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PLANAR SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following information should be read in conjunction with the consolidated interim financial statements and the notes thereto in Part I, Item I of this Quarterly Report and with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K for the year ended September 24, 2010. FORWARD-LOOKING STATEMENTSThis Management's 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. These and other 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. These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. Many factors, including the following, could cause actual results to differ materially from the forward-looking statements: poor or further weakened domestic and international business and economic conditions; changes or continued reductions in the demand for products in the various display markets served by the Company; any delay in the timing of customer orders or the Company's 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; 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 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 Company's third-party manufacturing partners or other interruptions in the supply of components the Company incorporates in its finished goods including as a result of natural disasters like the recent earthquakes and tsunami in Japan; future production variables resulting in excess inventory and other risk factors described under Part II, Item 1A. 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 Except for the adoption of ASU 2009-14, as described below, the Company reaffirms the critical accounting policies and use of estimates reported in its Form 10-K for the year ended September 24, 2010. On September 25, 2010 the Company adopted the provisions of ASU 2009-14, which changes the accounting model for revenue arrangements that include both tangible products and software elements. ASU 2009-14, which was issued in October 2009 by the Financial Accounting Standards Board, is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this Update did not have a material impact on the Company's financial statements. INTRODUCTIONPlanar Systems, Inc. is a provider of specialty display products, solutions, and services for customers in a number of end-market segments. Products include display components, completed displays, and display solutions and systems based on a variety of flat panel and front- and rear-projection technologies. The Company has a global reach with sales offices in North America, Europe, and Asia and manufacturing facilities in Finland and North America. 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 from 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. 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, includes all of the Company's consolidated subsidiaries. 11-------------------------------------------------------------------------------- Table of Contents The Company's Strategy For over a quarter century, Planar has been designing and bringing to market innovative display solutions. The Company focuses 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. The Company's Markets Planar delivers products for a variety of uses and categorizes the markets it serves as follows: Custom and Embedded, Video Wall, Information Technology, and High-end Home. Custom and Embedded The Company leverages its historical core competency in Electroluminescent ("EL") technologies and employs these technologies to focus on providing customized, embedded, and ruggedized displays to Original Equipment Manufacturers ("OEMs") and other system suppliers. Key technologies used in products sold to this market also include customized Active-Matrix Liquid Crystal Display ("AMLCD") panels. These technologies are used in a variety of applications and industries including instrumentation, medical equipment, vehicle dashboards, indoor and outdoor digital signage (including quick serve restaurant outdoor menu boards), and military applications, all of which require functionality in demanding usage conditions such as rugged outdoor conditions, extreme temperatures, instances where shaking or shock is expected, or applications that necessitate 3-D imaging. Video Wall The Company serves the video wall display market by offering both high-resolution flat panel LCD video walls and rear-projection cube video walls for use in large venue digital signage as well as various control room installations. The Company has marketed these products under the Clarity brand since 2006 when the Company acquired Clarity Visual Systems, Inc. ("Clarity"). Digital signage video wall installations are used in a growing list of retail, airport, sports arena, and other locations while control room installations are typically found in the security, governmental, telecom, energy, industrial, broadcast, and transportation sectors. 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. LCD flat panel video walls used in the retail and large venue end-markets are increasing as LCD costs have declined and as LCD technology has made advancements to allow panel tiling with smaller bezels (Super Narrow Bezel technology), enabling a growing number of installations especially in new digital signage applications. Information Technology ("IT") The Company capitalizes on its strong supply chain, logistics, and distribution relationships to sell a variety of primarily LCD based displays to the IT market. These strong relationships give the Company the ability to drive revenues in a number of product categories, including desktop monitors, touch displays, widescreen monitors, and front-projection equipment through its network of IT resellers. High-end Home The Company serves the high-end home market with its high-performance home theater front-projection video systems, video