This report contains forward-looking statements, which are subject to inherent uncertainties. These uncertainties include, but are not limited to, variations in weather, changes in the regulatory environment, customer preferences, general economic conditions, increased competition, the outcome of outstanding litigation, and future developments affecting environmental matters. All of these are difficult to predict, and many are beyond the ability of the Company to control.
Certain statements in this Quarterly Report on Form 10-Q that are not historical facts, but rather reflect the Company's current expectations concerning future results and events, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believes", "expects", "intends", "plans", "anticipates", "hopes", "likely", "will", and similar expressions identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's view only as of the date of this Form 10-Q. The Company undertakes no obligation to update the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.
-25- OVERVIEW
The Company is a leading manufacturer of flexible metal hose (also described as corrugated tubing), and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical, healthcare and other industries.
The Company's business is managed as a single operating segment that consists of
the manufacture and sale of flexible metal hose, as well as the sale of the
Company's related proprietary fittings and a vast array of accessories. The
Company's products are concentrated in residential and commercial construction,
and general industrial markets, with a comprehensive portfolio of intellectual
property and patents issued in various countries around the world. The Company's
primary product, flexible gas piping, is used for gas piping within residential
and commercial buildings. Through its flexibility and ease of use, the Company's
TracPipe® and TracPipe® CounterStrike® flexible gas piping, along with its
fittings distributed under the trademarks AutoSnap® and AutoFlare®, allows users
to substantially cut the time required to install gas piping, as compared to
traditional methods. The Company's products are manufactured at its
COVID-19 PANDEMIC
The emergence of the coronavirus (COVID-19) in
-26-
The Company has responded to the challenges of COVID-19 pandemic by taking
measures to reduce exposure to our employees. Production in
Due to the above circumstances and as described generally in this Form 10-Q, the
Company's results of operations for the quarter ended
CHANGES IN FINANCIAL CONDITION For the period endedMarch 31, 2020 vs.December 31, 2019
The Company's cash balance of
Accounts Receivable was
Accrued Compensation was
-27-
Accrued Commissions and Sales Incentives were
Other Liabilities were
RESULTS OF OPERATIONS Three-months endedMarch 31, 2020 vs.March 31, 2019
The Company reported comparative results from continuing operations for the
three-month periods ended
Three-months ended March 31, (in thousands) 2020 2020 2019 2019 ($000 ) % ($000 ) % Net Sales$ 25,266 100.0 %$ 26,788 100.0 % Gross Profit$ 15,769 62.4 %$ 16,946 63.3 % Operating Profit$ 5,845 23.1 %$ 5,591 20.9 %
Gross Profit. The Company's gross profit margins were 62.4% and 63.3% for the
three-months ended
Selling Expenses. Selling expenses consist primarily of employee salaries and
associated overhead costs, commissions, and the cost of marketing programs such
as advertising, trade shows and related communication costs, and freight.
Selling expense was
-28-
General and Administrative Expenses. General and administrative expenses consist
primarily of employee salaries, benefits for administrative, executive and
finance personnel, legal and accounting, and corporate general and
administrative services. General and administrative expenses were
Engineering Expense. Engineering expenses consist of development expenses
associated with the development of new products and enhancements to existing
products, and manufacturing engineering costs. Engineering expenses were
Operating Profits. Reflecting all of the factors mentioned above, operating
profits were
Interest Income (Expense)-Net. Interest income is recorded on cash investments,
and interest expense is recorded at times when the Company has debt amounts
outstanding on its line of credit. The Company recorded
Other Income (Expense)-Net. Other Income (Expense)-net primarily consists of
foreign currency exchange gains (losses) on transactions settled in currencies
other than the Company's local currency, typically related to the Company's
foreign
Income Tax Expense. Income Tax Expense was
-29-
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, released by the
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to revenue recognition and related sales incentives, accounts receivable valuations, investment valuations, inventory valuations, goodwill valuation, product liability reserve, stock-based compensation valuations and accounting for income taxes. Actual amounts could differ significantly from these estimates.
Our critical accounting policies and significant estimates and assumptions are described in more detail as follows:
Revenue Recognition
According to Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), the Company recognizes revenue in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services.
