Quality Products Announces Results For the Three and Six Months Ended March 31, 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 second quarter and six months operating results.
Net income was $757,215 compared to $1,008,005 earned last year, a decrease of $(250,790) or (24.9)%. Revenues were $4,449,798 compared to $5,287,698 last year, a decrease of $(837,900) or (15.8)%. The gross margin decreased to 41.3% this year from 43.8% 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 Multipress segment were $1,062,949 compared to $1,368,833, a decrease of $(305,884) or (22.3)%, and gross profit was $383,290 or 36.1% compared to $392,502 or 28.7%, a decrease of $(9,212) or (2.3)%. Incoming orders were $730,330 compared to $2,297,461 last year, a decrease of $(1,567,131) or (68.2)%. 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 $3,386,849 compared to $3,918,865 last year, a decrease of $(532,016) or (13.6)%. Gross profit was $1,456,172 or 43.0% compared to $1,924,323 or 49.1% last year, a decrease of $(468,151) or (24.3)%. Incoming orders were $4,981,178 compared to $2,813,070 last year, an increase of $2,168,108 or 77.1%. 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 $895,645 or 20.1% of sales in the current quarter compared to $882,353 or 16.7% last year, an increase of $13,292 or 1.5%, primarily resulting from environmental consulting fees incurred in preparation for the purchase of a building we had been leasing.
Other income was $248,555 in the latest quarter compared to other income of $226,745 last year, an increase of $21,810 or 9.6%. The latest quarter includes no royalties from our joint participation in certain military contracts and approximately $285,000 of distributions and net realized gains from our investments. Last year included no royalties from our joint participation in certain military contracts and approximately $241,000 of distributions and net realized gains from our investments. Interest expense, which reduces total other income, increased from $15,683 last year to $40,523 this year, resulting from our higher debt level.
Income tax expense was $435,157 in the latest quarter compared to $653,212 last year, a decrease of $(218,055) or (33.4)%. This primarily resulted from lower taxable income in the latest period.
Basic and diluted EPS was $0.32, down from $0.42 and the weighted average shares outstanding decreased to 2,380,714 from 2,410,066.
FISCAL SIX MONTHS RESULTS
Net income was $1,740,235 compared to $2,083,549 earned last year, a decrease of $(343,314) or (16.5)%. Revenues were $9,210,966 compared to $10,062,907 last year, a decrease of $(851,941), or (8.5)%. Gross margins were 42.8% this year, down from 46.6% 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 Multipress segment were $2,288,045 compared to $2,283,676 last year, an increase of $4,369 or 0.2%. Gross profit was $862,811 or 37.7% compared to $715,850 or 31.3%, an increase of $146,961 or 20.5%. Additionally, incoming orders were $2,388,676 compared to $3,474,375 last year, a decrease of $(1,085,699) or (31.2)%. 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 $6,922,921 compared to $7,779,231 last year, a decrease of $(856,310) or (11.0)%. Gross profit was $3,075,250 or 44.4% compared to $3,976,026 or 51.1% last year, a decrease of $(900,776) or (22.7)%. Incoming orders were $7,600,843 compared to $5,812,947 last year, an increase of $1,787,896 or 30.8%. 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 $1,773,449 or 19.3% of sales in 2013 compared to $1,756,431 or 17.5% in 2012, an increase of $17,018 or 1.0%. The increase primarily resulted from environmental consulting fees incurred in preparation for the purchase of a building we had been leasing.
2013 other income was $635,546 compared to $471,649 in 2012, an increase of $163,897 or 34.7%. 2013 includes approximately $60,000 of royalties from our joint participation in certain military contracts and approximately $640,000 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 $23,129 last year to $74,698 this year, resulting from our higher debt level.
Income tax expense was $1,059,820 in the current fiscal year compared to $1,323,545 last year, a decrease of $(263,725) or (19.9)%. This primarily resulted from lower pre-tax income in the current year.
Basic and diluted EPS decreased to $0.73 from $0.86 and the weighted average shares outstanding decreased to 2,380,714 from 2,412,115.
On May 8th, the order backlog for Multipress was approximately $1.2 million, down from the previous quarter's reported level of $1.5 million, and down from last year's level of $1.8 million.
The backlog for Columbus Jack was approximately $6.0 million, up from the previous quarter's reported level of $5.2 million, and up from last year's level of $4.3 million.
We do not provide financial estimates for future periods.
Liquidity & Cash Uses for the Six Months Ended March 31, 2013
As shown in the March 31, 2013 balance sheet, cash, short-term investments, accounts receivable and inventories totaled $8.6 million compared to $11.7 million of total liabilities. The balance outstanding under our credit lines was $7,653,105, leaving us with borrowing capacity of $4,846,895 at March 31, 2013, up by $281,269 from the previous quarter's availability.
We generated positive operating cash flow of $1,074,799, while capital expenditures were $262,830. We received net cash of $367,662 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 March 31, 2013, we had remaining commitments to these entities of approximately $859,000 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 six 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 did not repurchase any shares of our common stock. Subsequent to quarter-end we have not purchased any shares. Through May 8th, we have repurchased 379,472 shares, or 75.9% 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.
As previously disclosed, subsequent to quarter end, on April 26th, the Company announced an acquisition through a newly formed subsidiary, PPT Industrial Machines Inc., ("PPT"). Under the terms of the purchase agreement, 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 and $325,789 cash. Additionally, PPT assumed the existing building lease for the Mt. Carmel, Illinois facility where the business operates. The lease expires October 31, 2027.
The operations of PPT will be included in our financial statements for the first time in the quarter ending June 30, 2013. As with all of our operations, we do not provide financial projections.
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.
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 116 employees, including 52 acquired in the PPT transaction, up from 63 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.
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)
MARCH 31, 2013
Accounts Receivable, net of allowance for doubtful accounts of $74,570
Inventories, net of reserve of $270,161
Deferred Income Taxes, current
Prepaid Expenses and Other Current Assets
Total Current Assets
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $2,269,118
INTANGIBLE ASSETS, net of accumulated amortization of $1,691,489
GOODWILL, net of accumulated amortization of $19,174
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of bank borrowings
Accrued Payroll and Payroll Related Expenses
Other Accrued Expenses and Current Liabilities
Total Current Liabilities
DEFERRED TAXES, non-current
Line of Credit
Bank borrowings, net of current portion
Total long-term debt
Convertible preferred stock, Series A
Convertible preferred stock, Series B
Additional paid-in capital
Accumulated other comprehensive (loss)
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2013 AND 2012
COST OF GOODS SOLD
SELLING, GENERAL AND
INCOME FROM OPERATIONS
Royalty and other income
Other income(expense), net
PROVISION FOR INCOME TAXES
PROVISION FOR INCOME TAXES
UNREALIZED GAIN ON SHORT-TERM INVESTMENTS, NET OF TAX
BASIC INCOME PER SHARE:
DILUTED INCOME PER SHARE:
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
QUALITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2013 AND 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Bad Debt Expense
(Gain)Loss on sale of investments
Changes in operating assets and liabilities: