UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended April 29, 2005
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-11750
AEROSONIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 74-1668471 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1212 North Hercules Avenue
Clearwater, Florida 33765
(Address of principal executive offices and Zip Code)
Registrant’s telephone number, including area code: (727) 461-3000
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes £ No ⌧
As of May 16, 2005, the issuer had 3,921,019 shares of Common Stock outstanding, net of treasury shares.
PART I | FINANCIAL INFORMATION | |
3 | ||
Item 1 | ||
Condensed Consolidated Balance Sheets as of April 29, 2005 (unaudited) and January 31, 2005 | 4 | |
5 | ||
6 | ||
Notes to the Condensed Consolidated Financial Statements (unaudited) | 7 | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 |
Item 3 | 15 | |
Item 4 | 15 | |
PART II | OTHER INFORMATION | |
Item 1 | 16 | |
Item 2 | 17 | |
Item 3 | 17 | |
Item 4 | 17 | |
Item 5 | 17 | |
Item 6 | 18-20 |
2
PART I – FINANCIAL INFORMATION
Forward-Looking Statements
THIS DOCUMENT INCLUDES CERTAIN “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS AND OTHER STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL FACTS AS WELL AS STATEMENTS IDENTIFIED BY WORDS SUCH AS “EXPECTS,” “ANTICIPATES,” “INTENDS,” “PLANS,” “BELIEVES,” “SEEKS,” “ESTIMATES” OR WORDS OF SIMILAR MEANING. THESE STATEMENTS ARE BASED ON OUR CURRENT BELIEFS OR EXPECTATIONS AND ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CHANGES IN CIRCUMSTANCES, MANY OF WHICH ARE BEYOND OUR CONTROL. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THESE EXPECTATIONS DUE TO CHANGES IN GLOBAL POLITICAL, ECONOMIC, BUSINESS, COMPETITIVE, MARKET AND REGULATORY FACTORS.
Significant Events.
Note 7 of Item 1 of Part I and Item 1 of Part II of this report include discussions of: (i) a securities class action lawsuit filed in the Federal District Court of the Middle District of Florida against Aerosonic Corporation (the “Company”), PricewaterhouseCoopers LLP, the Company’s former auditor, and four former employees of the Company, two of whom were directors (the “Federal Class Action”), and (ii) a derivative lawsuit filed in a Florida state court by Matilda Franzitta, asserting that she is a shareholder acting on behalf of the Company, which is a nominal defendant, and naming as defendants certain present and past officers, directors and employees, some of whom also were named as defendants in the Federal Class Action, and the Company’s former auditor and that firm’s partner in charge of certain of the Company’s audits (the “Franzitta Suit”).
On April 1, 2005, the Company and the other named defendants in the Federal Class Action filed a Notice of Settlement with the court, confirming that all parties had executed a Memorandum of Understanding (“MOU”) with the plaintiffs to settle the Federal Class Action. The MOU provides for a payment by or on behalf of the defendants to the plaintiffs of approximately $5.35 million. Of this amount, the Company is obligated to pay $800,000, which has been accrued in the accompanying consolidated financial statements as of April 29, 2005 and January 31, 2005. The balance of the settlement is expected to be paid by Zurich American Insurance Company on behalf of the Company and the individual defendants under the Company’s directors’ and officers’ insurance policy, and by PricewaterhouseCoopers LLP. The settlement is subject to preliminary and final court approval, as well as certain other conditions that may cause the settlement not to be consummated.
On April 3, 2005, the Company was informed of the death of one of its directors, William C. Parker. Mr. Parker had served as a director of the Company since 1995. The passing of Mr. Parker resulted in a reduction in a pension liability that was initially recorded in the fourth quarter of the 2004 fiscal year of approximately $78,000, which the Company recognized in its financial statements in its fiscal quarter ended April 29, 2005.
On April 6, 2005, Aerosonic became aware of the Franzitta Suit filed on March 21, 2005 in the Circuit Court of Hillsborough County, Florida. The Franzitta Suit alleges (a) breaches of fiduciary duties and aiding and abetting such breaches by the present and former directors, officers, and employees named as defendants, for an asserted "Relevant Period" which appears to begin sometime in 1999 and continues to the present time; and (b) breaches of contract, professional negligence, and aiding and abetting breaches of fiduciary duties, by the Company’s former registered independent certified public accounting firm during the asserted Relevant Period, and that firm’s partner in charge of the Company’s audits during most of that time.
