U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
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November 30, 2004 |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from N/A to N/A
Commission file no. 1–7755
Summa Industries
(Name of registrant as specified in its charter)
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Delaware |
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95–1240978 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. employer identification number) |
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21250 Hawthorne Boulevard, Suite 500, Torrance, California 90503 |
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(Address of principle executive offices, including zip code) |
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Registrant’s telephone number: (310) 792–7024 |
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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 Exchange Act 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
The number of shares of common stock outstanding as of December 31, 2004 was 4,002,527.
Summa Industries
INDEX
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PART I – FINANCIAL INFORMATION |
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Item 1. |
Financial Statements: |
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Condensed Consolidated Income Statements
(unaudited) – |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
Summa Industries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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November 30, 2003 |
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August 31, 2004 |
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November 30, 2004 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
297,000 |
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$ |
1,248,000 |
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$ |
832,000 |
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Accounts receivable |
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15,681,000 |
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18,227,000 |
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16,371,000 |
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Inventories |
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13,198,000 |
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14,749,000 |
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15,118,000 |
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Prepaid expenses and other |
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3,060,000 |
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3,782,000 |
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4,512,000 |
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Total current assets |
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32,236,000 |
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38,006,000 |
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36,833,000 |
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Property, plant and equipment |
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56,261,000 |
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63,842,000 |
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67,152,000 |
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Less accumulated depreciation |
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(30,637,000 |
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(32,789,000 |
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(34,066,000 |
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Net property, plant and equipment |
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25,624,000 |
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31,053,000 |
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33,086,000 |
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Other assets |
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2,518,000 |
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1,804,000 |
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1,840,000 |
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Goodwill and other intangibles, net |
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9,361,000 |
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9,254,000 |
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9,186,000 |
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Total assets |
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$ |
69,739,000 |
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$ |
80,117,000 |
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$ |
80,945,000 |
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Current liabilities: |
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Accounts payable |
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$ |
6,149,000 |
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$ |
9,088,000 |
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$ |
6,543,000 |
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Accrued liabilities |
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4,504,000 |
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7,429,000 |
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6,744,000 |
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Current maturities of long–term debt |
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3,448,000 |
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2,195,000 |
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2,702,000 |
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Total current liabilities |
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14,101,000 |
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18,712,000 |
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15,989,000 |
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Long–term debt, net of current maturities |
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16,247,000 |
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28,663,000 |
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31,591,000 |
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Other long–term liabilities |
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2,594,000 |
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2,508,000 |
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2,500,000 |
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Total long–term liabilities |
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18,841,000 |
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31,171,000 |
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34,091,000 |
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Mandatorily redeemable convertible preferred stock, par value $.001, 5,000 shares authorized, issued and outstanding |
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6,287,000 |
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— |
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— |
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Minority interest in subsidiary |
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— |
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205,000 |
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205,000 |
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Stockholders’ equity: |
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Common stock, par value $.001; 10,000,000 shares authorized; issued and outstanding: |
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4,317,492 at November 30, 2003, |
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18,061,000 |
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15,305,000 |
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15,566,000 |
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Retained earnings |
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12,449,000 |
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14,724,000 |
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15,094,000 |
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Total stockholders’ equity |
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30,510,000 |
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30,029,000 |
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30,660,000 |
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Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity |
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$ |
69,739,000 |
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$ |
80,117,000 |
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$ |
80,945,000 |
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See accompanying notes to condensed consolidated financial statements.
