TOROTEL INC filed 10-Q

TOROTEL INC revealed 10-Q form on Fri, September 13.

Commercial Security Agreement dated October 19, 2018, between Torotel and the Bank (the “Commercial Security Agreement”), which was entered into in connection with the financiang agreements, the asset-based revolving line of credit is secured by a first lien on all business assets of Torotel. Under the revolving line of credit, if the aggregate principal amount of the outstanding advances exceeds the applicable borrowing base, Torotel must pay the Bank an amount equal to the difference between the outstanding principal balance of the revolving line of credit and the borrowing base. The equipment note was a guidance line of credit to be used for equipment purchases and had a capacity of $250,000. On May 13, 2019, Torotel converted the guidance line of credit relating to the equipment note into an equipment term loan. The equipment term loan is in the principal amount of $54,000 and contains a 5-year term with a 5-year amortization period, with the balance at maturity on May 13, 2024. The associated interest rate is fixed at 5.50%. Monthly repayments of approximately $1,034, consisting of both interest and principal, are required. This final payment of approximately $1,034 is due on the maturity date. This equipment term loan is cross collateralized and cross defaulted with the other financing agreements of Torotel and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel. The real estate term loan is in the principal amount of $815,000 and contains a 5-year term with a 20-year amortization period, with the balance at maturity on October 19, 2023. The associated interest rate is fixed at 5.35%. Monthly repayments of approximately $5,573, consisting of both interest and principal, are required. The final payment of approximately $690,829 is due on the maturity date. This real estate term loan is cross collateralized and cross defaulted with the other financing agreements. The real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas pursuant to the Commercial Security Agreement. The financing agreements contain customary representations, warranties, and covenants of Torotel for the benefit of the Bank, as well as customary default provisions. Other than the borrowing base limitations under the asset-based revolving line of credit, none of the financing agreements requires Torotel to comply with any financial covenants. Prepayments are allowed without penalty under all of the financing agreements. Irrevocable Standby Letter of Credit Under the terms of a lease amendment for its manufacturing facility located in Olathe, Kansas, Torotel provided the landlord an irrevocable standby letter of credit in the original amount of $300,000 as additional security. The balance under the letter of credit will automatically reduce in accordance with the below schedule if not drawn upon: NOTE 7—INCOME TAXES The Company incurred income tax expense of $111,000 during the three months ended July 31, 2019 with an effective tax rate of 19.9%, compared to income tax benefit of $15,000 during the three months ended July 31, 2018. As of July 31, 2019, the federal tax returns for the fiscal years ended 2017 through 2019 are open to audit until the statute of limitations closes for the years in which our net operating losses are utilized. We would recognize interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within income tax expense. As of July 31, 2019, we recorded no accrued interest or penalties related to uncertain tax positions. We expect no significant change in the amount of unrecognized tax benefit, accrued interest or penalties within the next twelve months.

The equipment note was a guidance line of credit to be used for equipment purchases and had a capacity of $250,000. On May 13, 2019, Torotel converted the guidance line of credit relating to the equipment note into an equipment term loan. The equipment term loan is in the principal amount of $54,000 and contains a 5-year term with a 5-year amortization period, with the balance at maturity on May 13, 2024. The associated interest rate is fixed at 5.50%. Monthly repayments of approximately $1,034, consisting of both interest and principal, are required. This final payment of approximately $1,034 is due on the maturity date. This equipment term loan is cross collateralized and cross defaulted with the other financing agreements of Torotel and is secured by a purchase money security interest in the assets purchased as well as a first lien on all business assets of Torotel.

The real estate term loan is in the principal amount of $815,000 and contains a 5-year term with a 20-year amortization period, with the balance at maturity on October 19, 2023. The associated interest rate is fixed at 5.35%. Monthly repayments of approximately $5,573, consisting of both interest and principal, are required. The final payment of approximately $690,829 is due on the maturity date. This real estate term loan is cross collateralized and cross defaulted with the other financing agreements. The real estate term loan is secured by a first lien priority real estate mortgage on the property located at 620 North Lindenwood Drive in Olathe, Kansas pursuant to the Commercial Security Agreement.

The Company incurred income tax expense of $111,000 during the three months ended July 31, 2019 with an effective tax rate of 19.9%, compared to income tax benefit of $15,000 during the three months ended July 31, 2018.

The Shares were granted subject to restrictions that prohibit them from being sold, assigned, pledged or otherwise disposed of until the restrictions lapse. The restrictions will lapse on the fifth anniversary of the date of grant if during the five year restriction period, (1) the Company’s cumulative annual growth in revenue is at least 10%, and (2) the average economic value added as a percentage of revenue is at least 2%. The economic value added, which attempts to capture the true economic profit, will be calculated as the operating profit less the cost of capital with adjustments made for taxes. The restrictions will also lapse, if prior to the fifth anniversary of the date of grant, (1) the grantee’s employment with the Company is terminated by reason of disability, (2) the grantee dies, or (3) the Committee, in its sole discretion, terminates the restrictions. If the restrictions on the Shares have not lapsed by the fifth anniversary of the date of grant, the Shares will be forfeited to the Company.

