $ 6,690  
Cost of Sales
    1,729       1,561       4,839       4,848  
                                 
Gross Profit
    383       720       1,573       1,842  
                                 
Selling, General and Administrative Expenses
    293       400       797       938  
                                 
Operating Income
    90       320       776       904  
                                 
OTHER INCOME (EXPENSES)
                               
Other Income (Expense), Net (Note 7)
    8       (1 )     8       1  
Interest Income
    -       1       11       12  
Other, Net
    8       -       19       13  
                                 
Income Before Income Taxes
    98       320       795       917  
                                 
Income Tax Expense
    (5 )     (4 )     (12 )     (9 )
                                 
Net Income
  $ 93     $ 316     $ 783     $ 908  
                                 
Net Income Per Share   : Basic
  $ .04     $ .14     $ .35     $ .40  
                                      : Diluted
  $ .04     $ .13     $ .31     $ .37  
                                 
Weighted Average
                               
 Shares Outstanding     : Basic
    2,267,775       2,263,775       2,267,489       2,263,775  
                                     : Diluted
    2,489,454       2,466,310       2,489,162       2,469,130  

The accompanying notes are an integral part of the condensed financial statements.

 
4

 

SOLITRON DEVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED NOVEMBER 30,
(Unaudited, in thousands)

   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Income
  $ 783     $ 908  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    143       153  
Unrecorded gain on Treasury bills and CDs
    (1 )     (4 )
Changes in operating assets and liabilities:
               
(Increase) Decrease in:
               
Accounts receivable
    (6 )     (166 )
Inventories
    66       (168 )
Prepaid expenses and other current assets
    (20 )     12  
Other non-current assets
    1       (13 )
Increase (Decrease) in:
               
Accounts payable – Post-petition
    (9 )     (14 )
Accounts payable – Pre-petition
    (21 )     (21 )
Customer deposits
    (1 )     87  
Accrued expenses and other current liabilities
    (231 )     113  
Other non-current liabilities
    (10 )     (10 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
    694       877  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Treasury bills and CDs purchased
    (4,175 )     (2,754 )
Treasury bills matured
    3,813       2,262  
Purchases of property, plant and equipment
    (140 )     (275 )
NET CASH (USED IN) INVESTING ACTIVITIES
    (502 )     (767 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash from exercise of employee stock options
    1       -  
NET CASH PROVIDED BY FINANCING ACTIVITIES
    1       -  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS
    193       110  
                 
CASH AT THE BEGINNING OF PERIOD
    539       400  
                 
CASH AT THE END OF PERIOD
  $ 732     $ 510  

The accompanying notes are an integral part of the condensed financial statements.

 
5

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
  (Unaudited)
 
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Activities
Solitron Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs, develops, manufactures, and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company was incorporated under the laws of the State of New York in 1959 and reincorporated under the laws of the State of Delaware in August 1987.

Basis of Presentation
The financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America.

Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market accounts.

Treasury Bill and CDs
Treasury bills and CDs includes treasury bills with maturities of one year or less, along with CDs with maturities of greater than one year, and is stated at market value.

Accounts Receivable
Accounts receivable consists of unsecured credit extended to the Company’s customers in the ordinary course of business.  The Company reserves for any amounts deemed to be uncollectible based on past collection experiences and an analysis of outstanding balances, using an allowance account.  The allowance amount was $2,000 as of November 30, 2011 and February 28, 2011.

Shipping and Handling
Shipping and handling costs billed to customers are recorded in net sales.  Shipping costs incurred by the Company are recorded in cost of sales.

Inventories
Inventories are stated at the lower of cost or market.  Cost is determined using the “first-in, first-out” (FIFO) method.  The Company buys raw material only to fill customer orders.  Excess raw material is created only when a vendor imposes a minimum buy in excess of actual requirements.  Such excess material will usually be utilized to meet the requirements of the customer’s subsequent orders.  If excess material is not utilized after two fiscal years it is fully reserved.  Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.
 
The Company’s inventory valuation policy is as follows:

Raw material /Work in process:
All material purchased, processed, and/or used in the last two fiscal years is valued at the lower of its acquisition cost or market.  All material not purchased/used in the last two fiscal years is fully reserved for.
   