3
Summa Industries
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
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Three months ended November 30 |
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2003 |
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2004 |
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Net sales |
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$ |
25,926,000 |
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$ |
28,238,000 |
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Cost of sales |
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19,555,000 |
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21,793,000 |
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Gross profit |
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6,371,000 |
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6,445,000 |
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Selling, general, administrative and other expenses |
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4,820,000 |
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5,118,000 |
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Operating income |
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1,551,000 |
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1,327,000 |
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Interest expense |
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305,000 |
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367,000 |
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Income before income taxes |
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1,246,000 |
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960,000 |
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Provision for income taxes |
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416,000 |
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350,000 |
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Net income |
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$ |
830,000 |
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$ |
610,000 |
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Preferred stock accretion |
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$ |
184,000 |
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$ |
— |
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Net income available to common stockholders |
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$ |
646,000 |
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$ |
610,000 |
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Earnings per common share |
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Basic |
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$ |
.15 |
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$ |
.15 |
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Diluted |
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$ |
.15 |
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$ |
.15 |
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Weighted average common shares outstanding: |
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Basic |
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4,287,000 |
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3,984,000 |
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Diluted |
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4,355,000 |
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4,064,000 |
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See accompanying notes to condensed consolidated financial statements.
4
Summa Industries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three months ended November 30 |
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2003 |
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2004 |
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Operating activities: |
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Net income |
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$ |
830,000 |
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$ |
610,000 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
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1,163,000 |
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1,277,000 |
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Amortization |
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61,000 |
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68,000 |
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Net change in assets and liabilities: |
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Accounts receivable |
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48,000 |
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1,856,000 |
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Inventories |
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(1,553,000 |
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(369,000 |
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Prepaid expenses and other assets |
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(350,000 |
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(766,000 |
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Accounts payable |
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847,000 |
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(2,545,000 |
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Accrued liabilities |
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(173,000 |
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(672,000 |
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Total adjustments |
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43,000 |
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(1,151,000 |
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Net cash provided by (used in) operating activities |
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873,000 |
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(541,000 |
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Investing activities: |
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Purchases of property and equipment |
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(675,000 |
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(3,310,000 |
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Net cash (used in) investing activities |
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(675,000 |
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(3,310,000 |
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Financing activities: |
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Net proceeds from line of credit |
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877,000 |
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1,743,000 |
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Proceeds from issuance of long–term debt |
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— |
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2,229,000 |
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Payments on long–term debt |
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(1,297,000 |
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(537,000 |
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Proceeds from the exercise of stock options |
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139,000 |
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— |
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Net cash provided by (used in) financing activities |
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(281,000 |
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3,435,000 |
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Net (decrease) in cash and cash equivalents |
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(83,000 |
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(416,000 |
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Cash and cash equivalents, beginning of period |
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380,000 |
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1,248,000 |
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Cash and cash equivalents, end of period |
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$ |
297,000 |
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$ |
832,000 |
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See accompanying notes to condensed consolidated financial statements.
5
Summa Industries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2004
1. Basis of presentation
The accompanying unaudited condensed consolidated financial statements of Summa Industries (the “Company”) have been condensed in certain respects and should, therefor, be read in conjunction with the audited consolidated financial statements and notes related thereto contained in the Company’s Annual Report on Form 10–K for the year ended August 31, 2004. Certain prior year amounts have been reclassified in the accompanying financial statements to conform with current year presentations. In the opinion of the Company, these financial statements contain all adjustments necessary for a fair presentation for the interim period, all of which were normal recurring adjustments. The results of operations for the three months ended November 30, 2004 are not necessarily indicative of the results to be expected for the full year ending August 31, 2005.
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), “Share–Based Payments,” which requires companies to recognize in the income statement the grant–date fair value of stock options and equity–based compensation issued to employees. The Company reports equity based compensation in accordance with Accounting Principles Board Opinion No. 25 and Financial Interpretation No. 44, and accordingly, no compensation expense is recognized in the financial statements. The pro forma effect of equity–based compensation under SFAS No. 123, “Accounting for Stock–Based Compensation,” is disclosed in Note 4 below. The standard is effective for interim or annual reporting periods beginning after June 15, 2005. The Company is currently evaluating the impact of adopting this standard.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), “Inventory Costs–an amendment of ARB 43, Chapter 4.” This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amount of idle facility expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current period charges. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company will adopt this statement, effective with its fiscal year beginning September 1, 2005. The Company is currently evaluating the effect of the adoption of this statement on the Company’s results of operations or financial position.
