News Column

EMCORE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included in Financial Statements under Item 1 within this Quarterly Report. The following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report, particularly in Risk Factors under



Part II, Item IA . These cautionary statements apply to all forward-looking statements wherever they appear in this Quarterly Report.

Business Overview

EMCORE Corporation and its subsidiaries (referred to herein as the "Company", "we", "our", or "EMCORE") offers a broad portfolio of compound semiconductor-based products for the broadband, fiber optics, satellite, and solar power markets. We were established in 1984 as a New Jersey corporation and we have two reporting segments: Fiber Optics and Photovoltaics. EMCORE's Fiber Optics business segment provides optical components, subsystems and systems for high-speed telecommunications, Cable Television (CATV), Wireless and Fiber-To-The-Premises (FTTP) networks, as well as products for satellite communications, video transport and specialty photonics technologies for defense and homeland security applications. Our Photovoltaics business segment provides products for space power applications including high-efficiency multi-junction solar cells, Covered Interconnect Cells (CICs) and complete satellite solar panels, and terrestrial applications, including high-efficiency GaAs solar cells for concentrating photovoltaic (CPV) power systems. In addition to organic growth and development of our existing Fiber Optics and Photovoltaics segments, we intend to pursue other strategies to enhance shareholder value, which may include acquisitions, investments in joint ventures, partnerships, and other strategic alternatives, such as dispositions, reorganizations, recapitalizations or other similar transactions. Accordingly, the Strategy Committee of the Board and our management may from time to time be engaged in evaluating potential strategic opportunities and may enter into definitive agreements with respect to, such transactions or other strategic alternatives. Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000. For specific information about us, our products, or the markets we serve, please visit our website at http://www.emcore.com. The information contained in or linked to our website is not a part of, nor incorporated by reference into, this Quarterly Report on Form 10-Q or a part of any other report or filing with the Securities and Exchange Commission (SEC).



Recent Developments

Strategy Committee of the Board of Directors

The Company's Board of Directors recently created a Strategy Committee of the Board of Directors, which is charged with evaluating strategic opportunities for the Company that may enhance shareholder value. The Strategy Committee may from time to time consider strategic opportunities, such as acquisitions, dispositions and joint ventures, and may engage financial and other advisors to assist it in doing so. There can be no assurance that the Strategy Committee will identify strategic opportunities that the Company will determine to pursue, or that the consideration of any such opportunity would result in the completion of a strategic transaction.



Suncore Joint Venture

In June 2013, we entered into an agreement to transfer our 40% registered ownership interest in Suncore to San'an for a purchase price of $4.8 million. Upon completion of the share transfer in September 2013, the Company recognized $3.3 million of deferred revenue from Suncore included in the financial statements as of June 30, 2013, as well as the resulting gain of $4.8 million on our registered ownership interest. The carrying value of our registered ownership interest in Suncore was $0 as of June 30, 2014. See Note 15 - Suncore Joint Venture in the notes to the condensed consolidated financial statements for more information regarding Suncore. 25



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Impact from Thailand Flood

In October 2011, flood waters severely impacted the inventory and production operations of our primary contract manufacturer in Thailand. The impacted areas included certain product lines for the Telecom and CATV market segments. This had a significant impact on our operations and our ability to meet customer demand for certain of our fiber optics products. Our Photovoltaics segment was not affected by the Thailand floods. Since that announcement, we developed and implemented a plan to rebuild the impacted production lines at other locations, including an alternate facility of our contract manufacturer in Thailand, as well as our own manufacturing facilities in the United States and the PRC. We completed the plan to rebuild our production lines and return to pre-flood capacity production levels as of September 2012. See Note 9 - Impact from Thailand Flood in the notes to the condensed consolidated financial statements for additional disclosures related to the impact of the Thailand flood on our operations.



Results of Operations

The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue.

