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 28, 2012.

FORWARD-LOOKING STATEMENTS This 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. 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 risk factors included in Part II, Item 1A of this report and 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 or order rates 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; the ability of the Company to successfully implement any cost reduction initiatives or generally cause ongoing operating expenses to be maintained at levels permitting Company profitability; 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 and future production variables resulting in excess inventory. 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 ESTIMATESThe Company reaffirms the critical accounting policies and use of estimates reported in its Form 10-K for the year ended September 28, 2012.

INTRODUCTION Planar 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, France 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.

The Company's Strategy For over a quarter century, Planar has been designing and bringing to market innovative display solutions. The Company has historically focused 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. In recent years, the Company has been transitioning its focus, strategic direction, and resources to target the larger and faster-growing market for digital signage displays, where a variety of its customers use the Company's video wall and large format stand-alone monitors for digital signage applications in retail, airport, sports arena and stadium, hospitality, quick serve restaurant, corporate and higher-education venues.

11-------------------------------------------------------------------------------- Table of Contents The Company's Products Planar delivers display products and related solutions for a wide variety of applications and vertical markets. It categorizes the products into two areas, "Digital Signage" and "Commercial and Industrial." Digital Signage The Digital Signage display market has experienced rapid growth in recent years and is expected to have strong growth over the next three to five years. Digital Signage solutions are being installed in many environments including retail locations, airports, and sports arenas, as well as in emerging applications.

Planar provides solutions for a number of display applications for the digital signage market utilizing a variety of technologies and products.

• Matrix and Mosaic (tiled LCD) Systems: Planar's super narrow bezel LCD display systems allow customers to create flat, large video walls for a number of applications including ambience, advertising, architectural and brand promotion, and are being deployed in a large range of markets including retail, hospitality, commercial, sports venues and airports.

Solutions utilize specialized LCD panels and "tile" them together using video processing to create large video wall displays. Products offered are well suited to these applications as they are designed for simple installation, easy and cost effective maintainability and off-boarding of power and video processing. The Company offers and supports a growing number of sizes and resolutions of super narrow bezel displays, including touch panels, that can be utilized in creating a wide variety of video wall solutions.

• LCD Commercial Flat Panel Displays: Planar provides a line-up of commercial-grade LCD displays, including the recently launched zero bezel "UltraLux" product offerings, suitable for a wide range of digital signage uses. Included in this category are outdoor signage displays, which are designed and manufactured by Planar and are uniquely suited to demanding environmental conditions.

• Custom Signage Displays: Planar manufactures a variety of customized LCD solutions for customers with requirements which go beyond those available from off the shelf products. Included in this category are customized and ruggedized indoor retail signage products used for direct marketing purposes. These displays are typically ruggedized to withstand extreme weather, direct sunlight, moisture, dust, vibration and other conditions present in public viewing spaces Commercial and Industrial The Commercial and Industrial display markets that the Company serves are varied and numerous. Some of these markets are relatively mature, and others offer unique opportunities to grow based on new technology enhancements and other factors. The Company serves these markets with a wide range of solutions including standard as well as highly differentiated custom display products and systems.

• Rear-Projection Cube Displays: 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. Planar provides premium quality rear-projection displays and video processing solutions that meet the customer's needs for virtually seamless video walls that support 24x7 operations.

• Touch Monitor Displays: Planar markets a wide variety of touch LCD products for use in kiosks and point of sale applications. As touch and interactive displays become more commonplace, particularly with the recent introduction of Microsoft® Windows® 8, the Company expects future opportunities for growth in this product category.

• Electroluminescent ("EL") Displays: Planar leverages its proprietary intellectual property and historical core competency in EL technologies to focus on providing customized, embedded and ruggedized displays to Original Equipment Manufacturers ("OEMs") and other system suppliers. EL is used in a variety of applications and industries including instrumentation, medical equipment, vehicle dashboards 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, the need for high-bright solutions, or applications requiring transparency, which have become possible as a result of new technical innovations. In the first quarter of 2013, the Company sold the assets and liabilities associated with its EL product line. The Company does not expect to have sales of EL products in future periods.

• Custom Commercial and Industrial Displays: Planar designs and manufactures custom LCD products that are generally targeted toward the transportation, military and medical vertical markets. These displays are typically ruggedized to withstand extreme weather, direct sunlight, moisture, dust, vibration and other extreme conditions.

12 -------------------------------------------------------------------------------- Table of Contents • Desktop Monitor Displays: Planar capitalizes on its strong supply chain, logistics and distribution partnerships to sell a variety of primarily LCD based displays to the United States marketplace.

