Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
x QUARTERLY REPORT UNDER
SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE
ACT OF 1934
For the
quarterly period ended September 30, 2009
OR
¨ TRANSITION REPORT UNDER
SECTION 13 OR 15 (D) OF THE SECURITIES AND
EXCHANGE
ACT OF 1934
For the
transition period from __________to__________
Commission
File No. 1-16779
Henry
Bros. Electronics, Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
22-3690168
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
17-01
Pollitt Drive
Fair
Lawn, New Jersey 07410
(address
of principal executive offices) (Zip Code)
Registrant’s
Telephone number, including area
code:
(201)
794-6500
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o
No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the Registrant’s Common Stock, as of
the latest practicable date: 6,035,366 shares of common stock, $.01 par value
per share, as of November 6, 2009.
INDEX
|
|
|
Page
|
Part
I
|
Financial
Information
|
|
3
|
|
|
|
|
Item
1.
|
Condensed
Consolidated Financial Statements
|
|
3
|
|
|
|
|
|
Condensed Consolidated Balance
Sheets as of September 30, 2009 (Unaudited) and December 31, 2008
(Audited)
|
|
3
|
|
|
|
|
|
Condensed Consolidated Statements
of Operations for the three and nine months ended September 30, 2009 (Unaudited)
and September 30, 2008 (Unaudited)
|
|
4
|
|
|
|
|
|
Condensed Consolidated Statements
of Cash Flows for the nine months ended September 30, 2009 (Unaudited)
and September 30, 2008 (Unaudited)
|
|
5
|
|
|
|
|
|
Condensed Consolidated Statement
of Changes in Stockholders’ Equity for the nine months ended September 30, 2009
(Unaudited)
|
|
6
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
|
7-13
|
|
|
|
|
Item 2.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
|
14-18
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
18
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
18
|
|
|
|
|
Part
II
|
Other
Information
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
19
|
|
|
|
|
Item
6.
|
Exhibits
|
|
19
|
|
|
|
|
SIGNATURES
|
|
20
|
|
|
|
CERTIFICATIONS
|
|
|
Part
I Financial Information
HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,033,623 |
|
|
$ |
27,704 |
|
Accounts
receivable-net of allowance for doubtful accounts of $874,568 at September
30, 2009 and $801,306 at December 31, 2008
|
|
|
11,459,950 |
|
|
|
18,164,066 |
|
Inventory
|
|
|
1,174,670 |
|
|
|
1,201,477 |
|
Costs
in excess of billings and estimated profits
|
|
|
5,208,209 |
|
|
|
5,512,101 |
|
Deferred
tax asset
|
|
|
1,117,975 |
|
|
|
1,363,309 |
|
Retainage
receivable
|
|
|
1,290,442 |
|
|
|
1,756,481 |
|
Prepaid
expenses and income tax receivable
|
|
|
1,395,179 |
|
|
|
878,003 |
|
Other
assets
|
|
|
338,022 |
|
|
|
330,052 |
|
Total
current assets
|
|
|
24,018,070 |
|
|
|
29,233,193 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment - net of accumulated depreciation of $3,455,254 at September
30, 2009 and $2,993,961 at December 31, 2008
|
|
|
2,339,888 |
|
|
|
2,328,438 |
|
Goodwill
|
|
|
3,745,730 |
|
|
|
3,592,080 |
|
Intangible
assets - net of accumulated amortization
|
|
|
891,503 |
|
|
|
1,016,665 |
|
Other
assets
|
|
|
496,934 |
|
|
|
439,732 |
|
TOTAL
ASSETS
|
|
$ |
31,492,125 |
|
|
$ |
36,610,108 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
4,281,345 |
|
|
$ |
6,927,365 |
|
Accrued
expenses
|
|
|
3,128,775 |
|
|
|
4,833,618 |
|
Accrued
taxes
|
|
|
- |
|
|
|
200,774 |
|
Billings
in excess of costs and estimated profits
|
|
|
1,327,085 |
|
|
|
2,006,751 |
|
Deferred
income
|
|
|
57,843 |
|
|
|
157,890 |
|
Current
portion of long-term debt
|
|
|
356,292 |
|
|
|
629,742 |
|
Other
current liabilities
|
|
|
436,852 |
|
|
|
532,932 |
|
Total
current liabilities
|
|
|
9,588,192 |
|
|
|
15,289,072 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
5,013,904 |
|
|
|
4,855,662 |
|
Deferred
tax liability
|
|
|
393,260 |
|
|
|
406,417 |
|
TOTAL
LIABILITIES
|
|
|
14,995,356 |
|
|
|
20,551,151 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 2,000,000 shares authorized; no shares
issued
|
|
|
- |
|
|
|
- |
|
Common
stock, $.01 par value; 10,000,000 shares authorized; 6,030,366 shares
issued and outstanding in 2009 and 5,966,583 shares in
2008
|
|
|
60,304 |
|
|
|
59,666 |
|
Additional
paid in capital
|
|
|
18,305,777 |
|
|
|
17,732,596 |
|
Accumulated
deficit
|
|
|
(1,869,312 |
) |
|
|
(1,733,305 |
) |
TOTAL
EQUITY
|
|
|
16,496,769 |
|
|
|
16,058,957 |
|
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
|
$ |
31,492,125 |
|
|
$ |
36,610,108 |
|
See
accompanying notes to the condensed consolidated financial
statements.
HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
Nine months ended September 30,
|
|
|
Three months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$ |
41,389,229 |
|
|
$ |
43,292,368 |
|
|
$ |
12,109,037 |
|
|
$ |
12,262,372 |
|
Cost
of revenue
|
|
|
30,255,049 |
|
|
|
32,148,857 |
|
|
|
9,086,980 |
|
|
|
8,649,920 |
|
Gross
profit
|
|
|
11,134,180 |
|
|
|
11,143,511 |
|
|
|
3,022,057 |
|
|
|
3,612,452 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses
|
|
|
11,015,124 |
|
|
|
9,461,002 |
|
|
|
3,452,480 |
|
|
|
3,204,834 |
|
Operating
profit (loss)
|
|
|
119,056 |
|
|
|
1,682,509 |
|
|
|
(430,423 |
) |
|
|
407,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
21,023 |
|
|
|
73,732 |
|
|
|
11,986 |
|
|
|
20,751 |
|
Other
income
|
|
|
29,274 |
|
|
|
9,656 |
|
|
|
13,481 |
|
|
|
1,408 |
|
Interest
expense
|
|
|
(222,333 |
) |
|
|
(209,211 |
) |
|
|
(56,926 |
) |
|
|
(66,483 |
) |
(Loss)
income before tax expense
|
|
|
(52,980 |
) |
|
|
1,556,686 |
|
|
|
(461,882 |
) |
|
|
363,294 |
|
Tax
expense (benefit)
|
|
|
83,027 |
|
|
|
724,686 |
|
|
|
(104,500 |
) |
|
|
152,512 |
|
Net
(loss) income
|
|
$ |
(136,007 |
) |
|
$ |
832,000 |
|
|
$ |
(357,382 |
) |
|
$ |
210,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC (LOSS) EARNINGS PER COMMON
SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per common share
|
|
$ |
(0.02 |
) |
|
$ |
0.14 |
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
Weighted
average common shares
|
|
|
5,859,400 |
|
|
|
5,783,425 |
|
|
|
5,877,798 |
|
|
|
5,798,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED (LOSS) EARNINGS PER COMMON
SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per common share
|
|
$ |
(0.02 |
) |
|
$ |
0.14 |
|
|
$ |
(0.06 |
) |
|
$ |
0.04 |
|
Weighted
average diluted common shares
|
|
|
5,859,400 |
|
|
|
5,975,221 |
|
|
|
5,877,798 |
|
|
|
5,989,904 |
|
See
accompanying notes to the condensed consolidated financial
statements.
HENRY
BROS. ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(136,007 |
) |
|
$ |
832,000 |
|
Adjustments
to reconcile net income from operations to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
692,877 |
|
|
|
621,256 |
|
Bad
debt expense
|
|
|
292,391 |
|
|
|
170,194 |
|
Provision
for obsolete inventory
|
|
|
- |
|
|
|
30,000 |
|
Impairment
charges
|
|
|
|
|
|
|
|
|
Stock
option expense
|
|
|
266,500 |
|
|
|
176,000 |
|
Deferred
income taxes
|
|
|
232,177 |
|
|
|
247,825 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
6,411,725 |
|
|
|
1,067,337 |
|
Inventory
|
|
|
26,807 |
|
|
|
170,061 |
|
Costs
in excess of billings and estimated profits
|
|
|
303,892 |
|
|
|
(2,438,481 |
) |
Retainage
receivable
|
|
|
466,040 |
|
|
|
92,788 |
|
Other
assets
|
|
|
(65,172 |
) |
|
|
(12,594 |
) |
Prepaid
expenses and income tax receivable
|
|
|
(517,176 |
) |
|
|
(50,081 |
) |
Accounts
payable
|
|
|
(2,646,020 |
) |
|
|
(2,726,920 |
) |
Accrued
expenses
|
|
|
(1,704,843 |
) |
|
|
730,520 |
|
Taxes
Payable
|
|
|
(200,774 |
) |
|
|
(90,213 |
) |
Billings
in excess of costs and estimated profits
|
|
|
(679,666 |
) |
|
|
834,621 |
|
Deferred
income
|
|
|
(100,048 |
) |
|
|
(11,181 |
) |
Other
liabilities
|
|
|
(96,079 |
) |
|
|
24,502 |
|
Net
cash provided by (used in) operating activities
|
|
|
2,546,624 |
|
|
|
(332,366 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of businesses, net of cash acquired
|
|
|
(50,000 |
) |
|
|
(50,000 |
) |
Purchase
of property and equipment
|
|
|
(291,026 |
) |
|
|
(453,039 |
) |
Net
cash used in investing activities
|
|
|
(341,026 |
) |
|
|
(503,039 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Recovery
from shareholder, net
|
|
|
- |
|
|
|
59,443 |
|
Proceeds
from exercising of stock options - net of fees
|
|
|
203,669 |
|
|
|
86,668 |
|
Borrowings
under revolving loan agreement
|
|
|
1,900,000 |
|
|
|
- |
|
Repayments
under revolving agreement
|
|
|
(1,750,000 |
) |
|
|
- |
|
Payments
of bank loans
|
|
|
(103,410 |
) |
|
|
(164,332 |
) |
Net
repayments of other debt
|
|
|
(238,909 |
) |
|
|
(196,904 |
) |
Payments
of equipment financing
|
|
|
(211,029 |
) |
|
|
(163,312 |
) |
Net
cash used in financing activities
|
|
|
(199,679 |
) |
|
|
(378,437 |
) |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
2,005,919 |
|
|
|
(1,213,842 |
) |
Cash
and cash equivalents - beginning of period
|
|
|
27,704 |
|
|
|
3,277,450 |
|
Cash
and cash equivalents - end of period
|
|
$ |
2,033,623 |
|
|
$ |
2,063,608 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Amount
paid for the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
204,881 |
|
|
$ |
209,211 |
|
Taxes
|
|
|
707,083 |
|
|
|
528,000 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Equipment
financed
|
|
|
288,140 |
|
|
|
337,938 |
|
Issuance
of stock to acquire businesses
|
|
|
103,650 |
|
|
|
120,550 |
|
Surrender
shares to purchase fixed assets
|
|
|
- |
|
|
|
14,080 |
|
See
accompanying notes to the condensed consolidated financial
statements.
HENRY
BROS. ELECTRONCS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
par value $.01
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
10,000,000 Authorized
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
|
5,966,583 |
|
|
$ |
59,666 |
|
|
$ |
17,732,596 |
|
|
$ |
(1,733,305 |
) |
|
$ |
16,058,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options exercised
|
|
|
43,783 |
|
|
|
438 |
|
|
|
203,231 |
|
|
|
|
|
|
|
203,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with the acquisition of CIS Security
Systems
|
|
|
20,000 |
|
|
|
200 |
|
|
|
103,450 |
|
|
|
|
|
|
|
103,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of value assigned to stock option grants
|
|
|
|
|
|
|
|
|
|
|
266,500 |
|
|
|
|
|
|
|
266,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136,007 |
) |
|
|
(136,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2009
|
|
|
6,030,366 |
|
|
$ |
60,304 |
|
|
$ |
18,305,777 |
|
|
$ |
(1,869,312 |
) |
|
$ |
16,496,769 |
|
See
accompanying notes to the condensed consolidated financial
statements.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
1.
