Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - TOROTEL INC | Financial_Report.xls |
| EX-31.1 - EXHIBIT 31.1 - TOROTEL INC | exhibit311certification201.htm |
| EX-32.1 - EXHIBIT 32.1 - TOROTEL INC | exhibit321certification201.htm |
| EX-32.2 - EXHIBIT 32.2 - TOROTEL INC | exhibit322certification201.htm |
| EX-31.2 - EXHIBIT 31.2 - TOROTEL INC | exhibit312certification201.htm |
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 January 31, 2014
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission File No. 1-8125
TOROTEL, INC.
(Exact name of registrant as specified in its charter)
MISSOURI | 44-0610086 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
620 NORTH LINDENWOOD DRIVE, OLATHE, KANSAS | 66062 | |
(Address of principal executive offices) | (Zip Code) | |
(913) 747-6111
(Registrant’s telephone number, including area code)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x
As of March 12, 2014, there were 5,615,750 shares of Common Stock, $.01 par value, outstanding.
TOROTEL, INC AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited) | ||||||
January 31, 2014 | April 30, 2013 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash | $ | 1,563,000 | $ | 1,593,000 | ||
Trade receivables, net | 1,344,000 | 1,345,000 | ||||
Inventories | 1,762,000 | 1,391,000 | ||||
Prepaid expenses and other current assets | 93,000 | 134,000 | ||||
Deferred income taxes | 139,000 | 183,000 | ||||
4,901,000 | 4,646,000 | |||||
Property, plant and equipment, net | 1,233,000 | 1,397,000 | ||||
Deferred income taxes | 478,000 | 657,000 | ||||
Other assets | 70,000 | 40,000 | ||||
Total Assets | $ | 6,682,000 | $ | 6,740,000 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Current liabilities: | ||||||
Current maturities of long-term debt | $ | 125,000 | $ | 140,000 | ||
Trade accounts payable | 449,000 | 405,000 | ||||
Accrued liabilities | 776,000 | 571,000 | ||||
Customer deposits | 32,000 | 608,000 | ||||
1,382,000 | 1,724,000 | |||||
Long-term debt, less current maturities | 560,000 | 655,000 | ||||
Stockholders' equity: | ||||||
Common stock; par value $0.01; 6,000,000 shares authorized; 5,615,750 and 5,265,750 shares issued and outstanding at January 31, 2014 and April 30, 2013 respectively. | 60,000 | 60,000 | ||||
Capital in excess of par value | 12,293,000 | 12,283,000 | ||||
Accumulated deficit | (7,604,000 | ) | (7,963,000 | ) | ||
Treasury stock, at cost | (9,000 | ) | (19,000 | ) | ||
4,740,000 | 4,361,000 | |||||
Total Liabilities and Stockholders' Equity | $ | 6,682,000 | $ | 6,740,000 | ||
The accompanying notes are an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
3 Months Ended | 9 Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Net sales | $ | 2,938,000 | $ | 2,976,000 | $ | 9,804,000 | $ | 8,876,000 | |||||
Cost of goods sold | 1,934,000 | 2,035,000 | 6,199,000 | 5,792,000 | |||||||||
Gross profit | 1,004,000 | 941,000 | 3,605,000 | 3,084,000 | |||||||||
Operating expenses: | |||||||||||||
Engineering | 147,000 | 129,000 | 434,000 | 427,000 | |||||||||
Selling, general and administrative | 798,000 | 692,000 | 2,563,000 | 1,880,000 | |||||||||
945,000 | 821,000 | 2,997,000 | 2,307,000 | ||||||||||
Earnings from operations | 59,000 | 120,000 | 608,000 | 777,000 | |||||||||
Other expense: | |||||||||||||
Interest expense, net | 8,000 | 10,000 | 26,000 | 32,000 | |||||||||
Earnings before provision for income taxes | 51,000 | 110,000 | 582,000 | 745,000 | |||||||||
Provision for income taxes | 20,000 | 44,000 | 223,000 | 298,000 | |||||||||
Net earnings | $ | 31,000 | $ | 66,000 | $ | 359,000 | $ | 447,000 | |||||
Basic earnings per share | $ | 0.01 | $ | 0.01 | $ | 0.06 | $ | 0.08 | |||||
The accompanying notes are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended | ||||||
January 31, 2014 | January 31, 2013 | |||||
Cash flows from operating activities: | ||||||
Net earnings | $ | 359,000 | $ | 447,000 | ||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||
Stock compensation cost amortized | 20,000 | (34,000 | ) | |||
Depreciation | 271,000 | 250,000 | ||||
Deferred income tax expense | 223,000 | 298,000 | ||||
Loss on impairment | — | 105,000 | ||||
Change in value of stock appreciation rights | 148,000 | 72,000 | ||||
Increase (decrease) in cash flows from operations resulting from changes in: | ||||||
Trade receivables | 1,000 | 180,000 | ||||
Inventories | (371,000 | ) | (334,000 | ) | ||
Prepaid expenses and other assets | 11,000 | (50,000 | ) | |||
Trade accounts payable | 44,000 | (240,000 | ) | |||
Accrued liabilities | 57,000 | 180,000 | ||||
Customer deposits | (576,000 | ) | 681,000 | |||
Net cash provided by operating activities | 187,000 | 1,555,000 | ||||
Cash flows from investing activities: | ||||||
Capital expenditures | (107,000 | ) | (230,000 | ) | ||
Net cash used in investing activities | (107,000 | ) | (230,000 | ) | ||
