Quality Products Announces Results For the Three and Nine Months Ended June 30, 2013

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Quality Products Announces Results For the Three and Nine Months Ended June 30, 2013

COLUMBUS, Ohio--(BUSINESS WIRE)-- Quality Products, Inc. (Pink Sheets: QPDC), a manufacturer and distributor of aircraft ground support equipment ("Columbus Jack & Regent Manufacturing") and hydraulic machine tools ("Multipress" & "PPT"), today reported fiscal 2013 third quarter and nine months operating results.

QUARTERLY RESULTS


Net income was $1,281,132 compared to $991,806 earned last year, an increase of $289,326 or 29.2%. Revenues were $7,113,807 compared to $4,851,974 last year, an increase of $2,261,833 or 46.6%. The gross margin decreased to 44.8% this year from 46.1% last year. As with most manufacturers, our margins can vary significantly depending on product mix and pricing pressures in the marketplace. Due to these factors, we consider the range of 35 - 40% to be normal for gross margins.

Shipments in the hydraulic machine tools segment were $3,392,313 compared to $1,778,998, an increase of $1,613,315 or 90.7%, and gross profit was $1,220,618 or 36.0% compared to $637,078 or 35.8%, an increase of $583,540 or 91.6%. Incoming orders were $2,393,258 compared to $1,448,122 last year, an increase of $945,136 or 65.3%. The increase in shipments, gross profits, and incoming orders resulted from the acquisition of PPT. Historically, the visibility of future business for this segment has rarely exceeded six months, making it difficult to predict long-term trends.

Shipments in the ground support equipment segment were $3,721,494 compared to $3,072,976 last year, an increase of $648,518 or 21.1%. Gross profit was $1,969,384 or 52.9% compared to $1,599,484 or 52.0% last year, an increase of $369,901 or 23.1%. Incoming orders were $4,536,717 compared to $4,041,986 last year, an increase of $494,731 or 12.2%. A majority of this segment's business is with the U.S. government. If defense spending is reduced, it is likely this segment will be unfavorably impacted. Historically, when equipment orders have declined, the impact has been somewhat muted by an increase in higher-margin parts orders as customers repair existing equipment instead of buying new equipment. However, we are unable to quantify this effect.

S G & A expenses were $1,476,929 or 20.8% of sales in the current quarter compared to $879,703 or 18.1% last year, an increase of $597,226 or 67.9%, primarily resulting from the addition of PPT, particularly for wages and benefits, and acquisition-related costs.

Other income was $278,059 in the latest quarter compared to other income of $269,858 last year, an increase of $8,201 or 3.0%. The latest quarter includes $209,158 for a bargain purchase gain on the acquisition of the net assets of PPT, indicating the price paid for the net assets was below fair value. This amount is preliminary and is subject to revision after completion of an independent valuation report.

Additionally, the latest quarter includes no royalties from our joint participation in certain military contracts and approximately $126,000 of distributions and net realized gains from our investments. Last year included no royalties from our joint participation in certain military contracts and approximately $302,000 of distributions and net realized gains from our investments. Interest expense, which reduces total other income, increased from $36,787 last year to $61,586 this year, resulting from our higher debt level.

Income tax expense was $710,000 in the latest quarter compared to $634,911 last year, an increase of $75,089 or 11.8%. This primarily resulted from higher taxable income in the latest period.

Basic and diluted EPS was $0.54, up from $0.41 and the weighted average shares outstanding decreased to 2,373,553 from 2,398,856.

FISCAL NINE MONTHS RESULTS

Net income was $3,021,367 compared to $3,075,354 earned last year, a decrease of $(53,987) or (1.8)%. Revenues were $16,324,773 compared to $14,914,881 last year, an increase of $1,409,892, or 9.5%. Gross margins were 43.7% this year, down from 46.5% last year. As with most manufacturers, our margins can vary significantly depending on product mix and pricing pressures in the marketplace. Due to these factors, we consider the range of 35 - 40% to be normal for gross margins.

