UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2013
or
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| 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)
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| | |
| 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.
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Large accelerated filer o | | Accelerated filer o |
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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, 2013, there were 5,515,750 shares of Common Stock, $.01 par value, outstanding.
TOROTEL, INC AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEETS
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| | | | | | |
| (Unaudited) |
|
| January 31, 2013 | April 30, 2012 |
| ASSETS | | |
| Current assets: | | |
| Cash | $ | 1,518,000 |
| $ | 308,000 |
|
| Trade receivables, net | 1,228,000 |
| 1,408,000 |
|
| Inventories | 1,523,000 |
| 1,229,000 |
|
| Prepaid expenses and other current assets | 99,000 |
| 71,000 |
|
| Deferred income taxes | 60,000 |
| 116,000 |
|
| 4,428,000 |
| 3,132,000 |
|
|
|
|
| Property, plant and equipment, net | 1,501,000 |
| 1,586,000 |
|
|
|
|
|
|
| Deferred income taxes | 250,000 |
| 492,000 |
|
| Other assets | 78,000 |
| 56,000 |
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|
|
|
|
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| Total Assets | $ | 6,257,000 |
| $ | 5,266,000 |
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|
|
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| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| Current liabilities: | | |
| Current maturities of long-term debt | $ | 144,000 |
| $ | 150,000 |
|
| Trade accounts payable | 418,000 |
| 658,000 |
|
| Accrued liabilities | 533,000 |
| 281,000 |
|
| Customer deposits | 887,000 |
| 206,000 |
|
| 1,982,000 |
| 1,295,000 |
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|
|
|
|
| Long-term debt, less current maturities | 686,000 |
| 795,000 |
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|
| Stockholders' equity: |
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|
|
| Common stock; par value $0.01; 6,000,000 shares authorized; 5,515,750 shares issued and outstanding | 60,000 |
| 60,000 |
|
| Capital in excess of par value | 12,285,000 |
| 12,319,000 |
|
| Accumulated deficit | (8,737,000 | ) | (9,184,000 | ) |
| Treasury stock, at cost | (19,000 | ) | (19,000 | ) |
| 3,589,000 |
| 3,176,000 |
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|
|
|
|
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| Total Liabilities and Stockholders' Equity | $ | 6,257,000 |
| $ | 5,266,000 |
|
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| January 31, 2013 | January 31, 2012 | | January 31, 2013 | January 31, 2012 |
| Net sales | $ | 2,976,000 |
| $ | 2,826,000 |
| | $ | 8,876,000 |
| $ | 8,085,000 |
|
| Cost of goods sold | 2,035,000 |
| 2,024,000 |
| | 5,792,000 |
| 5,773,000 |
|
| Gross profit | 941,000 |
| 802,000 |
| | 3,084,000 |
| 2,312,000 |
|
| Operating expenses: | | | | | |
| Engineering | 129,000 |
| 165,000 |
| | 427,000 |
| 510,000 |
|
| Selling, general and administrative | 692,000 |
| 595,000 |
| | 1,880,000 |
| 1,867,000 |
|
| 821,000 |
| 760,000 |
| | 2,307,000 |
| 2,377,000 |
|
| Earnings (loss) from operations | 120,000 |
| 42,000 |
| | 777,000 |
| (65,000 | ) |
| Other expense: | | | | | |
| Interest expense, net | 10,000 |
| 12,000 |
| | 32,000 |
| 36,000 |
|
|
|
|
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| |
|
|
|
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| Earnings (loss) before provision for income taxes | 110,000 |
| 30,000 |
| | 745,000 |
| (101,000 | ) |
| Provision for income taxes | 44,000 |
| — |
| | 298,000 |
| — |
|
| Net earnings (loss) | $ | 66,000 |
| $ | 30,000 |
| | $ | 447,000 |
| $ | (101,000 | ) |
| Basic earnings (loss) per share | $ | 0.01 |
| $ | 0.01 |
| | $ | 0.08 |
| $ | (0.02 | ) |
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| | | | | | |
| | Nine Months Ended |
| | January 31, 2013 | January 31, 2012 |