The Company is in the process of evaluating the various claims of the Franzitta Suit and is hopeful it still will be able to consummate the Federal Class Action settlement in the manner announced by the Company in its press release on April 5, 2005, as filed on Form 8-K on that date. However, at this time, the Company is unable to determine what effect, if any, the Franzitta Suit will have on its ability to consummate such settlement.
Item 1
Financial Statements
AEROSONIC CORPORATION AND SUBSIDIARY | |||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||
April 29, 2005 | January 31, 2005 | ||
(unaudited) | |||
ASSETS | |||
Current assets: | |||
Cash and cash equivalents | $ 734,000 | $ 840,000 | |
Receivables, net of allowance for doubtful accounts of $14,000 | 5,765,000 | 3,708,000 | |
Income tax receivable | 599,000 | 899,000 | |
Costs less estimated losses in excess of billings | 1,132,000 | 1,942,000 | |
Inventories | 5,597,000 | 5,483,000 | |
Prepaid expenses | 257,000 | 198,000 | |
Deferred income taxes | 1,236,000 | 1,236,000 | |
Total current assets | 15,320,000 | 14,306,000 | |
Property, plant and equipment, net | 3,758,000 | 3,842,000 | |
Deferred income taxes | 123,000 | 123,000 | |
Other assets, net | 263,000 | 192,000 | |
Total assets | $ 19,464,000 | $ 18,463,000 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||
Current liabilities: | |||
Long-term debt and notes payable due within one year | $ 230,000 | $ 243,000 | |
Accounts payable, trade | 1,566,000 | 1,600,000 | |
Compensation and benefits | 1,107,000 | 938,000 | |
Income taxes payable | 175,000 | - | |
Accrued expenses and other liabilities | 2,716,000 | 2,404,000 | |
Total current liabilities | 5,794,000 | 5,185,000 | |
Long-term debt and notes payable due after one year | 2,737,000 | 2,794,000 | |
Total liabilities | 8,531,000 | 7,979,000 | |
Commitments and contingencies | |||
Stockholders’ equity: | |||
Common stock $.40 par value: shares authorized 8,000,000; shares issued 3,986,262; shares outstanding 3,921,019 | 1,595,000 | 1,595,000 | |
Additional paid-in capital | 4,559,000 | 4,559,000 | |
Retained earnings | 5,475,000 | 5,026,000 | |
Less treasury stock: 65,243 shares, at cost | (696,000) | (696,000) | |
Total stockholders’ equity | 10,933,000 | 10,484,000 | |
Total liabilities and stockholders’ equity | $ 19,464,000 | $ 18,463,000 | |
|
| ||
The accompanying notes are an integral part of these condensed consolidated financial statements
4
AEROSONIC CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months ended | |||
April 29, 2005 | April 30, 2004 | ||
Revenue, net | $ 9,075,000 | $ 7,096,000 | |
Cost of sales | 6,550,000 | 5,088,000 | |
Gross profit | 2,525,000 | 2,008,000 | |
Selling, general and administrative expenses | 1,813,000 | 1,779,000 | |
Operating income | 712,000 | 229,000 | |
Other income (expense): | |||
Interest expense, net | (43,000) | (6,000) | |
Miscellaneous income | 55,000 | 121,000 | |
12,000 | 115,000 | ||
Income before income taxes | 724,000 | 344,000 | |
Income tax expense | (275,000) | (135,000) | |
Net income | $ 449,000 | $ 209,000 | |
Basic and diluted earnings per share | $ 0.11 | $ 0.05 | |
Basic and diluted weighted average shares outstanding | 3,921,019 | 3,921,019 | |
The accompanying notes are an integral part of these condensed consolidated financial statements
5
The accompanying notes are an integral part of these condensed consolidated financial statements
6
AEROSONIC CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1 – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Aerosonic Corporation (the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial reporting and with the instructions to Form 10-Q and in Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The April 29, 2005 consolidated balance sheet has been derived from the audited consolidated financial statements, but does not include all of the disclosures required by generally accepted accounting principles. The financial statements are prepared on a consistent basis (including normal recurring adjustments) and should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report on Form 10-K for the fiscal year ended January 31, 2005 (the “2005 Form 10-K”) that the Company filed with the SEC on April 18, 2005. Operating results for the three months ended April 29, 2005 are not necessarily indicative of the results that may be expected for the year ending January 31, 2006.
Note 2 – Business
The Company is principally engaged in one business segment: The manufacture and service of aircraft instruments. The Company consists of three operating divisions in three locations. The divisions are: the Clearwater, Florida Instrument Division (“Clearwater Instruments”), the Aerosonic Wichita, Kansas Division (“Kansas Instruments”) and Avionics Specialties, Inc., a Virginia corporation wholly owned by the Company (“Avionics”).
Clearwater Instruments primarily manufactures altimeters, airspeed indicators, rate of climb indicators, microprocessor controlled air data test sets, and a variety of other flight instrumentation. Kansas Instruments is the source inspection location for the Company’s Wichita customers and is the primary location for Clearwater Instruments’ repair business. Avionics maintains three major product lines: (1) angle of attack stall warning systems; (2) integrated multifunction probes, which are integrated air data sensors; and (3) other aircraft sensors and monitoring systems.
During the three months ended April 29, 2005 and April 30, 2004, sales to Lockheed represented approximately 14% and 20% of total revenues, respectively.
The Company has a January 31 fiscal year end. Accordingly, all references in this quarterly report on Form 10-Q to the first quarter mean the first quarter ended on the last Friday of April of the referenced fiscal year. For example, references to the first quarter of fiscal year 2006 mean the first quarter ended April 29, 2005.
Note 3 – Inventories
Inventories are stated at the lower of cost or market. Cost is determined using a method that approximates the first-in, first-out method. Provisions are made for any inventory deemed excess or obsolete. Management employs certain methods to estimate the value of work in process inventories for financial reporting purposes. At fiscal year end, these estimates are affected by the nature of the operation at which the items are located and the time at which a physical inventory is conducted, and are subject to judgment. This practice was employed for the fiscal year ended January 31, 2005. For interim reporting periods, the Company utilizes monthly work in process inventory reports to estimate the value of such inventories.
Inventories at April 29, 2005 and January 31, 2005 consisted of the following:
April 29, 2005 | January 31, 2005 | |||
Raw materials | $ 3,577,000 | $ 3,475,000 | ||
Work in process | 2,311,000 | 2,276,000 | ||
Finished goods | 101,000 | 133,000 | ||
Reserve for obsolete and slow moving inventory | (392,000) | (401,000) | ||
$ 5,597,000 | $ 5,483,000 |
7
Note 4 – Joint Strike Fighter Development Program
During fiscal 2003, the Company secured a long-term fixed-price contract for the development of instrumentation for the Joint Strike Fighter (“JSF”) program. Costs and estimated losses to date on this contract as of April 29, 2005 and January 31, 2005 are as follows:
April 29, 2005 | January 31, 2005 | ||
Costs incurred to date | $ 12,711,000 | $ 11,493,000 | |
Estimated losses | (704,000) | (201,000) | |
12,007,000 | 11,292,000 | ||
Less billings to date | (10,875,000) | (9,350,000) | |
Costs less estimated losses in excess of billings | $ 1,132,000 | $ 1,942,000 |
Following the revision to the Company’s estimate at completion for the JSF program in January 2005, the Company was required to resolve a number of action items that originated from a critical design review that occurred during February 2005. These action items required considerable resources of the Company to provide a satisfactory resolution for the program customer, and were the primary driver of the increase in costs during the quarter ended April 29, 2005. The estimated costs of the project increased by approximately $503,000 and, as a result, estimated total program costs exceed estimated program revenues by approximately $704,000. The Company has recognized the additional $503,000 loss in its financial statements for the quarter ended April 29, 2005.
During the quarter ended April 29, 2005, the Company also developed a solution for a significant design element that it expects will reduce program costs. Initially, the Company believed that the reduction in costs could be recognized during the quarter, but discussions with the customer during the fourth week of April 2005 resulted in a requirement that the solution successfully pass certain testing procedures prior to the solution being formally accepted as a design change. Since the first opportunity to conduct these testing procedures would not occur until June 2005, the Company did not recognize any of the potential cost savings associated with this potential design improvement.
The JSF program is a customer-funded product development program that is presently expected to generate total project revenues of approximately $16,336,000. As of April 29, 2005, based on project progress, the Company has recognized revenues of approximately $12,007,000 for the JSF project. The estimate for this program changes with each technological breakthrough and setback and the Company will continue to adjust its estimate to reflect the most current view of the program’s costs. The revenues and costs recorded in each quarter reflect the Company’s best estimate of the program’s expected profitability or loss at that point in time.
