August 2007
Dear Fellow Shareholders,
In the last two letters I’ve written to shareholders, I’ve spent significant time discussing the changes we have been planning for the company. I’ve also laid out our strategy for Winland to emerge as a stronger company in the future. In the first half of 2007 we have been working to build and adjust our electronic manufacturing services (EMS) and proprietary business models to address the sales and market opportunities we see as most viable. While doing this we have been challenged with inconsistent revenue in the first half of 2007 as well as operational issues.
Revenues for the second quarter were $8.1 million, a decrease of 24.5 percent compared to the $10.7 million reported for the second quarter of fiscal 2006, Additionally, we have faced significant margin compression compared to prior years as a result of overcapacity in the EMS sector due to near zero growth in North America.
We have added new business and continue to diversify our customer base. The profile of our typical new manufacturing customer is a customer seeking added value utilizing our full range of services and expertise. One area of growth in particular is in box-build projects, where we are assembling an entire product rather than just a printed circuit board assembly. We will continue to move upstream, taking on more complex and comprehensive projects with the goal of growing revenue and stabilizing margins.
We responded to our near-term challenges by making some difficult decisions during the quarter. While we have outpaced many in the industry, we are not immune from the problems of underutilization of our factory. We are not operating at peak capacity, and the excess overhead has hampered our financial results. We must move cautiously, as we do not want to reduce our overhead expenses so much as to be unable to meet customer demand rapidly. However, we must lower our fixed expenses based on this new revenue reality, at least in the short-term. In addition to fixed cost reductions, we continued to evaluate our inventory, eliminating excess and obsolete materials caused by assembly changes, discontinuing of programs and over supply. As we reported in the first quarter, the business mix and flow changes that have occurred and the associated risks caused us to take actions for possible future obsolescence. After a thorough review and analysis in the second quarter, we were disappointed to find that we needed to increase our reserves further and write off additional raw materials deemed to be not useable. At the conclusion of this detailed review we have set reserves at a levels we believe will be more reflective of the types of business inventory risks we will have going forward. At this point we are confident that the adjustments we are making both in our inventory reserve and our organization, are aligned with our efforts to build the company. The key next step is to continue to build sales revenue and we have been working with our sales team to fill and utilize the capacity and skills we have.
During the last few weeks of the second quarter, we began to see revenue stabilize in line with expectations. Although a few weeks does not make a quarter, modest incremental increases in revenue can make the difference between profit and loss based on the transition budget model under which we are currently operating.
As we have been discussing, the other key to Winland’s growth is to expand our line of proprietary products. We sell a proprietary line of sensors and controls targeted at the “monitoring of critical man-made environments.” These products represent the highest margins of anything we produce. We produce most of these products in our own plant utilizing our manufacturing capacity and our engineering skills, which adds to our overall efficiency. Growth in this portion of our business, in proper ratio to our EMS business, will improve our gross profit margins and add to overall profitability. We continue to lay the groundwork for future success in this area. Following a period of heavy R&D investment to revitalize these products and add technology, we are now building sales and marketing channels, including the development of a new European distribution system. We believe that, given time, these investments will help us to grow this segment of our business. We expect these investments and efforts to begin to bear fruit as we move into 2008.
Our mission is easy to identify. We must grow and strengthen our revenues and build a margin structure with our two primary businesses; electronic manufacturing services for OEM customers and the proprietary critical environment monitoring markets. Over the last several years, we had seen revenue grow in excess of 20% with the bulk of this coming from our EMS business. In fiscal 2007, our business has been adversely affected by both a reduction of revenue from Select Comfort as well as the overall industry slowdown in the first half of the year. However, we are confident in our team’s ability to rebuild momentum.
I should note that Winland was recognized as one of Minnesota’s top 25 fastest growing small public companies based on the previous three years’ sales growth and ranked 11th over all in the top 25 by The Minnesota Business Journal. We have accomplished much. But let me be clear, we remain unsatisfied with the results we are presenting in this letter and we continue to focus on improving our operational efficiency through efforts such as Lean and Six Sigma. We are actively investing in our proprietary products, and working hard to solidify our reputation in the EMS market. On behalf of the board and management team, I want to thank each of you for your patience and support as we continue to transition and build our Company.
Sincerely,
Lorin Krueger
President & CEO
WINLAND ELECTRONICS, INC.
CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
| | | | | | | | | |
| | | For the Three Months Ended June 30, | |
| | | 2007 | | | 2006 | |
| Net sales | | $ | 8,099 | | | $ | 10,725 | |
| Cost of sales | | | 7,221 | | | | 9,123 | |
| | | | | | | |
Gross profit | | | 878 | | | | 1,602 | |
| | | | | | | |
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| General and administrative | | | 716 | | | | 618 | |
| Sales and marketing | | | 421 | | | | 390 | |
| Research and development | | | 432 | | | | 120 | |
| | | | | | | |
| | | | 1,569 | | | | 1,128 | |
| | | | | | | |
| | | | | | | | | |
Operating income (loss) | | | (691 | ) | | | 474 | |
| | | | | | | |
| | | | | | | | | |
| Other income (expenses): | | | | | | | | |
| Interest expense | | | (93 | ) | | | (31 | ) |
| Other income, net | | | 2 | | | | (3 | ) |
| | | | | | | |
| | | | (91 | ) | | | (34 | ) |
| | | | | | | |
| | | | | | | | | |
Income (loss) before income taxes | | | (782 | ) | | | 440 | |
| | | | | | | | | |
| Income tax benefit (expense) | | | 274 | | | | (149 | ) |
| | | | | | | |
Net income (loss) | | $ | (508 | ) | | $ | 291 | |
| | | | | | | |
| | | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | |
| Basic | | $ | (0.14 | ) | | $ | 0.08 | |
| Diluted | | $ | (0.14 | ) | | $ | 0.08 | |
| | | | | | | | | |
| Weighted-average number of common shares outstanding: | | | | | | | | |
| Basic | | | 3,600,856 | | | | 3,563,164 | |
| Diluted | | | 3,600,856 | | | | 3,669,749 | |
WINLAND ELECTRONICS, INC.