For the three months ended June 30, For the nine months ended June 30, 2014 2013 2014 2013 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 78.9 87.9 79.9 81.7 Gross profit 21.1 12.1 20.1 18.3 Operating expense (income): Selling, general, and administrative 17.6 21.0 17.3 16.6 Research and development 10.5 14.0 11.0 11.3 Flood-related insurance proceeds - - - (15.2 ) Gain on sale of assets - - - (0.3 ) Total operating expense 28.1 35.0 28.3 12.4 Operating (loss) income (7.0 ) (22.9 ) (8.2 ) 5.9 Other income (expense): Interest expense, net (0.3 ) (0.6 ) (0.3 ) (0.5 ) Foreign exchange gain - 0.5 - 0.2 Gain on sale of investment - - 0.2 - Change in fair value of financial instruments 0.2 1.1 - 0.3 Other expense - - - - Total other expense (0.1 ) 1.0 (0.1 ) - (Loss) income before income tax expense (7.1 ) (21.9 ) (8.1 ) 5.9 Income tax expense - - - (0.1 ) Net (loss) income (7.1 )% (21.9 )% (8.1 )% 5.8 % 26



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Comparison of financial results:

Revenue:

(in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change Fiber Optics revenue $ 26,172$ 21,560$ 4,612 21.4% Photovoltaics revenue 18,410 11,913 6,497 54.5% Total revenue $ 44,582$ 33,473$ 11,109 33.2%



(in thousands, except percentages) For the Nine Months Ended June 30,

2014 2013 $ Change % Change Fiber Optics revenue $ 73,084$ 74,368$ (1,284 ) (1.7)% Photovoltaics revenue 57,956 50,688 7,268 14.3% Total revenue $ 131,040$ 125,056$ 5,984 4.8% Fiber Optics Revenue: Our Fiber Optics reporting segment provides optical components, subsystems, and systems for high-speed telecommunications, CATV, and FTTP networks, as well as products for satellite communications, video transport, and specialty photonics technologies for defense and homeland security applications. Our Fiber Optics segment is broken out into two distinct product lines: Broadband products, which includes cable television products, fiber-to-the-premises products, satellite communication products, video transport products, and defense and homeland security products; and,



Digital products, which include telecom optical products.

For the three months ended June 30, 2014, revenue from broadband products increased 9.9% compared to the same period during the prior year. This increase was primarily driven by higher sales of our CATV products due to higher customer demand. Sales of our CATV products, which include our quadrature amplitude modulation (QAM) transmitters and receivers, represented the second largest percentage of our total fiber optics-related revenue during the three-month period. For the nine months ended June 30, 2014, revenue from broadband products decreased 12.2% compared to the same period during the prior year. This decrease was primarily driven by lower sales of our CATV products due to lower customer demand. Sales of our CATV products, which include our QAM transmitters and receivers, represented the second largest percentage of our total fiber optics-related revenue during the nine-month period. For the three months ended June 30, 2014, revenue from digital products increased 36.8% compared to the same period during the prior year. This increase was primarily driven by higher sales of our integrated tunable laser assemblies (ITLAs) due to increased customer demand. Our telecom optical-related product line, which includes tunable XFP, and ITLAs, represented the largest percentage of our total fiber optics-related revenue during this period. For the nine months ended June 30, 2014, revenue from digital products increased 16.2% compared to the same period during the prior year. This increase was primarily driven by higher sales of our integrated tunable laser assemblies (ITLAs) due to increased customer demand. Our telecom optical-related product line, which includes tunable XFP, and ITLAs, represented the largest percentage of our total fiber optics-related revenue during this period. 27



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Our Fiber Optics segment accounted for 58.7% and 64.4% of our consolidated revenue for the three months ended June 30, 2014 and 2013, respectively. Our Fiber Optics segment accounted for 55.8% and 59.5% of our consolidated revenue for the nine months ended June 30, 2014 and 2013, respectively.



Photovoltaics Revenue:

Our Photovoltaics reporting segment provides products for both space and terrestrial solar power applications. For space solar power applications, we offer high-efficiency multi-junction solar cells, covered interconnect cells (CICs), and complete satellite solar panels. For terrestrial power applications, we offer high-efficiency multi-junction solar cells for concentrating photovoltaic (CPV) power systems. For the three months ended June 30, 2014, revenue from photovoltaics increased approximately 54% compared to the same period during the prior year. This increase was primarily due to higher revenues from our space cell products as a result of new contracts with existing customers. Sales of our satellite solar cells, CICs and panel products represented the largest percentage of our total photovoltaics-related revenue during this period. Historically, our Photovoltaics revenue has fluctuated significantly due to the timing of program completions and product shipments of major orders. For the nine months ended June 30, 2014, revenue from photovoltaics increased approximately 14% compared to the same period during the prior year. This increase was primarily due to higher revenues from our space cell products as a result of new contracts with existing customers. Sales of our satellite solar cells, CICs and panel products represented the largest percentage of our total photovoltaics-related revenue during this period. Historically, our Photovoltaics revenue has fluctuated significantly due to the timing of program completions and product shipments of major orders. Our Photovoltaics segment accounted for 41% and 36% of our consolidated revenue for the three months ended June 30, 2014 and 2013, respectively. Our Photovoltaics segment accounted for 44% and 41% of our consolidated revenue for the nine months ended June 30, 2014 and 2013, respectively.