Description of Business and Basis of Presentation
Interim
Financial Statements:
The
information presented as of September 30, 2009 and for the three and nine month
periods ended September 30, 2009 and 2008 are unaudited, and reflect all
adjustments (consisting only of normal recurring adjustments) which Henry Bros.
Electronics, Inc. and its subsidiaries (the “Company”) considers necessary for
the fair presentation of the Company’s financial position as of September 30,
2009, the results of its operations and cash flows for the nine month periods
ended September 30, 2009 and 2008, and changes in stockholders’ equity for the
nine month period ended September 30, 2009. The Company’s December 31, 2008
balance sheet information was derived from the audited consolidated financial
statements for the year ended December 31, 2008, which are included as part of
the Company’s Annual Report on Form 10-K.
The
condensed consolidated financial statements included herein have been prepared
in accordance with U.S. generally accepted accounting principles and the
instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the Company’s financial statements and
notes thereto included in the Company’s latest shareholders’ annual
report.
As of
September 30, 2009, there have been no material changes to any of the
significant accounting policies described in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2008.
Description
of Business:
The
Company’s operations are divided into two business segments – Security System
Integration (“Integration”) and Specialty Products and Services (“Specialty”).
The Integration segment provides cradle to grave services for a wide variety of
security, communications and control systems. The Company specializes
in turn-key systems that integrate many different
technologies. Systems are customized to meet the specific needs of
its customers. Through the Specialty segment we provide emergency preparedness
programs, and specialized radio frequency communication equipment and
integration. Each of the Company’s segments markets its products and
services nationwide with an emphasis in Arizona, California, Colorado, Maryland,
New Jersey, New York, Texas and Virginia. Customers are primarily medium and
large businesses and governmental agencies. The Company derives a majority of
its revenues from project installations and to a smaller extent, maintenance
service revenue.
The table below shows the
sales percentages by geographic location for the following periods:
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
New
Jersey/New York
|
|
|
50 |
% |
|
|
47 |
% |
California
|
|
|
18 |
% |
|
|
20 |
% |
Texas
|
|
|
5 |
% |
|
|
4 |
% |
Arizona
|
|
|
8 |
% |
|
|
11 |
% |
Colorado
|
|
|
11 |
% |
|
|
9 |
% |
Virginia
/ Maryland
|
|
|
8 |
% |
|
|
9 |
% |
Integration
segment
|
|
|
100 |
% |
|
|
100 |
% |
Specialty
segment
|
|
|
3 |
% |
|
|
1 |
% |
Inter-segment
|
|
|
-3 |
% |
|
|
-1 |
% |
Total
revenue
|
|
|
100 |
% |
|
|
100 |
% |
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
2. Summary
of Significant Accounting Policies:
Principles
of Consolidation:
The
condensed consolidated financial statements include the accounts of the
Company. Acquisitions are recorded as of the purchase date, and are
included in the consolidated financial statements from the date of
acquisition. All material intercompany transactions have been
eliminated in consolidation.
Reclassifications:
The
presentation of certain prior year information has been reclassified to conform
to the current year presentation. The Company has reclassified
certain costs from cost of revenue into selling, general and administrative
expenses. The amount of this reclassification was $112,707 and
$480,166 for the three and nine months ended September 30, 2008. This
reclassification had no impact on operating profit. In addition, the
Company has reclassified $292,352 of long-term assets related to equipment
leases from property and equipment into other assets at December 31,
2008.
Use
of Estimates:
The
preparation of financial statements, in conformity with generally accepted
accounting principles in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities, at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue and costs relating
to security integration systems projects and service agreements are particularly
affected by management’s estimates. The contract sale price and estimated costs
are based upon the facts and circumstances known at the time of the proposal.
Estimates for the costs to complete the contract are periodically updated during
the performance of the contract. Unpredictable events can occur during the
performance of the contract that can increase the costs and reduce the estimated
gross profit. Change orders to record additional costs may not be approved or
can become subject to long negotiations with the customer and can result in
concessions by the Company. Considerable judgments are made during the
performance of the contract that affects the Company’s revenue recognition and
cost accruals that may have a significant impact on the results of operations
reported by the Company.
Fair
Value of Financial Instruments:
The
carrying amounts of the Company’s financial instruments, which include cash
equivalents, accounts receivable, accounts payable, accrued expenses, short and
long-term debt, approximate their fair values as of September 30,
2009.
Recently Issued Accounting
Pronouncements:
In
June 2009, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, or SFAS 168. Effective July 1, 2009, this guidance
establishes the FASB Accounting Standards Codification, or ASC, as the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. In addition, SFAS 168 also specifies that rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. All guidance contained in the
ASC carries an equal level of authority. The Company adopted SFAS 168 for the
quarterly reporting period ending September 30, 2009. SFAS 168 has been
incorporated into the ASC as ASC-105, Generally Accepted Accounting
Principles, or ASC 105.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination
of the Useful Life of Intangible Assets” (FSP 142-3), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is
effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. Early adoption is prohibited. The
guidance in FSP 142-3 for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after
adoption, and the disclosure requirements shall be applied prospectively to all
intangible assets recognized as of, and subsequent to, adoption. We have
evaluated the new statement and have determined that it does not have a
significant impact on the determination or reporting of our financial
results. The provisions of FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets, have been incorporated in ASC 275, Risks and Uncertainties, or
ASC 275, and ASC 350, Intangibles — Goodwill and
Other, or ASC 350.
In April
2009 the FASB issued FSP No. FAS 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (FSP
FAS 157-4), which clarifies the application of SFAS 157 when there is
no active market or where the price inputs being used represent distressed
sales. Additional guidance is provided regarding estimating the fair value of an
asset or liability (financial and nonfinancial) when the volume and level of
activity for the asset or liability have significantly decreased and identifying
transactions that are not orderly. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009. We have evaluated the
new statement and have determined that it does not have a significant impact on
the determination or reporting of our financial results. The provisions of FSP
FAS 157-4 have been incorporated into ASC 820.
