EVANS & SUTHERLAND COMPUTER CORPORATION The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and notes included in Item 8, "Financial Statements and Supplementary Data," of this annual report on Form 10-K. Information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to differ materially from those contained in the forward-looking statements. See "Forward-Looking Statements" below for additional information concerning these items.
(All dollar amounts are in thousands unless otherwise indicated.)
The Impact of COVID-19
As of the time of this filing, certain of the Company's operating activities
have been curtailed by the impact of COVID-19. Government directives have
suspended manufacturing and limited workplace activities beginning
Executive Summary
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Sales for 2019 were
We believe that the period of low volume of new orders was not attributable to
work lost to competition, rather we believe that it was the timing of purchase
decisions and delayed development of new projects by potential customers. We saw
an increase in new orders in the second half of 2019 that improved the sales
backlog at the end of 2019, and we are hopeful that this will continue. We
believe that some of the 2019 lower sales were attributable to delayed decisions
paced by new developing technologies. We were optimistic that the improving
backlog as of
The Company used 2019 as an opportunity to redirect staff and resources, which would otherwise be working on customer projects, toward new sales and research and development activities to expand our products for future sales growth. As a result, operating expense increased and contributed to the net loss. We believe these efforts will lead to more sales and growth opportunities for the business; however, the Company's limited resources present a challenge to developing new technologies, such as DomeX, to grow the business.
Beyond 2020, we expect variable but reasonably consistent future sales and gross profit from our current product line at annual levels sufficient to cover or exceed operating expenses and meet our obligations. As our recovery progresses from a large stockholders' deficit eliminated mainly by the 2015 Pension Settlement, we expect to continue to improve our products and explore new opportunities to increase our sales and profits to grow shareholder value.
We are currently pursuing new opportunities for our business while we continue to develop and improve the products that serve our traditional markets. We consider the advancement of innovative products such as Digistar and DomeX essential to maintaining our leading share of the planetarium market. We will continue to develop and improve our planetarium products more narrowly focused on education markets such as our SciDome product. We intend to also continue development and improvement of our dome products used by planetarium theaters and many other varied applications. We intend to continue the production of quality show content for planetarium theaters. We believe that the ability to include the wide range of complementary products in the systems we sell, along with access to the legacy customer base of E&S and our subsidiary, Spitz, provides a unique competitive advantage.
Results of Operations
Consolidated Sales and Backlog
The following table summarizes our consolidated sales for the years endedDecember 31 : 2019 2018 Sales$ 27,716 $ 37,193
Sales decreased 25% from 2018 to 2019. The lower sales in 2019 were attributable to the acceleration of customer deliveries in 2018 and a low volume of new customer orders from late 2018 through the first half of 2019.
Revenue backlog increased to
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of 2019 and the low 2019 sales which were replenished by an improving volume of new orders in the third quarter of 2019.
Gross Profit
The following table summarizes our gross profit and the percentage to total
sales for the years ended
2019 2018
Gross profit $ 9,359 $ 13,445
Gross profit percentage 34 % 36 %
The mix of products delivered and the types of customer contracts that contributed to the revenue in the periods presented causes variability in the gross profit percentage. The lower 2019 gross profit percentage was mainly attributable to the low 2019 sales causing inefficiencies that increase overhead cost of as a percentage of sales. The negative effect of the lower 2019 sales was partially offset by strong gross margins on several projects which were completed at costs lower than estimated as efforts to meet some customized product features and uncertain site conditions were less than anticipated.
Operating Expenses
The following table summarizes our operating expenses during the years ended
2019 2018
Selling, general and administrative $ 7,449 $ 6,669
Research and development 3,164 2,903
Pension 226 217
Total operating expense $ 10,839 $ 9,789 Selling, general and administrative expenses were higher in 2019 compared to
2018. Most of the increase was attributable to a second quarter bad debt charge
of
Research and development expenses were higher in 2019 due to the deployment of more engineering resources to R&D activities made possible by lower activities for customer deliveries and show content production. Research and development expenses generally vary with use of engineering resources for product improvement projects and customer delivery activities. Research and development activities consisted of exploration of new applications for our products, improvements to the software in our planetarium products, testing hardware to project high definition video on large dome screens, development of various utilities for planetarium theaters, testing of optical coatings for projection surfaces and developing techniques to make dome projection surfaces more uniform.
Pension expense attributable to our Supplemental Executive Retirement Plan ("SERP") was slightly higher in 2019 compared to 2018 due to changes in the actuarial data and interest rates affecting the measurement of the pension expense.
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Other Expense, net
The following table summarizes our other expense during the years endedDecember 31 : 2019 2018 Interest expense$ (390) $ (433) Other income (expense), net 134 106 Other expense, net$ (256) $ (327)
Interest expense in 2019 and 2018 consisted mostly of imputed interest on the Pension Settlement Obligation. Interest expense also included interest paid on real estate debt in both years presented. Interest expense decreased in 2019 compared to 2018 due to the reduction of debt and is expected to continue to decrease at a comparable rate in future years.
