Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended October 29, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from
to
Commission
file number 1-11750
AEROSONIC
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
|
74-1668471
(I.R.S. Employer Identification
No.)
|
1212
North Hercules Avenue
Clearwater,
Florida 33765
(Address
of principal executive offices and Zip Code)
Registrant’s
telephone number, including area code: (727) 461-3000
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes xNo
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer¨ Smaller
reporting company x
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes ¨ No
x
As of
December 13, 2010, the issuer had 3,748,472 shares of Common Stock outstanding,
net of treasury shares.
PART
I
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1
|
Financial
Statements
|
|
|
|
|
|
Consolidated
Balance Sheets as of October 29, 2010 (unaudited) and January 31,
2010
|
4
|
|
|
|
|
Consolidated
Statements of Operations for the three and nine months ended October 29,
2010 and October 30, 2009 (unaudited)
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended October 29, 2010 and
October 30, 2009 (unaudited)
|
6
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
|
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
|
|
|
Item
4
|
Controls
and Procedures
|
21
|
|
|
|
PART
II
|
OTHER
INFORMATION
|
|
|
|
|
Item
1
|
Legal
Proceedings
|
23
|
|
|
|
Item
1A
|
Risk
Factors
|
23
|
|
|
|
Item
2
|
Unregistered
Sale of Equity Securities and Use of Proceeds
|
23
|
|
|
|
Item
3
|
Defaults
Upon Senior Securities
|
23
|
|
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
23
|
|
|
|
Item
5
|
Other
Information
|
23
|
|
|
|
Item
6
|
Exhibits
|
24
|
|
|
|
|
Signatures
|
25
|
PART
I - FINANCIAL INFORMATION
Cautionary
Note on Forward-Looking Statements
Certain
statements made in this Quarterly Report on Form 10-Q that are not statements of
historical or current facts are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
may involve known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements.
In
addition to statements that explicitly describe such risks and uncertainties,
readers are urged to consider statements in future or conditional tenses or,
include terms such as “believes,” “belief,” “expects,” “intends,” “anticipates”
or “plans” to be uncertain and forward-looking. Forward-looking statements are
based on management’s beliefs and assumptions, using information currently
available to us as to current expectations concerning future events and trends
and are necessarily subject to uncertainties, many of which are outside of the
Company’s control.
We claim
the protection of the safe harbor for forward-looking statements provided for in
the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Except as
required by applicable law, we undertake no obligation, and do not intend, to
update these forward-looking statements to reflect events or circumstances that
arise after the date they are made. Furthermore, as a matter of policy, we do
not generally make any specific projections as to future earnings, nor do we
endorse any projections regarding future performance, which may be made by
others outside our company.
All
subsequent written and oral forward-looking statements attributable to the
Company or individuals acting on its behalf are expressly qualified in their
entirety by this Cautionary Note on Forward-Looking Statements.
PART
I - FINANCIAL INFORMATION
ITEM
1.
|
FINANCIAL
STATEMENTS
|
AEROSONIC
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
October 29,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
3,924,000 |
|
|
|
3,421,000 |
|
Income
tax receivable
|
|
|
57,000 |
|
|
|
- |
|
Inventories,
net
|
|
|
7,631,000 |
|
|
|
7,743,000 |
|
Prepaid
expenses and other current assets, net
|
|
|
1,689,000 |
|
|
|
1,035,000 |
|
Property
held for sale, net
|
|
|
2,062,000 |
|
|
|
2,062,000 |
|
Deferred
income taxes
|
|
|
1,357,000 |
|
|
|
1,613,000 |
|
Total
current assets
|
|
|
16,720,000 |
|
|
|
15,874,000 |
|
Property,
plant and equipment, net
|
|
|
3,409,000 |
|
|
|
2,917,000 |
|
Deferred
income taxes
|
|
|
1,831,000 |
|
|
|
1,831,000 |
|
Intangible
assets, net
|
|
|
295,000 |
|
|
|
450,000 |
|
Goodwill
|
|
|
366,000 |
|
|
|
366,000 |
|
Other
assets, net
|
|
|
91,000 |
|
|
|
38,000 |
|
Total
assets
|
|
$ |
22,712,000 |
|
|
$ |
21,476,000 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$ |
3,133,000 |
|
|
$ |
2,165,000 |
|
Current
maturities of long-term debt
|
|
|
1,253,000 |
|
|
|
5,768,000 |
|
Accounts
payable, trade
|
|
|
1,874,000 |
|
|
|
2,717,000 |
|
Customer
advances
|
|
|
57,000 |
|
|
|
452,000 |
|
Compensation
and benefits
|
|
|
466,000 |
|
|
|
720,000 |
|
Income
taxes payable
|
|
|
- |
|
|
|
67,000 |
|
Accrued
sales commissions
|
|
|
- |
|
|
|
42,000 |
|
Accrued
expenses and other liabilities
|
|
|
2,027,000 |
|
|
|
1,617,000 |
|
Total
current liabilities
|
|
|
8,810,000 |
|
|
|
13,548,000 |
|
Long-term
debt
|
|
|
5,173,000 |
|
|
|
- |
|
Unrecognized
tax benefits
|
|
|
40,000 |
|
|
|
40,000 |
|
Deferred
income taxes
|
|
|
168,000 |
|
|
|
168,000 |
|
Total
liabilities
|
|
|
14,191,000 |
|
|
|
13,756,000 |
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.40 par value: authorized 8,000,000 shares; issued 4,173,956
shares and 4,162,289 shares at October 29, 2010 and January 31, 2010,
respectively; outstanding 3,743,189 and 3,731,522 shares at October 29,
2010 and January 31, 2010, respectively.
|
|
|
1,670,000 |
|
|
|
1,665,000 |
|
Additional
paid-in capital
|
|
|
6,175,000 |
|
|
|
5,749,000 |
|
Retained
earnings
|
|
|
3,839,000 |
|
|
|
3,469,000 |
|
Less
treasury stock: 430,767 shares at both October 29, 2010 and January 31,
2010, at cost
|
|
|
(3,163,000 |
) |
|
|
(3,163,000 |
) |
Total
stockholders' equity
|
|
|
8,521,000 |
|
|
|
7,720,000 |
|
Total
liabilities and stockholders' equity
|
|
$ |
22,712,000 |
|
|
$ |
21,476,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEROSONIC
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 29, 2010
|
|
|
October 30, 2009
|
|
|
October 29, 2010
|
|
|
October 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
$ |
7,049,000 |
|
|
$ |
7,537,000 |
|
|
$ |
20,793,000 |
|
|
$ |
24,425,000 |
|
Cost
of sales
|
|
|
4,980,000 |
|
|
|
4,865,000 |
|
|
|
14,471,000 |
|
|
|
15,280,000 |
|
Gross
profit
|
|
|
2,069,000 |
|
|
|
2,672,000 |
|
|
|
6,322,000 |
|
|
|
9,145,000 |
|
Selling,
general and administrative expenses
|
|
|
1,724,000 |
|
|
|
1,754,000 |
|
|
|
5,298,000 |
|
|
|
5,492,000 |
|
Operating
income
|
|
|
345,000 |
|
|
|
918,000 |
|
|
|
1,024,000 |
|
|
|
3,653,000 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(205,000 |
) |
|
|
(188,000 |
) |
|
|
(566,000 |
) |
|
|
(395,000 |
) |
Gain
from casualty
|
|
|
- |
|
|
|
- |
|
|
|
235,000 |
|
|
|
550,000 |
|
Other
income (expense)
|
|
|
(2,000 |
) |
|
|
(2,000 |
) |
|
|
(49,000 |
) |
|
|
(9,000 |
) |
Loss
on extinguishment of debt
|
|
|
(44,000 |
) |
|
|
- |
|
|
|
(75,000 |
) |
|
|
- |
|
|
|
|
(251,000 |
) |
|
|
(190,000 |
) |
|
|
(455,000 |
) |
|
|
146,000 |
|
Income
before income taxes
|
|
|
94,000 |
|
|
|
728,000 |
|
|
|
569,000 |
|
|
|
3,799,000 |
|
Income
tax provision
|
|
|
(1,000 |
) |
|
|
- |
|
|
|
(199,000 |
) |
|
|
(1,140,000 |
) |
Net
income
|
|
$ |
93,000 |
|
|
$ |
728,000 |
|
|
$ |
370,000 |
|
|
$ |
2,659,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.02 |
|
|
$ |
0.20 |
|
|
$ |
0.10 |
|
|
$ |
0.72 |
|
Diluted
earnings per share
|
|
$ |
0.02 |
|
|
$ |
0.18 |
|
|
$ |
0.09 |
|
|
$ |
0.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding basic
|
|
|
3,741,634 |
|
|
|
3,726,031 |
|
|
|
3,736,056 |
|
|
|
3,676,675 |
|
Weighted
average shares outstanding diluted
|
|
|
4,042,160 |
|
|
|
4,037,882 |
|
|
|
4,059,419 |
|
|
|
3,865,335 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEROSONIC
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
October 29, 2010
|
|
|
October 30, 2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
370,000 |
|
|
$ |
2,659,000 |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
224,000 |
|
|
|
202,000 |
|
Amortization
|
|
|
180,000 |
|
|
|
184,000 |
|
Accretion
on long-term debt
|
|
|
199,000 |
|
|
|
169,000 |
|
Loss
on early extinguishment of debt
|
|
|
75,000 |
|
|
|
- |
|
Recovery
of previously written off bad debt
|
|
|
(35,000 |
) |
|
|
- |
|
Provision
for obsolete and slow-moving inventory
|
|
|
212,000 |
|
|
|
- |
|
Stock-based
compensation
|
|
|
182,000 |
|
|
|
184,000 |
|
Gain
from casualty
|
|
|
(235,000 |
) |
|
|
(550,000 |
) |
Proceeds
from insurance
|
|
|
235,000 |
|
|
|
550,000 |
|
Provision
for deferred income taxes
|
|
|
256,000 |
|
|
|
1,140,000 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(468,000 |
) |
|
|
(1,855,000 |
) |
Income
taxes receivable
|
|
|
(57,000 |
) |
|
|
- |
|
Inventories,
net
|
|
|
(100,000 |
) |
|
|
131,000 |
|
Prepaid
expenses and other current assets, net
|
|
|
(654,000 |
) |
|
|
(557,000 |
) |
Other
assets
|
|