2. Inventories
Inventories were as follows:
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November 30, 2003 |
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August 31, 2004 |
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November 30, 2004 |
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Finished goods |
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$ |
5,202,000 |
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$ |
6,407,000 |
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$ |
6,771,000 |
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Work in process |
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325,000 |
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296,000 |
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292,000 |
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Materials and parts |
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7,671,000 |
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8,046,000 |
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8,055,000 |
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$ |
13,198,000 |
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$ |
14,749,000 |
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$ |
15,118,000 |
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3. Earnings per share
Basic earnings per share (“EPS”) was computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. The Company had 5,000 shares of redeemable convertible preferred stock outstanding until its repurchase on May 3, 2004, which provided for an accretion in its redemption price. This accretion reduced the net income available to common stockholders used in the EPS calculation prior to that date.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS was calculated using the “treasury stock” method as if dilutive options had been exercised and the funds were used to purchase common shares at the average market price during the period. Options to purchase 616,000 common shares as of
6
November 30, 2003 and 590,000 common shares as of November 30, 2004 were excluded from the calculation of equivalent shares, as they would have been anti–dilutive. The 5,000 shares of outstanding preferred stock, convertible into 625,000 shares of common stock, were excluded from the calculation of equivalent shares for the three month period ended November 30, 2003, as they would have been anti–dilutive.
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for “income available to common stockholders” and other disclosures required by FASB Statement of Accounting Standards No. 128, “Earnings per Share”:
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Three months ended November 30 |
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2003 |
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2004 |
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Numerators: |
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Net income |
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$ |
830,000 |
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$ |
610,000 |
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Preferred stock accretion |
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(184,000 |
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— |
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Income available to common stockholders |
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$ |
646,000 |
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$ |
610,000 |
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Denominators: |
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Weighted average shares outstanding – basic |
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4,287,000 |
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3,984,000 |
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Impact of common shares assumed to be issued under stock option plans |
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68,000 |
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80,000 |
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Weighted average shares outstanding – diluted |
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4,355,000 |
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4,064,000 |
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4. Stock–based compensation plans
The Company accounts for stock options issued to employees and directors in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25 and Financial Interpretation No. 44. Consequently, no compensation expense was recognized for the Company’s stock option plans. The following table illustrates the effect on net earnings and net earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock–Based Compensation”. The fair value estimate was computed using the Black–Scholes option pricing model.
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Three months ended November 30 |
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2003 |
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2004 |
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Income available to common stockholders |
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$ |
646,000 |
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$ |
610,000 |
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Pro forma impact of expensing stock options |
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(30,000 |
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(32,000 |
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Pro forma income available to common stockholders |
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$ |
616,000 |
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$ |
578,000 |
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Earnings per share: |
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As reported: |
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Basic |
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$ |
.15 |
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$ |
.15 |
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Diluted |
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$ |
.15 |
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$ |
.15 |
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Pro forma: |
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Basic |
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$ |
.14 |
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$ |
.15 |
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Diluted |
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$ |
.14 |
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$ |
.14 |
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7
5. Supplemental cash flow information
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Three months ended November 30 |
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2003 |
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2004 |
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Cash paid during the period: |
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Interest |
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$ |
250,000 |
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$ |
387,000 |
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Income taxes |
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$ |
36,000 |
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$ |
550,000 |
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Non–cash financing activity: |
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Common stock issued to 401(k) Plan |
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$ |
345,000 |
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$ |
261,000 |
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Dividend declared, $.06 per share |
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— |
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$ |
(240,000 |
) |
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6. Segment information
The Company has four reportable segments identified by differences in products and distribution channels. The accounting policies of the segments are the same as those described in the summary of significant accounting polices. The Company’s operations are reported in the following business segments:
Optical Components. In its Optical Components segment, Summa designs and manufactures plastic prismatic lenses, reflectors and diffusers and other plastic products, which are used in commercial and industrial lighting fixtures, display, signage, architectural and other applications.
