Item
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Overview:
Solitron
Devices, Inc., a Delaware corporation (the “Company” or “Solitron”), designs,
develops, manufactures and markets solid-state semiconductor components and
related devices primarily for the military and aerospace markets. The Company
manufactures a large variety of bipolar and metal oxide semiconductor (“MOS”)
power transistors, power and control hybrids, junction and power MOS field
effect transistors and other related products. Most of the Company’s products
are custom made pursuant to contracts with customers whose end products are
sold
to the United States government. Other products, such as Joint Army/Navy
transistors, diodes and Standard Military Drawings voltage regulators, are
sold
as standard or catalog items.
The
following discussion and analysis of factors which have affected the Company's
financial position and operating results during the periods included in the
accompanying condensed consolidated financial statements should be read in
conjunction with the Consolidated Financial Statements and the related Notes
to
Consolidated Financial Statements and Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in the Company’s Annual
Report on Form 10-KSB for the year ended February 28, 2007 and the Condensed
Consolidated Financial Statements and the related Notes to Condensed
Consolidated Financial Statements included in Item 1 of this Quarterly Report
on
Form 10-QSB.
Critical
Accounting Policies:
The
discussion and analysis of our financial condition and results of operations
are
based upon the condensed consolidated financial statements included elsewhere
in
this Form 10-QSB which are prepared in accordance with accounting principles
generally accepted in the United States. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of
assets, liabilities, revenue, and expenses. These estimates and assumptions
are
affected by management’s application of accounting policies. Our critical
accounting policies include inventories, valuation of plant, equipment and
intangible assets, revenue recognition and accounting for income taxes. A
discussion of all of these critical accounting policies can be found in Note
1
of the “Notes to the consolidated financial statements” in Item 7 of our Annual
Report on Form 10-KSB for the fiscal year ended February 28,
2007.
Trends
and Uncertainties
:
During
the six months ended August 31, 2007, the Company’s book-to-bill ratio was
approximately 1.48 as compared to approximately .96 for the six months ended
August 31, 2006, reflecting an
increase
in the volume of orders booked.
The
Company does not believe that the quarter-to-quarter change in the book-to-bill
ratio indicates a specific trend in the demand for the Company’s products.
Generally, the intake of orders over the last twenty four months has varied
greatly as a result of the fluctuations in the general economy, variations
in
defense spending on programs the Company supports
,
and the
timing of contract awards by the Department of Defense and subsequently by
its
prime contractors, which is expected to continue over the next twelve to
twenty
four months. The
Company
continues to identify means intended to reduce its variable manufacturing
costs
to offset the potential impact of low volume of orders to be shipped. However,
should order intake fall drastically below the level experienced in the last
twenty four months, the Company might be required to implement further cost
cutting or other downsizing measures to continue its business operations.
Results
of Operations-Three Months Ended August 31, 2007 Compared to Three Months
Ended
August 31, 2006
:
Net
sales
for the three months ended August 31, 2007 increased 4% to $1,847,000 as
compared to $1,779,000 for the three months ended August 31, 2006. This increase
was primarily attributable to a higher level of orders that were shipped
in
accordance with customer requirements.
Cost
of
sales for the three months ended August 31, 2007 increased to $1,551,000
from
$1,512,000 for the comparable period in 2006. Expressed as a percentage of
sales, cost of sales decreased to 84% from 85% for the same period in 2006.
This
change was due primarily to decreases in direct labor wages and manufacturing
overhead expenses.
Gross
profit for the three months ended August 31, 2007 increased to $296,000 from
$267,000 for the three months ended August 31, 2006. Accordingly, gross margins
on the Company’s sales increased to 16% for the three months ended August 31,
2007 in comparison to 15% for the three months ended August 31, 2006. This
change was due primarily to decreases in direct labor wages and manufacturing
overhead expenses as discussed above.
For
the
three months ended August 31, 2007, the Company shipped 205,790 units as
compared to 125,885 units shipped during the same period of the prior year.
It
should be noted that since the Company manufactures a wide variety of products
with an average sale price ranging from less than one dollar to several hundred
dollars, such periodic variations in the Company’s volume of units shipped
should not be regarded as a reliable indicator of the Company’s
performance.
The
Company’s backlog of open orders increased 18%, from $5,006,000 to $5,898,000,
for the three months ended August 31, 2007, as compared to a decrease of
5% for
the three months ended August 31, 2006. Changes in backlog reflect changes
in
the intake of orders and in the delivery dates required by
customers.
The
Company has experienced an increase of 61% in the level of bookings during
the
quarter ended August 31, 2007 as compared to a 20% decrease in bookings for
the
same period in 2006 principally as a result of a shift in defense spending
priorities, resulting in an increase in the monetary value of, and timing
differences in the placement of contracts by the Department of Defense and
its
prime contractors.