• High-End Home Displays: Planar offers a wide variety of high-performance home theater front-projection systems, video processing equipment, large-format thin displays, and accessories, largely aimed at the high-end home market and certain commercial installations. The Company has sold these products under the Runco brand since May 2007 when it acquired Runco International, 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 $44.2 million in the three months ended December 28, 2012 (the "first quarter of 2013"), which was a decrease of $3.5 million or 7.4% as compared to sales of $47.7 million in the three months ended December 30, 2011 (the "first quarter of 2012"). The decrease in sales in the first quarter of 2013 as compared to the first quarter of 2012 was primarily a result of a $9.5 million or 25.9% decrease in sales of commercial and industrial products to $27.3 million in the first quarter of 2013 from $36.8 million in the first quarter of 2012. This decrease was partially offset by a $6.0 million or 55.1% increase in sales of digital signage products to $16.9 million in the first quarter of 2013 from $10.9 million in the first quarter of 2012. The decrease in sales was offset by a decrease in cost of sales, leading to a $0.5 million or 4.7% increase in gross profit to $11.0 million in the first quarter of 2013 from $10.5 million in the first quarter of 2012.

Loss from operations was $1.3 million in the first quarter of 2013 as compared to $3.4 million in the first quarter of 2012. The $2.1 million improvement in the loss from operations was primarily due to the $0.5 million increase in gross profit and a decrease in operating expenses of $1.6 million or 11.3% to $12.3 million in the first quarter of 2013 from $13.9 million in the first quarter of 2012. The $1.6 million decrease in operating expenses was due primarily to a $1.8 million or 27.1% decrease in sales and marketing expenses, a $0.7 million or 25.5% decrease in research and development expenses, and a $0.7 million or 16.3% decrease in general and administrative expenses. These decreases were partially offset by a $1.5 million loss recognized on the sale of the assets and liabilities related to the Company's EL product line during the first quarter of 2013.

Net loss was $1.5 million or $0.07 per basic and diluted share in the first quarter of 2013 as compared to a net loss of $3.2 million or $0.16 per basic and diluted share in the first quarter of 2012. The $1.7 million improvement in net loss was due primarily to the improvement in loss from operations, which was partially offset by a net foreign currency loss of $0.1 million in the first quarter of 2013 as compared to a foreign currency gain of $0.4 million in the first quarter of 2012.

In the first quarter of 2013, the Company continued to experience strong demand for its digital signage products as the Company achieved significant growth in its product offerings, including Matrix, UltraLux, and a portfolio of LCD commercial flat panels. The Company believes the overall market for digital signage products is currently growing and will continue to grow in the future.

13 -------------------------------------------------------------------------------- Table of Contents Sales For the three months ended December 28, 2012, the Company's sales decreased $3.5 million or 7.4% to $44.2 million compared to sales of $47.7 million for the three months ended December 30, 2011. The decrease was due to a decrease in sales of commercial and industrial products, which was partially offset by an increase in sales of digital signage products. The decrease in sales of commercial and industrial products of $9.5 million or 25.9% was primarily due to decreases in sales of EL displays, rear-projection cubes, high-end home products, custom commercial and industrial products, and desktop monitors, which were partially offset by an increase in sales of touch monitors. The increase in sales of digital signage products of $6.0 million or 55.1% was due to increases in sales of tiled LCD video wall systems and LCD commercial flat panels. A summary of the major components of sales for the first quarter of 2013, including changes in sales from the first quarter of 2012 due to changes in volumes and average selling price (ASP), is as follows: Three months ended % % Change in % Change in Dec. 28, 2012 Dec. 30, 2011 $ Change Change Volumes(1) ASP(1) (In millions, except percentages) Commercial & Industrial Sales High-end home $ 3.0 $ 5.3 $ (2.3 ) -42.9 % -47.5 % 4.6 % Custom commercial & industrial 2.0 3.0 (1.0 ) -33.6 % -43.7 % 17.9 % Desktop monitors 8.7 9.6 (0.9 ) -9.4 % 8.0 % -27.0 % Rear-projection cubes 6.1 9.0 (2.9 ) -32.4 % -47.6 % -6.4 % Touch monitors 4.9 3.5 1.4 38.5 % 31.5 % 11.0 % Electroluminescent(2) 2.3 5.7 (3.4 ) -59.7 % -59.4 % -0.7 % Other 0.3 0.7 (0.4 ) -52.1 % - - Total Commercial & Industrial sales 27.3 36.8 (9.5 ) -25.9 % - - Digital Signage Sales Tiled LCD video wall systems 13.4 9.2 4.2 45.1 % 61.2 % -10.0 % LCD commercial flat panels 3.2 1.4 1.8 122.8 % 88.9 % 17.9 % Customized digital signage 0.3 0.3 - 0.0 % - - Total Digital Signage sales 16.9 10.9 6.0 55.1 % - - Total sales $ 44.2 $ 47.7 $ (3.5 ) -7.4 % - - (1) Due to the significant differences in volumes and ASP for each product category, changes in volumes and ASP have not been included for the "Other" categories or subtotals.