|
(109,000 |
) |
|
|
226,000 |
|
Accounts
payable, trade
|
|
|
(843,000 |
) |
|
|
(91,000 |
) |
Customer
advances
|
|
|
(395,000 |
) |
|
|
(2,568,000 |
) |
Compensation
and benefits
|
|
|
(254,000 |
) |
|
|
(78,000 |
) |
Income
taxes payable
|
|
|
(67,000 |
) |
|
|
- |
|
Accrued
expenses and other liabilities
|
|
|
368,000 |
|
|
|
(413,000 |
) |
Net
cash used in operating activities
|
|
|
(916,000 |
) |
|
|
(667,000 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(716,000 |
) |
|
|
(1,319,000 |
) |
Net
cash used in investing activities
|
|
|
(716,000 |
) |
|
|
(1,319,000 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in revolving credit facility
|
|
|
968,000 |
|
|
|
1,482,000 |
|
Principal
payments on notes payable
|
|
|
(700,000 |
) |
|
|
- |
|
Proceeds
from issuance of notes payable
|
|
|
600,000 |
|
|
|
800,000 |
|
Principal
payments on long-term debt
|
|
|
(5,348,000 |
) |
|
|
(296,000 |
) |
Proceeds
from refinancing of long-term debt
|
|
|
6,112,000 |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
1,632,000 |
|
|
|
1,986,000 |
|
|
|
|
|
|
|
|
|
|
Change
in cash and cash equivalents
|
|
|
- |
|
|
|
- |
|
Cash
and cash equivalents, beginning of period
|
|
|
- |
|
|
|
- |
|
Cash
and cash equivalents, end of period
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Net
cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
353,000 |
|
|
$ |
226,000 |
|
Non-cash
financing and other transactions:
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
$ |
- |
|
|
$ |
123,000 |
|
Common
stock warrants issued
|
|
$ |
249,000 |
|
|
$ |
283,000 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
AEROSONIC
CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
|
Description
of Business, Basis of Presentation and Recent Accounting
Pronouncements
|
Description
of Business
Aerosonic
Corporation (“Aerosonic”) and its wholly-owned subsidiaries, Avionics
Specialties, Inc. and OP Technologies, Inc.
(collectively referred to herein as the “Company”) manufacture and sell aircraft
instrumentation and sensors systems, including integrated cockpit displays,
digital and mechanical standby displays, sensors and probes. Our customers
include government and commercial users located worldwide. The Company’s
production facilities are located in Florida and Virginia.
Financial
Condition and Management’s Plans
On April
30, 2010, the Company refinanced its Wachovia Bank, N.A. (“Wachovia”) debt
totaling $7,481,000 with new debt facilities from M&I Marshall & Ilsley
Bank (“M&I”) with a maximum credit availability of $10,100,000. On May 1,
2010, the Wachovia debt was repaid with proceeds available under the M&I
facilities. As of October 29, 2010, the Company was in compliance with all of
the financial and other restrictive covenants under the M&I
facilities.
Prior to
the debt refinancing, and as of January 31, 2010, the Company was not in
compliance with certain debt covenants with Wachovia. As a result, the Company’s
total debt with Wachovia, which was $7,245,000 at January 31, 2010, was subject
to acceleration and was classified as current on the consolidated balance sheet
at January 31, 2010. The Company maintained a written waiver of
noncompliance from Wachovia through April 30, 2010.
Basis
of Presentation
The
Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). These principles require management to make estimates and judgments that
affect reported and contingent amounts of assets, liabilities, revenues and
expenses, including such items as (i) inventory, restructuring and environmental
costs, (ii) other miscellaneous accruals and (iii) valuation allowances for
accounts receivable, inventory and deferred tax assets (including the
measurement of uncertain tax positions). Actual results may differ from these
estimates under different assumptions or conditions, and such differences could
be material.
The
accompanying consolidated financial statements include the accounts of the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation. The Company operates on a fiscal year that ends on
January 31, consisting of four quarters, each of the first three quarters ending
on the Friday of each successive 13 week period. Accordingly, all references to
the third quarter mean the third quarter ended on the 39th Friday
of the fiscal year. For example, references to the third quarter of fiscal year
2011 mean the quarter ended October 29, 2010.
Reclassifications
Certain
amounts in the three and nine months ended October 30, 2009 financial statements
and balance sheet dated January 31, 2010 have been reclassified to conform to
the three and nine months ended October 29, 2010 presentation. Such
reclassifications had no effect on net income or stockholders’ equity as
previously reported.
Unaudited
Interim Financial Information
The
accompanying consolidated balance sheet as of October 29, 2010, the consolidated
statements of operations for the three and nine months ended October 29, 2010
and October 30, 2009, and the consolidated statements of cash flows for the nine
months ended October 29, 2010 and October 30, 2009 are unaudited but include all
adjustments (consisting of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of our financial
position at such dates and our results of operations and cash flows for the
periods then ended, in conformity with U.S. GAAP. The consolidated balance sheet
as of January 31, 2010 has been derived from the audited consolidated financial
statements at that date but, in accordance with the rules and regulations of the
United States Securities and Exchange Commission (“SEC”), does not include all
of the information and notes required by U.S. GAAP for complete financial
statements. Interim results are not necessarily indicative of results that may
be expected for the fiscal year ending January 31, 2011. The consolidated
financial statements are prepared on a basis consistent with, and should be read
in conjunction with, the consolidated financial statements and related notes for
the fiscal year ended January 31, 2010 included in the Company’s Annual Report
on Form 10-K filed with the SEC on May 3, 2010.
Adoption of New Accounting
Pronouncements
In April
2010, the FASB issued new authoritative guidance surrounding revenue
recognition, specifically addressing the criteria for recognizing revenue tied
to research and development efforts. The guidance adds the milestone method to
the list of acceptable methods of revenue recognition when accounting for
multiple element arrangements within research and development efforts. The
guidance is effective for milestones achieved in fiscal years beginning on or
after June 15, 2010, unless early adoption is elected. The Company adopted the
guidance beginning the quarter ended July 30, 2010, which required retrospective
application from the beginning of the fiscal year. The adoption of this guidance
did not have a material impact on the Company’s financial
statements.
Milestone
method of revenue recognition
The
Company has been engaged by three separate customers for the design and
development of prototypical hardware components or software programs. All three
contracts are short term in nature and not expected to extend beyond twelve
months. Each contract provides for interim payments upon achievement of
specifically defined milestones, consisting of the delivery of hardware,
software or documentation.
The
Company has deemed all milestone payments within each contract to be either
substantive or non-substantive. That conclusion was determined based upon a
thorough review of each contract and the Company’s deliverables committed to in
each such contract. For substantive milestones, the Company has concluded that
upon achievement of each milestone, the amount of the corresponding defined
payment is commensurate with the effort required to achieve such milestone or
the value of the delivered item. The payment associated with each milestone
relates solely to past performance and is deemed reasonable upon consideration
of the deliverables and the payment terms within the contract. For
non-substantive milestones, including advance payments, the recognition of such
payments are pro-rated to the substantive milestones. During the three and nine
months ended October 29, 2010, revenue recognized through the achievement of two
milestones, relating to one of the three contracts, amounted to $0 and $108,000,
respectively.
|
|
Milestone
|
|
|
Milestone
|
|
|
|
consideration
|
|
|
recognition
|
|
Milestone
1 (non-substantive)
|
|
|
218,000 |
|
|
|
- |
|
Milestone
2
|
|
|
32,000 |
|
|
|
53,000 |
|
Milestone
3
|
|
|
33,000 |
|
|
|
55,000 |
|
Milestone
4
|
|
|
65,000 |
|
|
|
108,000 |
|
Milestone
5
|
|
|
65,000 |
|
|
|
108,000 |
|
Milestone
6
|
|
|
65,000 |
|
|
|
108,000 |
|
Milestone
7
|
|
|
66,000 |
|
|
|
112,000 |
|
|
|
|
544,000 |
|
|
|
544,000 |
|
This
table excludes two research and development contracts for which milestone
revenue has not yet been recognized.