Material Handling Components. In its Material Handling Components segment, Summa designs and manufactures engineered plastic components, which form conveyer belts and chains and other plastic products for use in food processing.
Irrigation Components. In its Irrigation Components segment, Summa designs and manufactures plastic injection–molded fittings, valves, filters and accessories, extruded tubing and other plastic products for drip irrigation systems used in agriculture, commercial landscape and other applications.
Electrical Components. In its Electrical Components segment, Summa designs and manufactures thermoplastic coil forms or “bobbins” and other plastic products used principally in the manufacture of magnetic devices such as transformers, relays, switches, power supplies and small electric motors.
8
Financial information by reportable business segment is reported in the following tables:
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Three months ended November 30 |
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2003 |
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2004 |
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External sales |
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Optical components |
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$ |
13,592,000 |
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$ |
14,150,000 |
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Material handling components |
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5,893,000 |
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6,409,000 |
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Irrigation components |
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3,580,000 |
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4,929,000 |
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Electrical components |
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2,861,000 |
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2,750,000 |
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Consolidated |
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$ |
25,926,000 |
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$ |
28,238,000 |
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Inter–segment sales |
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Optical components |
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$ |
446,000 |
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$ |
291,000 |
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Material handling components |
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— |
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— |
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Irrigation components |
|
798,000 |
|
— |
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Electrical components |
|
— |
|
— |
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Other |
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(1,244,000 |
) |
(291,000 |
) |
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Consolidated |
|
$ |
— |
|
$ |
— |
|
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Total sales |
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Optical components |
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$ |
14,038,000 |
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$ |
14,441,000 |
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Material handling components |
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5,893,000 |
|
6,409,000 |
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Irrigation components |
|
4,378,000 |
|
4,929,000 |
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Electrical components |
|
2,861,000 |
|
2,750,000 |
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Other |
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(1,244,000 |
) |
(291,000 |
) |
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Consolidated |
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$ |
25,926,000 |
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$ |
28,238,000 |
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|
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Operating income (loss) |
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Optical components |
|
$ |
1,808,000 |
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$ |
1,282,000 |
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Material handling components |
|
157,000 |
|
710,000 |
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Irrigation components |
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(94,000 |
) |
163,000 |
|
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Electrical components |
|
140,000 |
|
(379,000 |
) |
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Other |
|
(460,000 |
) |
(449,000 |
) |
||
|
Consolidated |
|
$ |
1,551,000 |
|
