UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
COMMISSION FILE NUMBER 0-10449
TVI CORPORATION
(Exact name of registrant as specified in its charter)
| Maryland | 52-1085536 | |
(State or other jurisdiction of incorporation or incorporation) | (I.R.S. Employer Identification No.) |
7100 Holladay Tyler Road, Glenn Dale, MD 20769
(Address of principal executive offices, including zip code)
(301) 352-8800
(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 ¨
Indicate by check mark 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: 30,003,607 shares of Common Stock issued and outstanding as of August 12, 2005.
INDEX TO FORM 10-Q
| Page | ||||||
PART I –FINANCIAL INFORMATION | ||||||
| Item 1. | Consolidated Financial Statements | 1 | ||||
Consolidated Statements of Income (Unaudited) | 1 | |||||
Consolidated Balance Sheets (Unaudited) | 3 | |||||
Consolidated Statements of Cash Flows (Unaudited) | 4 | |||||
Notes to Consolidated Financial Statements (Unaudited) | 5 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 10 | ||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 16 | ||||
| Item 4. | Controls and Procedures. | 16 | ||||
PART II –OTHER INFORMATION | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders. | 17 | ||||
| Item 6. | Exhibits. | 17 | ||||
| 18 | ||||||
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PART I – FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30, 2005 and 2004
(all data in thousands, except per share data)
(Unaudited)
| 2005 | 2004 | |||||
NET SALES | $ | 7,618 | $ | 10,238 | ||
COST OF SALES | 3,599 | 5,316 | ||||
GROSS PROFIT | 4,019 | 4,922 | ||||
OPERATING EXPENSES | ||||||
Selling, general and administrative expenses | 2,003 | 1,944 | ||||
Research and development expenses | 287 | 245 | ||||
Total operating expenses | 2,290 | 2,189 | ||||
OPERATING INCOME | 1,729 | 2,733 | ||||
INTEREST AND OTHER INCOME, NET | 93 | 13 | ||||
INCOME BEFORE INCOME TAXES | 1,822 | 2,746 | ||||
PROVISION FOR INCOME TAXES | 720 | 931 | ||||
NET INCOME | $ | 1,102 | $ | 1,815 | ||
EARNINGS PER COMMON SHARE - BASIC | $ | 0.037 | $ | 0.063 | ||
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | 30,138 | 28,729 | ||||
EARNINGS PER COMMON SHARE - DILUTED | $ | 0.035 | $ | 0.060 | ||
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | 31,517 | 30,397 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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TVI CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 2005 and 2004
(all data in thousands, except per share data)
(Unaudited)
| 2005 | 2004 | |||||
NET SALES | $ | 16,489 | $ | 18,831 | ||
COST OF SALES | 7,761 | 9,392 | ||||
GROSS PROFIT | 8,728 | 9,439 | ||||
OPERATING EXPENSES | ||||||
Selling, general and administrative expenses | 4,039 | 3,651 | ||||
Research and development expenses | 564 | 468 | ||||
Total operating expenses | 4,603 | 4,119 | ||||
OPERATING INCOME | 4,125 | 5,320 | ||||
INTEREST AND OTHER INCOME, NET | 132 | 28 | ||||
INCOME BEFORE INCOME TAXES | 4,257 | 5,348 | ||||
PROVISION FOR INCOME TAXES | 1,621 | 1,933 | ||||
NET INCOME | $ | 2,636 | $ | 3,415 | ||
EARNINGS PER COMMON SHARE - BASIC | $ | 0.088 | $ | 0.120 | ||
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC | 29,891 | 28,520 | ||||
EARNINGS PER COMMON SHARE - DILUTED | $ | 0.084 | $ | 0.113 | ||
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED | 31,311 | 30,342 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
At June 30, 2005 and December 31, 2004
(all data in thousands, except per share data)
June 30, 2005 | December 31, 2004 | |||||
| (Unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash and cash equivalents | $ | 13,214 | $ | 13,054 | ||
Short-term investments | 2,002 | 0 | ||||
Accounts receivable less allowance for doubtful accounts | 3,757 | 4,418 | ||||
Inventories | 3,050 | 1,829 | ||||
Deferred income taxes | 120 | 227 | ||||
Other current assets | 855 | 506 | ||||
Total current assets | 22,998 | 20,034 | ||||
PROPERTY, PLANT AND EQUIPMENT, NET | 2,963 | 2,506 | ||||
OTHER ASSETS | ||||||
Goodwill | 554 | 554 | ||||
Intangible assets, net | 225 | 148 | ||||
Other assets | 48 | 48 | ||||
Total other assets | 827 | 750 | ||||
