10-Q 1 a4883854.txt VALPEY-FISHER CORPORATION 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 2005 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 1-4184 Valpey-Fisher Corporation (Exact name of registrant as specified in its charter) Maryland 06-0737363 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 75 South St., Hopkinton, Massachusetts 01748 (Address of principal executive offices) (Zip Code) (508) 435-6831 (Registrant's telephone number, including area code) 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 _X_ No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X] As of May 10, 2005, the number of shares outstanding of Registrant's Common Stock, par value $.05 was 4,246,503. 1 Valpey-Fisher Corporation INDEX PAGE ----- ----- PART I. FINANCIAL INFORMATION ITEM 1. - Financial Statements - Consolidated Condensed Balance Sheets - April 3, 2005 (Unaudited) and December 31, 2004 (Audited) 3 Consolidated Statements of Operations - (Unaudited) Three Months Ended April 3, 2005 and March 28, 2004 4 Consolidated Condensed Statements of Cash Flows - (Unaudited) Three Months Ended April 3, 2005 and March 28, 2004 5 Notes to Consolidated Condensed Financial Statements 6-7 ITEM 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 ITEM 3. - Quantitative and Qualitative Disclosures About Market Risk 10 ITEM 4. - Controls and Procedures 10-11 PART II. OTHER INFORMATION ITEM 6. - Exhibits 11 SIGNATURES 12 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Valpey-Fisher Corporation and Subsidiaries Consolidated Condensed Balance Sheets (In thousands, except share data)
4/3/05 12/31/04 --------- --------- (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 6,384 $ 6,455 Accounts receivable, net of allowances of $86 in 2005 and $100 in 2004 1,527 1,137 Inventories, net 1,235 1,501 Deferred income taxes and other current assets 663 629 ---------------------------------------------------------------------------------------------------- Total current assets 9,809 9,722 Property, plant and equipment, at cost 10,853 10,807 Less accumulated depreciation 7,998 7,808 ---------------------------------------------------------------------------------------------------- 2,855 2,999 Other assets 153 143 ---------------------------------------------------------------------------------------------------- $ 12,817 $ 12,864 ==================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 593 $ 409 Accrued liabilities 996 1,246 ---------------------------------------------------------------------------------------------------- Total current liabilities 1,589 1,655 Deferred income taxes 543 578 Stockholders' equity: Preferred stock, $1.00 par value- Authorized 1,000,000 shares; issued none - - Common stock, $.05 par value- Authorized 10,000,000 shares; Issued and outstanding: 4,222,519 and 4,222,519 shares 211 211 Capital surplus 5,070 5,076 Retained earnings 5,547 5,502 Less unearned compensation (143) (158) ---------------------------------------------------------------------------------------------------- Total stockholders' equity 10,685 10,631 ---------------------------------------------------------------------------------------------------- $ 12,817 $ 12,864 ==================================================================================================== See notes to consolidated condensed financial statements.