Selling,
general, and administrative expenses decreased to $235,000
for
the
three months ended August 31, 2007 from $277,000 for the comparable period
in
2006. During the three months ended August 31, 2007, selling, general, and
administrative expenses as a percentage of net sales decreased to 13% as
compared with 16% for the three months ended August 31, 2006. The decrease
was
due primarily to decreases in sales commissions and selling wages.
Operating
income/(loss) for the three months ended August 31, 2007 increased to an
operating income of $61,000
from
an
operating loss of $10,000 for the three months ended August 31, 2006. This
increase is due mainly to an increase in sales, a decrease in cost of sales
percentage, and a decrease in selling, general and administrative
expenses.
The
Company recorded net other income of $43,000 for the three months ended August
31, 2007 versus net other income of $33,000 for the three months ended August
31, 2006. Included in net other income was interest income of $46,000 offset
by
$3,000 of other expense due to the loss of an equipment deposit, for the
three
months ended August 31, 2007 as compared to interest income of $33,000 for
the
three months ended August 31, 2006. The increase in interest income is due
primarily to higher cash and equivalents balances invested.
Net
income for the three months ended August 31, 2007 increased to
$104,000
versus
$23,000 for the same period in 2006. This increase was due primarily to an
increase in sales, a decrease in cost of sales percentage, and a decrease
in
selling, general and administrative expenses
.
Results
of Operations-Six Months Ended August 31, 2007 Compared to Six Months Ended
August 31, 2006
:
Net
sales
for the six months ended August 31, 2007 decreased 2% to $3,590,000
as
compared to $3,680,000 for the six months ended August 31, 2006. This decrease
was primarily attributable to a lower level of orders that were shipped in
accordance with customer requirements.
Cost
of
sales for the six months ended August 31, 2007 decreased to
$2,921,000
from
$3,209,000
for
the
comparable period in 2006. Expressed as a percentage of sales, cost of sales
decreased to 81%
from
87%
for the same period in 2006. The change was due primarily to lower raw material
costs resulting from higher product yields and decreases in direct labor
wages
and manufacturing overhead expenses.
Gross
profit for the six months ended August 31, 2007 increased to
$669,000
from
$471,000 for the six months ended August 31, 2006. Accordingly, gross margins
on
the Company’s sales increased to approximately 19% for the six months ended
August 31, 2007 in comparison to approximately 13% for the six months ended
August 31, 2006. This change was primarily due to lower raw material costs
resulting from higher product yields and decreases in direct labor wages
and
manufacturing overhead expenses as discussed above.
For
the
six months ended August 31, 2007, the Company shipped 405,136 units as compared
to 184,373 units shipped during the same period of the prior year. It should
be
noted that since the Company manufactures a wide variety of products with
an
average sales price ranging from less than one dollar to several hundred
dollars, such periodic variations in the Company’s volume of units shipped
should not be regarded as a reliable indicator of the Company’s
performance.
The
Company’s backlog of open orders increased 32%, from $4,472,000 to $5,898,000
for the six months ended August 31, 2007, as compared to a decrease of
approximately 6% for the six months ended August 31, 2006. Changes in backlog
resulted from changes in the intake of orders and in the delivery dates required
by customers.
The
Company has experienced an increase in the level of bookings of approximately
41% for the quarter ended August 31, 2007 as compared to a decrease of 19%
for
the same period for the previous year principally as a result of a shift
in
defense spending priorities, resulting in an increase in the monetary value
of,
and timing differences in the placement of contracts by the Department of
Defense and its prime contractors.
Selling,
general, and administrative expenses decreased to $505,000 for the six months
ended August 31, 2007 from $565,000 for the comparable period in 2006. During
the six months ended August 31, 2007, selling, general, and administrative
expenses as a percentage of net sales decreased to 14%
as
compared to 15% for the six months ended August 31, 2006. The decrease was
due
primarily to decreases in sales commissions and selling wages.
Operating
income/(loss) for the six months ended August 31, 2007 increased to income
of
$164,000
from
a
loss of $94,000
for
the
six months ended August 31, 2006. This increase is due mainly to an increase
in
sales, a decrease in cost of sales percentage, and a decrease in selling,
general and administrative expenses.
The
Company recorded net other income of $91,000 for the six months ended August
31,
2007 versus net other income of $64,000 for the six months ended August 31,
2006. Included in net other income was interest income of $90,000 for the
six
months ended August 31, 2007 as compared to $64,000 for the six months ended
August 31, 2006. The increase in interest income is due primarily to higher
cash
and equivalents balances invested.