Gross Profit:

(in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change Fiber Optics gross profit $ 4,288$ 638$ 3,650 572.1% Photovoltaics gross profit 5,105 3,406 1,699 49.9% Total gross profit $ 9,393$ 4,044$ 5,349 132.3% (in thousands, except percentages) For the Nine Months Ended June 30, 2014 2013 $ Change % Change Fiber Optics gross profit $ 8,618$ 7,222$ 1,396 19.3% Photovoltaics gross profit 17,776 15,603 2,173 13.9% Total gross profit $ 26,394$ 22,825$ 3,569 15.6% Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue, as a percentage of revenue, has fluctuated largely due to inventory and specific product warranty charges. Our gross margins are also affected by product mix, manufacturing yields and volumes, and timing related to the completion of long-term contracts. 28



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Consolidated gross margins were 21.1% and 12.1% for the three months ended June 30, 2014 and 2013, respectively, and 20.1% and 18.3% for the nine months ended June 30, 2014 and 2013, respectively.

Stock-based compensation expense within cost of revenue totaled approximately $0.3 million and $0.3 million during the three months ended June 30, 2014 and 2013, respectively, and approximately $0.7 million and $0.9 million during the nine months ended June 30, 2014 and 2013, respectively.



Fiber Optics Gross Profit:

Fiber Optics gross margin was 16.4% and 3.0% for the three months ended June 30, 2014 and 2013, respectively, and 11.8% and 9.7% for the nine months ended June 30, 2014 and 2013, respectively.

For the three months ended June 30, 2014, gross margins increased from our broadband and digital product lines when compared to the same period during the prior year. The increase in gross margins for the three months ended June 30, 2014 compared to the same period in 2013 was primarily due to higher sales volume and products with higher gross margins. The increase in gross margins for the nine months ended June 30, 2014 compared to the same period in 2013 is due to products with higher gross margins.



Photovoltaics Gross Profit:

Photovoltaics gross margin was 27.7% and 28.6% for the three months ended June 30, 2014 and 2013, respectively, and 30.7% and 30.8% for the nine months ended June 30, 2014 and 2013, respectively. The decrease in gross margin for the three months ended June 30, 2014 compared to the same period during the prior year is primarily due to a decrease in sales of our higher margin products in 2014. The slight decrease in gross margin for the nine months ended June 30, 2014 compared to the same period during the prior year is primarily due to a decrease in sales of our higher margin products in 2014. Additionally, included in gross margin for the nine months ended June 30, 2014 is $0.8 million of license technology revenue received from Suncore. See Note 15 - Suncore Joint Venture for additional disclosures related to the Suncore revenues.



Selling, General and Administrative (SG&A):

(in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change SG&A expense $ 7,843$ 7,039$ 804 11.4% (in thousands, except percentages) For the Nine Months Ended June 30, 2014 2013 $ Change % Change SG&A expense $ 22,726$ 20,714$ 2,012 9.7% SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, amortization expense on intangible assets, legal and patent-related costs, and other corporate-related expenses. Stock-based compensation expense within SG&A totaled approximately $0.6 million and $0.5 million during the three months ended June 30, 2014 and 2013, respectively, and approximately $1.8 million and $1.3 million during the nine months ended June 30, 2014 and 2013, respectively. 29



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SG&A expense for the three months ended June 30, 2014 was higher than the amount reported in the same period during the prior year primarily due to higher legal costs. The increase in SG&A expense for the nine months ended June 30, 2014 when compared to the same period during the prior year was due to higher severance related costs primarily associated with Mr. Larocca's resignation, additional costs associated with a shareholder group regarding matters addressed in their Schedule 13D filings with the SEC (filed as of December 4, 2013 and December 6, 2013), and higher legal costs. As a percentage of revenue, SG&A expenses were 17.6% and 21.0% for the three months ended June 30, 2014 and 2013, respectively, and 17.3% and 16.6% for the nine months ended June 30, 2014 and 2013, respectively.