TOTAL ASSETS | $ | 26,788 | $ | 23,290 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
CURRENT LIABILITIES | ||||||
Accounts payable - trade | $ | 1,202 | $ | 1,073 | ||
Accrued expenses | 2,331 | 1,857 | ||||
Total current liabilities | 3,533 | 2,930 | ||||
TOTAL LIABILITIES | 3,533 | 2,930 | ||||
STOCKHOLDERS’ EQUITY | ||||||
Preferred stock $1 par value; 1,200 shares authorized, -0- issued and outstanding | 0 | 0 | ||||
Common stock $0.01 par value; 98,800 shares authorized, issued and outstanding 30,004 and 29,771 shares in 2005 and 2004, respectively. | 300 | 298 | ||||
Additional paid in capital | 14,890 | 14,633 | ||||
Retained earnings | 8,065 | 5,429 | ||||
TOTAL STOCKHOLDERS’ EQUITY | 23,255 | 20,360 | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 26,788 | $ | 23,290 | ||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June, 2005 and 2004
(all data in thousands)
(Unaudited)
| 2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net Income | $ | 2,636 | $ | 3,415 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 170 | 106 | ||||||
Stock-based compensation | 59 | 0 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in accounts receivable - trade | 661 | (83 | ) | |||||
Increase in inventories | (1,222 | ) | (521 | ) | ||||
Increase in other current assets | (117 | ) | (93 | ) | ||||
Increase in accounts payable | 129 | 554 | ||||||
Increase in accrued expenses | 433 | 271 | ||||||
Net cash provided by operating activities | 2,749 | 3,649 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of short-term investments, net | (2,002 | ) | 0 | |||||
Purchases of intangible assets | (91 | ) | (533 | ) | ||||
Purchases of property, plant and equipment | (613 | ) | (1,081 | ) | ||||
Net cash used in investing activities | (2,706 | ) | (1,614 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Issuance of common stock | 117 | 688 | ||||||
Net cash provided by financing activities | 117 | 688 | ||||||
NET INCREASE IN CASH | 160 | 2,723 | ||||||
Cash and cash equivalents at beginning of year | 13,054 | 7,592 | ||||||
Cash and cash equivalents at end of interim period | $ | 13,214 | $ | 10,315 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended June 30, 2005
(in thousands, except per share data)
Note 1. BASIS OF PRESENTATION.
The accompanying consolidated financial statements include the activity of TVI Corporation and its consolidated subsidiary (collectively referred to as “TVI” or the “Company”). TVI was incorporated under the laws of Maryland in 1977. In April 2004, TVI acquired substantially all of the assets of CAPA Manufacturing, LLC, a privately-held company. As a consequence, the Company established CAPA Manufacturing Corp. (“CAPA”) as its wholly-owned subsidiary. All material inter-company transactions have been eliminated in consolidation.
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. This quarterly report and the accompanying financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto presented in its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 (the “2004 Annual Report”). Footnotes which would substantially duplicate the disclosures in the Company’s audited financial statements for the year ended December 31, 2004 contained in the 2004 Annual Report have been omitted. The interim financial information contained in this quarterly report is not necessarily indicative of the results to be expected for any other interim period or for the full year ending December 31, 2005.
Use of Estimates
Our financial statements and related public information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretation of accounting principles that have an impact on the assets, liabilities and expense amounts reported. These estimates and judgments affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. The Company continually reviews these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in estimates and assumptions used by management could have a significant impact on the Company’s financial results. The Company believes that the following are among its most significant accounting policies. They utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment.