2.
|
Accounts
Receivable – Allowance for Doubtful
Accounts
|
The
allowance for doubtful accounts activity for the nine months ended October 29,
2010 and October 30, 2009 was as follows:
|
|
Nine Months Ended
|
|
|
|
October 29, 2010
|
|
|
October 30, 2009
|
|
Beginning
balance
|
|
$ |
653,000 |
|
|
$ |
551,000 |
|
Amounts
written off
|
|
|
- |
|
|
|
(16,000 |
) |
Recoveries
of amounts provided for
|
|
|
(35,000 |
) |
|
|
(106,000 |
) |
Ending
balance
|
|
$ |
618,000 |
|
|
$ |
429,000 |
|
3.
|
Inventories
– Reserve for Obsolete and Slow Moving
Inventory
|
Inventories
at October 29, 2010 and January 31, 2010 consisted of the
following:
|
|
October 29, 2010
|
|
|
January 31, 2010
|
|
Raw
materials
|
|
$ |
6,638,000 |
|
|
$ |
6,622,000 |
|
Work
in process
|
|
|
2,826,000 |
|
|
|
2,758,000 |
|
Finished
goods
|
|
|
404,000 |
|
|
|
388,000 |
|
Reserve
for obsolete and slow moving inventory
|
|
|
(2,237,000 |
) |
|
|
(2,025,000 |
) |
Inventories,
net
|
|
$ |
7,631,000 |
|
|
$ |
7,743,000 |
|
The
reserve for obsolete and slow moving inventory activity for the nine months
ended October 29, 2010 and October 30, 2009 was as follows:
|
|
Nine Months Ended
|
|
|
|
October 29, 2010
|
|
|
October 30, 2009
|
|
Beginning
balance
|
|
$ |
2,025,000 |
|
|
$ |
1,795,000 |
|
Amounts
charged to operations
|
|
|
212,000 |
|
|
|
- |
|
Ending
balance
|
|
$ |
2,237,000 |
|
|
$ |
1,795,000 |
|
4.
|
Prepaid
Expenses and Other Current Assets
|
Included
in, and making up the majority of, prepaid expenses and other current assets was
$1,833,000 and $864,000 of deferred charges related to several current
engineering contracts as of October 29, 2010 and January 31, 2010, respectively.
The Company has been retained for the development of customer specific
engineering projects. All the contracts are short-term in nature and not
expected to extend beyond twelve months. As of October 29, 2010, the
deferred charges consist of $1,511,000 of internal engineering labor, including
overhead, and $322,000 of external engineering contract labor. As of
January 31, 2010, the deferred charges consist of $546,000 of internal
engineering labor, including overhead, and $318,000 of external engineering
contract labor. The deferred charges are offset by interim payments from
customers of $473,000 and $218,000 as of October 29, 2010 and January 31, 2010,
respectively. Related to the deferred charges are accrued contract losses of
$756,000 and $273,000 as of October 29, 2010 and January 31, 2010, respectively,
which are included in accrued expenses and other liabilities.
Amortization
expense related to intangible assets for the three and nine months ended October
29, 2010 was $45,000 and $155,000, respectively. Amortization expense related to
capitalized debt issue costs for the three and nine months ended October 29,
2010 was $13,000 and $25,000, respectively. Unamortized debt issue costs
in the amount of $31,000, related to the extinguished Wachovia debt, was
expensed in the quarter ended July 30, 2010. Debt issue costs in the
amount of $109,000, related to the M&I debt, was capitalized and is being
amortized over the three-year term of the debt.
Amortization
expense related to intangible assets and capitalized debt issue costs is
included in selling, general and administrative expenses.
On
May 14, 2009, the Company entered into three separate unsecured notes
payable, herein referred to as “Notes Payable”, with three separate private
lenders, Bruce J. Stone, Redmond Family Investments, LLLP and Martin L.
Schaffel, herein referred to as “the Investors”, each containing a drawdown
provision allowing the Company to borrow up to an aggregate of $2,000,000. The
loan agreements provide for the issuance of warrants with an exercise price of
$0.64 per warrant issued at the rate of one warrant for every four dollars
loaned to the Company and common shares at the rate of one share for every ten
dollars loaned to the Company. Additionally, any amounts borrowed are subject to
14% interest per annum, payable monthly.
On May
21, 2009, the Company borrowed an aggregate principal amount of $800,000 based
upon the cash drawdown provision of each of the three unsecured loan agreements.
The 200,000 warrants issued to the Investors pursuant to the $800,000 drawdown
are exercisable at any time during the period after May 21, 2010 and before the
warrant expiration date of April 10, 2015. Aerosonic’s 80,000 common shares
issued in connection with the $800,000 cash drawdown were not registered under
the Securities Act of 1933 and therefore, are restricted securities as that term
is defined in Rule 144 under the Securities Act. The aggregate amount borrowed
of $800,000 was payable in full under each of the three notes on or before April
10, 2010.
On
February 19, 2010, the Company entered into amendments to each of the three
unsecured loan agreements with the Investors. The note modifications (a)
extended the maturity date of the subordinated notes for a period of one year
from April 10, 2010 to April 10, 2011, (b) removed Aerosonic’s obligation to
issue shares of its common stock upon each cash drawdown made on or after
February 19, 2010, (c) revised the ratio of common shares underlying warrants
issuable per each $1.00 of principal amount borrowed from “.25 shares per $1.00
of principal amount” to “.20 shares per $1.00 of principal amount” with respect
to cash draw downs made on or after February 19, 2010 and (d) deleted certain
negative covenants relating to the issuance of securities. The warrant
modifications (a) extended the expiration date of any warrants issued prior to
February 19, 2010 for a period of five years from April 10, 2015 to April 10,
2020, (b) extended the expiration date of any warrants issued on or after
February 19, 2010 from April 10, 2015 to the sixth anniversary date of the
issuance of the warrant certificate and (c) revised the purchase price for any
warrants issued on or after February 19, 2010 from $0.64 per share to a price
equal to 50% of the volume weighted average of the selling price of Aerosonic’s
common stock on February 12, 2010 and for the 19 trading days prior to February
12, 2010, or $1.98 per share. On that date, the Company borrowed an
additional $600,000 from the Investors under the three unsecured loan agreements
entered into on May 14, 2009 and amended on February 19, 2010. The related
warrants (120,000 issued to the Investors pursuant to the additional $600,000
loan) are exercisable at any time during the period after February 19, 2011 but
before the expiration date of February 19, 2016.
On
October 13, 2010, the Company repaid $700,000 of the outstanding balance of the
Notes Payable, with each Investor receiving a pro-rata portion of the aggregate
repayment amount based on the Investor’s balance on that date. Also in October
2010, the Company borrowed $700,000 under an equipment line of credit from
M&I as reimbursement for purchased and self-constructed equipment costs made
within the prior 12 months. See Note 9.
The
warrants and common shares issued under the unsecured loan agreements described
above are recorded as a separate component of interest and are being accreted
into the loan balances over the term of the loans. For the three and nine months
ended October 29, 2010, the Company had recognized accretion of $75,000 and
$199,000, respectively, presented as additional interest expense. In
addition, as a result of the early repayments to the Investors in October 2010,
the Company recognized accelerated interest accretion expense in the amount of
$44,000, for the three and nine months ended October 29, 2010, which is reported
as loss on extinguishment of debt.
From
September 2008 through January 2009, the Company received advances totaling
approximately $4,965,000 from certain customers for unbilled product orders.
Such advances were used to fund production, thus alleviating some of the
Company’s liquidity challenges resulting from the business interruption caused
by the August 2008 fire at our Florida facility. These advances represent
non-interest bearing prepayments and have been offset against the resulting
accounts receivable at the time of product shipments. Remaining advances from
customers total approximately $57,000 at October 29, 2010.
8.
|
Accrued
Expenses and Other Liabilities
|
Accrued
expenses and other liabilities as of October 29, 2010 and January 31, 2010
consisted of the following:
|
|
October 29, 2010
|
|
|
January 31, 2010
|
|
Environmental
liability
|
|
$ |
836,000 |
|
|
$ |
932,000 |
|
Contract
loss provision
|
|
|
756,000 |
|
|
|
273,000 |
|
Warranty
liability
|
|
|
119,000 |
|
|
|
167,000 |
|
Other
|
|
|
316,000 |
|
|
|
245,000 |
|
Accrued
expenses and other liabilities
|
|
$ |
2,027,000 |
|
|
$ |
1,617,000 |
|
9.
|
Long-Term
Debt, Notes Payable and Revolving Credit
Facility
|
On April
30, 2010, the Company entered into a Loan Agreement (the “Loan Agreement”) with
M&I with a maximum amount of credit facilities available to us of
$10,100,000. The Loan Agreement provides for (a) a $4,000,000 revolving line of
credit (the “Revolving Credit Line Note”), (b) a $3,500,000 first real estate
mortgage loan (the “Real Estate Mortgage Note”), (c) a $1,900,000 term loan (the
“Equipment Term Note” and together with the Real Estate Mortgage Note, the “Bank
Notes”), and (d) a $700,000 equipment line of credit (the “Equipment Credit Line
Note” and together with the Revolving Credit Line Note, the “Credit Line
Notes”). The proceeds from the M&I facilities were used, in part, to fully
satisfy the outstanding debt and fees with Wachovia of $7,521,830. The available
funds received and financing available under the Loan Agreement will be used for
new product development, working capital and capital expenditure
needs.
