Add
PIII to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PIII > SEC Filings for PIII > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
References to "we," "us," "our," "the Company," or "PECO II" refer to PECO II, Inc. unless the context indicates otherwise.
Overview
The first-quarter financial performance reflects the impact of the weak economic conditions that began to impact our industry in the fourth quarter of 2008. We had a weak fourth-quarter backlog coming into 2009. As we entered 2009, January product bookings continued at significantly reduced levels. January 2009 product bookings were 43% below January 2008 levels. While February and March product bookings increased over January, they were down 10% from 2008 levels. The weak product bookings were partially offset by strong services bookings. Services bookings for the first quarter 2009 were up 67% versus the first quarter of 2008. The strong services bookings growth results from a significant service provider contract award made in the fourth quarter of 2008. Given the weak economic environment, we took aggressive cost action by reducing the workforce by 25 and managing out-of-pocket expenses resulting in a $0.2 million reduction of our operating expenses in the first quarter of 2009. These cost-cutting actions are expected to result in savings of $1.2 million on an annualized basis.
During the period, we continued to expand the versatility of our Quantum™ Power System by developing a distribution panel for use in large applications. The Quantum Consolidated System provides up to 24 load distribution positions for one to four Quantum power shelves. Applications for the new product include cell sites, small central offices, and controlled environment vaults.
We also introduced a new outside plant cabinet, the SC1037, for use in wireless backhaul and fiber termination applications. The SC1037 incorporates PECO's Quantum and MPS power systems into the configurations.
We also developed an enhanced version of our 827E Inverter System. The 24V input system now provides 30 Amps of 120Vac output in a 23-inch shelf, a 50% increase in output power.
We will continue to take aggressive cost action as necessary during these challenging economic times. At the same time, we continue to focus on our industry leading responsiveness capability to ensure our customers can continue to rely on PECO II.
Results of Operations
Our net sales decreased to $7.5 million for the three months ended March 31, 2009, a decrease of $1.5 million, or 17.0%, compared to the corresponding prior year period. Product net sales were $5.4 million for the first quarter of 2009, a decrease of $1.9 million, or 25.6%, compared to the first quarter of 2008. With the exception of the Company's major Tier 1 service provider customers, product revenue decreases were realized primarily from decreased volume.
Services net sales were $2.1 million for the first quarter of 2009, an increase of $341 thousand, or 19.8%, as compared to the first quarter of 2008. Services revenues grew as a result of a major contract award achieved in the fourth quarter of 2008.
As of March 31, 2009, our sales backlog, which represents total dollar volume of firm sales orders not yet recognized as revenue, was $5.0 million, a $255 thousand, or 5.3%, increase from the comparable prior year period. The sales backlog at the end of the first quarter, however, was a $2.5 million, or a 97.7% increase from December 31, 2008. Product backlog of $3.0 million was a $1.1 million, or 55.8% increase from December 31, 2008, while services backlog was $2.0 million, a $1.4 million, or 223%, increase from December 31, 2008. Our April 2009 bookings of $5.7 million were an increase of $1.1 million over April 2008. This increase was totally driven by continued growth in services bookings.
Gross margin dollars were $1.0 million for the quarter ended March 31, 2009, as compared to $1.5 million for the quarter ended March 31, 2008. Gross margin as a percentage of net sales decreased to 13.9% for the three months ended March 31, 2009, compared to 16.3% for the comparable prior year period.
For the quarter ended March 31, 2009, product gross margin was $756 thousand, as compared to $1.2 million for the corresponding period in 2008, or a decrease of 35.4%. The decline in product gross margins is attributed to the reduced revenue levels realized in the first quarter of 2009 due to the overall economic environment.
The services gross margin was $287 thousand for the first quarter of 2009, as
compared to $294 thousand for the first quarter of 2008, or a decrease of 2.4%.
This decline was primarily attributable to start up costs incurred in the first
quarter of 2009 as the Company began to ramp resources to support the new
services contract awarded in the fourth quarter of 2008. The Company does not
expect the startup costs to be recurring in the coming quarter.
Research, development and engineering expense incurred was $521 thousand for the quarter ended March 31, 2009, down from $621 thousand for the quarter ended March 31, 2008. The reduction in quarterly spending over the 2008 quarterly average results from the completion of certain new products in 2008 that began to be rolled out to the market in the fourth quarter of 2008. As a percentage of net product sales, research, development and engineering expense was 9.6% for the quarter ended March 31, 2009, as compared to 8.5% for the quarter ended March 31, 2008. The percentage increase was driven by the reduced product revenues resulting from the poor economic conditions currently existing in the market. As a percentage of revenues, this spending is expected to decline as revenues grow in future quarters.
Selling, general and administrative expense decreased to $1.8 million for the quarter ended March 31, 2009, from $1.9 million for the quarter ended March 31, 2008. This decrease reflects the benefits being realized from the cost reduction activities taken by the Company in the first quarter of 2009. As a percentage of net sales, selling, general and administrative expense increased to 23.6% for the quarter ended March 31, 2009, compared to 21.2% in the comparable prior year period. The percentage increase was driven by the reduced product revenues resulting from the poor economic conditions currently existing in the market. As a percentage of revenues, this spending is expected to decline as revenues grow in future quarters.