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Cash and Cash Equivalents
For purposes of financial statement presentation, the Company considers all liquid investments with initial maturities of approximately ninety days or less to be cash equivalents. The carrying value of the cash equivalents approximates their estimated fair value.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” and it supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” SFAS 123R does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans.
SFAS 123R requires companies to measure compensation expense for all share-based payments (including employee stock options) at fair value and recognize the expense over the related service period. Additionally, excess tax benefits, as defined in SFAS 123R, will be recognized as an addition to paid-in capital and will be reclassified from operating cash flows to financing cash flows in the Consolidated Statements of Cash Flows.
As amended by the Securities and Exchange Commission in Release No. 33-8568, SFAS 123R will be effective beginning in the first quarter of 2006 and we are currently evaluating the effect that implementation will have on the results of our operations and financial position. We have included below, in “Note 3. Stock-based Compensation”, information regarding the effect on net income and net income per common share had we applied the fair value expense recognition provisions of the original Statement No. 123. The Company expects the impact of implementing SFAS 123R will be a reduction in earnings per share. However, a number of technical implementation issues must be resolved, including the selection and use of an appropriate valuation model such that the ultimate impact of adopting SFAS 123R is not yet known.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29” (“SFAS 153”). SFAS 153 eliminates the exception for nonmonetary exchanges of similar productive assets in APB 29 and replaces it with a general
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exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 will be effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Company anticipates that adoption of SFAS 153 will not have a material impact on its net income or financial condition.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 requires that “abnormal” amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, the allocation of fixed production overhead to the costs of conversion is required to be based on the normal capacity of the production facilities. SFAS 151 is effective prospectively for financial statements for fiscal years beginning after June 15, 2005. The Company is evaluating the impact that SFAS 151 will have on its net income and financial condition and the ultimate impact of adopting this Statement is not yet known.
Note 2. BASIC AND DILUTED EARNINGS PER SHARE.
Basic earnings per share are calculated using the weighted-average number of common shares outstanding during the period. Diluted earnings per share are calculated using the weighted-average number of common shares plus dilutive potential common shares outstanding during the period. Potential common shares consist of stock options and convertible preferred stock. As of June 30, 2005, shares attributable to 519,500 outstanding stock options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.
Note 3. STOCK COMPENSATION.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement 123”), encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the estimated fair value of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the “disclosure only” alternative described in Statement 123, which requires pro forma disclosures of net income and earnings per share as if the fair value method of accounting has been applied.
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The following table illustrates the effect on net income for the three and six month periods ended June 30, 2005 if the company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation.
| ($ in thousands except per share data) | ||||||||||||||||
| Three-Months June 30, | Six-Months June 30, | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
Net income as reported | $ | 1,102 | $ | 1,815 | $ | 2,636 | $ | 3,415 | ||||||||
Add: Stock-based compensation expense included in net income | 5 | 0 | 36 | 0 | ||||||||||||
Deduct: Stock-based compensation determined under fair value | (323 | ) | (120 | ) | (498 | ) | (120 | ) | ||||||||
Proforma net income | $ | 784 | $ | 1,695 | $ | 2,174 | $ | 3,295 | ||||||||
Earnings per common share as reported: | ||||||||||||||||
Basic | $ | 0.037 | $ | 0.063 | $ | 0.088 | $ | 0.120 | ||||||||
Diluted | $ | 0.035 | $ | 0.060 | $ | 0.084 | $ | 0.113 | ||||||||
Proforma earnings per common share | ||||||||||||||||
Basic | $ | 0.026 | $ | 0.059 | $ | 0.073 | $ | 0.116 | ||||||||
Diluted | $ | 0.025 | $ | 0.056 | $ | 0.069 | $ | 0.109 | ||||||||
Note 4. INVENTORIES.