Research and Development (R&D):

(in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change R&D expense $ 4,681$ 4,674$ 7 0.1% (in thousands, except percentages) For the Nine Months Ended June 30, 2014 2013 $ Change % Change R&D expense $ 14,288$ 14,176$ 112 0.8% R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they related to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide. Stock-based compensation expense within R&D totaled $0.3 million and $0.4 million during the three months ended June 30, 2014 and 2013, respectively, and $0.9 million and $1.0 million during the nine months ended June 30, 2014 and 2013, respectively.



R&D expense for the three and nine months ended June 30, 2014 is consistent with the amount reported in the same periods during the prior year.

As a percentage of revenue, R&D expenses were 10.5% and 14.0% for the three months ended June 30, 2014 and 2013, respectively, and 11.0% and 11.3% for the nine months ended June 30, 2014 and 2013, respectively.

Other Operating (Income):

(in thousands, except percentages) For the Nine Months Ended June 30,

2014 2013 $ Change %



Change

Flood-related insurance proceeds $ - $ (19,000 )$ (19,000 ) (100.0)%

During the nine months ended June 30, 2013, we received flood-related insurance proceeds of $19.0 million from our contract manufacturer. Flood-related insurance proceeds related to inventory and equipment destroyed by the Thailand flood were recognized when they became realized. See Note 9 - Impact from Thailand Flood in the notes to the condensed consolidated financial statements for additional disclosures related to the impact of the Thailand flood on our operations. 30



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Operating (Loss) Income:

(in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change Fiber Optics operating loss $ (5,092 )$ (8,998 )$ 3,906 (43.4)% Photovoltaics operating income 1,961 1,329 632 47.6% Total operating loss $ (3,131 )$ (7,669 )$ 4,538 (59.2)%



(in thousands, except percentages) For the Nine Months Ended June 30,

2014 2013 $ Change %



Change

Fiber Optics operating loss $ (18,983 )$ (1,501 )$ (17,482 ) 1,164.7% Photovoltaics operating income 8,363 8,849 (486 ) (5.5)% Total operating (loss) income $ (10,620 )$ 7,348$ (17,968 ) (244.5)% Operating (loss) income represents revenue less the cost of revenue and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared service departments and gains on sale of unconsolidated affiliates. Operating (loss) income is a measure of profit and loss that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating (loss) income was (7.0)%, and (22.9)% for the three months ended June 30, 2014 and 2013, respectively, and (8.2)% and 5.9% for the nine months ended June 30, 2014 and 2013, respectively. The change in the Fiber Optics operating loss for the nine months ended June 30, 2014 compared to the same period in 2013 is primarily due to the $19.0 million of insurance proceeds received in 2013. Included in our operating income for the three and nine months ended June 30, 2014 are $0.2 million and $0.8 million, respectively, of tax credits received. The amount was allocated to cost of goods sold, selling, general and administrative and research and development expense primarily based on the number of employees allocated to the related departments. Included in our operating income for the three and nine months ended June 30, 2013 are $0.4 million and $1.8 million, respectively, of tax credits received. 31