processing equipment, large-format thin video displays, "window wall" video applications, and a number of accessories. The Company has sold these products under the Runco brand since 2007 when it acquired the business assets of Runco International, Inc. ("Runco"), an industry leader in high-end, luxury video products. Planar's Runco products are primarily sold to its established network of custom home installation dealers in the United States. Overview The Company recorded sales of $45.7 million in the three months ended July 1, 2011 (the "third quarter of 2011"), which was an increase of $1.0 million or 2.1% as compared to sales of $44.7 million in the three months ended June 25, 2010 (the "third quarter of 2010"). In the nine months ended July 1, 2011 (the "first nine months of 2011"), sales were $135.4 million, which was an increase of $7.9 million or 6.2% as compared to $127.5 million in the nine months ended June 25, 2010 (the "first nine months of 2010"). The increase in both the three and nine months ended July 1, 2011 as compared to the same periods of 2010 was primarily due to increases in sales of digital signage products, including tiled flat panel LCD video wall systems and LCD flat panel displays, and also due to increases in sales of rear-projection cubes. In the third quarter of 2011 loss from operations was $1.6 million as compared to a $0.6 million loss from operations in the third quarter of 2010. For the first nine months of 2011 loss from operations was $2.6 million as compared to a $10.5 million loss from operations in the first nine months of 2010. 12-------------------------------------------------------------------------------- Table of Contents In the third quarter of 2011 net loss was $1.9 million or $0.10 per basic and diluted share as compared to a net income of $0.1 million or $0.01 per basic and diluted share in the third quarter of 2010. For the first nine months of 2011 net loss was $3.3 million or $0.17 per basic and diluted share as compared to a net loss of $6.2 million or $0.33 per basic and diluted share for the first nine months of 2010. The Company continues to experience strong demand for its digital signage products, as customers adopt its LCD video wall systems for use in venues requiring large format viewing, including retail applications, sports arenas, and airports. The Company continues to focus on driving revenue growth in the digital signage market. The Company believes the overall market for digital signage products is currently growing and will continue to grow in the future. The Company has been and plans to continue adding resources aimed at building out the product portfolio as well as expanding the sales and marketing reach for its digital signage products. Sales The Company's sales increased $1.0 million or 2.1% in the third quarter of 2011 to $45.7 million from $44.7 million in the third quarter of 2010. The increase was primarily due to increases in sales of digital signage products, high-end home products and rear-projection cubes. These increases were partially offset by decreases in sales of desktop monitors and customized non-digital signage LCD products. Sales of digital signage products increased 35% due primarily to a 221% increase in volumes of tiled Super Narrow Bezel LCD video wall systems and a 45% increase in volumes of LCD flat panel displays. These increases were primarily the result of improved demand as the Company's existing customers increased large capital projects and utilized more of the Company's products in areas involving digital signage. Growth was also attributed to new customers being added in application areas such as indoor retail digital signage. Sales of the Company's LCD flat panel displays also increased as a result of strong customer demand for the Company's ultra-thin LED technology product offerings. These increases were partially offset by a 34% decrease in sales of customized digital signage products, which was primarily due to the timing of customer orders related to a large design win obtained in a previous period. Sales of high-end home products increased 21% in the third quarter of 2011 as compared to the third quarter of 2010 due to 7% and 12% increases in volumes sold and average selling prices, respectively. The increase in volumes sold was primarily driven by strong demand for the Company's new 3-D projector which began shipping in the third quarter of 2011. Average selling prices of high-end home products increased due to changes in product mix sold, rather than changes in the relative pricing of these products. Sales of rear-projection cubes increased 16% due primarily to a 19% increase in average selling prices as customers transitioned from purchasing lamp-based cubes to the Company's lamp-less, LED-based cubes. The increases in sales discussed above were partially offset by 23% and 81% decreases in sales of desktop monitors and customized non-digital signage LCD products, respectively. Volumes of desktop monitors decreased 36% in the third quarter of 2011 as compared to the same period of 2010. This decrease was primarily due to reduced customer demand arising from or associated with certain electronics industry market dynamics. The Company believes that the reduced demand in the third quarter was not, in general, isolated or unique to the Company and that other suppliers of similar desktop monitor products also experienced reduced demand to varying degrees during the same period. The decrease in sales of customized non-digital signage LCD products was primarily due to an 85% decrease in volumes sold in the third quarter of 2011 as compared to the same period of the prior year, which was primarily due to a large custom order that was fully shipped in 2010 and not repeated in 2011. In the first nine months of 2011, sales increased $7.9 million or 6.2% to $135.4 million, as compared to sales of $127.5 million in the first nine months of 2010. This increase was primarily the result of 40% and 21% increases in the sales of digital signage products and rear-projection cubes. These increases were partially offset by a 11% decrease in sales of high-end home products. Sales of digital signage products, including LCD flat panel displays and LCD video wall systems, increased as a result of 18% and 20% increases in volumes and average selling prices, respectively. Sales of rear-projection cubes increased primarily due to a 26% increase in volumes sold. These increases in volumes and average selling prices of digital signage products and rear-projection cubes in the first nine months of 2011 as compared to the first nine months of 2010 were primarily due to the reasons discussed above. These increases were partially offset by a decrease in sales of high-end home products, which experienced 10% and 5% decreases in volumes and average selling prices, respectively. These decreases were due to the timing of product introductions and changes in product mix in the first nine months of 2011 as compared to the first nine months of 2010. International sales increased $2.4 million or 20.5% to $14.2 million in the third quarter of 2011 as compared to $11.8 million in the third quarter of 2010. As a percentage of total sales, international sales increased to 31.0% from 26.3% in the third quarter of 2011 as compared to the same period of the prior year. International sales increased $6.9 million or 19.3% to $42.7 million in the first nine months of 2011 as compared to $35.8 million in the first nine months of 2010. As a percentage of total sales, international sales increased to 31.6% from 28.1% in the first nine months of 2011 as compared to the same period of 2010. The increases in international sales in both the three and nine months ended July 1, 2011 were primarily due to increased sales to China where the Company has invested in sales and marketing efforts to drive growth and capture market share. International sales in the first nine months of 2011 also increased due to increased demand for the Company's products in Mexico, Taiwan and Canada. The Company does not have material sales to any particular country outside the United States. Gross Profit Gross profit as a percentage of sales increased to 28.1% in the third quarter of 2011 from 27.7% in the third quarter of 2010. Total gross profit increased $0.4 million or 3.3% to $12.8 million in the third quarter of 2011 as compared to $12.4 million in the same period of the previous year. The increase in gross profit was primarily due to sales of a favorable product mix of higher margin products such as video wall systems, relative to sales of lower margin products such as projectors sold in the High-end Home and IT end-markets. 13-------------------------------------------------------------------------------- Table of Contents For the first nine months of 2011, gross profit as a percentage of sales increased to 28.4% from 24.9% in the first nine months of 2010. Total gross profit increased $6.8 million or 21.4% to $38.5 million in the first nine months of 2011 as compared to $31.7 million in the first nine months of 2010. The increase in gross profit in the first nine months of 2011 was primarily the result of a favorable product mix, and also due to gross profit in the first nine months of 2010 being negatively affected by lower estimates of inventory value as rear-projection cubes transitioned from lamp-based to LED-based platforms. Research and Development Research and development expenses increased $0.4 million or 15.0% to $2.8 million in the third quarter of 2011 from $2.4 million in the same period of the prior year. The increase was primarily the result of higher project spending to support new product designs as part of the Company's initiative to drive future sales in growth markets. Research and development expenses also increased due to increases in compensation expense including higher headcount and share based compensation expense recorded in the third quarter of 2011 as compared to the same period of 2010. Research and development expenses increased $0.5 million or 6.9% to $8.0 million in the first nine months of 2011 from $7.5 million in the first nine months of 2010. The increase in the first nine months of 2011 was primarily due to increased compensation expense including higher headcount and share based compensation expense as compared to the first nine months of 2010. As a percentage of sales, research and development expenses increased to 6.1% in the third quarter of 2011 as compared to 5.4% in the same period of 2010. As a percentage of sales, research and development expenses increased to 5.9% in the first nine months of 2011 as compared to 5.8% in the first nine months of 2010. These increases were primarily due to the reasons discussed above. Sales and Marketing Sales and marketing expenses increased $0.8 million or 13.3% to $6.9 million in the third quarter of 2011 as compared to $6.1 million in the same period of the prior year. This increase was primarily due to higher headcount and program spending in an effort to drive sales growth and market penetration, especially in the growing digital signage market. Sales and marketing expenses also increased in the third quarter of 2011 as compared to the same period of 2010 as a result of increased compensation-related items including share based compensation expense. For the first nine months of 2011, sales and marketing expenses increased $1.7 million or 10.0% to $18.9 million as compared to $17.2 million in the first nine months of 2010. The nine-month increase in sales and marketing expenses was primarily due to increased compensation expense including higher headcount and stock based compensation expense. As