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| HSR > SEC Filings for HSR > Form 10-K on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Annual Report
The following discussion of Hi-Shear's financial condition and results of operations should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. This report, including this discussion, contains forward-looking statements about business strategies, market potential, and product launches and future financial performance that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. These factors include the acceptance and pricing of its new products, the development and nature of its relationship with key strategic partners, the allocation of the federal budget for government sponsored military and aerospace programs and the economy in general.
Hi-Shear's revenues are derived principally from fixed-price contracts that are accounted for on the percentage-of-completion method. Revenues for those contracts are calculated on the basis of the relationship between costs incurred and total estimated costs at completion of the contracts ("cost-to-cost" type of percentage-of-completion method of accounting).
Because of the large amount of contracts in process at any point in time, changes in estimated costs to complete can have a significant impact on profitability of the Company. We estimate that each 1% change in the total estimated costs to complete the contracts in process at May 31, 2009 would change both the amount of revenue and earnings recognized by approximately $79,000. We evaluate and update estimated costs to complete for open contracts on a regular basis. Those evaluations and updates include the participation of management and other key employees from all operational areas. Changed estimates to complete the contracts are then incorporated in the calculations of revenues and profits.
Included in the inventories recorded and maintained by the Company are purchased and manufactured component parts and finished goods that relate to previously completed contracts. The Company's management periodically assesses the likelihood that those inventory items will be used in future
contracts, since many of the Company's past contracts relate to on-going programs, for which it will be awarded similar contracts. The current method utilized in management's assessment is to evaluate individual items in the inventories and assess current or future contract requirements which may use inventory parts. A reserve is established for individual inventory parts based on said analysis. Since the inventory reserve methodology is subjective, and subject to changes in estimates based upon updated information, changes in those estimates can be substantial.
Fiscal Year Ended May 31, 2009 compared with Fiscal Year Ended May 31, 2008
Revenues recognized during fiscal year 2009 were $25,933,000 compared to the $27,628,000 of revenues recognized during fiscal year 2008. Some customer delays in releasing their requirements to the company resulted in the revenue decrease for the year. Although these orders were subsequently placed with the Company later during the fiscal year, the delays extended some recognition of revenue on those orders to fiscal year 2010. The Company serviced approximately 200 separate space and defense projects during the year including space and national missile defense applications accounting for 66% of total revenues and tactical weapon applications accounting for 19% of total revenues.
Cost of revenues for the fiscal year 2009 was $12,285,000, or 47% of revenues, compared to $14,827,000, or 54% of revenues, for the prior fiscal year. Cost containment programs, including utilization of new equipment, absorption of fixed overhead expenses and continuing improvements in manufacturing procedures contributed to the reduction in cost of revenues.
Gross margin continued to improve in both total amount and as a percentage of revenues. Satellite and missile defense products experienced increased profitability and contributed to gross margin percentage growth year over year. Gross margin for fiscal year 2009 increased $847,000 to $13,648,000, or 53% of revenues, from $12,801,000, or 46% of revenues, in fiscal year 2008. Consistent with year over year reductions to cost of revenues, the Company continues to realize gross margin improvement.
Selling, general and administrative expenses were $2,513,000 for fiscal year 2009, compared to $7,259,000 in fiscal year 2008. The 65% decrease or $4,746,000 results from the Company's favorable litigation settlement offset by some increases in executive compensation and consulting expenses.
Reduction in the amounts previously accrued for litigation resulted from the Company entering into a settlement agreement to close the ongoing litigation with United Space Alliance. The outstanding accrual in the amount of $3,275,000 in addition to accrued interest totaling $152,000, has been reduced to the settlement amount of $1,600,000. Also, the judgment amount of $57,800 owed to the Company by Alliance was forgiven as part of the agreement. In addition, $252,000 was expended during the year on attorney fees related to this litigation. The net effect of these adjustments resulting from the settlement is a reduction of selling, general and administrative expenses and an increase to operating income.
Operating income increased to $11,135,000 compared to the $5,542,000 for the prior year. The increase in operating income was the result of improvements in gross margin and the favorable effect of the litigation settlement.
The Company realized pre-tax income of $11,095,000, or 43% of revenues, for the fiscal year ended May 31, 2009, compared to pre-tax income of $5,586,000, or 20% of revenues, for the previous fiscal year. The increase of 99% was driven by the improvements to gross margin and the favorable litigation settlement.
Income tax expense for fiscal year 2009 was $4,419,000 and 40% of pre-tax income, compared to $2,046,000 and 37% of pre-tax income for fiscal year 2008. The increase in income tax expense occurred primarily as a result of the increase in pre-tax income, upon which reported income tax expense is principally based. The increase as a percentage relates to an increase in non-deductable compensation expense associated with share based awards.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes" ("FIN 48"), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on deregulation, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the provisions of FIN 48 on June 1, 2007. The adoption of FIN 48 did not have a significant effect on the Company's financial position and results of operations for the year ended May 31, 2009. Further, the Company is currently under audit by the Internal Revenue Service. The Company's management has considered the various tax positions subject to examination in accordance with FIN 48, and as a result, the Company's management does not anticipate any material adjustments that may arise as the result of the examination. Accordingly, no adjustments have been made to the accompanying financial statements.
Net income for the fiscal year ended May 31, 2009 was $6,676,000, or $0.98 per share and 26% of revenues, compared to $3,540,000, or $0.52 per share and 13% of revenues, for the previous fiscal year. The net income increased significantly over last year and is driven by the growth in product gross margins and a favorable litigation settlement. The Company's positive earnings supported the distribution of dividends to shareholders, of a $0.50 per share dividend to shareholders in October, 2008.