(2) In the first quarter of 2013, the Company sold the assets and liabilities related to its EL product line.

For the three months ended December 28, 2012, the decrease in volumes of EL displays sold was due primarily to the sale of the Company's EL related assets and liabilities during the quarter, resulting in lower shipments during the first quarter of 2013 as compared to the first quarter of 2012. The decrease in rear-projection cube sales volumes was due primarily to large customer orders shipped in the first quarter of 2012 as compared to the first quarter of 2013.

The decrease in rear-projection cube average selling prices was a result of continued customer transition from rear-projection cube format to LCD panels and reduced demand for this product offering. The decrease in high-end home product sales volumes was due to continued decreases in demand for high-end projection home theater systems. The decrease in volumes sold of custom commercial and industrial products was due to certain large customer orders that shipped in the first quarter of 2012 that were not repeated in the same period of 2013. The increase in average selling prices of custom commercial and industrial products was due primarily a change in product mix during the first quarter of 2013 as compared to the same period of 2012. The increase in volumes sold of desktop monitors was due to increased demand while the decrease in average selling prices was due to a change in product mix to lower-priced offerings as compared to the first quarter of 2012. The increase in volumes sold of tiled LCD video wall systems, including Matrix and Mosaic, were due primarily to increased demand for indoor video wall systems and the Company's efforts to drive customer transition toward digital signage products through expanded product offerings and sales and marketing efforts. The decrease in average selling prices of tiled LCD video wall systems was due to product mix and a general decline in the selling prices of these products. The increase in volumes sold and average selling prices of LCD commercial flat panels is due primarily to increased product offerings available during the first quarter of 2013 as compared to the first quarter of 2012 as well as a change in product mix toward higher priced products. The decrease in volumes sold and increase in average selling prices of customized digital signage products was due primarily to a change in product mix.

% of Total Sales Three months ended Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change Dec. 28, 2012 Dec. 30, 2011 (In millions, except percentages) Domestic sales (United States) $ 32.5 $ 33.0 $ (0.5 ) -1.7 % 73.6 % 69.3 % International sales 11.7 14.7 (3.0 ) -20.3 % 26.4 % 30.7 % Total sales $ 44.2 $ 47.7 $ (3.5 ) -7.4 % International sales decreased $3.0 million or 20.3% to $11.7 million in the first quarter of 2013 from $14.7 million in the first quarter of 2012. The decrease in international sales in the three months ended December 28, 2012 was due primarily to a decrease in sales of commercial industrial products, including EL sales and rear-projection cubes, that was partially offset by an increase in sales of digital signage products. The decrease in sales of commercial and industrial products and increase in sales of digital signage 14-------------------------------------------------------------------------------- Table of Contents products was due primarily to the reasons described above. As a percentage of total sales, international sales decreased to 26.4% in the first quarter of 2013 from 30.7% in the first quarter of 2012. The Company does not have material sales to any particular country outside the United States.

Gross Profit Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Gross profit $ 11.0 $ 10.5 $ 0.5 4.7 % Gross profit margin 24.9 % 22.0 % - 290 bps Gross profit margin increased to 24.9% in the first quarter of 2013 as compared to 22.0% in the first quarter of 2012. Total gross profit increased $0.5 million or 4.7% to $11.0 million from $10.5 million in the first quarter of 2012. The increase in gross profit is due primarily to lower estimates of existing inventory value related to certain end-of-life products in the first quarter of 2012 that were not repeated in the first quarter of 2013 as well as an increase in overhead absorption.

Research and Development, Net Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Research and development, net $ 2.0 $ 2.7 $ (0.7 ) -25.5 % % of sales 4.6 % 5.7 % - (110 ) bps Net research and development expenses decreased $0.7 million or 25.5% to $2.0 million in the first quarter of 2013 from $2.7 million in the first quarter of 2012. The decrease was due primarily to lower headcount and project related expenses in the first quarter of 2013 as compared to the first quarter of 2012.