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Table of Contents Other Income (Expense): (in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change Interest expense, net $ (134 )$ (185 )$ 51 27.6% Foreign exchange gain 5 181 (176 ) 97.2% Change in fair value of financial instruments 110 373 (263 ) 70.5% Other expense - 17 (17 ) N/A Total other (expense) income $ (19 )$ 386$ (405 ) 104.9% (in thousands, except percentages) For the Nine Months Ended June 30, 2014 2013 $ Change % Change Interest expense, net $ (377 )$ (609 )$ 232 38.1% Foreign exchange gain 15 261 (246 ) (94.3)% Gain on sale of investment 307 - 307 N/A Change in fair value of financial instruments 39 343 (304 ) (88.6)% Other expense - 17 (17 ) N/A Total other (expense) income $ (16 )$ 12$ (28 ) 233.3% Foreign Exchange We recognize gains and losses due to the effect of exchange rate changes on foreign currency primarily due to our operations in Spain, the Netherlands, and in China. The assets and liabilities of our foreign operations are translated from their respective functional currencies into U.S. dollars at the rates in effect at the consolidated balance sheet dates, and the revenue and expense amounts are translated at the average rate during the applicable periods reflected on the consolidated statements of operations and comprehensive (loss) income. Foreign currency translation adjustments are recorded as accumulated other comprehensive income. Gains and losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive loss. A majority of the gain or losses recorded relates to the change in value of the euro and yuan renminbi relative to the U.S. dollar. Change in Fair Value of Financial Instruments As of June 30, 2014 and September 30, 2013, warrants representing the right to purchase 400,001 shares of our common stock were outstanding. All of our warrants meet the classification requirements for liability accounting pursuant to ASC 815, Derivatives and Hedging. Each quarter, we expect an impact on our statement of operations and comprehensive (loss) income when we record the change in fair value of our outstanding warrants using the Monte Carlo option valuation model. The Monte Carlo option valuation model is used since it allows the valuation of each warrant to factor in the value associated with our right to affect a mandatory exercise of each warrant. The valuation model requires the input of subjective assumptions, including the warrant's expected life and the price volatility of the underlying stock. The change in the fair value of our warrants has been primarily due to the change in the closing price of our common stock. See Note 3 - Fair Value Accounting in the notes to the condensed consolidated financial statements for additional information related to our valuation of our outstanding warrants. 32



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Gain on Sale of Investment During the nine months ended June 30, 2014, we sold our investment in a company that had a net book value of $0 at September 30, 2013, for $0.3 million. Income Tax Expense During the nine months ended June 30, 2013, we recorded income tax expense of $0.1 million primarily due to federal alternative minimum income tax and state income taxes. Net (Loss) Income: (in thousands, except percentages) For the Three Months Ended June 30, 2014 2013 $ Change % Change Net loss $ (3,150 )$ (7,283 )$ 4,133 (56.7)%



(in thousands, except percentages) For the Nine Months Ended June 30,

2014 2013 $ Change % Change Net (loss) income $ (10,636 )$ 7,240$ (17,876 ) (246.9)%



Net loss per basic and diluted share was $(0.10) and $(0.27) for the three months ended June 30, 2014 and 2013, respectively. Net loss per basic and diluted share was $(0.35) for the nine months ended June 30, 2014. Net income per basic and diluted share was $0.27 for the nine months ended June 30, 2013.

Order Backlog: As of June 30, 2014, order backlog for our Photovoltaics segment totaled $70.5 million, an increase of 37% from $51.4 million reported as of March 31, 2014 primarily due to two customer orders. Order backlog is defined as purchase orders or supply agreements accepted by us and deferred revenue with expected product delivery and/or services to be performed within the next twelve months. From time to time, our customers may request that we delay shipment of certain orders and our order backlog could also be adversely affected if our customers unexpectedly cancel purchase orders that we have previously accepted. Product sales from our Fiber Optics segment are made pursuant to purchase orders, often with short lead times. These orders are subject to revision or cancellation and often are made without deposits. Fiber optics products typically ship within the same quarter in which a purchase order is received; therefore, our order backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period. 33



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Cash Flow:

Net Cash Provided By (Used In) Operating Activities

Operating Activities (in thousands, except percentages) For the Nine Months Ended June 30, 2014 2013 $ Change % Change Net cash provided by (used in) operating activities $ 3,600$ (12,723 )$ 16,323 128.3% Fiscal 2014: For the nine months ended June 30, 2014, our operating activities provided cash of $3.6 million primarily due to the changes in our current assets and liabilities (or working capital components) of $2.7 million, depreciation, amortization and accretion expense of $6.3 million, stock-based compensation expense of $3.4 million, warranty provision of $1.9 million and allowance for doubtful accounts of $0.2 million partially offset by our net loss of $10.6 million and the gain on sale of investment of $0.3 million. The change in our current assets and liabilities was primarily the result of a decrease in inventory of $4.0 million, other assets of $2.1 million and an increase in accounts payable of $1.5 million, partially offset by a decrease in accrued expenses and other liabilities of $3.3 million and an increase in accounts receivable of $1.6 million. Fiscal 2013: Our operating activities consumed cash of $12.7 million for the nine months ended June 30, 2013 primarily due to the changes in our current assets and liabilities (or working capital components) of $15.5 million and non-cash insurance proceeds of $16.1 million, partially offset by our net income of $7.2 million, depreciation, amortization and accretion expense of $6.2 million, stock-based compensation expense of $3.3 million and warranty provision of $2.6 million. The change in our current assets and liabilities was primarily the result of a decrease in accounts payable of $11.2 million, a decrease in accrued expenses and other current liabilities of $5.1 million, and an increase in accounts receivable of $2.3 million and inventory of $1.4 million, partially offset by a decrease in other assets of $4.4 million. The decrease in accounts payable is primarily a result of paying down balances that had increased in prior quarters with the proceeds received in the current period from the issuance of common stock and the collection of other current assets.



