You should read the following discussion in conjunction with the "Financial
Statements and Supplementary Data" section of this Annual Report on Form
The Company designs, develops, manufactures and markets solid-state semiconductor components and related devices primarily for the military and aerospace markets. The Company manufactures a large variety of bipolar and MOS power transistors, power and control hybrids, junction and power MOFSET's, field effect transistors and other related products. Most of the Company's products are custom made pursuant to contracts with customers whose end products are sold to the
The following table is included solely for use in comparative analysis of income before extraordinary items to complement Management's Discussion and Analysis of Financial Condition and Results of Operations:
(Dollars in Thousands) Years Ended February 28, 2014 28, 2013 Net Sales
$ 8,650 $ 8,424Cost of sales 6,389 6,585 Gross profit 2,261 1,839 Selling, general and administrative expenses 1,543 1,284 Operating income 718 555 Environmental Expenses - (7 ) Interest income 28 33 Other income, net 163 254 Provision for Income taxes (13 ) (11 ) Net Income $ 896 $ 824TRENDS AND UNCERTAINTIES:
During the fiscal year ended
SIGNIFICANT ACCOUNTING PRINCIPLES:
Cash and Cash Equivalents Cash and cash equivalents include demand deposits and money market accounts.
Earnings Per Common Share Earnings per common share is presented in accordance with ASC 260-10 "Earnings per Share." Basic earnings per common share is computed using the weighted average number of common shares outstanding during the period.
Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options to the extent they are not anti-dilutive using the treasury stock method.
Inventories are stated at the lower of cost or market. Cost is determined using the "first-in, first-out" (FIFO) method. The Company buys raw material only to fill customer orders. Excess raw material is created only when a vendor imposes a minimum quantity buy in excess of actual requirements. Such excess material will usually be utilized to meet the requirements of the customer's subsequent orders. If excess material is not utilized after two fiscal years it is fully reserved. Any inventory item once designated as reserved is carried at zero value in all subsequent valuation activities.
The Company's inventory valuation policy is as follows:
Raw material All material purchased, processed and/or used in the last two /Work in fiscal years is valued at the lower of its acquisition cost or process: market. All material not purchased/used in the last two fiscal years is fully reserved for. Finished goods: All finished goods with firm orders for later delivery are valued (material and overhead) at the lower of cost or market. All finished goods with no orders are fully reserved. Direct labor Direct labor costs are allocated to finished goods and work in costs: process inventory based on engineering estimates of the amount of man-hours required from the different direct labor departments to bring each device to its particular level of completion. RESULTS OF OPERATIONS
2014 vs. 2013 Net sales for the fiscal year ended
Net bookings were more than net sales by approximately 6%. As a result, backlog increased from
During the fiscal year ended
Cost of sales for the fiscal year ended
Gross profit for the fiscal year ended
During the year ended
Operating income for the fiscal year ended
Interest income for the fiscal year ended
Environmental expenses for the fiscal year ended
Other income for the fiscal year ended
Net income for the fiscal year ended
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities Net cash provided by operating activities was
Net cash used in operating activities was
Investing Activities Net cash used in investing activities was
Net cash provided by investing activities was
Financing Activities There was no cash used in or provided by financing activities for the year ended
Net cash used in financing activities was
Subject to the following discussion, the Company expects its sole source of liquidity over the next twelve months to be cash on hand and cash from operations. The Company anticipates that its capital expenditures required to sustain operations will be in excess of
Based upon (i) management's best information as to current national defense priorities, future defense programs, as well as management's expectations as to future defense spending, (ii) the market trends signaling a steady level of bookings, but with an increase in the cost of raw materials and operations that will result in the potential erosion of profit levels and continued price pressures due to intense competition, and (iii) the continued competition in the defense and aerospace market, the Company believes that it will have sufficient cash on hand and cash from continuing operations to satisfy its operating needs over the next 12 months. However, due to the level of current backlog, projected new order intake, the status of the general economy and the shift to Commercial Off-The-Shelf (COTS) products by the defense industry, the Company might operate at breakeven or at a small loss during part of the next fiscal year.
Over the long term, based on these factors and at the current level of bookings, costs of raw materials and services, profit margins and sales levels, the Company believes it will generate sufficient cash to satisfy its operating needs over the next twelve months. In the event that bookings in the long-term decline significantly below the level experienced during the previous two fiscal years, the Company may be required to implement further cost-cutting or other downsizing measures to continue its business operations. Such cost-cutting measures could inhibit future growth prospects. In appropriate situations, the Company may seek strategic alliances, joint ventures with others or acquisitions in order to maximize marketing potential and utilization of existing resources and provide further opportunities for growth.
