Attached files
file | filename |
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EX-31.1 - EX-31.1 - PLANAR SYSTEMS INC | d838981dex311.htm |
EX-31.2 - EX-31.2 - PLANAR SYSTEMS INC | d838981dex312.htm |
EX-32.2 - EX-32.2 - PLANAR SYSTEMS INC | d838981dex322.htm |
EX-32.1 - EX-32.1 - PLANAR SYSTEMS INC | d838981dex321.htm |
EXCEL - IDEA: XBRL DOCUMENT - PLANAR SYSTEMS INC | Financial_Report.xls |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Act of 1934
For the Quarter Ended December 26, 2014
Commission File No. 023018
PLANAR SYSTEMS, INC.
(exact name of registrant as specified in its charter)
Oregon | 93-0835396 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
1195 NW Compton Dr., Beaverton, Oregon | 97006 | |
(Address of principal executive offices) | (zip code) |
Registrants telephone number, including area code: (503) 748-1100
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 website, 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 x 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 definitions of large accelerated filer, accelerated filer non-accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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
Number of common stock outstanding as of January 30, 2015
22,408,547 shares, no par value per share
Table of Contents
PLANAR SYSTEMS, INC.
2
Table of Contents
Item 1. | Financial Statements |
PLANAR SYSTEMS, INC.
Dec. 26, 2014 | Sept. 26, 2014 | |||||||
(Unaudited) | ||||||||
(In thousands, except share data) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash |
$ | 14,907 | $ | 13,068 | ||||
Accounts receivable, net of allowance for doubtful accounts of $386 at Dec. 26, 2014 and $469 at Sept. 26, 2014 |
28,223 | 28,333 | ||||||
Inventories (Note 2) |
28,798 | 26,805 | ||||||
Other current assets (Note 9) |
5,119 | 3,909 | ||||||
|
|
|
|
|||||
Total current assets |
77,047 | 72,115 | ||||||
Property, plant and equipment, net |
4,716 | 5,039 | ||||||
Other assets (Note 9) |
5,829 | 7,250 | ||||||
|
|
|
|
|||||
$ | 87,592 | $ | 84,404 | |||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 19,674 | $ | 18,176 | ||||
Current portion of capital leases |
161 | 394 | ||||||
Deferred revenue |
1,336 | 1,637 | ||||||
Other current liabilities (Notes 5 and 6) |
13,156 | 12,974 | ||||||
|
|
|
|
|||||
Total current liabilities |
34,327 | 33,181 | ||||||
Other long-term liabilities (Note 5) |
4,341 | 5,189 | ||||||
|
|
|
|
|||||
Total liabilities |
38,668 | 38,370 | ||||||
Shareholders equity: |
||||||||
Preferred stock, $0.01 par value, authorized 10,000,000 shares, no shares issued |
| | ||||||
Common stock, no par value. Authorized 30,000,000 shares; 21,898,047 and 21,680,975 issued shares at Dec. 26, 2014 and Sept. 26, 2014, respectively |
189,096 | 188,127 | ||||||
Retained deficit |
(135,934 | ) | (138,508 | ) | ||||
Accumulated other comprehensive loss |
(4,238 | ) | (3,585 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
48,924 | 46,034 | ||||||
|
|
|
|
|||||
$ | 87,592 | $ | 84,404 | |||||
|
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|
|
See accompanying notes to consolidated financial statements.
3
Table of Contents
PLANAR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended | ||||||||
Dec. 26, 2014 | Dec. 27, 2013 | |||||||
(In thousands, except share data) | ||||||||
Sales |
$ | 55,780 | $ | 40,455 | ||||
Cost of sales |
41,374 | 30,723 | ||||||
|
|
|
|
|||||
Gross profit |
14,406 | 9,732 | ||||||
Operating expenses: |
||||||||
Research and development, net |
1,632 | 1,244 | ||||||
Sales and marketing |
6,088 | 4,673 | ||||||
General and administrative |
3,985 | 3,267 | ||||||
Restructuring charges (Note 5) |
10 | 11 | ||||||
|
|
|
|
|||||
Total operating expenses |
11,715 | 9,195 | ||||||
|
|
|
|
|||||
Income from operations |
2,691 | 537 | ||||||
Non-operating income (expense): |
||||||||
Interest, net |
139 | 53 | ||||||
Foreign exchange, net |
268 | (43 | ) | |||||
Other, net |
104 | 175 | ||||||
|
|
|
|
|||||
Net non-operating income |
511 | 185 | ||||||
|
|
|
|
|||||
Income before income taxes |
3,202 | 722 | ||||||
Provision for income taxes (Note 7) |
113 | 92 | ||||||
|
|
|
|
|||||
Net Income |
3,089 | 630 | ||||||
|
|
|
|
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Net income per share |
||||||||
Basic (Note 3) |
$ | 0.14 | $ | 0.03 | ||||
|
|
|
|
|||||
Diluted (Note 3) |
$ | 0.14 | $ | 0.03 | ||||
|
|
|
|
|||||
Average shares outstandingbasic (Note 3) |
21,770 | 21,113 | ||||||
Average shares outstandingdiluted (Note 3) |
22,310 | 21,416 |
See accompanying notes to consolidated financial statements.
4
Table of Contents
PLANAR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | ||||||||
Dec. 26, 2014 | Dec. 27, 2013 | |||||||
(In thousands) | ||||||||
Net income |
$ | 3,089 | $ | 630 | ||||
Other comprehensive income (loss): |
||||||||
Foreign currency translation adjustments |
(653 | ) | 203 | |||||
Amounts reclassified from accumulated other comprehensive income |
| | ||||||
|
|
|
|
|||||
Comprehensive income |
$ | 2,436 | $ | 833 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
5
Table of Contents
PLANAR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended | ||||||||
Dec. 26, 2014 | Dec. 27, 2013 | |||||||
(In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 3,089 | $ | 630 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation |
398 | 478 | ||||||
Restructuring charges |
10 | 11 | ||||||
Shared based compensation |
944 | 414 | ||||||
Decrease in accounts receivable, net |
36 | 1,104 | ||||||
Increase in inventories |
(2,000 | ) | (1,520 | ) | ||||
Increase in other assets |
(143 | ) | (791 | ) | ||||
Increase in accounts payable |
1,506 | 740 | ||||||
Decrease in deferred revenue |
(296 | ) | (290 | ) | ||||
Increase (decrease) in other liabilities |
(603 | ) | 513 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
2,941 | 1,289 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property, plant and equipment |
(143 | ) | (120 | ) | ||||
Proceeds from Beneq receivables (Note 9) |
188 | | ||||||
|
|
|
|
|||||
Net cash provided by (used in) investing activities |
45 | (120 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Payments of capital lease obligations |
(230 | ) | (57 | ) | ||||
Value of shares withheld for tax liability |
(515 | ) | (63 | ) | ||||
Net proceeds from issuance of capital stock |
25 | 84 | ||||||
|
|
|
|
|||||
Net cash used in financing activities |
(720 | ) | (36 | ) | ||||
Effect of exchange rate changes on cash |
(427 | ) | 74 | |||||
|
|
|
|
|||||
Net increase in cash |
1,839 | 1,207 | ||||||
Cash at beginning of period |
13,068 | 11,971 | ||||||
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|
|
|
|||||
Cash at end of period |
$ | 14,907 | $ | 13,178 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
6
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States. However, certain information and footnote disclosures normally included in such financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments necessary (which are of a normal and recurring nature) for the fair presentation of the results of the periods presented. These financial statements should be read in connection with the Companys audited financial statements for the year ended September 26, 2014. All references to a year or a quarter in these notes are to the Companys fiscal year or quarter in the period stated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Actual results may differ from those estimates.
The accompanying financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. The results of operations from the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending September 25, 2015.
Recently Adopted Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, (ASU 2013-11) which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Accordingly, the Company adopted this standard during the first quarter ended December 26, 2014, see Note 7 Income Taxes for disclosure of the impact of adopting the provisions of this ASU.
NOTE 2 INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
Dec. 26, 2014 | Sep. 26, 2014 | |||||||
Raw materials |
$ | 16,370 | $ | 16,398 | ||||
Work in process |
255 | 52 | ||||||
Finished goods |
12,173 | 10,355 | ||||||
|
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|
|
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$ | 28,798 | $ | 26,805 | |||||
|
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|
|
NOTE 3 EARNINGS PER SHARE
Weighted average basic shares outstanding for the three months ended December 26, 2014 and December 27, 2013 were 21,770,000 and 21,113,000, respectively. Diluted shares outstanding for the three months ended December 26, 2014 and December 27, 2013 were 22,310,000 and 21,416,000, respectively. The FASB Accounting Standards CodificationTM (ASC) Topic 260, Earnings per Share, requires that employee equity share options, nonvested shares and similar equity instruments granted by the Company be treated as potential common shares in computing diluted earnings per share. Diluted shares outstanding includes the dilutive effect of in-the-money options and nonvested shares, which is calculated based on the average closing share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits or deficiencies that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. For the three months ended December 26, 2014 and December 27, 2013 the dilutive effect of nonvested stock awards was approximately 540,000 and 303,000, respectively. There was no dilutive effect of in-the-money employee stock options for the three months ended December 26, 2014 or the three months ended December 27, 2013. For the three months ended December 26, 2014 and December 27, 2013 options and nonvested stock awards amounting to approximately 519,000 shares and 775,000 shares, respectively, were excluded from the calculation as their effect would have been anti-dilutive.
7
Table of Contents
NOTE 4 SHAREHOLDERS EQUITY
In the first quarter of fiscal 2010 the Company adopted the 2009 Incentive Plan (the 2009 Plan). The 2009 plan replaced the Companys Amended and Restated 1993 Stock Incentive Plan for Nonemployee Directors, the Clarity Visual Systems, Inc. 1995 Plan, the Clarity Visual Systems, Inc. Non-Qualified Stock Option Plan, the 1996 Stock Incentive Plan, the 1999 Non-Qualified Stock Option Plan, the 2007 New Hire Incentive Plan, as well as any individual inducement awards, which are collectively referred to as the Prior Plans. The 2009 Plan authorizes the issuance of 1,300,000 shares of common stock. In addition, up to 2,963,375 shares subject to awards outstanding under the Prior Plans at the time the 2009 Plan was approved became available for issuance under the 2009 Plan to the extent that these shares cease to be subject to the original awards (such as by expiration, cancellation or forfeiture of the awards). In the fourth quarter of 2012, shareholders approved an amendment to the 2009 Plan, authorizing the issuance of an additional 1,700,000 shares of common stock. The maximum number of shares that may be issued under the 2009 Plan is 5,963,375 shares, including shares available from the Prior Plans.