Repayment
of the loans and all obligations to M&I under the Loan Agreement, the Bank
Notes and Credit Line Notes are collateralized by the personal property and real
property of the Company. Details of loan facilities are as follows:
|
·
|
The
Revolving Credit Line Note, which supports a $4,000,000 revolving line of
credit, has a 364 day term and provides a line of credit in an amount
equal to the lesser of (a) the Revolving Credit Limit of $4,000,000; or
(b) the Borrowing Base, which is the sum of (i) up to eighty percent
(80%) of the aggregate amount of Eligible Accounts, which is represented
by all of the Company’s accounts that contain selling terms and conditions
acceptable to M&I; plus (ii) eighty percent (80%) of the
aggregate amount of Finished Goods Inventory, which is represented, at any
time, by all of the Company’s inventory, except: (a) inventory which
is not subject to a perfected first priority security interest in favor of
M&I and not otherwise free and clear of all other liens;
(b) inventory which M&I, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective or unfit for further processing;
(c) work in progress; (d) inventory stored offsite for which
M&I cannot obtain a landlord waiver or which is not insured by the
Company; and (e) inventory in transit from vendor/supplier if such
inventory is uninsured; plus (iii) fifty percent (50%) of the
aggregate amount of Raw Materials Inventory, which is represented by
materials used to assemble inventory, including purchased and manufactured
components and subassemblies, with the aggregate total inventory of
(ii) and (iii) not to exceed $1,500,000. The interest rate on
the Revolving Credit Line Note is one month LIBOR plus 300 basis points
with a 4% floor. Interest is paid
monthly.
|
|
·
|
The
Real Estate Mortgage Note, which supports a $3,500,000 first real estate
mortgage loan, has a 3 year term, a 15 year amortization period, and the
interest rate is one month LIBOR plus 340 basis points with a 4% floor.
Interest and principal are paid monthly. The proceeds of the Real Estate
Mortgage Note were used for refinancing an existing loan relating to the
Clearwater, Florida property and for working capital and capital
expenditure needs.
|
|
·
|
The
Equipment Term Note, which supports a $1,900,000 term loan, has a 3 year
term, a 5 year amortization period, and the interest rate is one month
LIBOR plus 340 basis points with a 4% floor. Interest and principal are
paid monthly. The proceeds of the Equipment Term Note were used for
refinancing an existing loan relating to the Earlysville, Virginia
property and for working capital and capital expenditure needs. The
Company must pay any proceeds from the sale of the Earlysville, Virginia
property to M&I to be applied as a principal payment under the
Equipment Term Note.
|
|
·
|
The
Equipment Credit Line Note, which supports a $700,000 equipment line of
credit, has a 3 year term, a 5 year amortization period, and the interest
rate is one month LIBOR plus 325 basis points with a 4% floor. Interest is
paid monthly. Principal is to be paid monthly beginning June 2011.
Proceeds are used to purchase equipment for use in the Company’s
business.
|
The Loan
Agreement with M&I contains certain financial and other restrictive
covenants, including the requirement to maintain: (i) on a consolidated basis,
Total Stockholders’ Equity, defined as the value of total assets less total
liabilities, equal to at least $7,419,000, which amount shall increase on a
quarterly basis in an amount equal to ninety percent (90%) of the Company’s net
income (calculated on a consolidated basis) for such quarter; (ii) on a
consolidated basis, a ratio of Funded Debt, defined as all outstanding
liabilities for borrowed money and other interest-bearing liabilities, including
current and long term debt, less the non-current portion of Subordinated
Liabilities, defined as liabilities subordinated to the Company’s obligations to
M&I in a manner acceptable to M&I in its sole discretion, to EBITDA not
exceeding 3.0:1.0; and (iii) on a consolidated basis, a Fixed Charge Coverage
Ratio, defined as the ratio of (a) the sum of EBITDA plus lease expense and
rent expense, minus income tax, minus dividends, withdrawals, and other
distributions, to (b) the sum of cash interest expense, lease expense, rent
expense, scheduled principal amortization actually paid to M&I during the
measuring period (excluding any principal payments under the Revolving Credit
Line Note and the Investors’ Notes Payable), and scheduled payments on
capitalized lease obligations during the measuring period, of at least 1.20:1.0.
These three covenant amounts are calculated at the end of each quarterly
reporting period for which M&I will require financial statements. As
of October 29, 2010, the Company complied with all of M&I’s financial and
other restrictive covenants.
On
October 12, 2010, the Company borrowed $700,000 against the Equipment Credit
Line Note. On October 13, 2010, the proceeds replenished cash used by the
Company for purchased and self-constructed equipment costs made within the prior
12 months. The replenished cash was immediately used to accelerate repayments of
the Investors Notes Payable. See Note 6.
Prior to
the refinancing with M&I on April 30, 2010, the Company’s credit facilities
were with Wachovia. In fiscal year 2008, the Company increased the maximum
amount available to the Company under its credit facilities with Wachovia to
$8,420,000 and delivered to Wachovia two replacement promissory notes as
follows: (i) a Renewal and Future Advance Promissory Note in the amount of
$3,920,000 (the “Future Advance Note”), and (ii) a Renewal and Amended Term
Promissory Note in the amount of $2,000,000 (the “Term Note” and together with
the Future Advance Note, the “Notes”). Additionally, the Company’s revolving
credit facility of $2,500,000 was continued under the original terms of the
revolving promissory note. The Future Advance Note was collateralized by the
Company’s real estate in Clearwater, Florida. The revolving credit facility was
collateralized by the Company’s assets, with the exception of the Company’s real
estate located in Earlysville, Virginia and Clearwater, Florida. The Term Note
was collateralized by the Company’s real estate in Earlysville, Virginia. The
Notes were scheduled to mature on: (i) with respect to the Future Advance Note,
September 1, 2022, and (ii) with respect to the Term Note, June 1, 2011. The
interest rate on the Wachovia revolving credit facility, as well as on the Notes
was one-month LIBOR (which was 0.25% and 0.23% at April 30, 2010, the date of
refinancing, and January 31, 2010, respectively), plus 300 basis
points.
The
Company’s long-term debt agreements with Wachovia contained certain financial
and other restrictive covenants, including the requirement to maintain: (i) at
all times, a ratio of total liabilities to tangible net worth that does not
exceed 1.30 to 1.00; and (ii) at the end of each fiscal quarter, a cash flow
coverage ratio (with regard to the debt service) of at least 1.25 to
1.00.
As of
January 31, 2010, the Company was not in compliance with Wachovia’s cash flow
coverage ratio covenant and the total liability to tangible net worth covenant.
Wachovia provided a written waiver of the non-compliance to the Company through
April 30, 2010. Consequently, the entire amount of long-term debt was classified
as current maturities at January 31, 2010.
Wachovia’s
other restrictive covenants, among other things, required the Company to obtain
consent from the lender prior to making a material change of management,
guarantee or otherwise become responsible for obligations of any other person or
entity or assuming or becoming liable for any debt, contingent or direct, in
excess of $100,000.
The
interest rate on the M&I Revolving Credit Line Note was one-month LIBOR
(which was 0.254% at October 29, 2010), plus 300 basis points with a 4% floor.
Available borrowings on the Revolving Credit Line Note at October 29, 2010 were
$867,000.
Long-term
debt and Notes Payable at October 29, 2010 and January 31, 2010 consisted of the
following:
|
|
October 29, 2010
|
|
|
January 31, 2010
|
|
Future
Advance Note
|
|
$ |
- |
|
|
$ |
3,294,000 |
|
Term
Note
|
|
|
- |
|
|
|
1,786,000 |
|
Real
Estate Mortgage Note
|
|
|
3,403,000 |
|
|
|
- |
|
Equipment
Term Note
|
|
|
1,742,000 |
|
|
|
- |
|
Equipment
Credit Line Note
|
|
|
700,000 |
|
|
|
|
|
Notes
Payable
|
|
|
581,000 |
|
|
|
688,000 |
|
|
|
|
6,426,000 |
|
|
|
5,768,000 |
|
Less:
current maturities
|
|
|
(1,253,000 |
) |
|
|
(5,768,000 |
) |
Long-term
debt, less current maturities
|
|
$ |
5,173,000 |
|
|
$ |
- |
|
Interest
expense on long-term debt, notes payable and the revolving credit line for the
three months ended October 29, 2010 and October 30, 2009 was $205,000 and
$188,000, respectively. Included in interest expense, net is accretion of
discount on notes payable of $75,000 and $102,000 for the three months ended
October 29, 2010 and October 30, 2009, respectively. Interest expense on
long-term debt, notes payable and the revolving credit line for the nine months
ended October 29, 2010 and October 30, 2009 was $566,000 and $395,000,
respectively. Included in interest expense, net is accretion of discount on
notes payable of $199,000 and $169,000 for the nine months ended October 29,
2010 and October 30 2009, respectively.