The JSF program represents a significant investment in the Company’s future product development capabilities. While Company management is expending considerable effort to control costs and complete the development process on schedule, the key benefit to the program is the substantial revenue that the Company will earn if it is awarded the production contract for the JSF that is expected to follow the conclusion of the development program.
Note 5– Accrued Expenses
Accrued expenses as of April 29, 2005 and January 31, 2005 were approximately $2,716,000 and $2,404,000, respectively. A substantial portion of these expenses are related to amounts owed to subcontractors who participate in the Company’s product development programs, as shown below:
April 29, 2005 | January 31, 2005 | |||
Product development programs | $ 1,257,000 | $ 886,000 | ||
Shareholder litigation (See Note 7) | 800,000 | 800,000 | ||
Other accrued expenses | 659,000 | 718,000 | ||
$ 2,716,000 | $ 2,404,000 |
8
Note 6 – Long Term Debt and Notes Payable
The Company’s credit facilities are with Wachovia Bank, N.A. (“Wachovia”). The facilities total approximately $5.7 million, and include a 15 year term loan of approximately $3.0 million that is collateralized by the Company’s real estate in Clearwater, Florida, a revolving credit facility of approximately $2.5 million, and a seven year equipment loan of approximately $0.2 million. All of the Company’s other assets (i.e., other than the Clearwater real estate) are subject to liens collateralizing all three of the loans from Wachovia. This includes all assets of Avionics Specialties, Inc., the Company’s wholly owned subsidiary.
Long term debt and notes payable at April 29, 2005 and January 31, 2005 consisted of the following:
April 29, 2005 | January 31, 2005 | |||
Mortgage note payable - Wachovia | $ 2,783,000 | $ 2,833,000 | ||
Equipment term loan | 184,000 | 191,000 | ||
Capitalized leases | - | 13,000 | ||
2,967,000 | 3,037,000 | |||
Less current maturities | 230,000 | 243,000 | ||
Long-term debt and notes payable, less current maturities | $ 2,737,000 | $ 2,794,000 |
Covenants
The Company’s long-term debt agreements with Wachovia contain certain financial and other restrictive covenants, including the requirement to maintain: (i) at all times, a ratio of total liabilities to tangible net worth that does not exceed 1.30 to 1.00: and (ii) at the end of each fiscal quarter, a “cash flow coverage ratio” (with regard to the debt service) of at least 1.25 to 1.00. As of April 29, 2005, the Company was in compliance with these financial covenants.
The Wachovia loan agreement subjects the Company to a number of additional covenants that, among other things, require the Company to obtain consent from the lender prior to making a material change of management, guarantee or otherwise become responsible for obligations of any other person or entity or assuming or becoming liable for any debt, contingent or direct, in excess of $100,000.
The Company’s ability to maintain sufficient liquidity and compliance with covenants in fiscal year 2006 and beyond is highly dependent upon achieving expected operating results. Failure to achieve expected operating results and compliance with covenants could have a material adverse effect on the Company’s liquidity and operations in fiscal year 2006 and beyond, and could require implementation of further measures, including deferring planned capital expenditures, reducing discretionary spending, and/or, if necessary, selling assets.
Note 7 – Commitments and Contingencies
In accordance with a consent agreement with the Department of Environmental Protection signed by the Company in 1993, the Company’s environmental consultant has developed an interim remedial action plan to contain and remediate certain contamination on and underlying the Company’s property in Clearwater, Florida. During 1997, the Company recorded a provision of approximately $175,000 related to the estimated costs to be incurred under this plan. As of January 31, 2000, the Company had utilized all amounts originally recorded in other accrued expenses, and Phase I remediation had been completed.
During the third quarter of 2001, management determined the post-remediation monitoring expense related to the environmental cleanup of 1993 would cost approximately $125,000. This amount was accrued and expensed during the third quarter of 2001. As of January 31, 2005, all existing reserve balances had been utilized. Based upon information provided by the Company’s environmental consultants, management estimated that the Company will incur post-remediation monitoring expenses of approximately $98,000, for which a reserve was established as of January 31, 2005. As of April 29, 2005, this reserve remains at $98,000.
