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, 2005
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 29, 2005 | |
| Common Shares, without par value | 21,566,302 |
INDEX
2
PART I. FINANCIAL INFORMATION
PECO II, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for per share data)
| March 31, 2005 |
December 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 8,380 | $ | 9,723 | ||||
| Accounts receivable, net of allowance of $45 in March 31, 2005 and $68 in December 31, 2004 |
5,502 | 5,764 | ||||||
| Inventories |
9,885 | 10,031 | ||||||
| Prepaid expenses and other current assets |
530 | 527 | ||||||
| Assets held for sale |
4,136 | 4,136 | ||||||
| Restricted cash |
9,735 | 9,722 | ||||||
| Total current assets |
38,168 | 39,903 | ||||||
| Property and equipment, at cost: |
||||||||
| Land and land improvements |
254 | 254 | ||||||
| Buildings and building improvements |
10,363 | 10,363 | ||||||
| Machinery and equipment |
9,217 | 9,255 | ||||||
| Furniture and fixtures |
6,046 | 6,237 | ||||||
| 25,880 | 26,109 | |||||||
| Less-accumulated depreciation |
(13,969 | ) | (13,832 | ) | ||||
| Property and equipment, net |
11,911 | 12,277 | ||||||
| Other Assets: |
||||||||
| Goodwill, net |
1,774 | 1,774 | ||||||
| Long term notes receivable |
8 | 11 | ||||||
| Investment in joint venture |
9 | 16 | ||||||
| Total Assets |
$ | 51,870 | $ | 53,981 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: |
||||||||
| Industrial revenue bonds |
$ | 5,860 | $ | 5,860 | ||||
| Borrowings under line of credit |
271 | 992 | ||||||
| Capital leases payable |
88 | 87 | ||||||
| Accounts payable |
1,713 | 2,537 | ||||||
| Accrued compensation expense |
1,425 | 1,227 | ||||||
| Accrued income taxes |
77 | 145 | ||||||
| Other accrued expenses |
5,518 | 5,255 | ||||||
| Total current liabilities |
14,952 | 16,103 | ||||||
| Long-term Liabilities: |
||||||||
| Capital leases payable, net of current portion |
425 | 448 | ||||||
| Shareholders’ Equity: |
||||||||
| Common shares, no par value: authorized 50,000,000 shares; 21,566,302 shares outstanding and 22,201,666 shares issued at March 31, 2005 and December 31, 2004 |
2,816 | 2,816 | ||||||
| Additional paid-in capital |
110,251 | 110,251 | ||||||
| Retained deficit |
(75,534 | ) | (74,597 | ) | ||||
| Treasury shares, at cost, 635,364 shares at March 31, 2005 and December 31, 2004 |
(1,040 | ) | (1,040 | ) | ||||
| Total shareholders’ equity |
36,493 | 37,430 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 51,870 | $ | 53,981 | ||||
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, |
||||||||
| 2005 |
2004 |
|||||||
| Net sales: |
||||||||
| Product |
$ | 6,665 | $ | 4,015 | ||||
| Services |
2,547 | 2,559 | ||||||
| 9,212 | 6,574 | |||||||
| Cost of goods sold: |
||||||||
| Product |
5,065 | 4,041 | ||||||
| Services |
2,428 | 2,911 | ||||||
| 7,493 | 6,952 | |||||||
| Gross margin: |
||||||||
| Product |
1,600 | (26 | ) | |||||
| Services |
119 | (352 | ) | |||||
| 1,719 | (378 | ) | ||||||
| Operating expenses: |
||||||||
| Research, development and engineering |
703 | 748 | ||||||
| Selling, general and administrative |
1,973 | 1,932 | ||||||
| 2,676 | 2,680 | |||||||
| Loss from operations |
(957 | ) | (3,058 | ) | ||||
| Loss from joint venture |
7 | — | ||||||
| Loss from operations after joint venture |
(964 | ) | (3,058 | ) | ||||
| Interest income, net |
48 | 25 | ||||||
| Loss before income taxes |
(916 | ) | (3,033 | ) | ||||
| Provision for income taxes |
(20 | ) | (20 | ) | ||||
| Net loss |
$ | (936 | ) | $ | (3,053 | ) | ||
| Net loss per common share: |
||||||||
| Basic |
$ | (0.04 | ) | $ | (0.14 | ) | ||
| Diluted |
$ | (0.04 | ) | $ | (0.14 | ) | ||
| Weighted average common shares outstanding: |
||||||||
| Basic |
21,566 | 21,402 | ||||||
| Diluted |
21,566 | 21,402 | ||||||
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, |
||||||||
| 2005 |
2004 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (936 | ) | $ | (3,053 | ) | ||
| Adjustments to reconcile net loss to net cash from (used for) operating activities: |
||||||||
| Depreciation and amortization |
355 | 422 | ||||||
| Loss on disposals of property and equipment |
11 | 227 | ||||||
| Investment loss in joint venture |
7 | — | ||||||
| Working capital changes: |
||||||||
| Accounts and notes receivable |
265 | 698 | ||||||
| Inventories |
146 | (352 | ) | |||||
| Prepaid expenses and other current assets |
(3 | ) | (117 | ) | ||||
| Accounts payable, other accrued expenses and accrued income taxes |
(630 | ) | 687 | |||||
| Accrued compensation expense |
198 | (95 | ) | |||||
| Net cash used for operating activities |
(587 | ) | (1,583 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
— | (54 | ) | |||||
| Proceeds from sale of property and equipment |
— | 65 | ||||||
| Net cash from investing activities |
— | 11 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Transfer to restricted cash |
(13 | ) | (71 | ) | ||||
| Net repayments under line of credit agreement |
(721 | ) | — | |||||
| Repayment of long-term debt and capital leases |
(22 | ) | (85 | ) | ||||
| Proceeds from issuance of common shares- options exercised |
— | 68 | ||||||
| Net cash used for financing activities |
(756 | ) | (88 | ) | ||||
| Net decrease in cash |
(1,343 | ) | (1,660 | ) | ||||
| Cash and cash equivalents at beginning of period |
9,723 | 17,366 | ||||||
| Cash and cash equivalents at end of period |
$ | 8,380 | $ | 15,706 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Income taxes paid |
$ | 90 | $ | — | ||||
| Interest paid |
53 | 36 | ||||||
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 and partially 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.
In May 2004, PECO II Global Services, Inc. (PGS), a wholly owned subsidiary of PECO II, Inc. and b+w Electronic Systems Verwaltung-GmbH (BWESV), a German corporation, formed a corporation named b+w II, Inc. The corporation is established under the laws of the state of Ohio and the principal office is at 1376 State Route 598, Galion, Ohio. The ownership structure is 50% PGS and 50% BWESV, with a $100,000 equity investment by both parties. This joint venture is accounted for under the equity method of accounting.
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, 2004 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. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Estimates are used for, but not limited to, the accounting for doubtful accounts, inventory obsolescence, depreciation and amortization, sales returns, warranty costs, taxes and contingencies. Actual results could differ from those estimates.
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, 2005, 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 2005.
No treasury shares were issued during the first quarter of 2005.
6
PECO II, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Cont.)
4. Contingencies
The Company is a party to legal proceedings and litigation, which have arisen in the ordinary course of business or assumed in connection with an acquisition. Although the outcome of such items cannot be determined, management believes the amount of additional costs in excess of recorded amounts should not materially affect the financial position or results of operations of the Company.
5. 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, 2005 and December 31, 2004 are summarized below:
| (In thousands)
|
March 31, 2005 |
December 31, 2004 | ||||
| Raw materials |
$ | |||||