Earnings
Per Share
Basic
earnings per share are based upon the Company’s weighted average number of
common shares outstanding during each period. Diluted earnings per share is
based upon the weighted average number of common shares outstanding during each
period, assuming the issuance of common shares for all dilutive potential common
shares outstanding during the period. Potential common stock shares, amounting
to 44,910 shares, resulting from stock options were not included in the
computation of diluted earnings per share for the three months ended October 29,
2010 as the exercise price of those options were greater than the market value
of the common stock and inclusion of the potential common stock would be
anti-dilutive and increase earnings per share. Potential common stock shares
from stock options and warrants, which were included in the computation of
diluted earnings per share for the three months ended October 29, 2010, were
accounted for using the treasury stock method.
11.
|
Commitments
and Contingencies
|
Litigation
From time
to time, the Company may be involved in certain claims and legal actions arising
in the ordinary course of business. As of October 29, 2010, there were no claims
or legal actions that management believes will have a material adverse effect on
the Company’s financial position, results of operations, or
liquidity.
Environmental
In
preparation for the sale of the Earlysville, Virginia facility, the Company
engaged an environmental consulting firm to survey the property for possible
soil or groundwater contamination. This survey revealed impacts to both shallow
soils and groundwater that may have resulted from the accidental loss of
solvents. As a result of the initial and subsequent surveys, contamination
treatment was determined to be necessary at an estimated total cost of $836,000
as of October 29, 2010, as determined by an environmental compliance specialist,
and which is included in the environmental liability. Thus, in accordance with
U.S. GAAP, the Company
capitalized these contamination treatment costs in its financial statements as
an increase to property held for sale, net, since such costs will be incurred in
preparation for the sale of the Earlysville, Virginia facility. Costs incurred
totaled $76,000 and $0 for the three months ended October 29, 2010 and October
30, 2009, respectively. Costs incurred totaled $96,000 and $2,000 for the nine
months ended October 29, 2010 and October 30, 2009, respectively.
The
Company has solicited proposals from highly qualified environmental consulting
firms and received proposals from which management estimates the cost of
contamination treatment to be approximately $597,000. Additionally, an estimated
$27,000 remains to pay an environmental consulting firm to characterize any
contamination that may be present in the ground between the Company’s property
and nearby homes. Depending on the findings of this additional study, the scope
and cost of the contamination treatment may change. Current estimates of
future monitoring, oversight and other related costs are $212,000. The Company
is proceeding with the final characterization of the site as well as the
resulting treatment actions required under the Voluntary Remediation Program
administered by the Virginia DEQ. We will reassess the accrued liability
and record any appropriate adjustments in our financial statements following
completion of the characterization process.
After the
August 8, 2008 fire at our Florida facility, during a routine investigation by
the Florida Department of Environmental Protection (“Florida DEP”), the Company
was cited with violations, and potential civil penalties estimated at $100,000,
relating to the storage, handling and disposal of normal chemicals, solvents and
paints used in our production facility. The Company’s remediation plan, to avoid
future violations and the payment of the above civil penalties, was submitted
and subsequently approved by the Florida DEP. During the three months ended
April 30, 2010, the Company completed the construction of a materials handling
building at a cost of $116,000. On June 7, 2010, the Company received a release
of said violations and civil penalties from the Florida DEP.
Commitments
There
have been no material changes to our purchase and lease commitments from those
disclosed in our Annual Report on Form 10-K for the year ended January 31, 2010.
Total rent expense under the facility lease in Charlottesville, Virginia for the
three months ended October 29, 2010 and October 30, 2009, was $42,000 and
$73,000, respectively, which are both included in cost of sales. Rent expense
for the nine months ended October 29, 2010 and October 30, 2009, was $112,000
and $139,000, respectively, which are both included in cost of
sales.
ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(“MD&A”)
|
Explanatory
Note
We begin
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") of Aerosonic Corporation with a business overview
followed by the "Results of Operations." We then provide an analysis of cash
flows under "Liquidity and Capital Resources” as well as a discussion on working
capital and capital expenditures. This is followed by a discussion of the
critical accounting estimates that we believe are important to understanding the
assumptions and judgments incorporated in our reported financial results and in
the discussion provided within the MD&A. This MD&A should be read in
conjunction with our unaudited Consolidated Financial Statements, the notes
thereto, the other unaudited financial data included elsewhere in this Quarterly
Report on Form 10-Q and our 2010 Annual Report on Form 10-K filed with the SEC
on May 3, 2010.
Overview
We are an
aerospace industry leader in which we design and manufacture aircraft
instrumentation and sensor systems. These products are used for both primary
flight data as well as for standby purposes in cockpits where electronic
displays are used for primary flight data. As cockpit panel space becomes more
valuable in the new age of glass displays, we have maintained a strong position
with Original Equipment Manufacturers (OEM) as a premier supplier of quality
aircraft instrumentation in both the military and commercial aircraft
marketplace. This allows us to offer a fully integrated avionics package, from
air data collection products to display and backup instrumentation which reduces
the number of suppliers required on an aircraft. The Company’s unique
capabilities in air data collection products continues to expand with the
development of a flush port air data system for a leading international aircraft
manufacturer for use on a new unmanned combat air vehicle and Level A
certification of a stall warning transmitter for a major US manufacturer of
business and military aircraft.
Building
on our expertise with mechanical instrumentation, we have successfully developed
and marketed digital instrumentation and displays for both primary flight data
systems as well as standby redundant systems to complement our mechanical
product line. In addition, we have made considerable progress in the development
of electronic air data collection instrumentation for use in military and
commercial aircraft applications.
Our
current market focus has been, and will continue to be, the design, development
and supply of electronic and mechanical primary and standby flight control
systems components and instruments. These include altimeters, airspeed
indicators, angle of attack indicators, stall warning systems, air data
measurement systems and flight display systems. These products are critical to
aircraft operation, performance and safety.
In
conjunction with our development and production activities, Aerosonic has
developed expertise in the build, test and validation of critical test
equipment, including environmental stress screening chambers and wind tunnels.
Aerosonic is expanding that knowledge to offer customers the ability to order
turnkey solutions for their test needs.
The trend
in the aerospace industry continues toward digital cockpits and away from
mechanical cockpit instrumentation that was our foundation. During the first
three quarters of fiscal year 2011, we continued to make progress in our ability
to design and manufacture digital instrumentation that is integrated into
cockpit flight management systems. We have maintained and strengthened our
commitment to research and development to further enhance our product line as we
anticipate continued movement toward digital cockpits in the aerospace industry.
We plan to position ourselves such that we have the ability to offer both
digital and mechanical instrumentation. While we believe that this strategy
will, over time, strengthen our position in the aerospace industry, we cannot
guarantee that this strategy will be successful or that we will have access to
the capital resources needed to fully support this strategy.
A
significant amount of our business relates to the sale of our products to United
States (“U.S.”) and foreign military programs. As a consequence, our sales can
fluctuate materially, either favorably or unfavorably, depending upon the level
of government spending on those military programs which are the focus of our
manufacturing efforts. While we have been successful in obtaining contracts to
supply military needs in recent years, sudden reductions in government spending
or delays in the government contract award process could have a material
unfavorable effect on our current and future military sales and related cash
flows. While we cannot predict the outcome of the U.S. government contract award
or budget process, we expect that the majority of the military programs that we
supply will be sustained at current or near current levels. Additionally, U.S.
Government procurement offices often require long periods of time to issue
requests for proposals and to negotiate contracts. Such lengthy contract cycle
times may delay the award of certain anticipated contracts of significant value
to the Company. Continued delays of such contract awards may have a significant
adverse effect on the financial results of the Company.
Similarly,
changes in the commercial sector of the aerospace industry can have a favorable
or unfavorable impact on our future business. While we have historically
invested heavily in product development for both funded and unfunded programs,
OEM requirements may change such that additional product development efforts
will be necessary to maintain or increase our revenue in the aerospace industry.
With the recent economic conditions, several of our commercial customers
continue to operate with reduced operations and manufacturing. While this may be
offset by additional increases in aftermarket support, it is likely that our
business will continue to be negatively affected until the economy recovers and
our customers resume prior levels of production and growth. Recently, we are
finding that with the negative effects of the ongoing recession, the general
aviation and business jet markets may take longer to recover than previously
believed. For example, certain key commercial customers are slowing their
operations and are pushing contractual delivery dates into the future by six to
eighteen months. Continued movements into the future of such customer deliveries
may have a significant adverse effect on the financial results of the
Company.
Recognizing
the risks and challenges of the current environment in both our military and
commercial markets, we are closely analyzing our operations and our cost
structure for opportunities to enhance our financial performance in the face of
the difficult economic environment. We will complete our analysis and implement
actions we deem appropriate to counter the near term challenges in our markets
while preserving our ability to be responsive to our customers as the economy
improves.
Results
of Operations
Our
senior management regularly reviews the performance of our operations including
reviews of key performance metrics and the status of operating initiatives. We
review information on the financial performance of the operations, new business
opportunities, customer relationships and initiatives, IR&D activities,
human resources, manufacturing effectiveness, cost reduction activities, as well
as other subjects. We compare performance against budget, against prior
comparable periods and against our most recent internal forecasts.
Three
months ended October 29, 2010 and October 30, 2009:
Net sales
for the third quarter of fiscal year 2011 decreased $488,000, or 6%, to
$7,049,000 when compared to $7,537,000 for the third quarter of fiscal year
2010. During the third quarter of fiscal year 2011, the sales volume decreased
from the prior year by approximately $1.2 million on reduced demand for
transmitter products, sensor products and spares, offset by approximately
$800,000 of increased sales volume of mechanical instruments, contributing to
the net decrease of $488,000. Our revenues continue to be impacted by the
ongoing recession in the business jet and general aviation markets. While it’s
difficult to predict when the markets will begin a more effective recovery, we
expect that they will recover at some point and we continue to invest in new
products and capabilities in anticipation of that recovery.