Inventories as June 30, 2005 and December 31, 2004 consist of:
| 2005 | 2004 | |||||
Finished goods | $ | 223 | $ | 136 | ||
Work in progress | 920 | 207 | ||||
Raw materials | 1,700 | 1,338 | ||||
Other | 207 | 148 | ||||
Total | $ | 3,050 | $ | 1,829 | ||
Other inventories consist of field service, demonstration and other sales support inventory. At June 30, 2005 and December 31, 2004, inventory reserves for excess and obsolete inventories were $675 and $629, respectively.
Note 5. SIGNIFICANT CUSTOMERS.
Net sales to the Company’s largest customer totaled approximately $11,648 and $6,435 for the six-months ended June 30, 2005 and 2004, respectively. These sales represented 71% and 34% of total net sales for the periods then ended, respectively. For the six-months ended June 30, 2004, net sales to two other customers represented approximately 25% and 16%, respectively. There were no other customers representing more than 10% of net sales in either year.
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Note 6. INTERNAL REVENUE SERVICE EXAMINATION.
The Internal Revenue Service (“IRS”) is currently examining the Company’s 2003 federal income tax return. The IRS has proposed certain adjustments to the return that aggregate approximately $140 of possible additional income tax due. The Company contests these proposed adjustments and is in the process of responding to the initial IRS proposal. Management believes that any additional tax due as a result of the examination would not be material to the Company’s financial condition, results of operations, or liquidity.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CAUTIONARY NOTE REGARDING THE USE OF FORWARD-LOOKING
STATEMENTS CONCERNING OUR BUSINESS:
The following section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Report contain “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995, that are based on management’s expectations, estimates, projections and assumptions. These statements may be identified by the use of forward-looking words or phrases such as “should”, “believes”, “expects”, “might result”, “anticipates”, “projects”, “estimates” and others. These forward-looking statements involve risks and uncertainties and are not guarantees of future performance, as actual results could differ materially from our current expectations.
Such risks and uncertainties include achieving order and sales levels to fulfill revenue expectations; expected costs or charges, certain of which may be outside our control; the time and costs involved in the research, development, marketing and promotion for our products; the possible cancellation or non-fulfillment of existing orders or distributor commitments for our products; our ability to respond to product and other changes in the counter-terrorism, military, public safety and first responder communities; adverse changes in governmental regulations; our ability to maintain and manage our growth; difficulties in integrating the operations, technologies and products of any businesses we may acquire; general economic and business conditions; and competitive factors in our markets and industry generally. Numerous other factors could cause or contribute to such differences. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date of this report. The Company assumes no obligation to update any such forward-looking statements even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto contained herein.
Overview
TVI Corporation, located in Glenn Dale, Maryland, is a supplier of rapidly deployable first responder systems for homeland security, hospitals, police and fire departments, the military and public health agencies. The Company designs, fabricates and markets products and systems both through distributors and directly to end-users and original equipment manufacturers (“OEM”). These systems include chemical and biological decontamination systems, hospital surge capacity systems, and infection control systems, all of which utilize the Company’s fabric shelter structures as a core product, employing the Company’s proprietary articulating frame. The Company also sells a line of powered air respirator systems and thermal products, which include targets, Identification Friend or Foe (“IFF”) devices, aircraft beacons, markers and decoys. In addition, the Company recently established capability for the manufacture of disposable filter canisters for the first responder, military, healthcare and industrial markets.
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Results of Operations for the Three Months Ended June 30, 2005 Compared With 2004
(dollars in thousands, except per share data)
Net Sales:
Net Sales decreased $2,620, or 26%, to $7,618 for the three-months ending June 30, 2005, from $10,238 in the second quarter of 2004. The decline in our core shelter sales was attributable to an approximate $1,570 decrease in sales through our international distributors, reflective of overall economic weakness in major Western European countries in which we sell our shelters. The net sales decrease was also attributable to the ongoing restructuring of the agencies that make up the Department of Homeland Security. Funding to these agencies has slowed as a result. However, we continue to believe that our target markets remain well-funded and, once the re-organization is completed, funds will be released to continue purchasing the needed equipment.