Cash flows from financing activities: | ||||||
Principal payments on long-term debt | (84,000 | ) | (81,000 | ) | ||
Payments on capital lease obligations | (26,000 | ) | (34,000 | ) | ||
Net cash used in financing activities | (110,000 | ) | (115,000 | ) | ||
Net increase (decrease) in cash | (30,000 | ) | 1,210,000 | |||
Cash, beginning of period | $ | 1,593,000 | $ | 308,000 | ||
Cash, end of period | 1,563,000 | 1,518,000 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||
Cash paid during the year for: | ||||||
Interest | $ | 26,000 | $ | 32,000 | ||
Income taxes | $ | 7,000 | $ | — | ||
Non-cash investing and financing activities: | ||||||
Capital expenditure | $ | — | $ | — | ||
Proceeds from capital lease | $ | — | $ | — | ||
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
The consolidated condensed balance sheet as of April 30, 2013, which has been derived from the audited financial statements of Torotel, Inc. ("Torotel"), is accompanied by the unaudited interim consolidated condensed financial statements, which reflect the normal recurring adjustments that in the opinion of management are necessary to present fairly Torotel’s consolidated financial position at January 31, 2014, and the consolidated results of operations for the three and nine months ended January 31, 2014, and 2013, respectively.
The unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although management believes the disclosures made are adequate to make the information not misleading. The financial statements contained herein should be read in conjunction with Torotel’s consolidated financial statements and related notes filed on Torotel's Form 10-K for the year ended April 30, 2013 as filed with the SEC on July 19, 2013.
NOTE 2 — NATURE OF OPERATIONS
Torotel conducts business primarily through its wholly owned subsidiary, Torotel Products, Inc. (“Torotel Products”), but also operates another wholly owned subsidiary, Electronika, Inc. (“Electronika”). Another subsidiary, Torotel Manufacturing Corporation ("TMC"), previously provided manufacturing services to Torotel Products. TMC ceased activities on December 31, 2012. Torotel specializes in the custom design and manufacture of a wide variety of precision magnetic components, consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies, for use in commercial, industrial and military electronics. Torotel also distributes ballast transformers for the airline industry.
NOTE 3—INVENTORIES
The following table summarizes the components of inventories:
January 31, 2014 | April 30, 2013 | |||||
Raw materials | $ | 1,041,000 | $ | 850,000 | ||
Work in process | 433,000 | 281,000 | ||||
Finished goods | 288,000 | 260,000 | ||||
$ | 1,762,000 | $ | 1,391,000 | |||
6
NOTE 4—FINANCING AGREEMENTS
Torotel Products has a financing agreement (the “financing agreement”) with Commerce Bank, N.A (the “Bank”). The financing agreement provides for a revolving line of credit, a guidance line of credit, and a real estate term loan. Both Torotel and Electronika serve as additional guarantors to all notes described below. A summary of the notes within the financing agreement is provided below:
As of January 31, 2014: | |||||||||
Line of Credit | Mortgage note payable to Commerce Bank | Equipment loan note payable to Commerce Bank | |||||||
Face amount | $ | 500,000 | $ | 650,000 | $ | 500,000 | |||
Proceeds received | — | 650,000 | 380,000 | ||||||
Unused borrowing capacity | 500,000 | — | 120,000 | ||||||
Amount previously repaid | — | 108,000 | 243,000 | ||||||
Total debt outstanding | $ | — | $ | 542,000 | $ | 137,000 | |||
Rate | 4.00 | % | 4.63 | % | 4.63 | % | |||
Maturity date | September 27, 2014 | September 26, 2015 | September 26, 2015 | ||||||
Monthly payment | $ | — | $ | 5,038 | $ | 7,123 | |||
Additional Criteria | Borrowing base limited to 75% of eligible receivables | 15 year amortization schedule | Advance rate equal to 80% of the price of the equipment purchased | ||||||
The revolving line of credit, to be used for working capital purposes, is renewable annually. The associated interest rate is equal to the greater of the floating Commerce Bank Prime Rate (currently 3.25%) or a floor of 4% (as listed above). Monthly repayments of interest only are required with the principal due at maturity. This facility is cross collateralized and cross defaulted with all other facilities of Torotel Products and is secured by a first lien on all business assets of Torotel Products.
The mortgage note requires monthly payments consisting of both interest and principal. This facility is cross collateralized and cross defaulted with all other facilities of Torotel Products and is secured by a first real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas. This loan was refinanced on February 21, 2014. See Note 12 of Notes to Consolidated Financial Statements for further information regarding this subsequent event.