| Cash flows from operating activities: | | |
| Net earnings (loss) | $ | 447,000 |
| $ | (101,000 | ) |
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | |
| Stock compensation cost amortized | (34,000 | ) | (109,000 | ) |
| Depreciation | 250,000 |
| 226,000 |
|
| Deferred income tax expense | 298,000 |
| — |
|
| Loss on impairment | 105,000 |
| — |
|
| Change in value of stock appreciation rights | 72,000 |
| (5,000 | ) |
| Increase (decrease) in cash flows from operations resulting from changes in: | | |
| Trade receivables | 180,000 |
| 1,251,000 |
|
| Inventories | (334,000 | ) | 139,000 |
|
| Prepaid expenses and other assets | (50,000 | ) | (41,000 | ) |
| Trade accounts payable | (240,000 | ) | (77,000 | ) |
| Accrued liabilities | 180,000 |
| (22,000 | ) |
| Customer deposits | 681,000 |
| (472,000 | ) |
| Income taxes payable | — |
| (8,000 | ) |
| Net cash provided by operating activities | 1,555,000 |
| 781,000 |
|
| | | |
| Cash flows from investing activities: | | |
| Capital expenditures | (230,000 | ) | (421,000 | ) |
| Net cash used in investing activities | (230,000 | ) | (421,000 | ) |
| | | |
| Cash flows from financing activities: | | |
| Principal payments on long-term debt | (81,000 | ) | (77,000 | ) |
| Payments on capital lease obligations | (34,000 | ) | (24,000 | ) |
| Net cash used in financing activities | (115,000 | ) | (101,000 | ) |
| | | |
| Net increase in cash | 1,210,000 |
| 259,000 |
|
| Cash, beginning of period | 308,000 |
| 490,000 |
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| Cash, end of period | $ | 1,518,000 |
| $ | 749,000 |
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| | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | |
| Cash paid during the year for: | | |
| Interest | $ | 32,000 |
| $ | 36,000 |
|
| Income taxes | $ | — |
| $ | 8,000 |
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| Non-cash investing and financing activities: | | |
| Capital expenditure | $ | — |
| $ | (41,000 | ) |
| Proceeds from capital lease | $ | — |
| $ | 41,000 |
|
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
The consolidated condensed balance sheet as of April 30, 2012, which has been derived from audited financial statements, 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, 2013, and the consolidated results of operations for the three and nine months ended January 31 2013, and 2012, respectively.
The unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 Form 10-K for the year ended April 30, 2012.
NOTE 2 — NATURE OF OPERATIONS
Torotel, Inc. (“Torotel”) conducts business primarily through three wholly owned subsidiaries, Torotel Products, Inc. (“Torotel Products”), Torotel Manufacturing Corp. (“TMC”), and Electronika, Inc. (“Electronika”). TMC provides manufacturing services to Torotel Products. 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:
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| | | | | | |
| | January 31, 2013 | April 30, 2012 |
| Raw materials | $ | 971,000 |
| $ | 848,000 |
|
| Work in process | 291,000 |
| 296,000 |
|
| Finished goods | 261,000 |
| 85,000 |
|
| | $ | 1,523,000 |
| $ | 1,229,000 |
|
NOTE 4—FINANCING AGREEMENTS
Torotel Products has a financing agreement (the “agreement”) with Commerce Bank, N.A (the “Bank”). The agreement provides for a revolving line of credit, a guidance line of credit, and a real estate term loan. Both Torotel, Inc. and Electronika, Inc. serve as additional guarantors to all notes described below. A summary of the notes within this agreement is provided below:
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| | | | | | | | | |
| | 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 | — |
| 74,000 |
| 166,000 |
|
| Total debt outstanding | $ | — |
| $ | 576,000 |
| $ | 214,000 |
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| | | | |
| Rate | 4.00 | % | 4.63 | % | 4.63 | % |
| Maturity date | September 27, 2013 |
| 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 and is secured by a first lien on all business assets of Torotel Products.
