TII Network Technologies Inc. (TIII)

Form 10-Q for TII NETWORK TECHNOLOGIES, INC.

12-May-2006

Quarterly Report


Overview

The Company's primary market, the traditional Telco copper-based transmission network, has been adversely impacted over the last several years principally as a result of the competitive impact of alternative technologies that compete with the Telco's traditional copper-based transmission network (examples include cellular service, Fiber to the Premise ("FTTP") and competition from multi-system operators ("MSOs")). This trend, which has resulted in cutbacks in copper-based construction and maintenance budgets by the Telcos and a reduction in the number of their access lines, has adversely affected the Company's principal copper-based business. In response to this trend, the Company has been pursuing new markets with new products designed to take advantage of the Company's more than 40 years of network related experience focusing on proprietary overvoltage surge protection, enclosure technologies and electronics design capabilities.

The Company's major customer, Verizon, has begun its strategy to deploy FTTP through a multi-year program. This has resulted in a reduction of capital outlays on its traditional copper network and has therefore impacted the Company's traditional protection based products since FTTP networks require less traditional protection than current copper networks. Though the full extent of the impact on the Company of this program is not yet known, the Company believes that, while the current embedded copper infrastructure will continue to play a significant role as a transmission medium for years to come, it will continue to decline year to year.

On July 8, 2005, the Company received a Product Purchase Agreement (the "Verizon Agreement"), which is a general supply agreement, executed by Verizon Services Corp., setting forth the terms under which the Company would continue to provide product to Verizon, including additional approved products and an expanded territory, until March 31, 2010. General supply agreements do not require Telcos to purchase specific quantities of product and can be terminated without cause by either party, or extended by mutual written agreement. Prices, warranties, benefits, terms and conditions granted to Verizon under the Verizon Agreement are fixed, but must be at least as favorable as those granted by the Company to other commercial customers under like or similar circumstances.

Effective December 31, 2005, TII Network Technologies, Inc. changed its fiscal year end from the last Friday in June to December 31. This change was made to align the Company's reporting period with the budgetary and reporting periods of the Company's largest customers and provide an easier comparison of the Company's reported results with those of other companies. Therefore, the Company is now reporting on a calendar year basis with a December 31 year end, and its first three fiscal quarters ending on March 31, June 30 and September 30. The three months ended March 31, 2006 and March 25, 2005, contained 13 weeks and 12 weeks, respectively.


Results of Operations

The following table sets forth certain statement of operations information as a
percentage of net sales for the periods indicated:

Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
-------------- --------------

Net sales 100.0% 100.0%
Cost of sales 66.2 73.5
----- -----
Gross profit 33.8 26.5
----- -----
Operating expenses:

Selling, general and administrative 23.5 25.4
Research and development 4.7 7.7
----- -----
Total operating expenses 28.2 33.1
----- -----
Operating earnings (loss) 5.6 (6.6)
Interest income .5 .5
Other (expense) income - 5.0
----- -----
Earnings (loss) before income taxes 6.1 (1.1)
Provision for income taxes 2.4 -
----- -----
Net earnings (loss) 3.7 (1.1)
===== =====

Net sales for the first quarter of 2006 were $9.4 million compared to $5.2 million for the comparative prior year period, an increase of approximately $4.2 million or 80.2%. The increase in the 2006 period was primarily due to the expanded territories and products covered under the general supply agreement received from the Company's largest customer in July 2005, increased sales to existing and new customers of recently developed products, including DSL and VoIP products, an additional week of sales due to a thirteen week quarter compared to twelve weeks in the prior year period and the effect of a mild winter. The severe winter during the first quarter of 2005 adversely affected the Telco's ability to install the Company's NIDs and other outside plant products which resulted in lower than normal sales for that quarter.

Gross profit for the first quarter of 2006 was $3.2 million compared to $1.4 million for the comparable prior year period, an increase of approximately $1.8 million or 129.6%, while gross profit margin increased to 33.8% from 26.5%. The increase in gross profit was primarily due to the higher sales levels and gross profit margins. The improved gross profit margin was due to the higher sales levels in conjunction with the Company's primarily fixed overhead cost and an improved sales mix of higher margin products.

