UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2003
OR
o Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-21872
ALDILA, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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13-3645590 |
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(State or other
jurisdiction of |
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(I.R.S. Employer Identification Number) |
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13450 Stowe Drive, Poway, California 92064 |
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(Address of principal executive offices) |
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(858) 513-1801 |
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(Registrant’s telephone no., including area code) |
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www.aldila.com |
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Not applicable |
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(Former name, former address and former fiscal year, if changed from last report) |
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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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes o No ý
As of November 13, 2003 there were 4,897,449 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.
ALDILA, INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 2003
2
PART I - FINANCIAL INFORMATION
ALDILA, INC. AND SUBSIDIARIES
(In thousands, except share data)
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September 30, |
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December 31, |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
6,044 |
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$ |
3,286 |
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Accounts receivable |
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3,311 |
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4,393 |
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Income taxes receivable |
|
1,183 |
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1,185 |
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Inventories |
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7,193 |
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8,538 |
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Prepaid expenses and other current assets |
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411 |
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497 |
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Total current assets |
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18,142 |
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17,899 |
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PROPERTY, PLANT AND EQUIPMENT |
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5,126 |
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6,167 |
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INVESTMENT IN JOINT VENTURE |
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6,978 |
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6,825 |
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OTHER ASSETS |
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259 |
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268 |
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TOTAL ASSETS |
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$ |
30,505 |
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$ |
31,159 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
2,941 |
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$ |
2,912 |
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Accrued expenses |
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1,658 |
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1,825 |
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Total current liabilities |
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4,599 |
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4,737 |
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LONG-TERM LIABILITIES: |
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Deferred rent and other long-term liabilities |
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41 |
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69 |
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Total liabilities |
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4,640 |
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4,806 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY: |
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Preferred stock, $.01 par value; authorized 5,000,000 shares; no shares issued |
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Common stock, $.01 par value; authorized 30,000,000 shares; issued and outstanding 4,927,449 shares in 2003 and 4,947,648 shares in 2002, respectively |
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49 |
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49 |
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Additional paid-in capital |
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41,946 |
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41,983 |
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Accumulated deficit |
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(16,130 |
) |
(15,679 |
) |
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Total stockholders’ equity |
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25,865 |
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26,353 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
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$ |
30,505 |
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$ |
31,159 |
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See notes to consolidated financial statements.
3
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - - UNAUDITED
(In thousands, except per share data)
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Three months ended |
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Nine months ended |
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2003 |
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2002 |
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2003 |
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2002 |
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NET SALES |
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$ |
7,995 |
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$ |
6,450 |
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$ |
28,022 |
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$ |
28,375 |
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COST OF SALES |
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6,102 |
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5,968 |
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22,877 |
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24,594 |
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Gross profit |
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1,893 |
|
482 |
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5,145 |
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3,781 |
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SELLING, GENERAL AND ADMINISTRATIVE |
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1,741 |
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1,897 |
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5,643 |
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5,650 |
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Operating income (loss) |
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152 |
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(1,415 |
) |
(498 |
) |
(1,869 |
) |
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OTHER EXPENSE (INCOME): |
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Interest expense |
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2 |
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17 |
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19 |
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85 |
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Other, net |
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(2 |
) |
9 |
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43 |
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45 |
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Equity in earnings of joint venture |
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(37 |
) |
(52 |
) |
(109 |
) |
(192 |
) |
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INCOME (LOSS) BEFORE INCOME TAXES |
|
189 |
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(1,389 |
) |
(451 |
) |
(1,807 |
) |
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BENEFIT FOR INCOME TAXES |
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— |
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(690 |
) |
— |
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(740 |
) |
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NET INCOME (LOSS) |
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$ |
189 |
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$ |
(699 |
) |
$ |
(451 |
) |
$ |
(1,067 |
) |
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NET INCOME (LOSS) PER COMMON SHARE |
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$ |
0.04 |
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$ |
(0.14 |
) |
$ |
(0.09 |
) |
$ |
(0.22 |
) |
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NET INCOME (LOSS) PER COMMON SHARE, ASSUMING DILUTION |
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$ |
0.04 |
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$ |
(0.14 |
) |
$ |
(0.09 |
) |
$ |
(0.22 |
) |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |
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4,932 |
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4,948 |
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4,942 |
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4,948 |
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WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES |
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4,952 |
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4,948 |
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4,942 |
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4,948 |
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See notes to consolidated financial statements.