9
The Company’s contractual obligations for future minimum payments under our purchase commitments, long-term debt and operating leases as of April 29, 2005 are as follows:
Payments Due by Period | ||||||||||
Contractual Obligations | Total | Less than One Year | 1 - 3 years | 4 - 5 years | > 5 years | |||||
Purchase commitments | $ 7,062,000 | $ 6,850,000 | $ 188,000 | $ 24,000 | $ - | |||||
Long-term debt | 2,967,000 | 230,000 | 460,000 | 460,000 | 1,817,000 | |||||
Operating leases | 718,000 | 398,000 | 320,000 | - | - | |||||
Total | $10,747,000 | $ 7,478,000 | $ 968,000 | $ 484,000 | $ 1,817,000 | |||||
A securities class action lawsuit in the Federal District Court of the Middle District of Florida remains pending against the Company, PricewaterhouseCoopers LLP, the Company’s former auditor, and four former employees of the Company, two of whom were directors (the “Federal Class Action”). On April 1, 2005, the Company and the other named defendants in the Federal Class Action filed a Notice of Settlement with the court, confirming that all parties had executed a Memorandum of Understanding (“MOU”) with the plaintiffs to settle the litigation. The MOU provided for a payment by or on behalf of the defendants to the plaintiffs of approximately $5.35 million. Of this amount, the Company is obligated to pay $800,000, which has been accrued in the accompanying consolidated financial statements as of April 29, 2005 and January 31, 2005. The balance of the settlement is expe cted to be paid by Zurich American Insurance Company on behalf of the Company and the individual defendants under the Company’s directors’ and officers’ insurance policy, and by PricewaterhouseCoopers LLP. The settlement is subject to preliminary and final court approval, as well as certain other conditions that may cause the settlement not to be consummated.
On April 3, 2005, the Company was informed of the death of one of its directors, William C. Parker. Mr. Parker had served as a director of the Company since 1995. The passing of Mr. Parker resulted in a reduction in a pension liability that was initially recorded in the fourth quarter of the 2004 fiscal year of approximately $78,000, which the Company recognized in its financial statements in its fiscal quarter ended April 29, 2005.
On April 6, 2005, Aerosonic became aware of a Derivative Complaint filed on March 21, 2005 in the Circuit Court of Hillsborough County, Florida, by Matilda Franzitta, asserting that she is a shareholder acting on behalf of the Company, which is a nominal defendant, and naming as defendants certain present and past officers, directors and employees, some of whom also were named as defendants in the Federal Class Action, and the Company’s former auditor and that firm’s partner in charge of certain of the Company’s audits (the “Franzitta Suit”). The Complaint alleges (a) breaches of fiduciary duties and aiding and abetting such breaches by the present and former directors, officers, and employees named as defendants, for an asserted "Relevant Period" which appears to begin sometime in 1999 and continues to the present time; and (b) breaches of contract, professional negligen ce, and aiding and abetting breaches of fiduciary duties, by the Company’s former registered independent certified public accounting firm during the asserted Relevant Period, and that firm’s partner in charge of the Company’s audits during most of that time.
The Company is in the process of evaluating the various claims in the Franzitta Suit and is hopeful it still will be able to consummate the Federal Class Action settlement in the manner announced by the Company in its press release on April 5, 2005, as filed on Form 8-K on that date. However, at this time, the Company is unable to determine what effect, if any, the Franzitta Suit will have on its ability to consummate such settlement.
Note 8 – Subsequent Events
The Company’s revolving credit facility with Wachovia, which was set to expire June 1, 2005, was renewed effective May 16, 2005. The limit of this facility remains at $2.5 million, while the expiration date is June 30, 2006.
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Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Revenues for the first quarter increased approximately $1,979,000 when compared to the first quarter of fiscal year 2005. This resulted primarily from core instrument sales increasing by approximately $2,234,000 and revenue from the Joint Strike Fighter (“JSF”) development program decreasing by approximately $313,000, as compared to the first quarter of fiscal year 2005. The core instrument revenue increases were due to increased production throughput in the Company’s Clearwater and Charlottesville operations. The reduction in revenues on the JSF program was due to slower progress on completion of the probe design.
Gross profit for the three months ended April 29, 2005 increased by approximately 26%, or approximately $517,000, when compared to the first quarter of fiscal year 2005. Approximately $560,000 of this change is due to an increase in volume, while changes in sales mix as well as lower margins on the JSF program partially offset this volume-related increase.
Selling, general and administrative expenses for the first quarter increased approximately $34,000 when compared to the three months ended April 30, 2004. This increase is attributable to increased costs for insurance coverage as well as slight increases in salaries and benefits, and these increases are partially offset by lower costs for travel and entertainment.
