Results of Operations for Three Months Ended March 31, 2009 Compared to March 31, 2008:
Gross Profit:
Gross profit for the first quarter of 2009 increased by $1,181, or 13.5%, to $9,905, which represented 20.6% of net sales, from $8,724, which represented 17.7% of net sales for the first quarter of 2008. The gross profit increased during the first quarter of 2009 due to the company’s reduction in facilities, labor efficiencies and improved procurement management.
Operating expenses:
Operating expenses for the first quarter of 2009 decreased by $1,741 or 18.8%, to $7,535, representing 15.7% of net sales, from $9,276, representing 18.9% of net sales, for the first quarter of 2008. The decrease in operating expenses is primarily due to the sale of certain direct sales offices, decreases in freight costs of $825, commissions of $305, advertising costs of $281 and a decrease in professional fees of $262.
Non-operating income:
Net non-operating income for the first quarter of 2009 decreased by $1,483, to $487 representing 1.0% of net sales, from $1,970 representing 4.0% of net sales, for the first quarter of 2008 due to the sale of certain sales divisions for a gain during the first quarter 2008 as well as the settling of trade accounts payable with Superior Diecutting, Inc. (previously a related party of the company) for less than what was owed.
Provision for income taxes:
The IRS is currently examining the company’s federal income tax returns of 2002, 2003, 2004, 2005, and 2006. To date the IRS has proposed certain changes for the 2002, 2003, 2004, 2005, and 2006 examinations, resulting in additional liabilities due. The company has submitted a petition to the IRS for a redetermination of the changes with the U.S. Tax Court. These liabilities have been included in the company’s FIN 48 liability which is included in other current liabilities. The company’s provision for the three months of 2009 and 2008 were a blended state and federal rate of about 37% and 40% of pretax earnings, respectively.
Extraordinary gain on Fire and Flood (net of taxes): The extraordinary gain of $1,533 was calculated as the gain on the costs that were attributable to these natural disasters ($975) that were less than the insurance proceeds ($3,529), net of taxes of $1,021.
Liquidity and Capital Resources:
The company’s working capital was about $46,553 at March 31, 2009, compared to about $45,164 at December 31, 2008. This includes cash and cash equivalents of $451, at March 31, 2009 and $404 at December 31, 2008.
The company’s trade receivables increased $2,272, or 6.0% to $39,954 at March 31, 2009, from $37,682 at December 31, 2008 due to the timing of sales during the first quarter of 2009. Trade receivables are typically higher during the second and third quarters due to higher sales volume due to increased demand during the warmer months of the year.
Inventories increased $1,711, or 5.4%, to $33,260 at March 31, 2009 from $31,549 at December 31, 2008. The increase in inventory was primarily due to the increase in demand for the company’s retail products as well as the seasonal increase in raw materials as the company prepares for the peak demand during the warmer months.
The company’s continuing operations generated $1,805 and $3,650 of cash during the first quarter of 2009 and 2008, respectively. The decrease in cash flows from operating activities was primarily due to an increase in accounts receivable and inventory partially offset by an increase in accrued expenses.
The company’s financing activities generated $1,874 of cash during the first quarter of 2009, primarily consisting of proceeds on the line of credit, net of payments on other long term borrowings. The company’s investing activities used $3,632 of cash during the first quarter of 2009, primarily due to purchase of property and equipment for the build out of its new Bartow facility, other investments made for facility consolidations and automation.
During March 2009, the company entered into an amendment to the credit facility with its bank. The new current revolving credit agreement with the bank provides a maximum line of credit of $36 million (subject to availability) and bears interest at (i) LIBOR plus 3.75%; or (ii) the bank’s base rate plus 2.75%. The revolving credit agreement is part of a combined facility with a bank that also includes a $12 million facility to guarantee letters of credit. The line of credit is due in 2011. The combined facility is collateralized by substantially all of the company’s assets and restricts capital expenditures, payment of dividends and share repurchases.
In connection with the working capital credit facility and notes payable to a regional development authority and bank, the company and its majority owned subsidiaries have agreed to certain restrictive covenants which include, among other things, not paying dividends or repurchasing its stock without prior written consent, and maintenance of certain financial ratios at all times including: a minimum current ratio; a minimum tangible net worth; a maximum ratio of total liabilities to tangible net worth; a minimum fixed charge coverage ratio; and a minimum earnings before interest, taxes, depreciation and amortization amount. As of March 31, 2009 the financial covenants of the company are in compliance with the credit facility.
The company believes that its cash on hand, cash generated by operations, and cash available from its existing credit facilities is sufficient to meet the capital demands of its current operations during the 2009 fiscal year. Any major increases in sales, particularly in new products, may require substantial capital investment for the manufacture of filtration products. Failure to obtain sufficient capital could materially adversely impact the company’s growth potential.