Subsequent to May 31, 2009 on July 16, 2009 the Board of Directors approved a cash dividend of $0.75 per share payable on or about August 21, 2009.
Revenues in the fourth quarter were $7,234,000 compared to $9,102,000 for the same quarter in fiscal year 2008. Some order delays experienced earlier in the fiscal year resulted in the revenues associated with those orders being extended into 2010 and resulted in the lower fourth quarter revenues compared to the prior year. Improvements in manufacturing processes and lower variable overhead expenses contributed to growth in gross margins and higher operating margins. Gross margin in the fourth quarter of fiscal year 2009 was 53% compared to 47% for the same period last year. The implementation of new automated equipment, operating efficiencies and lower variable overhead costs contributed to a strong gross margin. Operating margin in the fourth quarter of fiscal year 2009 was 63% compared to 5% for the same period last year due to improved gross profitability and the favorable litigation settlement described above. All operating expenses are covered by current cash balances and thus, there is no borrowing on the revolving line of credit the Company maintains with its commercial bank.
Accounts receivable balances, which consist of billed and unbilled amounts were $2,769,000 and $7,977,000 respectively at the end of fiscal year 2009. The billed and unbilled amounts at the completion of fiscal year 2008 were $8,111,000 and $6,363,000 respectively. The accounts receivable balances at both May 31, 2009 and May 31, 2008 were not reduced for reserves on doubtful accounts. The decrease in billed receivables of $5,342,000 can be attributed to the delays in delivering customer hardware resulting in reduced billing opportunities. In addition, the billed balance at fiscal year end 2008 included a $1.2 million progress billing on an Air Force contract that did not have a corresponding billing
at the end of the fiscal year 2009. Also, contributing to the higher fiscal year 2008 balance was the final billing of $1.3 million for delivery of hardware on a completed contract that did not have a corresponding event at the end of fiscal year 2009.
Unbilled receivables represent revenues recognized from fixed priced contracts based upon percentage-of-completion, but in advance of completing billable events for which invoices are submitted to customers. As billing events occur for such contracts (generally tied to delivery of hardware), previously unbilled receivables are converted to billed accounts receivable with the preparation and submission of invoices to customers. Unbilled receivables at May 31, 2009 were $7,977,000, compared to $6,363,000 at the end of fiscal year 2008. The increase in unbilled receivables at May 31, 2009 can be attributed to continuing efforts on on-going projects not yet delivered.
Inventories, net of reserves, increased to $1,512,000 at May 31, 2009 from $1,345,000 at May 31, 2008. Inventory reserves, which are established in accordance with management's estimates regarding the extent to which inventory items will ultimately be used to generate future revenues, were $553,000 at May 31, 2009, compared to $526,000 at May 31, 2008.
Trade accounts payable decreased to $611,000 at the end of fiscal year 2009 compared to $740,000 at the end of fiscal year 2008. Timing of receipts submitted to Hi-Shear for payment at the end of any fiscal month/year will directly impact the outstanding balance for invoices due. There are no disputed amounts included in accounts payable at May 31, 2009.
At both May 31, 2009 and May 31, 2008, the Company did not have any bank debt
and has available borrowing of up to $5,000,000 available from its commercial
bank under a revolving line of credit maturing December 15, 2009 (See Note
8). The Company also had available a $1,000,000 equipment letter of credit that
expired March 2, 2009, and bore interest under the same terms as the revolving
line of credit. The equipment line of credit was not renewed based on
projections of short term needs but can be re-instated if necessary.
Net cash of $9,679,000 was provided by operating activities during fiscal year 2009, compared to net cash of $5,994,000 that was provided by operating activities during fiscal year 2008. The increase in net operating cash flows between the two fiscal years was primarily the result of increases in net income and collections of accounts receivables.
To supplement cash provided by operating activities, the Company maintains a business loan agreement including a revolving line of credit with a commercial bank, for the purpose of having sufficient cash to meet its cash obligations. There was no outstanding balance under this line of credit at May 31, 2009. Since the maximum borrowing limit under the line of credit is $5,000,000, the amount available for borrowing at May 31, 2009 was $5,000,000. The line of credit is available to the Company through December 15, 2009, which is the maturity date of the business loan agreement covering the line of credit. Outstanding amounts under the line of credit bear interest at prime less .25% (3.00% at May 31, 2009) or at the Company's option LIBOR plus 2% (3.22% at May 31, 2009).
The Company's $1,000,000 equipment letter of credit matured March 2, 2009 and was not renewed.
The business loan agreement contains various financial covenants that have not been modified during the fiscal year. At May 31, 2009, the Company was compliant with all of the financial covenants.
The Company's management believes that the current line of credit is sufficient to enable the Company to meet its projected needs for cash throughout the period of time during which the revolving line of credit is available for its use.
The Company and bank executives assigned to Hi-Shear accounts continue to keep current on banking regulatory changes that have been evolving during current economic times. During the fourth quarter of fiscal year 2009, the Company moved its funds from a "sweep" account insured by government backed securities to a "passbook" account FDIC insured to $250 million. Cash and cash equivalents at the end of the fiscal year 2009 was $7,502,000.
With the approval of its Board of Directors, the Company paid a cash dividend of $3,410,000, or $0.50 per share to shareholders of record as of the close of business October 24, 2008. Subsequent to May 31, 2009 on July 16, 2009 the Board of Directors approved a cash dividend of $0.75 per share payable on or about August 21, 2009. The ex-dividend date is August 12, 2009.
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