$ |
1,327,000 |
|
|
|
|
November 30 2003 |
|
August 31 2004 |
|
November 30 2004 |
|
|||
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Assets |
|
|
|
|
|
|
|
|||
|
Optical components |
|
$ |
28,737,000 |
|
$ |
30,183,000 |
|
$ |
28,995,000 |
|
|
Material handling components |
|
19,271,000 |
|
20,069,000 |
|
21,781,000 |
|
|||
|
Irrigation components |
|
10,194,000 |
|
13,622,000 |
|
13,709,000 |
|
|||
|
Electrical components |
|
6,956,000 |
|
10,453,000 |
|
10,737,000 |
|
|||
|
Other |
|
4,581,000 |
|
5,790,000 |
|
5,723,000 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Consolidated |
|
$ |
69,739,000 |
|
$ |
80,117,000 |
|
$ |
80,945,000 |
|
9
In the fourth quarter of fiscal 2004, all of the assets and operations of the former Miscellaneous Plastic Components segment were integrated with the Irrigation Components segment. Prior period segment information has been restated to conform to the consolidation. Segment information as reported prior to the consolidation is as follows for the three months ended November 30:
|
|
|
2003 |
|
|
|
External sales: |
|
|
|
|
|
Irrigation Components |
|
$ |
3,271,000 |
|
|
Miscellaneous Plastic Components |
|
309,000 |
|
|
|
Total |
|
$ |
3,580,000 |
|
|
Inter–segment sales: |
|
|
|
|
|
Irrigation Components |
|
$ |
— |
|
|
Miscellaneous Plastic Components |
|
798,000 |
|
|
|
Total |
|
$ |
798,000 |
|
|
Total sales: |
|
|
|
|
|
Irrigation Components |
|
$ |
3,271,000 |
|
|
Miscellaneous Plastic Components |
|
1,107,000 |
|
|
|
Total |
|
$ |
4,378,000 |
|
|
Operating income (loss): |
|
|
|
|
|
Irrigation Components |
|
$ |
56,000 |
|
|
Miscellaneous Plastic Components |
|
(150,000 |
) |
|
|
Total |
|
$ |
(94,000 |
) |
|
Assets: |
|
|
|
|
|
Irrigation Components |
|
$ |
7,895,000 |
|
|
Miscellaneous Plastic Components |
|
2,299,000 |
|
|
|
Total |
|
$ |
10,194,000 |
|
Interest expense and income taxes are not shown in the preceding tables, as they are not fully allocated by segment. “Other” includes inter–company eliminations and corporate and other expenses not allocated by segment.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this Quarterly Report on Form 10–Q, which are not purely historical, are forward–looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to statements regarding Summa’s expectations, hopes, beliefs, intentions or strategies regarding the future, such as those set forth in Part II, Item 1 “Legal Proceedings” below. Actual results could differ materially from those projected in any forward–looking statements as a result of a number of factors, including those detailed in this “Management’s Discussion and Analysis” section and elsewhere herein and in the Company’s Annual Report on Form 10–K for the fiscal year ended August 31, 2004. The forward–looking statements are made as of the date hereof, and the Company assumes no obligation to update the forward–looking statements, or to update the reasons why actual results could differ materially from those projected in the forward–looking statements. For a discussion of risks and uncertainties that should be considered and which could materially adversely affect the Company, please see “Risk Factors” in the “Management Discussion and Analysis” section of the Company’s Annual Report on Form 10–K for the fiscal year ended August 31, 2004.
Summa manufactures plastic products for diverse commercial and industrial markets. Through its four reportable segments, Summa designs and manufactures injection–molded and formed plastic optical components for OEM customers in the lighting industry; modular plastic conveyor belt and chain for the food processing industry; engineered plastic fittings, valves, filters and tubing for irrigation systems used in agriculture, commercial landscape and other applications; molded plastic coil forms (“bobbins”) for use in transformers, motors, relays and switches; and other molded and extruded plastic components for diverse industries.
10
Results of Operations
During the quarter ended November 30, 2004, the Company experienced some difficulty and delays in passing through plastic resin price increases, which adversely impacted gross margins and resulted in some loss of business to competitors who did not try to increase prices to the full extent of cost increases. Although most of the recent price increases have now been implemented, further resin price increases have been announced or are anticipated in the near future and passing these on will represent a continuing challenge.
After the end of the quarter, the Company announced that it plans to sell several parcels of real estate which have or will become excess, primarily as a result of several consolidation and restructuring initiatives. Summa estimates that the sales could result in a book gain of $5 to $9 million and generate cash, net of taxes, of $9 to $14 million. The parcels will be offered for sale separately and the timing of each sale is uncertain.