4
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - - UNAUDITED
(In thousands)
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Nine months ended |
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2003 |
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2002 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(451 |
) |
$ |
(1,067 |
) |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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1,351 |
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1,451 |
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Loss (gain) on disposal of fixed assets |
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17 |
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(13 |
) |
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Undistributed income of joint venture, net |
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(153 |
) |
(198 |
) |
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Changes in assets and liabilities: |
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Accounts receivable |
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1,082 |
|
1,099 |
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Income taxes receivable |
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2 |
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(802 |
) |
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Inventories |
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1,345 |
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1,679 |
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Prepaid expenses and other assets |
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54 |
|
706 |
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Accounts payable |
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29 |
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(762 |
) |
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Accrued expenses |
|
95 |
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(170 |
) |
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Deferred tax liabilities |
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— |
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(57 |
) |
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Deferred rent and other long-term liabilities |
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15 |
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(3 |
) |
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Net cash provided by operating activities |
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3,386 |
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1,863 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property, plant and equipment |
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(607 |
) |
(300 |
) |
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Proceeds from sales of property, plant and equipment |
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16 |
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16 |
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Distribution from joint venture |
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— |
|
515 |
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Net cash (used for) provided by investing activities |
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(591 |
) |
231 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Borrowings under line of credit |
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— |
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887 |
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Repayments on line of credit |
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— |
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(887 |
) |
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Repurchases of common stock |
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(37 |
) |
— |
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Net cash used for financing activities |
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(37 |
) |
— |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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2,758 |
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2,094 |
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
3,286 |
|
266 |
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CASH AND CASH EQUIVALENTS, END OF PERIOD |
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$ |
6,044 |
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$ |
2,360 |
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
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$ |
22 |
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$ |
34 |
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Income taxes |
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$ |
148 |
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$ |
215 |
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See notes to consolidated financial statements.
5
ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. Basis of Presentation
The consolidated balance sheet as of September 30, 2003, the consolidated statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and consolidated statements of cash flows for the nine-month periods of September 30, 2003 and September 30, 2002 are unaudited and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented. The consolidated balance sheet as of December 31, 2002 was derived from the Aldila, Inc. and subsidiaries’ (the “Company’s”) audited financial statements. Operating results for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year ending December 31, 2003. These consolidated financial statements should be read in conjunction with the Company’s December 31, 2002 consolidated financial statements and notes thereto.
Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value (See SFAS 148 below under Recently Issued Accounting Pronouncements). The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) 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 quoted market price of the Company’s stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation cost for the Company’s stock option awards been determined based upon the fair value at the grant date and recognized on a straight-line basis over the related vesting period, in accordance with the provisions of SFAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except for per share data):
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For the
three months |
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For the
nine months |
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||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
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Net income(loss) as reported |
|
$ |
189 |
|
$ |
(699 |
) |
$ |
(451 |
) |
$ |
(1,067 |
) |
|
|
|
|
|
|
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Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(46 |
) |
(87 |
) |
(163 |
) |
(299 |
) |
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Pro forma net income(loss) |
|
$ |
143 |
|
$ |
(786 |
) |
$ |
(614 |
) |
$ |
(1,366 |
) |
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Income(loss) per share: |
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Basic – as reported |
|
$ |
0.04 |
|
$ |
(0.14 |
) |
$ |
(0.09 |
) |
$ |
(0.22 |
) |
|
Basic – pro forma |
|
$ |
0.03 |
|
$ |
(0.16 |
) |
$ |
(0.12 |
) |
$ |
(0.28 |
) |
|
|
|
|
|
|
|
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|
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Diluted – as reported |
|
$ |
0.04 |
|
$ |
(0.14 |
) |
$ |
(0.09 |
) |
$ |
(0.22 |
) |
|
Diluted – pro forma |
|
$ |
0.03 |
|
$ |
(0.16 |
) |
$ |
(0.12 |
) |
$ |
(0.28 |
) |
6
The pro forma compensation costs presented above were determined using the weighted average fair values of options granted under the Company’s stock option plans. The fair value of the grants was estimated at $0.81 and $0.90, for 2003 and 2002, respectively, on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 0% dividend yield, volatility of 49% and 50%, for 2003 and 2002, respectively, risk free rate of return of 2.4% and 3.3%, for 2003 and 2002, respectively and expected lives of five years. The estimated fair value of options granted is subject to the assumptions made and if the assumptions changed, the estimated fair value amounts could be significantly different.