Finished goods:
All finished goods with firm orders for later delivery are valued (material and overhead) at the lower or cost or market.  All finished goods with no orders are fully reserved.
   
Direct labor costs:
Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the amount of man-hours required from the different direct labor departments to bring each device to its particular level of completion.
 
 
6

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition.  This pronouncement requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery   has occurred; 3) the fee is fixed or  determinable; and 4) collectability  is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met.  The criteria are usually met at the time of product shipment. Shipping terms are generally FCA (Free Carrier) shipping point.

Financial Statement  Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates, and the differences could be material.  Such estimates include depreciable life, valuation allowance, and allowance for inventory obsolescence.

2. 
ENVIRONMENTAL REGULATION:

While the Company believes that it has the environmental permits necessary to conduct its business and that its operations conform to present environmental regulations, increased public attention has been focused on the environmental impact of semiconductor manufacturing operations.  The Company, in the conduct of its manufacturing operations, has handled and does handle materials that are considered hazardous, toxic or volatile under federal, state and local laws and, therefore, is subject to regulations related to their use, storage, discharge and disposal.  No assurance can be made that the risk of accidental release of such materials can be completely eliminated.  In the event of a violation of environmental laws, the Company could be held liable for damages and the costs of remediation. In addition, the Company, along with the rest of the semiconductor industry, is subject to variable interpretations and governmental priorities concerning environmental laws and regulations.  Environmental statutes have been interpreted to provide for joint and several liability and strict liability regardless of actual fault.  There can be no assurance that the Company will not be required to incur costs to comply with, or that the operations, business or financial condition of the Company will not be materially adversely affected by current or future environmental laws or regulations.

3. 
ENVIRONMENTAL LIABILITIES:

The Company entered into an Ability to Pay Multi-Site Settlement Agreement with the United States Environmental Protection Agency (“USEPA”), effective February 24, 2006 (“Settlement Agreement”), to resolve the Company’s alleged liability to USEPA at the following sites:  Solitron Microwave Superfund Site, Port Salerno, Florida (“Port Salerno Site”); Petroleum Products Corporation Superfund Site, Pembroke Park, Florida; Casmalia Resources Superfund Site, Santa Barbara, California (“Casmalia Site”); Solitron Devices Site, Riviera Beach, Florida (the “Riviera Beach Site”); and City Industries Superfund Site, Orlando, Florida (collectively, the “Sites”).  Pursuant to the Settlement Agreement, the Company paid the sum of $74,000 to USEPA on February 27, 2006.  In addition, the Company is required to pay to USEPA the sum of $10,000 or 5% of Solitron’s net after-tax income over the first $500,000, if any, whichever is greater, for each year from fiscal years 2009-2013.  On June 14, 2011 the Company paid $40,035 for fiscal year 2011.  The Company has accrued $20,000 for its remaining minimum obligations under the Settlement Agreement (for fiscal years 2012 and 2013) which is reflected in “Accrued expenses” on the Company’s Balance Sheets at November 30, 2011.

On October 21, 1993, a Consent Final Judgment was entered into between the Company and the Florida Department of Environmental Protection (“FDEP”) in the Circuit Court of the Nineteenth Judicial Circuit of Florida in and for Martin County, Florida, in Case No. 91-1232 CA (the “Consent Final Judgment”).  The Consent Final Judgment required the Company to remediate the Port Salerno and Riviera Beach Sites, make monthly payments to escrow accounts for each Site until the sale of the Sites to fund the remediation work, take all reasonable steps to sell the two Sites and, upon the sale of the Sites, apply the net proceeds from the sales to fund the remediation work.  Both Sites have been sold pursuant to purchase agreements approved by FDEP.
 