Working Capital Components:

Accounts Receivable: We generally expect the level of accounts receivable at any given quarter to reflect the level of sales in that quarter. Our accounts receivable balances have fluctuated historically due to the timing of account collections, timing of product shipments, and/or change in customer credit terms. Inventory: We generally expect the level of inventory at any given quarter to reflect the change in our expectations of forecasted sales. Our inventory balances have fluctuated historically due to the timing of customer orders and product shipments, changes in our internal forecasts related to customer demand, as well as adjustments related to excess and obsolete inventory.



Accounts Payable: The fluctuation of our accounts payable balances is primarily driven by changes in inventory purchases as well as changes related to the timing of actual payments to vendors.

Accrued Expenses: Our largest accrued expense typically relates to compensation. Historically, fluctuations of our accrued expense accounts have primarily related to changes in the timing of actual compensation payments, receipt or application of advanced payments, adjustments to our warranty accrual, and accruals related to professional fees. 34



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Net Cash Used In Investing Activities

Investing Activities (in thousands, except percentages) For the Nine Months Ended June



30,

2014 2013 $ Change % Change Net cash used in investing activities $ (1,423 )$ (1,605 )$ (182 ) (11.3)% Fiscal 2014: For the nine months ended June 30, 2014, our investing activities consumed $1.4 million of cash primarily from capital related expenditures of $1.7 million, partially offset by cash proceeds of $0.3 million from the sale of an investment. Fiscal 2013: For the nine months ended June 30, 2013, our investing activities consumed $1.6 million of cash primarily due to capital related expenditures of $6.8 million, and the funding of restricted cash of $0.6 million, partially offset by flood related insurance proceeds of $5.4 million and cash proceeds of $0.4 million related to the disposal of equipment.



Net Cash (Used In) Provided By Financing Activities

Financing Activities (in thousands, except percentages) For the Nine Months Ended June 30, 2014 2013 $ Change % Change Net cash (used in) provided by financing activities $ (105 )$ 11,238$ (11,343 ) (100.9)% Fiscal 2014: For the nine months ended June 30, 2014, our financing activities consumed cash of $0.1 million primarily due to the net payment of $0.8 million on our bank credit facility partially offset by $0.7 million in proceeds from stock plan transactions. See Note 1 - Description of Business in the notes to the condensed consolidated financial statements for information related to borrowings from our bank credit facility. Fiscal 2013: For the nine months ended June 30, 2013 our financing activities provided $11.2 million of net cash primarily from proceeds of $9.5 million from the sale of common stock, $0.7 million of proceeds related to borrowings from our bank credit facility, and $1.0 million in proceeds from stock plan transactions. See Note 1 - Description of Business in the notes to the condensed consolidated financial statements for information related to borrowings from our bank credit facility. 35



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Contractual Obligations and Commitments

Our contractual obligations and commitments for the remainder of fiscal 2014 and over the next five fiscal years are summarized in the table below: (in thousands)

Total 2014 2015 to 2016 2017 to 2018 2019 and later Purchase obligations $ 32,841$ 24,299$ 1,060 $ 876 $ 6,606 Credit facility 20,937 20,937 - - - Asset retirement obligations 7,665 - 436 4,754 2,475 Operating lease obligations 4,042 174 1,278 152 2,438



Total contractual obligations and commitments $ 65,485$ 45,410$ 2,774$ 5,782$ 11,519

Interest payments are not included in the contractual obligations and commitments table above since they are insignificant to our consolidated results of operations.