In May
2009, the Financial Accounting Standard Board issued Statement of Financial
Accounting Standard No. 165, Subsequent Event (SFAS 165). SFAS 165 establishes
general standards for accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. In particular, SFAS 165 sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures that an entity should make about events
or transactions that occurred after the balance sheet date. SFAS 165
is effective for interim and annual periods ending after June 15, 2009 and
became effective for the Company in the second quarter of 2009. The adoption of
SFAS 165 did not have a material impact on the Company’s results of operations,
financial position or liquidity. Subsequent events were evaluated
through November 12, 2009, the date the financial statements of the Company were
issued. SFAS 165 has been incorporated in ASC 855, Subsequent Events, or ASC
855.
In April
2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB
28-1”). FSP FAS 107-1 and APB 28-1 extends the disclosure requirements of SFAS
No. 107, “Disclosures About Fair Value of Financial Instruments” (“SFAS 107”),
to interim period financial statements, in addition to the existing requirements
for annual periods and reiterates SFAS 107’s requirement to disclose the methods
and significant assumptions used to estimate fair value. This FSP is effective
for interim reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The provisions of
FSP FAS 107-1 and APB 28-1 have been incorporated in ASC-270, Interim Reporting, or ASC
270, and ASC-825, Financial
Instruments, or ASC 825. The provisions of FSP FAS 107-1 and APB 28-1
have been incorporated in ASC 270, Interim Reporting, or ASC
270, and ASC 825, Financial
Instruments, or ASC 825.
In
August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurement and
Disclosures: Measuring Liabilities at Fair Value, or ASU 2009-05. This
ASU, which amends ASC 820 and ASC 825, provides clarification on measuring
liabilities at fair value when a quoted price in an active market is not
available. The Company’s adoption of ASU 2009-05 beginning with the interim
period ended September 30, 2009, did not have an impact on the Company’s
results of operations, financial position or cash flows.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
3. Earnings
(Loss) Per Share
The
computation of basic earnings per share is based upon the weighted average
number of shares of common stock outstanding during the period. The computation
of diluted earnings per share includes the dilutive effects of common stock
equivalents, less the shares that may be repurchased with the funds received
from their exercise and the effect of adding back unrecognized future stock
compensation expense. Contingent shares are excluded from basic earnings per
share.
4. Stock
Based Compensation
For the
three months ended September 30, 2009 and 2008, the Company charged $73,500 and
$64,000, respectively, to operations for stock based compensation
expense. For the nine months ended September 30, 2009 and 2008, the
Company charged $266,500 and $176,000, respectively, to operations for stock
based compensation expense. A modification to a stock option,
previously issued to an executive officer, extending the term for one year,
resulted in an expense in the second quarter, equal to the net increase in the
fair value of the modified stock option of $49,000.
A summary
of stock option activity for the nine months ended September 30, 2009 under the
Company’s various Stock Option Plans’ follows:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Outstanding
|
|
|
Exercisable
|
|
January
1, 2009
|
|
|
984,515 |
|
|
|
496,856 |
|
|
$ |
4.97 |
|
|
$ |
5.44 |
|
Granted
at market
|
|
|
45,000 |
|
|
|
|
|
|
|
6.31 |
|
|
|
|
|
Exercised
|
|
|
(43,783 |
) |
|
|
|
|
|
|
4.65 |
|
|
|
|
|
Forfeited
or expired
|
|
|
(30,933 |
) |
|
|
|
|
|
|
6.49 |
|
|
|
|
|
September
30, 2009
|
|
|
954,799 |
|
|
|
312,267 |
|
|
$ |
5.00 |
|
|
$ |
4.13 |
|
The fair
value of the Company’s stock option awards granted during the nine months ended
September 30, 2009 was estimated assuming no expected dividends and the
following weighted-average assumptions:
Expected
Life (years)
|
|
|
4.4 |
|
Expected
volatility
|
|
|
51.4 |
% |
Risk-free
interest rates
|
|
|
2 |
% |
Dividend
yield
|
|
|
- |
|
Weighted-average
grant-date fair value
|
|
$ |
2.83 |
|
There
were no stock option grants during the three months ended September 30,
2009.
The
assumptions above are based on multiple factors, including historical exercise
patterns of employees with respect to exercise and post-vesting employment
termination behaviors, expected future exercise patterns for these employees and
the historical volatility of our stock price. The expected term of
options granted is derived using company-specific, historical exercise
information and represents the period of time that the options granted are
expected to be outstanding. The risk-free interest rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
5. Costs
and Billings on Uncompleted Contracts
Costs and
billing on uncompleted contracts consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Cost
incurred on uncompleted contracts
|
|
$ |
76,066,496 |
|
|
$ |
68,235,896 |
|
Billings
on uncompleted contracts
|
|
|
72,185,372 |
|
|
|
64,730,546 |
|
|
|
$ |
3,881,124 |
|
|
$ |
3,505,350 |
|
Included
in accompanying Balance Sheets under the following captions:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Costs
in excess of billings and estimated profits
|
|
$ |
5,208,209 |
|
|
$ |
5,512,101 |
|
Billing
in excess of costs and estimated profits
|
|
|
1,327,085 |
|
|
|
2,006,751 |
|
|
|
$ |
3,881,124 |
|
|
$ |
3,505,350 |
|
6. Long-Term
Debt
On June
30, 2005, the Company entered into a loan agreement (the “Loan Agreement”) with
TD Bank, N.A. pursuant to which TD Bank extended a $4 million two-year
credit facility (the “Revolving Loan”), to the Company and refinanced $1 million
of existing indebtedness to TD Bank into a five year term loan (the “Term
Loan”).
On
October 6, 2008, the Company executed its fourth amendment to the Revolving Loan
with TD Bank, increasing its line of credit from $4 million to $8 million. The
Revolving Loan is subject to certain borrowing base limitations. On
November 11, 2009 the term of the Revolving Loan has been extended to
June 30, 2011. Advances under the Revolving Loan may be used to
finance working capital and acquisitions. Interest is paid monthly in arrears at
TD Bank’s prime rate (3.25% at September 30, 2009 and December 31,
2008). As part of the extension of the Term Loan to June 30, 2011,
the interest rate will now be subject to a minimum floor rate of
4.0%. TD Bank has a first priority security interest on the Company’s
accounts receivable and inventory.
