UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 000-31283
PECO II, INC.
(Exact name of Registrant as specified in its charter)
| OHIO | 34-1605456 | |
| (State or other jurisdiction of Incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 1376 STATE ROUTE 598, GALION, OHIO | 44833 | |
| (Address of principal executive office) | (Zip Code) | |
Registrant’s telephone number including area code: (419) 468-7600
Indicate by check mark (“X”) whether the Registrant: (1) has filed all reports to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve 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 x NO ¨
Indicate by check mark (“X”) whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| CLASS |
OUTSTANDING AT APRIL 30, 2004 | |
| Common Shares, without par value | 21,458,836 |
INDEX
2
PART I. FINANCIAL INFORMATION
| ITEM 1. | Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 15,706 | $ | 17,366 | ||||
| Accounts receivable |
5,270 | 5,967 | ||||||
| Inventories |
8,925 | 8,573 | ||||||
| Prepaid expenses and other current assets |
525 | 410 | ||||||
| Assets held for sale |
4,136 | 4,136 | ||||||
| Restricted cash |
7,219 | 7,148 | ||||||
| Total current assets |
41,781 | 43,600 | ||||||
| Property and equipment, at cost: |
||||||||
| Land and land improvements |
254 | 254 | ||||||
| Buildings and building improvements |
10,363 | 9,945 | ||||||
| Machinery and equipment |
9,315 | 9,671 | ||||||
| Furniture and fixtures |
6,455 | 7,614 | ||||||
| 26,387 | 27,484 | |||||||
| Less-accumulated depreciation |
(12,985 | ) | (13,422 | ) | ||||
| Property and equipment, net |
13,402 | 14,062 | ||||||
| Other Assets: |
||||||||
| Goodwill, net |
7,842 | 7,842 | ||||||
| Long term notes receivable |
21 | 20 | ||||||
| Total Assets |
$ | 63,046 | $ | 65,524 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: |
||||||||
| Borrowings under line of credit |
$ | — | $ | — | ||||
| Current portion of industrial revenue bonds |
6,080 | 6,080 | ||||||
| Capital leases payable |
94 | 158 | ||||||
| Accounts payable |
2,136 | 1,113 | ||||||
| Accrued compensation expense |
1,397 | 1,492 | ||||||
| Other accrued expenses |
5,678 | 6,030 | ||||||
| Accrued income taxes |
595 | 579 | ||||||
| Total current liabilities |
15,980 | 15,452 | ||||||
| Long-term Liabilities: |
||||||||
| Capital leases payable, net of current portion |
514 | 535 | ||||||
| Total long-term liabilities |
514 | 535 | ||||||
| Shareholders’ Equity: |
||||||||
| Common shares, no par value: authorized 50,000,000 shares: 22,201,666 shares issued at March 31, 2004 and December 31, 2003, respectively |
2,816 | 2,816 | ||||||
| Additional paid-in capital |
110,451 | 110,726 | ||||||
| Retained deficit |
(65,380 | ) | (62,327 | ) | ||||
| Treasury shares, at cost, 742,830 and 847,830 shares at March 31, 2004 and December 31, 2003, respectively |
(1,335 | ) | (1,678 | ) | ||||
| Total shareholders’ equity |
46,552 | 49,537 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 63,046 | $ | 65,524 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| (In thousands, except for per share data) | For the Three Months Ended March 31, |
|||||||
| 2004 |
2003 |
|||||||
| Net sales: |
||||||||
| Product |
$ | 4,015 | $ | 6,148 | ||||
| Services |
2,559 | 4,962 | ||||||
| 6,574 | 11,110 | |||||||
| Cost of goods sold: |
||||||||
| Product |
4,041 | 6,709 | ||||||
| Services |
2,911 | 5,997 | ||||||
| 6,952 | 12,706 | |||||||
| Gross margin: |
||||||||
| Product |
(26 | ) | (561 | ) | ||||
| Services |
(352 | ) | (1,035 | ) | ||||
| (378 | ) | (1,596 | ) | |||||
| Operating expenses: |
||||||||
| Research, development and engineering |
748 | 1,195 | ||||||
| Selling, general and administrative |
1,932 | 3,147 | ||||||
| Real estate impairment |
— | 1,096 | ||||||
| 2,680 | 5,438 | |||||||
| Loss from operations |
(3,058 | ) | (7,034 | ) | ||||
| Interest income , net |
25 | 17 | ||||||
| Loss before income taxes |
(3,033 | ) | (7,017 | ) | ||||
| Provision for income taxes |
20 | 27 | ||||||
| Net loss |
$ | (3,053 | ) | $ | (7,044 | ) | ||
| Net loss per common share: |
||||||||
| Basic |
$ | (0.14 | ) | $ | (0.33 | ) | ||
| Diluted |
$ | (0.14 | ) | $ | (0.33 | ) | ||