 
7

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Prior to the sale of the Port Salerno and Riviera Beach Sites, USEPA took over from FDEP as the lead regulatory agency for the remediation of the Sites.   At the closing of the sale of each site, the net proceeds of sale were distributed to USEPA and/or FDEP or other parties, as directed by the agencies.  In addition, upon the sale of the Riviera Beach Site, the Riviera Beach Escrow Account was transferred to USEPA, as directed by the agencies.  The current balance in the Port Salerno Escrow Account is approximately $58,000.  USEPA completed remedy construction at the Port Salerno  Site in 2004 and is performing annual groundwater sampling.  A 5-Year review performed by USEPA in 2009 concluded  that  remedial  actions  taken  at  the property  remain  protective.  Work  at  the Riviera Beach  Site  is  being performed by Honeywell, Inc. (“Honeywell”), pursuant to an Administrative Order on Consent entered into between Honeywell and USEPA.  Design and construction of the remedy is reported by USEPA to be complete and the treatment  system has been in operation since March 2009.  The Company has been notified by FDEP that the performance of remediation work by USEPA at the Port Salerno Site and by Honeywell at the Riviera Beach Site will be construed by FDEP as discharging the Company’s remediation obligations under the Consent Final Judgment.

In 2006, FDEP notified the Company that FDEP has unreimbursed expenses associated with the Port Salerno and Riviera Beach Sites of $214,800 and initially directed the Company to resume payments under the Consent Final Judgment to ensure that there are adequate funds to cover FDEP’s unreimbursed expenses and the Company’s residual liability under the Consent Final Judgment.  Later, FDEP advised the Company that FDEP would prepare a justification for the asserted unreimbursed expenses, following receipt of which the Company is required to transfer $58,000 from the Port Salerno Escrow Account to FDEP as partial payment for FDEP’s unreimbursed expenses.  FDEP further stated that FDEP would work with the Company to establish a reduced payment schedule for the Company to resume payments under the Consent Final Judgment based on the Company’s financial ability to pay.  To date, FDEP has not further pursued the Company for cost reimbursement under the Consent Final Judgment.

On August 7, 2002, the Company received a Request for Information from the State of New York Department of Environmental Conservation (“NYDEC”), seeking information on whether the Company had disposed of certain wastes at the Clarkstown Landfill Site located in the Town of Clarkstown, Rockland County, New York (The Clarkstown Landfill Site”).  By letter dated August 29, 2002, the Company responded to the Request for Information and advised NYDEC that the Company’s former Tappan, New York facility had closed in the mid-1980’s, prior to the initiation of the Company’s bankruptcy proceedings.  The Company contends that, to the extent that NYDEC has a claim against the Company as a result of the Company’s alleged disposal of wastes at the Clarkstown Landfill Site prior to the closing of the Company’s former Tappan facility in the mid-1980’s, the claim was discharged in bankruptcy as a result of the Bankruptcy Court’s August 1993 Order.  By letter dated March 17, 2010, the Clarkstown Landfill Joint Defense Group (“JDG”) offered to pursue a settlement of NYDEC’s claim against the Company in return for the Company’s agreement to pay the sum of $125,000, representing the Company’s alleged share of JDG’s overall settlement with NYDEC.  The Company rejected the settlement offer on March 29, 2010, based on its continuing contention that any claim of NYDEC against the Company was discharged in bankruptcy as a result of the Bankruptcy Court’s August 1993 Order. The JDG/NYDEC Consent Decree, settling NYDEC’s claims against individual members of  JDG, was entered by the Court on March 21, 2011. To date, neither NYDEC nor JDG have pursued any claim against the Company with respect to the Clarkstown Landfill Site.

4. 
EARNINGS PER SHARE:

The shares used in the computation of the Company’s basic and diluted earnings per common share were as follows:

   
For the three months ended
November 30,
   
For the nine months ended
November 30,
 
   
2011
   
2010
   
2011
   
2010
 
Weighted average common shares outstanding
    2,267,775       2,263,775       2,267,489       2,263,775  
Dilutive effect of employee stock options
    221,679       202,535       221,673       205,355  
Weighted average common shares outstanding, assuming dilution
    2,489,454       2,466,310       2,489,162       2,469,130  

Weighted average common shares outstanding, assuming dilution, include the incremental shares that would be issued upon the assumed exercise of stock options.  For the three and nine month periods ended November 30, 2011 and November 30, 2010, 13,500 shares (at $3.95) underlying  the Company's stock options were excluded from the calculation of diluted earning per share because the exercise prices of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive.
 