Shipments in the PPT segment were $1,921,007. PPT was acquired on April 26, 2013 so there are no comparisons for last year. Gross profit was $647,113 or 33.7%. Incoming orders were $1,300,425.

Shipments in the hydraulic machine tools segment were $5,680,358 compared to $4,062,674 last year, an increase of $1,617,684 or 39.8%. Gross profit was $2,083,429 or 36.7% compared to $1,352,928 or 33.3%, an increase of $730,501 or 54.0%. Additionally, incoming orders were $4,795,719 compared to $5,360,263 last year, a decrease of $(564,544) or (10.5)%. The increase in shipments resulted from the acquisition of PPT. The increase in gross profits primarily resulted from the acquisition of PPT, but secondarily to better margins at Multipress. Historically, the visibility of future business for this segment has rarely exceeded six months, making it difficult to predict long-term trends.

Shipments in the ground support equipment segment were $10,644,415 compared to $10,852,207 last year, a decrease of $(207,792) or (1.9)%. Gross profit was $5,044,531 or 47.4% compared to $5,575,510 or 51.4% last year, a decrease of $(530,979) or (9.5)%. Incoming orders were $12,054,835 compared to $9,845,732 last year, an increase of $2,209,103 or 22.4%. A majority of this segment's business is with the U.S. government. If defense spending is reduced, it is likely this segment will be unfavorably impacted. Historically, when equipment orders have declined, the impact has been somewhat muted by an increase in higher-margin parts orders as customers repair existing equipment instead of buying new equipment. However, we are unable to quantify this effect.

S G & A expenses were $3,250,482 or 19.9% of sales in 2013 compared to $2,636,135 or 17.7% in 2012, an increase of $615,347 or 23.3%. The increase primarily resulted from the addition of PPT, particularly for wages and benefits, and acquisition-related costs.

2013 other income was $913,605 compared to $741,508 in 2012, an increase of $172,097 or 23.2%. 2013 includes $209,158 for a bargain purchase gain on the acquisition of the net assets of PPT, indicating the price paid for the net assets was below fair value. This amount is preliminary and is subject to revision after completion of an independent valuation report.

Additionally, 2013 includes approximately $60,000 of royalties from our joint participation in certain military contracts and approximately $766,000 of distributions and net realized gains from our investments. 2012 included approximately $125,000 of royalties from our joint participation in certain military contracts and $360,000 of distributions and net realized gains from our investments. Interest expense, which reduces total other income, increased from $59,916 last year to $136,284 this year, resulting from our higher debt level.

Income tax expense was $1,769,820 in the current fiscal year compared to $1,958,457 last year, a decrease of $(188,637) or (9.6)%. This primarily resulted from lower pre-tax income in the current year.

Basic and diluted EPS decreased to $1.27 from $1.28 and the weighted average shares outstanding decreased to 2,378,327 from 2,407,712.

Backlog

On August 14th, the backlog for the hydraulic machine tools segment was approximately $8.4 million, up from the previous quarter's reported level of $1.2 million, and up from last year's level of $1.3 million. The increase resulted from the acquisition of PPT.

The backlog for the ground support equipment segment was approximately $5.4 million, down from the previous quarter's reported level of $6.0 million, but up from last year's level of $4.1 million.

We do not provide financial estimates for future periods.

Liquidity & Cash Uses for the Nine Months Ended June 30, 2013

As shown in the June 30, 2013 balance sheet, cash, short-term investments, accounts receivable and inventories totaled $11.5 million compared to $16.7 million of total liabilities. The balance outstanding under our credit lines was $6,677,421, leaving us with borrowing capacity of $3,822,579 at June 30, 2013, down by $1,024,316 from the previous quarter's availability.