The mortgage note is a refinancing of our previous real estate loan and equipment loans with the Bank of Blue Valley. Monthly payments consisting of both interest and principal are required. This facility is cross collateralized and cross defaulted with all other facilities and is secured by a first real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas.
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 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 Products is also required to comply with specified financial covenants. As of January 31, 2013, Torotel was in compliance with these covenants.
Torotel Products also currently has capital lease agreements related to information technology equipment and other items for $40,000.
NOTE 5—INCOME TAXES
Our effective income tax rates were 39.9% for the nine months ended January 31, 2013 and 0% for the same period in the prior year. The effective tax rate for the nine months ended January 31, 2013 is higher than the comparable prior year period primarily due to operating earnings generated in the first nine months of fiscal year 2013 as opposed to the loss incurred in the first nine months of fiscal year 2012.
As of January 31, 2013, the federal tax returns for the fiscal years ended 2008 through 2012 are open to audit until the statute of limitations closes for the years in which the 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, 2013, 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.
NOTE 6—RESTRICTED STOCK AGREEMENTS
Restricted Stock Agreements are authorized by the Compensation and Nominating Committee ("Committee") and the Board of Directors of Torotel. 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 individual, 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 agreements further provide, subject to certain conditions, that if prior to all of the restricted shares having been released, we undergo a change in control, then all of the restricted shares shall be released and no longer subject to restrictions under the 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.
We executed Restricted Stock Agreements dated August 7, 2007, with eight key employees pursuant to the Stock Award Plan ("SAP"). The SAP provided 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 terms of the SAP, were filed as Exhibit 10.9 of Form 10-KSB for the fiscal year ended April 30, 2007. These were newly issued shares from the number of authorized shares remaining to be issued. Stock compensation cost for the existing restricted stock awards, net of an appropriate pre-vesting forfeiture rate, was recorded per quarter during the remaining vesting period during which the financial performance metrics as outlined in the Restricted Stock Agreement were anticipated as likely to be attained. However, due to the mid-year projections developed in the second quarter of fiscal year 2012, the likelihood of achieving the financial performance metrics as outlined in the Restricted Stock Agreement was classified as remote. As a result, we stopped amortizing the stock compensation cost associated with the restricted stock awarded on August 7, 2007 and recovered the previously amortized stock compensation cost of $117,000 in the second quarter ended October 31, 2011. The remaining outstanding shares associated with the restricted stock awards dated August 7, 2007, were forfeited by the employees in accordance with the SAP, and were converted to treasury shares on January 27, 2012.
On September 2, 2009, we entered into Restricted Stock Agreements with two key employees (Messrs. Sizemore and Serrone) pursuant to the SAP. 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 Restricted Stock Agreement 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, will be reverted to treasury shares during the fourth quarter of fiscal year 2013.
Total stock compensation cost for the three months ended January 31, 2013 and 2012 was a credit of $42,000 and an expense of $3,000, respectively. Total stock compensation cost for the nine months ended January 31, 2013 and 2012 was a credit of $34,000 and $109,000, respectively.