3 Valpey-Fisher Corporation and Subsidiaries Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three Months Ended 4/3/05 3/28/04 ------------------- Net sales $ 3,022 $ 2,767 Cost of sales 2,057 1,980 -------------------------------------------------------------------------------- Gross profit 965 787 Operating expenses: Selling and advertising 371 396 General and administrative 461 473 Research and development 87 61 -------------------------------------------------------------------------------- 919 930 Operating profit (loss) 46 (143) Other income: Interest income 23 6 -------------------------------------------------------------------------------- 23 6 Earnings (loss) before income taxes 69 (137) Income tax (expense) benefit (24) - -------------------------------------------------------------------------------- Net earnings (loss) $ 45 $ (137) ================================================================================ -------------------------------------------------------------------------------- Basic and diluted earnings (loss) per share $ .01 $ (.03) ================================================================================ Basic weighted average shares 4,223 4,194 Diluted weighted average shares 4,312 4,194 See notes to consolidated condensed financial statements. 4 Valpey-Fisher Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited) Three Months Ended ------------------- 4/3/05 3/28/04 ------------------- Cash flows from operating activities: Net earnings (loss) from operations $ 45 $ (137) Adjustments to reconcile net earnings (loss) to net cash (used) by operating activities: Depreciation and amortization 190 209 Deferred income taxes (33) (10) Net non-cash stock compensation 9 10 Changes in operating assets and liabilities (226) (198) -------------------------------------------------------------------------------- Net cash (used) by operating activities (15) (126) -------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (46) (56) Collection of note receivables - 8 Other, net (10) (8) -------------------------------------------------------------------------------- Net cash (used) by investing activities (56) (56) -------------------------------------------------------------------------------- Cash flows from financing activities: Stock options exercised - 1 -------------------------------------------------------------------------------- Net cash provided by financing activities - 1 -------------------------------------------------------------------------------- Net (decrease) in cash and cash equivalents (71) (181) Cash and cash equivalents: Beginning of period 6,455 4,209 ------------------- End of period $ 6,384 $ 4,028 =================== Noncash Investing and Financing Activities: In 2004, the Company issued 29,500 shares of stock valued at $85,500 to four employees in payment for a bonus accrued in 2003. See notes to consolidated condensed financial statements. 5 Valpey-Fisher Corporation and Subsidiaries Notes to Consolidated Condensed Financial Statements 1. Financial Presentation: The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company's 2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission. 2. Stock Compensation Plans: The Company applies the intrinsic value method, Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. The Company provides the disclosure requirements of Statement of Financial Accounting Standards Nos. 123 and 148, "Accounting for Stock-Based Compensation," and related interpretations and amendments. The Company adopted the disclosure-only option under SFAS No.123 "Accounting for Stock-Based Compensation." The following table illustrates the effect on net earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No.123 to stock-based compensation.
Three Months Ended (in thousands, except per share amounts) 4/3/05 3/28/04 ------------------------------------------------------------------------------------------------ (unaudited) Net earnings (loss), as reported $ 45 $ (137) Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects (37) (57) ---------------- Pro forma net earnings (loss) $ 8 $ (194) ================ Basic and diluted earnings (loss) per share, as reported $ .01 $ (.03) ================ Basic and diluted earnings (loss) per share, pro forma $ .00 $ (.05) ================
6 3. Comprehensive Income (Loss): During the three months ended April 3, 2005 and March 28, 2004, there were no differences between comprehensive income (loss) and net income (loss). 4. Inventories, net: Inventories, net of reserves, consist of the following: (in thousands) 4/3/05 12/31/04 --------------------------------------------------------------------------- (unaudited) Raw materials $ 707 $ 964 Work in process 281 204 Finished goods 247 333 ------------------- $ 1,235 $ 1,501 =================== 5. Earnings (Loss) Per Share: Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the net incremental shares that would be issued if dilutive outstanding stock options were exercised using the treasury stock method. The computation of diluted earnings (loss) per share excludes stock options with an exercise price in excess of the average market price as they are antidilutive. During the three months ended April 3, 2005, the computation of dilutive earnings (loss) per share included 89,790 of net incremental shares from dilutive stock options and excluded 28,750 of stock options, as the exercise prices were greater than the average market price. During the three months ended March 28, 2004, 488,438 common shares issuable under stock options have not been included in the computation of "Diluted Earnings (Loss) per Share". These shares were not included because of the antidilutive effect of the options since the Company reported a loss from operations in this period. 