The Term
Loan provided for the payment of sixty equal monthly installments of principal
and interest in the amount of $19,730 commencing July 30, 2005 and continued
through June 30, 2009. Interest under the Term Loan was 6.75%.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
The
Company is required to maintain certain financial and reporting covenants and is
restricted from paying dividends under the terms of the Loan
Agreement. The Company is in compliance with these financial and
reporting covenants.
Long-term
debt included the following balances:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Term
loan at 6.75% interest payable in monthly installments of $19,730 thru
June 30, 2010
|
|
$ |
- |
|
|
$ |
103,410 |
|
|
|
|
|
|
|
|
|
|
Revolving
line at the prime rate of interest, payable in monthly installments thru
June 30, 2010
|
|
|
4,485,898 |
|
|
|
4,335,898 |
|
|
|
|
|
|
|
|
|
|
Corporate
insurance financed at 7.85% payable in monthly installments thru October
1, 2009
|
|
|
30,084 |
|
|
|
268,992 |
|
|
|
|
|
|
|
|
|
|
Capitalized
lease obligations due in monthly installments, with interest ranging from
6.4% to 12.7%
|
|
|
854,214 |
|
|
|
777,104 |
|
|
|
|
5,370,196 |
|
|
|
5,485,404 |
|
Less:
Current Portion
|
|
|
(356,292 |
) |
|
|
(629,742 |
) |
|
|
$ |
5,013,904 |
|
|
$ |
4,855,662 |
|
The
weighted average prime interest rate was 3.25% and 4.8% for the nine months
ended September 30, 2009 and the year ended December 31, 2008,
respectively.
7. Income
Taxes
Income
tax expense for interim reporting is based on an estimated overall effective tax
rate for the year ending December 31, 2009. An effective tax rate of 44% was
applied to the loss before tax, which was offset by the effect of permanent
differences which increased taxable income. The Company’s overall
effective tax rate during the nine months ended September 30, 2008 was estimated
to be approximately 46.6%.
The
estimated overall effective income tax rate for fiscal 2009 has not been
impacted by any material discrete items. The overall estimated effective tax
rate is based on expectations and other estimates which are monitored closely,
but are subject to change. As of December 31, 2008 the Company had
$54,866 of unrecognized income tax benefits, all of which would affect the
Company’s effective tax rate if recognized. There have been no
significant changes in the quarter ended September 30, 2009.
8. STOCKHOLDERS’
EQUITY
In
connection with the acquisition of all the capital stock of CIS Security Systems
Corp. (“CIS”) on October 2, 2006, the Company issued an aggregate of 20,000
shares of its common stock, valued at $67,200. The Company issued an
additional 30,000 shares during 2007 and 2008 and 20,000 shares during the first
nine months of 2009 of its restricted common stock to CIS’s selling shareholder
after CIS met certain performance targets. The issuance of the shares of
restricted stock in connection with the aforementioned acquisition was made in
reliance upon the exemption provided in section 4(2) of the Securities Act of
1933, as amended. In addition, the selling shareholder may earn an
additional 30,000 shares of the Company’s common stock if CIS achieves certain
performance targets through December 2011.
HENRY
BROS. ELECTRONICS, INC AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED) – (continued)
9. Segment
Data
Selected
information by business segment is presented in the following
tables:
|
|
Nine months ended September 30,
|
|
|
Three months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration
|
|
$ |
40,463,589 |
|
|
$ |
43,075,570 |
|
|
$ |
11,576,861 |
|
|
$ |
12,541,847 |
|
Specialty
|
|
|
1,193,640 |
|
|
|
1,026,644 |
|
|
|
532,176 |
|
|
|
423,246 |
|
Inter-segment
|
|
|
(268,000 |
) |
|
|
(809,846 |
) |
|
|
- |
|
|
|
(702,721 |
) |
Total
revenue
|
|
$ |
41,389,229 |
|
|
$ |
43,292,368 |
|
|
$ |
12,109,037 |
|
|
$ |
12,262,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration
|
|
$ |
2,585,029 |
|
|
$ |
4,734,540 |
|
|
$ |
266,891 |
|
|
$ |
1,214,506 |
|
Specialty
|
|
|
225,296 |
|
|
|
(536,043 |
) |
|
|
153,352 |
|
|
|
45,393 |
|
Corporate
|
|
|
(2,691,269 |
) |
|
|
(2,515,988 |
) |
|
|
(850,665 |
) |
|
|
(852,281 |
) |
Total
operating profit
|
|
$ |
119,056 |
|
|
$ |
1,682,509 |
|
|
$ |
(430,422 |
) |
|
$ |
407,618 |
|
Selected
balance sheet information by business segment is presented in the following
table as of:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Total Assets:
|
|
|
|
|
|
|
Integration
|
|
$ |
28,812,619 |
|
|
$ |
33,304,890 |
|
Specialty
|
|
|
1,128,906 |
|
|
|
1,756,730 |
|
Corporate
|
|
|
1,550,600 |
|
|
|
1,548,488 |
|
Total
assets
|
|
$ |
31,492,125 |
|
|
$ |
36,610,108 |
|
10. Contingent
Liabilities
From time
to time, the Company is subject to various claims with respect to matters
arising out of the normal course of business. In management’s opinion, none of
these claims is likely to have a material affect on the Company’s consolidated
financial statements.
11: Subsequent
Events
On
November 11, 2009, the Company’s Certificate of Incorporation was amended to
increase the number of shares of Common Stock from 10,000,000 shares, $.01 par
value, to 20,000,000 shares, $.01 par value.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
We are an
established leader in the electronic physical security industry, specializing in
integrated security systems and emergency preparedness. Our
operations are divided into two business segments – Security System Integration
(“Integration”) and Specialty Products and Services (“Specialty”). The
Integration segment provides “cradle to grave” services for a wide variety of
security, communications and control systems. The Company specializes
in turn-key systems that integrate many different
technologies. Systems are customized to meet the specific needs of
its customers. Through the Specialty segment we provide emergency preparedness
programs, and specialized radio frequency communication equipment and
integration. Each of the Company’s segments markets nationwide with
an emphasis in Arizona, California, Colorado, Maryland, New Jersey, New York,
Texas and Virginia. Customers are primarily medium and large businesses and
governmental agencies. The Company derives a majority of its revenues from
project installations and, to a smaller extent, maintenance service
revenue.