The principle of Topic 606 is achieved through applying the following five-step approach:
? Identification of the contract, or contracts, with a customer - a contract with a customer exists when the Company enters into an enforceable contract with a customer, typically a purchase order initiated by the customer, that defines each party's rights regarding the goods to be transferred and identifies the payment terms related to these goods. ? Identification of the performance obligations in the contract - performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are distinct, whereby the customer can benefit from the goods on their own or together with other resources that are readily available from third parties or from us. Persuasive evidence of an arrangement for the sale of product must exist. The Company ships product in accordance with the purchase order and standard terms as reflected within the Company's order acknowledgments and sales invoices. -30- ? 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 to the customer. This would be the agreed upon quantity and price per product type in accordance with the customer purchase order, which is aligned with the Company's internally approved pricing guidelines. ? 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. This applies to the Company as there is only one performance obligation to ship the goods. ? Recognition of revenue when, or as, the Company satisfies a performance obligation - the Company satisfies performance obligations at a point in time when control of the goods transfers to the customer. Determining the point in time when control transfers requires judgment. Indicators considered in determining whether the customer has obtained control of a good include: ? The Company has a present right to payment ? The customer has legal title to the goods ? The Company has transferred physical possession of the goods ? The customer has the significant risks and rewards of ownership of the goods ? The customer has accepted the goods
It is important to note that the indicators are not a set of conditions that must be met before the Company can conclude that control of the goods has transferred to the customer. The indicators are a list of factors that are often present if a customer has control of the goods.
The Company has typical, unmodified FOB shipping point terms. As the seller, the Company can determine that the shipped goods meet the agreed-upon specifications in the contract or customer purchase order (e.g. items, quantities, and prices) with the buyer, so customer acceptance would be deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to payment upon shipment of the goods.
Based upon the above, the Company has concluded that transfer of control substantively transfers to the customer upon shipment.
Other considerations of Topic 606 include the following:
? Contract Costs - costs to obtain a contract (e.g. customer purchase order) include sales commissions. Under Topic 606, these costs may be expensed as incurred for contracts with a duration of one year or less. The majority of the Company's customer purchase orders are fulfilled (e.g. goods are shipped) within two days of receipt. ? Warranties - the Company does not offer customers to purchase a warranty separately. Therefore, there is not a separate performance obligation. The Company does account for warranties as a cost accrual and the warranties do not include any additional distinct services other than the assurance that the goods comply with agreed-upon specifications. There is no impact of warranties under Topic 606 upon the financial reporting of the Company. -31- ? Returned Goods - from time to time, the Company provides authorization to customers to return goods. If deemed to be material, the Company would record a "right of return" asset for the cost of the returned goods which would reduce cost of sales. ? Volume Rebates (Promotional Incentives) - volume rebates are variable (dependent upon the volume of goods purchased by our eligible customers) and, under Topic 606, must be estimated and recognized as a reduction of revenue as performance obligations are satisfied (e.g. upon shipment of goods). Also under Topic 606, to ensure that revenue recognized would not be probable of a significant reversal, the four following factors are considered: ? The amount of consideration is highly susceptible to factors outside the Company's influence. ? The uncertainty about the amount of consideration is not expected to be resolved for a long period of time. ? The Company's experience with similar types of contracts is limited. ? The contract has a large number and broad range of possible consideration amounts.
If it was concluded that the above factors were in place for the Company, it would support the probability of a significant reversal of revenue. However, as none of the four factors apply to the Company, promotional incentives are recorded as a reduction of revenue based upon estimates of the eligible products expected to be sold.
Regarding disaggregated revenue disclosures, as previously noted, the Company's
business is controlled as a single operating segment that consists of the
manufacture and sale of flexible metal hose. Most of the Company's transactions
are very similar in nature, contract, terms, timing, and transfer of control of
goods. As indicated within Note 2, under the caption "Significant
Concentration", the majority of the Company's sales were geographically
contained within
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
90 days or less at the time of purchase to be cash equivalents. Cash equivalents
include investments in an institutional money market fund, which invests in
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Accounts Receivable and Provision for Credit Losses
All accounts receivables are stated at amortized cost, net of allowances for credit losses, and adjusted for any write-offs. The Company maintains allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The estimate is a result of the Company's ongoing assessments and evaluations of collectability, historical loss experience, and future expectations in estimating credit losses in its receivable portfolio. For accounts receivables, the Company uses historical loss experience rates and applies them to a related aging analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowances consider numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit risk characteristics.
The reserve for credit losses, which include future credits, discounts, and
doubtful accounts, was
Investments
The Company invests excess funds in liquid interest earning instruments
including
Inventories
Inventories are valued at the lower of cost or net realizable value. The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two-years usage, measured on a historical usage basis, to be excess inventory and reduces the carrying value of inventory accordingly.
Property and Equipment
Property and equipment are initially recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or, for leasehold improvements, the life of the lease, if shorter. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income or expense for the period. The cost of maintenance and repairs is expensed as incurred; significant improvements are capitalized.
-33-Goodwill
In accordance with
However, the duration and severity of the COVID-19 pandemic could result in
future goodwill impairment charges. While we have concluded that a triggering
event did not occur during the quarter ended
Stock-Based Compensation Plans
In 2006, the Company adopted a Phantom Stock Plan (the "Plan"), which allows the Company to grant phantom stock units ("Units") to certain key employees, officers or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company's common stock. The Units follow a vesting schedule of three years from the grant date, and are then paid upon maturity. In accordance with FASB ASC Topic 718, Compensation - Stock Compensation, the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units and are accordingly recorded as liabilities. Additionally, the liabilities for the Units are adjusted to market value over time from the grant dates to the related maturity dates. Further details of the Plan are provided in Note 6.
