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| UPG > SEC Filings for UPG > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
The following discussion and analysis should be read in conjunction with our unaudited interim financial statements and notes thereto included elsewhere in this Form 10-Q. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995. Forward-looking statements, including statements regarding our plans, objectives, expectations and intentions, involve forward-looking statements that reflect the current view about future events and financial performance based on certain assumptions. They include opinions, forecasts, projections, assumptions, guidance, expectations, beliefs or other statements that are not statements of historical fact. In some cases, forward-looking statements can be identified by words such as "may", "can", "will", "should", "could", "expects", "hopes", "believes", "plans", "anticipates", "estimates", "predicts", "projects", "potential", "intends", "approximates" or the negative or other variation of such terms and other comparable expressions. Forward-looking statements in this Report may include statements about:
º future financial and operating results, including projections of revenues, income, expenditures, cash balances and other financial items;
º our capital requirements and the need for additional financing;
º our ability to acquire new customers or expand our relationships with our existing customers;
º our ability to find alternative suppliers for batteries and other portable power products
º our ability to successfully consummate financing and merger and acquisition transactions;
º the outcome of various regulatory and legal proceedings in which we are currently involved;
º our ability to execute our growth and expansion and acquisition strategies;
º current and future economic and political conditions;
º overall industry and market performance;
º competition;
º management's goals and plans for future operations; and
º other assumptions described in this Report underlying or relating to any forward-looking statements
The forward-looking statements in this Form 10-Q are only predictions. Actual results could, and likely will, differ materially from these forward-looking statements for many reasons, including the risks described under "Risk Factors" for the year ended December 31, 2007 filed with the SEC in our form 10-K and the other risks and uncertainties you can find in our press releases and other SEC filings. No guarantee about future results, performance or achievements can be made. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Revenues in the second quarter of 2008 rose 14.4% to $30.2 million compared to $26.4 million for the second quarter of 2007, reflecting the strength in our new and existing customer relationships and successful execution of our growth strategy. Second quarter 2008 revenues from sources other than Brinks Home Security ("Brinks") and their dealers rose 35.0% to $16.8 million from $12.4 million in the second quarter of 2007, reflecting growth of new and existing customer accounts as well as price increases implemented by us to offset higher costs of goods sold. Growth in our higher margin business for the second quarter was driven 21% by volume and 79% by price increases. Second quarter revenues from Brinks decreased to $13.5 million, or 3.9% compared to $14.0 million in the second quarter of 2007. We believe this slight decrease primarily reflects slower growth in the residential housing market. Additionally, and of note, our concentration of revenues with Brinks and their dealers fell to 44.6% of our total revenues in the second quarter 2008 compared to 53.0% in the second quarter of 2007.
Gross margin grew 8.9% but decreased as a percentage of revenues for the second quarter of 2008 to 15.0% compared to 15.7% in the comparable period in 2007. We attribute the decrease to timing of passing along our product cost increases. This decrease reflects product mix improvement as well as some price increases to offset higher raw material costs. However, while we improved our product mix toward our historically higher margin products, the margins realized did not reflect the benefit of price increases implemented slowly due to a very competitive market especially for our "commodity" influenced products. Of note, our 15.0 % second quarter 2008 margin as a percentage of sales is only slightly down from 15.2% for the first quarter of 2008 and ahead of the third and fourth quarters of 2007, continuing a generally upward trend. The product mix improvement also includes our reduced concentration with Brinks, as noted above. We experienced cost increases during the second quarter of 2008 and expect continued volatility throughout the year in certain raw materials such as lead, copper and zinc. Growing our gross margins will continue to be more challenging when prices for raw materials are volatile. We will continue recovering cost increases from our customers wherever possible. Currently, there is no indication that we will not be able to obtain supplies of all the materials that we require. We continue to focus on and develop higher margin products and markets.
During the second quarter of 2008, our net income decreased 35.9% to $0.5 million, or $0.09 per share, compared to $0.7 million, or $0.15 per share, for the second quarter of 2007. The decrease is primarily
In addition to targeted organic growth, acquisitions are a significant component of our expansion initiatives and growth plans. We continue to diligently evaluate markets and suitable acquisition candidates that will facilitate reaching our strategic objectives.