| Weighted average common shares outstanding: |
||||||||
| Basic |
21,402 | 21,142 | ||||||
| Diluted |
21,402 | 21,142 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| (In thousands) | For the Three Months Ended March 31, |
|||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (3,053 | ) | $ | (7,044 | ) | ||
| Adjustments to reconcile net loss to net cash used for operating activities: |
||||||||
| Depreciation and amortization |
422 | 687 | ||||||
| Loss on disposals of property and equipment |
227 | 11 | ||||||
| Asset impairment |
— | 1,096 | ||||||
| Working capital changes: |
||||||||
| Accounts and notes receivable |
698 | (1,361 | ) | |||||
| Inventories |
(352 | ) | 275 | |||||
| Prepaid expenses and other current assets |
(117 | ) | 23 | |||||
| Accounts payable, other accrued expenses and accrued income taxes |
687 | (513 | ) | |||||
| Accrued compensation expense |
(95 | ) | 53 | |||||
| Net cash used for operating activities |
(1,583 | ) | (6,773 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
(54 | ) | (16 | ) | ||||
| Proceeds from sale of property and equipment |
65 | — | ||||||
| Net cash from (used for) investing activities |
11 | (16 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Transfer to restricted cash |
(71 | ) | (10,329 | ) | ||||
| Borrowing (repayments) under lines of credit |
— | 702 | ||||||
| Repayment of long-term debt and capital leases |
(85 | ) | (75 | ) | ||||
| Proceeds from issuance of common shares |
68 | — | ||||||
| Net cash used for financing activities |
(88 | ) | (9,702 | ) | ||||
| Net decrease in cash |
(1,660 | ) | (16,491 | ) | ||||
| Cash and cash equivalents at beginning of period |
17,366 | 25,674 | ||||||
| Cash and cash equivalents at end of period |
$ | 15,706 | $ | 9,183 | ||||
| Supplemental Disclosure of Cash Flow Information: |
||||||||
| Income taxes paid |
$ | — | $ | 62 | ||||
| Interest paid |
36 | 60 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of PECO II, Inc. (the “Company”) and its wholly owned subsidiaries. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, of a normal and recurring nature, necessary to present fairly the results for the interim periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The December 31, 2003 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. It is suggested that these condensed statements be read in conjunction with the Company’s most recent Annual Report on Form 10-K.
This Form 10-Q contains forward-looking statements, which involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause the Company’s actual results or activities to differ materially from these forward-looking statements include but are not limited to the statements under “Forward Looking Statements” and other sections in the Company’s Form 10-K filed with the Securities and Exchange Commission and press releases.
Results for the interim period are not necessarily indicative of the results that may be expected for the entire year.
2. Reclassifications
Certain amounts in prior years have been reclassified to conform to the 2003 consolidated financial statements.
3. Treasury Shares
In September 2001, the Board of Directors authorized the repurchase of up to one million shares in the open market or in private transactions. On July 26, 2002, the Board approved a one million share increase in the program. As of March 31, 2004, the Company has repurchased an aggregate of 1,385,712 shares at an average price of $2.70 per share since inception of the repurchase program. The Company did not repurchase any shares during the first quarter of 2004.
During the first quarter of 2004, the Company issued 105,000 treasury shares in connection with the exercise of options.
4. Inventories
Inventory is stated at the lower of cost or market. Cost is computed using standard cost, which approximates actual cost on the first-in, first-out basis, net of allowances for estimated obsolescence. Major classes of inventory at March 31, 2004 and December 31, 2003 are summarized below:
| (In thousands) | March 31, 2004 |
December 31, 2003 | ||||
| Raw materials |
$ | 8,204 | $ | 7,749 | ||
| Work-in-process |
112 | 134 | ||||
| Finished goods |
609 | 690 | ||||
| $ | 8,925 | $ | 8,573</ | |||