The equipment note is a guidance line of credit to be used for equipment purchases. Monthly repayments consisting of both interest and principal are required. This facility is cross collateralized and cross defaulted with all other facilities of Torotel Products and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel Products.
Torotel is also required to comply with specified financial covenants in its guaranty of the financing agreement. As of January 31, 2014, Torotel was in compliance with these covenants.
Torotel Products also currently has capital lease agreements related to information technology equipment and other items for a total of $6,000.
NOTE 5—INCOME TAXES
Our effective income tax rates were 38.3% for the nine months ended January 31, 2014 and 39.9% for the nine months ended January 31, 2013.
As of January 31, 2014, the federal tax returns for the fiscal years ended 2009 through 2013 are open to audit until the statute of limitations closes for the years in which our net operating losses are utilized. We would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. As of January 31, 2014, we recorded no accrued interest or penalties related to uncertain tax positions. We expect no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.
7
NOTE 6—RESTRICTED STOCK AGREEMENTS
Restricted Stock Agreements are authorized by the Compensation and Nominating Committee (the "Committee") and the Board of Directors of Torotel (the "Board"). The Committee and the Board have determined that the interests of Torotel and its stockholders will be promoted by hiring talented individuals and, to induce such individuals to accept employment with Torotel, the Committee and the Board believe a key component of such individuals' compensation should be granting equity ownership opportunities based upon the acceptance of employment and the continuing employment of such individuals, subject to certain conditions and restrictions. The Restricted Stock Agreements afford the grantees all of the rights of a stockholder with respect to the award shares, including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares since the date of award. Under the terms of each agreement, the non-vested shares are restricted as to disposition and subject to forfeiture under certain circumstances. The Restricted Stock Agreements further provide, subject to certain conditions, that if prior to all of the restricted shares having vested, we undergo a change in control, then all of the restricted shares shall be vested and no longer subject to restrictions under the Restricted Stock Agreements.The restricted shares are treated as non-vested stock; accordingly, the fair value of the restricted stock at the date of award is offset against capital in excess of par value in the accompanying consolidated balance sheets under stockholders' equity.
On September 2, 2009, we entered into Restricted Stock Agreements with two key employees (Messrs. Sizemore and Serrone) pursuant to the Stock Award Plan (the "SAP"). The SAP provides key employees the opportunity to acquire newly issued common stock of Torotel pursuant to awards earned for accomplishing goals that promote the long-term financial performance of our business. The aggregate amount of the restricted stock awards was 250,000 shares of common stock, $0.01 par value per share. These shares were transferred from treasury shares. Based on the market price of $0.27 for our common stock as of September 2, 2009, the fair value of the restricted stock at the date of award was $67,500. Stock compensation cost net of an appropriate pre-vesting forfeiture rate is recorded per quarter for the remainder of the vesting period provided the financial performance metrics as outlined in the SAP are likely to be attained. However, due to updated projections developed in the third quarter of fiscal year 2013, the likelihood of achieving the financial performance metrics as outlined in the SAP was classified as remote. As a result, we stopped amortizing the stock compensation cost associated with the restricted stock awarded on September 2, 2009 and recovered the previously amortized stock compensation cost of $42,000 in the third quarter ended January 31, 2013. The 250,000 shares associated with the restricted stock awards dated September 2, 2009, were reverted to treasury shares during the fourth quarter of fiscal year 2013.
On June 17, 2013, we entered into Restricted Stock Agreements with three key employees pursuant to the SAP. The aggregate amount of the restricted stock awards was 400,000 shares of common stock, 0.01 par value per share. These shares were transferred from treasury shares. Based on the market price of $0.50 for our common stock as of June 17, 2013, the fair value of the restricted stock at the date of award was $200,000. The form of the Restricted Stock Agreement was filed as Exhibit 10.1to our Form 8-K filed with the SEC on June 19, 2013, and is incorporated herein by reference as Exhibit 10.1. The shares issued pursuant to the Restricted Stock Agreements on June 17, 2013 are restricted and may not be sold, assigned, pledged or otherwise disposed of until the restrictions lapse. The restrictions will lapse on the fifth anniversary of the date of grant if during the five (5) year restriction period, (1) Torotel's cumulative annual growth in earnings before interest and taxes ("EBIT") is at least 10% and (2) Torotel's average return on capital employed ("ROCE") is at least 25%. The restrictions will also lapse, if prior to the fifth anniversary of the date of grant, (1) the grantee's employment with Torotel is terminated by reason of disability, (2) the grantee dies, or (3) the Committee, in its sole discretion, terminates the restrictions. If the restrictions on such shares have not lapsed by the fifth anniversary of the date of grant, such shares will be forfeited to Tototel. Stock compensation cost net of an appropriate pre-vesting forfeiture rate is recorded per quarter for the remainder of the vesting period provided the financial performance metrics as outlined in the SAP are likely to be attained.
Total stock compensation cost for the nine months ended January 31, 2014 and 2013 was $20,000 and a credit of $34,000, respectively.