Liquidity and Capital Resources
As of March 31, 2009, available cash and cash equivalents approximated $5.5 million. We believe that cash and cash equivalents, anticipated cash flow from operations, and our credit facilities will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months. Working capital at March 31, 2009 was $11.1 million, which represented a working capital ratio of 2.6 to 1, compared to $12.4 million at December 31, 2008, which represented a working capital ratio of 2.5 to 1. Capital expenditures for the three months ended March 31, 2009, totaled $81 thousand. We continue our efforts to conserve cash.
Cash flows provided by operating activities for the three months ended March 31, 2009, was $627 thousand. This increase was driven by strong accounts receivable collections combined with reduced inventory levels offset by the net loss and decreases in accounts payable. There was $72 thousand of net cash used for investing activities which was primarily from capital expenditures offset by the sale of excess equipment as a result of outsourcing. Cash used by financing activities was $891 thousand from the net decrease in bank overdrafts. The change in the Company's bank overdraft position is the result of the timing of payments due on trade accounts payables.
Cash flows used for operating activities for the three months ended March 31, 2008, was $968 thousand. While this included a net loss and decreases in accounts payable, it was offset by non-cash charges and decreases in accounts receivable and inventory. There was $11 thousand of net cash provided by investing activities which was primarily from the sale of excess equipment as a result of outsourcing offset by minimal capital expenditures.
Contractual Obligations
We have an agreement with National City Bank to provide all banking services and a $3.5 million line of credit. As collateral for the line of credit, the Company maintains a deposit account with the bank. As of March 31, 2009, the balance on the line of credit was $1.2 million. As such, $1.2 million of the deposit account is reflected as restricted cash.
Critical Accounting Policies and Estimates
In preparing the accompanying unaudited condensed consolidated financial statements and accounting for the underlying transactions and balances, we applied the accounting policies disclosed in the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2008. For a detailed discussion of the critical accounting policies and estimates, see the Management Discussion and Analysis included in our Annual Report. There were no significant changes in these critical accounting policies and estimates in the first quarter of 2009, except for the recently adopted accounting pronouncements as discussed below.
Recently Adopted Accounting Pronouncements
As permitted, management elected to defer adoption of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, until 2009 for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. Accordingly, beginning January 1, 2009, management will apply the provisions of SFAS 157 to nonfinancial assets and liabilities as the nonrecurring fair value measurements are required. During 2009, there have been no fair value measurements on a nonrecurring basis of the Company's nonfinancial assets and liabilities that require further consideration or disclosure.
Effective January 1, 2009, we adopted SFAS 141(R), Business Combinations, and SFAS 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements. These new standards significantly change the financial accounting and reporting of business combination transactions and noncontrolling (or minority) interests in consolidated financial statements. We have not entered into any business combination transactions during 2009; and therefore, the effect of implementing these standards will be dependent upon the nature and extent of future business combination transactions.
Effective January 1, 2009, we adopted the Financial Accounting Standards Board's Staff Position on EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ("FSP EITF 03-6-1"). Under the guidance of FSP EITF 03-6-1, unvested share-based awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method described in SFAS 128, Earnings per Share. Before adoption, the Company already treated unvested share-based awards granted in share-based payment transactions as participating securities. As such, the adoption of FSP EITF 03-6-1 did not have any effect on the computation of earnings per share.
Forward-Looking Statements
Certain of the Company's statements in this Quarterly Report on Form 10-Q and the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operation are not purely historical, and as such are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but may not be limited to, all statements regarding the Company's and management's intent, beliefs, expectations, and plans, such as statements concerning the Company's future profitability, industry trends, operating results, and product development strategy. These forward-looking statements include numerous risks and uncertainties, including, without limitation: a general economic recession; a downturn in our principal customers' businesses; current and future mergers of key customers; the volatility in the communications industry; the demand for communications equipment generally and in particular for the products and services offered by the Company; the Company's ability to generate sales orders during fiscal 2009 and thereafter; the ability to develop and market new products and product enhancements; the potential environmental issues in regards to an aging manufacturing facility; the ability to attract and retain customers; competition and technological change; and successful implementation of the Company's business strategy. One or more of these factors have affected, and in the future could affect, the Company's business and financial results in future periods and could cause actual results to differ materially from plans and projections.
There can be no assurances that the forward-looking statements included herein will prove to be accurate, and issuance of such forward-looking statements should not be regarded as a representation of the Company, or any other person, that the objectives and plans of the Company will be achieved. In addition, this Quarterly Report on Form 10-Q contains time-sensitive information that reflects management's best analysis only as of the date of this report. PECO II does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this release. Further information concerning issues that could materially affect financial performance related to forward-looking statements can be found in the Company's periodic filings with the Securities and Exchange Commission.
Results for the interim period are not necessarily indicative of the results that may be expected for the entire year.
ITEM 3.
|
|