Gross Profit:
Gross profit decreased $903, or 18%, to $4,019 for the three-months ending June 30, 2005, compared with $4,922 for the second quarter of 2004. Gross margin as a percentage of sales was 52.8% for the 2005 quarter compared with 48.1% for 2004. The increase in the gross margin percentage is related to a change in product mix and an improvement in warranty costs.
Selling, General and Administrative:
Selling, general and administrative (“SG&A”) expense was $2,003 for the three months ending June 30, 2005, an increase of $59, or 3%, compared with $1,944 for the second quarter of 2004. The increase primarily relates to expenses for legal fees and compensation related to an increase in Board members. The Company also incurred increased SG&A expenses related to various strategic and marketing initiatives that are intended to produce future business growth.
Research and Development:
Research and development (“R&D”) expense was $287 for the three-months ended June 30, 2005, an increase of $42 compared with $245 for the second quarter of 2004. The increase primarily reflects additional expenditures for powered air-purifying products and the new filter canister manufacturing line.
Operating Income:
Operating income decreased by $1,004, or 37%, to $1,729 for the three-months ending June 30, 2005, from $2,733 for the second quarter 2004. Operating income as a percent of net sales decreased to 23% for the three-months ending June 30, 2005, from 27% for the second quarter of 2004 due to the aforementioned decline in sales and the increases in SG&A and R&D expenses.
Income Tax Expense:
The provision for income taxes decreased $211, or 23%, to $720 for the three-months ending June 30, 2005, from $931 for the second quarter 2004. The effective tax rate (“EFT”) for the 2005 quarter was 39.5%, compared with 33.9% for the second quarter 2004. The increase in the EFT is attributable to lower international sales, which benefit the Company through a deduction associated with the international sales of a domestically produced product. This is partially offset by a manufacturing exemption granted by the American Jobs Creation Act of 2004.
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Net Income:
Net income decreased $713, or 39%, to $1,102 for the second quarter of 2005, compared with $1,815 for the same period in 2004, reflecting the decline in sales and increase in SG&A and R&D expenses. Earnings per diluted share were $0.035 for the three-months-ended June 30, 2005, compared with $0.060 for the second quarter of 2004.
Results of Operations for the Six Months Ended June 30, 2005 Compared With 2004
(dollars in thousands, except per share data)
Net Sales:
Net Sales decreased $2,342, or 12%, to $16,489 for the six-months ending June 30, 2005, from $18,831 for the same 2004 year-to-date period. The six-month decline in our core shelter sales was primarily attributable to an approximate $3.8 million decrease in sales through our international distributors, reflective of overall economic weakness in major Western European countries in which we sell our shelters. The net sales decrease was also attributable to the ongoing restructuring of the agencies that make up the Department of Homeland Security. Funding to these agencies has slowed as a result. However, we continue to believe that our target markets remain well-funded and, once the re-organization is completed, funds will be released to continue purchasing the needed equipment.
Gross Profit:
Gross profit decreased $711, or 8%, to $8,728 for the six-months ending June 30, 2005, compared with $9,439 for the same 2004 year-to-date period. Gross margin as a percentage of sales was 52.9% for 2005 compared with 50.1% for 2004. The increase in the gross margin percentage is related to a change in product mix and an improvement in warranty costs.
Selling, General and Administrative:
SG&A expense was $4,039 for the six-months ending June 30, 2005, an increase of $388, or 11%, compared with $3,651 for the same 2004 year-to-date period. The 2005 increase in SG&A expenses primarily reflects increased headcount related to our acquisition of CAPA in 2004 and the addition of the filter canister manufacturing line. The Company also incurred increased expenses in 2005 for legal fees and compensation related to an increase in Board members, as well as various strategic and marketing initiatives that are intended to produce future business growth.
Research and Development:
R&D expense was $564 for the six-months ended June 30, 2005, an increase of $96 compared with $468 for the same 2004 year-to-date period. The increase primarily reflects additional expenditures for powered air-purifying products and the new filter canister manufacturing line.