8
Restricted stock activity for each nine month period through January 31 is summarized as follows:
2014 | 2013 | |||||||||
Restricted Shares Under Option | Weighted Average Grant Price | Restricted Shares Under Option | Weighted Average Grant Price | |||||||
Outstanding at May 1 | — | $ | — | 250,000 | $ | 0.27 | ||||
Granted | 400,000 | 0.50 | — | — | ||||||
Vested | — | — | — | — | ||||||
Forfeited | 50,000 | 0.50 | — | — | ||||||
Outstanding at January 31 | 350,000 | $ | 0.50 | 250,000 | $ | 0.27 | ||||
NOTE 7—STOCKHOLDERS' EQUITY
The changes in shares of common stock outstanding as of January 31 of each year are summarized as follows:
2014 | 2013 | |||
Balance, May 1 | 5,265,750 | 5,515,750 | ||
Restricted stock activity | 350,000 | — | ||
Balance, January 31 | 5,615,750 | 5,515,750 | ||
NOTE 8—EARNINGS PER SHARE
Basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Per share amounts are computed by dividing net income attributable to common shareholders by the weighted average shares outstanding during each period.
The basic earnings per common share were computed as follows:
Three Months Ended | Nine Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Net earnings | $ | 31,000 | $ | 66,000 | $ | 359,000 | $ | 447,000 | |||||
Amounts allocated to participating securities (nonvested restricted shares) | (2,000 | ) | (3,000 | ) | (22,000 | ) | (20,000 | ) | |||||
Net income attributable to common shareholders | $ | 29,000 | $ | 63,000 | $ | 337,000 | $ | 427,000 | |||||
Basic weighted average common shares | 5,265,750 | 5,265,750 | 5,265,750 | 5,265,750 | |||||||||
Earnings per share attributable to common shareholders: | |||||||||||||
Basic earnings per share | $ | 0.01 | $ | 0.01 | $ | 0.06 | $ | 0.08 | |||||
ASC 260, Earnings per Share, provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be participating securities and must be included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per share is not presented as we do not have any shares considered incremental and dilutive.
9
NOTE 9—STOCK APPRECIATION RIGHTS
The Board , approved the Directors Stock Appreciation Rights Plan (the "Plan") for non-employee directors in September 2004. The Plan was amended effective December 6, 2013, to permit directors to exercise fully vested stock appreciation rights ("SARS") after five years from the grant date. The Amended and Restated Directors Stock Appreciation Rights Plan (the "Amended Plan") was filed as Exhibit 10.12 to Torotel's current report on Form 8-K filed with the SEC on December 11, 2013.
On January 24, 2014, the Board terminated the Amended Plan by unanimous written consent of the members of the Board. The Amended Plan was terminated as part of Torotel’s plans to move toward different long-term performance-based awards, which are still under consideration. The Board consent authorizing the termination provides for vested SARS to be exercised within 75 days following the effective date of the termination as well as a one-time cash award equal to the cumulative and aggregate fair market value on the date of grant of any and all unvested SARS held by a grantee under the Plan. All payments related to the exercise of vested SARS and the one-time cash award for unvested SARS shall occur on May 15, 2014.
As under the prior version of the Plan, under the Amended Plan each SAR granted as a part of the Amended Plan may be exercised to the extent that the grantee is vested in such SAR and unvested SARS will be forfeited. The SARS will vest according to the following schedule:
Number of Years the Grantee has remained a Torotel director following the Date of Grant | Shares represented by a SAR in which a Grantee is Vested | |
Under one | — | % |
At least one but less than two | 33 | % |
At least two but less than three | 67 | % |
Three or more | 100 | % |
In accordance with ASC 718, compensation expense is recognized over the vesting period based upon the estimated fair value of the SARS pursuant to the terms of the Amended Plan using the Black-Scholes options-pricing model as of the end of each financial reporting period. The stock volatility rate was determined using the historical volatility rates of our common stock based on the weekly closing price of our stock. The expected life represents the actual life as well as the use of the simplified method prescribed by the SEC, which uses the average of the vesting period and expiration period of each group of SARS. The interest rates used were the government Treasury bill rate on the date of valuation. Dividend yield was based on the historical policy that we have not issued any form of dividend since 1985.