 
8

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5. 
INVENTORIES:

As of November 30, 2011, inventories consist of the following:

 
   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,471,000     $ (403,000 )   $ 1,068,000  
Work-In-Process
    2,971,000       (1,096,000 )     1,875,000  
Finished Goods
    545,000       (523,000 )     22,000  
Totals
  $ 4,987,000     $ (2,022,000 )   $ 2,965,000  

As of February 28, 2011, inventories consist of the following:

   
Gross
   
Reserve
   
Net
 
Raw Materials
  $ 1,639,000     $ (403,000 )   $ 1,236,000  
Work-In-Process
    2,732,000       (990,000 )     1,742,000  
Finished Goods
    571,000       (518,000 )     53,000  
Totals
  $ 4,942,000     $ (1,911,000 )   $ 3,031,000  

6. 
INCOME TAXES:

At November 30, 2011, the Company has net operating loss carryforwards of approximately $14,662,000 that expire through 2029.  Such net operating losses are available to offset future taxable income, if any.  As the utilization of such net operating losses for tax purposes is not assured, the deferred tax asset has been mostly reserved through the recording of a 100% valuation allowance.  Should a cumulative change in the ownership of more than 50% occur within a three-year period, there could be an annual limitation on the use of the net operating loss carryforward.

Total net deferred taxes were comprised of the following as of November 30 and February 28, 2011:
 
Deferred tax assets:
 
11/30/11
   
2/28/11
 
Loss carryforwards
  $ 5,572,000     $ 6,064,000  
Allowance for doubtful accounts
    1,000       1,000  
Inventory valuation
    673,000       853,000  
Depreciation
    48,000       49,000  
Section 263A capitalized costs
    494,000       296,000  
Total deferred tax assets
    6,788,000       7,263,000  
Valuation allowance
    (6,788,000 )     (7,263,000 )
                 
Total net deferred taxes
  $ 0     $ 0  

The change in the valuation allowance on deferred tax assets is due principally to the utilization of the net operating loss for the quarter ended November 30, 2011 and for the year ended February 28, 2011.

A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate for the quarter ended November 30, 2011 and for the year ended February 28, 2011 is as follows:

   
11/30/11
   
2/28/11
 
U.S. federal statutory rate
    34.0 %     34.0 %
Change in valuation allowance
    (34.0 )     (34.0 )
Effective income tax rate
    0.0 %     0.0 %

 
9

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

7. 
OTHER INCOME:
 
The $8,000 of other income reflected in the condensed statements of income for the three months ended November 30, 2011 consists of an $8,000 gain on disposal of an asset. The net $0 of other income reflected in the condensed statements of income for the three months ended November 30, 2010 consists of $1,000 of interest income on investment in treasury bills net of changes in market value and a $1,000 loss on disposal of asset.

8. 
ACCRUED EXPENSES:

As of November 30, 2011 and February 28, 2011, accrued expenses and other liabilities consisted of the following:

   
11/30/11
   
2/28/11
 
Payroll and related employee benefits
  $ 453,000     $ 657,000  
Income taxes
    13,000       14,000  
Property taxes
    -       7,000  
Environmental liabilities
    13,000       40,000  
Other liabilities
    16,000       8,000  
    $ 495,000     $ 726,000  

9. 
EXPORT SALES AND MAJOR CUSTOMERS:

Revenues from domestic and export sales to unaffiliated customers for the three months ended November 30, 2011 are as follows:

   
Power
         
Field Effect
   
Power
       
Geographic Region
 
Transistors
   
Hybrids
   
Transistors
   
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 0     $ 0     $ 27,000     $ 0     $ 27,000  
Canada and Latin America
    14,000       0       2,000       0       16,000  
Far East and Middle East
    0       0       3,000       54,000       57,000  
United States
    338,000       963,000       79,000       632,000       2,012,000  
Totals
  $ 352,000     $ 963,000     $ 111,000     $ 686,000     $ 2,112,000  

Revenues from domestic and export sales to unaffiliated customers for the three months ended November 30, 2010 are as follows:

   
Power
         
Field Effect
   
Power
       
Geographic Region
 
Transistors
   
Hybrids
   
Transistors
   
MOSFETS
   
Totals
 
                               
Europe and Australia
  $ 8,000     $ 384,000     $ 1,000     $ 0     $ 393,000  
Canada and Latin America
    0       0       0       1,000       1,000  
Far East and Middle East
    0       0       23,000       82,000       105,000  
United States
    345,000       1,021,000       160,000       256,000       1,782,000  
Totals
  $ 353,000     $ 1,405,000     $ 184,000     $ 339,000     $ 2,281,000  

Revenues from domestic and export sales are attributed to global geographic region according to the location of the customer’s primary manufacturing or operating facilities.
 