Stock Options
The 2009 Plan provides for the granting of stock options, which generally vest and become exercisable over a three-year period and expire seven to ten years after the date of grant. Options were last granted in the second quarter of fiscal 2008.
Information regarding outstanding options is as follows:
Number of Shares |
Weighted Average Exercise Price |
|||||||
Options outstanding at September 26, 2014 |
545,636 | $ | 8.67 | |||||
Granted |
| | ||||||
Exercised |
(4,402 | ) | 5.86 | |||||
Forfeited |
| | ||||||
Expired |
(164,299 | ) | 9.57 | |||||
|
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|
|||||
Options outstanding at December 26, 2014 |
376,935 | $ | 8.31 | |||||
|
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|
|
All options outstanding at December 26, 2014 were exercisable. As of December 26, 2014, the total pretax intrinsic value of options outstanding and options exercisable was $90 and the options had a weighted average remaining contractual term of 0.9 years.
Restricted Stock
The 2009 Plan provides for the issuance of restricted stock (nonvested shares per ASC Topic 718, Compensation Stock Compensation). Shares issued generally vest over a one to three year period upon the passage of time, or upon meeting objective performance conditions.
Information regarding outstanding restricted stock awards is as follows:
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Restricted stock outstanding at September 26, 2014 |
1,521,717 | $ | 2.08 | |||||
Granted |
655,000 | 3.87 | ||||||
Vested |
(322,976 | ) | 1.96 | |||||
Forfeited |
| | ||||||
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|
|||||
Restricted stock outstanding at December 26, 2014 |
1,853,741 | $ | 2.72 | |||||
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8
Table of Contents
Valuation and Expense Information
The following table summarizes share based compensation expense related to share based payment awards and employee stock purchases for the three months ended December 26, 2014 and December 27, 2013. The expense was allocated as follows:
Three Months Ended Dec. 26, 2014 |
Three Months Ended Dec. 27, 2013 |
|||||||
Cost of sales |
$ | 77 | $ | 25 | ||||
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|
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Research and development |
$ | 22 | $ | 9 | ||||
Sales and marketing |
191 | 37 | ||||||
General and administrative |
654 | 343 | ||||||
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|
|
|
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Share based compensation expense included in operating expenses |
$ | 867 | $ | 389 | ||||
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Share based compensation expense related to employee stock options, restricted stock awards and employee stock purchase plan |
$ | 944 | $ | 414 | ||||
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The Company recognizes compensation expense for all share based payment awards made to its employees and directors including employee stock options, restricted stock awards and employee stock purchases related to the Employee Stock Purchase Plan, based on estimated fair values. The Company calculates the value of employee stock options on the date of grant using the Black-Scholes model. The Company values restricted stock awards at the closing price of the Companys shares on the date of grant. As share based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures were estimated based on historical and anticipated future experience.
NOTE 5 RESTRUCTURING CHARGES
In fiscal 2013 the Company consolidated its two assembly and integration facilities in the United States into a single facility and recorded a liability related to the estimated present value of the remaining lease payments on the vacated facility less an assumption for sublease income. In 2014 the Company evaluated the liability associated with this action and revised the assumption for sublease income as a result of not being able to sublease the facility. The Company continues to actively seek a sublease tenant for this facility. For the three months ended December 26, 2014 and December 27, 2013, the Company recorded $10 and $11, respectively, in accretion of interest expense related to the liability recorded for this action. The remaining liability from this action is included in other current liabilities and other long-term liabilities.
Restructuring charges related to previously recorded charges affected the Companys financial position as follows:
Accrued Compensation |
Other Current Liabilities |
Other Long-term Liabilities |
||||||||||
Balance as of September 26, 2014 |
$ | 16 | $ | 705 | $ | 1,662 | ||||||
Accretion of interest expense |
| 10 | | |||||||||
Cash paid |
(16 | ) | (182 | ) | | |||||||
Reclassifications from other long-term liabilities to other current liabilities |
| 170 | (170 | ) | ||||||||
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|||||||
Balance as of December 26, 2014 |
$ | | $ | 703 | $ | 1,492 | ||||||
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NOTE 6 OTHER CURRENT LIABILITIES
Other current liabilities consist of:
Dec. 26, 2014 | Sept. 26, 2014 | |||||||
Warranty reserve |
$ | 3,406 | $ | 3,319 | ||||
Accrued compensation |
4,044 | 4,407 | ||||||
Other |
5,706 | 5,248 | ||||||
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Total |
$ | 13,156 | $ | 12,974 | ||||
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9
Table of Contents
The Company provides a warranty for its products and establishes an allowance at the time of sale which the Company believes, based on its best estimates, is sufficient to cover costs during the warranty period. The warranty period is generally between 12 and 36 months. This reserve is included in other current liabilities.
A reconciliation of the changes in the warranty reserve is as follows:
Three months ended Dec. 26, 2014 |
||||
Balance at beginning of period |
$ | 3,319 | ||
Cash paid for warranty repairs |
(1,493 | ) | ||
Provision for current period sales |
1,580 | |||
|
|
|||
Balance at end of period |
$ | 3,406 | ||
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NOTE 7 INCOME TAXES
The provision for income taxes for the first quarter of fiscal 2015 was recorded based upon the current estimate of the Companys annual effective tax rate. Generally, the provision for income taxes is the result of a mix of profits and losses the Company and its subsidiaries earn in tax jurisdictions with a broad range of income tax rates. The tax provisions of $113 and $92 for the three months ended December 26, 2014 and December 27, 2013, respectively, were generated by a mix of tax expense in foreign jurisdictions and state taxes. For the three months ended December 26, 2014 and December 27, 2013 the effective tax rates of 3.5% and 12.7%, respectively, differ from the federal statutory rate due to the valuation allowance on Finnish losses, and by generating U.S. income that can make use of NOLs which previously had valuation allowances recorded against them.
Each quarter the Company assesses and evaluates a number of factors in determining whether the weight of available evidence supports the recognition of some or all of the deferred tax assets. The Company establishes a valuation allowance for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. In fiscal 2007 the Company determined that a valuation allowance should be recorded against all of its U.S. deferred tax assets, and in the third quarter of fiscal 2012 the Company recorded a valuation allowance against its Finnish deferred tax assets due to its cumulative three year operating loss in Finland. As of December 26, 2014 the Company continued to place a valuation allowance against its U.S. and Finnish deferred tax assets. While a valuation allowance was still in place for financial statement purposes as of December 26, 2014, the valuation allowance does not limit the Companys ability to utilize the loss-carryforwards or other deferred tax assets on future tax returns.
During the first quarter of fiscal 2015 the Company implemented ASU 2013-11. The Company presents an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward. The implementation of ASU 2013-11 had no impact on the Companys income statement. The implementation of ASU changed the balance sheet presentation of unrecognized tax benefits at December 26, 2014 by reducing Other Current Assets and Other Assets by $117 and $457 respectively, and by reducing Other Liabilities by $574.
During the three months ended December 26, 2014 there was no change to the amount of unrecognized tax benefits under ASC Topic 740, Income Taxes. The Company is subject to taxation primarily in the United States, Finland, and France, as well as in certain states (including Oregon and California) and other foreign jurisdictions. The Companys larger jurisdictions generally provide for statutes of limitations from three to five years. The Company has effectively settled with the Internal Revenue Service on their examination of all United States federal income tax matters through fiscal year 2008. The Company has also settled examinations of both its Finnish tax returns for all tax years through 2007, as well as its French tax returns through fiscal year 2010.
NOTE 8 BORROWINGS
The Companys credit agreement allows for borrowing up to 80% of its eligible accounts receivable with a maximum borrowing capacity of $12.0 million. The credit agreement has interest rates ranging from LIBOR + 2.25% to Prime + 0.75%, expires on November 21, 2015, and is secured by substantially all of the assets of the Company. As of December 26, 2014 the Companys current borrowing capacity was $12.0 million, of which approximately $0.3 million is committed through standby letters of credit related to the Companys capital lease obligations. There were no amounts outstanding under the Companys credit agreement as of December 26, 2014 and September 26, 2014. The credit agreement contains certain financial covenants, with which the Company was in compliance as of December 26, 2014.
NOTE 9 BENEQ RECEIVABLES
In fiscal 2013 the Company sold the assets and liabilities associated with its electroluminescent (EL) product line to Beneq Products Oy (Beneq Products) for a base sale price of $6.5 million, of which $3.9 million was paid in cash at closing, with the remaining $2.6 million held as two promissory notes (collectively, Purchase Price Note). The term of the note is five years with principal payments due annually beginning in November 2014. The note accrues interest at 10% annually, with interest payments due in advance on the first day of each month.
10
Table of Contents
In October 2014, Beneq Products informed the Company that it would not pay, when due on November 30, 2014, the first principal payment of $0.7 million due under the Purchase Price Note. Beneq Products sought to exercise its right under the Purchase Price Note to reschedule, on a single occasion, the due date of a payment to a date not later than 180 days after the November 30, 2014 due date and requested that the Company agree to waive the penalty interest payable under the Purchase Price Note in connection with the exercise of its right to delay payment. Under the terms of the Purchase Price Note, Beneq Products had agreed that, upon its exercise of the right to delay payment, it would pay a penalty equal to 12 months interest on the entire loan balance. The Company has agreed to allow Beneq Products to exercise its right to delay repayment of the initial principal payment for up to 180 days in consideration for the payment of penalty interest equal to an additional 2% on the deferred balance in lieu of the penalty amount set forth in the Purchase Price Note.
Under the terms of the sale of assets agreement entered into by the Company in conjunction with the sale of the assets and liabilities associated with the EL product line, the Company transferred to Beneq Products certain non-cancelable component purchase commitments with third party vendors. Subsequent to the closing of the transaction, the Company learned that a vendor would not cooperate in the transfer to Beneq Products of such purchase commitments and demanded performance by Planar. In the third quarter of 2014, the Company entered into an agreement with this vendor (Vendor Agreement) related to such purchase commitments. As a part of the Vendor Agreement, the Company agreed to take delivery and ownership of 2.9 million ($3.9 million based on the EUR to USD exchange rate as of the agreement date) of electronic component devices. Delivery of these components and payment to the vendor were both completed in the third quarter of 2014. In the third quarter of 2014, the Company also entered into a settlement agreement (Settlement Agreement) with Beneq Products and Beneq Oy, the parent company of Beneq Products (collectively Beneq) establishing the terms under which the component inventory will be transferred to and paid for by Beneq (Component Device Receivable).