a percentage of sales, sales and marketing expenses increased to 15.1% in the third quarter of 2011 as compared to 13.6% in the same period of the prior year due to the reasons discussed above. In the first nine months of 2011 and 2010, sales and marketing expenses were 14.0% and 13.5% of sales, respectively. General and Administrative General and administrative expenses increased $0.3 million or 7.7% to $4.2 million in the third quarter of 2011 from $3.9 million in the third quarter of 2010. For the first nine months of 2011, general and administrative expenses increased $0.3 million or 2.9% to $12.6 million from $12.3 million in the first nine months of 2010. The increases in both the three and nine months ended July 1, 2011 were primarily the result of increases in compensation-related items including share based compensation expense, which were partially offset by lower spending on professional services. As a percentage of sales, general and administrative expenses increased to 9.2% in the third quarter of 2011 as compared to 8.7% in the third quarter of 2010. This increase was primarily due to the reasons discussed above. As a percentage of sales, general and administrative expenses decreased to 9.3% from 9.6% in the first nine months of 2011 and 2010, respectively. This decrease was primarily due to general and administrative expense increasing at a slower rate than sales in that period. Amortization of Intangible Assets Expenses for the amortization of intangible assets were $0.5 million and $0.6 million in the third quarters of 2011 and 2010, respectively. In the first nine months of 2011, amortization expenses were $1.5 million as compared to $1.9 million in the same period of 2010. The decrease in amortization expenses for both the three and nine months ended July 1, 2011 was the result of certain intangible assets that became fully amortized in the fourth quarter of 2010 and as such had no related amortization expense in the first nine months of 2011. As of July 1, 2011 the identifiable intangible assets subject to amortization, net of accumulated amortization, consisted of $1.3 million for customer relationships and $0.4 million for developed technology. These assets are being amortized over their remaining estimated useful lives of approximately 1.8 years. When these assets were acquired, the amortization periods were between four and seven years. 14 -------------------------------------------------------------------------------- Table of Contents Impairment and Restructuring Charges No impairment or restructuring charges were incurred in the first nine months of 2011. During the first quarter of 2010, the Company recorded $3.4 million in impairment and restructuring charges. As discussed in Note 4-Impairment and Restructuring Charges, the charges consisted primarily of a charge to write-off the goodwill previously reflected on the Company's balance sheet as it was determined to be impaired. Total Operating Expenses Total operating expenses increased $1.4 million or 10.5% to $14.4 million in the third quarter of 2011 from $13.0 million in the same period of the prior year. The increase in operating expenses was primarily due to increases in research and development, sales and marketing, and general and administrative expenses. These increases were partially offset by lower amortization of intangible assets. In the first nine months of 2011, total operating expenses decreased $1.2 million or 2.7% to $41.0 million as compared to $42.2 million in the same period of 2010. The decrease in total operating expenses was primarily due to the $3.4 million of impairment and restructuring charges that were recorded in the first nine months of 2010, which increased expenses in that period. This decrease was partially offset by increases in sales and marketing, research and development, and general and administrative expenses. As a percentage of sales, total operating expenses increased to 31.5% in the third quarter of 2011 from 29.1% in the same period of the prior year. This increase was primarily due to the reasons discussed above. As a percentage of sales, total operating expenses decreased to 30.3% in the first nine months of 2011 as compared to 33.1% in the first nine months of 2010. This decrease was primarily due to the impairment and restructuring charges recorded in the first nine months of 2010. Non-operating Income and Expense Non-operating income and expense includes interest income on investments, interest expense, net foreign exchange gain or loss and other income or expense. Net interest income was $9 thousand in the third quarter of 2011 as compared to $3 thousand in the same period of the prior year. For the first nine months of 2011, net interest income was $23 thousand as compared to net interest expense of $7 thousand in the same period of the prior year. 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. Foreign exchange gains and losses amounted to a net loss of $0.2 million in the third quarter of 2011 as compared to a net gain of $1.1 million in the third quarter of 2010. In the first nine months of 2011, foreign currency exchange gains and losses amounted to a net loss of $0.8 million as compared to a net gain of $2.4 million in the same period of the prior year. The losses in both the three and nine months ended July 1, 2011 were primarily due to the weakening of the U.S. Dollar as compared to the Euro in those periods. Comparatively, the gains in both the three and nine months ended June 25, 2010 were primarily due to the strengthening of the U.S. Dollar as compared to the Euro in those periods. Net other expense was $10 thousand in the third quarter of 2011 as compared to net other income of $0.2 million in the same period of 2010. Net other income was $0.2 million in the first nine months of both 2011 and 2010. Provision (Benefit) for