Operating Income:
Operating income decreased by $1,195, or 22%, to $4,125 for the six-months ending June 30, 2005, from $5,320 for the same 2004 year-to-date period. Operating income as a percent of net sales decreased to 25% for the six-months ending June 30, 2005, from 28% for the same 2004 year-to-date period due to the aforementioned decline in sales and the increases in SG&A and R&D expenses.
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Income Tax Expense:
The provision for income taxes decreased $312, or 16%, to $1,621 for the six-months ending June 30, 2005, from $1,933 for the same 2004 year-to-date period. The EFT for the first-half of 2005 was 38.1%, compared with 36.1% for 2004. The increase in the EFT is attributable to lower international sales, which benefit the Company through a deduction associated with the international sales of a domestically produced product. This is partially offset by a manufacturing exemption granted by the American Jobs Creation Act of 2004.
Net Income:
Net income decreased $779, or 23%, to $2,636 for the first-half of 2005, compared with $3,415 for the same period in 2004, reflecting the decline in sales and gross profits and increase in operating expenses. Earnings per diluted share were $0.084 for the six-months-ended June 30, 2005, compared with $0.113 for the first-half of 2004.
Financial Condition, Liquidity and Capital
(dollars in thousands)
Management measures the Company’s liquidity on the basis of its ability to meet short-term and long-term operational funding needs and fund additional investments, including acquisitions. Significant factors affecting the management of liquidity are the amount of current working capital, cash flows from operating activities, capital expenditures, access to bank lines of credit and the Company’s ability to attract long-term capital with satisfactory terms.
Working Capital:
At June 30, 2005, TVI’s working capital totaled $19,465, an increase of $2,361 compared with $17,104 at December 31, 2004. Cash and cash equivalents at June 30, 2005 totaled $13,214, an increase of 1% from December 31, 2004. During the first quarter of 2005, the Company implemented an enhanced cash management program in order to achieve higher yields on its free cash flow. Under this program, the Company may invest in U.S. Treasury, corporate commercial paper and other interest-bearing securities with various maturities, some of which may have maturities of up to six months. At June 30, 2005, the Company had $2,002 classified as short-term investments under the new program.
Accounts receivable was $3,757 at June 30, 2005, a decrease of 15% from December 31, 2004, largely attributable to the decline in sales in the second quarter. Days-sales outstanding were approximately 45 days at June 30, 2005, as compared with 70 days at March 31, 2005 and 42 days at December 31, 2004.
Cash Flows:
Cash flow provided by operating activities was $2,749 for the six-months ended June 30, 2005, compared with $3,649 in the same period a year ago. The decrease in operating cash flows is primarily attributable to the decline in net operating results, as discussed above. While collections of accounts receivable contributed positive cash flow compared with the same period of 2004, the Company has decided to increase its inventories based on expected near-term customer demand.
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Cash used in investing activities totaled $2,706 for 2005, comprised of $2,002 for the purchase of short-term investments, $613 for the purchase of property, plant and equipment, primarily related to the new filter canister manufacturing line, and $91 for the purchase of intangible assets, primarily capitalized costs pertaining to patents and product certifications.
The Company expects that currently available cash and cash equivalents, combined with the internal cash flow generation, will be sufficient to fund investments in working capital to support increased business and additional capital expenditures. The Company actively seeks to expand by acquisition as well as through the growth of its present businesses. While a significant acquisition may require additional borrowings, equity financing or both, the Company believes it would be able to obtain financing based on its last two years of favorable earnings performance and current financial position.