The Purchase Price Note and the Component Device Receivable are included in other current assets and other assets as of December 26, 2014 and September 26, 2014.
Other current assets consist of:
Dec. 26, 2014 | Sept. 26, 2014 | |||||||
Purchase Price Note Receivable from Beneq, current portion |
$ | 1,300 | $ | 650 | ||||
Component Device Receivable from Beneq, current portion |
549 | 382 | ||||||
Other |
3,270 | 2,877 | ||||||
|
|
|
|
|||||
Total |
$ | 5,119 | $ | 3,909 | ||||
|
|
|
|
Other assets consist of:
Dec. 26, 2014 | Sept. 26, 2014 | |||||||
Purchase Price Note Receivable from Beneq, non-current portion |
$ | 1,300 | $ | 1,950 | ||||
Component Device Receivable from Beneq, non-current portion |
2,256 | 2,741 | ||||||
Other |
2,273 | 2,559 | ||||||
|
|
|
|
|||||
Total |
$ | 5,829 | $ | 7,250 | ||||
|
|
|
|
Management has reviewed the total $5.4 million due from Beneq. Given Beneq Oys guarantee of the obligations of Beneq Products under the Purchase Price Note, the Companys security interest in assets of each of Beneq Products and Beneq Oy and information provided by Beneq relating to its efforts to take actions that would enhance its ability to perform the obligations under the Purchase Price Note and the Settlement Agreement, the Company continues to believe the receivables due from Beneq are appropriately valued based on the Companys best estimate of collectability. Based on this evaluation, the Company has determined that as of December 26, 2014 the total receivables due from Beneq (the Purchase Price Note and the Component Device Receivable) were collectible and appropriately valued on the Companys balance sheet as of that date. Accordingly, no allowance has been recorded against these receivables.
11
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following information should be read in conjunction with the consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report and with the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report on Form 10-K for the year ended September 26, 2014.
FORWARD-LOOKING STATEMENTS
This Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made pursuant to the safe harbor provisions of the federal securities laws. Forward-looking statements, which may be identified by the inclusion of words such as expects, anticipates, intends, plans, believes, seeks, estimates, goal and variations of such words and other similar expressions, are based on current expectations, estimates, assumptions and projections that are subject to change, and actual results may differ materially from the forward-looking statements. Forward looking statements include, among others: expectations about the growth of the digital signage display market; beliefs about and continued focus on digital signage products and efforts to transition the Companys focus, strategic direction, and resources; work to diversify the Companys supplier base; expectations regarding the future impact of accounting measures; the possibility (and timing) of decreases in the Companys uncertain tax positions; and the collectability of the purchase price note and component device receivable due from Beneq. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Many factors, including the risk factors included in Part II, Item 1A of this Report and the following, could cause actual results to differ materially from the forward-looking statements: poor or weakened domestic and international business and economic conditions; changes or reductions in the demand or order rates for products in the various display markets served by the Company; any delay in the timing of customer orders or the Companys ability to ship product upon receipt of a customer order; the extent and timing of any additional expenditures by the Company to address business growth opportunities; any inability to reduce costs or to do so quickly enough, in either case, in response to reductions in revenue; the ability of the Company to successfully implement any cost reduction initiatives or generally cause ongoing operating expenses to be maintained at levels permitting Company profitability; adverse impacts on the Company or its operations relating to or arising from any inability to fund desired expenditures, including due to difficulties in obtaining necessary financing; changes in the flat-panel monitor and digital signage industry; changes in customer demand or ordering patterns; changes in the competitive environment including pricing pressures or the ability to keep pace with technological changes; technological advances; shortages of manufacturing capacity from the Companys third-party manufacturing partners or other interruptions in the supply of components the Company incorporates in its finished goods including as a result of existing work slowdowns at certain U.S. West Coast ports or other labor unrest at import facilities and natural disasters and future production variables resulting in excess inventory. The forward-looking statements contained in this Report speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Report. If the Company does update one or more forward-looking statements, it should not be concluded that the Company will make additional updates with respect thereto or with respect to other forward-looking statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company reaffirms the critical accounting policies and use of estimates reported in its Form 10-K for the year ended September 26, 2014.
INTRODUCTION
Planar Systems, Inc. is a global leader in display and digital signage technology, providing premier solutions for the worlds most demanding environments. Retailers, educational institutions, government agencies, businesses, utilities and energy firms, and home theater enthusiasts all depend on Planar to provide superior performance when image experience is of the highest importance. Planar video walls, large format liquid crystal displays (LCD), interactive touch screen monitors, and many other solutions are used by the worlds leading organizations in applications ranging from digital signage to simulation and from interactive kiosks to large-scale data visualization. The Company has a global reach with sales offices in North America, Europe, and Asia and manufacturing facilities in the United States and France.
The electronic specialty display industry is driven by the proliferation of display products, from both the increase in functionality in smart devices and the availability and versatility of LCD flat panel displays at increasingly lower costs; the ongoing need for system providers and integrators to rely on display experts to provide customized solutions; and the growth in the market for targeted marketing and messaging to consumers using digital signage in a variety of form factors in both indoor and outdoor applications.
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Unless context otherwise requires, or as otherwise indicated, we, us, our and similar terms, as well as references to the Company and Planar, refer to Planar Systems, Inc. and, unless the context requires otherwise, include all of the Companys consolidated subsidiaries.
The Companys Strategy
For over 30 years, Planar has been designing and bringing to market innovative display solutions. The Company has historically focused on customized or specialty display products and systems, generally in niche display markets where requirements are more stringent, innovation is valued, and the customer is not served or is underserved by the mass-market, commodity display providers. In recent years, the Company has been transitioning its focus, strategic direction, and resources to target the larger and faster-growing market for digital signage displays, where a variety of its customers and end users use the Companys tiled LCD systems and large format stand-alone signage monitors for digital signage applications in retail, airport, sports arena and stadium, hospitality, corporate and higher-education venues, as well as in applications that have traditionally used customized or specialty display products and systems, including control rooms.
The Companys Markets and Products
Planar delivers display products and related solutions for a wide variety of applications and vertical markets. It categorizes the products into two areas, Digital Signage and Commercial and Industrial, and markets and sells its products under the Planar, Clarity, and Runco brands.
Digital Signage
The digital signage display market has experienced growth in recent years and the Company expects that the digital signage display market will continue to grow in the future. Digital signage solutions are being installed in many environments including retail locations, airports, and sports arenas, as well as emerging applications and in applications historically served by Commercial and Industrial products, including rear-projection cubes. Planar provides solutions for a number of display applications in the digital signage display market utilizing a variety of technologies and products.
Tiled LCD Systems (Matrix and Mosaic): Planars ultra-narrow bezel LCD display systems allow customers to create flat, large video walls for a number of applications including ambience, advertising, architectural and brand promotion. These systems are being deployed in a wide range of markets including retail, hospitality, commercial, sports venues and airports, as well as in markets traditionally served by rear-projection cubes, such as control rooms. Planars solutions utilize specialized LCD panels and tile them together using video processing to create large video wall displays. Products offered are well suited to these applications as they are designed for simple installation, easy and cost effective maintenance and off-boarding of power and video processing. The Company offers and supports a growing number of sizes and resolutions of ultra-narrow bezel displays, including touch panels, which can be utilized in creating a wide variety of video wall solutions. Beginning in the three month period ended December 26, 2014, the sales of tiled LCD systems also includes sales of Visual Control Stations (VCS) video processing solutions that were previously reported in the sales of rear-projection cube displays.
Signage Monitors: Planar provides a line-up of commercial-grade LCD displays, including the zero bezel UltraLux and Ultra HD UltraRes product offerings, which are suitable for a wide range of digital signage uses. This category also includes other stand-alone signage monitors, outdoor signage displays, transparent displays, and customized LCD signage solutions for customers with requirements that go beyond those available from off-the-shelf products.
Commercial and Industrial
The Commercial and Industrial display markets that the Company addresses are varied and numerous and some of these markets are relatively mature. The Company serves these markets with a wide range of solutions including standard as well as highly differentiated custom display products and systems.
Custom Commercial and Industrial Displays: Planar designs and manufactures custom LCD products that are generally targeted toward the transportation, military and natural resource exploration vertical markets. These displays are typically ruggedized to withstand extreme weather, direct sunlight, moisture, dust, vibration and other extreme conditions.
Desktop Monitor Displays: Planar capitalizes on its strong supply chain, logistics and distribution partnerships to sell a variety of LCD based displays principally to the United States marketplace.
Touch Monitor Displays: Planar markets a wide variety of desktop touch LCD products for use in kiosks, point of sale applications, and other applications.
Rear-Projection Cube Displays: The market for control room video wall solutions is driven by the development, expansion, and upgrade of industrial infrastructure such as power plants, transportation systems, communication systems, and security monitoring. Planar provides premium quality rear-projection displays and video processing solutions that meet the customers needs for virtually seamless video walls that support 24x7 operations.
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High-End Home Displays: Planar offers a wide variety of high-performance home theater front-projection systems, video processing equipment, and accessories, largely aimed at the high-end home market and certain commercial installations. The Company has sold these products under the Runco brand since May 2007 when it acquired Runco International, an industry leader in high-end, luxury video products. Planars Runco products are primarily sold to its established network of custom home installation dealers in the United States.
Overview of Results
In the three months ended December 26, 2014, the Company continued to experience strong demand for its digital signage products as the Company achieved significant growth in its digital signage product offerings, including UltraRes, tiled LCD systems, and a portfolio of LCD commercial flat panel displays. The Company believes the overall market for digital signage products is currently growing and will continue to grow in the future.
