TOROTEL, INC. Overview Introduction
? aircraft navigational equipment;
? digital control devices;
? airport runway lighting devices;
? medical equipment; ? avionics systems; ? radar systems; ? down-hole drilling;
? conventional missile guidance systems; and
? other aerospace and defense applications.
We believe the primary factors that drive our gross profit and net earnings are sales volume and product mix. The gross profits on mature products/programs and complex transformer devices tend to be higher than those that are still in the prototyping or early production stages and simpler inductor devices. As a result, in any given accounting period the mix of product shipments between higher and lower margin products has a significant impact on our gross profit and net earnings. Our operating plan continues to focus on expanding the product base beyond electronic components.
The industry mix of
COVID-19 Impact
The COVID-19 pandemic, first identified in
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other safety precautions. We expect to continue these changes for the
foreseeable future. As a result of the pandemic, there is significant
uncertainty around the
Business and Industry Considerations
Defense Markets
During fiscal year 2020 and fiscal year 2019, the amount of consolidated
revenues derived from contracts with prime contractors of the
Despite ongoing uncertainty and potential constraints associated with the
We provide magnetic components and electro-mechanical assemblies for a variety
of applications in the commercial aerospace and industrial markets. The primary
demand drivers for these markets include commercial aircraft production orders,
oil and gas drilling exploration activity, and general economic growth. Each of
these could have an ongoing impact due to the effects of the pandemic on
commercial aircraft production, oil prices and general economic turmoil and
uncertainty. Producers of commercial aircraft have announced a decrease in the
production of multiple models of aircraft. This reduction adversely impacted
our commercial aerospace backlog and is expected to further impact our
commercial aerospace business throughout fiscal year 2021. Other threats to our
near-term and long-term market outlook in these markets include delays on the
development and production of new commercial aircraft and competition from
international suppliers. As of
Business Outlook
Our backlog as of
Consolidated Results of Operations
The following management comments regarding
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Table of ContentsNet Sales Years ended April 30, 2020 2019 Magnetic components$ 14,090,000 $ 10,600,000 Potted coil assembly 5,655,000 5,751,000 Electro-mechanical assemblies 6,388,000 3,920,000 Large transformers - 284,000 Total$ 26,133,000 $ 20,555,000
Consolidated net sales in fiscal year 2020 increased
Consolidated net sales in fiscal year 2019 increased
Gross Profit
Years ended April 30, 2020 2019
Gross profit $ 9,009,000 $ 6,964,000
Gross profit % of net sales 34 % 34 %
Gross profit as a percentage of net sales in fiscal year 2020 remained consistent at 34% when compared to fiscal year 2019. The gross profit percentage for fiscal year 2020 increased primarily due to higher demand for magnetic components and electro-mechanical assemblies and lower manufacturing costs and scrap.
Gross profit as a percentage of net sales in fiscal year 2019 increased 8% as
compared to fiscal year 2018. The gross profit percentage for fiscal year 2019
increased primarily due to higher demand for magnetic components and
electro-mechanical assemblies, lower manufacturing costs and scrap, and the
change in revenue recognition policy (described in Note 1). The change in the
revenue recognition policy increased gross profit by
Operating Expenses
Years ended April 30, 2020 2019
Engineering $ 1,462,000 $ 1,316,000
Selling, general and administrative 6,662,000 4,881,000
Total $ 8,124,000 $ 6,197,000 Engineering expense increased 11%, or
Engineering expense increased 22%, or
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Selling, general and administrative expenses increased 36%, or
Selling, general and administrative expenses decreased 2%, or
Earnings (loss) from Operations
Years ended April 30, 2020 2019
Torotel Products $ 2,414,000 $ 1,296,000
Torotel (1,529,000) (529,000)
Total $ 885,000 $ 767,000 For the reasons discussed in the Net Sales, Gross Profit, and Operating Expenses
above, consolidated earnings from operations increased by
Other Earnings Items
Years ended April 30, 2020 2019
Income from operations $ 885,000 $ 767,000
Interest expense 96,000 112,000
Income before income taxes 789,000 655,000
Income tax expense 75,000 13,000
Net income $ 714,000 $ 642,000 Interest expense decreased by 14%, or
Interest expense increased by 51%, or
We evaluate the appropriateness of our deferred income tax asset valuation allowance on a quarterly basis and continue to consider positive and negative trends in our industry that affect our determination. During the fourth quarter of fiscal year 2018, we determined we were no longer in a positive cumulative earnings position which is significant negative evidence indicating the need for a valuation allowance. As a result, we concluded it unlikely the full benefit of our deferred tax assets will more-likely-than-not be fully realized and our valuation allowance has been increased accordingly. Our evaluation in fiscal years 2020 and 2019 were consistent with our 2018 conclusions. See Note 6 in the consolidated financial statements for further details.