6. Recent Accounting Pronouncements: In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending compliance dates for SFAS No. 123R. In accordance with the new rule, the Company will be required to adopt the accounting provisions of SFAS No. 123R in its first quarter of 2006, beginning January 1, 2006. The Company is currently evaluating the impact of the adoption of this statement. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes that judgments and estimates related to the Company's critical accounting policies could materially affect its consolidated financial statements. The Company's most critical accounting policies, which were discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2004, pertain to accounts receivable, inventories and income taxes. Those policies continue to be the Company's most critical accounting policies for the period covered by this report and there were no significant changes in the application of those policies during this reporting period. Liquidity and Capital Resources Cash and cash equivalents decreased $71,000 during the three months ended April 3, 2005. During this period, the Company's operations used cash of $15,000 and investing activities used cash of $56,000. Cash used for operations of $15,000 resulted mainly from the net earnings of $45,000 adjusted for the net effect of non-cash items, mainly depreciation and amortization, of $166,000 offset by a $226,000 increase in working capital. The net increase in working capital was mainly due to a $390,000 increase in accounts receivable, net and a $250,000 reduction in accrued liabilities offset in part by a $266,000 reduction in inventory and an $184,000 increase in accounts payable. The increase in accounts receivable is mainly due to a combination of the increased sales level compared to the 4th quarter of 2004 and the increase in the days sales outstanding from 44 days at December 31, 2004 to 49 days at April 3, 2005. The reduction in accrued liabilities is mainly due to the $340,000 payment of incentive compensation to employees. The reduction in inventory is mainly due to a continuing control of inventory levels. The increase in accounts payable is primarily due to the timing of inventory and equipment purchases. Management believes that based on its current working capital and the expected cash flow from operations, the Company's resources are sufficient to meet its financial needs and to fund the capital expenditures for the projected levels of business in 2005. Off-Balance Sheet Arrangements The Company does not maintain any off-balance sheet financing arrangements. Contractual Obligations During the normal course of business, the Company incurs certain commitments to make future payments for the purchase of inventory and production supplies based on projected requirements. At April 3, 2005, the Company has outstanding purchase commitments totaling approximately $573,000, all of which are expected to be fulfilled in 2005. 8 Results of Operations During the quarter ended April 3, 2005, net sales increased $255,000 or 9% over the comparable quarter in 2004 mainly due to a combination of increased sales of its high reliability ("high-rel") products and higher sales to customers in the telecom market. While the actual number of units sold decreased from the prior year, the sales increase was due to an increase in the average selling prices of products sold as the Company continues to move to more value-added, high-rel products. The Company also saw an increase in bookings during the current quarter compared to the 3rd and 4th quarters of 2004. The book-to-bill ratio during the quarter ended April 3, 2005 was 1.03 versus 1.17 during the comparable period in 2004. The Company's backlog amounted to $1.9 million at April 3, 2005 compared to $1.8 million at December 31, 2004 and $2.3 million at March 28, 2004. Management believes that the market conditions for the Company's products, in particular those for the telecom market, are slowly starting to stabilize and in fact show modest growth. However, our near-term visibility continues to be poor and we continue to see customer orders for small quantities with near-term delivery dates. Management is not sure of the potential impact on its future operations from the current continuing telecom market uncertainties and our industry's over capacity issues. The Company reported a $965,000 gross profit (32% of net sales) in the current quarter versus a $787,000 gross profit (28% of net sales) in the 2004 quarter. The higher margin was mainly attributable to a decrease in raw material costs due to changes in product mix toward the more value-added, high-rel products and yield improvements. Direct labor and overhead costs as a percentage of sales in 2005 remained fairly consistent with that in the 2004 period. Selling and advertising expenses decreased $25,000 or 6% from the comparable quarter in 2004. The primary reasons for the decrease were reductions in travel and entertainment expenses ($21,500) and personnel expense ($10,000) being partially offset by a $10,000 increase in advertising expense. During the quarter ended April 3, 2005, general and administrative expenses decreased $12,000 or 3% from the comparable 2004 period as the Company continues to control its discretionary expenses. Research and development expenses increased $26,000 over the $61,000 reported in the comparable 2004 period primarily as a result of increased personnel expenses. The 43% increase is consistent with the Company's plan to make significant engineering investments in new product development in 2005. The $17,000 increase in interest income in 2005 was due to a combination of higher average cash balances and higher interest rates