Restricted stock activity for each period through January 31 is summarized as follows:
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| | | | | | | | | | |
| | 2013 | 2012 |
| | Restricted
Shares
Under
Option | Weighted
Average
Grant
Price | Restricted
Shares
Under
Option | Weighted
Average
Grant
Price |
| Outstanding at May 1 | 250,000 |
| $ | 0.270 |
| 562,900 |
| $ | 0.398 |
|
| Granted | — |
| — |
| — |
| — |
|
| Vested | — |
| — |
| — |
| — |
|
| Forfeited | — |
| 0.270 |
| (312,900 | ) | 0.500 |
|
| Outstanding at January 31 | 250,000 |
| $ | 0.270 |
| 250,000 |
| $ | 0.270 |
|
NOTE 7—STOCKHOLDERS' EQUITY
The changes in shares of common stock outstanding as of January 31 of each year are summarized as follows:
|
| | | | |
| | 2013 | 2012 |
| Balance, May 1 | 5,515,750 |
| 5,828,650 |
|
| Restricted stock activity | — |
| (312,900 | ) |
| Treasury stock activity | — |
| — |
|
| Balance, January 31 | 5,515,750 |
| 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:
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| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | January 31,
2013 | January 31,
2012 | | January 31,
2013 | January 31,
2012 |
| Net earnings (loss) | $ | 66,000 |
| $ | 30,000 |
| | $ | 447,000 |
| $ | (101,000 | ) |
| Amounts allocated to participating securities (nonvested restricted shares) | (3,000 | ) | (1,000 | ) | | (20,000 | ) | — |
|
| Net income (loss) attributable to common shareholders | $ | 63,000 |
| $ | 29,000 |
| | $ | 427,000 |
| $ | (101,000 | ) |
| Basic weighted average common shares | 5,265,750 |
| 5,034,288 |
| | 5,265,750 |
| 5,189,158 |
|
| Earnings (loss) per share attributable to common shareholders: | |
| | | |
|
|
|
| Basic earnings (loss) per share | $ | 0.01 |
| $ | 0.01 |
| | $ | 0.08 |
| $ | (0.02 | ) |
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.
NOTE 9—STOCK APPRECIATION RIGHTS
The board of directors of Torotel approved the Directors Stock Appreciation Rights Plan (the "Plan") for non-employee directors in September 2004. This plan was filed as Exhibit 10.4 of the form 10-QSB for the quarter ended October 31, 2004.
Each SAR granted as a part of the plan may be exercised to the extent that the Grantee is vested in such SAR. 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 | % |
A Grantee shall become fully vested in each of his or her SARs under the following circumstances: (i) upon termination of the Grantee's service as a director of Torotel for reasons of death, disability or retirement; (ii) if the Compensation and Nominating Committee (the "Committee"), in its sole discretion, determines that acceleration of the SAR vesting schedule would be desirable for Torotel; or (iii) if Torotel shall, pursuant to action by its Board of Directors, at any time propose to merge into, consolidate with, or sell or otherwise transfer all or substantially all of its assets to another corporation, and provision is not made pursuant to the terms of such transaction for the assumption by the surviving, resulting or acquiring corporation of outstanding SARs or for substitution of new SARs therefore, the Committee shall cause written notice of the proposed transaction to be given to each Grantee not less than twenty days prior to the anticipated effective date of the proposed transaction, and his or her SARs shall become fully vested and, prior to a date specified in such notice, which shall be not more than ten days prior to the anticipated effective date of the proposed transaction, each Grantee shall have the right to exercise his or her SARs.
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 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 period though January 31 are summarized as follows:
|
| | | | | | | | | | |
| | 2013 | 2012 |
| | SARs
Under
Option | Weighted
Average
Grant
Price | SARs
Under
Option | Weighted
Average
Grant
Price |
| Outstanding at beginning of period | 280,000 |
| $ | 0.429 |
| 240,000 |
| $ | 0.407 |
|
| Granted | 40,000 |
| $ | 0.270 |
| 40,000 |
| $ | 0.558 |
|
| Exercised | — |
| $ | — |
| — |
| $ | — |
|
| Forfeited | — |
| $ | — |
| — |
| $ | — |
|
| Outstanding at end of period | 320,000 |
| $ | 0.409 |
| 280,000 |
| $ | 0.421 |
|
| SARs exercisable at end of period | 243,300 |
| $ | 0.419 |
| 210,000 |
| $ | 0.426 |
|
| Weighted average fair value of SARs granted during the period | |
| $ | 0.270 |
| |
| $ | 0.374 |
|
The following information applies to SARs outstanding for each period through January 31:
|
| | | | | | |
| | 2013 | 2012 |
| Number outstanding | 320,000 |
| 280,000 |
|
| Range of grant prices, upper limit | $ | 0.695 |
| $ | 0.695 |
|
| Range of grant prices, lower limit | $ | 0.208 |
| $ | 0.208 |
|