Net
income/(loss) for the six months ended August 31, 2007 increased to income
of
$255,000 from a loss of $30,000 for the same period in 2006. This increase
was
due primarily to a higher sales volume and lower cost of sales percentage
as
discussed above.
Liquidity
and Capital Resources:
The
Company’s sole source of cash is revenue generated by ongoing operations. The
Company’s liquidity is expected to be adversely affected by decreased cash
receipts due to anticipated lower level of sales volume over the next twelve
to
twenty-four months due to customers’ delivery requirements. The Company’s
liquidity is not expected to improve until the Company’s revenues increase to a
level consistently above its breakeven point.
Furthermore,
the Company’s liquidity continues to be adversely affected by the Company’s 1993
bankruptcy petition obligations and the Company’s inability to obtain additional
working capital through the sale of debt or equity securities. For a more
complete discussion of the Company’s bankruptcy obligations, see “Business -
Bankruptcy Proceedings” in the Company’s Annual Report on Form 10-KSB filed for
the period ended February 28, 2007.
The
Company is required to make quarterly payments to holders of unsecured claims
until they receive 35 percent (35%) of their pre-petition claims. As of August
31, 2007, the Company has paid approximately $720,000 to its unsecured
creditors. The Company’s remaining obligation is approximately $1,128,000 to
holders of allowed unsecured claims to be paid in quarterly
installments.
The
Company reported net income of $255,000 and operating income of $164,000
for the
six months ended August 31, 2007.
At
August
31, 2007, February 28, 2007 and August 31, 2006, the Company had cash of
approximately $3,880,000, $3,539,000 and $2,828,000 respectively. Increases
in
accounts payable contributed $168,000 to the last six months’ positive cash flow
generated by ongoing operations.
At
August
31, 2007, the Company had working capital of $5,454,000 as compared with
a
working capital at August 31, 2006 of $4,586,000. At February 28, 2007,
the
Company had a working capital of $5,179,000. The $275,000 increase for
the six
months ended August 31, 2007 was due mainly to cash generated by net
income.
Off-Balance
Sheet Arrangements:
The
Company is not involved in any off-balance sheet arrangements
.
FORWARD-LOOKING
STATEMENTS
Some
of
the statements in this Quarterly Report on Form 10-QSB 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 Quarterly Report on Form 10-QSB, including those identified
below. We do not undertake any obligation to update forward-looking statements.
Some
of
the factors that may impact our business, financial condition, results of
operations, strategies or prospects include:
·
|
the
loss of certification or qualification of the Company’s products or the
inability of the Company to capitalize on such certifications
and/or
qualifications;
|
·
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unexpected
rapid technological change;
|
·
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a
misinterpretation of the Company’s capital needs and sources and
availability of liquidity;
|
·
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a
change in government regulations which hinders the Company’s ability to
perform government contracts;
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·
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a
shift in or misinterpretation of industry
trends;
|
·
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unforeseen
factors which impair or delay the development of any or all of
its
products;
|
·
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inability
to sustain or grow bookings and
sales;
|
·
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inability
to capitalize on competitive strengths or a misinterpretation
of those
strengths;
|
·
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the
emergence of improved, patented technology by
competitors;
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·
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inability
to protect the Company’s proprietary
technologies;
|
·
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a
misinterpretation of the nature of the competition, the Company’s
competitive strengths or its reputation in the
industry;
|
·
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inability
to respond quickly to customers’ needs and to deliver products in a timely
manner resulting from unforeseen
circumstances;
|
·
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inability
to generate sufficient cash to sustain
operations;
|
·
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inability
to adequately respond to continued pricing pressure;
|
·
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failure
to successfully implement cost-cutting or downsizing measures,
strategic
plans or the insufficiency of such measures and
plans;
|
·
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changes
in military or defense
appropriations;
|
·
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inability
to make or renegotiate payments under the Plan of
Reorganization;
|
·
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inability
to move into new markets or develop new products;
|
·
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unexpected
impediments affecting the Company’s ability to fill
backlog;
|
·
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inability
to be released from certain environmental
liabilities;
|
·
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an
increase in the expected cost of environmental
compliance;
|
·
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changes
in law or industry regulation;
|
·
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unexpected
growth or stagnation of the
business;
|
·
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any
changes that render the Company’s headquarters and manufacturing
facilities unsuitable or inadequate to meet the Company’s current needs;
|
·
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significant
fluctuations in the price and volume of trading in the Company’s common
stock;
|
·
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unforeseen
effects of inflation; and
|
·
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the
impact of hurricanes, tornadoes and other weather conditions
on our
business.
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