The following table sets forth certain information, derived from Summa’s unaudited condensed consolidated statements of operations, as a percent of sales for the three month periods ended November 30, 2003 and 2004 and the Company’s effective income tax rate during those periods:
|
|
|
Three months ended November 30 |
|
||
|
|
|
2003 |
|
2004 |
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
|
Cost of sales |
|
75.4 |
% |
77.2 |
% |
|
Gross profit |
|
24.6 |
% |
22.8 |
% |
|
S,G & A and other expenses, net |
|
18.6 |
% |
18.1 |
% |
|
Operating income |
|
6.0 |
% |
4.7 |
% |
|
Interest expense, net |
|
1.2 |
% |
1.3 |
% |
|
Income before tax |
|
4.8 |
% |
3.4 |
% |
|
Provision for income taxes |
|
1.6 |
% |
1.2 |
% |
|
Net Income |
|
3.2 |
% |
2.2 |
% |
|
|
|
|
|
|
|
|
Effective tax rate |
|
33.4 |
% |
36.5 |
% |
Quarter ended November 30, 2004 compared to the quarter ended November 30, 2003
Sales for the first quarter ended November 30, 2004 increased $2,312,000, or 9%, primarily due to the contribution of sales from recently acquired operations in the Irrigation Components segment and the effects of price increases. Sales increased 4% in the Optical Components segment, primarily due to price increases; increased 9% in the Material Handling Components segment, primarily due to improved efficiencies, sales of new products and price increases; increased 38% in the Irrigation Components segment, primarily due to the inclusion of sales from recently acquired operations, recaptured market share from certain major customers, improved market conditions, the inclusion of the sales of the former Miscellaneous Plastic components segment and price increases; and decreased 4% in the Electrical Components segment, despite price increases, primarily due to reduced customer demand.
Gross profit for the first quarter increased $74,000, or 1%, from the comparable prior year period, primarily due to higher sales, substantially offset by increased material costs and plant consolidation costs. Gross margin decreased from 24.6% to 22.8%, primarily due to difficulties and delays in fully passing through increases in plastic resin prices.
Operating expenses for the first quarter increased $298,000, or 6%, from the comparable prior year period, due to higher variable selling expenses related to higher sales, the inclusion of operating expenses of newly acquired operations and increased costs related to compliance with Sarbanes–Oxley rules and regulations and plant consolidation costs. As a percent of sales, operating expenses decreased from 18.6% to 18.1%.
Operating income for the first quarter was $1,327,000, which was $224,000, or 14%, lower than in the comparable prior year period. By segment, operating income decreased $526,000 in the Optical Components segment, due primarily to difficulty and delays in fully passing through resin price increases and an unfavorable product mix; increased $553,000 in the Material
11
Handling Components segment, primarily due to low sales volume and inefficiencies related to a plant consolidation in the prior year first quarter; increased $257,000 in the Irrigation Components segment, primarily due to the effects of higher sales volume; and decreased $519,000 in the Electrical Components segment, primarily due to costs of the business relocation which is underway. Operating margin for the quarter decreased from 6.0% in the first quarter of fiscal 2003 to 4.7% in the first quarter of fiscal 2004, due to the factors discussed above.
Net interest expense for the first quarter ended November 30, 2004 increased $62,000 from the prior year first quarter, due to higher average debt levels, despite lower average interest rates.
The provision for income taxes in the first quarter was $66,000 lower than in the prior year first quarter, despite a significantly higher effective tax rate of 36.5% versus 33.4% in the prior year, due to lower income before taxes.
The Company’s backlog of unfilled orders, believed to be firm, was $7,699,000 at November 30, 2003, $7,696,000 at August 31, 2004 and $7,877,000 at November 30, 2004. Because the time between entering an order and shipping the product and recording a sale is typically shorter than one month, backlog levels are not a reliable indicator of future sales volume.
Liquidity and Capital Resources
Working Capital. The Company’s working capital was $18,135,000 at November 30, 2003; $19,294,000 at August 31, 2004 and $20,844,000 at November 30, 2004. Working capital at November 30, 2004 was $1,550,000 greater than at August 31, 2004, primarily due to a decrease in accounts payable due to seasonality, the timing of payments on capital projects and increased discounting of vendor invoices and increases in prepaid expenses and inventory, partially offset by a decrease in accounts receivable due to lower sequential quarter sales and improved collections. Working capital at November 30, 2004 was $2,709,000 greater than at November 30, 2003, primarily due to the refinancing of a term loan which reduced the current portion of term debt, an increase in inventory in anticipation of increased sales, and a bulk purchase of inventory as part of an asset acquisition, partially offset by an increase in accrued liabilities.