CONDENSED BALANCE SHEETS
(In Thousands of Dollars)
| | | | | | | | | |
| | | June 30, 2007 | | | December 31, 2006 | |
| | | (Unaudited) | | | | | |
ASSETS | | | | | | | | |
| �� | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash | | $ | 265 | | | $ | 51 | |
| Accounts receivable, net | | | 3,591 | | | | 5,165 | |
| Refundable Income taxes | | | 560 | | | | 237 | |
| Inventories | | | | | | | | |
| Raw materials | | | 5,164 | | | | 4,881 | |
| Work in process | | | 294 | | | | 327 | |
| Finished goods | | | 1,242 | | | | 1,976 | |
| Allowance for obsolete inventory | | | (551 | ) | | | (190 | ) |
| | | | | | | |
| Total inventories | | | 6,149 | | | | 6,994 | |
| Prepaid expenses | | | 479 | | | | 360 | |
| Deferred income taxes | | | 296 | | | | 278 | |
| | | | | | | |
Total current assets | | | 11,340 | | | | 13,085 | |
| | | | | | | |
| | | | | | | | | |
| Other Assets | | | 3 | | | | 3 | |
| | | | | | | |
| | | | | | | | | |
| Property and Equipment, at cost: | | | | | | | | |
| Land and land improvements | | | 383 | | | | 383 | |
| Building | | | 3,052 | | | | 3,048 | |
| Machinery and equipment | | | 6,997 | | | | 6,863 | |
| Data processing equipment | | | 1,235 | | | | 1,003 | |
| Office furniture and equipment | | | 481 | | | | 457 | |
| | | | | | | |
Total property and equipment | | | 12,148 | | | | 11,754 | |
| Less accumulated depreciation | | | (6,414 | ) | | | (5,975 | ) |
| | | | | | | |
Net property and equipment | | | 5,734 | | | | 5,779 | |
| | | | | | | |
Total assets | | $ | 17,077 | | | $ | 18,867 | |
| | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Revolving line of credit agreement | | $ | 1,879 | | | $ | 1,924 | |
| Current maturities of long-term debt | | | 602 | | | | 627 | |
| Accounts payable | | | 1,967 | | | | 2,830 | |
| Accrued expenses: | | | | | | | | |
| Compensation | | | 466 | | | | 673 | |
| Allowance for rework and warranty costs | | | 240 | | | | 126 | |
| Other | | | 171 | | | | 197 | |
| | | | | | | |
Total current liabilities | | | 5,325 | | | | 6,377 | |
| | | | | | | |
| | | | | | | | | |
| Long Term Liabilities | | | | | | | | |
| Long-term debt, less current maturities | | | 1,575 | | | | 1,706 | |
| Deferred income taxes | | | 255 | | | | 255 | |
| Deferred revenue | | | 142 | | | | 146 | |
| | | | | | | |
Total long-term liabilities | | | 1,972 | | | | 2,107 | |
| | | | | | | |
| | | | | | | | | |
| Stockholders’ Equity | | | | | | | | |
| Common stock | | | 36 | | | | 36 | |
| Additional paid-in capital | | | 4,583 | | | | 4,429 | |
| Retained earnings | | | 5,161 | | | | 5,918 | |
| | | | | | | |
Total stockholders’ equity | | | 9,780 | | | | 10,383 | |
| | | | | | | |
Total liabilities and stockholders’ equity | | $ | 17,077 | | | $ | 18,867 | |
| | | | | | | |
Cautionary Statements
Certain statements contained in this letter and other written and oral statements made from time to time by the company do not relate strictly to historical or current facts. As such, they are considered forward-looking statements, which provide current expectations or forecasts of future events. The statements included in this letter with respect to (i) growth in box-build projects and continuing to move upstream; (ii) beginning to see revenue stabilizing in line with expectations; and (iii) our expectation that investments in proprietary products will begin to bear fruit as we move into 2008, are forward looking statements. These statements involve a variety of risks and uncertainties, known and unknown, that may cause acutal results to vary materially from those contemplated by such forward looking statements. These risks and uncertainties include, among others, the risks that (i) we will be unsuccessful in adding new customers for both our EMS business and our proprietary products due to intense competition from larger, better-financed competitors located in the U.S. and abroad; (ii) we will be unable to increase sales of our existing proprietary products or develop or obtain new proprietary products due to lack of market acceptance of existing or new products, price competition or other factors , (iii) competition may force the Company to continually develop or revise products thereby causing a long-term increase in costs relating to new or revised products; and (iv) the scheduled release of new products may be delayed due to unanticipated difficulties in the development or manufacturing process. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially.
| | |
 | | 1950 Excel Drive
Mankato, MN 56001 |
| | | |
| | | SECOND QUARTER 2007 RESULTS |
| | |
Investor information
Symbol/Exchange: WEX/Amex
Transfer agent
Registrar & Transfer
Cranford, NJ 07016
800-368-5948
Investor relations contacts
Hayden Communications
Brett Maas, Partner
500 Fifth Avenue, Suite 2240
New York, NY 10110
646/536-7331
www.haydenir.com
| | 
Lorin Krueger, President & CEO
Linda Annis, Manager of Administration
Winland Electronics, Inc.
1950 Excel Drive
Mankato, MN 56001
507/625-7231
www.winland.com |