Known Trends
In 2004, we entered the rapidly-growing personal protection equipment market through the acquisition of the CAPA business. We also launched our Infection Control product line, which is expected to enhance the medical community’s ability to deal with naturally emerging infectious agents, as well as biological war agents. In April 2005, we announced the installation of our state-of-the-art filter canister manufacturing facility, which we expect to add a new consumable-product, recurring-revenue component to the Company’s business model. The Company expects to obtain approval on the canister designs from the National Institute of Occupational Health and Safety in the second half of 2005. Once the plant is approved and fully operational, which we expect to occur in the second half of 2005, we plan to manufacture disposable canisters for filtering chemical, biological, radial, and nuclear agents, as well as organic vapor and acid gases. We also plan to develop highly efficient particulate filters for the medical market, and filters that meet the acute American military standard known as “C2 A1”. In connection with the initiatives described above for the filter canister manufacturing facility, the Company expects additional capital investments.
The Company’s product strategy is to continue to expand each product family by both internal and external means, and to continue to upgrade and improve the performance of existing product lines, so that end users in all of TVI’s major market segments will have access to the latest technology and will continue to upgrade their current stock with more advanced products. In addition, the Company plans to add related new products, which can also be sold to the first responder and military markets.
We believe that on-going research and development is critical to our strategic product development objectives and overall growth strategies. Specifically, we believe that in order to meet the changing requirements of our customers in the rapidly emerging military, domestic and international markets, we must continue to fund investments in several development projects in parallel. Our R&D activities are focused on the improvement and maintenance of our existing products; developing new uses and applications for our existing products; and the development of new products, particularly in the area of thermal marking infra-red, infection control and powered air purifying respirator technology. Most of our efforts are directed toward the realization of products with near-term revenue potential, but we continue to invest in new R&D initiatives to ensure our continued competitiveness in the more distant future.
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The Company’s Provision for Income Taxes and its tax returns as filed with the Internal Revenue Service (“IRS”) are subject to management’s interpretation of the Internal Revenue Code, as well as applicable state tax codes. As disclosed in Note 6 to the Consolidated Financial Statements, the IRS is currently examining the Company’s 2003 federal income tax return. The IRS has proposed certain adjustments to the return that aggregate approximately $140 of possible additional income tax due. The Company contests these proposed adjustments and is in the process of responding to the initial IRS proposal. Management believes that any additional tax due as a result of the examination would not be material to the Company’s financial condition, results of operations, or liquidity.
Critical Accounting Estimates
Note 1 of the Notes to Consolidated Financial Statements included in our Form 10-KSB for the year ended December 31, 2004 describes the significant accounting policies used in the preparation of the Company’s financial statements.
Our consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, and expense amounts reported. These estimates and judgments affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures. The Company continually reviews these estimates and their underlying assumptions to ensure they are appropriate for the circumstances. Changes in estimates and assumptions used by management could have a significant impact on the Company’s financial results. The Company believes that the following are among its most significant accounting policies. They utilize estimates about the effect of matters that are inherently uncertain and therefore are based on management’s judgment.
Revenue Recognition:
Revenue is recognized from sales when the risks and rewards of ownership pass to customers, which may either be at the time of shipment, upon delivery or acceptance by the customer, according to the terms of sale. Sales discounts and allowances are recorded in the period in which the sale is recorded.
Inventory Valuation:
The Company routinely evaluates the carrying value of its inventories to ensure they are carried at the lower of cost or market value. Such evaluation is based on management’s judgment and use of estimates, including sales forecasts, historical usage, planned dispositions of materials, product lines, technological events and trends. In addition, the evaluation is based on changes in inventory management practices that may influence the timing of exiting products and method of disposing of excess inventory.
Excess inventory is generally identified by comparing historical and future expected inventory usage to actual on-hand quantities. Reserves are provided for on-hand inventory in excess of pre-defined usage forecasts. Forecast usage is primarily determined by projecting historical (actual) inventory usage levels forward to future periods.
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Credit and Collections:
The Company maintains allowances for doubtful accounts receivable in order to reflect the potential uncollectibility of receivables related to purchases of products on open credit. If the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make required payments, the Company may be required to record additional allowances for doubtful accounts.
Contingent Liabilities:
The Company is subject to proceedings, lawsuits, warranty and other claims or uncertainties related to environmental, legal, product and other matters. The Company routinely assesses the likelihood of an adverse judgment or outcome to these matters, as well as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis. The required reserves may change in the future due to new developments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The requirements of this Item are not applicable to TVI Corporation for the 2005 reporting period.