Cost of
sales for the third quarter of fiscal year 2011 increased $115,000, or 2%, to
$4,980,000 when compared to $4,865,000 for the third quarter of fiscal year
2010. Gross profit for the third quarter of fiscal year 2011 was 29.4% versus
35.5% for the third quarter of fiscal year 2010. The three-month comparative
decrease in gross profit as a percent of sales reflects (a) the effects of a
significantly higher mix of mechanical products which historically produce lower
gross margins, (b) lean investment activities, and (c) contract loss provisions
of approximately $198,000 on two customer-funded development contracts. These
two customer-funded programs creating the need for the contract loss provisions,
are nearing their final stages of development and are entering the qualification
testing stage. Management views these costs as investments in technology and
capabilities that are expected to benefit future business opportunities. Future
enhancement of gross profit will require continuously improving throughput in
our manufacturing processes while reducing costs and inefficiencies in our
operations through better resource management. We are well engaged with the
implementation of lean manufacturing principles, supported by training programs,
to further develop a consistent, disciplined, and innovative engineering and
production culture. These initiatives are complemented by a marketing and sales
strategy that builds on our market presence and core competencies in sensor, air
data computation, and display technologies.
Selling,
general and administrative expenses for the third quarter of fiscal year 2011
was $1,724,000 and was a decrease of approximately $30,000 from the third
quarter of fiscal 2010 of $1,754,000. The net decrease was primarily due to (a)
a decrease in legal and consulting expenses, offset by (b) increases in
internally funded research and development (IR&D) costs
We
reported operating income during the third quarter of fiscal 2011 of $345,000,
or 4.9% of net sales, compared to $918,000, or 12.2% of net sales, in the prior
year’s third quarter, a decrease of $573,000. This decrease in operating income
is primarily attributable to (a) the comparatively lower net sales and (b) the
lower gross margin percentage as described above.
Interest
expense, net, increased $17,000 for the third quarter of fiscal year 2011 when
compared to the third quarter of fiscal year 2010 primarily as a result of
accretion expense relating to the Notes Payable. A loss on extinguishment of
debt was reported in the third quarter of fiscal year 2011 in the amount of
$44,000 representing accelerated accretion expense relating to the portion of
the Notes Payable that was repaid early. See Note 6 to our unaudited
Consolidated Financial Statements.
Income
before income taxes was approximately $94,000 in the third quarter of fiscal
year 2011 versus $728,000 in the third quarter of fiscal year 2010. The
provision for income taxes was $1,000 as (a) our estimated effective income tax
rate for fiscal 2011 is approximately 45% and (b) we accrued a $57,000 refund
for federal taxes relating to tax year 2009. The fiscal 2011 estimated effective
tax rate is higher than the statutory rate of approximately 37% primarily due to
the permanent tax difference relating to the accretion expense associated with
the Notes Payable. For the quarter ended October 29, 2010, net income was
approximately $93,000 or $0.02 basic and diluted earnings per share, versus net
income of approximately $728,000, or $0.20 basic and $0.18 diluted earnings per
share for the quarter ended October 30, 2009.
Nine
months ended October 29, 2010 and October 30, 2009:
Net sales
for the nine months ended October 29, 2010 decreased $3,632,000, or 14.9%, to
$20,793,000 when compared to $24,425,000 for the nine months ended October 30,
2009. During the nine months of fiscal year 2011, the sales volume decreased
from the prior year by approximately $5.8 million on reduced demand for
transmitter products, sensor products and spares, offset by approximately $2.9
million of increased sales volume of mechanical instruments, contributing to the
net decrease of $3.6 million.
Cost of
sales for the nine months of fiscal year 2011 decreased $809,000, or 5.3%, to
$14,471,000 when compared to $15,280,000 for the nine months of fiscal year
2010. Gross profit for the nine months of fiscal year 2011 was 30.4% versus
37.4% for the nine months of fiscal year 2010. The nine month comparative
decrease in gross profit, as a percent of sales, reflects (a) the effects of a
significantly higher mix of mechanical products which historically produce lower
gross margins, (b) lean investment activities, and (c) contract loss provisions
of approximately $483,000 on two customer funded development contracts.
Management views these costs as investments in technology and capabilities that
are expected to benefit future business opportunities.
Selling,
general and administrative expenses for the nine months of fiscal year 2011 was
$5,298,000 and was a decrease of approximately $194,000 over the nine months of
fiscal 2010 at $5,492,000. The net decrease was primarily due to (a) decreases
in legal and consulting expenses, offset by (b) increases in IR&D
costs.
We
reported operating income during the nine months of fiscal 2011 of $1,024,000,
or 4.9% of net sales, compared to $3,653,000, or 15.0% of net sales, in the
prior year’s nine months period, a decrease of $2,629,000. This decrease in
operating income is primarily attributable to (a) the comparatively lower net
sales and (b) the lower gross margin percentage as described above, offset by
(c) the reduced level of selling, general, and administrative
expenses.
Interest
expense, net, increased $171,000 for the nine months of fiscal year 2011 when
compared to the nine months of fiscal year 2010 primarily as a result of
accretion expense relating to the Notes Payable. A gain from casualty of
$235,000 and $550,000 in the nine months of fiscal years 2011 and 2010,
respectively, relates to the insurance claim as a result of the August 8,
2008 fire. A loss on extinguishment of debt was reported in fiscal year 2011 in
the amount of $75,000 representing (a) accelerated accretion expense relating to
the portion of the Notes Payables repaid early and (b) costs relating to the
extinguishment of debt with our prior bank. See Note 6 to our unaudited
Consolidated Financial Statements.
Income
before income taxes was approximately $569,000 in the nine months of fiscal year
2011 versus $3,799,000 in the nine months of fiscal year 2010. The provision for
income taxes was $199,000 as (a) our estimated effective income tax rate for
fiscal 2011 is approximately 45% and (b) we accrued a $57,000 refund for federal
taxes relating to tax year 2009. The fiscal 2011 estimated effective tax rate is
higher than the statutory rate of approximately 37% primarily due to the
permanent tax difference relating to the accretion expense associated with the
Notes Payable. For the nine month period ended October 29, 2010, net income was
approximately $370,000 or $0.10 basic and $0.09 diluted earnings per share,
versus net income of approximately $2,659,000, or $0.72 basic and $0.69 diluted
earnings per share for the nine month period ended October 30,
2009.
Liquidity
and Capital Resources
We
believe that anticipated cash flows from operations, together with existing cash
and cash equivalents and our recent M&I debt facilities will be adequate to
finance current period working capital, capital expenditure requirements and
other contractual obligations and to repay our debt as it matures.
Cash used
in operating activities was $916,000 and $667,000 for the nine months ended
October 29, 2010 and October 30, 2009, respectively, an operating cash flow
decrease of $249,000.
Significant
decreases in cash from operating activities during the nine months ended October
29, 2010 in comparison to the nine months ended October 30, 2009
included:
|
·
|
net income in the current period
of $370,000 compared to $2,659,000 in the prior
period;
|
|
·
|
increased
payments to reduce trade payables in the current period of $843,000
compared to $91,000 in the prior period;
and
|
|
·
|
a
decrease in the deferred tax provision in the current period of $256,000
compared to $1,140,000 in the prior
period.
|
Significant
increases in cash from operating activities during the nine months ended October
29, 2010 in comparison to the nine months ended October 30, 2009
included:
|
·
|
the
repayment of customer advances in the current period of $395,000 compared
to $2,568,000 in the prior period;
|
|
·
|
increases
in trade accounts receivable in the current period of $468,000 compared to
$1,855,000 in the prior period; and
|
|
·
|
increases
in accrued expenses in the current period of $368,000 compared to
decreases of $413,000 in the prior
period.
|
Cash used
in investing activities was $716,000 for the nine months ended October 29, 2010,
compared to cash used in investing activities of $1,319,000 for the nine months
ended October 30, 2009. In both nine-month periods, the cash used was
attributable to the purchase of new, as well as the internal development of,
production and testing equipment, most of which was destroyed in the August 2008
fire.
Cash
provided by financing activities was $1,632,000 for the nine months ended
October 29, 2010, compared to cash provided by financing activities of
$1,986,000 for the nine months ended October 30, 2009. When compared to the nine
months ended October 30, 2009, the variance in cash provided by financing
activities for the nine months ended October 29, 2010 was due primarily to
positive cash flows from the April 30, 2010 refinancing of long-term debt which
was offset by net repayments of Notes Payable and reduced borrowings on the
revolving line of credit.
As
discussed within the “Overview”, continued delays in military contract awards
and the adverse effects of the recession on our commercial customers may have a
significant adverse effect on our financial results, which could in turn
adversely affect our liquidity, and consequently, our ability to maintain
compliance with our bank covenants.