2. Inventories
Inventories consist of the following (in thousands):
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|
September
30, |
|
December
31, |
|
||
|
|
|
|
|
|
|
||
|
Raw materials |
|
$ |
3,912 |
|
$ |
3,226 |
|
|
Work in process |
|
1,408 |
|
1,703 |
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||
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Finished goods |
|
1,873 |
|
3,609 |
|
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|
Inventories |
|
$ |
7,193 |
|
$ |
8,538 |
|
3. Accrued Expenses
|
|
|
September
30, |
|
December
31, |
|
||
|
Warranty Reserve [1] |
|
$ |
190 |
|
$ |
345 |
|
|
Plant Consolidation [2] |
|
— |
|
$ |
289 |
|
|
|
[1] Warranty Reserve |
|
|
|
|
|
||
|
Beginning Balance |
|
$ |
345 |
|
$ |
485 |
|
|
Settlement of Warranty |
|
(83 |
) |
(137 |
) |
||
|
Adjustments to Warranty |
|
(72 |
) |
(3 |
) |
||
|
Ending Balance |
|
$ |
190 |
|
$ |
345 |
|
[2] Plant Consolidation
|
Description |
|
Reserve
Balance as of |
|
Usage |
|
Reserve
Balance as of |
|
|||
|
Leasehold Improvements |
|
$ |
305 |
|
$ |
(305 |
) |
$ |
— |
|
|
Other (including credit for deferred rent) |
|
37 |
|
(37 |
) |
— |
|
|||
|
Lease payments (net of sublease income) |
|
(53 |
) |
53 |
|
— |
|
|||
|
Total |
|
$ |
289 |
|
$ |
(289 |
) |
$ |
— |
|
7
4. Revolving Credit Agreement
On July 9, 1999, Aldila Golf Corp. (“Aldila Golf”), a wholly owned subsidiary of the Company, entered into a Loan and Security Agreement (the “Agreement”) with a financial institution which provided Aldila Golf with up to $12.0 million in secured financing. The Agreement initially had a three-year term and was secured by substantially all of the assets of Aldila Golf and guaranteed by the Company. The Company terminated the Agreement effective July 9, 2003. Management does not currently intend to replace the Agreement with another credit Agreement.
5. Summarized Financial Information
Summarized financial information for Carbon Fiber Technology LLC (“CFT”), the Company’s 50% owned joint venture, for the periods ended September 30, 2003 and 2002 is as follows (in thousands):
|
|
|
Three
months ended |
|
Nine
months ended |
|
||||||||
|
|
|
2003 |
|
2002 |
|
2003 |
|
2002 |
|
||||
|
Sales |
|
$ |
1,599 |
|
$ |
2,083 |
|
$ |
5,316 |
|
$ |
7,493 |
|
|
Cost of sales |
|
1,511 |
|
1,984 |
|
5,065 |
|
7,139 |
|
||||
|
Gross profit |
|
88 |
|
99 |
|
251 |
|
354 |
|
||||
|
Net income |
|
$ |
97 |
|
$ |
104 |
|
$ |
278 |
|
$ |
375 |
|
6. Recently Issued Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” the provisions of which are effective for any exit or disposal activities initiated by the Company after December 31, 2002. SFAS No. 146 provides guidance on the recognition and measurement of liabilities associated with exit or disposal activities and requires that such liabilities be recognized when incurred. The adoption of the provisions of SFAS No. 146 will impact the measurement and timing of costs associated with any exit and disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
8
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As the Company still uses the guidance under APB Opinion 25 to account for stock based compensation, the adoption of SFAS 148 did not have a material effect on the Company’s financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company is principally engaged in the business of designing, manufacturing and marketing graphite (carbon fiber based composite) golf club shafts. In reporting the Company’s results from its operations, the Company relies on several critical accounting policies.
Critical Accounting Policies
We prepare the consolidated financial statements of the Company in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.