The Company recorded sales of $55.8 million in the three months ended December 26, 2014 (the first quarter of 2015), which was an increase of $15.3 million or 37.9% as compared to sales of $40.5 million in the three months ended December 27, 2013 (the first quarter of 2014). The increase in sales in the first quarter of 2015 as compared to the first quarter of 2014 was primarily the result of a $10.8 million or 56.9% increase in sales of digital signage products to $29.8 million in the first quarter of 2015 from $19.0 million in the first quarter of 2014. This increase was also due to a $4.5 million or 21.1% increase in sales of commercial and industrial products to $26.0 million in the first quarter of 2015 from $21.5 million in the first quarter of 2014.
Income from operations was $2.7 million in the first quarter of 2015 as compared to a $0.5 million in the first quarter of 2014. The improvement in income from operations in the three months ended December 26, 2014 was primarily due to an increase in gross profit of $4.7 million or 48.0%, which was partially offset by an increase in operating expenses of $2.5 million or 27.4%. The increase in gross profit was primarily the result of lower labor and overhead expenses as a percentage of revenue driven by improved capacity utilization, increased sales of digital signage products and higher gross profit rates on these sales as compared to the first quarter of 2014, as well as a change in the mix of products sold towards higher margin digital signage products, as the Company continued to execute its strategy to focus on the market for digital signage products. The increase in operating expenses was primarily driven by a $1.4 million increase in sales and marketing expenses, a $0.7 million increase in general and administrative expenses, and a $0.4 million increase in net research and development expenses.
Net income was $3.1 million or $0.14 per basic and diluted share in the first quarter of 2015 as compared to $0.6 million or $0.03 per basic and diluted share in the first quarter of 2014. The improvement in net income for the three months ended December 26, 2014 was due primarily to the improvement in income from operations.
Sales
For the three months ended December 26, 2014, the Companys sales increased $15.3 million or 37.9% to $55.8 million from $40.5 million for the three months ended December 27, 2013. The increase was due to an increase in sales of both digital signage products and commercial and industrial products. The increase in sales of digital signage products of $10.8 million or 56.9% was due primarily to an increase in the sales volume of tiled LCD video wall systems and an increase in the average selling prices (ASPs) of signage monitors, which was driven by a shift in the mix of products sold towards higher priced large format displays. The increase in sales of commercial and industrial products of $4.5 million or 21.1% was due primarily to an increase in the ASPs of custom displays and an increase in the sales volume of desktop monitors. These increases were partially offset by a decrease in sales of high-end home products, touch monitors, and rear-projection cubes. A summary of the major components of sales for the first quarter of 2015, including changes in sales from the first quarter of 2014 due to changes in volumes and ASPs is as follows:
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Sales for the Three Months Ended December 26, 2014
Three months ended | % | % Change in | % Change in | |||||||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | Change | Volumes(1) | ASPs(1) | |||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Digital Signage Product Sales |
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Tiled LCD systems |
$ | 21.0 | $ | 13.5 | $ | 7.5 | 55.6 | % | 71.1 | % | -9.0 | % | ||||||||||||
Signage monitors |
8.8 | 5.5 | 3.3 | 60.0 | % | -14.6 | % | 87.3 | % | |||||||||||||||
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Total Digital Signage Product Sales |
29.8 | 19.0 | 10.8 | 56.9 | % | | | |||||||||||||||||
Commercial & Industrial Sales |
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Custom commercial & industrial |
8.3 | 3.3 | 5.0 | 152.6 | % | -8.2 | % | 187.3 | % | |||||||||||||||
Desktop monitors |
9.2 | 8.1 | 1.1 | 14.4 | % | 18.3 | % | -1.1 | % | |||||||||||||||
Touch monitors |
2.9 | 3.2 | (0.3 | ) | -10.7 | % | -3.0 | % | -4.4 | % | ||||||||||||||
Rear-projection cubes |
4.8 | 5.0 | (0.2 | ) | -3.6 | % | 7.6 | % | -7.9 | % | ||||||||||||||
High-end home |
0.8 | 1.7 | (0.9 | ) | -51.1 | % | -51.9 | % | -9.4 | % | ||||||||||||||
Other |
| 0.2 | (0.2 | ) | -96.3 | % | | | ||||||||||||||||
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Total Commercial & Industrial Sales |
26.0 | 21.5 | 4.5 | 21.1 | % | | | |||||||||||||||||
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Total Sales |
$ | 55.8 | $ | 40.5 | $ | 15.3 | 37.9 | % | | | ||||||||||||||
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(1) | Due to the significant differences in volumes and ASPs for each product category, changes in volumes and ASPs have not been included for the Other categories or subtotals. |
For the three months ended December 26, 2014, the increase in volumes sold of tiled LCD video wall systems, including Matrix and Mosaic, was due primarily to increased demand for indoor video wall systems, while the decrease in ASPs of tiled LCD video wall systems was due primarily to a change in the mix of products sold towards certain Matrix products with lower ASPs. The increase in ASPs of signage monitors was due primarily to a change in the mix of products sold towards higher priced large format UltraRes products, while the decrease in volumes sold of signage monitors was due to decreased customer demand for touch signage products. The increase in ASPs of custom commercial and industrial products were due primarily to a shift in the mix of products sold in the first three months of 2015 towards certain custom products with higher ASPs as compared to the custom products that were sold in the first three months of 2014. The increase in volumes sold of desktop monitors was due to increased customer demand for desktop monitors. The decrease in high-end home product volumes sold was due to continued declines in demand for high-end projection home theater systems, while the decrease in high-end home ASPs was due primarily to a change in product mix toward lower priced product offerings.
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Sales by Geographic Region
% of Total Sales | ||||||||||||||||||||||||
Three months ended | Three months ended | |||||||||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | Dec. 26, 2014 | Dec. 27, 2013 | |||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Domestic sales (United States) |
$ | 42.5 | $ | 31.3 | $ | 11.2 | 36.0 | % | 76.2 | % | 77.3 | % | ||||||||||||
International sales |
13.3 | 9.2 | 4.1 | 44.2 | % | 23.8 | % | 22.7 | % | |||||||||||||||
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Total sales |
$ | 55.8 | $ | 40.5 | $ | 15.3 | 37.9 | % | ||||||||||||||||
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Domestic (United States) sales increased $11.2 million or 36.0% to $42.5 million in the first quarter of 2015 from $31.3 million in the first quarter of 2014. The increase in domestic sales for the three months ended December 26, 2014 was due primarily to an increase in sales of digital signage products, custom commercial and industrial products, and desktop monitors, which was partially offset by a decrease in sales of rear-projection cubes and high-end home products. These increases and decreases in the domestic product sales were primarily due to the reasons discussed above in Sales for the Three Months Ended December 26, 2014. As a percentage of sales, domestic sales decreased to 76.2% in the first quarter of 2015 from 77.3% in the first quarter of 2014. International sales increased $4.1 million or 44.2% to $13.3 million in the first quarter of 2015 from $9.2 million in the first quarter of 2014. The increase in international sales for the three months ended December 26, 2014 was primarily due to an increase in sales of custom commercial and industrial products and rear-projection cubes sold outside of the United States. As a percentage of sales, international sales increased to 23.8% in the first quarter of 2015 from 22.7% in the first quarter of 2014. The Company does not have material sales to any particular country outside the United States.
Gross Profit
Three months ended | ||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | |||||||||||||
(In millions, except percentage and basis point changes) | ||||||||||||||||
Gross profit |
$ | 14.4 | $ | 9.7 | $ | 4.7 | 48.0 | % | ||||||||
Gross profit margin |
25.8 | % | 24.1 | % | | 170 bps |
Gross profit as a percentage of sales increased to 25.8% in the first quarter of 2015 from 24.1% in the first quarter of 2014. Total gross profit increased $4.7 million or 48.0% to $14.4 million in the first quarter of 2015 as compared to $9.7 million in the first quarter of 2014. The increase in gross profit margin for the first quarter of 2015 was due primarily to lower labor and overhead expenses as a percentage of sales the result of improved capacity utilization, increased sales of digital signage products and higher gross profit rates on these sales as compared to the first quarter of 2014, as well as a change in the mix of products sold towards higher margin digital signage products, as the Company continued to execute its strategy to focus on the market for digital signage products. The higher digital signage gross profit rates were primarily the result of a change in the mix of digital signage products sold toward larger format products which have higher margins.
Research and Development, Net
Three months ended | ||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | |||||||||||||
(In millions, except percentage and basis point changes) | ||||||||||||||||
Research and development, net |
$ | 1.6 | $ | 1.2 | $ | 0.4 | 31.2 | % | ||||||||
% of sales |
2.9 | % | 3.1 | % | | (20) bps |
Net research and development expenses increased $0.4 million or 31.2% to $1.6 million in the first quarter of 2015 as compared to $1.2 million in the first quarter of 2014. The increase for the three months ended December 26, 2014 was due primarily to increased compensation related expenses driven by increased headcount as compared to the first three months ended December 27, 2013, and is also due to increased project related expenses.
As a percentage of sales, net research and development expenses decreased to 2.9% in the first quarter of 2015 as compared to 3.1% in the first quarter of 2014. The decrease in net research and development expenses as a percentage of sales for the first quarter of 2015 was primarily the result of net research and development expenses increasing at a slower rate than sales.
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Sales and Marketing
Three months ended | ||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | |||||||||||||
(In millions, except percentage and basis point changes) | ||||||||||||||||
Sales and marketing |
$ | 6.1 | $ | 4.7 | $ | 1.4 | 30.3 | % | ||||||||
% of sales |
10.9 | % | 11.6 | % | | (70) bps |
Sales and marketing expenses increased $1.4 million or 30.3% to $6.1 million in the first quarter of 2015 as compared to $4.7 million in the first quarter of 2014. The increase for the three months ended December 26, 2014 was due primarily to increased headcount and increased compensation related expenses to support the growth in sales as well as higher sales and marketing program spending.
As a percentage of sales, sales and marketing expenses decreased to 10.9% in the first quarter of 2015 as compared to 11.6% in the same period of the prior year. The decrease in sales and marketing expenses, as a percentage of sales, was primarily the result of sales and marketing expenses increasing at a slower rate than sales.
General and Administrative
Three months ended | ||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | |||||||||||||
(In millions, except percentage and basis point changes) | ||||||||||||||||
General and administrative |
$ | 4.0 | $ | 3.3 | $ | 0.7 | 22.0 | % | ||||||||
% of sales |
7.1 | % | 8.1 | % | | (100) bps |
General and administrative expenses increased $0.7 million or 22.0% to $4.0 million in the first quarter of 2015 from $3.3 million in the first quarter of 2014. The increase in general and administrative expenses in the first quarter of 2015 was due primarily to increased compensation related expenses.