 
10

 

SOLITRON DEVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

For the three months ended November 30, 2011, sales to the Company’s top two customers consisted of the following:

Customer
 
% of Sales
 
Raytheon Company
    45 %
United States Government
    16 %
Totals
    61 %

For the three months ended November 30, 2010, sales to the Company’s top two customers consisted of the following:

Customer
 
% of Sales
 
Raytheon Company
    24 %
BAE Systems Australia
    17 %
Totals
    41 %

10. 
MAJOR SUPPLIERS:

For the three months ended November 30, 2011, purchases from the Company’s top two suppliers consisted of the following:

Vendor
 
% of Purchases
 
Air Products, Inc.
    7 %
Stellar Industries, Inc.
    7 %
Totals
    14 %

For the three months ended November 30, 2010, purchases from the Company’s top two suppliers consisted of the following:

Vendor
 
% of Purchases
 
Egide, USA
    10 %
WUXI Streamtek Ltd
    9 %
Totals
    19 %
 
 
11

 

Item 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:
 
Solitron Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets.  The Company manufactures a large variety of bipolar and metal oxide semiconductor (“MOS”) power transistors, power and control hybrids, junction and power MOS field effect transistors and other related products.  Most of the Company’s products are custom made pursuant to contracts with customers whose end products are sold to the United States government.  Other products, such as Joint Army/Navy transistors, diodes and Standard Military Drawings voltage regulators, are sold as standard or catalog items.
 
The following discussion and analysis of factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed financial statements should be read in conjunction with the Financial Statements and the related Notes to Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2011 and the Condensed Financial Statements and the related Notes to Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
 
Significant Accounting Policies:
 
The discussion and analysis of our financial condition and results of operations are based upon the condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q which are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Our critical accounting policies include inventories, valuation of plant, equipment, revenue recognition and accounting for income taxes. A discussion of all of these critical accounting policies can be found in Note 1 of the “Notes To Financial Statements” in Item 8 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2011.
 
Trends and Uncertainties:
 
During the three months ended November 30, 2011, the Company’s book-to-bill ratio was approximately .43 as compared to approximately .77 for the three months ended November 30, 2010, reflecting a decrease in the volume of orders booked.  The Company does not believe that, in most years, the year-to-year change in the book-to-bill ratio indicates a specific trend in the demand for the Company’s products.  Generally, the intake of orders over the last twenty four months has varied greatly as a result of the fluctuations in the general economy, variations in defense spending on programs the Company supports, and the timing of contract awards by the Department of Defense and subsequently by its prime contractors, which is expected to continue over the next twelve to twenty four months. Should order intake fall drastically below the level experienced in the last 24 to 36 months, the Company might be required to implement cost cutting or other downsizing measures to continue its business operations.
 
Inventories:
Inventories are stated at the lower of cost or market.  Cost is determined using the “first-in, first-out” (FIFO) method.  The Company buys raw material only to fill customer orders.  Excess raw material is created only when a vendor imposes a minimum buy in excess of actual requirements.  Such excess material will usually be utilized to meet the requirements of the customer’s subsequent orders.  If excess material is not utilized after two fiscal years, it is fully reserved.  Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.
 
 
12

 

The Company’s inventory valuation policy is as follows:

Raw material /Work in process:
 
All material purchased, processed and/or used in the last two fiscal years is valued at the lower of its acquisition cost or market.  All material not purchased/used in the last two fiscal years is fully reserved for.
     
Finished goods:
 
All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or market.  All finished goods with no orders are fully reserved.
     
Direct labor costs:
 
Direct labor costs are allocated to finished goods and work in process inventory based on engineering estimates of the amount of man hours required from the different direct labor departments to bring each device to its particular level of completion.

Results of Operations-Three Months Ended November 30, 2011 Compared to Three Months Ended November 30, 2010:

Net sales for the three months ended November 30, 2011 decreased 7% to $2,112,000 as compared to $2,281,000 for the three months ended November 30, 2010.  This decrease was primarily attributable to a lower level of orders that were shipped in accordance with customer requirements.
 