Working
Capital and Capital Expenditures
Our
working capital at October 29, 2010 was $7,910,000 compared to $2,326,000 at
January 31, 2010, an increase of $5,584,000. The increase in working capital
during the nine months ended October 29, 2010 relates primarily to the
reclassification of debt from current to noncurrent, sourced by the April 30,
2010 debt refinancing with M&I which accounted for $4,515,000 of the
increase. Additional increases in working capital were created by an increase to
net deferred charges of $714,000 related to ongoing engineering contract costs,
an increase to accounts receivable of $503,000, due primarily to the timing of
collections and a decrease to trade and accrued liabilities of $1,191,000,
attributable primarily to efforts to improve vendor credit terms. The decreases
to working capital stem from a reduction of inventory of $112,000, a result of
efforts to improve the management of inventory, additional draw-downs on the
Revolving Credit Line Note of $968,000 and a reduction to the deferred tax asset
of $256,000, a result of the current income tax provision of $199,000 and income
tax receivable of $57,000.
Future
capital requirements depend on numerous factors, including unforeseen costs
associated with production and testing requirements, research and development,
expansion of product lines and other factors. Furthermore, we may need to
develop and introduce new or enhanced products, respond to competitive
pressures, invest or acquire businesses or technologies or respond to
unanticipated requirements or developments, which would require additional
resources.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon the accompanying unaudited consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of those
financial statements and this Quarterly Report on Form 10-Q requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure items, including
disclosure of contingent assets and liabilities, at the date of our financial
statements. Actual results may differ from these estimates under different
assumptions or conditions, and as a result of trends and uncertainties
identified previously under Item 2. Such differences could be
material.
Set forth
below is a discussion of the Company’s critical accounting policies. The Company
considers critical accounting policies to be those (i) that require the Company
to make estimates that are highly uncertain at the time the estimate is made,
(ii) for which a different estimate which could have been made would have a
material impact on the Company’s financial statements, (iii) that are the most
important and pervasive policies utilized, and (iv) that are the most sensitive
to material change from external factors. Additionally, the policies discussed
below are critical to an understanding of the financial statements because their
application places the most significant demands on management’s judgment, with
financial reporting results relying on estimates about the effect of matters
that are highly uncertain. Specific risks for these critical accounting policies
are described in the following paragraphs. The impact and any associated risks
related to these policies on business operations is discussed throughout this
MD&A where such policies affect reported and expected financial
results.
Senior
management has discussed the development and selection of the critical
accounting estimates and the related disclosure included herein with the Audit
Committee of the Board of Directors.
Revenue
Recognition
The
Company generally recognizes revenue from sales of its products when the
following have occurred: evidence of a sale arrangement exists; delivery or
shipment has occurred or services have been rendered; the price to the buyer is
fixed or determinable; and collectability is reasonably assured.
For
fixed-price contracts, the Company recognizes revenue on a completed contract
“units of delivery” basis. The units-of-delivery method recognizes as revenue
the contract price of units of a basic production product delivered during a
period and as the cost of earned revenue the costs allocable to the delivered
units; costs allocable to undelivered units are reported in the balance sheet as
inventory or work in progress. Revenue is recorded when title to the goods
passes to the customer, generally upon shipment. The Company recognizes most of
its revenue under the completed contract method.
For
long-term, fixed-price contracts meeting certain criteria, the Company may elect
to follow the percentage-of-completion method of accounting for revenue
recognition. Under this method, contract revenue is computed as that percentage
of estimated total revenue that costs incurred to date bear to total estimated
costs, after giving effect to the most recent estimates of costs to complete.
From time to time, the Company will record costs and estimated profits in excess
of billings for a contract. Revisions in costs and revenue estimates are
reflected in the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined without regard to the
percentage-of-completion.
Occasionally,
the Company enters into research and development contracts with customers. When
the contracts provide for milestone or other interim payments, generally, the
Company will follow the milestone method, which recognizes revenue upon
achievement of each milestone. Milestones are commensurate with the effort
required to achieve the milestone or the value of the delivered item.
Additionally, the payment associated with each milestone relates solely to past
performance and is deemed reasonable upon consideration of the deliverables and
the payment terms within the contract. When there is no milestone or other
interim payments, revenue is generally recognized at completion. The Company
adopted the use of the milestone method for the quarter ended July 30,
2010.
As a
general matter, the terms specified in customer purchase orders determine
whether the Company or the customer bears the obligation for payment of freight
charges. While customers pay for freight in most transactions, the Company does
occasionally pay freight charges on behalf of customers and may bill all or a
portion to customers.
Accounts
Receivable, Allowance for Doubtful Accounts and Credit Losses
The
Company continuously evaluates its customers and provides specific reserves for
anticipated credit losses as soon as collection becomes compromised. Measurement
of such losses requires consideration of historical loss experience, including
the need to adjust for current conditions, and judgments about the probable
effects of relevant observable data, including present economic conditions such
as delinquency rates and financial health of specific customers.
Inventories
The
Company values inventory at the lower of cost or net realizable value using a
method that approximates the first-in, first-out method (“FIFO”), or net
realizable value. The reserve for obsolete and slow moving inventory is based
upon reviews of inventory quantities on hand, usage and sales
history.
During
production, the Company uses standards to estimate product costs. These
standards are reviewed and updated periodically by management and approximate
costing under the FIFO method.
Property
Held for Sale
Property
held for sale is reported at the lower of its carrying amount or fair value less
cost to sell. Depreciation on property held for sale is discontinued at the time
the criteria, established by U.S. GAAP, are met. The Earlysville, Virginia
property is presently held for sale. The property consists of a 53,000 square
foot manufacturing facility on approximately 12 acres of land. In preparation
for the sale of the Earlysville, Virginia facility, we engaged an environmental
consulting firm to survey the property for any possible soil or groundwater
contamination. This survey revealed impacts to both shallow soils and
groundwater that may have resulted from the accidental loss of solvents by a
former owner of the property. As a result of the initial and subsequent surveys,
the remaining contamination treatment costs are estimated at $836,000. The Company has
capitalized these contamination treatment costs as an increase to property held
for sale, net, since such costs will be incurred in preparation for the sale of
the Earlysville, Virginia facility and will not result in a carrying value in
excess of the estimated fair value less cost to sell. Costs incurred during the
three months ended October 29, 2010 and October 30, 2009, totaled $76,000 and
$0, respectively. Costs incurred during the nine months ended October 29, 2010
and October 30, 2009, totaled $96,000 and $2,000, respectively.
Goodwill
and Intangible Assets
The
carrying value of goodwill is reviewed at least annually for impairment and will
be reviewed more frequently if current events and circumstances indicate a
possible impairment. An impairment loss is charged to expense in the period
identified. As current events and circumstances warrant, the Company examines
the carrying value of its intangible assets with finite lives, such as
capitalized software and development costs, purchased intangibles, and other
long-lived assets, to determine whether there are any impairment losses. If
indicators of impairment are present and future cash flows are not expected to
be sufficient to recover the asset’s carrying amount, an impairment loss is
charged to expense in the period identified. Factors that may cause impairment
include negative industry or economic trends or significant underperformance
relative to historical or projected future operating results.
Long-Lived
Assets
Management
periodically evaluates long-lived assets for potential impairment. Upon
indication of possible impairment, management evaluates the recoverability of
such asset. When an evaluation indicates that the impairment is unrecoverable,
the asset is written down to its estimated fair value.
Income
Taxes
Aerosonic
and its includable subsidiaries file a consolidated U.S. federal income tax
return in accordance with the provisions of the Internal Revenue Code of 1986,
as amended.
The
Company’s accounting for income taxes represents management’s best estimate of
various events and transactions.
Deferred
tax assets and liabilities resulting from temporary differences between the
financial reporting and tax bases of assets and liabilities are measured at the
balance sheet date using enacted tax rates expected to apply to taxable income
in the years the temporary differences are expected to reverse.
The
realization of deferred tax assets depends upon the existence of sufficient
taxable income within the carryback or carryforward periods under the tax law in
the applicable tax jurisdiction. Valuation allowances are established when
management determines, based on available information, that it is more likely
than not that deferred income tax assets will not be realized. Significant
judgment is required in determining whether valuation allowances should be
established as well as the amount of such allowances. When making such
determination, consideration is given to, among other things, the
following:
· future
taxable income exclusive of reversing temporary differences and
carryforwards;
· future
reversals of existing taxable temporary differences;
· taxable
income in prior carryback years;
· tax
planning strategies; and
· interest
and penalties related to uncertain tax positions.
We
believe that we will ultimately recover a majority of the deferred tax assets
recorded on our consolidated balance sheets. However, should there be a change
in our ability to recover our deferred tax assets, our tax provision would
increase in the period in which we determined that the recovery was not
likely.
We
re-evaluate these uncertain tax positions on a regular basis. This evaluation is
based on factors such as changes in facts or circumstances, changes in tax law,
new audit activity, and effectively settled issues. Determining whether an
uncertain tax position is effectively settled requires judgment. Such a change
in recognition or measurement would result in the recognition of a tax benefit
or an additional charge to the tax provision.
The
Company classifies tax related interest as interest expense and tax related
penalties as a component of income taxes.
Research
and Development
Research
and development costs are expensed in the period incurred.
Environmental
Expenditures
The
Company assesses its property held for sale, along with any property that is
being taken out of its initially intended use, for the presence of hazardous or
toxic substances that would result in an environmental liability.