We have several critical accounting policies, which were discussed in the 2002 Annual Report filed on Form 10-K, that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments. Typically, the circumstances that make these judgments complex and difficult have to do with making estimates about the effect of matters that are inherently uncertain. During the nine months ended September 30, 2003, we did not adopt any new accounting policies that are considered critical accounting policies nor were there any significant changes related to our critical accounting policies that would have a material impact on our consolidated financial position, results of operations, cash flows or our ability to conduct business.
The Company is principally engaged in the business of designing, manufacturing and marketing graphite (carbon fiber based composite) golf club shafts, with approximately 80% of its net sales resulting from sales to golf club manufacturers for inclusion in their clubs. As a result, the Company’s operating results are substantially dependent not only on demand by its customers for the Company’s shafts, but also on demand by consumers for clubs including graphite shafts such as the Company’s.
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Initially, graphite shafts were principally offered by manufacturers of higher priced, premium golf clubs, and the Company’s sales had been predominantly of premium graphite shafts. However, over the years the Company has realized substantial sales growth in the value priced segment of the graphite shaft market, although this growth has slowed in the last couple of years. The Company now competes aggressively with both United States and foreign-based shaft manufacturers for premium graphite shafts and also against primarily foreign-based shaft manufacturers for lower priced value shaft sales. The Company continues to maintain a broad customer base in the premium shaft market segment. While the Company’s market share in the value segment is not as great as the premium segment, in the past the Company has advanced rapidly in securing new customers in this segment. Generally, value shafts have significantly lower selling prices than premium shafts and, as a result, contribute less to gross profit.
The Company’s sales have tended to be concentrated among a limited number of major club companies, thus making the Company’s results of operations dependent on those customers, their continued willingness to purchase a significant portion of their shafts from the Company, and their success in selling clubs containing the Company’s shafts to their customers. In 2002, net sales to Callaway Golf, Acushnet Company and TaylorMade-adidas Golf represented 22%, 21% and 13% of the Company’s net sales, respectively, and the Company anticipates that these companies will continue, collectively, to represent the largest portion of its sales in 2003. Although it is generally difficult to predict in advance the success of any particular club or of any particular manufacturer, the Company believes that it is protected to some extent from normal periodic fluctuations in sales among the various golf club companies by virtue of the broad range of its club manufacturer customers.
Golf club companies regularly introduce new clubs, frequently containing innovations in design. Sometimes these new clubs achieve dramatic success in the marketplace, thus increasing the overall volatility of club sales among the major companies. While the Company seeks to have its shafts represented on as many major product introductions as possible, it can provide no assurance that its shafts will be included in any particular “hot” club or that sales of a “hot” club that do not include the Company’s shafts will not have a negative impact on the sales of those clubs that do. The Company’s sales could also suffer a significant drop-off from period to period to the extent that they may be dependent in any period on sales of one or more “hot” clubs, which then tail off in subsequent periods when no other club offers a high level of new sales to replace the lost sales.
In 1994, the Company started manufacturing prepreg, the principal raw material in the manufacture of graphite golf shafts, at its facility in Poway, California. Most of its production of prepreg is used internally by the Company, with the remainder sold to other composite materials manufacturers. The Company does not expect third party sales of prepreg to have a significant financial impact on the Company for at least the next several years. In 1998, the Company established a manufacturing facility in Evanston, Wyoming for the production of carbon fiber. During 1998 and through the first ten months of 1999, the Company used the material from this facility to satisfy a significant portion of its internal demand for carbon fiber in the manufacturing of golf club shafts. During 1999, the Company also produced and sold carbon fiber from this facility to other unrelated entities for the manufacture of other carbon-based products. On
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October 29, 1999, SGL Carbon Fibers and Composite, Inc. (“SGL”) purchased a 50% interest in the Company’s carbon fiber manufacturing operation. The Company and SGL entered into an agreement to operate the facility as a limited liability company with equal ownership interests between the venture partners. The Company and SGL also entered into supply agreements with the new entity, CFT, for the purchase of carbon fiber at cost plus an agreed-upon mark-up. The Company and SGL are each responsible to bear 50% of the fixed costs to operate the facility as a term of this supply agreement. Profits and losses of CFT are shared equally by the partners. The carbon fiber from this facility is primarily consumed by the joint venture partners: however, if any excess carbon fiber is produced at this facility, it could be marketed for sale to unrelated third parties. The Company continues to use its share of the output of this facility to satisfy a significant portion of its internal demand for carbon fiber.