We continue implementation of our Sarbanes-Oxley 404 compliance plan and expect associated costs during 2008 to be less than the approximately $0.3 million incurred during all of 2007.
A more detailed analysis of our results of operations and financial condition follows.
Results of Operations For Period Ending June 30, 2008 Compared to June 30, 2007
For the three months ended June 30, 2008 and 2007:
For the three month period ended June 30, 2008, we had revenues of $30.2 million compared to $26.4 million for the similar period in 2007, an increase of $3.8 million or 14.4%. Revenues from Brinks Home Security and its authorized dealers in the quarter were $13.5 million compared to $14.0 million from the second quarter of 2007, a decrease of 3.9% . As most of our Brinks business is related to residential security systems, we attribute this slight decrease in our sales to them to the overall slowdown in the growth of residential construction, offset by price increases. On the other hand, revenues from customers other than Brinks increased from $12.4 million in the second quarter of 2007 to $16.8 million in the second quarter of 2008, or 35.0% reflecting growth of new and existing customer accounts as well as price increases implemented by us to offset higher costs of goods sold. We anticipate continued growth in revenue from the sales of battery, battery-powered product lines and new products.
For the three month period ended June 30, 2008, our cost of revenues increased to $25.7 million compared to $22.3 million for the similar period in 2007, an increase of $3.4 million or 15.4% . A portion of this increase was attributable to increases in the prices of lead, copper and zinc, the significant commodity raw materials for batteries and wire. Cost of revenues as a percentage of revenues was slightly higher at 85.0% compared to 84.3% for the similar period in 2007 due primarily to timing of passing on cost increases. As we expect raw material cost increases to continue in the near future, we continually monitor customer and vendor pricing.
For the three month period ended June 30, 2008, our operating expenses, consisting of selling, general and administrative expenses as well as depreciation and amortization of property and equipment, increased approximately $0.8 million or 28.6% to approximately $3.5 million from $2.7million for the similar period in 2007. Of this increase, approximate amounts totaling $0.4 million were attributable to compensation and other employee related expenses due to overall growth, $0.1 million for costs related to increased sales such as commissions, travel, and trade show participation, additional facilities costs of $0.1 million and general corporate expenses of $0.2 million.
For the three month period ending June 30, 2008 we incurred approximately $135,000 in depreciation and amortization expense compared to approximately $47,000 in the similar period for 2007. This increase is primarily related to our new logistics and distribution system that was placed into service at the beginning of 2008.
Our interest expense totaled approximately $247,000 for the three month period ended June 30, 2008 compared to $365,000 for the similar period in 2007, a decrease of approximately $118,000. The decrease is due to lower average interest rates in 2008 and decreased average borrowings under our line of credit. The average outstanding loan balance on the line of credit for the 2008 and 2007 periods was $11.5 million and $15.1 million, respectively and the weighted average interest rates during the two periods was 5.57% and 7.82%, respectively.
Our interest income for the three months ended June 30, 2008 was nominal and totaled approximately $167,000 for the three month period ending June 30, 2007. The decrease is due to funds raised during our initial public offering being maintained in short term investments.
For the six months ended June 30, 2008 and 2007:
For the six month period ended June 30, 2008, we had revenues of approximately $59.7 million compared to $50.0 million for the similar period in 2007, an increase of $9.8 million, or 19.6% . Revenues from Brinks Home Security and their dealers for the six month period were approximately $27.0 million compared to $26.5 million for the similar period in 2007, an increase of 1.9% . As most of our Brinks business is related to residential security systems, we attribute this modest increase primarily to the overall slowdown in the residential construction industry, thus slowing the demand for certain security products. However, revenues from other customers for the similar periods increased to approximately $32.7 million in 2008 from $23.4 million in 2007, or 39.6% . We attribute this increase to more focused marketing to existing and new accounts. In addition, we experienced price increases in certain battery and battery-related products as a result of increases in the cost of lead and copper which we were able to successfully pass along to our customers. We anticipate continued growth in revenue from the sales of battery, battery-powered product lines and new products.