Summary of the Company’s debt at November 30, 2004:
|
Description of Debt |
|
Balance |
|
Weighted Average Interest Rate |
|
Additional Availability |
|
Fiscal Year Due |
|
|||||||||||||||
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 and thereafter |
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Revolving line of credit |
|
$ |
14,086,000 |
|
3.7 |
% |
$ |
5,282,000 |
|
$ |
— |
|
$ |
— |
|
$ |
14,086,000 |
|
$ |
— |
|
$ |
— |
|
|
Bank term loan |
|
4,310,000 |
|
4.7 |
% |
— |
|
699,000 |
|
971,000 |
|
1,019,000 |
|
1,068,000 |
|
553,000 |
|
|||||||
|
Real estate and other loans |
|
12,902,000 |
|
4.4 |
% |
3,377,000 |
|
1,027,000 |
|
4,330,000 |
|
3,933,000 |
|
891,000 |
|
2,721,000 |
|
|||||||
|
Subordinated debt |
|
2,995,000 |
|
7.5 |
% |
— |
|
— |
|
2,000,000 |
|
995,000 |
|
— |
|
— |
|
|||||||
|
Total debt |
|
$ |
34,293,000 |
|
4.4 |
% |
$ |
8,659,000 |
|
$ |
1,726,000 |
|
$ |
7,301,000 |
|
$ |
20,033,000 |
|
$ |
1,959,000 |
|
$ |
3,274,000 |
|
The interest rate on the bank term loan is fixed for five years. Interest rates on the bank line of credit are subject to market fluctuation and are subject to reduction as the Company achieves certain financial milestones. Interest rates on most of the real estate and other loans are subject to market fluctuation. The interest rate on the subordinated debt is scheduled to decrease as the outstanding balance is reduced.
In October 2004, the Company announced a plan to repurchase up to $2,000,000 of its Common Stock with no time limit (the “2005 Buy Back”). No shares were purchased during the quarter ended November 30, 2004.
Sources and Uses of Funds. Net cash used in operating activities for the first quarter of fiscal 2005 was $541,000 compared to $873,000 provided by operating activities for the first quarter of fiscal 2004. The decrease was primarily due to decreases in accounts payable related to the timing of payments for inventory and capital equipment additions, partially offset by decreased accounts receivable due to seasonal reasons and improved collections. Net cash used in investing activities was $3,310,000 in the first quarter of fiscal 2005, $2,635,000 more than in the first quarter of fiscal 2004, primarily related to the investment in a new facility in the Material Handling Components segment. Net cash of $3,435,000 was provided by financing activities for the first quarter of fiscal 2005, primarily by debt related to the new facility, compared to $281,000 net cash used in the prior year first quarter used in paying debt.
Summa believes that cash flows from operations and existing credit facilities will be sufficient to fund working capital
12
requirements, planned investments and debt service for the next twelve months. The Company has a strategy of growth by acquisition. In the event an acquisition plan is adopted which requires funds exceeding the availability described above, an alternate source of funds to accomplish the acquisition would have to be developed. The Company has 10,000,000 shares of common stock authorized, of which 4,002,527 shares were outstanding at November 30, 2004 and 5,000,000 shares of “blank check” preferred stock authorized, of which none was outstanding at November 30, 2004. The Company could issue additional shares of common or preferred stock or enter into new or revised borrowing arrangements to raise funds.
The Company’s material off–balance sheet arrangements are as follows:
Future Lease Payments. The Company leases offices and manufacturing facilities and certain equipment under non–cancelable operating leases. Future payments under these leases at November 30, 2004 are approximately as follows:
|
Fiscal Year |
|
Amount |
|
|
|
2005 |
|
$ |
699,000 |
|
|
2006 |
|
$ |
971,000 |
|
|
2007 |
|
$ |
1,019,000 |
|
|
2008 |
|
$ |
1,068,000 |
|
|
2009 |
|
$ |
553,000 |
|
|
2010 and thereafter |
|
$ |
— |
|
In recent years the Company has consolidated and/or abandoned several facilities in an effort to improve efficiencies and operating results, and plans further consolidations. In the event the Company was to abandon a facility prior to its being leased to a new tenant, the Company could become obligated for accelerated lease payments or other expenses.