Liabilities
for environmental remediation costs not related to retirements of tangible
long-lived assets, and arising from claims, assessments, litigation, fines, and
penalties and other sources, are recorded when it is probable that a liability
has been incurred and the amount of the assessment and/or remediation can be
reasonably estimated.
Legal
costs incurred in connection with environmental remediation are expensed as
incurred. Recoveries of environmental remediation costs from third parties,
which are probable of realization, are separately recorded as assets, and are
not offset against the related environmental liability, in accordance with U.S.
GAAP.
Stock-Based
Compensation
U.S. GAAP
requires that all stock-based compensation be recognized as an expense in the
financial statements and that such cost be measured at the fair value of the
award. Under this method, in addition to reflecting compensation for new
share-based awards, expense is also recognized to reflect the remaining service
period of awards. U.S. GAAP requires that the cost of all share-based
transactions be measured at fair value and recognized over the period during
which a grantee is required to provide goods or services in exchange for the
award. Although the terms of the Company’s share-based plans do not accelerate
vesting upon retirement, or the attainment of retirement eligibility, the
requisite service period subsequent to attaining such eligibility is considered
non-substantive. Accordingly, the Company recognizes compensation expense
related to share-based awards over the shorter of the requisite service period
or the period to attainment of retirement eligibility. U.S. GAAP also requires
an estimation of future forfeitures of share-based awards to be incorporated
into the determination of compensation expense when recognizing expense over the
requisite service period.
During
the three months ended October 29, 2010 and October 30, 2009, the Company
recorded approximately $46,000 and $46,000, respectively, of stock-based
compensation expenses. During the nine months ended October 29, 2010 and October
30, 2009, the Company recorded approximately $137,000 and $139,000,
respectively, of stock-based compensation expenses.
Stock issued in payment for services provided by members of the board
of directors is expensed in the period the services are provided. During the
three months ended October 29, 2010 and October 30, 2009, the Company recorded
director compensation expense, relating to stock-based compensation, in the
amount of $15,000, respectively. During the nine months ended October 29, 2010
and October 30, 2009, the Company recorded director compensation expense,
relating to stock-based compensation, in the amount of $45,000,
respectively.
Product
Warranties
We
provide for the estimated costs of warranties at the time the related revenue is
recognized. We estimate the costs based on historical and projected product
failure rates and historical and projected repair costs. Warranty terms and
conditions vary depending upon the product sold and the customer it was sold to,
but generally includes parts and labor over a period generally ranging from one
to five years. We regularly reevaluate our estimates to assess the adequacy of
the recorded warranty liabilities and adjust the amounts as
necessary.
Off-Balance
Sheet Arrangements
The
Company does not maintain off-balance sheet arrangements except as disclosed in
our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 nor
does it participate in non-exchange traded contracts requiring fair value
accounting treatment.
Contractual
Obligations
There
have been no material changes to our commitments and contingencies from that
disclosed in our Annual Report on Form 10-K for the year ended January 31,
2010.
Adoption of New Accounting
Pronouncements
In April
2010, the FASB issued new authoritative guidance surrounding revenue
recognition, specifically addressing the criteria for recognizing revenue tied
to research and development efforts. The guidance adds the milestone method to
the list of acceptable methods of revenue recognition when accounting for
multiple element arrangements within research and development efforts. The
guidance is effective for milestones achieved in fiscal years beginning on or
after June 15, 2010, unless early adoption is elected. The Company adopted the
guidance beginning the quarter ended July 30, 2010, which required retrospective
application from the beginning of the fiscal year. The adoption of this guidance
did not have a material impact on the Company’s financial
statements.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET
RISK
|
We do not
issue or invest in financial instruments or their derivatives for trading or
speculative purposes. Our market risk is limited to fluctuations in interest
rates pertaining to our borrowings under our existing credit facilities which
require the payment of interest at variable rates equal to one-month LIBOR plus
300 to 340 basis points, with a minimum rate of 4%. We therefore are exposed to
market risk from changes in interest rates on certain of our funded debt. Any
increase in these rates could adversely affect our interest expense. The extent
of market rate risk associated with fluctuations in interest rates is not
quantifiable or predictable because of the volatility of future interest rates
and business financing requirements. We use no derivative products to hedge or
mitigate interest rate risk.
Based on
the outstanding balance of $8,978,000 on our credit facilities with M&I as
of October 29, 2010, a 1% increase in interest rates would cost the Company
approximately $23,000 annually.
ITEM 4.
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CONTROLS AND
PROCEDURES
|
We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of October 29, 2010. Our principal executive and financial
officers supervised and participated in the evaluation. Based on the evaluation,
and in light of the previously identified material weakness as of
January 31, 2010, described within the 2010 Annual Report on Form 10-K, our
principal executive and financial officers each concluded that, as of October
29, 2010, our disclosure controls and procedures were not effective in providing
reasonable assurance that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s form and
rules and accumulated and communicated to our management, including our
principal executive and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosures.
Given the
identification of the above material weakness, we are continuing on a course of
action that we anticipate will remediate the material weakness. Management
completed a standard cost accounting analysis and developed a plan of actions
deemed necessary to provide reasonable assurance that controls are adequate to
detect or prevent a material misstatement in our financial statements in a
timely manner. Implementation of remediation actions is progressing as planned
and will continue through fiscal year 2011.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter ended October 29, 2010 that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
ITEM 2.
|
UNREGISTERED SALE OF EQUITY
SECURITIES AND USE OF
PROCEEDS
|
ITEM 3.
|
DEFAULTS UPON SENIOR
SECURITIES
|
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
|
ITEM
5.
|
OTHER
INFORMATION
|
On
December 13, 2010, the Company entered into Retention Agreements with these
executives: Douglas J. Hillman, Kevin J. Purcell, P. Mark Perkins,
Thomas Cason, and Scott Kempshall. The agreements provide for payment of
amounts as severance if both (a) a Change of Control occurs and (b) one of
certain triggering events occurs: the executive is involuntarily
terminated without cause, his base salary or bonus eligibility are reduced or
his title, duties, authority, or reporting relationships are materially
reduced. On the occurrence of both of these triggering events, the
executive is entitled to receive severance compensation consisting of (a) for
Mr. Hillman and Mr. Purcell, an amount equal to 110% of annual base salary times
150%, plus 150% of the average of executive’s bonus over the previous two fiscal
years from the triggering event and (b) for Mr. Perkins, Mr. Cason, and Mr.
Kempshall, an amount equal to 110% of annual base salary, plus the average of
executive’s bonus over the previous two fiscal years from the triggering
event. These amounts would be payable in equal monthly installments over
18 months and 12 months, respectively.
On
December 13, 2010, the Company entered into Indemnification Agreements with Mr.
Hillman, Mr. Purcell, Mr. Perkins, and Mr. Cason. Each Indemnification Agreement
provides for the Company to indemnify the executive for liabilities that he
incurs in the course of performing his responsibilities for the Company, subject
to limitations on the scope of that indemnity imposed under applicable
law.
In
addition, on December 13, 2010, the Company and Mr. Hillman entered into an
amendment (the “Amendment”) to the employment agreement between the Company and
Mr. Hillman, entered into as of April 17, 2008 (the “Employment
Agreement”). The Amendment modifies the Employment Agreement by
eliminating the Company’s obligation to make severance payments upon a voluntary
termination of employment by Mr. Hillman. This change is consistent with
the severance provisions contained in the Company’s employment agreements with
its other executive officers.
The
foregoing information is qualified in its entirety by reference to the Retention
Agreements, the Form of Indemnification Agreement and the Amendment, which are
filed as Exhibits 10.1 through 10.7 to this Quarterly Report on Form 10-Q and
incorporated herein by reference.
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
10.1
|
|
Form
of Indemnification Agreement.
|
|
|
|
10.2
|
|
Retention
Agreement, dated as of December 13, 2010, between Aerosonic Corporation
and Douglas J. Hillman.
|
|
|
|
10.3
|
|
Retention
Agreement, dated as of December 13, 2010, between Aerosonic Corporation
and Kevin J. Purcell.
|
|
|
|
10.4
|
|
Retention
Agreement, dated as of December 13, 2010, between Aerosonic Corporation
and P. Mark Perkins.
|
|
|
|
10.5
|
|
Retention
Agreement, dated as of December 13, 2010, between Aerosonic Corporation
and Thomas W. Cason.
|
|
|
|
10.6
|
|
Retention
Agreement, dated as of December 13, 2010, between Aerosonic Corporation
and Scott R. Kempshall.
|
|
|
|
10.7
|
|
Amendment
to Employment Agreement, dated as of December 13, 2010, between Aerosonic
Corporation and Douglas J. Hillman.
|
|
|
|
31.1
|
|
Section
302 Certification.
|
|
|
|
31.2
|
|
Section
302 Certification.
|
|
|
|
32.1
|
|
Section
906 Certification.
|
|
|
|
32.2
|
|
Section
906 Certification.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date:
December 13, 2010
AEROSONIC
CORPORATION
|
|
/s/ Douglas J. Hillman
|
|
Douglas
J. Hillman
|
|
President
and Chief Executive Officer
|
|
|
Date:
December 13, 2010
|
|
AEROSONIC
CORPORATION
|
|
/s/ Kevin J. Purcell
|
|
Kevin
J. Purcell
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|