Net interest expense increased approximately $37,000 for the three months ended April 29, 2005 when compared to the three months ended April 30, 2004. The current quarter results reflect a normal level of net interest expense, while the three months ended April 30, 2004 included the one-time receipt of interest payments of approximately $41,000 in conjunction with the Company’s receipt of income tax refunds during that period.
Miscellaneous income decreased approximately $66,000 for the three months ended April 29, 2005 when compared to the three months ended April 30, 2004. Foreign exchange gains on British Pound-denominated accounts receivable and bank deposits represent nearly all of the current quarter’s miscellaneous income. During the three months ended April 30, 2004, the Company’s miscellaneous income of approximately $121,000 was comprised of a gain on the sale of its Engine Vibration Monitoring System (“EVMS”) product line inventory, the settlement of a claim that was previously asserted by Mrs. Miriam Frank, widow of the Company’s founder, Herbert J. Frank and capitalized loan costs that were written off concurrent with the refinancing of the Company’s debt with Wachovia in February 2004.
Income tax expense increased approximately $140,000 for the three months ended April 29, 2005 when compared to the three months ended April 30, 2004. This increase is primarily due to an increase in taxable income in the current quarter, when compared to the three months ended April 30, 2004.
Liquidity and Capital Resources
Cash used in operating activities was approximately $8,000 for the three months ended April 29, 2005 a decrease of approximately $1,470,000 when compared to the three months ended April 30, 2004. This decrease in cash usage is primarily attributable to:
—
An increase in net income of approximately $240,000
—
An increase due to accounts payable of approximately $1,593,000 as the Company maintained a substantial majority of accounts as current, whereas the Company expended a considerable amount of cash in the three months ended April 30, 2004 to bring its accounts payable obligations to a current status
—
An increase due to accrued expenses and other liabilities of approximately $579,000 due primarily to increases in liabilities to suppliers for the JSF contract
11
—
A decrease due to accounts receivable of approximately $1,672,000 resulting from a significant increase in sales volume, a majority of which is due to billings related to the JSF program that occurred in the last half of April 2005
—
A decrease due to net income taxes receivable and payable of approximately $350,000 due to a reduced level of income tax refund receipts
—
An increase in compensation and benefits liabilities of approximately $18,000
—
An increase due to a reduction in costs less estimated losses in excess of billings of approximately $1,437,000 resulting from substantial invoicing related to the achievement of certain project milestones for the JSF program during the current quarter
—
A decrease of approximately $319,000 due to increases in inventories
Cash used in investing activities decreased approximately $45,000 due to lower investment in Machinery and Equipment.
Cash used by financing activities increased approximately $641,000 when compared to the three months ended April 30, 2004 as the Company’s current quarter activity was confined to the scheduled repayment of long-term debt obligations while the Company had completed a refinancing of its debt obligations in the first quarter of fiscal 2005.
Future capital requirements depend on numerous factors, including research and development, expansion of product lines, the resolution of the recently filed class action suits and potential related litigation, and other factors. Management believes that cash and cash equivalents, together with the Company’s current borrowing arrangements will provide for these necessary expenditures. Furthermore, the Company may develop and introduce new or enhanced products, respond to competitive pressures, invest or acquire businesses or technologies or respond to unanticipated requirements or developments, which would require additional resources.
The Company’s ability to maintain sufficient liquidity in fiscal year 2006 and beyond is highly dependent upon achieving expected operating results. Failure to successfully achieve these results could have a material adverse effect on the Company’s liquidity and operations in fiscal year 2006, and could require implementation of further measures, including deferring planned capital expenditures, reducing discretionary spending, and/or, if necessary, selling assets.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of those financial statements and this Quarterly Report on Form 10-Q requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure items, including disclosure of contingent assets and liabilities, at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions, and as a result of trends and uncertainties identified above under “RESULTS OF OPERATIONS” and “LIQUIDITY AND CAPITAL RESOURCES”. Further, such differences could be material.
Set forth below is a discussion of the Company’s critical accounting policies. The Company considers critical accounting policies to be those (i) that require the Company to make estimates that are highly uncertain at the time the estimate is made, (ii) for which a different estimate which could have been made would have a material impact on the Company’s financial statements, (iii) that are the most important and pervasive policies utilized, and (iv) that are the most sensitive to material change from external factors. Additionally, the policies discussed below are critical to a