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| UPG > SEC Filings for UPG > Form 10-Q on 13-Nov-2008 | All Recent SEC Filings |
13-Nov-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 and the state of the economy. 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 our ability to protect our intellectual property rights and secure the right to use other intellectual property that we deem to be essential to the conduct of our business;
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 regarding general economic conditions and the markets in which we operate;
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 and Outlook
While we have not yet experienced any significant impact from the general slowdown of the economy or current global credit crisis, continuing economic deterioration could have a negative impact on our sales, and therefore profitability in future periods, particularly in markets driven directly by changes in demand for consumer electronics and other consumer products. Further, while we have not seen any significant economic impact on our key customers relative to their business with us, at the present time we cannot assess how a weakening economy may affect our business levels going forward or general ability to access credit sources.
Revenues in the third quarter of 2008 rose 2.9% to $30.6 million compared to $29.8 million for the third quarter of 2007. Third quarter 2008 revenues from sources other than BHS and their dealers rose 13.2% to $17.3 million from $15.3 million in the third quarter of 2007, primarily due to price increases implemented by us to offset higher costs of goods sold as well as growth of new and existing customer accounts. Third quarter revenues from BHS decreased to $13.4 million, or 7.9% compared to $14.5 million in the third quarter of 2007. We believe this decrease primarily reflects a slower housing market. Additionally, and of note, our concentration of revenues with BHS and their dealers fell to 43.5% of our total revenues in the third quarter 2008 compared to 48.7% in the third quarter of 2007.
Gross profit grew 8.3% to $4.6 million for the third quarter of 2008, compared with a gross profit of $4.2 million in the third quarter in 2007. Gross margin as a percent of revenues also increased in the third quarter 2008 to 15.0%, compared to 14.2% in the comparable 2007 quarter. This increase reflects product mix improvement as well as some price increases to offset higher raw material costs. The product mix improvement also includes our reduced concentration with BHS, as noted above. We experienced cost volatility during the third 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 developing higher margin products and markets.
While higher net sales were offset by higher operating expenses for the third quarter of 2008, operating income was unchanged at $1.0 million for the third quarter in both 2008 and 2007. Increased operating expenses were largely the result of growth initiatives.
During the third quarter of 2008, our net income decreased to $0.4 million, or $0.08 per share, compared to $0.7 million, or $0.14 per share, for the third quarter of 2007. The decrease is primarily due to a decrease in interest income of approximately $56,000 from having cash in short term investments during 2007 and an increase of approximately $170,000 to reflect management's change in estimates of state taxes. In addition, we received a state tax refund of $89,000 during the third quarter of 2007 which contributed to an increase in net income for that quarter.
In addition to targeted organic growth, acquisitions are a significant component of our expansion initiatives and growth plans. As reported on Form 8-K during the third quarter, we entered into an agreement for the purchase of all of the tangible and intangible assets used in connection with the business known as Monarch Hunting Products. This acquisition, expected to close in January 2009, will enable us to expand our presence in the high-margin hunting and outdoor market by integrating our hunting battery and other outdoor accessory product lines with their products and customer base. We continue to monitor economic and industry conditions in order to evaluate potential synergistic business acquisitions that would allow us to leverage overhead, penetrate new markets and expand our core business and distribution channels.
Also, we reported on November 6, 2008 a new agreement with BHS extending our third party logistics services to them for another two years with successive one year renewals. Under the terms of the agreement, UPG is responsible for managing BHS' product procurement, warehousing, fulfillment and distribution needs.
We continue implementation of our Sarbanes-Oxley 404 compliance plan and expect associated costs during 2008 will be about the same as the $0.3 million incurred during 2007.
A more detailed analysis of our results of operations and financial condition follows.
Results of Operations for Period Ending September 30, 2008 Compared to September 30, 2007
For the three months ended September 30, 2008 and 2007:
For the three month period ended September 30, 2008, we had revenues of $30.6 million compared to $29.8 million for the similar period in 2007, an increase of $0.9 million or 2.9% . Revenues from BHS and its authorized dealers in the quarter were $13.3 million compared to $14.5 million from the third quarter of 2007, a decrease of 7.9% . As most of our BHS business is related to residential security systems, we attribute this decrease in our sales to them to the overall slowdown in the growth of residential construction. On the other hand, revenues from customers other than BHS increased to $17.3 million in the third quarter of 2008 from $15.3 million in the third quarter of 2007, or 13.2% reflecting price increases implemented by us to offset higher costs of goods sold as well as growth of new and existing customer accounts. We anticipate continued growth in revenue from the sales of battery, battery-powered product lines and new products.
For the three month period ended September 30, 2008, our cost of revenues increased to $26.0 million compared to $25.5 million for the similar period in 2007, an increase of $0.5 million or 2.0% . 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 lower at 85.0% compared to 85.8% for the similar period in 2007 due largely to improvement in product mix. As we expect raw material cost volatility in the future, we will continue to monitor customer and vendor pricing.