If the carbon fiber facility is not operated at high production levels, either because of production difficulties or because there is not enough demand by the joint venture partners to justify that level of production, the cost per unit of carbon fiber consumed by the Company (and thus the cost of producing the Company’s golf shafts and other products) is increased due to spreading the fixed costs of production over smaller volumes. If demand is lower than production capacity, CFT also runs the risk of building up excess inventory. Given the relatively low costs at the present time in the market for carbon fiber and the highly competitive market for graphite golf shafts, the failure to operate at high levels could adversely affect the Company’s gross margins or its ability to maintain competitive prices for its products. Although third party sales of carbon fiber could help justify high production levels and thus help control unit production costs, the weakness of the carbon fiber market and the overall excess capacity in the industry means that third party sales at CFT are not likely to be significant at least until the overall market improves significantly. Third party sales at CFT have not had a significant effect on either its sales or profitability.
During the 1990’s, the graphite golf shaft industry became increasingly competitive, placing extraordinary pressure on the selling prices of the Company’s golf shafts and adversely affecting its gross profit margins and level of profitability. The Company’s response has been to reduce its cost structure, principally by producing its own prepreg and by shifting the largest portion of its shaft production to its offshore facilities, while maintaining high quality and superior customer service. The cost saving benefits of its efforts to vertically integrate its operations, particularly through carbon fiber manufacturing, have been limited somewhat due to historically low market prices for golf shaft raw materials in recent years, which, in some cases, have made carbon fiber available in the market at attractive prices when compared to the Company’s cost to purchase it from CFT. Although the Company’s gross margins and profitability have continued to be adversely affected through this period despite its efforts, management believes that these efforts have been successful to date and are allowing the Company to maintain, or in some cases enhance, its competitive position with respect to the major United States golf club companies that are its principal customers. The Company continues to look for opportunities to cut costs and to increase its market share. In an effort to reduce costs, in 2002 the Company decided to consolidate its executive offices with its manufacturing facilities in Poway, California. The consolidation was completed during the first quarter ended March 31, 2003. Based upon a Board of Directors led initiative, in an effort to further reduce costs, the Company has reviewed and,
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where appropriate, adjusted its contractual arrangements with providers of legal, accounting, insurance, banking and other administrative support services.
The pressure on selling prices of both premium and value shafts under current market conditions, and the increased percentage of overall sales represented by value shafts has resulted in a reduction of approximately 58% in the average selling price of the Company’s shafts over the last seven years, although in some cases average selling prices may increase slightly from period to period depending on the mix of products sold. In addition, the percentage of overall golf clubs sold with graphite shafts appears to have leveled off after several decades of significant growth and most major club companies continue to seek multiple sources of supply for their shafts and, thus, are unwilling to commit to one principal graphite shaft supplier. These trends are not likely to reverse themselves under current market conditions.
The Company is responding to the current prospects in its core golf shaft business in a variety of ways. First, the Company introduced its new and innovative “One” shaft early in 2002, which management intends to use to capture a portion of the market for premium branded custom shafts, which tend to sell at higher prices and gross margins than the standard shafts sold to club manufacturers. In addition to the “One” shaft, the Company continues to develop other premium branded custom shafts. The Company previewed its NVTM Prototype shaft at the 2003 PGA Merchandise Show (“PGA Show”) in January 2003 and began shipping the NVTM Prototype during the second quarter through OEM custom club departments and distributors. The NVTM will be offered as a custom upgrade option for 2004 by virtually every major golf club OEM and several companies have chosen to offer it for stock custom programs, which have a strong retail presence. Worldwide professional tour use of the NVTM continues to grow. Since its introduction at the PGA Show, NVTM has become one of the leading shaft models on the PGA Tour and has shown a commanding presence in the Nationwide Tour counts. Numerous tour victories, including the 2003 British Open, have positioned NVTM near the top of this highly competitive market. The Company is currently developing future products that will be introduced into this highly competitive premium branded custom shaft market. In addition, the Company has increased its marketing and advertising spending in recent years in support of its premium branded custom offerings.