OUR
VISION AND STRATEGY
Our
vision is to maintain our leadership position in security technology. We
intend to do this in part by:
|
·
|
Providing advice on product
selection and system design;
|
|
·
|
Examining and thoroughly testing
each security product as it would be set up for use in our customers’
facilities; and,
|
|
·
|
Using only systems and components
that are reliable and efficient to
use.
|
In
addition to growing the business organically, we have been actively pursuing the
strategic acquisition of synergistic integrators and specialty products and
service companies to further fuel steady growth. Consistent with our
expansion strategy, we acquired seven companies since August of
2002.
To
finance our acquisitions, we have used a combination of internally generated
cash, the sale of Company common stock and bank debt. We currently have an $8
million revolving credit facility, subject to certain borrowing base
limitations, with TD Bank. Borrowings under the revolving credit
facility were $4,485,898, at September 30, 2009. It is our expectation and
intent to use cash and to incur additional debt as appropriate to finance future
working capital and acquisitions. Additionally, to fund future
acquisitions we would consider the issuance of subordinated debt, the sale of
equity securities, or the sale of existing Company assets.
TRENDS
As a
result of the protracted credit freeze and severe recession which are having a
significant negative impact on construction markets and capital spending
patterns of commercial businesses, we are revising our revenue forecast for 2009
to fall within a range of $50 million to $55 million, from the previous estimate
of $65 million to $70 million. We anticipate our overall average
operating margins for our business to now be essentially breakeven for the year
ended December 31, 2009, from a previous estimate of 3.0% to 5.0%, as compared
to an operating margin of 5.0% in 2008 and essentially breakeven operating
margin in 2007.
There are
several factors impacting operating margins, including levels of competition for
a particular project and the size of the project. As a significant
amount of our costs are relatively fixed, such as labor costs,
increases or decreases in revenues can have a significant impact on operating
margins. The Company continually monitors costs and pursues various
cost control measures and sales initiatives to improve operating
margins.
In
February 2008, the Company entered into a subcontractor agreement with Global
Security & Engineering Solutions, a division of L-3 Services, Inc. (the “L-3
Contract”) pursuant to which L-3 would issue task orders under its Indefinite
Quantity Firm Fixed Price Contract with the U.S. Marine Corp Systems Command to
deliver a Tactical Video Capture System (“TVCS”). TVCS is used for
real-time visualization and situational awareness while Marine units are
conducting military operations in urban terrain training
exercises. The performance period of the contract is three
years. In the first three quarters of 2009, the revenue recognized
under this contract represented $4.8 million and there were outstanding task
orders included in our backlog of approximately $2.3 million at September 30,
2009. There was no revenue recognized under this contract for the
first three quarters of 2008.
Three
Months Ended September 30, 2009 compared to September 30, 2008
|
|
Three months ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
Revenue
|
|
$ |
12,109,037 |
|
|
$ |
12,262,372 |
|
|
|
-1.3 |
% |
Cost
of revenue
|
|
|
9,086,980 |
|
|
|
8,649,920 |
|
|
|
5.1 |
% |
Gross
profit
|
|
|
3,022,057 |
|
|
|
3,612,452 |
|
|
|
-16.3 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses
|
|
|
3,452,480 |
|
|
|
3,204,834 |
|
|
|
7.7 |
% |
Operating
(loss) profit
|
|
|
(430,423 |
) |
|
|
407,618 |
|
|
|
-205.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
11,986 |
|
|
|
20,751 |
|
|
|
-42.2 |
% |
Other
income
|
|
|
13,481 |
|
|
|
1,408 |
|
|
|
857.4 |
% |
Interest
expense
|
|
|
(56,926 |
) |
|
|
(66,483 |
) |
|
|
-14.4 |
% |
(Loss)
income before tax expense
|
|
|
(461,882 |
) |
|
|
363,294 |
|
|
|
-227.1 |
% |
Tax
(benefit) expense
|
|
|
(104,500 |
) |
|
|
152,512 |
|
|
|
-168.5 |
% |
Net
(loss) income
|
|
$ |
(357,382 |
) |
|
$ |
210,782 |
|
|
|
-269.6 |
% |
Revenue - Revenue for the
three months ended September 30, 2009 was $12,109,037, representing a decrease
of $153,335 or 1.3%, as compared to revenue of $12,262,372 for the three months
ended September 30, 2008. Revenue was down in all of the Company’s integration
regions in the third quarter of 2009 versus the same quarter in the prior year,
with the exception of Texas, whose revenues nearly doubled. The New Jersey /New
York region had the greatest decrease, as a result of the winding down of large
projects that were not replaced by similar projects due to competitive margin
pressure. These declines are due principally to the protracted credit freeze and
economic downturn which is having a significant negative impact on construction
markets and capital spending patterns of commercial businesses. Partially
offsetting these declines was an increase in revenue resulting from the L-3
Contract.
Cost of Revenue - Cost of
revenue for the three months ended September 30, 2009 was $9,086,980 as compared
to $8,649,920 for the three months ended September 30, 2008. The gross profit
margin for the three months ended September 30, 2009 was 25.0% as compared to
29.5% for the three months ended September 30, 2008. Except for our
Texas operation, each of the Company’s integration regions had lower
quarter-over-quarter gross profit margins and gross profit dollars due to a
combination of: 1) decline in revenues; 2) competitive pricing of projects given
the current economy, and 3) cost overruns on a limited number of
projects. Partially offsetting these declines was gross profit
recognized under the L-3 Contract.
Selling, General and Administrative
Expenses - Selling, general and administrative expense was $3,452,480 for
the three months ended September 30, 2009 as compared to $3,204,834 for the
three months ended September 30, 2008. This increase of $247,646 or 7.7% was
mainly attributable to a lower absorption of overhead into cost of revenue
during the 2009 quarter, and higher personnel related costs. As part of our
strategic growth initiative, we have increased our sales force starting in the
last quarter of 2008 and continuing throughout the third quarter of
2009. This initiative was implemented in order to take
advantage of an anticipated increase in security spending related to public
projects and the expansion of the Company’s national footprint into Houston,
Texas and Grand Junction, Colorado. These sales force personnel
increases were partially offset by personnel reductions in other areas of our
business.