As a percentage of sales, general and administrative expenses decreased to 7.1% in the first quarter of 2015 as compared to 8.1% in the first quarter of 2014. The decrease in general and administrative expenses as a percentage of sales in the first quarter of 2015 was primarily the result of general and administrative expenses increasing at a slower rate than sales.
Restructuring Charges
During the first quarter of 2015 and first quarter of 2014, the Company recorded $10 thousand and $11 thousand, respectively, in restructuring charges. As discussed in Note 5Restructuring Charges, the charges were the result of accretion of interest expense related to the liability recorded in fiscal 2013 and adjusted in fiscal 2014 related to the consolidation of the Companys two assembly and integration facilities in the United States into a single facility.
Total Operating Expenses
Three months ended | ||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | |||||||||||||
(In millions, except percentage and basis point changes) | ||||||||||||||||
Total operating expenses |
$ | 11.7 | $ | 9.2 | $ | 2.5 | 27.4 | % | ||||||||
% of sales |
21.0 | % | 22.7 | % | | (170) bps |
Total operating expenses increased $2.5 million or 27.4% to $11.7 million in the first quarter of 2015 from $9.2 million in the same period of the prior year. The increase in total operating expenses in the first quarter of 2015 was due primarily to increases in sales and marketing, general administrative, and net research and development expenses due to the reasons discussed above.
As a percentage of sales, total operating expenses decreased to 21.0% in the first quarter of 2015 from 22.7% in the first quarter of 2014. The decrease in total operating expenses as a percentage of sales for the first quarter of 2015 was primarily the result of the operating expenses increasing at a slower rate than sales.
Non-operating Income and Expense
Three months ended | ||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | ||||||||||
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Interest, net |
$ | 0.1 | $ | | $ | 0.1 | ||||||
Foreign exchange, net |
0.3 | | 0.3 | |||||||||
Other, net |
0.1 | 0.2 | (0.1 | ) | ||||||||
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$ | 0.5 | $ | 0.2 | $ | 0.3 | ||||||
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Non-operating income and expense includes interest income, interest expense, net foreign exchange gain or loss and other income or expense. Net interest income in the first quarter of 2015 was $0.1 million as compared to $53 thousand in the first quarter of 2014.
Foreign currency exchange gains and losses are related to timing differences in the receipt and payment of funds in various currencies and the conversion of cash, accounts receivable and accounts payable denominated in foreign currencies to the applicable functional currency. In the first quarter of 2015 the company recorded a net foreign currency exchange gain of $0.3 million, as compared to a net loss of $43 thousand in the first quarter of 2014.
Net other non-operating income was $0.1 million in the first quarter of 2015 as compared to $0.2 million in the first quarter of 2014.
Provision for Income Taxes
In the first quarter of 2015 the Company recorded an income tax expense of $0.1 million on pretax income of $3.2 million, resulting in an effective tax rate of 3.5%. Comparatively, the Company recorded an income tax expense of $0.1 million on pretax income of $0.7 million in the first quarter of 2014, resulting in an effective tax rate of 12.7%. The tax expense recorded in both the first quarter of 2015 and the first quarter of 2014 was generated by tax expense in certain foreign jurisdictions and state taxes.
As discussed in Note 7 Income Taxes, the Company evaluates a number of factors in determining whether the weight of available evidence supports the recognition of some or all of the Companys deferred tax assets, and the need for a valuation allowance. Factors considered when determining the likelihood of realization of the tax assets include, among others, future reversals of existing taxable temporary differences, future taxable income projections, taxable income in carryback years, and tax planning strategies.
The financial results in the United States during the first three months of 2015 were positive and available U.S. NOLs permitted the Company not to record U.S. income tax expense against those earnings. Although the Company experienced positive U.S. income in the current quarter, the Companys assessment of all the positive and negative evidence lead it to conclude that it is more likely than not that the U.S. deferred tax assets will not be realized, and the valuation allowance against those U.S. tax assets are still necessary. Accordingly, as of December 26, 2014, the Company continued to place a valuation allowance against its U.S. deferred tax assets. There were no material changes to the Companys Finnish operations and the Company continued to maintain a full valuation allowance against the Finnish deferred tax assets.
Net Income
Three months ended | ||||||||||||||||
Dec. 26, 2014 | Dec. 27, 2013 | $ Change | % Change | |||||||||||||
(In millions, except percentage and basis point changes) | ||||||||||||||||
Net income |
$ | 3.1 | $ | 0.6 | $ | 2.5 | 390 | % | ||||||||
% of sales |
5.5 | % | 1.6 | % | | 390 bps | ||||||||||
Net income per sharebasic |
$ | 0.14 | $ | 0.03 | ||||||||||||
Net income per sharediluted |
$ | 0.14 | $ | 0.03 |
In the first quarter of 2015 net income was $3.1 million or $0.14 per basic and diluted share, as compared to net income of $0.6 million or $0.03 per basic and diluted share in the first quarter of 2014.
Liquidity and Capital Resources
Net cash provided by operating activities was $2.9 million in the first three months of 2015 as compared to net cash provided by operating activities of $1.3 million in the first three months of 2014. Cash provided by operating activities in the first three months of 2015 primarily relates to net income for the period, an increase in accounts payable, and non-cash charges including depreciation and share-based compensation, which did not result in a cash outlay. These sources of cash were partially offset by increases in inventories and other assets and decreases in deferred revenue and other liabilities. Comparatively, cash provided by operating activities in the first three months of 2014 primarily related to a decrease in accounts receivable and an increase in accounts payable and other liabilities and also related to non-cash charges including depreciation, share-based compensation, and restructuring charges, which did not result in a cash outlay. These sources of cash were partially offset by an increase in inventories and other assets and a decrease in deferred revenue.
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Working capital increased $3.8 million to $42.7 million at December 26, 2014 from $38.9 million at September 26, 2014. The increase in working capital was due primarily to increases in cash, inventories, and other current assets, which were partially offset by increases in accounts payable. Current assets increased $4.9 million to $77.0 million at December 26, 2014 as compared to $72.1 million at September 26, 2014 due primarily to increases in cash, inventories, and other current assets. Cash increased $1.8 million due primarily to cash provided by operating activities of $2.9 million as a result of the factors discussed above, which was partially offset by cash used in financing activities of $0.7 million. Inventories increased $2.0 million due primarily to increases in desktop monitor, Matrix, and signage monitor inventories to support the growth in sales. Other current assets increased $1.2 million due primarily to the reclassification of a portion of the Purchase Price Note Receivable and the Component Device Receivable from Beneq from long-term to current. Current liabilities increased $1.1 million to $34.3 million at December 26, 2014 from $33.2 million at September 26, 2014 due primarily to an increase in accounts payable. Accounts payable increased $1.5 million due to an increase in inventory purchases and also due to the timing of payments to vendors.
The Companys credit agreement allows for borrowing up to 80% of its eligible accounts receivable with a maximum borrowing capacity of $12.0 million. The credit agreement has interest rates ranging from LIBOR + 2.25% to Prime + 0.75%, expires on November 21, 2015, and is secured by substantially all of the assets of the Company. As of December 26, 2014 the Companys current borrowing capacity was $12.0 million, of which approximately $0.3 million is committed through standby letters of credit related to the Companys capital lease obligations. There were no amounts outstanding under the Companys credit agreement as of December 26, 2014 and September 26, 2014. The credit agreement contains certain financial covenants, with which the Company was in compliance as of December 26, 2014.
The Companys position on indefinite reinvestment of unremitted earnings from foreign operations may limit its ability to transfer cash between or across foreign and U.S. operations.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), (ASU 2014-09), which provides guidance on when an entity should recognize revenue in connection with the transfer of goods or services to customers and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. ASU 2014-09 will be effective for public entities for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption of the provisions of this ASU. The Company is currently evaluating which transition method it expects to use and the impacts that adoption of this standard will have on our financial position, results of operations, and cash flows.
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Item 4. | Controls and Procedures |
An evaluation was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures are effective. There were no significant changes in the Companys internal controls or in other factors during the quarter ended December 26, 2014 that could significantly affect the Companys internal controls over financial reporting.
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Item 1. | Legal Proceedings |
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or to which any of its property is subject.
Item 1A. | Risk Factors |
The following issues, risks, and uncertainties, among others, should be considered in evaluating the Companys future financial performance and prospects for growth.
The Companys operating results can fluctuate significantly.
In addition to the variability resulting from the short-term nature of commitments from the Companys customers, other factors can contribute to significant periodic fluctuations in its results of operations. These factors include, but are not limited to, the following:
| the receipt and timing of orders from customers; |
| the timing of receipt of components and products from vendors and the timing of delivery of orders, which have recently been and may continue in future periods to be affected by the existing work slowdowns at certain U.S. West Coast ports or other labor unrest at import facilities among other factors; |
| the inability to adjust expense levels or delays in adjusting expense levels, in either case in response to lower than expected revenues or gross margins; |
| the volume of orders relative to the Companys capacity; |
| product introductions and market acceptance of new products or new generations of products; |
| evolution in the lifecycles of customers products; |
| changes in cost and availability of labor and components; |
| variations in revenue and gross margins relating to the mix of products available for sale and the mix of products sold from period to period; |
| availability of sufficient quantities of the components of the Companys products on a timely basis or at all; |
| variation in operating expenses; |
| expenses arising from the vesting of restricted stock based upon achievement of certain performance measures; |
| pricing and availability of competitive products and services; |
| general economic conditions and changeswhether or not anticipatedin economic conditions; and |
| the ability to use cash flow to fund working capital, capital expenditures, development projects, acquisitions, and other general corporate purposes, which could be limited by any Company indebtedness and the covenants of the Companys existing credit facility. |
Accordingly, the results of any past periods should not be relied upon as an indication of the Companys future performance. It is possible that, in some future period, the Companys operating results may be below expectations of public market analysts and/or investors. If this occurs, the Companys stock price may decrease.
The Company faces intense competition.