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Financial Condition and Liquidity
The following table highlights the funds available to us as ofApril 30, 2020 and 2019: 2020 2019 Cash$ 2,263,000 $ 58,000 Amount available under our equipment loan - 196,000 Amount available under our 5.00% asset-based revolving line of credit 2,000,000 275,000 Total funds available$ 4,263,000 $ 529,000 Operating Activities 2020 2019 Net cash provided by (used in) operating activities$ 1,804,000 $ (453,000)
The increase of
Investing Activities
2020 2019
Net cash used in investing activities $ (507,000) $ (150,000) The increase of
Financing Activities
2020 2019
Net cash provided by financing activities $ 908,000 $ 86,000 The increase of
Liquidity and Capital Resources
Due to the above-mentioned pandemic-related challenges, we are proactively
managing costs and finding new sources of revenue to offset the impact of the
anticipated commercial aerospace downturn. We believe that maintaining our
skilled workforce of production employees and engineers is vital to our
continued success. Without the combination of the PPP loan and the expansion of
our line of credit, we would have had to make significant cost structure changes
to our operations beginning near the end of fiscal year 2020. We believe that
the projected cash flow from operations, additional proceeds from PPP funding
and available borrowings under existing financing arrangements that supplement
our working capital needs, will enable us to meet our anticipated funding
requirements for the foreseeable future, based on historical levels. Our
asset-based revolving line of credit and guidance line of credit are scheduled
to mature on
As of
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Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements.
Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in
The following is a summary of the most critical accounting policies used in the preparation of our consolidated financial statements.
Leases
The Company adopted the guidance of ASU No. 2016-02, Leases, ("ASC 842") as of
Revenue Recognition
We determine revenue recognition through the following steps:
1) Identification of the contract, or contracts, with a customer
A contract with a customer exists when (i) the Company enters into an
enforceable contract with a customer that defines each party's rights
regarding the services to be transferred and identifies the payment terms
related to these services, (ii) the contract has commercial substance and,
(iii) the Company determines that collection of substantially all
consideration for goods or services that are transferred is probable based
on the customer's intent and ability to pay the promised consideration. The
Company applies judgment in determining the customer's ability and intention
to pay, which is based on a variety of factors including the customer's
historical payment experience or, in the case of a new customer, published
credit and financial information pertaining to the customer.
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2) Identification of the performance obligations in the contract
Performance obligations promised in a contract are identified based on the
goods or services that will be transferred to the customer that are both
capable of being distinct, whereby the customer can benefit from the service
either on its own or together with other resources that are readily
available from third parties or from the Company, and are distinct in the
context of the contract, whereby the transfer of the goods or services are
separately identifiable from other promises in the contract. To the extent a
contract includes multiple promised goods or services, the Company must
apply judgment to determine whether promised goods or services are capable
of being distinct and distinct in the context of the contract. If these
criteria are not met the promised goods or services are accounted for as a
combined performance obligation.
3) Determination of the transaction price
The transaction price is determined based on the consideration to which the
Company will be entitled in exchange for transferring goods or services to
the customer. To the extent the transaction price includes variable
consideration, the Company estimates the amount of variable consideration
that should be included in the transaction price utilizing either the
expected value method or the most likely amount method depending on the
nature of the variable consideration. Variable consideration is included in
the transaction price if, in the Company's judgment, it is probable that a
significant future reversal of cumulative revenue under the contract will
not occur. None of the Company's contracts as of April 30, 2020 contained a
significant financing component. Determining the transaction price requires
significant judgment, which is discussed by revenue category in further
detail below.
4) Allocation of the transaction price to the performance obligations in the
contract
If the contract contains a single performance obligation, the entire
transaction price is allocated to the single performance obligation.
However, if a series of distinct goods or services that are substantially
the same qualifies as a single performance obligation in a contract with
variable consideration, the Company must determine if the variable
consideration is attributable to the entire contract or to a specific part
of the contract. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance
obligation based on a relative standalone selling price basis unless the
transaction price is variable and meets the criteria to be allocated
entirely to a performance obligation or to a distinct service that forms
part of a single performance obligation. The Company determines standalone
selling price based on the price at which the performance obligation is sold
separately. If the standalone selling price is not observable through past
transactions, the Company estimates the standalone selling price taking into
account available information such as market conditions and internally
approved pricing guidelines related to the performance obligations.