Interest Income – Interest
income for the three months ended September 30, 2009 was $11,986 as compared to
$20,751 for the three months ended September 30, 2008. This decrease
was attributable to lower average cash balances during the three month period
ended September 30, 2009 versus the same period in the prior
year.
Interest Expense - Interest
expense for the three months ended September 30, 2009 was $56,926 as compared to
$66,483 for the three months ended September 30, 2008. The decrease
is due to the average outstanding revolving debt balance
being $1,969,565 higher in the three month period ended September 30,
2009 versus that in the three months ended September 30, 2008, offset in part by
a 175 basis point lower average prime rate of interest in 2009 compared to the
same period in 2008.
Tax (Benefit) Expense – The
Company realized a tax benefit for the three months ended September 30, 2009 of
$104,500, based upon a loss before tax expense of $461,882. Income
tax expense for interim reporting is based on an estimated overall effective tax
rate for the year ending December 31, 2009. An effective tax rate of 44% was
applied to the loss before tax, which was offset by the effect of permanent
differences which increased taxable income. The effective tax rate
for the three months ended September 30, 2008 was 42.0%, based upon income
before tax expense of $363,294.
Net (Loss) Income - As a
result of the above noted factors our net loss was $357,382 for the three months
ended September 30, 2009, compared to net income of $210,782 for the three
months ended September 30, 2008. This resulted in diluted loss per share of
$(0.06) on weighted average diluted common shares outstanding of 5,877,798
for the three months ended September 30, 2009, as compared to diluted earnings
per share of $0.04 on weighted average diluted common shares outstanding of
5,989,904 for the three month period ended September 30, 2008.
Nine
Months Ended September 30, 2009 compared to September 30, 2008
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
% change
|
|
Revenue
|
|
$ |
41,389,229 |
|
|
$ |
43,292,368 |
|
|
|
-4.4 |
% |
Cost
of revenue
|
|
|
30,255,049 |
|
|
|
32,148,857 |
|
|
|
-5.9 |
% |
Gross
profit
|
|
|
11,134,180 |
|
|
|
11,143,511 |
|
|
|
-0.1 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses
|
|
|
11,015,124 |
|
|
|
9,461,002 |
|
|
|
16.4 |
% |
Operating
profit
|
|
|
119,056 |
|
|
|
1,682,509 |
|
|
|
-92.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
21,023 |
|
|
|
73,732 |
|
|
|
-71.5 |
% |
Other
income
|
|
|
29,274 |
|
|
|
9,656 |
|
|
|
203.2 |
% |
Interest
expense
|
|
|
(222,333 |
) |
|
|
(209,211 |
) |
|
|
6.3 |
% |
(Loss)
income before tax expense
|
|
|
(52,980 |
) |
|
|
1,556,686 |
|
|
|
-103.4 |
% |
Tax
expense
|
|
|
83,027 |
|
|
|
724,686 |
|
|
|
-88.5 |
% |
Net
(loss) income
|
|
$ |
(136,007 |
) |
|
$ |
832,000 |
|
|
|
-116.3 |
% |
Revenue - Revenue for the nine
months ended September 30, 2009 was $41,389,229, representing a decrease of
$1,903,139 or 4.4%, as compared to revenue of $43,292,368 for the nine months
ended September 30, 2008. Revenue was down in the Company’s New
Jersey, Arizona, California and Mid-Atlantic regions in the first nine months of
2009 versus the same period in the prior year. The New Jersey region
had the greatest decrease, as a result of the winding down of large projects
that were not replaced by similar projects due to competitive margin pressure in
the marketplace. The overall declines in revenues are also due to the
protracted credit freeze and economic downturn which is having a significant
negative impact on construction markets and capital spending patterns of
commercial businesses. Partially offsetting these declines was an increase in
revenue resulting from the L-3 Contract, and increases in the Colorado and Texas
regions, which were up 24.6% on a combined basis.
Cost of Revenue - Cost of
revenue for the nine months ended September 30, 2009 was $30,255,049 as compared
to $32,148,857 for the nine months ended September 30, 2008. While gross profit
dollars were basically flat, the gross profit margin for the nine months ended
September 30, 2009 increased to 26.9% as compared to 25.7% for the nine months
ended September 30, 2008. In the first quarter of 2008, our
Airorlite subsidiary incurred significant losses in order to complete work on
certain open contracts which depressed gross profit for that period in
2008. Our Arizona, Mid-Atlantic and California Banking operations had
both lower period-over-period gross profit margin and gross profit dollars due
to a combination of: 1) decline in revenues; 2) competitive pricing of projects
given the current economy, and 3) cost overruns on a limited number of
projects. While revenues and gross profit dollars were down in our
New Jersey / New York operation, margins improved as we favorably closed out
several of the jobs with large public agencies in the New York Metropolitan area
referenced above in “Revenue”. The L-3 Contract generated profit during
the nine months ended September 30, 2009, albeit at a lower margin percent than
the Company’s overall gross margin.
Selling, General and Administrative
Expenses - Selling, general and administrative expense was $11,015,124
for the nine months ended September 30, 2009 as compared to $9,461,002 for the
nine months ended September 30, 2008. This increase of $1,554,122 or 16.4% was
mainly attributable to higher personnel related costs. As part of our strategic
growth initiative, we have increased our sales force starting in the last
quarter of 2008 and continuing throughout the third quarter of
2009. This initiative was implemented in order to take
advantage of an anticipated increase in security spending related to public
projects and the expansion of the Company’s national footprint into Houston,
Texas and Grand Junction, Colorado. Higher training costs for our
sales and technical staff were also incurred during the first nine months of
2009 compared with the same period in 2008, which contributed to the overall
increase.
Interest Income – Interest
income for the nine months ended September 30, 2009 was $21,023 as compared to
$73,732 for the nine months ended September 30, 2008. This decrease
was attributable to lower average cash balances during the nine month period
ended September 30, 2009 versus the same period in the prior year.
Interest Expense - Interest
expense for the nine months ended September 30, 2009 was $222,333 as compared to
$209,211 for the nine months ended September 30, 2008. While the
average outstanding revolving debt balance was $2,056,410 higher in the nine
month period ended September 30, 2009 versus that in the nine months ended
September 30, 2008, the average prime rate of interest paid was 225 basis points
lower in the 2009 period than it was in 2008 resulting in the lower interest
expense.