| Weighted average grant price | $ | 0.409 |
| $ | 0.421 |
|
| Weighted average contractual life remaining (in years) | 5.10 |
| 5.53 |
|
| 10-day average market price | $ | 0.530 |
| $ | 0.400 |
|
| Weighted average stock volatility | 148.76 | % | 132.96 | % |
| Weighted average expected life | 4.60 |
| 5.11 |
|
| Weighted average risk free rate | 0.80 | % | 0.89 | % |
| Weighted average dividend yield | — | % | — | % |
| Weighted average fair value price | $ | 0.498 |
| $ | 0.374 |
|
| Aggregate fair value | $ | 110,000 |
| $ | 75,000 |
|
| Aggregate intrinsic value | $ | 33,000 |
| $ | 19,000 |
|
| Total compensation expense (credit) for three months ended January 31 | $ | 63,000 |
| $ | (6,000 | ) |
| Total compensation expense (credit) for nine months ended January 31 | $ | 72,000 |
| $ | (5,000 | ) |
| Unrecognized compensation expense related to non-vested SARs granted | $ | 24,000 |
| $ | 17,000 |
|
| Expected period to recognize compensation expense related to non-vested SARs granted (in years) | 1.87 |
| 2.00 |
|
| Total liability for SARs on consolidated balance sheets | $ | 124,000 |
| $ | 75,000 |
|
NOTE 10—CUSTOMER DEPOSITS
The contract for the potted coil assembly, dated March 7, 2012, provides for milestone payments in the aggregate amount of $1,400,000 to be paid by the customer. This aggregate amount will be used to procure raw materials and to establish a 500-piece finished goods buffer. These milestone payments will be recovered by the customer ratably over the course of the contract as invoices are paid. As of January 31, 2013, we have received milestone payments associated with this new contract in the amount of $1,086,000. In addition, we have $22,000 in unrecovered milestone payments associated with a previous contract. The net amounts are reflected as a customer deposit under current liabilities in the accompanying consolidated balance sheet as of January 31, 2013. In accordance with our revenue recognition policy, we recognize revenue on this contract upon monthly shipment of the product.
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, 2013 we had approximately $19,000 in customer deposits related to this arrangement.
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, 2013, cash balances exceeded federally insured limits. As a result of this, 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—ENTERPRISE RESOURCE MANAGEMENT SYSTEM RECOVERABILITY
During the fourth quarter of fiscal year 2011, we determined that the enterprise resource management system (the “ERP system”) implemented in November 2010 was not appropriate for long-term use based on certain functionalities not performing as represented. After discussions with the ERP system provider, we received a partial refund of $40,000 subsequent to April 30, 2011, which was applied to the carrying amount of the software. Subsequent to the change in carrying amount, we evaluated the asset for existence of impairment. After determining that impairment existed, we evaluated recoverability by comparing undiscounted cash flows provided by the ERP system to the carrying value of the asset. Since an ERP system is integral to the operations of our business, entity level cash flows were used in this test. Since we expected to generate undiscounted cash flows in excess of the carrying amount of the software, no impairment loss adjustment was necessary. A new ERP system was implemented on November 1, 2012.
NOTE 13 - ASSET IMPAIRMENT
During the first quarter ended July 31, 2012, we discontinued production of the injection molded products effective with the conclusion of the existing orders in July 2012. In conjunction with this decision and subsequent to July 31, 2012, we finalized our review of both current and long-term assets associated with the injection molded products. After reviewing our inventory and property, plant, and equipment related to the injection molded products, we concluded that impairments were necessary as of July 31, 2012. On January 23, 2013 we accepted an offer for the sale of the equipment that is lower than the estimated value used at July 31, 2012. To reflect the agreed upon sale price, an additional impairment charge was recorded in the third quarter ended January 31, 2013. The total charges associated with this asset impairment are outlined in the following table:
|
| | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| January 31, 2013 | | January 31, 2013 |
| Equipment | $ | 46,000 |
| | $ | 65,000 |
|
| Inventory | — |
| | 40,000 |
|
| Total | $ | 46,000 |
| | $ | 105,000 |
|
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; |
| |
| • | 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"), provides manufacturing services to Torotel Products.