For the three month period ended September 30, 2008, our operating expenses, consisting of selling, general and administrative expenses as well as depreciation and amortization of property and equipment, increased approximately $0.4 million or 12.4% to approximately $3.6 million from $3.2 million for the similar period in 2007. Of this increase, approximate amounts totaling $0.2 million were attributable to costs related to increasing sales, such as personnel, travel and trade show participation, additional facilities costs of $0.1 million and general corporate expenses of $0.1 million.
For the three month period ending September 30, 2008 we incurred approximately $130,000 in depreciation and amortization expense compared to approximately $51,000 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 $236,000 for the three month period ended September 30, 2008 compared to $225,000 for the similar period in 2007, an increase of approximately $11,000. The average outstanding loan balance on the line of credit for the 2008 and 2007 periods was $9.9 million and $6.9 million, respectively and the weighted average interest rates during the two periods was 4.59% and 7.37%, respectively.
Interest income for the three month period ended September 30, 2008 decreased to a nominal amount compared to approximately $56,000 for the three month period ended September 30, 2007. The decrease was related to our IPO funds being held in short-term cash investments during the third quarter of 2007.
For the nine months ended September 30, 2008 and 2007:
For the nine month period ended September 30, 2008, we had revenues of approximately $90.4 million compared to $79.7 million for the similar period in 2007, an increase of $10.6 million or 13.3% . Revenues from BHS for the nine month period were approximately $40.4 million compared to $41.0 million for the similar period in 2007, a decrease of 1.6% . As most of our BHS business is related to residential security systems, we attribute this decrease 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 $50.0 million in 2008 from $38.7 million in 2007, or 29.2% . 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 nine month period ended September 30, 2008, our cost of revenues increased to approximately $76.8 million compared to $67.9 million for the similar period in 2007, an increase of $8.9 million or 13.1% . Cost of revenues as a percentage of revenues was relatively flat at 85.0% compared to 85.2% for the similar period in 2007. As we expect raw material cost volatility in the future, we will continue to monitor customer and vendor pricing.
For the nine month period ended September 30, 2008 our operating expenses, consisting of selling, general and administrative expenses as well as depreciation and amortization of property and equipment, increased approximately $1.8 million or 21.4% to approximately $10.4 million from $8.5 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, $0.4 million for costs related to increasing sales such as personnel, travel and trade show participation, additional facilities costs of $0.3 million and general corporate expenses of $0.5 million.
For the nine month period ending September 30, 2008 we incurred approximately $376,000 in depreciation and amortization expense compared to $142,000 for the similar period in 2007. The increase of approximately $234,000 is due primarily to our new warehouse management system which was placed into service in January, 2008.
Our interest expense totaled approximately $0.7 million and $1.0 million for the nine month periods ended September 30, 2008 and 2007, respectively, a decrease of approximately $0.3 million. The decrease is due primarily to lower average interest rates in 2008 under our line of credit. The average outstanding loan balance on the line of credit was $10.6 million and $12.4 million, respectively for the nine month periods ending September 30, 2008 and 2007. The weighted average interest rate during the periods was 4.8% and 7.65% respectively for 2008 and 2007.
Our interest income was nominal for the nine month period ended September 30, 2008 and totaled approximately $0.4 million for the nine month period ending September 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 $1.0 million and $0.7 million at September 30, 2008 and 2007, respectively.
For the nine month period ended September 30, 2008, net cash provided by operating activities was approximately $2.2 million compared to approximately $2.1 million used in operating activities for the nine month period ended September 30, 2007. The net cash provided by operating activities is due primarily to net income of approximately $1.4 million, non-cash charges for depreciation, amortization, provision for bad debts and obsolete inventory and stock-based compensation totaling approximately $0.8 million, a decrease of approximately $3.3 million in inventories, and an increase in accounts payable and accrued liabilities of approximately $0.9 million, offset by approximate increases of $3.7 million in our accounts receivable - trade, and $0.3 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 nine month periods ended September 30, 2008 and 2007, was approximately $1.3 million and $0.9 million, respectively. The cash used in 2008 was related to the purchases of property and equipment totaling approximately $0.4 million and $0.9 million in restricted cash deposited in escrow pursuant to an asset purchase agreement. The cash used in 2007 was related to the purchases of property and equipment.
Net cash used in financing activities for the nine month period ended September 30, 2008 was approximately $0.5 million compared to $9.3 million for the similar period in 2007. The net cash used in financing activities for 2008 included approximately $0.4 million reduction in our notes payable to Zunicom, Inc.
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 September 30, 2008 that rate was 5.03%. 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 interest rate swap is accounted for as an effective cash flow hedge and the change in fair value has been recorded in accumulated other comprehensive loss in shareholders' equity. 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 September 30, 2008, $12.7 million was outstanding under the line of credit and approximately $7.8 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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