Item 4. CONTROLS AND PROCEDURES
An evaluation as of the end of the period covered by this report was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the foregoing, the Company’s President and Chief Executive Officer and Acting Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Item 4. Submission of Matters to a Vote of Security Holders.
On May 27, 2005, TVI held its 2005 Annual Meeting of Stockholders. Out of a total of 29,943,392 shares of Common Stock of the Company issued and outstanding and entitled to vote at such Meeting, the holders of 25,873,629 shares, or approximately 86.4% of all outstanding shares entitled to vote, were present either in person or by proxy, thus constituting a quorum. The following is a record of the votes cast as to the two propositions presented for a vote:
Proposal One - Election of Class A Directors. The Amended and Restated By-Laws of the Company (the “By-Laws”) provide that the Company’s business shall be managed under the direction of a Board of Directors, with the number of directors to be 10 members, unless and until otherwise determined by resolution of the Board of Directors. The Board of Directors fixed the number of directors to be elected at the Annual Meeting at seven, by adding two directors to Class A, for a total of three directors in Class A. The Board nominated for election to the Board the three individuals named below.
NOMINEE: | FOR | WITHHELD | ||||||
Matthew M. O’Connell | 24,017,459 (92.83)% | 1,856,170 (7.17)% | ||||||
Todd L. Parchman | 24,067,459 (93.02)% | 1,806,170 (6.98)% | ||||||
Charles L. Sample | 25,658,439 (99.17)% | 215,190 (0.83)% | ||||||
Directors continuing in office are Joseph J. Duffy (Class B), Mark N. Hammond (Class B), Harley A. Hughes (Class C) and Richard V. Priddy (Class C).
Proposal Two. Upon the recommendation of the Audit Committee, the Board of Directors appointed Stegman & Company to serve as the Company’s independent accountants for its year ending December 31, 2005. The Board of Directors sought ratification of this appointment.
FOR | AGAINST | ABSTAIN | ||
25,756,449 (99.54)% | 76,422 (0.29)% | 40,758 (0.15)% |
Accordingly, each of the above Proposals, having received a favorable vote of at least a majority of all the votes cast for each proposal, were declared to be duly approved by the Stockholders of the Company.
| Exhibit Number | Description | |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TVI CORPORATION | ||
| (Registrant) | ||
| Date: August 15, 2005 | /s/ JEFFERY C. KORDELA | |
JEFFERY C. KORDELA, Corporate Controller and Acting Chief Financial Officer | ||
| Date: August 15, 2005 | /s/ RICHARD V. PRIDDY | |
RICHARD V. PRIDDY, President and Chief Executive Officer | ||
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| Exhibit Number | Exhibit Description | |
| 3.1 | Articles of Amendment and Restatement of the Company (incorporated by reference to Exhibits from our Form 10-KSB for Fiscal Year Ended December 31, 2003) | |
| 3.2 | Amended and Restated By-laws of the Company (incorporated by reference to Exhibits from our Form 10-Q for the quarter ended March 31, 2005) | |
| 4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibits from our Registration Statement on Form S-4, File No. 33-15029) | |
| 10.1 | Amended and Restated 1998 Incentive Stock Option Plan (incorporated by reference to Exhibits from our Form 10-Q for the quarter ended March 31, 2005) | |
| 10.2 | January 31, 2003 Employment Agreement between TVI Corporation and Richard V. Priddy (incorporated by reference to Exhibits from our Form 10-KSB for the fiscal year ended December 31, 2002) | |
| 10.3 | Rights Agreement, dated as of December 2, 2003, between TVI Corporation and Securities Transfer Corporation which includes the form of Articles of Supplementary of the Series A Preferred Stock of TVI Corporation as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibits from our Form 8-K dated December 2, 2003) | |
| 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Richard V. Priddy | |
| 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Jeffery C. Kordela | |
| 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Richard V. Priddy | |
| 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Jeffery C. Kordela | |