Second, the Company continues to look for opportunities to sell its prepreg to other composite materials manufacturers and to manufacture other non-golf composite materials products, such as hockey sticks and hockey blades. Although the Company has achieved some success in these areas, in particular, with respect to sales of hockey sticks to Mission Hockey, management continues to believe that the growth opportunities in these areas are limited and that sales of prepreg and of other composite materials products will not be material to its results of operations for at least several years.
Third, management has concluded that its ownership interest in the joint venture that operates its carbon fiber plant does not offer significant value to the Company and on June 23, 2003 Aldila announced that it had reached a tentative agreement, subject to conditions, and entered into a non-binding letter of intent with its joint venture partner SGL to sell its interest in CFT to SGL. The potential transaction is subject to satisfaction of certain conditions, some of which are
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beyond Aldila’s control, including negotiation of definitive agreements satisfactory to the parties and the requirement that SGL enter into various agreements with third parties. The potential transaction to sell its interest in CFT to SGL is currently on hold. The Company announced on September 17, 2003 that CFT had signed a non-binding letter of interest to sell selected assets, including property, plant, equipment, and know-how to an independent third party at a price to be negotiated. The non-binding letter of interest contains a standstill period until October 20, 2003, and presently anticipates closing before December 31, 2003 if the transaction is consummated. The Company is still currently negotiating with the independent third party.
Finally, the Company continues to be receptive to acquisition opportunities, in areas related to its core business and otherwise, in an effort to add the potential for meaningful growth in its overall profitability, although the Company is not actively seeking such opportunities at the present time. Although management anticipates that operating cash flow levels are likely to be measurably lower for at least the next several years than was typical until a few years ago, given the absence of debt currently on the Company’s balance sheet, the Company anticipates that it can generate cash from operations in excess of its historical needs during this period. This excess operating cash could be used for research and development or marketing activities related to its current core business or to support expansion of its current businesses either internally or through acquisitions. At present, the Company is unable to provide any assurances that it will identify and be able to negotiate a sale of its interest in the joint venture or that it will be able to successfully complete any potential acquisitions.
Results of Operations
Third Quarter 2003 Compared to Third Quarter 2002
Net Sales. Net sales increased $1.5 million, or 24.0%, to $8.0 million for the third quarter ended September 30, 2003 (the “2003 Period”) from $6.5 million for the third quarter ended 2002 (the “2002 Period”). The increase in net sales was primarily attributable to an increase in average selling price of shafts sold, which, in turn, was reflective of a change in product mix, and somewhat mitigated by a decrease in golf shaft units sold, which decreased by 5.3% in the 2003 Period as compared to the 2002 Period. The average price of shafts sold increased approximately 20.9% in the 2003 Period as compared to the 2002 Period. The increase in the average selling price was attributed to selling more premium shaft units and a reduction in value shaft units sold in the 2003 quarter. Sales of value golf shaft units, which have the lowest gross margins, decreased by 45.1% but were somewhat offset by a 12.3% increase in sales of premium shaft units. In addition, other revenues increased in the quarter, primarily related to sales of hockey products to Mission Hockey.
Gross Profit. Gross profit increased $1.4 million, or 292.7%, to $1.9 million for the 2003 Period from $482,000 for the 2002 Period. The Company’s gross profit margin increased to 23.7% in the 2003 Period compared to 7.5% in the 2002 Period. The increase in gross profit was primarily attributed to an increase in net sales. In addition, the 2002 Period was negatively impacted by a charge for inventory reserves in the amount of $338,000.
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Operating Income(Loss). Operating income increased $1.6 million, or 110.7%, to income of $152,000 for the 2003 Period from an operating loss of $1.4 million for the 2002 Period. The increase in operating income was primarily attributed to an increase in gross profit. Selling, general and administrative expense (“SG&A”) decreased by $156,000, or 8.2%, to $1.7 million for the 2003 Period compared to $1.9 million for the 2002 Period. The decrease was attributed to a decrease in administrative expenses, which was partially offset by an increase in marketing expense. SG&A decreased as a percentage of net sales to 21.8% for the 2003 Period compared to 29.4% for the 2002 Period.
Income(Loss) Before Income Taxes. Income before income taxes increased $1.6 million to income before taxes of $189,000 for the 2003 Period from a loss before income taxes of $1.4 million for the 2002 Period. The majority of the increase was attributed to the increase in operating income.