during the current year. The annual combined federal and state income tax rate for 2005 is estimated to be 34%. As the Company has state income tax NOL carryforwards available, there is no estimated state income tax provision for 2005. During the quarter ended March 28, 2004, the Company did not provide for income taxes based on the estimated taxable loss for the year and the uncertainty surrounding the realization of these future tax benefits. For the quarter ended April 3, 2005, the Company reported an operating profit of $46,000 compared to an operating loss of $143,000 in comparable quarter of 2004. The improvement in the operating performance was mainly due to the increases in sales and gross margin in 2005 and a slight reduction in operating expenses. As a result, the Company reported a pre-tax profit of $69,000 during the quarter ended April 3, 2005 compared to a pre-tax loss of $137,000 in comparable 2004 period. For the quarter ended April 3, 2005, the Company reported net earnings of $45,000 versus a net loss of $137,000 in 2004. 9 Forward-Looking Statements Certain statements made herein contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Words such as "expects", "believes", "estimates", "plans" or similar expressions are intended to identify such forward-looking statements. The forward-looking statements are based on the Company's current views and assumptions and involve risks and uncertainties that include, but not limited to: the Company's ability to continue to achieve profitability, the current production over-capacity within the suppliers of frequency control devices, the ability to develop, market and manufacture new innovative products competitively, the fluctuations in product demand of the telecommunications industry, the ability of the Company and its suppliers to produce and deliver materials and products competitively, the ability to limit the amount of the negative effect on operating results caused by pricing pressure and the Company's ability to comply with Section 404 of the Sarbanes-Oxley Act. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's cash balances in excess of operating requirements are currently invested in money market accounts. These money market accounts are subject to interest rate risk and interest income will fluctuate in relation to general money market rates. Based on the cash and cash equivalent balance at April 3, 2005, and assuming the balance was totally invested in money market instruments for the full year, a hypothetical 1% point increase or decrease in interest rates would result in an approximate $63,800 increase or decrease in interest income. The Company purchases certain inventory from and sells product in foreign countries. As these activities are currently transacted in U.S. dollars, they are not subject to foreign currency exchange risk. However, significant fluctuation in the currencies where the Company purchases inventory or sells product could make the U.S. dollar equivalent of such transactions more or less favorable to the Company and the other involved parties. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. At the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the Company's management, including the Company's President and Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded, except as noted below, that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic SEC filings and that information required to be disclosed by the Company in these periodic filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. As stated in the Company's 2004 Form 10-K, the Company's independent registered accounting firm advised management and the audit committee in March 2005, that the following identified internal control deficiencies constituted a significant deficiency in the Company's internal control. 1. Reliance on the Chief Financial Officer for period end financial reporting functions, accounting estimates and income taxes. 10 2. The lack of adequate segregation of duties in certain accounts payable and payroll functions and certain account reconciliations. We believe that these deficiencies did not affect the accuracy of our financial statements in this report. As of April 3, 2005, the Company has instituted certain management review procedures to correct certain of the lack of segregation of duties and account reconciliations described above. Management will continue to evaluate the employees involved and the control procedures in place, the risks associated with such lack of segregation of duties and whether the potential benefits of adding employees to clearly segregate duties or other alternatives justifies the expense associated with the changes. Management recognizes that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Management is aware that there is a lack of segregation of duties in some areas due to the size of the Company and the limited number of employees within the financial and administrative departments of the Company. In addition, management will review this matter with its outside consultants to examine other available alternative solutions. Changes in internal control. Other than as discussed above, during the first quarter of 2005, there were no changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 6. Exhibits 10.1 Key Employee Bonus Plan for 2005. Filed herewith. 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. 11 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. Valpey-Fisher Corporation Date: May 10, 2005 By /s/ Michael J. Ferrantino ---------------------------- Michael J. Ferrantino, President and Chief Executive Officer Date: May 10, 2005 By /s/ Michael J. Kroll ----------------------- Michael J. Kroll Vice President, Treasurer and Chief Financial Officer 12