Tax Expense – Tax expense for
the nine months ended September 30, 2009 was $83,027 based upon a loss before
tax expense of $52,980. An effective tax rate of 44% was applied to
the loss before tax, which was offset by the effect of permanent differences
which increased taxable income. The effective tax rate for the nine
months ended September 30, 2008 was 46.6%, based upon income before tax expense
of $1,556,686. These tax rates are a result of the Company operating
in multiple states and jurisdictions with higher tax rates than the average of
all states combined.
Net (Loss) Income - As a
result of the above noted factors our net loss was $136,007 for the nine months
ended September 30, 2009 compared to net income of $832,000 for the nine months
ended September 30, 2008. This resulted in diluted loss per share of
$(0.02) on weighted average diluted common shares outstanding of 5,849,400
for the nine months ended September 30, 2009, as compared to diluted earnings
per share of $0.14 on weighted average diluted common shares outstanding of
5,975,221 for the nine month period ended September 30, 2008.
Liquidity and Capital
Resources
As of
September 30, 2009, we had cash and cash equivalents of
$2,033,623. Our net current assets were $14,429,878 at September 30,
2009 versus $13,944,121 at December 31, 2008. Total debt at September
30, 2009 was $5,370,196 compared to the December 31, 2008 balance of
$5,485,404.
Cash
provided by operating activities was $2,546,624 during the nine months ended
September 30, 2009. The most significant provider of cash resulted
from a net decrease in accounts receivable of $6,411,725. Partially
offsetting this was a use of cash resulting from a decrease in accounts payable
and accrued expenses of $2,646,020 and $1,704,843, respectively.
Cash used
in investing activities was $341,026, comprised of $291,026 for the purchase of
property and equipment and $50,000 of earn-out payments associated with the CIS
acquisition.
Cash used
in financing activities was $199,679, of which $553,348 representing the
repayments of bank loans and other debt, partially offset by $150,000 in net
borrowings from our revolving bank line and $203,669 of proceeds from stock
option exercises.
Borrowings
under the revolving credit facility were $4,485,898 at September 30, 2009 and
were $4,335,898 at December 31, 2008. On October 6, 2008, the Company
executed an amendment to its revolving credit agreement with TD Bank, increasing
its line of credit from $4 million to $8 million. On November 11,
2009 the term of the revolving credit agreement was
extended to June 30, 2011. As part of this extension, interest will continue be
paid monthly in arrears at TD Bank’s prime rate, however, interest will now be
subject to a minimum floor rate of 4.0%. The Company is required to maintain
certain financial and reporting covenants and restrictions on dividend payments
under the terms of the Loan Agreement with TB Bank, N.A. (See Note 6 to the
Condensed Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q).
Backlog
and Bookings
Booked
orders decreased 28.3% to $13,199,733 in the third quarter of 2009, as compared
to $18,399,713 same quarter of 2008. Booked orders increased 2.4% to
$41,441,455 in the first nine months of 2009, as compared to $40,471,651 in the
first nine months of 2008.
The
Company’s backlog of $23,753,469 at September 30, 2009 was relatively unchanged
from the September 30, 2008 backlog of 23,746,449.
Critical
Accounting Policies and Estimates
Disclosure
of the Company’s significant accounting policies is included in Note 1 to the
consolidated financial statements of the Company’s Annual Report on Form 10-K
for year ended December 31, 2008. Some of these policies require
management to make estimates and assumptions that may affect the reported
amounts in the Company’s financial statements.
Forward Looking
Statements
When used
in this discussion, the words "believes", "anticipates", "contemplated",
"expects", or similar expressions are intended to identify forward looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Those
risks and uncertainties include changes in interest rates, the ability to
control costs and expenses, significant variations in recognized revenue due to
customer caused delays in installations, cancellations of contracts by our
customers, and general economic conditions which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company undertakes no obligation to publicly release the results
of any revisions to those forward looking statements that may be made to reflect
events or circumstances after this date or to reflect the occurrence of
unanticipated events.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
We have
one revolving credit facility for which the interest rate on outstanding
borrowings is variable and is based upon the prime rate of
interest. At September 30, 2009, there was $4,485,898 outstanding
under this credit facility.
Our
business is impacted by the health of the U.S economy. Current
economic conditions have caused a decline in business spending which has
adversely affected our business and financial performance and our operating
results. Accordingly, our business and financial performance has been
adversely affected by current economic conditions, and any future deterioration
of economic conditions, could cause a further reduction in the availability of
credit in the capital markets to our customers.
Item
4. Controls and Procedures
(a) Evaluation of Disclosure
Controls and Procedures
The
Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer have evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of
September 30, 2009. Based on such evaluation, such officers have
concluded that, as of September 30, 2009, the Company’s disclosure controls and
procedures are effective.
(b) Changes in Internal
Control Over Financial Reporting
During
the three months ended September 30, 2009, management did not identify any
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
1.
|
Legal
Proceedings
|
We know
of no material litigation or proceeding, pending or threatened, to which we are
or may become a party.
Number
|
|
Description
|
|
|
|
31.1
|
|
Rule
13a-14(a) 15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
|
Rule
13a-14(a) 15d-14(a) Certification of Chief Operating
Officer
|
31.3
|
|
Rule
13a-14(a) 15d-14(a) Certification of Chief Financial
Officer
|
32
|
|
Section
1350 Certification
|
In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
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.
|
Henry
Bros. Electronics, Inc.
|
|
(Registrant)
|
|
|
|
Date:
November 12, 2009
|
|
By: /s/
JAMES E. HENRY
|
|
|
|
|
|
James
E. Henry
|
|
|
|
|
|
Vice
Chairman, Chief Executive Officer,
Treasurer
and Director
|
|
|
|
Date:
November 12, 2009
|
|
By: /s/
BRIAN REACH
|
|
|
|
|
|
Brian
Reach
|
|
|
|
|
|
President,
Chief Operating Officer,
Secretary
and Director
|
|
|
|
Date:
November 12, 2009
|
|
By: /s/
JOHN P. HOPKINS
|
|
|
|
|
|
John
P. Hopkins
|
|
|
|
|
|
Chief
Financial
Officer
|