Other income, net increased from
Income Taxes
The income tax benefit (expense) consisted of federal and state income taxes as
follows for the years ended
2019 2018
Income tax benefit (expense) $ 138 $ (21) The 2019 tax benefit resulted primarily from state film tax credit for the production of a planetarium show which was recorded at the estimated value realizable through assignment. The 2018 income tax expense was for state income taxes resulting from Spitz' normal business activity in various jurisdictions.
Other Comprehensive Income
The following table summarizes other comprehensive income for the years ended
2019 2018
Decrease (increase) to minimum pension liability $ (206) $ 200
Other comprehensive income $ (206) $ 200 Other comprehensive income consists of accounting for potential changes in the actuarial valuation of the SERP liabilities.
Liquidity and Capital Resources
Outlook
We believe existing liquidity resources and funds generated from forecasted revenue will be sufficient to meet our current and long-term obligations. We continue to operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures.
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Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of restrictions on business activities, travel restrictions, business closures, and the promotion of social distancing, have affected and could continue to affect our customers' behavior and impact our operations. Additionally, we cannot predict the impact that any widespread infection by COVID-19, including the potential infection of our workforce would have on our ability to perform our services. We continue to take measures to ensure the health and welfare of our employees. COVID-19 may affect the ability of our suppliers and vendors to provide products and services to us that support our activities. These and other factors may restrict our ability to conduct business and unpredictably increase or decrease demand for our products.
Due to the speed with which this situation is developing and the uncertainty regarding its extent or duration, we are not able to estimate the impact of COVID-19 on our revenues, results of operations, and liquidity, or our outlook for the first or second quarters of 2020 or beyond, and this impact could be material.
Cash Flows
The following table summarizes our cash flows for the years ended
2019 2018
Net cash and cash equivalents provided by (used in):
Operating activities $ (1,815) $ 3,729
Investing activities (124) (101)
Financing activities (653) (631)
Increase (decrease) in cash and cash equivalents $ (2,592) $ 2,997 The fluctuation in the annual increase and decrease in cash and cash equivalents is mainly due to cash provided by or used in operating activities.
Operating Activities
The net cash used in operating activities in 2019 was attributable to
The non-cash charges consisted primarily of
The changes in working capital which used cash were largely attributable to an increase in accounts receivable and unbilled contract revenue. These changes are attributable to the timing of performance on customer projects.
The net cash provided by operating activities in 2018 was attributable to
The non-cash charges consisted primarily of
The changes in working capital which used cash were largely attributable to an increase in inventory and the reduction of liabilities. This was partially offset by a decrease in customer accounts receivable. These changes are attributable to the timing of performance on customer projects.
Investing Activities
Investing activities used
Investing activities used
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Financing Activities
Financing activities used
Financing activities used
Credit Facilities
The Company is a party to a line-of-credit agreement with a commercial bank
which permits borrowings of up to
The ability to issue letters of credit and bank guarantees is an important tool to mitigate credit risk in our business. International sales are increasingly important to our business and, in many countries, letters of credit and bank guarantees serve as performance guarantees for customer contracts. Also, domestic sales sometimes require performance guarantees in the form of surety bonds. We have relationships with licensed surety companies to provide performance bonds subject to certain limitations and collateral which we must provide for security. Letters of credit and bank guarantees are issued to serve as collateral and to ensure our performance for these purposes. Cash deposits or deferral of customer payments for performance guarantees can often be used as an alternative to letters of credit.
Under the terms of financing arrangements for letters of credit, the Company is
required to maintain a balance in a specific cash account equal to or greater
than the outstanding value of all letters of credit issued, plus other amounts
necessary to adequately secure obligations with the financial institutions who
issue the letters of credit. As of
Mortgage Notes
Debt obligations include a first mortgage note payable to a commercial bank
which represents the balance on a
Debt obligations also include a second mortgage note payable to a commercial
bank which represents the balance on a
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The Mortgage Notes are secured by the real property occupied by Spitz pursuant
to a Mortgage and Security Agreement. The real property had a carrying value of
Land and building lease
On
Other
In 2020, we expect capital expenditures similar to 2019. There were no material
capital expenditure commitments as of
Our Board of Directors has authorized the repurchase of 1,600,000 shares of our
common stock. As of
We also maintain trade credit arrangements with certain suppliers. The unavailability of a significant portion of, or the loss of, these trade credit arrangements from suppliers would have a material adverse effect on our financial condition and operations.
As of
Effects of Inflation
The effects of inflation were not considered material for the years 2019 and 2018 and are not expected to be material for the year 2020.