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; |
| |
| • | conventional missile guidance systems. |
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 2013 was 66% defense, 10% industrial, and 24% aerospace compared to 61% defense, 20% industrial and 19% aerospace for the same period in fiscal year 2012. Also, approximately 98% of Torotel’s sales during the first nine months of fiscal year 2013 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 2013 and 2012, the amount of consolidated revenues derived from contracts with prime contractors of the U.S. Department of Defense (“DoD”) was approximately 66% and 61%, 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, 2013, our consolidated order backlog for the defense market was nearly $3.5 million, which included $2.6 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, increases in airport modernization projects (for our runway lighting assemblies), 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; however, the fragile global economic recovery, the current inventory of Boeing 787's, and the recent grounding of all 787 aircraft by the Federal Aviation Administration may hinder any near-term increase in demand. As of January 31, 2013, our consolidated order backlog for the aerospace and industrial markets was $1.8 million.
New Opportunities and Earnings Outlook
The consolidated order backlog was $9.8 million at the beginning of fiscal year 2013, a 34% increase compared to the beginning of the prior year. In addition, our order activity has increased 18% during the first nine months of fiscal year 2013. These factors, combined with cost saving initiatives taken throughout fiscal year 2012, have contributed to our improved sales and earnings performance in fiscal year 2013. We are anticipating another contract award for the potted coil assembly in the next few weeks which should put us in a strong backlog position for the beginning of fiscal year 2014.
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, Inc. and its subsidiaries, Torotel Products, Inc., Torotel Manufacturing Corp., and Electronika, Inc. 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,
2013 | January 31,
2012 | | January 31,
2013 | January 31,
2012 |
| Torotel Products: | | | |
|
|
| Magnetic components | $ | 1,254,000 |
| $ | 1,061,000 |
| | $ | 4,301,000 |
| $ | 3,360,000 |
|
| Potted coil assembly | 1,315,000 |
| 1,551,000 |
| | 3,402,000 |
| 4,147,000 |
|
| Electro-mechanical assemblies | 325,000 |
| 83,000 |
| | 1,021,000 |
| 258,000 |
|
| Injection molded products | — |
| 114,000 |
| | 70,000 |
| 300,000 |
|
| Large transformers | 82,000 |
| — |
| | 82,000 |
| — |
|
| Total Torotel Products | $ | 2,976,000 |
| $ | 2,809,000 |
| | $ | 8,876,000 |
| $ | 8,065,000 |
|
| Electronika | $ | — |
| $ | 17,000 |
| | $ | — |
| $ | 20,000 |
|
| Total consolidated net sales | $ | 2,976,000 |
| $ | 2,826,000 |
| | $ | 8,876,000 |
| $ | 8,085,000 |
|
Consolidated net sales in the three and nine months ended January 31, 2013 increased 5% and 10%, respectively. Net sales in both periods increased due to higher unit volume for magnetic components combined with a higher average unit selling price, and higher shipments of electro-mechanical assemblies. These sales increases were offset partially by lower shipments of the potted coil assembly due to production delays resulting from a customer requested change in the painting process. Electronika's net sales represented a small portion of consolidated net sales and decreased $20,000 in the nine month period. Electronika's sales continue to fluctuate within a small range as overall demand for the ballast transformers is very limited.