The foregoing discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements of the Company, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions in applying certain critical accounting policies. Certain accounting estimates are particularly sensitive because of their significance to the Company’s consolidated financial statements and because of the possibility that future events affecting the estimates could differ markedly from current expectations. The Company believes that the following are some of the more critical judgment areas in the application of its accounting policies that affect the Company’s financial statements:
The Company has a significant amount of property and equipment and intangible assets. The determination as to whether events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable involves management’s judgment. In addition, should the Company conclude that recoverability of an asset is in question, the estimate of undiscounted future operating cash flows to determine whether an asset is recoverable and, if not, the final determination of the fair value of the asset are also based on the judgment of management. These judgments can be impacted by a variety of underlying assumptions, such as the general business climate, effectiveness of competition and supply and cost of resources. Accordingly, actual results can differ significantly from the assumptions made by management in making its estimates. Future changes in management’s estimates could result in indicators of impairment and future impairment charges.
13
Accounts Receivable. The Company performs ongoing evaluations of customers and adjusts credit limits based upon each customer’s payment history and credit worthiness, as determined by credit information available at that time. The Company monitors collections and payments from customers and maintains allowances for doubtful accounts for the inability of customers to make required payments. If the financial condition of customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required.
Goodwill. Goodwill represents the excess of purchase price over fair value of net assets acquired. Goodwill is tested for impairment annually in the fourth quarter, after completion of an annual planning process, or earlier if events occur which require an impairment analysis to be performed. With respect to each reporting unit which has any goodwill, the fair value is determined using traditional valuation methodology, and compared with its carrying value. If the fair value exceeds the unit’s carrying value, goodwill of the reporting unit is considered not to be impaired. If the unit’s carrying value exceeds its fair value, assets of the unit are individually valued to determine the implied fair value of the reporting unit goodwill. Impairment loss is recognized to the extent that the carrying value of the goodwill exceeds its implied fair value. Significant management judgment is involved in determining the fair value of assets. Future changes in management’s estimates could result in additional impairment charges to goodwill.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the outstanding debt and related variable interest rates set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” above, there are no material changes to the disclosure set forth in Item 7A of the Company’s Annual Report on Form 10–K for the fiscal year ended August 31, 2004. The Company has no market risk sensitive instruments entered into for trading purposes.
EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a – 14 and 13a–15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls that could significantly affect these controls subsequent to the date of their evaluation.
PART II – OTHER INFORMATION
The Company encounters lawsuits from time to time in the ordinary course of business and, at November 30, 2004, the Company and/or its affiliates were parties to several civil lawsuits. Summa does not expect that the resolution of these lawsuits will have a material adverse impact on future results of operations or financial position. Certain lawsuits filed against the Company from time to time contain claims not covered by insurance, or seek damages in excess of policy limits, and such claims could be filed in the future. The Company may file patent infringement and/or other types of lawsuits in the future which may result in materially increased costs and other adverse consequences. Any costs and/or losses that Summa may suffer from such lawsuits, and the effect such litigation may have upon the reputation and marketability of Summa’s products, could have a material adverse impact on the future results of operations, financial condition and/or prospects of the Company.
14
In October 2004, the Company announced a plan to repurchase up to $2,000,000 of its Common Stock with no time limit (the “2005 Buy Back”). As of November 30, 2004, no shares had been repurchased under the 2005 Buy Back.
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
31.1 |
Section 302 Certification |
|
32.1 |
Section 906 Certification |
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 on January 5, 2005.
Summa Industries
|
/s/ James R. Swartwout |
|
/s/ Trygve M. Thoresen |
|
|
James R. Swartwout |
Trygve M. Thoresen |
||
|
President and Chief Financial Officer |
Vice President and Secretary |
||
15