As a percentage of sales, research and development expenses decreased to 4.6% in the first quarter of 2013 as compared to 5.7% in the same period of 2012.

Sales and Marketing Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Sales and marketing $ 5.1 $ 6.9 $ (1.8 ) -27.1 % % of sales 11.5 % 14.5 % - (300 ) bps Sales and marketing expenses decreased $1.8 million or 27.1% to $5.1 million in the first quarter of 2013 as compared to $6.9 million in the same period of the prior year. This decrease was primarily due to lower headcount and sales commissions as a result of lower sales in the first quarter of 2013 relative to the first quarter of 2012. As a percentage of sales, sales and marketing expenses decreased to 11.5% of sales in the first three months of 2013 as compared to 14.5% of sales in the first three months of 2012 as a result of expenses decreasing at a faster rate than the decrease in sales.

General and Administrative Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) General and administrative $ 3.4 $ 4.1 $ (0.7 ) -16.3 % % of sales 7.7 % 8.5 % - (80 ) bps General and administrative expenses decreased $0.7 million or 16.3% to $3.4 million in the first quarter of 2013 from $4.1 million in the first quarter of 2012. The decrease in general and administrative expenses was primarily due to lower headcount and decreases in expenditures related to professional services and lease expenses versus the first quarter of 2012. As a percentage of sales, general and administrative expenses decreased to 7.7% in the first three months of 2013 as compared to 8.5% in the first three months of 2012. The decreases in general and administrative expenses as a percentage of sales in the first quarter of 2013 were primarily due to the reasons discussed above.

15-------------------------------------------------------------------------------- Table of Contents Amortization of Intangible Assets Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Amortization $ 0.1 $ 0.2 $ (0.1 ) -16.0 % % of sales 0.3 % 0.4 % - (10 ) bps Expenses for the amortization of intangible assets were $0.1 million and $0.2 million in the first quarters of 2013 and 2012, respectively. The decrease in amortization expenses in the first quarter of 2013 as compared to the first quarter of 2012 was the result of certain intangible assets that became fully amortized in the fourth quarter of 2012 and, as such, had no related amortization expense in the first quarter of 2013.

Restructuring Charges Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Restructuring charges $ 0.2 $ - $ 0.2 - % of sales 0.4 % 0.0 % - 40 bps During the first quarter of 2013, the Company recorded $0.2 million in restructuring charges. As discussed in Note 5-Restructuring Charges, the charges consisted primarily of severance benefits estimated for the termination of certain employees who performed manufacturing and general and administrative functions for the Company. No impairment or restructuring charges were incurred in the first quarter of 2012.

Loss on Sales of Assets Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Loss on sale of assets $ 1.5 $ - $ 1.5 - % of sales 3.4 % 0.0 % - 340 bps During the first quarter of 2013, the Company sold the assets and liabilities associated with the EL product line. As discussed in Note 9-Loss on Sale of Assets, the Company recorded a $1.5 million loss on the sale.

Total Operating Expenses Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Total operating expenses $ 12.3 $ 13.9 $ (1.6 ) -11.3 % % of sales 27.9 % 29.2 % - (130 ) bps Total operating expenses decreased $1.6 million or 11.3% to $12.3 million in the first quarter of 2013 from $13.9 million in the first quarter of 2012. The decrease in operating expenses was primarily due to decreases in sales and marketing expenses, research and development expenses, general and administrative expenses, and amortization of intangible assets, which were partially offset by an increase in restructuring charges and the loss on the sale of assets, as discussed above. As a percentage of sales, operating expenses decreased to 27.9% in the first quarter of 2013 as compared to 29.2% in the first quarter of 2012. The decrease in operating expenses as a percentage of sales was primarily due to the reasons discussed above.

16-------------------------------------------------------------------------------- Table of Contents Non-operating Income and Expense Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change (In millions) Interest, net $ 0.0 $ - $ 0.0 Foreign exchange, net (0.1 ) 0.4 (0.5 ) Other, net 0.1 0.0 0.1 Total non-operating income (expense) $ 0.0 $ 0.4 $ (0.4 ) Non-operating income and expense includes interest income on cash equivalents, interest expense, net foreign exchange gain or loss and other income or expense.

Net interest income was $17 thousand in the first quarter of 2013. No net interest income or expense was recognized in the first quarter of 2012.