Benefit For Income Taxes. During the fourth quarter of 2002, management determined that it was no longer more likely than not that the tax benefits associated with its deferred tax assets would be realized. Accordingly, the Company placed a full valuation allowance against its net deferred tax asset as of December 31, 2002. As such, the Company has not recorded a benefit for income taxes for the 2003 Period. The Company recorded a benefit for income taxes of $690,000 in the 2002 Period. The effective tax rate was 49.7% for the 2002 period.
Nine-Month Period in 2003 Compared to the Nine-Month Period in 2002
Net Sales. Net sales decreased $353,000, or 1.2%, to $28.0 million for the nine-month period ended September 30, 2003 from $28.4 million for the nine-month period ended September 30, 2002. The decrease in net sales was attributed to a decrease in units shipped, which was partially offset by an increase in the average selling price of shafts sold and an increase in other revenues in the quarter, which was primarily attributed to sales of hockey products to Mission Hockey. Shaft unit sales decreased 16.4% in 2003 compared to 2002, and the average selling price of shafts sold increased 10.1% during the same period. The increase in average selling price was attributed to a change in product mix.
Gross Profit. Gross profit increased $1.4 million, or 36.1%, to $5.1 million in 2003 from $3.8 million in 2002. Gross profit was negatively impacted by an increase in inventory reserves of approximately $427,000 during the nine-month period ended 2003. In 2002, gross profit was negatively impacted by $389,000 for un-utilized carbon fiber capacity and approximately $484,000 related to a charge for inventory reserves. Gross profit margin was 18.4% in 2003 as compared to 13.3% in 2002.
Operating Loss. Operating loss decreased $1.4 million, or 73.4%, to an operating loss of $498,000 in 2003 as compared to an operating loss of $1.9 million in 2002. The decrease in operating loss was mainly attributed to an increase in gross profit. SG&A remained relatively flat in 2003 compared to 2002, however the components of SG&A changed. There was a decrease in administrative expenses that was offset by an increase in marketing and advertising
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expenses in 2003, which was in support of the Company’s premium branded product line. The Company anticipates that it will continue to support its premium branded product line in the future at a comparable level of spending as it has in 2003. The Company anticipates that it will further reduce its administrative expenses in the areas of accounting, legal, banking and corporate services, however, the Company does not anticipate this reduction to be realized until 2004. Operating loss decreased as a percentage of net sales to an operating loss of 1.8% in 2003 compared to 6.6% in 2002. SG&A expense increased as a percentage of net sales to 20.1% in 2003, from 19.9% in 2002.
Loss Before Income Tax. Loss before income taxes decreased $1.4 million, or 75.0%, to a loss before taxes of $451,000 in 2003 as compared to a loss before taxes of $1.8 million in 2002. The majority of the decrease is attributed to the decrease in operating loss.
Benefit For Income Taxes. During the fourth quarter of 2002, management determined that it was no longer more likely than not that the tax benefits associated with its deferred tax assets would be realized. Accordingly, the Company placed a full valuation allowance against its net deferred tax asset as of December 31, 2002. As such, the Company has not recorded a benefit for income taxes for 2003. The Company recorded an income tax benefit of $740,000 in 2002. The Company’s effective tax rate was 41.0% in 2002.
Liquidity and Capital Resources
As of June 30, 2003, the Company had in place a $12.0 million revolving credit facility from a financial institution, which was secured by substantially all the assets of Aldila Golf and guaranteed by the Company. Borrowings under the line of credit bore interest, at the election of the Company, at the bank reference rate or at the adjusted Eurodollar rate plus 2.5%, with a minimum rate of 7%. The Company terminated the line of credit effective July 9, 2003. The Company did not incur any termination penalties for the termination of the line of credit. The Company currently does not anticipate replacing the terminated credit facility with another credit facility.
On June 27, 2003, the Company announced that its Board of Directors authorized a stock repurchase program whereby shares of its common stock may be purchased up to a total of $1.5 million as business conditions warrant. Under the program, the stock may be repurchased on the open market and through privately negotiated transactions from time to time at management’s discretion. The Company has repurchased 20,199 shares at prices ranging between $1.70 to $2.07 per share, for a total cash consideration of approximately $37,500, during the third quarter of 2003.