SARs transactions for each nine month period though January 31 are summarized as follows:
2014 | 2013 | |||||||||
SARs Under Option | Weighted Average Grant Price | SARs Under Option | Weighted Average Grant Price | |||||||
Outstanding at beginning of period | 320,000 | $ | 0.409 | 280,000 | $ | 0.429 | ||||
Granted | 40,000 | $ | 0.410 | 40,000 | $ | 0.270 | ||||
Exercised | — | $ | — | — | $ | — | ||||
Terminated | 80,000 | $ | 0.387 | — | $ | — | ||||
Outstanding at end of period | 280,000 | $ | 0.415 | 320,000 | $ | 0.409 | ||||
SARs exercisable at end of period | 280,000 | $ | 0.415 | 243,300 | $ | 0.419 | ||||
Weighted average fair value of SARs granted during the period | $ | 0.410 | $ | 0.270 | ||||||
10
The following information applies to SARS vested and outstanding for each nine month period through January 31:
2014 | 2013 | |||||
Number outstanding | 280,000 | 320,000 | ||||
Range of grant prices, upper limit | $ | 0.695 | $ | 0.695 | ||
Range of grant prices, lower limit | $ | 0.208 | $ | 0.208 | ||
Weighted average grant price | $ | 0.415 | $ | 0.409 | ||
Weighted average contractual life remaining (in years) | 0.29 | 5.10 | ||||
10-day average market price | $ | 1.194 | $ | 0.530 | ||
Weighted average stock volatility | 136.35 | % | 148.76 | % | ||
Weighted average expected life | 0.24 | 4.60 | ||||
Weighted average risk free rate | — | % | 0.80 | % | ||
Weighted average dividend yield | — | % | — | % | ||
Weighted average fair value price | $ | 0.710 | $ | 0.498 | ||
Aggregate fair value | $ | 213,000 | $ | 110,000 | ||
Aggregate intrinsic value | $ | 204,000 | $ | 33,000 | ||
Total compensation expense (credit) for three months ended January 31 | $ | (69,000 | ) | $ | 63,000 | |
Total compensation expense for nine months ended January 31 | $ | 148,000 | $ | 72,000 | ||
Unrecognized compensation expense related to non-vested SARs granted | $ | — | $ | 24,000 | ||
Expected period to recognize compensation expense related to non-vested SARs granted (in years) | — | 1.87 | ||||
Total liability for SARs on consolidated balance sheets | 213,000 | 124,000 | ||||
NOTE 10—CUSTOMER DEPOSITS
For certain customers, we collect payment at the time the order is placed. These deposits are classified as a liability and will be recognized as revenue at the time of shipment in accordance with our revenue recognition policy. As of January 31, 2014 we had approximately $32,000 in customer deposits related to these arrangements.
NOTE 11 — CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. We grant unsecured credit to most of our customers. We do not believe that we are exposed to any extraordinary credit risk as a result of this policy. At various times, and at January 31, 2014, cash balances exceeded federally insured limits. However, we have incurred no losses in the cash accounts and we do not believe we are exposed to any significant credit risk with respect to our cash.
NOTE 12 — SUBSEQUENT EVENT
On February 21, 2014, Torotel Products refinanced its mortgage note under the financing agreement with the Bank. The new mortgage is in the principal amount of approximately $542,000. The new note has a 59 month term with a 15 year amortization period with the balance payable at maturity. The associated annual interest rate is fixed at 4.05%. Monthly repayments of approximately $4,873 consisting of both interest and principal are required. No cash proceeds were received as a result of the refinancing. Prepayment of the new note up to $100,000 per year is allowed without penalty so long as these funds are generated through internal cash flow and not borrowed from a separate financial institution. The new note is cross collateralized and cross defaulted with all other facilities of Torotel Products and is secured by a first real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas. Both Torotel and Electronika remain as additional guarantors pursuant to the 2010 guaranty and the new note is also made pursuant to the 2010 business loan agreement that was filed as Exhibit 10.11 to our quarterly report on Form 10-Q for the quarter ended October 31, 2010 filed with the SEC on December 15, 2010.
11
Forward-Looking Information
This report, as well as our other reports filed with or furnished to the Securities and Exchange Commission ("SEC"), contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The words "believe," "estimate," "anticipate," "project," "intend," "expect," "plan," "outlook," "forecast," "may," "will," "should," "continue," "predict" and similar expressions are intended to identify forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, budgets and management's plans and objectives. Accordingly, these forward-looking statements are based on assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to be different from what appear here. These risk factors include,without limitation:
• | economic and legislative factors that could impact defense spending; |
• | our relatively concentrated customer base; |
• | risks in fulfilling military subcontracts; |
• | our ability to finance operations; |
• | continued production of the Hellfire II missile system for which we supply parts; |
• | the ability to adequately pass through to customers unanticipated future increases in raw material and labor costs; |
• | decreased demand for products; |
• | delays in developing new products; |
• | markets for new products and the cost of developing new markets; |
• | expected orders that do not occur; |
• | our ability to adequately protect and safeguard our network infrastructure from cyber security vulnerabilities; |
• | loss of key customers; |
• | our ability to satisfy our debt covenant requirements; |
• | our ability to generate sufficient taxable income to realize the amount of our deferred tax assets; |
• | the impact of competition and price erosion as well as supply and manufacturing constraints; and |
• | other risks and uncertainties. |
In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate. Accordingly, our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Torotel, Inc. ("Torotel") conducts business primarily through its wholly owned subsidiary, Torotel Products, Inc. ("Torotel Products"), but it also operates another wholly owned subsidiary, Electronika, Inc. ("Electronika"). Another subsidiary, Torotel Manufacturing Corporation ("TMC"), previously provided manufacturing services to Torotel Products. TMC ceased activities on December 31, 2012.
Torotel Products is engaged in the custom design and manufacture of a wide variety of precision magnetic components consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies for use in military, aerospace and industrial electronic applications. These products are used to modify and control electrical voltages and currents in electronic devices. Torotel Products sells these products to original equipment manufacturers, which use them in applications such as:
• | aircraft navigational equipment; |
• | digital control devices; |
• | airport runway lighting devices; |
• | medical equipment; |
• | avionics systems; |
• | radar systems; |
• | down-hole drilling; |
• | conventional missile guidance systems; and |
• | other aerospace and defense applications |
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Torotel Products markets its components primarily through an internal sales force and independent manufacturers’ representatives paid on a commission basis. These commissions are earned when a product is sold and/or shipped to a customer within the representative’s assigned territory. Torotel Products also utilizes its engineering department in its direct sales efforts for the purpose of expanding its reach into new markets and/or customers.
The industry mix of Torotel Products’ net sales for the first nine months of fiscal year 2014 was 63% defense, 28% aerospace, and 9% industrial compared to 66% defense, 24% aerospace, 10% industrial for the same period in fiscal year 2013. Also, approximately 95% of Torotel Products’ sales during the first nine months of fiscal year 2014 have been derived from domestic customers.
Torotel Products is an approved source for magnetic components used in numerous military and aerospace systems, which means Torotel Products is automatically solicited for any procurement needs for such applications. The magnetic components manufactured by Torotel Products are sold primarily in the United States, and most sales are awarded on a competitive bid basis. The markets in which Torotel Products competes are highly competitive. A substantial number of companies sell components of the type manufactured and sold by Torotel Products. In addition, Torotel Products sells to a number of customers who have the capability of manufacturing their own electronic components. The principal methods of competition for electronic products in the markets served by Torotel Products include, among other factors, price, on-time delivery performance, lead times, customized product engineering and technical support, marketing capabilities, quality assurance, manufacturing efficiency, and existing relationships with customers’ engineers. While we believe magnetic components are not susceptible to rapid technological change, Torotel Products’ sales, which do not represent a significant share of the industry’s market, are susceptible to decline given the competitive nature of the market.
Business and Industry Considerations
Defense Markets
During the first nine months of fiscal years 2014 and 2013, the amount of consolidated revenues derived from contracts with prime contractors of the U.S. Department of Defense (“DoD”) was approximately 63% and 66% respectively. As a result, our financial results in any period could be impacted substantially by spending cuts in the DoD budget and the funds appropriated for certain military programs.
Notwithstanding the uncertainty associated with the DoD budget, we believe our overall defense business outlook remains favorable due to the present demand for the potted coil assembly for the Hellfire II missile system and other existing orders from major defense contractors. As of January 31, 2014, our consolidated order backlog for the defense market was nearly $7.4 million, which included $5.7 million for the potted coil assembly.
Aerospace and Industrial Markets
We provide magnetic components and electro-mechanical assemblies for a variety of applications in the aerospace and industrial markets. The significant growth factors for these markets include demand for Boeing commercial aircraft, down-hole drilling applications, and general demand for electronic components.
We anticipate that near-term demand for aerospace and industrial products will remain consistent with current demand. We also believe that the long-term outlook remains positive because of the nature of the customers' applications for these products. As of January 31, 2014, our consolidated order backlog for the aerospace and industrial markets was $1.4 million.
Business Outlook
Our order activity increased 31% during the first nine months of fiscal year 2014. While this order activity contributed to higher sales of magnetic components, the increase in selling, general and administrative expenses for the same time periods have outpaced the gross profit generated from the incremental sales increase. We anticipate that this relationship will improve as more new products complete their qualification phases and transition to higher production levels.
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Consolidated Results of Operations
The following management comments regarding Torotel’s results of operations and outlook should be read in conjunction with the Consolidated Condensed Financial Statements and Notes to the Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report.
This discussion and analysis of the results of operations include the operations of Torotel and its subsidiaries, Torotel Products, TMC, and Electronika. While each company’s results are included separately in the following discussion, segment reporting is not applicable because the products offered are similar in form and function, and target similar markets.
Net Sales
Three Months Ended | Nine Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Torotel Products: | |||||||||||||
Magnetic components | $ | 1,523,000 | $ | 1,254,000 | $ | 4,547,000 | $ | 4,301,000 | |||||
Potted coil assembly | 1,268,000 | 1,315,000 | 3,915,000 | 3,402,000 | |||||||||
Electro-mechanical assemblies | 103,000 | 325,000 | 1,194,000 | 1,021,000 | |||||||||
Injection molded products | — | — | — | 70,000 | |||||||||
Large transformers | $ | 44,000 | $ | 82,000 | $ | 146,000 | $ | 82,000 | |||||
Total Torotel Products | $ | 2,938,000 | $ | 2,976,000 | $ | 9,802,000 | $ | 8,876,000 | |||||
Electronika | $ | — | $ | — | $ | 2,000 | $ | — | |||||
Total consolidated net sales | $ | 2,938,000 | $ | 2,976,000 | $ | 9,804,000 | $ | 8,876,000 | |||||
Consolidated net sales in the three and nine months ended January 31, 2014 decreased 1% and increased 10%, respectively. Torotel Products' net sales increased during the nine month period primarily due to a higher average unit selling price for magnetic components combined with higher shipments of electro-mechanical assemblies. Electronika's net sales represented a small portion of consolidated net sales. Electronika's sales continue to fluctuate within a small range as overall demand for the ballast transformers is very limited.