Cost of sales for the three months ended November 30, 2011 increased to $1,729,000 from $1,561,000 for the comparable period in 2010, primarily due to a lower level of orders that were shipped in accordance with customer requirements.  Expressed as a percentage of sales, cost of sales increased to 82% from 68% for the same period in 2010.  This increase in percentage was due primarily to a higher cost of materials resulting from higher precious metal prices and lower yields on devices produced.

Gross profit for the three months ended November 30, 2011 decreased to $383,000 from $720,000 for the three months ended November 30, 2010, primarily due to a decrease in net sales and to a higher cost of materials as mentioned above.  Gross margins on the Company’s sales decreased to 18% for the three months ended November 30, 2011 in comparison to 32% for the three months ended November 30, 2010 primarily due to a higher cost of materials as described above.

For the three months ended November 30, 2011, the Company shipped 26,934 units as compared to 24,491 units shipped during the same period of the prior year.  It should be noted that since the Company manufactures a wide variety of products with an average sales price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company’s volume of units shipped should not be regarded as a reliable indicator of the Company’s performance.

For the three months ended November 30, 2011, the Company’s backlog of open orders decreased 20% to $4,780,000 as compared to the same period of the prior year. For the three months ended November 30, 2010, the Company’s backlog of open orders decreased 8% to $5,989,000 as compared to same period in 2009.  Changes in backlog reflect changes in the intake of orders and in the delivery requirements of customers.

The Company has experienced a decrease of 48% to $914,000 in the level of bookings during the three months ended November 30, 2011 as compared to the same period in the prior year. For the three months ended November 30, 2010, the Company experienced a 21% decrease to $1,759,000 in the level of bookings as compared to the same period in the prior year. The decrease in bookings for the three months ended November 30, 2011 is principally as a result of delays in the placement of orders by key customers, as well as a decrease in defense spending on programs the Company supports, resulting in a decrease in the monetary value of, and timing differences in the placement of contracts by the Department of Defense and its prime contractors.

Selling, general, and administrative expenses decreased to $293,000 for the three months ended November 30, 2011 from $400,000 for the comparable period in 2010. The decrease reflects lower sales wages, sales commissions and legal expenses.  During the three months ended November 30, 2011, selling, general, and administrative expenses as a percentage of net sales decreased to 14% as compared to 18% for the three months ended November 30, 2010.

 
13

 

Operating income for the three months ended November 30, 2011 decreased to $90,000 as compared to $320,000 for the three months ended November 30, 2010. This decrease is due primarily to a lower level of shipments and a higher cost of materials as described above.
 
The Company recorded net other income of $3,000 for the three months ended November 30, 2011 as compared to  net other expense of $4,000 for the three months ended November 30, 2010. Net other income for the three months ended November 30, 2011 included an $8,000 gain on disposal of asset offset by $5,000 of income tax expense. Net other expense for the three months ended November 30, 2010 included $1,000 of interest income on investment in treasury bills net of changes in market value plus $2,000 of income tax benefit offset by $6,000 of income tax expense and a $1,000 loss on disposal of asset.
 
Net income for the three months November 30, 2011 decreased to $93,000 as compared to $316,000 for the same period in 2010.  This decrease is due primarily to a lower level of shipments and a higher cost of materials as described above.

Results of Operations-Nine Months Ended November 30, 2011 Compared to Nine Months Ended November 30, 2010:

Net sales for the nine months ended November 30, 2011 decreased 4% to $6,412,000 as compared to $6,690,000 for the nine months ended November 30, 2010.  This decrease was primarily attributable to a lower level of orders that were shipped in accordance with customer requirements.
 
Cost of sales for the nine months ended November 30, 2011 decreased to $4,839,000 from $4,848,000 for the comparable period in 2010, primarily due to a lower level of shipments and a higher cost of materials caused by higher precious metal prices and lower yields on devices produced.  Expressed as a percentage of sales, cost of sales increased to 75% as compared to 72% for the same period in 2010.
 
