SMIT Earnings out - net income was $55,315 compared to a net loss of $(251,640) for the same period last year. Three-month earnings (loss) per share, basic and diluted, were $.01 and $(.03) for the three months ended August 31, 2002
October 11, 2002
SCHMITT INDUSTRIES INC (SMIT)
Quarterly Report (SEC form 10-Q)
Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations:
These financial statements are those of the Company and its wholly owned subsidiaries. In the opinion of management, the accompanying Consolidated Financial Statements of Schmitt Industries, Inc. contain all adjustments, consisting only of normal recurring adjustments, necessary to fairly state its financial position as of August 31, 2002 and 2001 and its results of operations and its cash flows for the three-month periods ended August 31, 2002 and 2001. Operating results for the three-month period ended August 31, 2002 are not necessarily indicative of the results that may be experienced for the fiscal year ending May 31, 2003.
RESULTS OF OPERATIONS
Sales in the first quarter of fiscal 2003 increased to $2,001,191 versus $1,585,244 in the same period last year, with increases in both business segments. Worldwide sales of Balancer products were $1,483,330 in the first quarter of fiscal 2003 compared to $1,337,726 for the same period last year. Conditions in the European markets improved in the most recent quarter while those in North America were essentially equal to those in the same period in the prior fiscal year. Measurement product sales totaled $517,861 in the first quarter of fiscal 2003 compared to $247,518 in the first quarter of fiscal 2002. Sales of this segment's products improved due to the sale of two surface measurement products during the most recent fiscal quarter.
The improved sales in the quarter ended August 31, 2002 compared to the same quarter in the prior year are encouraging but have not occurred for a sufficient period to determine if they are sustainable. The slowdown in the global economy had impacted the sales of both segments over the past few fiscal quarters through reduced demand for both balancer and measurement devices. Beyond that, there are not other specific or quantifiable reasons for the decline in sales. The balancer segment sales focus on end-users, rebuilders and original equipment manufacturers throughout the world. Sales people, representatives and distributors throughout these geographic areas spend a large amount of time with the targeted customers. Over the past several months they have found many of the customers in the automotive, bearing and aircraft industries have referred to the state of the economy and its impact on the machine tool industry as reasons for their reduced ordering activity. Our customers are seeing lack of demand for their products and as a result their demand for Schmitt Dynamic Balancing Systems has declined in recent fiscal periods.
The primary target markets for Measurement products have historically been disk drive and silicon wafer manufacturers. Management and the sales staff monitor industry publications and public financial information in order to judge the potential demand for products by the targeted industries. Over the past several months, this information has discussed at length declining demand for and sales of the products of those two industries and have generally defined industries that are in a severe recession. Also, frequent discussions with customers have confirmed the information presented in the public information and their inability to purchase measurement products due to their lack of a capital budget.
Sales by the foreign subsidiaries totaled $541,072 for the most recent quarter versus $381,912 for the same quarter last year. The increase is due to improving market conditions in Europe as well as improving sales and marketing efforts by the European sale staff.
First quarter cost-of-sales decreased to 41% of sales versus 45% in the same period last year. Cost-of-sales of Balancer products was 48% and 46% for the three months ended August 31, 2002 and 2001 respectively while the cost of sales percentage of Measurement products was 22% for the first quarter of fiscal 2003 versus 42% in the same period last year. The increase in the Balancer segment cost of sales is due to the sales mix. Competitive market conditions in Europe result in lower sales prices and therefore higher materials costs than in other geographical areas. As sales in Europe in the most recent fiscal quarter were a higher proportion of total sales than in the prior fiscal year, this served to increase overall cost of sales percentages on balancer products. The decrease in the cost of
sales in the Measurement segment was due to the sales mix as, with the high volume, direct labor costs were over absorbed by the level of sales.
First quarter general, administrative and R&D expenses totaled $1,166,485 versus $1,122,044 for the same period last year. As a percentage of revenues, operating expenses (including R&D) during the first quarter of fiscal 2003 were 58% compared to 71% for the same period last year. In future fiscal periods, Management believes the Company's costs will not increase at the same rate that sales are anticipated to increase, although there can be no such assurance.
In the three-month period ended August 31, 2002, the net income was $55,315 compared to a net loss of $(251,640) for the same period last year. Three-month earnings (loss) per share, basic and diluted, were $.01 and $(.03) for the three months ended August 31, 2002 and 2001 respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ratio of current assets to current liabilities increased to 6.7 to 1 at August 31, 2002 compared to 5.7 to 1 at May 31, 2002. As of August 31, 2002 the Company had $433,191 in cash compared to $447,679 at May 31, 2002. During the three-months ended August 31, 2002, cash provided from operating activities amounted to $237,205 with the changes described as follows:
º • º Net income for the three-months ended August 31, 2002 of $55,315 plus two noncach items: depreciation and amortization of $60,948 and a decrease in the long-term deferred tax asset of $13,000.
º • º Accounts receivable used cash as the balance increased $87,994 to an August 31, 2002 balance of $1,223,030 compared to $1,135,036 at May 31, 2001. At August 31, 2002, no significant accounts receivable were considered a doubtful collection. The Company generally experiences a payment cycle of 30-90 days on invoices. Management believes its credit and collection policies are effective and appropriate for the marketplace. There can be no assurance that the Company's collection procedures will continue to be successful, particularly with current economic conditions.
º • º Inventories decreased $18,983 from the balance at May 31, 2002 with inventories in the Balancer segment decreasing by $36,731 and those in the Measurement segment increasing by $17,748. The Company maintains levels of inventory sufficient to satisfy normal customer demands plus an increasing short-term delivery requirement for a majority of its Balancer products. Management believes its ability to provide prompt delivery gives it a competitive advantage for certain sales.
º • º Prepaid expenses increased by $9,427 due to the addition of prepaid trade show costs less the amortization of several items including prepaid trade show costs, professional fees and various business and life insurance costs.
º • º Income taxes receivable declined by $99,777 with $125,887 received from Federal and local tax refunds less $26,110 in State and local estimated tax payments made during the quarter ended August 31, 2002.
º • º Trade accounts payable increased by $88,090 with the increase due to increased purchasing activities of the Balancer segment, particularly for items related to two new product lines. The purchasing activities of that segment were higher in the weeks proceeding August 31, 2002 than in the weeks preceding May 31, 2002.
º • º Other accrued liabilities (including commission, payroll items and other accrued expenses) decreased by $1,487.
During the three months ended August 31, 2002, net cash used in investing activities was $32,338, consisting of net additions to property and equipment. Net cash used in financing activities amounted to $228,459, which consists of repayments of long-term debt of $28,459 and the credit line of $200,000. |