Each of the markets served by the Company is highly competitive, and the Company expects this to continue and even intensify. The Company believes that over time this competition will have the effect of reducing average selling prices of its products. Certain of the Companys competitors have substantially greater name recognition and financial, technical, manufacturing, marketing and other resources than does the Company. There is no assurance that the Company will not face additional competitors or that the Companys competitors will not succeed in developing or marketing products that would render the Companys products obsolete or noncompetitive. To the extent the Company is unable to compete effectively, its business, financial condition and results of operations would be materially adversely affected. The Companys ability to compete successfully depends on a number of factors, both within and outside its control. These factors include, but are not limited to:
| the Companys ability to anticipate and address the needs of its customers; |
| the Companys ability to develop innovative, new and value-added products and technologies and the extent to which such technologies can be protected as proprietary to the Company; |
| the quality, performance, reliability, features, ease of use, pricing and diversity of the Companys product solutions; |
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| foreign currency fluctuations, which may cause competitors products to be priced significantly lower than the Companys product solutions; |
| the quality of the Companys customer services; |
| the effectiveness of the Companys supply chain management; |
| the Companys ability to identify new markets and develop attractive products to address the needs of such markets; |
| the Companys ability to develop and maintain effective and financially viable sales channels; |
| the rate at which customers incorporate the Companys product solutions into their own products; and |
| product or technology introductions by the Companys competitors. |
The Companys success depends on the development of new products and technologies.
Future results of operations will partly depend on the Companys ability to improve and successfully market its existing products, while also successfully developing and marketing new value-added products and developing new markets for existing products and technologies. If the Company fails to do this, its products or technologies could become obsolete or noncompetitive. Additionally, if the Company is unable to successfully execute its transition from existing products to new offerings or technologies, it could result in declining sales and the Company holding excess or obsolete inventory, either of which could have a material adverse effect on the Companys business, financial condition, and results of operations. In the past, the Company has reduced its spending on research and development projects as a part of overall cost reductions. The Company may be required to further reduce research and development expenditures in future periods as a part of cost reduction programs. These reductions could impact the Companys ability to improve its existing products and to successfully develop new products.
The Company may have challenges with new technologies, products, markets, and customers.
New technologies, products, and markets, by their nature, present significant risks and even if the Company is successful in developing new products, they typically result in pressure on gross margins during the initial phases as start-up activities are spread over lower initial sales volumes. The Company has experienced lower margins from new products and processes in the past, which have negatively impacted overall gross margins. In addition, customer relationships can be negatively impacted due to production and product performance problems and late delivery of shipments. Future operating results will depend on the Companys ability to continue to provide new product solutions that compare favorably on the basis of cost and performance with competitors. The Companys success in attracting new customers and developing new business depends on various factors, including, but not limited to, the following:
| developing and/or deploying advances in technology; |
| developing innovative products for new markets; |
| offering efficient and cost-effective services; |
| timely completion of the design and manufacture of new product solutions; and |
| developing proprietary technology positions and adequately protecting the Companys proprietary property. |
The Company must continue to add value to its portfolio of offerings.
Traditional display components are produced in such large quantities and by many varied suppliers at a high quality such that traditional display components are subject to increasing competition to the point of commoditization. In addition, advances in LCD technology make standard displays effective in an increasing breadth of applications. An increasing proportion of the Companys business is based on commercially available components rather than proprietary technology. The Company must add additional value to its products and services for which customers are willing to pay. The Company may not be successful at developing products that add sufficient value beyond commodity products and failure to do so could adversely affect the Companys revenue levels, margins, and its results of operations and financial condition.
The Companys reliance on third party suppliers for its products creates risks over control of timing, quality and delivery of products.
The Company relies on third party manufacturers or suppliers for substantially all of its products and product components. The Company does not have sufficient market power to exercise significant influence over its suppliers, some of whom are substantially larger than the Company and most of whom are located in Asia. The Companys reliance on these third parties involves risks, including, but not limited to the following:
| lack of control over production capacity and delivery schedules; |
| unanticipated interruptions in transportation and logistics; |
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| limited control over quality assurance, manufacturing yields and production costs; |
| potential termination by suppliers of agreements to supply materials to the Company, which would necessitate the Companys contracting of alternative suppliers, which may not be possible; |
| risks associated with international commerce, including unexpected changes in legal and regulatory requirements, foreign currency fluctuations and changes in duties and tariffs; and |
| trade policies and political and economic instability. |
The Companys supply of products and profitability can be adversely affected by each of these risks.
The Companys dependence on a limited number of key suppliers in foreign countries could result in delayed or more costly products.
The Company obtains much of the material it uses in the manufacture of its products from a limited number of suppliers and in some cases from a single or sole source supplier. It generally does not have long-term supply contracts and the Company does not generally have a guaranteed alternative source of supply. Any one of its suppliers could, among other things:
| encounter constraints in its supply chain, for example due to the unavailability of certain natural resources used in the manufacturing process; |
| encounter a natural disaster or other physical act disrupting supply or transportation; |
| be unwilling to extend the Company credit to purchase supplies on terms acceptable to the Company; |
| be subject to foreign or other local regulations or trade policies applicable to sales of components to the Company; |
| choose to prioritize another more significant customer over the Company in periods of high demand; |
| discontinue manufacturing the products the Company needs; or |
| fail to maintain suitable manufacturing facilities, train manufacturing employees, manage its supply chain effectively, manufacture a quality product, or provide spare parts in support of the Companys warranty and customer service obligations. |
Examples of these risks include, without limitation:
| Asia experiencing several earthquakes, tsunamis, typhoons, and interruptions to power supplies, resulting in business interruptions. In particular, the March 2011 earthquake and tsunami in Japan caused some of the Companys suppliers and some of the vendors of the Companys suppliers to halt, delay or reduce production of displays, display components and other materials used in the Companys products; |
| in fiscal 2010, in connection with an intellectual property dispute among two LCD panel manufacturers, the U.S. International Trade Commission issued an exclusion order banning the import of certain LCD panels incorporated by the Company into certain of its specialty display products (this matter was resolved); and |
| certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring reports on conflict minerals, possibly resulting in increased costs or constrained supply as contract manufacturers attempt to assess and possibly avoid the purchase of conflict minerals from the Democratic Republic of the Congo and adjoining countries. |
Any of these risks could result in, among other things, the Company having:
| the inability to timely obtain sufficient quantities of components and other materials necessary to produce the Companys displays and products to meet customer demand, resulting in reduced, delayed or cancelled sales and the loss of customers; |
| an increase in the costs for supplies and components, resulting in decreased margins and profits; |
| excess or obsolete inventory, because of a failure to timely obtain all of the components for a product, resulting in write-offs and additional expenditures; and |
| poor quality components, resulting in increased costs for replacements and returns, cancellation of orders and loss of customers. |
Any significant interruption in the supply of displays, components and contract manufacturing capacity necessary to produce and sell the Companys products would have a material adverse effect on the Companys business, financial condition and results of operations.
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Continued customer demands to shorten delivery times along with supplier constraints in meeting lead time schedules could result in the Company not meeting customer demands and excess or obsolete inventory.
The Company is subject to supply lead times that can vary considerably depending on capacity fluctuations and other manufacturing constraints of the Companys suppliers. These lead times can be significant when suppliers operate with diminished capacity or experience other restrictions that limit their ability to produce products in a timely manner. For most of the Companys products, supplier lead times significantly exceed the Companys customers required delivery time, causing the Company to order based on a forecast rather than order based on actual demand. Competition for the Companys products continues to reduce the period of time customers will wait for product delivery. Ordering raw materials and building finished goods based on the Companys forecast rather than actual demand exposes the Company to numerous risks including its inability to service customer demand in an acceptable timeframe, holding excess and obsolete inventory or having unabsorbed manufacturing overhead.
The risks inherent in the Companys operations could be heightened by general economic weakness and potential lack of credit availability.
In recent years, disruptions in global credit and financial markets and the general decline in worldwide economic conditions have resulted in diminished liquidity and credit availability, a decline in consumer confidence, increased unemployment, a decline in economic growth and uncertainty about economic stability. These types of conditions make it extremely difficult for the Company and its customers and vendors to accurately forecast and plan future business activities. In times of economic uncertainties, the Companys financial performance and prospects for growth are subject to heightened risks including, but not limited to, the risk that the poor economic conditions and uncertainties in the credit and financial markets could adversely affect the amount, timing and stability of the demand for the Companys products, the financial strength of the Companys customers and vendors and their ability or willingness to do business with the Company, the ability of the Companys customers and/or vendors to fulfill their obligations to the Company, and the ability of the Companys customers and/or vendors to obtain credit in amounts and on terms acceptable to them. Each of the foregoing could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company took a number of measures to reduce costs in response to the worldwide economic downturn over the past several years. However, in connection with the execution of the growth strategy adopted during fiscal 2011 the Company has refocused sales and marketing resources to better position it for sales growth. If the economic recovery were to slow or cease and dip back into recession, or if customer demand for the Companys products were to otherwise not improve or slow down, the Company might be unable to adjust expense levels rapidly enough in response to falling demand or adequately reduce expenses without changing the way in which it operates in a manner that adversely affects its business, financial condition, or results of operations. If revenues were to decrease and the Company was unable to adequately reduce expense levels, it might incur significant losses that could potentially adversely affect the Companys overall financial performance and the market price of the Companys common stock.
A significant slowdown in the demand for the products of certain of the Companys customers would adversely affect its business.
The Company designs and manufactures custom display solutions that its customers incorporate into their products. As a result, the Companys success partly depends upon the market acceptance of its customers products. Dependence on the success of products of the Companys customers exposes the Company to a variety of risks, including, but not limited to, the following:
| the Companys ability to match its design and manufacturing capacity with customer demand and to maintain satisfactory delivery schedules; |
| customer order patterns, changes in order mix and the level and timing of orders that the Company can manufacture and ship in a quarter; and |
| the cyclical nature of the industries and markets served by the Companys customers. |
These risks could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company faces risks associated with operations outside the United States.