Application of Critical Accounting Estimates
The application of the accounting estimates discussed below is considered by management to be critical to an understanding of our consolidated financial statements. Their application places significant demands on management's judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting estimates are described in the following paragraphs. A summary of significant accounting policies can be found in Note 1, "Nature of Operations and Summary of Significant Accounting Policies," of Item 8, "Financial Statements and Supplementary Data," in this annual report on Form 10-K. For all of these policies, management cautions that future results rarely develop exactly as forecast, and the best estimates routinely require adjustment.
Revenue Recognition
Revenue from contracts is recorded over time using the percentage-of-completion method. This method uses the ratio of costs incurred to management's estimate of total anticipated costs. Our estimates of total costs include assumptions, such as man-hours to complete, estimated materials cost, and estimates of other direct and indirect costs. Actual results may vary significantly from our estimates. If the actual costs are higher than management's anticipated total costs, then an adjustment is required to reduce the previously recognized revenue as the ratio of costs incurred to management's estimate was overstated.
If actual costs are lower than management's anticipated total costs, then an adjustment is required to increase the previously recognized revenue as the ratio of costs incurred
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to management's estimate is understated. Adjustments for revisions of previous estimates are made in the period they become known.
Contract Revenue in Excess of Billings on and Billings in Excess Contract Revenue
Billings on uncompleted long-term contracts may be greater than or less than revenue recognized. As a result, these differences are recorded as an asset or liability on the balance sheet. Since revenue recognized on these long-term contracts includes management's estimates of total anticipated costs, the amounts in revenue in excess of billings and billings in excess of revenue also include these estimates.
Inventories
Inventories include materials at weighted average actual costs. We periodically review inventories for excess supply, obsolescence, and valuations above estimated realizable amounts, and then provide a reserve we consider sufficient to reduce inventories to net realizable values. Reserve adequacy is based on estimates of future sales, product pricing, and requirements to complete projects. Revisions of these estimates would result in adjustments to our operating results.
Allowance for Doubtful Accounts Receivable
We specifically analyze accounts receivable and consider historical experience, customer creditworthiness, facts and circumstances specific to outstanding balances, current economic trends, and changes in payment terms when evaluating the adequacy of the allowance for doubtful accounts receivable. Changes in these factors could result in material adjustments to the expense recognized for bad debts.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our actual income taxes in each of the jurisdictions in which we operate. This involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatments of items, such as accrued liabilities, for tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we must include a corresponding adjustment within the income tax provision in the statement of comprehensive income. Significant judgment by management is required to determine our provision for income taxes, our deferred income tax assets and liabilities and any valuation allowance recorded against our net deferred income tax assets.
Impairment of Long- Lived Assets
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the carrying values of the assets may not be fully recoverable. When this occurs, we review the value assigned to long-lived assets by analyzing the anticipated, undiscounted cash flows they generate. When the expected future undiscounted cash flows from these assets do not exceed their carrying values, the Company determines the estimated fair value of such assets. Impairment is recognized to the extent the carrying values of the assets exceed their estimated fair values. Assets held for sale are reported at the lower of their carrying values or fair values less costs to sell.
Straight-
We recognize scheduled rent increases on a straight-line basis over the lease term, which may include optional lease renewal terms, and deferred rent income and expense is recognized to reflect the difference between the rent paid or received in the current period and the calculated straight-line amount.
Recent Accounting Pronouncements
In
Forward-Looking Statements
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The foregoing contains "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including among others, those statements preceded by, followed by or including the words "estimates," "believes," "expects," "plans," "projects," and similar expressions.
These forward-looking statements include, but are not limited to, the following statements:
·Our belief that our range of products and services at various price and performance levels, our research and development investments and capabilities, and our ability to design and manufacture products will enable us to compete effectively.
·Our belief that our facilities and operations are within standards fully
acceptable to the
·Our belief that our existing sources of liquidity will provide sufficient liquidity to meet our obligations through 2020 and beyond.
·Our belief that our ability to include the wide range of complementary products offered by E&S and Spitz in the systems we sell, along with access to the legacy customer base of E&S and Spitz, provides a unique competitive advantage.
·Our expectations for variable future sales and gross profits from our current product line at annual levels sufficient to cover or exceed operating expenses.
·Our belief that an improved financial position may present business growth opportunities.
·Our belief that the business cost structure creates the potential for long-term profitability.
·Our belief that capital expenditures during 2020 will be similar to the capital expenditures incurred during 2019.
·Our belief that the effects of inflation will not be material for 2020.
·Our belief that approximately 90% of our backlog will be converted to sales in 2020.
·Our belief that we will receive sufficient new orders to produce total sales in 2020 at sufficient levels to sustain profitable results.
?The uncertainty regarding the impact or duration of the COVID-19 virus pandemic that is rapidly spreading globally and adversely affecting communities and businesses, including ours.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Our actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include risks of product demand, market acceptance, economic conditions, competitive products and pricing, difficulties in product development, and product delays. In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this annual report will, in fact, occur.
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