As of September 30, 2003, the Company had cash and cash-equivalents of approximately $6.0 million. Cash (including cash equivalents) provided by operating activities was $3.4 million for the nine-month period ended September 30, 2003 compared to cash provided by operating activities of $1.9 million in the comparable period last year. The increase in cash provided by operations in 2003 was primarily attributable to a decrease in net loss and an increase in cash provided by working capital items. The Company used $607,000 for capital expenditures during
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the first nine months of 2003 as compared to $300,000 for the first nine months of 2002. The increase in capital expenditures is primarily attributed to the tenant improvements to the Company’s manufacturing facility, which enabled the Company to consolidate its executive offices into its manufacturing facility during the first quarter of 2003. Management anticipates capital expenditures to approximate $670,000 for all of 2003. The Company also has an obligation to support one half of CFT’s fixed annual cost. The Company believes that it will have adequate cash resources, including anticipated cash flow, to meet its obligations for at least the next twelve months through September 30, 2004.
Seasonality
Because the Company’s customers have historically built inventory in anticipation of purchases by golfers in the spring and summer, the principal selling season for golf equipment, the Company’s operating results have been affected by seasonal demand for golf clubs, which has generally resulted in the highest sales occurring in the first quarter. The timing of customers’ new product introductions has at times mitigated the impact of seasonality in recent years.
“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995
With the exception of historical information (information relating to the Company’s financial condition and results of operations at historical dates or for historical periods), the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements that necessarily are based on certain assumptions and are subject to certain risks and uncertainties. These forward-looking statements are based on management’s expectations as of the date hereof, that necessarily contain certain assumptions and are subject to certain risks and uncertainties. The Company does not undertake any responsibility to update these statements in the future. The Company’s actual future performance and results could differ from that contained in or suggested by these forward-looking statements as a result of a variety of factors.
The Company’s Report on Form 10-K for the year ended December 31, 2002 (the “Form 10-K”) presents a more detailed discussion of these and other risks related to the forward-looking statements in this 10-Q, in particular under “Business Risks” in Part I, Item 1 of the Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 7 of the Form 10-K. The forward-looking statements in this 10-Q are particularly subject to the risks that:
• we will not maintain or increase our market share with our principal customers;
• demand for clubs manufactured by our principal customers will decline, thereby affecting their demand for our shafts;
• the market for graphite shafts will continue to be extremely competitive, affecting selling prices and profitability;
• our principal customers will be unwilling to satisfy a greater portion of their demand with shafts manufactured in China instead of in the United States or Mexico;
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• our product offerings, including the Aldila One shaft and Aldila NVTM shaft and product offerings outside the golf industry, will not achieve success with consumers or OEM customers;
• our business with Mission Hockey will not continue to grow;
• we will not achieve success marketing shafts to club assemblers based in China;
• our international operations will be adversely affected by political instability, currency fluctuation, export/import regulation and other risks typical of multi-national operations, particularly those operating in less developed countries;
• that the sale of the selected assets of CFT to a third party is not consummated;
• CFT will be unsuccessful as a result, for example, of internal operational problems, raw material supply problems, changes in demand for carbon fiber based products, or difficulties in operating a joint venture.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes from the information that was disclosed in the Company’s Annual Report for the period ended December 31, 2002 filed on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the Company’s Chairman and Chief Executive Officer (CEO) and the Company’s Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.
Changes in Internal Controls
There have been no significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Item 6. Exhibits and Reports on Form 8-K
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Exhibits |
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11.1 |
Statement re: Computation of Net Income (Loss) per Common Share |
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31.1 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Reports on Form 8-K during Quarter ended September 30, 2003 |
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On July 30, 2003, the Company furnished a Form 8-K regarding its financial results for the second quarter and six-month period ended June 30, 2003. |
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On September 17, 2003, the Company filed a Form 8-K announcing that CFT has signed a non-binding letter of interest to sell selected assets, including property, plant, equipment, and know-how to an independent third party at a price to be negotiated. |
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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.
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Dated: |
November 13, 2003 |
ALDILA, INC. |
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/s/ Robert J. Cierzan |
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Robert J. Cierzan |
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Vice President, Finance |
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Signing both in his
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