Gross Profit
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| January 31,
2013 | January 31,
2012 | | January 31,
2013 | January 31,
2012 |
| Torotel Products: | | | | | |
| Gross profit | $ | 941,000 |
| $ | 792,000 |
| | $ | 3,084,000 |
| $ | 2,300,000 |
|
| Gross profit % of net sales | 32 | % | 28 | % | | 35 | % | 29 | % |
| Electronika: | | | | | |
| Gross profit | $ | — |
| $ | 10,000 |
| | $ | — |
| $ | 12,000 |
|
| Gross profit % of net sales | — |
| 60 | % | | — | % | 60 | % |
| Combined: | | | | | |
| Gross profit | $ | 941,000 |
| $ | 802,000 |
| | $ | 3,084,000 |
| $ | 2,312,000 |
|
| Gross profit % of net sales | 32 | % | 28 | % | | 35 | % | 29 | % |
Consolidated gross profit as a percentage of net sales in the three and nine months ended January 31, 2013 increased 4% and 6%, respectively. The gross profit percentage in both periods increased because of lower direct labor costs associated with
the personnel reductions implemented in the prior year, higher sales without a corresponding increase in fixed production costs, and higher margins associated with the product mix. The gross profit percentage of Electronika declined as there were no sales in the nine months ended January 31, 2013.
Operating Expenses
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| January 31,
2013 | January 31,
2012 | | January 31,
2013 | January 31,
2012 |
| Engineering | $ | 129,000 |
| $ | 165,000 |
| | $ | 427,000 |
| $ | 510,000 |
|
| Selling, general and administrative | 692,000 |
| 595,000 |
| | 1,880,000 |
| 1,867,000 |
|
| Total | $ | 821,000 |
| $ | 760,000 |
| | $ | 2,307,000 |
| $ | 2,377,000 |
|
Engineering expenses in the three and nine months ended January 31, 2013 decreased nearly 22% and 16% respectively. This decrease was primarily due to lower payroll costs associated with a reduction in personnel.
Selling, general and administrative expenses increased 16% in the three months ended January 31, 2013 and increased 1% in the nine months ended January 31, 2013. The increase in the three month period primarily resulted from the reversal in the prior year period of $117,000 in stock compensation amortization expense resulting from the cancellation of restricted stock. This increase was offset partially by a decrease in travel costs and professional fees expense. The increase in the nine month period primarily resulted from a reversal in the prior year period of the stock compensation amortization expense.
Earnings (Loss) from Operations
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| January 31,
2013 | January 31,
2012 | | January 31,
2013 | January 31,
2012 |
| Torotel Products | $ | 231,000 |
| $ | 76,000 |
| | $ | 1,053,000 |
| $ | 171,000 |
|
| Electronika | — |
| 10,000 |
| | — |
| 11,000 |
|
| Torotel | (111,000 | ) | (44,000 | ) | | (276,000 | ) | (247,000 | ) |
| Total | $ | 120,000 |
| $ | 42,000 |
| | $ | 777,000 |
| $ | (65,000 | ) |
For the reasons discussed above, consolidated earnings from operations increased by $78,000 and $842,000 for the three and nine months ended January 31, 2013, respectively.
Other Earnings Items
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| January 31,
2013 | January 31,
2012 | | January 31,
2013 | January 31,
2012 |
| Earnings (loss) from operations | $ | 120,000 |
| $ | 42,000 |
| | $ | 777,000 |
| $ | (65,000 | ) |
| Interest expense | 10,000 |
| 12,000 |
| | 32,000 |
| 36,000 |
|
| Earnings (loss) before income taxes | 110,000 |
| 30,000 |
| | 745,000 |
| (101,000 | ) |
| Provision for income taxes | 44,000 |
| — |
| | 298,000 |
| — |
|
| Net earnings (loss) | $ | 66,000 |
| $ | 30,000 |
| | $ | 447,000 |
| $ | (101,000 | ) |
Our effective income tax rates were 39.9% for the three and nine months ended January 31, 2013 and 0% for the same periods in the prior year. The effective tax rate for the three and nine months ended January 31, 2013 is higher than the comparable prior year period due to operating earnings generated in the first nine months of fiscal year 2013 as opposed to the loss incurred
in the first nine months of fiscal year 2012. For additional discussion related to Income Taxes, see Note 5 of Notes to Consolidated Financial Statements.