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 $0.1 million in the first quarter of 2013 and a net gain of $0.4 million in the first quarter of 2012.

Net other income was $115 thousand in the first quarter of 2013 as compared to $42 thousand in the same period of 2012.

Provision for Income Taxes In the first quarter of 2013 the Company recorded income tax expense of $0.2 million on a pretax loss of $1.3 million, resulting in a negative effective tax rate of 14.1%. Comparatively, the Company recorded an income tax expense of $0.3 million on a pretax loss of $2.9 million in the first quarter of 2012, resulting in a negative effective tax rate of 9.0%. The tax expense recorded in the first quarter of 2013 was generated by tax expense in certain foreign jurisdictions and state taxes. Comparatively, the tax expense of $0.3 million for first quarter of 2012 was driven by tax expense in certain foreign jurisdictions and state taxes, partially offset by larger benefits resulting from losses in other foreign jurisdictions.

Net Loss Three months ended Dec. 28, 2012 Dec. 30, 2011 $ Change % Change (In millions, except percentage and basis point changes) Net loss $ (1.5 ) $ (3.2 ) $ (1.7 ) -53.6 % % of sales -3.4 % -6.7 % - (330 ) bps Net loss per share basic and diluted (0.07 ) (0.16 ) In the first quarter of 2013, net loss was $1.5 million or $0.07 per basic and diluted share, as compared to a net loss of $3.2 million or $0.16 per basic and diluted share in the first quarter of 2012.

Liquidity and Capital Resources Net cash used in operating activities was $2.1 million in the first quarter of 2013 as compared to net cash used in operating activities of $1.1 million in the first quarter of 2012. Net cash used in operating activities in the first quarter of 2013 primarily relates to the net loss incurred, and increases in accounts receivable, other assets, inventories, and a decrease in other liabilities. These uses of cash were partially offset by increases in cash relating to an increase in accounts payable, as well as non-cash charges including depreciation and amortization, share based compensation, and restructuring charges, which do not require a current cash outlay.

Working capital decreased $3.0 million to $38.5 million at December 28, 2012 from $41.5 million at September 28, 2012. The decrease in working capital was due primarily to increases in accounts payable, deferred revenue, and the current portion of capital leases, which were partially offset by increases in accounts receivable, inventory, cash, other current assets, and a decrease in other current liabilities. Current assets increased $6.7 million to $77.9 million at December 28, 2012 as compared to $71.2 million at September 28, 2012 due to increases in accounts receivable, inventories, cash and other current assets. Accounts receivable increased $2.8 million, due primarily to the increase in sales during the first quarter of 2013 as compared to the fourth quarter of 2012, and also due to the timing of cash receipts. This increase was partially offset by the sale of EL related accounts receivable to Beneq as part of the sale of the EL assets and liabilities during the quarter. Inventories increased $1.7 million 17 -------------------------------------------------------------------------------- Table of Contents due to higher purchases in the first quarter of 2013 as compared to the fourth quarter of 2012, which were partially offset by the sale of EL inventories to Beneq. Current liabilities increased $9.7 million to $39.4 million at December 28, 2012 from $29.7 million at September 28, 2012 due primarily to increases in accounts payable, partially offset by a decrease in other current liabilities. Accounts payable increased $10.6 million due primarily to the increase in inventories and the timing of payments made to the Company's vendors. The increase in accounts payable was partially offset by the sale of EL related accounts payable to Beneq. Other current liabilities decreased $1.4 million due primarily to the payment of certain compensation related liabilities and payment of severance arrangements, which were accrued in prior periods.

The Company's credit agreement was amended on November 16, 2012 and allows for borrowing up to 80% of its eligible domestic accounts receivable with a maximum borrowing capacity of $12.0 million. As of December 28, 2012 the Company's borrowing capacity was $10.6 million, of which $1.5 million was committed through standby letters of credit related to the Company's capital lease obligations. The credit agreement, as amended, has an interest rate of LIBOR + 1.75%, expires on December 1, 2013 and performance of all of the Company's obligations, thereunder, including repayment of borrowings, is secured by substantially all of the assets of the Company. There were no amounts outstanding under the Company's credit agreement as of December 28, 2012 and September 28, 2012. The credit agreement contains certain financial covenants, with which the Company was in compliance as of December 28, 2012.

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. In December 2011, the FASB issued ASU No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" which defers the requirement within ASU 2011-05 to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this standard effective September 29, 2012 and elected to present comprehensive income and its components in two separate, consecutive statements.

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