5) Recognition of revenue when, or as, we satisfy a performance obligation
The Company satisfies performance obligations either over time or at a point
in time as discussed in further detail below. Revenue is recognized at the
time the related performance obligation is satisfied by transferring a
promised service to a customer.
Performance Obligations Satisfied Over Time
We recognize revenue on agreements for the sale of customized goods including magnetic components, consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies for use in commercial aerospace and military electronics on an over time basis.
Performance obligations under long-term agreements are considered to be under contract at the time that authorization to ship has been obtained from the customer, except for one long-term agreement which provides a contract for two specific parts if the ship date is within 21 days. Performance obligations under standalone purchase orders are considered to be under contract at the time that the purchase order is received. Parts manufactured for customers in our aerospace and defense product revenue stream must be built to certain
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specifications that are then qualified by the customer. Due to the proprietary nature of our custom-built products designed for a specific use by our aerospace and defense customers, control is considered to be with the customer as the products are finalized and placed into finished goods. Goods within this revenue stream do not provide simultaneous receipt and benefit to the customer. The goods are controlled by our customers once the finished parts are created. The customers prevent any alternative use of the asset and an enforceable right to payment does exist. We provide for potential losses on any of these agreements when it is probable that we will incur the loss.
Our billing terms for these over-time contracts vary, but are generally based on ship date. Control is transferred as products are completed and closed to finished goods.
Product fees and engineering and design services
For product fees along with engineering and design services, transfer of control is determined by the revenue stream of the associated product. Percentage-of-completion revenue recognition is utilized when revenue recognized exceeds the amount billed to the customer for any project-related services, utilizing labor as the input method.
Performance Obligations Satisfied at a Point in Time
We recognize revenue on agreements for the sale of customized goods including magnetic components, consisting of transformers, inductors, reactors, chokes, toroidal coils, high voltage transformers, dry-type transformers and electro-mechanical assemblies for use in the industrial and commercial market on point in time basis.
Industrial and Commercial Parts
Performance obligations under long-term agreements are considered to be under
contract at the time that authorization to ship has been obtained from the
customer. Performance obligations under standalone purchase orders are
considered to be under contract at the time that the purchase order is received.
For our commercial customers, control of the underlying product design is
retained by
Our billing terms for these point in time sales are generally based on ship date. Control is transferred as products are shipped to the customers.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Shipping and handling costs do not have a material impact to the financial statements. No impairment losses were recognized in fiscal years 2020 and 2019 relating to receivables or contract assets arising from contracts with customers.
Allowance for Doubtful Accounts
Gross trade accounts receivable are offset with an allowance for doubtful
accounts. The allowance for doubtful accounts is our best estimate of the amount
of probable credit losses in our existing accounts receivable. We review the
allowance for doubtful accounts on a regular basis, and all past due balances
are reviewed individually for collectability. Account balances are charged
against the allowance when placed for collection. Recoveries of receivables
previously written off are recorded when received. The majority of the customer
accounts are considered past due after the invoice becomes older than the
customer's normal credit terms. Interest is not charged on past due accounts.
The allowance for doubtful accounts was
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Table of Contents Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined using a FIFO approximated weighted average costing method of valuation. Our industry is characterized by short-term customer commitments and changes in demand, as well as other market considerations. Provisions for obsolete and excess inventory are based on reviews of inventory usage, quantities on hand and latest product demand information from customers. Inventories are reviewed in detail utilizing a 12-month time horizon. Individual part numbers that have not had any usage or purchases in a 12-month time period and do not have any known usage requirements are categorized as obsolete; individual part numbers having more than a 12-month supply based on the current year's usage are categorized as excess. Once specific inventory has been identified as excess or obsolete, the cost of the identified inventory is fully reserved and the cost of the inventory is not recovered until it is sold. The reserve balance is analyzed for adequacy as part of the inventory review each quarter.
Income Taxes
Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our annual tax rate and in evaluating our tax positions. An estimated effective tax rate for a year is applied to our quarterly operating results. In the event there is a significant or unusual item recognized in our quarterly operating results, the tax attributable to that item is separately calculated and recorded at the same time as that item. Tax law requires items to be included in our tax returns at different times than the items are reflected in our financial statements. As a result, our annual tax rate reflected in our financial statements is different than that reported in our tax returns (our cash tax rate). Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences reverse over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit in our income statement. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, or expense for which we have already taken a deduction in our tax return but have not yet recognized as expense in our financial statements. The accounting for uncertainty in income taxes requires a more-likely-than-not threshold for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. If necessary, we record a liability for the difference between the benefit recognized and measured for financial statement purposes and the tax position taken or expected to be taken on our tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. If applicable in a given year, tax-related interest and penalties are classified as a component of income tax expense.
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