The industry mix of the customers that accounted for Torotel’s net sales for the first three months of the fiscal year ending April 30, 2020 (“fiscal year 2020”) was 60% defense, 38% commercial aerospace, and 2% industrial compared to 51% defense, 39% commercial aerospace, and 10% industrial for the same period in the fiscal year ending April 30, 2019 (“fiscal year 2019”). Approximately 96% of Torotel’s sales during the first three months of fiscal year 2020 have been derived from domestic customers.

respectively. As a result, our financial results in any period could be impacted substantially by spending cuts or increases in the DoD budget and the funds appropriated for certain military programs. Despite ongoing uncertainty associated with the DoD budget, we believe our overall defense business outlook remains favorable due to the present demand for the potted coil assembly and other existing orders from major defense contractors. As of July 31, 2019, our consolidated order backlog for the defense market was nearly $9.2 million, which included $2.8 million for the potted coil assembly. Commercial Aerospace and Industrial Markets 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 orders, oil and gas drilling exploration activity, and general economic growth. While domestic economic growth remains positive, the above demand drivers could be impacted by short-term changes in the economy such as spikes or declines in the price of oil, war, terrorism, or changes in regulation. Other threats to our anticipated positive near-term and long-term market outlook include delays on the development and production of new commercial aircraft and competition from international suppliers. As of July 31, 2019, our consolidated order backlog for the aerospace and industrial markets was $3.8 million. However, a material portion of our business has been converted to long-term agreements. Business Outlook Our backlog as of July 31, 2019 as compared to July 31, 2018 increased from $9.6 million to $12.9 million, a 35% increase. This was due primarily to an increase in magnetics and assembly orders. We anticipate that net sales for fiscal year 2020 will improve from net sales for fiscal year 2019. This is primarily due to the timing of newer program revenue that is projected to ship in fiscal year 2020. We anticipate that 85% of our $12.9 million backlog as of July 31, 2019 is expected to ship and be converted to sales in fiscal year 2020. Consolidated Results of Operations The following management comments regarding Torotel’s results of operations and outlook should be read in conjunction with the Consolidated Condensed Financial Statements and Notes to the Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report. This discussion and analysis of the results of operations include the operations of Torotel and its subsidiary Torotel Products as of July 31, 2019. Net Sales Consolidated net sales in the three months ended July 31, 2019 increased 42%, or $1,873,000, compared to the three months ended July 31, 2018. Consolidated net sales increased primarily because of increased demand in magnetic components and electro-mechanical assemblies.

Our backlog as of July 31, 2019 as compared to July 31, 2018 increased from $9.6 million to $12.9 million, a 35% increase. This was due primarily to an increase in magnetics and assembly orders. We anticipate that net sales for fiscal year 2020 will improve from net sales for fiscal year 2019. This is primarily due to the timing of newer program revenue that is projected to ship in fiscal year 2020. We anticipate that 85% of our $12.9 million backlog as of July 31, 2019 is expected to ship and be converted to sales in fiscal year 2020.

Consolidated net sales in the three months ended July 31, 2019 increased 42%, or $1,873,000, compared to the three months ended July 31, 2018. Consolidated net sales increased primarily because of increased demand in magnetic components and electro-mechanical assemblies.

Gross Profit Consolidated gross profit increased by 62%, or $914,000, in the three months ended July 31, 2019 compared to the three months ended July 31, 2018. Consolidated gross profit increased primarily due to increased direct labor efficiencies during the first quarter of fiscal year 2020, as well as change in product mix. Operating Expenses Engineering expenses increased 28%, or $86,000, in the three months ended July 31, 2019 compared to the three months ended July 31, 2018. The increase primarily resulted from an increase in headcount during the first quarter of fiscal year 2020. Selling, general and administrative expenses increased 18%, or $212,000, in the three months ended July 31, 2019 compared to the three months ended July 31, 2018. The increase primarily resulted from an increase in headcount during the first quarter of fiscal year 2020. Earnings (loss) from Operations For the reasons discussed under each of the Gross Profit and Operating Expenses headings above, consolidated earnings from operations increased by $616,000 and changed to an income position, for the three months ended July 31, 2019 when compared to the three months ended July 31, 2018. Other Earnings Items We anticpate that our effective income tax rate for fiscal year ending April 30, 2020 will be 19.9%. For additional discussion related to Income Taxes, see Note 7 of Notes to the Consolidated Financial Statements.

Consolidated gross profit increased by 62%, or $914,000, in the three months ended July 31, 2019 compared to the three months ended July 31, 2018. Consolidated gross profit increased primarily due to increased direct labor efficiencies during the first quarter of fiscal year 2020, as well as change in product mix.

Engineering expenses increased 28%, or $86,000, in the three months ended July 31, 2019 compared to the three months ended July 31, 2018. The increase primarily resulted from an increase in headcount during the first quarter of fiscal year 2020.

Selling, general and administrative expenses increased 18%, or $212,000, in the three months ended July 31, 2019 compared to the three months ended July 31, 2018. The increase primarily resulted from an increase in headcount during the first quarter of fiscal year 2020.

We anticpate that our effective income tax rate for fiscal year ending April 30, 2020 will be 19.9%. For additional discussion related to Income Taxes, see Note 7 of Notes to the Consolidated Financial Statements.

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