Gross profit for the nine months ended November 30, 2011 decreased to $1,573,000 from $1,842,000 for the nine months ended November 30, 2010, primarily due to a lower level of shipments and a higher cost of materials as described above. Gross margins on the Company’s sales decreased to 25% as compared to 28% for the same period in 2010
 
For the nine months ended November 30, 2011, the Company shipped 115,154 units as compared to 110,614 units shipped during the same period of the prior year.  It should be noted that since the Company manufactures a wide variety of products with an average sales price ranging from less than one dollar to several hundred dollars, such periodic variations in the Company’s volume of units shipped should not be regarded as a reliable indicator of the Company’s performance.
 
For the nine months ended November 30, 2011, the Company’s backlog of open orders decreased 27% to $4,780,000 as compared to the same period of the prior year. For the nine months ended November 30, 2010, the Company’s backlog of open orders increased 8% to $5,989,000 as compared to same period in 2009. Changes in backlog resulted from changes in the intake of orders and in the delivery dates required by customers.

The Company has experienced a decrease of 31% to $4,665,000 in the level of bookings during the nine months ended November 30, 2011 when compared with the nine months ended November 30, 2010. The decrease occurred principally as a result of delays in the placement of orders by key customers, as well as a decrease in defense spending on programs the Company supports, resulting in a decrease in the monetary value of, and timing differences in the placement of contracts by the Department of Defense and its prime contractors.

Selling, general, and administrative expenses decreased to $797,000 for the nine months ended November 30, 2011 from $938,000 for the comparable period in 2010, primarily due to lower sales wages, sales commissions and legal costs.  During the nine months ended November 30, 2011, selling, general, and administrative expenses as a percentage of net sales decreased to 12% as compared to 14% for the nine months ended November 30, 2010.

Operating income for the nine months ended November 30, 2011 decreased to $776,000 from $904,000 for the nine months ended November 30, 2010. This decrease is due primarily to a lower level of shipments and a higher cost of materials as described above.
 
 
14

 

The Company recorded net other income of $7,000 for the nine months ended November 30, 2011 as compared to net other income of $4,000 for the nine months ended November 30, 2010.  Included in net other income for the nine months ended November 30, 2011 was interest income of $11,000 plus $8,000 of gain on disposal of asset offset by $12,000 of income tax expense. Included in net other income for the nine months ended November 30, 2010 was $12,000 of interest income plus $1,000 of net other income offset by $9,000 of income tax expense.
 
Net income for the nine months ended November 30, 2011 decreased to $783,000 from $908,000 for the same period in 2010.  This decrease is due primarily to a lower level of shipments and a higher cost of materials as described above.
 
Liquidity and Capital Resources:
 
Subject to the following discussion, the Company expects its sole source of liquidity over the next twelve months to be cash from operations.  The Company anticipates that its capital expenditures required to sustain operations will be approximately $300,000 during the current fiscal year and will be funded from operations.

Based upon (i) management’s best information as to current national defense priorities, future defense programs, as well as management’s expectations as to future defense spending, (ii) the market trends signaling a declining level of bookings, an increase in the cost of raw materials, particularly the cost of precious metals and copper, and operations that will result in the potential erosion of   profit levels and continued price pressures due to more intense competition, and (iii) the continued competition in the defense and aerospace market, the Company believes that it will have sufficient cash on hand to satisfy its operating needs during the next twelve months and at its current level of payments to its pre-bankruptcy creditors.  However, due to the level of current backlog and projected new order intake (due to the status of the general economy and the shift to Commercial Off –The-Shelf (COTS) by the defense industry), the Company might operate at a break even during the balance of the current fiscal year.

Over the long-term, based on these factors and at the current level of bookings, costs of raw materials and services, profit margins and sales levels, the Company believes that during the next twelve months it is expected to generate sufficient cash from operations to satisfy its operating needs and the level of payments to pre-bankruptcy creditors it has maintained over the last eighteen years.  In the event that bookings in the long-term decline significantly below the level experienced during the last 24 to 36 months, the Company may be required to implement further cost-cutting or other downsizing measures to continue its business operations.  Such cost-cutting measures could inhibit future growth prospects. In appropriate situations, the Company may seek strategic alliances, joint ventures with others or acquisitions in order to maximize marketing potential and utilization of existing resources and provide further opportunities for growth.