Product Liability Reserves
Product liability reserves represent the estimated unpaid amounts under the
Company's insurance policies with respect to existing claims. The Company uses
the most current available data to estimate claims. As explained more fully
under Note 5, Commitments and Contingencies, for various product liability
claims covered under the Company's general liability insurance policies, the
Company must pay certain defense and settlement costs within its deductible or
self-insured retention limits, ranging primarily from
Leases
Effective
1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. -34- 3. The lease term is for the major part of the remaining economic life of the underlying asset. 4. The present value of the sum of lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
For any leases that do not meet the criteria identified above for finance
leases, the Company treats such leases as operating leases. As of
Both finance and operating leases are reflected on the balance sheet as lease or "right-of-use" assets and lease liabilities.
There are some exceptions, which the Company has elected in its accounting policies. For leases with terms of twelve months or less, or below the Company's general capitalization policy threshold, the Company has elected an accounting policy to not recognize lease assets and lease liabilities for all asset classes. The Company recognizes lease expense for such leases generally on a straight-line basis over the lease term.
The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right-of-use assets at the inception of the lease and accounts for these options when they are reasonably certain to be exercised. Certain leases contain non-lease components, such as common area maintenance, which are generally accounted for separately. In general, the Company will assess if non-lease components are fixed and determinable, or variable, when determining if the component should be included in the lease liability. For purposes of calculating the present value of the lease obligations, the Company utilizes the implicit interest rate within the lease agreement when known and/or determinable, and otherwise utilizes its incremental borrowing rate at the time of the lease agreement.
As permitted under ASU 2018-11, the Company elected the optional transition
method to adopt the new leases standard. Under this new transition method, the
Company initially applied the new leases standard at the adoption date of
The impact of the adoption of this new standard resulted in an increase to the
Company's operating lease assets and liabilities on
-35-
Fair Value of Financial and Nonfinancial Instruments
The Company measures financial instruments in accordance with FASB ASC Topic
820, Fair Value Measurements and Disclosures. The accounting standard defines
fair value, establishes a framework for measuring fair value under GAAP, and
enhances disclosures about fair value measurements. Fair value is defined as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value must maximize
the use of observable inputs and minimize the use of unobservable inputs. The
standard creates a fair value hierarchy which prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels as
follows: Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities; Level 2 inputs are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly; and Level 3 inputs are unobservable inputs that
reflect the Company's own assumptions about the assumptions market participants
would use in pricing the asset or liability. The Company relies upon Level 1
inputs in determining the fair value of investments and the fair value of the
Company's reporting unit in its annual impairment test as described in the FASB
ASC Topic 350, Intangibles -
Earnings per Common Share
Basic earnings per share have been computed using the weighted-average number of common shares outstanding. For the periods presented, there are no dilutive securities. Consequently, basic and dilutive earnings per share are the same.
Currency Translation
Assets and liabilities denominated in foreign currencies, most of which relate
to the Company's
Income Taxes
The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes. Under this method the Company recorded tax expense, related deferred taxes and tax benefits, and uncertainties in tax positions.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain.
-36-
The FASB ASC Topic 740, Income Taxes, clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. This guidance prescribes a recognition threshold of more-likely than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.
The Company follows the provisions of ASC 740-10 relative to accounting for uncertainties in tax positions. These provisions provide guidance on the recognition, de-recognition and measurement of potential tax benefits associated with tax positions.
On
Other Comprehensive Income
For the quarters ended
Significant Concentration
The Company has one significant customer which represented more than 10% of the
Company's Accounts Receivable at
Subsequent Events
The Company evaluates all events or transactions through the date of the related filing that may have a material impact on its condensed consolidated financial statements. Refer to Note 10 of the condensed consolidated financial statements.
Recent Accounting Pronouncements
In
-37-
In
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary cash needs have been related to working capital items, which the Company has largely funded through cash generated from operations.
As of
Subsequent to
We believe our existing cash and cash equivalents, along with our borrowing capacity, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend upon many factors including our rate of revenue growth, the timing and extent of any expansion efforts, the potential for investments in, or the acquisition of any complementary products, businesses or supplementary facilities for additional capacity, and the COVID-19 crisis. The details of our operating, investing and financing activities are provided below.
-38- Operating Activities
Cash used in operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such as those included in working capital.
For the first three months of 2020, the Company's operating activities provided
cash of
Investing Activities
Cash used in investing activities during the first three months of 2020 and 2019
was
Financing Activities
A dividend was declared in both December of 2019 and 2018, amounting to
CONTINGENT LIABILITIES AND GUARANTEES
See Note 5 to the Company's condensed consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
None
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