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 income before interest and taxes (EBIT). 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, 2012 and 2011, Torotel's ROCE was 1.23% and 17.59%, respectively. The ROCE for the 12-month trailing period ended January 31, 2013 was 32.59%. This change in ROCE is attributable to higher operating earnings generated in the last nine months as result of higher sales and lower fixed costs.
Liquidity and Capital Resources
As of January 31, 2013, Torotel had $1,518,000 in cash compared to $308,000 as of April 30, 2012 and $749,000 as of January 31, 2012. 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.
|
| | | | | | |
| | 2013 | 2012 |
Net cash provided by operating activities
| $ | 1,555,000 |
| $ | 781,000 |
|
Net cash used in investing activities
| $ | (230,000 | ) | $ | (421,000 | ) |
Net cash used in financing activities
| $ | (115,000 | ) | $ | (101,000 | ) |
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 $1,555,000 of cash provided by operating activities was largely due to higher earnings before interest, taxes, and depreciation combined with the net change in customer deposits. We do not anticipate any significant changes in the amount of cash flow from operations in the near-term.
The $781,000 of cash provided by operating activities for the same period in fiscal year 2012 is primarily attributable to the decrease in accounts receivable of $1,251,000.
Investing Activities
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. We do not anticipate a significant amount of additional capital expenditures during the remainder of fiscal year 2013.
The $421,000 of cash used in investing activities in the first nine months of fiscal year 2012 was the result of capital expenditures. This amount included approximately $30,000 related to building improvements for the parking lot at Torotel's principal office as well as $370,000 in additional capital expenditures primarily related to our investment in large transformer production equipment and a new enterprise resource planning system.
Financing Activities
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.
The $101,000 of cash used in financing activities in the first nine months of fiscal year 2012 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, 2013, the entire credit line was available.
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, 2012. We have made no significant change in our critical accounting policies since April 30, 2012.
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 is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission's rules and regulations. Torotel’s management, with the participation of the 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 Exchange Act, 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 ineffective.
Changes in Internal Control
Our previous enterprise resource planning system, which was implemented on November 1, 2010, processed all financial information for our business. Late in the fourth quarter of fiscal year 2011, we encountered irregularities related to the calculation of inventory costs. In an effort to identify the magnitude and scope of these irregularities, we undertook an extensive review of our inventory transactions as well as other transactional areas, including revenue and accounts payable. Based on our review, we believe that these errors were systematic in nature and not caused by our implementation or usage of the system. As a result of these errors, we filed an amended quarterly report on Form 10-Q/A for the period ended January 31, 2011 with the restated financial statements on August 15, 2011.
Since identifying the material weakness as described above, we implemented measures to remediate the material weakness, including:
| |
| • | Performing extensive detailed price testing on our raw material inventory balance; and |
| |
| • | Expanding reviews of certain functional areas including revenue and accounts payable transactions. |
We believe the remediation measures described above strengthened our internal control over financial reporting and helped remediate the identified material weakness. As we continued to evaluate and enhance internal control over financial reporting, we determined that additional measures were not required.
Because the reliability of the internal control process requires repeatable execution, the successful remediation of this material weakness will require review and evidence of effectiveness prior to us concluding that the controls are effective. While the mitigating controls that have been implemented have been in place for a sufficient period of time to demonstrate their effectiveness, we ultimately believe that this material weakness will be fully remediated as a result of the implementation of the new ERP system on November 1, 2012. However, the review of additional period close cycles are required to validate that the material weakness is fully remediated.
Other than measures implemented to remediate the material weakness, as described above, there have been no changes in our internal control over financial reporting or in other factors that have materially affected, or in our estimates are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.
PART II. OTHER INFORMATION
Item 6. Exhibits
a) Exhibits
|
| | |
| 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 |
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. |
| | | | | | (Registrant) |
|
| | |
| March 13, 2013 | | /s/ Dale H. Sizemore, Jr. |
| Date | | Dale H. Sizemore, Jr. |
| | | Chief Executive Officer |
| | | |
| March 13, 2013 | | /s/ H. James Serrone |
| Date | | H. James Serrone. |
| | | Chief Financial Officer |