The Companys manufacturing, sales and distribution operations in Europe and Asia create a number of logistical, systems and communications challenges. The Companys international operations also expose the Company to various economic, political and other risks, including, but not limited to, the following:
| complexities involved in the management of a multi-national organization; |
| compliance with local laws and regulatory requirements as well as changes in those laws and requirements; |
| employment and severance issues; |
| complexity of tax issues; |
| tariffs and duties; |
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| employee turnover or labor unrest; |
| lack of developed infrastructure; |
| difficulties protecting intellectual property; |
| difficulties repatriating funds without adverse tax effects; |
| risks associated with outbreaks of infectious diseases; |
| burdens and costs of compliance with a variety of foreign laws; |
| political or economic instability throughout the world; |
| effects of doing business in currencies other than the Companys functional currency; |
| effects of doing business in countries where the local currency is pegged to the currency of another country (For instance the exchange rate of the Chinese RMB to the U.S. Dollar is closely monitored by the Chinese government and may be subject to significant changes in future periods. The Company purchases a significant amount of goods from Chinese suppliers and, while those purchases are typically denominated in U.S. Dollars, changes in the RMB relative to the U.S. Dollar would tend to cause the cost of such goods to fluctuate); and |
| effects of foreign currency fluctuations on overall financial results. (For instance, while the Company is for the most part naturally hedged due to approximately equal foreign denominated sales and expenses, the Company is exposed to certain risks relating to Euro denominated assets held in the United States as well as U.S. Dollar denominated assets primarily held in Europe. The Company does not hedge foreign currency risk through forward exchange contracts. As a result the Company may experience non-cash GAAP income statement losses due to changes in the U.S. Dollar versus the Euro exchange rate.) |
Changes in policies by the United States or foreign governments resulting in, among other things, increased duties, higher taxation, currency conversion limitations, restrictions on the transfer or repatriation of funds, limitations on imports or exports, changes in environmental standards or regulations, or the expropriation of private enterprises also could have a materially adverse effect on the Companys business, financial condition, and results of operations. Any actions by the Companys host countries to curtail or reverse policies that encourage foreign investment or foreign trade also could adversely affect its operating results. In addition, U.S. trade policies, such as most favored nation status and trade preferences for certain Asian nations, could affect the attractiveness of the Companys services to its U.S. customers.
The sale of the Companys EL display assets and liabilities involves significant risks.
In November 2012, the Company completed a transaction in which Beneq Products Oy (Beneq Products) purchased from the Company substantially all of the assets, and assumed certain liabilities, used in or necessary in connection with the Companys EL display business (the EL Transaction). As a result of or in connection with the EL Transaction, the Company may incur future liabilities, costs, expenses, claims, and losses, including those relating to (i) claims by Beneq Products for losses incurred by Beneq Products as a result of breaches of representations and warranties given by the Company in the sale agreement, (ii) claims against the Company by third parties associated with the EL display business (e.g. vendors, customers, etc.) based upon, or payments made or further credit granted by the Company in respect of, non-performance by Beneq Products of obligations it assumed in the EL transaction, (iii) liabilities relating to the EL display business that the Company retained as part of the EL Transaction, and (iv) a default by Beneq Products on the promissory notes issued to the Company by Beneq Products in connection with the EL Transaction and related transactions (collectively, the Promissory Notes) or the agreement among the Company, Beneq Products and Beneq Oy, the parent company of Beneq Products (Beneq Oy and collectively with Beneq Products, Beneq), entered into in June 2014 to repay to the Company funds advanced for certain electronic component devices as discussed below (the Settlement Agreement). Any liabilities, costs or expenses incurred by the Company as a result of the foregoing or other matters arising out of or in connection with the EL Transaction could materially and adversely affect the Companys business, financial condition and results of operations.
As discussed in Note 9Beneq Receivables to the Consolidated Financial Statements, in April 2014 the Company entered into an agreement with a vendor related to a purchase commitment that was transferred by the Company to Beneq Products in connection with the EL Transaction. As a part of the April 2014 agreement, the Company agreed to take delivery and ownership of 2.9 million of electronic component devices. The Company subsequently entered into the Settlement Agreement with Beneq to establish the terms under which the component devices will be transferred to and paid for by Beneq.
As discussed in Note 9Beneq Receivables to the Consolidated Financial Statements, on October 23, 2014, Beneq Products informed the Company that it would not pay, when due on November 30, 2014, the first principal payment of $650,000 under the Promissory Notes. Beneq Products sought to exercise its right under the Promissory Notes to reschedule, on a single occasion, the due date of a payment to a date not later than 180 days after the November 30, 2014 due date and requested that the Company agree to waive the penalty interest payable under the Promissory Notes in connection with the exercise of its right to delay payment. Under the terms of the Promissory Notes, Beneq Products had agreed that, upon its exercise of the right to delay payment, it would pay a penalty equal to 12 months interest on the entire loan balance. The Company has agreed to allow Beneq to exercise its right to delay
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repayment of the initial principal payment for up to 180 days in consideration for the payment of penalty interest equal to an additional 2% on the deferred balance in lieu of the penalty amount set forth in the Promissory Notes. The Company believes that Beneqs request to delay repayment of the principal scheduled to be paid on November 30, 2014 evidences an increased risk that Beneq will be unable to repay its obligations to the Company in the normal course of operating its business. Given Beneq Oys guarantee of the obligations of Beneq Products under the Promissory Notes, the Companys security interest in assets of each of Beneq Products and Beneq Oy and information provided by Beneq relating to its efforts to take actions that would enhance its ability to perform the obligations under the Promissory Notes and the Settlement Agreement, the Company continues to believe there is a reasonable probability that Beneq will satisfy its obligations to the Company. However, no assurance can be given that the on-going operations of Beneq will support the repayment of these obligations, that Beneq will otherwise be able to complete actions necessary to ensure repayment of these obligations, or that the value of the assets of Beneq Oy and Beneq Products will be sufficient to repay, in full or in a timely manner, the obligations owed to the Company. The Company will continue to monitor the events, facts and circumstances associated with the Beneq obligations and evaluate the impact of any changes in facts and circumstances on the value of the Beneq obligations. The failure by Beneq to perform its obligations under the Promissory Notes or the Settlement Agreement, or a decision by the Company, based upon future events, facts or circumstances, to write down the value of these assets on the Companys books, could materially and adversely affect the Companys assets and results of operations.
Variability of customer requirements or losses of key customers may adversely affect the Companys operating results.
The Company must provide increasingly rapid product turnaround and respond to ever-shorter lead times expected from its customers and ever-longer lead times from its vendors and suppliers, while at the same time meeting its customers product specifications and quality expectations. A variety of conditions, including bankruptcy and other conditions both specific to individual customers and generally affecting the demand for their products, may cause customers to cancel, reduce, or delay orders. These actions by a significant customer or by a set of customers could adversely affect the Companys business. On occasion, customers require rapid increases in production, which can strain the Companys resources and reduce margins. The Company may lack sufficient capacity or inventory at any given time to meet customers demands. Sales to a significant customer, if lost, could have a material, adverse impact on the results of operations. If accounts receivable from a significant customer or set of customers became uncollectible, a resulting charge could have a material adverse effect on operations.
The Company may be unable to attract and retain key personnel.
The Companys success depends in part upon the services of its executive officers and key personnel. The loss of key personnel, or the Companys inability to attract and retain qualified personnel, could inhibit the Companys ability to operate and grow its business and otherwise have a material adverse effect on its business, financial position and results of operations. The Company has previously had to, and may in the future have to, impose salary freezes and reductions in force in an effort to maintain its financial position. These actions may have an adverse effect on employee loyalty and may make it more difficult for the Company to attract and retain key personnel. Competition for qualified personnel in the businesses in which the Company competes is intense, and the Company may not be successful in attracting and retaining qualified personnel. The Company may incur significant costs in its efforts to recruit and retain key personnel, which could have a material adverse effect on its business, financial condition and results of operations.
Future indebtedness could reduce the Companys ability to use cash flow for purposes other than debt service or otherwise restrict the Companys activities.
If the Company incurred a significant amount of debt under its current secured credit facility or otherwise, the leverage would reduce the Companys ability to use cash flow to fund working capital, capital expenditures, development projects, acquisitions, and other general corporate purposes. High leverage would also limit flexibility in planning for, or reacting to, changes in business and increases vulnerability to a downturn in the business and general adverse economic and industry conditions. Substantially all of the assets of the Company are pledged as security for the performance of the Companys obligations under its credit agreement, which includes certain financial covenants. The Company may not generate sufficient profitability to meet these covenants. If the Company fails to comply with applicable covenants under its debt agreements, the Company may be unable to borrow amounts under the agreements or may have to repay all amounts outstanding at that time, which, in turn could lead to the Companys inability to pay its debts and the loss of control of its assets. If the Company is unable to borrow amounts under the agreements or is unable to extend or renew the agreements upon expiration, the Company may need to pursue other sources of financing. Other sources of credit may not be available at all or on terms that are acceptable to the Company. If credit is not available to fully satisfy the Companys liquidity needs, the Company may need to dispose of additional assets. In addition, the Companys position on indefinite reinvestment of unremitted earnings from foreign operations may limit its ability to transfer cash between or across foreign and U.S. operations as may be required to service its debt.
The Company may experience losses selling certain desktop monitors or other low margin products.
The market for the Companys desktop monitor and other low margin products is highly competitive and subject to rapid changes in prices and demand. The Companys failure to successfully manage inventory levels or quickly respond to changes in
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pricing, technology or consumer tastes and demand could result in lower than expected revenue, lower gross margin and excess, obsolete and devalued inventories of its desktop monitor or other low margin products which could adversely affect the Companys business, financial condition and results of operations. Past market conditions have been characterized by rapid declines in end user pricing. Such declines caused the Companys inventory to lose value and triggered price protection obligations for channel inventory. Supply and pricing of LCD panels has been volatile in the past and may be in the future. This volatility, combined with lead times of five to eight weeks, may cause the Company to pay too much for products or suffer inadequate product supply.
The Company does not have long-term agreements with its resellers, who generally may terminate their relationship with the Company with little or no notice. Such action by the Companys resellers could substantially harm the Companys operating results. In addition, strategic changes made by the Companys management to invest greater resources in specialty display markets could result in reduced revenue from desktop monitors.
The sale, disposal or elimination of one or more business or product lines could result in unabsorbed overhead costs that must be absorbed by the Companys remaining product lines.
From time to time the Company disposes of product lines. For instance, in the first fiscal quarter of 2013 the Company sold the assets and liabilities related to the EL product line. The Company may consider selling, disposing or discontinuing business or product lines or reducing its staffing and efforts to sell particular product lines. If the Company were to sell, dispose of or discontinue one or more business or product lines or substantially reduce its efforts to sell products to any of its targeted end-markets, for the purpose of reducing costs or losses or changing strategic direction or otherwise, the Company might not be able to eliminate all, or even a substantial portion of, fixed overhead costs, including those associated with those products. Not reducing or eliminating overhead costs in these circumstances could cause a decrease in the Companys gross profit margins for its remaining products or result in losses.