See "Environmental Liabilities" and "Properties" in Part I, Items 1 and 2, for more information.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not engaged in any off-balance sheet arrangements.
BOOKINGS AND BACKLOG
During the fiscal year ended
To increase liquidity, the Company plans to (a) continue improving operating efficiencies, (b) reduce overhead expenses, (c) develop alternative lower cost packaging technologies and lower cost packaging suppliers, (d) develop products utilizing its current manufacturing technologies geared toward market segments it is currently not serving on a significant level or not at all, and (e) replace aging manufacturing equipment with new equipment to improve efficiency.
The Company also plans to continue its efforts in selling commercial semiconductors and power modules and to develop appropriate strategic alliance arrangements. If these plans are successful, the Company intends to aggressively pursue sales of these products which could require the Company to invest in the building up of inventories of finished goods and invest in capital equipment (assembly and test) to replace older generation equipment and to support new product manufacturing. Any financing necessary to fund these initiatives could come from equipment leasing, among other financing alternatives. Despite its intentions, the Company cannot assure you that any of the above described plans will be successful in increasing liquidity, reducing costs or improving sales.
The rate of inflation has not had a material effect on the Company's revenues and costs and expenses, and it is not anticipated that inflation will have a material effect on the Company in the near future. However, sharp increases in the cost of precious metals has had an adverse impact on the Company's cost of raw materials.
The Company's bookings of new orders and sales are largely dependent on congressional budgeting and appropriation activities and the cycles associated therewith. The Company has historically experienced a decreased level of bookings during the summer months as a result of a slowdown in the level of budgeting and appropriation activities.
Some of the statements in this Annual Report on Form 10-K are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, strategies or prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption "Risk Factors" in this Annual Report on Form 10-K, including those identified below. We do not undertake any obligation to update forward-looking statements, except as required by law.
Some of the factors that may impact our business, financial condition, results of operations, strategies or prospects include:
· Our complex manufacturing processes may lower yields and reduce our revenues. · Our business could be materially and adversely affected if we are unable to obtain qualified supplies of raw materials, parts and finished components on a timely basis and at a cost-effective price. · We are dependent on government contracts, which are subject to termination, price renegotiations and regulatory compliance, which can increase the cost of doing business and negatively impact our revenues. · Changes in government policy or economic conditions could negatively impact our results. · Our inventories may become obsolete and other assets may be subject to risks. · Environmental regulations could require us to incur significant costs. · Our business is highly competitive, and increased competition could reduce gross profit margins and the value of an investment in our Company. · Downturns in the business cycle could reduce the revenues and profitability of our business. · Our operating results may decrease due to the decline of profitability in the semiconductor industry. · Uncertainty of current economic conditions, domestically and globally, could continue to affect demand for our products and negatively impact our business. · Cost reduction efforts may be unsuccessful or insufficient to improve our profitability and may adversely impact productivity. · We may not achieve the intended effects of our new business strategy, which could adversely impact our business, financial condition and results of operations. · Our inability to introduce new products could result in decreased revenues and loss of market share to competitors; new technologies could also reduce the demand for our products. · Loss of, or reduction of business from, substantial clients could hurt our business by reducing our revenues, profitability and cash flow. · A shortage of three-inch silicon wafers could result in lost revenues due to an inability to build our products. 21
· The nature of our products exposes us to potentially significant product liability risk. · We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could seriously harm our business. · Provisions in our charter documents and rights agreement could make it more difficult to acquire our Company and may reduce the market price of our stock. · Natural disasters, like hurricanes, or occurrences of other natural disasters whether in
the United Statesor internationally may affect the markets in which our common stock trades, the markets in which we operate and our profitability. · Failure to protect our proprietary technologies or maintain the right to use certain technologies may negatively affect our ability to compete. · We cannot promise that we will have sufficient capital resources to make necessary investments in manufacturing technology and equipment. · We may make substantial investments in plant and equipment that may become impaired. · While we attempt to monitor the credit worthiness of our customers, we may be at risk due to the adverse financial condition of one or more customers. · Our international operations expose us to material risks, including risks under U.S. export laws. · Security breaches and other disruptions could compromise the integrity of our information and expose us to liability, which could cause our business and reputation to suffer. · The price of our common stock has fluctuated widely in the past and may fluctuate widely in the future. · Compliance with new regulations regarding the use of "conflict minerals" could limit the supply and increase the cost of certain metals used in manufacturing our products.