At November 30, 2011, February 28, 2011 and November 30, 2010, the Company had cash of approximately $732,000, $539,000 and $510,000, respectively.  The cash increase for the nine months ended November 30, 2011 was primarily due to income from operations.

At November 30, 2011, February 28, 2011 and November 30, 2010, the Company had investments in treasury bills (and CDs as of November 30, 2011) of approximately $6,697,000, $6,334,000 and $6,097,000, respectively.

At November 30, 2011, the Company had working capital of $9,627,000 as compared with a working capital at November 30, 2010 of $8,515,000.  At February 28, 2011, the Company had a working capital of $8,849,000.  The $778,000 increase for the nine months ended November 30, 2011 was due mainly to a $556,000 combined increase in cash and investments in treasury and a $231,000 decrease in accrued expenses.

Off-Balance Sheet Arrangements:

The Company has not engaged in any off-balance sheet arrangements.

Forward Looking Statements:
 
Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended February 28, 2011, including those identified below. We do not undertake any obligation to update forward-looking statements.
 
 
15

 
 
Some of the factors that may impact our business, financial condition, results of operations, strategies or prospects include:
 
·
Our complex manufacturing processes may lower yields and reduce our revenues.
 
·
Our business could be materially and adversely affected if we are unable to obtain qualified supplies of raw materials, parts and finished components on a timely basis and at a cost-effective price.
 
·
We are highly dependent on government contracts, which are subject to termination, price renegotiations and regulatory compliance, which can increase the cost of doing business and negatively impact our revenues.
 
·
Changes in government policy or economic conditions could negatively impact our results.
 
·
Our inventories may become obsolete and other assets may be subject to risks.
 
·
Environmental regulations could require us to incur significant costs.
 
·
Our business is highly competitive, and increased competition could reduce gross profit margins and the value of an investment in our Company.
 
·
Downturns in the business cycle could reduce the revenues and profitability of our business.
 
·
Our operating results may decrease due to the decline of profitability in the semiconductor industry.
 
·
Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business.
 
·
Cost reduction efforts may be unsuccessful or insufficient to improve our profitability and may adversely impact productivity.
 
·
Our inability to introduce new products could result in decreased revenues and loss of market share to competitors; new technologies could also reduce the demand for our products.
 
·
Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow.
 
·
A shortage of three-inch silicon wafers could result in lost revenues due to an inability to build our products.
 
·
The nature of our products exposes us to potentially significant product liability risk.
 
·
We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business.
 
·
Provisions in our charter documents and rights agreement could make it more difficult to acquire our Company and may reduce the market price of our stock.
 
·
Natural disasters, like hurricanes, or occurrences of other natural disasters whether in the United States or internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability. They may also affect the availability of raw materials which may adversely affect our profitability.
 
·
Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete.
 
·
The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future.

 
16

 

ITEM 4.
CONTROLS AND PROCEDURES:

Our Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e), and 15d-15(e)) as of the end of the period covered by this Quarterly Report.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control over Financial Reporting

Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II– OTHER INFORMATION

ITEM 6.
EXHIBITS:

Exhibits

31
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS*
XBRL Instance Document
   
101.SCH*
XBRL Taxonomy Extension Schema
   
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
   
101.DEF*
XBRL  Taxonomy Extension Definition Linkbase
   
101.LAB*
XBRL Taxonomy Label Linkbase
   
101.PRE*
XBRL Taxonomy Presentation Linkbase

*       Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 
17

 

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 thereunto duly authorized.

 
SOLITRON DEVICES, INC.
   
Date: January 12, 2012
 
 
/s/ Shevach Saraf
 
Shevach Saraf
 
Chairman, President,
 
Chief Executive Officer,
 
Treasurer and
 
Chief Financial Officer
 
(Principal Executive and
 
 Financial Officer)

 
18

 

EXHIBIT INDEX
 
EXHIBIT NUMBER
   
DESCRIPTION
     
31
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS*
 
XBRL Instance Document
     
101.SCH*
 
XBRL Taxonomy Extension Schema
     
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF*
 
XBRL  Taxonomy Eltension Definition Linkbase
     
101.LAB*
 
XBRL Taxonomy Label Linkbase
     
101.PRE*
 
XBRL Taxonomy Presentation Linkbase

*       Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 
19