The slight decrease during the three month period was due to fewer assembly shipments and slightly lower selling prices for magnetics during the the third fiscal quarter.
Gross Profit
Three Months Ended | Nine Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Torotel Products: | |||||||||||||
Gross profit | $ | 1,004,000 | $ | 941,000 | $ | 3,603,000 | $ | 3,084,000 | |||||
Gross profit % of net sales | 34 | % | 32 | % | 37 | % | 35 | % | |||||
Electronika: | |||||||||||||
Gross profit | $ | — | $ | — | $ | 2,000 | $ | — | |||||
Gross profit % of net sales | — | % | — | % | — | % | — | % | |||||
Combined: | |||||||||||||
Gross profit | $ | 1,004,000 | $ | 941,000 | $ | 3,605,000 | $ | 3,084,000 | |||||
Gross profit % of net sales | 34 | % | 32 | % | 37 | % | 35 | % | |||||
Consolidated gross profit as a percentage of net sales increased 2% in the three and nine months ended January 31, 2014. The gross profit percentage of Torotel Products increased in the three and nine months ended because of higher sales without a corresponding increase in fixed production costs and higher direct margins associated with the product mix. The gross profit percentage of Electronika represented a small portion of consolidated gross profit.
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Operating Expenses
Three Months Ended | Nine Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Engineering | $ | 147,000 | $ | 129,000 | $ | 434,000 | $ | 427,000 | |||||
Selling, general and administrative | 798,000 | 692,000 | 2,563,000 | 1,880,000 | |||||||||
Total | $ | 945,000 | $ | 821,000 | $ | 2,997,000 | $ | 2,307,000 | |||||
Engineering expenses increased nearly 14% and 2% in the three and nine months ended January 31, 2014, respectively. Engineering expenses increased during the three months ended primarily due to a $19,000 increase in salaries and fringe benefits and a $14,000 increase in consulting expenses. These increases were offset primarily by a decrease in travel expenses of $15,000. Engineering expenses increased during the nine months ended due to a $5,000 increase in salaries and fringe benefits, a $3,000 increase in software expense and a $24,000 increase in consulting expenses. These increases were offset primarily by a decrease of $26,000 in travel expenses.
Selling, general and administrative expenses increased 15% and 36% in the three and nine months ended January 31, 2014, respectively. The increases during the three months ended period were primarily due to a $90,000 increase in salaries and fringe benefits due to additional personnel, a $3,000 increase in travel and entertainment expenses and a $15,000 increase in information technology expenses. This was offset by a decrease of $21,000 for recruiting and $13,000 for building repairs. For the nine months ended increases primarily resulted from a $317,000 increase in salaries and fringe benefits due to additional personnel, a $71,000 increase related to training, a $57,000 increase in stock compensation expense due to a credit taken in the prior year but not the current year, a $49,000 increase in travel and entertainment expenses, a $14,000 increase in operating expenses, a $55,000 increase in professional fees, a $41,000 increase in accounting fees, a $45,000 increase in depreciation expense, a $17,000 increase in advertising expense and a $64,000 increase in software and information technology expenses. These increase were offset by decreases of $31,000 in building repairs and maintenance and a $17,000 decrease in recruiting.
Earnings from Operations
Three Months Ended | Nine Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Torotel Products | $ | 72,000 | $ | 231,000 | $ | 1,025,000 | $ | 1,053,000 | |||||
Electronika | — | — | 2,000 | — | |||||||||
Torotel | (13,000 | ) | (111,000 | ) | (419,000 | ) | (276,000 | ) | |||||
Total | $ | 59,000 | $ | 120,000 | $ | 608,000 | $ | 777,000 | |||||
For the reasons discussed above, consolidated earnings from operations decreased by $61,000 and $169,000 for the three and nine months ended January 31, 2014, respectively.
Other Earnings Items
Three Months Ended | Nine Months Ended | ||||||||||||
January 31, 2014 | January 31, 2013 | January 31, 2014 | January 31, 2013 | ||||||||||
Earnings from operations | $ | 56,000 | $ | 120,000 | $ | 602,000 | $ | 777,000 | |||||
Interest expense | 8,000 | 10,000 | 26,000 | 32,000 | |||||||||
Earnings before income taxes | 48,000 | 110,000 | 576,000 | 745,000 | |||||||||
Provision for income taxes | 13,000 | 44,000 | 215,000 | 298,000 | |||||||||
Net earnings | $ | 35,000 | $ | 66,000 | $ | 361,000 | $ | 447,000 | |||||
Our effective income tax rate was 38.3% for the nine months ended January 31, 2014. The effective income tax rate was 39.9% for the same period in the prior year. For additional discussion related to Income Taxes, see Note 5 of Notes to Consolidated Financial Statements.