For the six month period ended June 30, 2008, our cost of revenues increased to approximately $50.7 million compared to $42.4 million for the similar period in 2007, an increase of $8.4 million, or 19.8% . Cost of revenues as a percentage of revenues was relatively flat at 84.9% compared to 84.8% for the similar period in 2007. We continue to monitor customer and vendor pricing due to raw material cost increases, which are expected to continue in the near future.
For the six month period ended June 30, 2008 our operating expenses, consisting of selling, general and administrative expenses as well as depreciation and amortization of property and equipment, increased approximately $1.5 million, or 26.9% to approximately $6.8 million from $5.3 million for the similar period in 2007. Of this increase, approximate amounts totaling $0.6 million were attributable to compensation and other employee related expenses due to overall growth, $0.2 million for costs related to increased sales such as commissions, travel, and trade show participation, additional facilities costs of $0.3 million and general corporate expenses of $0..4 million.
For the six month period ending June 30, 2008 we incurred approximately $266,000 in depreciation and amortization expense compared to $104,000 for the similar period in 2007.
Our interest expense totaled approximately $0.5 million and $0.7 million for the six month periods ended June 30, 2008 and 2007, respectively, a decrease of approximately $0.2 million. The decrease is due to lower average interest rates in 2008 and decreased average borrowings under our line of credit. The
Our interest income was nominal for the six month period ended June 30, 2008 and totaled approximately $0.3 million for the six month period ending June 30, 2007. The decrease is due to funds raised during our initial public offering being maintained in short term investments during 2007.
We had cash and cash equivalents of approximately $0.5 million and $13.3 million at June 30, 2008 and 2007, respectively. The 2007 amount includes approximately $11.8 million of net proceeds from our IPO that was consummated in late December 2006. We have used approximately $1.8 million of the IPO funds for specific projects and approximately $10.0 million has been applied to temporarily reduce our line of credit pending acquisition opportunities or other designated IPO uses.
For the six month period ended June 30, 2008, net cash provided by operating activities was approximately $1.0 million compared to a nominal amount used in operating activities for the six month period ended June 30, 2007. The net cash provided by operating activities is due primarily to net income of approximately $1.0 million, non-cash charges for depreciation, amortization, provision for bad debts and obsolete inventory and stock-based compensation totaling approximately $0.5 million and a decrease of approximately $3.9 million in inventories, offset by approximate increases of $3.7 million in our accounts receivable - trade, and $0.5 million in prepaid expenses. The overall improvement toward cash provided by, rather than used in operating activities is attributable generally to our increased cash flow from growing operations and managing inventory growth.
Cash used in investing activities for the six month periods ended June 30, 2008 and 2007, was approximately $319,000 and $143,000, respectively. The cash used in 2008 and 2007 was related to the purchases of property and equipment.
Net cash used in financing activities for the six month period ended June 30, 2008 was approximately $0.8 million compared to cash provided by financing activities of $0.4 million for the similar period in 2007. The net cash used in financing activities for 2008 was primarily comprised of reductions in net borrowings on our line of credit.
We have a $30 million line of credit with Compass Bank which matures on July 5, 2012. The facility bears interest at LIBOR Index Rate plus a sliding range from 1.25% to 2.50% based on quarterly covenant performance. At June 30, 2008 that rate was 4.48% . In June, 2008 We entered into an interest rate swap agreement which "locks-in" a fixed rate of 5.85% on the first $6.0 million outstanding under the line of credit, thus swapping the fixed rate for the current variable rate as calculated under the original loan agreement through its maturity date of July 5, 2012. The rate swap agreement's fair value at June 30, 2008 was not material. The line of credit is due on demand and is secured by accounts receivable, inventories, and equipment. The line's availability is based on a borrowing formula, which allows for borrowings equal to 85% of our eligible accounts receivable and a percentage of eligible inventory. In addition, we must maintain certain financial covenants including ratios on funded debt to EBITDA, as well as a fixed charge ratio. At June 30, 2008, $12.0 million was outstanding under the line of credit and approximately $8.3 million remained available for borrowings under the line of credit based on the borrowing formula.
We believe that cash provided by operations and cash available under our line of credit will be sufficient to meet our operational needs over the next year.
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