We generated positive operating cash flow of $1,072,465, while capital expenditures were $270,430. We received net cash of $507,953 from the sale and purchase of investments. The items classified on the balance sheet as "short-term investments" consist of various publicly traded mutual funds and common stocks. The items classified as "non-current investments" are minority positions in numerous non-related party private equity companies in manufacturing, service, distribution, technology, real estate, and financial industries. These are considered long-term investments and are not intended for short-term liquidation. Many of our "non-current" investments require the Company to commit to additional funding in excess of the initial contribution. These additional funds are collected from time-to-time, usually over 2 - 3 years, as the management of the investment deems it necessary. At June 30, 2013, we had remaining commitments to these entities of approximately $903,000 which does not appear as a liability on our balance sheet. Subsequent to quarter-end, we have not funded any of these remaining commitments.

During the nine months we used $4,761,428 to pay a common stock dividend which was funded with $2.0 million of available cash and $2.7 million from our credit line. We repurchased 15,862 shares of our common stock at a cost of $233,457. Subsequent to quarter-end we have not purchased any shares. Through August 14th, we have repurchased 395,334 shares, or 79.1% of the 500,000 shares authorized by the Board on May 20, 2010.

On March 6th the Company acquired a building it had been leasing and certain fixed assets contained in that building for a purchase price of $1,000,000. The purchase was financed with $200,000 of cash and an $800,000, ten-year mortgage note payable from our lender.

On April 26th the Company, through a newly formed subsidiary, PPT Industrial Machines Inc. ("PPT"), acquired certain assets and liabilities of Pacific Press Technologies LLC, a manufacturer and servicer of press brakes, hydraulic presses, and shears for industrial metal forming applications, located in Mt. Carmel, Illinois. The purchase price was $2,825,789, consisting of $2,225,789 in cash and $600,000 in a 36-month unsecured subordinated promissory note. The cash portion of the transaction was funded through a new $2.5 million, 36-month term loan from our lender. Additionally, PPT assumed the existing building lease for the Mt. Carmel, Illinois facility where the business operates. The lease expires October 31, 2027.

In association with this transaction, the Company's lender expanded the borrowing capacity of an existing working capital line of credit from $500,000 up to $1.5 million. Additionally, the lender reduced the borrowing capacity of an existing line of credit from $12.0 million down to $9.0 million.

Other Information

Quality Products' large number of smaller shareholders has become increasingly costly and burdensome to service. In addition to the stock repurchase program referenced above, the Board of Directors is considering effecting a reverse stock split as another solution to this issue. Such an action, if it were to occur, would reduce the number of shareholders by paying cash for the resulting fractional shares. Should the Company decide to proceed with this action, it will issue a separate communication at a later date more fully describing the matter.

Since 2010, the Company's subsidiary, Multipress, has been named as a defendant in multiple lawsuits. During 2011 a third party assumed the defense of these cases, but it is possible for the defense to revert back to Multipress. However, based on the outcome of a similar claim involving Multipress, management expects the lawsuits to be fully dismissed and does not expect any liability to the Company to result from these matters.

Quality Products currently has 125 employees, up from 116 in the previous report.

Columbus Jack will occasionally be a joint participant in certain military contracts which are awarded in the name of the other participating entity. As such, we will not recognize revenues associated with those contracts, but instead will recognize our share of the contract profits as royalty income.

For more information on products and services please visit: www.columbusjack.com, www.multipress.com, and www.pacific-press.com.

This press release, other than the historical information, consists of "forward-looking statements" (as defined in the Private Securities Litigation Reform Act of 1995), which are identified by the use of words such as "believes", "expects", "projects", and similar expressions. While these statements reflect the Company's current beliefs and are based on assumptions that the Company believes are reasonable, they are subject to uncertainties and risks that could cause actual results to differ materially from anticipated results.

 

QUALITY PRODUCTS, INC.

 

CONSOLIDATED BALANCE SHEET (UNAUDITED)

JUNE 30, 2013

 
ASSETS
 
CURRENT ASSETS:
 
Cash$146,594
Short-term Investments610,348

Accounts Receivable, net of allowance for doubtful accounts of $83,565

3,026,623

Inventories, net of reserve of $1,343,6697,789,213
Deferred Income Taxes, current365,179
Prepaid Expenses and Other Current Assets 513,777 
Total Current Assets 12,451,734 
 
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $3,399,440

2,864,030

 
INVESTMENTS, non-current3,852,165
 

INTANGIBLE ASSETS, net of accumulated amortization of $1,752,276

2,326,864

 

GOODWILL, net of accumulated amortization of $19,174

 

2,723,247

 
 
TOTAL ASSETS$24,218,040 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:
 
Current portion of Line of Credit$677,421
Current portion of Bank Borrowings165,000
Current portion of Notes Payable200,000
Current portion of Lease Liabilities8,535
Accounts Payable1,635,140
Accrued Payroll and Payroll Related Expenses897,395
Other Accrued Expenses and Current Liabilities625,404
Taxes payable314,620
Customer Deposits 1,543,835 
Total Current Liabilities 6,067,350 
 
PENSION & POSTRETIREMENT BENEFIT OBLIGATIONS652,427
 
DEFERRED TAXES, non-current589,591
 
LONG-TERM DEBT:
Line of Credit, net of current portion6,000,000
Bank borrowings, net of current portion3,104,167
Notes payable, net of current portion350,000
Lease Liabilities, net of current portion 33,109 
Total long-term debt 9,487,276 
 
TOTAL LIABILITIES 16,796,644 
 
 
STOCKHOLDERS' EQUITY:
 
Convertible preferred stock, Series A-
Convertible preferred stock, Series B-
Common stock16
Additional paid-in capital4,710,389
Accumulated other comprehensive (loss)(76,919)
Retained earnings3,021,367
Less cost of treasury stock (15,862 shares of common stock) (233,457)
Total stockholders' equity 7,421,396 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$24,218,040 
 
    
QUALITY PRODUCTS, INC.
 
CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2013 AND 2012

 

Three Months

Nine Months

(UNAUDITED)(UNAUDITED)

2013

2012

2013

2012

 
NET SALES$7,113,807$4,851,974$16,324,773$14,914,881
 
COST OF GOODS SOLD 3,923,805  2,615,412  9,196,813  7,986,443 
 
GROSS PROFIT3,190,0022,236,5627,127,9606,928,438
 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

1,476,929

  

879,703

  

3,250,378

  

2,636,135

 
 
INCOME FROM OPERATIONS

1,713,073

1,356,859

3,877,582

4,292,303

 
OTHER INCOME:
Interest expense(61,586)(36,787)(136,284)(59,916)
Gain on bargain purchase

209,158

--

209,158

--

Royalty and other income 

130,487

  

306,645

  

840,731

  

801,424

 
Other income, net 278,059  269,858  913,605  741,508 
 

INCOME BEFORE PROVISION FOR INCOME TAXES

1,991,132

1,626,717

4,791,187

5,033,811

 

PROVISION FOR INCOME TAXES

 

710,000

  

634,911

  

1,769,820

  

1,958,457

 
 
NET INCOME$1,281,132 $991,806 $3,021,367 $3,075,354 
 

UNREALIZED GAIN(LOSS) ON SHORT-TERM INVESTMENTS, NET OF TAX

2,004

(6,921

)

5,607

21,735

 

CHANGE IN POSTRETIREMENT BENEFITS, NET OF TAX

 

8,049

  

--

  

8,049

  

--

 
 
COMPREHENSIVE INCOME$1,291,185 $984,885 $3,035,023 $3,097,089 
 
BASIC INCOME PER SHARE:

$

.54

 

$

.41

 

$

1.27

 

$

1.28

 
 
DILUTED INCOME PER SHARE:

$

.54

 

$

.41

 

$

1.27

 

$

1.28

 
 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic2,373,5532,398,8562,378,3272,407,712
Diluted2,373,5532,398,8562,378,3272,407,712
 

  

QUALITY PRODUCTS, INC.

 
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED JUNE 30, 2013 AND 2012
 

2013

2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$3,021,3
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