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Return on Capital Employed
Return on capital employed ("ROCE") is the primary benchmark used by management to evaluate Torotel's performance. ROCE measures how effectively and efficiently net operating assets ("NOA") are used to generate earnings before interest and taxes. For these purposes, NOA, or capital employed, is defined as "accounts receivable + inventory + net fixed assets + miscellaneous operating assets - accounts payable - miscellaneous operating liabilities." The performance of Torotel's management and the majority of its decisions will be measured by whether Torotel's ROCE improves. For the fiscal years ended April 30, 2013 and 2012, Torotel's ROCE was 29.41% and 1.23%, respectively. The ROCE for the 12-month trailing period ended January 31, 2014 was 22.76%. This change in ROCE is attributable to higher sales and earnings offset by the reduction in customer deposits.
Liquidity and Capital Resources
As of January 31, 2014, Torotel had $1,563,000 in cash compared to $1,593,000 as of April 30, 2013 and $1,518,000 as of January 31, 2013. The factors contributing to the differences from period to period are discussed below. The table below presents the summary of cash flow for the nine month periods indicated through January 31.
2014 | 2013 | |||||
Net cash provided by operating activities | $ | 187,000 | $ | 1,555,000 | ||
Net cash used in investing activities | $ | (107,000 | ) | $ | (230,000 | ) |
Net cash used in financing activities | $ | (110,000 | ) | $ | (115,000 | ) |
Operating Activities
Net cash provided by operating activities fluctuates between periods primarily as a result of differences in operating earnings, the timing of shipments and the collection of accounts receivable, changes in inventory, level of sales and payment of accounts payable. The $187,000 of cash provided by operating activities was largely due to lower earnings before taxes and depreciation combined with the net change in accounts receivable, accounts payable and customer deposits. The significant change in customer deposits was due to the recovery of milestone payments related to a contract for the potted coil assembly. We do not anticipate any significant changes in the amount of cash flow from operations in the near-term.
The $1,555,000 of cash provided by operating activities for the same period in fiscal year 2013 is primarily attributable to earnings before taxes and depreciation combined with the net change in accounts receivable, inventories and customer deposits.
Investing Activities
The $107,000 of cash used in investing activities in the first nine months of fiscal year 2014 was the result of capital expenditures for production equipment. We do not anticipate a significant amount of additional capital expenditures during the remainder of fiscal year 2014.
The $230,000 of cash used in investing activities in the first nine months of fiscal year 2013 was the result of capital expenditures. This amount was primarily related to the implementation of our new enterprise resource planning system.
Financing Activities
The $110,000 of cash used in financing activities in the first nine months of fiscal year 2014 is the result of payments on long-term debt and capital lease obligations.
The $115,000 of cash used in financing activities in the first nine months of fiscal year 2013 is the result of payments on long-term debt and capital lease obligations.
Capital Resources
We believe the projected cash flow from operations, combined with existing cash balances, will be sufficient to meet funding requirements for the foreseeable future. Torotel has a $500,000 bank line of credit available, which we anticipate could be utilized to help fund any working capital requirements. As of January 31, 2014, the entire credit line was available and we have not utilized this credit line in fiscal year 2014.
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We believe that inflation will have only a minimal effect on future operations since such effects should be offset by sales price increases, which are not expected to have a significant effect upon demand.
Critical Accounting Policies
We discuss our critical accounting policies and estimates in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended April 30, 2013 filed with the SEC on July 19, 2013. We have made no significant change in our critical accounting policies since April 30, 2013.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Torotel’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Torotel’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that Torotel’s disclosure controls and procedures are effective as of the end of the period covered by this report.
Changes in Internal Control
There were no significant changes in Torotel’s internal control over financial reporting or in other factors that in management’s estimates have materially affected, or are reasonably likely to materially affect, Torotel’s internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q.
PART II. OTHER INFORMATION
Item 6. Exhibits
a) Exhibits
Exhibit 10.1 | First Amendment to Lease dated December 20, 2013 by and between 96-OP Prop, L.L.C., a Kansas limited liability company, and Torotel, Inc., a Missouri corporation (incorporated by reference to Exhibit 10.1 of Form 8-K filed with the SEC on December 24, 2013). | |
Exhibit 10.12 | Amended and Restated Directors Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.12 of Form 8-K filed with the SEC on December 11, 2013). | |
Exhibit 31.1 | Officer Certification | |
Exhibit 31.2 | Officer Certification | |
Exhibit 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 101.INS | XBRL Instance Document | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document | |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
Exhibit 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Torotel, Inc. | |||||
March 12, 2014 | /s/ H. James Serrone | ||||
Date | H. James Serrone | ||||
Chief Financial Officer | |||||
Principal Financial Officer | |||||