The Company may encounter difficulties in the operation of its new enterprise resource planning (ERP) system.
The operation of the new ERP system, which commenced in the third quarter of 2013, is a complex process that is subject to a variety of difficulties and uncertainties. Any difficulties the Company encounters with the successful operation of the new ERP system, or modification of the system to meet changing business needs, could damage the effectiveness of the Companys business processes and controls and could adversely impact the Companys ability to accurately and effectively forecast and manage sales demand, manage the Companys supply chain, identify and implement actions that improve the Companys operational effectiveness, and report financial and management information on an accurate and timely basis, any of which could have a material adverse effect on the Companys business, financial condition and results of operations.
The Company may lose key licensors, sales representatives, foundries, licensees, vendors, other business partners and employees due to uncertainties regarding the future results of the Company or the worldwide economic condition, which could seriously harm the Company.
Sales representatives, vendors, resellers, distributors, and others doing business with the Company may experience uncertainty about their future role with the Company, may elect not to continue doing business with the Company, may seek to modify the terms under which they do business in ways that are less attractive, more costly, or otherwise damaging to the business of the Company, or may declare bankruptcy or otherwise cease operations. Loss of relationships with these business partners could adversely affect the Companys business, financial condition, and results of operations. Similarly, the Companys employees may experience uncertainty about their future role with the Company to the extent that its operations are unsuccessful or its strategies are changed significantly. This may adversely affect its ability to attract and retain key management, marketing and technical personnel. The loss of a significant group of key technical personnel would seriously harm the Companys product development efforts. The loss of key sales personnel could cause the Company to lose relationships with existing customers, which could cause a decline in the sales of the Companys products.
The Company does not have long-term purchase commitments from its customers.
The Companys business is generally characterized by short-term purchase orders and contracts that specify certain sales terms but do not require customers to make purchases. The Company typically plans its production and inventory levels based on internal forecasts of customer demand which rely in part on nonbinding forecasts provided by its customers and estimated lead times provided by its vendors and suppliers. As a result, the Companys backlog generally does not exceed three months, which makes forecasting its sales difficult. Inaccuracies in the Companys forecast as a result of changes in customer demand or otherwise may result in its inability to service customer demand in an acceptable timeframe, the Company holding excess and obsolete inventory, or having unabsorbed manufacturing overhead. The failure to obtain anticipated orders and deferrals or cancellations of purchase commitments because of changes in customer requirements, or otherwise, could have a material adverse effect on the Companys business, financial condition and results of operations. The Company has experienced such problems in the past and may experience such problems in the future.
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The Company must protect its intellectual property, and others could infringe on or misappropriate its rights.
The Company believes that its business success depends, in part, on developing proprietary technology and protecting its proprietary technology. The Company relies on a combination of patent, trade secret, and trademark laws, confidentiality procedures and contractual provisions to protect its intellectual property. The Company seeks to protect some of its technology under trade secret laws, which afford only limited protection. The Company faces risks associated with its intellectual property, including, but not limited to, the following:
| much of the Companys proprietary intellectual property is not protectable by patent, copyright or similar laws; |
| patent and copyright applications are filed only in a limited number of countries; |
| pending patent and copyright applications may not be issued or may be significantly limited in scope prior to issuance; |
| intellectual property laws may not protect the Companys intellectual property rights; |
| others may challenge, invalidate, or circumvent any patent or copyright issued to the Company; |
| rights granted under patents or copyrights issued to the Company may not provide competitive advantages to the Company; |
| unauthorized parties may attempt to obtain and use information that the Company regards as proprietary despite its efforts to protect its proprietary rights; and |
| others may independently develop similar technology or design around any patents issued to the Company. |
The Company has to defend against infringement claims.
In recent fiscal years, the Company has been made party to lawsuits (among many other defendants) alleging infringement of certain U.S. patents relating to certain products marketed and sold by the Company, including the Companys Indisys image processing products, certain projector products, and LED technology. While each of these matters has been resolved, the Company is currently a party to patent infringement litigation relating to the Companys sale of multi-monitor stands. Intellectual property litigation can be very expensive and can divert managements time and attention, which could adversely affect the Companys business. In addition, the Company may not be able to obtain a favorable outcome in any intellectual property litigation.
In the event of an allegation that the Company is infringing on anothers rights, the Company may seek to obtain a license to the intellectual property at issue or refuse the claim. The Company may not be able to obtain licenses on commercially reasonable terms, if at all, and the party alleging infringement may commence litigation against the Company. The failure to obtain necessary licenses or other rights or the institution of litigation arising out of such claims could materially and adversely affect the Companys business, financial condition and results of operations. The Company will vigorously defend itself against the assertion of any future claims for infringement and will, as a matter of course, seek indemnification from third-party suppliers, where available. While the Company would, in each instance, seek indemnification from the manufacturer of an accused product if it were found to be liable, a determination of liability against the Company could have an adverse impact on the Companys business, financial condition, and results of operations.
The market price of the Companys common stock may be volatile.
The market price of the Companys common stock has been subject to wide fluctuations. During the Companys four most recently completed fiscal quarters, the sales prices of the Companys stock ranged from $1.93 to $8.48. The market price of the Companys common stock in the future is likely to continue to be subject to wide fluctuations in response to various factors, including, but not limited to, the following:
| variations in the Companys operating results and financial condition; |
| variations in trading volumes of the Companys stock; |
| public announcements by the Company as to its expectations of future sales and net income or loss; |
| actual or anticipated announcements of technical innovations or new product developments by the Company or its competitors; |
| changes in analysts estimates of the Companys financial performance; |
| general conditions in the electronics industry; and |
| worldwide economic and financial conditions. |
In addition, the public stock markets have experienced extreme price and volume fluctuations that have particularly affected the market prices for many technology companies and that often have been unrelated to the operating performance of these companies. These broad market fluctuations and other factors may continue to adversely affect the market price of the Companys common stock.
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The Company faces risks in connection with potential acquisitions.
The Company has made several acquisitions during its history. Not all of these acquisitions have been successful. It is possible that the Company will make additional acquisitions in the future. The Companys ability to effectively integrate any future acquisitions will depend on, among other things, the adequacy of its implementation plans, the ability of management to oversee and effectively operate the combined operations and the Companys ability to achieve desired operational efficiencies. The integration of businesses, personnel, product lines and technologies is often difficult, time consuming and subject to significant risks. For example, the Company could lose key personnel from companies that it acquires, incur unanticipated costs, lose major sources of revenue, fail to integrate critical technologies, suffer business disruptions, fail to capture anticipated synergies, or fail to establish satisfactory internal controls. Any of these difficulties could disrupt the Companys ongoing business, distract management and employees, increase expenses and decrease revenues. Furthermore, the Company might assume or incur debt or issue additional equity securities to pay for future acquisitions. Additional debt may negatively impact the Companys financial results and increase its financial risk, and the issuance of any additional equity securities could dilute the Companys then existing shareholders ownership. In addition, in connection with any future acquisitions, the Company could:
| incur amortization expense related to intangible assets; |
| uncover previously unknown liabilities; or |
| incur large and immediate write-offs that would reduce net income. |
Acquisitions are inherently risky, and any acquisition may not be successful. If the Company is unable to successfully integrate the operations of any businesses that it may acquire in the future, the Companys business, financial position, results of operations or cash flows could be materially adversely affected.
Changes in internal controls or accounting guidance could materially adversely affect the Companys financial results and/or cause volatility in the Companys stock price.
Failure of the Companys internal controls to prevent error or fraud could adversely affect the Companys financial position and results of operations. The Companys internal controls over financial reporting are not currently required to be audited by its independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). If, in future periods, the Companys internal controls over financial reporting are required to be audited by its independent registered public accounting firm significant additional expenditures could be incurred which could adversely impact the Companys results of operations.
Additionally, the Companys future assessment of its internal controls over financial reporting, or a future audit by the Companys independent public accounting firm on the effectiveness of internal controls over financial reporting, could identify a material weakness which would result in the Company receiving an adverse opinion on its internal controls over financial reporting from its independent registered public accounting firm. The identification of a material weakness could result in additional expenditures responding to the Section 404 internal control audit, heightened regulatory scrutiny, and if not remediated could result in future errors in the Companys financial statements all of which could potentially have an adverse effect on the price of the Companys stock.
The Company cannot provide any assurance that current environmental laws and product quality specification standards, or any laws or standards enacted in the future, will not have a material adverse effect on its business.
The Companys operations are subject to environmental and various other regulations in each of the jurisdictions in which it conducts business. Some of the Companys products use substances, such as lead, that are highly regulated or will not be allowed in certain jurisdictions in the future. The Company has redesigned certain products to eliminate such substances in its products. In addition, regulations have been enacted in certain jurisdictions which impose restrictions on waste disposal of electronic products and electronics recycling obligations. If the Company fails to comply with applicable rules and regulations in connection with the use and disposal of such substances or other environmental or recycling legislation, it could be subject to significant liability or loss of future sales.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information regarding purchases of our shares of common stock during the three-month period ended December 26, 2014:
Period | (a) Total number of shares purchased(1) |
(b) Average price paid per share(1) |
(c) Total number of shares purchased as part of publicly announced plans or programs |
(d) Approximate dollar value of shares that may yet be purchased under the plans or programs |
||||||||||||
Month 1 |
||||||||||||||||
September 27, 2014 to October 31, 2014 |
5,452 | $ | 3.71 | | $ | | ||||||||||
Month 2 |
||||||||||||||||
November 1, 2014 to November 28, 2014 |
| $ | | | $ | | ||||||||||
Month 3 |
||||||||||||||||
November 29, 2014 to December 26, 2014 |
29,742 | $ | 7.30 | | $ | | ||||||||||
|
|
|
|
|
|
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Total |
35,194 | $ | 6.74 | | ||||||||||||
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|
|
|
|
|
(1) | Fully vested shares of common stock withheld by us in satisfaction of required withholding tax liability upon the vesting of restricted shares. |
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Item 6. | Exhibits |
(a) |
31.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted 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 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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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.
PLANAR SYSTEMS, INC. (Registrant) | ||||||
DATE: February 4, 2015 | /s/ RYAN GRAY | |||||
Ryan Gray | ||||||
Vice President and Chief Financial Officer |
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