Income Taxes In the third quarter of 2011 the Company recorded an income tax provision of $0.1 million on a pretax loss of $1.8 million, resulting in an effective tax rate of negative 7.2%. Comparatively, income tax expense was $0.6 million in the third quarter of 2010 on a pretax income of $0.7 million, resulting in an effective tax rate of 82.6%. The tax expense for the third quarter of 2011 was largely driven by tax expense in certain foreign jurisdictions and state taxes, offset by larger benefits resulting from losses in other foreign jurisdictions. For the first nine months of 2011 the Company recorded an income tax expense of $0.1 million on a pretax loss of $3.2 million, resulting in an effective tax rate of negative 4.6%. Comparatively, the Company recorded an income tax benefit of $1.7 million on a pretax loss of $7.9 million in the first nine months of 2010, resulting in an effective tax rate of 22.0%. The prior year's nine-month $1.7 million tax benefit was largely driven by the one-time five-year net operating loss ("NOL") carryback provision created by Public Law 111-92, the "Worker, Homeownership, and Business Assistance Act of 2009." The difference between the effective tax rate and the federal statutory tax rate is due primarily to a valuation allowance on the Company's U.S. deferred tax assets, the provision for state income taxes, and the effects of the Company's operations in foreign jurisdictions with different tax rates. During periods of time in which a valuation allowance is required for GAAP accounting purposes, the effective tax rate recorded will not represent the Company's longer-term normalized tax rate in profitable times. Additionally, given the relationship between fixed dollar tax items and pretax financial results, the effective tax rate can change materially based on small variations of income. 15-------------------------------------------------------------------------------- Table of Contents Net Loss In the third quarter of 2011, net loss was $1.9 million or $0.10 per basic and diluted share, as compared to net income of $0.1 million or $0.01 per basic and diluted share in the third quarter of 2010. In the first nine months of 2011, net loss was $3.3 million or $0.17 per basic and diluted share, as compared to net loss of $6.2 million or $0.33 per basic and diluted share in the first nine months of 2010. Liquidity and Capital Resources Net cash used in operating activities was $7.4 million in the first nine months of 2011 as compared to cash provided by operating activities of $5.2 million in the first nine months of 2010. Net cash used in operating activities in the first nine months of 2011 primarily relates to increases in inventories and other assets, a decrease in other liabilities, and the net loss incurred in that period. These were partially offset by an increase in accounts payable, a decrease in accounts receivable, and non-cash charges including depreciation, amortization and share based compensation, which do not require a current cash outlay. Working capital increased $2.2 million to $60.7 million at July 1, 2011 from $58.5 million at September 24, 2010. Current assets increased $3.8 million to $99.8 million at July 1, 2011 as compared to $96.0 million at September 24, 2010 due primarily to increases in inventories and other current assets, which were partially offset by decreases in cash and accounts receivable. The $12.8 million increase in inventories was primarily due to purchases made to support the Company's growth initiatives and new product launches, and also due to weaker than expected demand for desktop monitors, which the Company believes will be sold within the next few quarters. Other current assets increased $1.0 million due primarily to increases in non-trade receivables. The $8.3 million decrease in cash was primarily due to inventory purchases made in the first nine months of 2011. The $1.7 million decrease in accounts receivable was due primarily to the timing of cash receipts and also due to lower sales in the third quarter of 2011 as compared to the fourth quarter of 2010. Current liabilities increased $1.6 million to $39.1 million at July 1, 2011 from $37.5 million at September 24, 2010 due primarily to an increase in accounts payable, partially offset by a decrease in other current liabilities. The $2.8 million increase in accounts payable was related to the timing of payments to the Company's vendors. Other current liabilities decreased $1.8 million due primarily to payments made to customers for rebates accrued in prior periods and also due to decreases in the current portion of the Company's deferred rent liabilities. The Company's credit agreement was amended on November 18, 2010 and allows for borrowing up to 80% of its eligible domestic accounts receivable with a maximum borrowing capacity of $12.0 million. As of July 1, 2011 the Company's borrowing capacity was the full $12.0 million. The credit agreement, as amended, has an interest rate of LIBOR + 3.0%, expires on December 1, 2011, and is secured by substantially all of the assets of the Company. There were no amounts outstanding under the Company's credit agreement as of July 1, 2011 and September 24, 2010. The credit agreement contains certain financial covenants, with which the Company was in compliance as of July 1, 2011. The Company's 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. Recent Accounting Pronouncements In June 2011, the FASB issued Accounting Standards Update No. 2011-05, "Presentation of Comprehensive Income," ("ASU 2011-05") which requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the current option of allowing an entity to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not anticipate the adoption of ASU 2011-05 will have a material effect on its results of operations or financial position. |