Purchase Obligations Our purchase obligations represent agreements to purchase goods or services that are enforceable and legally binding, that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. Credit Facility As of June 30, 2014, we had a $20.9 million LIBOR rate loan outstanding, with an interest rate of 3.3%, and approximately $1.7 million reserved under six outstanding standby letters of credit under the credit facility. The credit facility, as it has been amended through its five amendments, currently provides us with a revolving credit of up to $35 million through November 2015 that can be used for working capital requirements, letters of credit, and other general corporate purposes. The credit facility contains customary representations and warranties, and affirmative and negative covenants, including, among other things, cash balance and excess availability requirements, and limitations on liens and certain additional indebtedness and guarantees, in addition to minimum tangible net worth, fixed charge coverage, and EBITDA covenants. The covenants are written such that as long as we maintain the minimum cash balance and excess availability requirement, the other covenants are not required to be met. As of June 30, 2014, we were in compliance with the financial covenants contained in the credit facility since cash on deposit and excess availability exceeded the $3.25 million minimum financial covenant requirement. The credit facility also contains certain events of default, including a subjective acceleration clause. Under this clause, Wells Fargo may declare an event of default if it believes in good faith that our ability to pay all or any portion of our indebtedness with Wells Fargo or to perform any of our material obligations under the credit facility has been impaired, or if it believes in good faith that there has been a material adverse change in the business or financial condition of the Company. If an event of default is not cured within the grace period (if applicable), then Wells Fargo may, among other things, accelerate repayment of amounts borrowed under the credit facility, cease making advances under the credit facility, or take possession of the Company's assets that secure its obligations under the credit facility. We do not anticipate at this time any change in the business or financial condition of the Company that could be deemed a material adverse change by Wells Fargo. The borrowing availability provided by the credit facility includes approximately $3.6 million secured by machinery and equipment, which is reduced monthly by approximately $91,000. The borrowing base also includes amounts which are not yet earned by the final rendition of services by the Company including progress billings and that portion of those amounts earned but not yet invoiced. The borrowing base for these amounts will be the lesser of (1) 60% of these amounts, or (2) $5.0 million. 36



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The credit facility established the Company's minimum cash balance and excess liquidity requirement at $2.5 million until June 30, 2014, when it was increased by $750,000 and thereafter on the last day of each quarter until it reaches a maximum of $5.0 million. The Company's minimum cash balance and excess liquidity requirement was $3.25 million as of June 30, 2014. If the minimum cash balance and excess liquidity requirement falls below the specified amounts, the other financial covenants noted above are triggered. On August 26, 2013, we entered into a Fifth Amendment to the credit facility, pursuant to which Wells Fargo agrees, among other things, to provide up to $7.5 million in additional secured financing to the Company using certain real estate as collateral, subject to the terms and conditions of the Fifth Amendment and the credit facility. This change to the borrowing base calculation was not implemented as of June 30, 2014 as not all conditions required had been completed. We now expect at least 50% of the total amount of credit under the credit facility to be available for use based on the revised borrowing base formula during the remainder of fiscal year 2014. As of August 1, 2014, the outstanding balance under this credit facility totaled approximately $4.2 million. See Note 10 - Credit Facilities for additional information related to our bank credit facility. Asset Retirement Obligations We have known conditional asset retirement conditions, such as certain asset decommissioning and restoration of rented facilities to be performed in the future. Our asset retirement obligations include assumptions related to renewal option periods where we expect to extend facility lease terms. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs, and changes in the estimated timing of settling asset retirement obligations. See Note 12 - Commitments and Contingencies



in

the notes to the condensed consolidated financial statements for additional information related to our asset retirement obligations.

Operating Leases Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and maintenance expenses on leased properties. There are no off-balance sheet arrangements other than our operating leases. See Note 12 - Commitments and Contingencies in the notes to the condensed consolidated financial statements for additional information related to our operating lease obligations. Segment Data and Related Information See Note 14 - Segment Data and Related Information in the notes to the condensed consolidated financial statements for disclosures related to business segment revenue, geographic revenue, significant customers, and operating (loss) income by business segment. Recent Accounting Pronouncements See Note 2 - Recent Accounting Pronouncements in the notes to the condensed consolidated financial statements for disclosures related to recent accounting pronouncements. Restructuring Accruals See Note 8 - Accrued Expenses and Other Current Liabilities in the notes to the condensed consolidated financial statements for disclosures related to our severance and restructuring-related accrual accounts.


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Source: Edgar Glimpses


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