Selling, general and administrative expenses for the first quarter of 2006 were $2.2 million compared to $1.3 million for the comparable prior year quarter, an increase of approximately $888,000 or 66.9%. This increase was primarily due to five items representing 71% or $629,000 of the increase, as follows: stock option expense as a result of SFAS No.123(R) "Share-Based Payment," an additional week of payroll and related expenses, increased marketing resources and efforts associated with the Company's planned introduction of its new multi-service residential gateway, increased professional fees and a credit from the gain on the sale of fixed assets in 2005 which reduced that year's expenses.

Research and development expenses for the first quarter of 2006 were $444,000 compared to $405,000 for the comparable prior year period, an increase of approximately $39,000 or 9.6%. This higher level of expenditure reflects the Company's increased efforts to develop new products for the growth segments of the Telco and MSO markets and costs associated with the development of the Company's new multi-service residential gateway.

Interest income for the first quarter of 2006 was $44,000 compared to $26,000 for the comparable prior year period, an increase of approximately $18,000. The increase was due to increased interest rates and higher average cash and cash equivalent balances held by the Company.

Other income for the three months ended March 25, 2005 includes a gain of $265,000 resulting from the net settlement received from the surrender of whole-life insurance policies that the Company had held on the Company's Chief Executive Officer.

During the three months ended March 31, 2006, a provision for income taxes of $228,000 was recorded at the expected combined Federal and state effective annual tax rate of 40%. This rate differs from the U.S. Federal statutory rate of 34% primarily due to state income taxes and the recording of certain costs that are not deductible from taxable income. The Company's actual cash outlay for income taxes, or current provision, will be approximately 4% of pre-tax income due to the availability of net operating loss carryforwards which will offset a substantial portion of the Company's expected taxable income. No provision for income taxes was recorded in the first quarter of 2005 due to pre-tax losses and the uncertainty of the recoverability of deferred taxes.

Net earnings for the first quarter of 2006 were $343,000 or $0.03 per diluted share, compared to net loss of $53,000 in the year ago quarter.

Liquidity and Capital Resources

The Company's cash and cash equivalents were $6.3 million at March 31, 2006 compared to $5.3 million at the end of 2005 and $5.3 million at March 25, 2005, an increase of approximately $981,000 and $1 million, respectively. Working capital increased to $15.6 million at the end of the first quarter of 2006 from $15.2 million at the end of 2005 and $11.8 million at March 25, 2005.

For the three months ended March 31, 2006, the Company generated $1.6 million of net cash from operating activities compared to $634,000 of net cash used in operating activities for the three months ended March 25, 2005. The cash generated from operating activities in the first quarter of 2006 was due to net operating earnings of $856,000 (net earnings of $343,000 plus depreciation and amortization expense of $367,000 and non-cash share-based compensation $146,000) and a reduction in inventories of $948,000 as increased product demand used existing inventories, offset, in part, by an increase in accounts receivable of $235,000 due to higher sales in the first quarter of 2006, a decrease in other assets of $152,000, a decrease in deferred tax assets of $205,000 related to income taxes provision and a decrease in accounts payable and accrued liabilities of $289,000 due to the timing of payments to vendors.

Net cash used in investing activities was $674,000 in the first quarter of 2006 due to the purchase of capital assets in the normal course of business, the purchase of a new Enterprise Resource Planning ("ERP") software package and a contractually required deposit on the building, which the Company is buying.

Net cash provided by financing activities was $18,000 in the first quarter of 2006 due to proceeds received from the exercise of options.

The Company has a credit facility that enables it to have up to $3.0 million of borrowings outstanding at any one time, limited by a borrowing base equal to 85% of eligible accounts receivable, subject to certain reserves. The maximum amount of borrowings under the credit facility can be reduced by the lender upon written notice. Outstanding borrowings under the credit facility will bear interest at a specified bank's prime rate (7.75% at March 31, 2006) plus 1%, but never less than 5% per annum, and the Company is also required to pay an annual facility fee of 3/4 of 1% of the maximum amount of the credit facility. At March 31, 2006, the borrowing base was $3.2 million and there were no borrowings outstanding. The credit facility had an initial one year term and automatically renewed in September 2004 for a two year period until September 2006 but may be terminated by the lender at any time on 60 days notice or by the Company on 60 days notice prior to the end of the current term or any renewal term. If the credit facility is terminated by the lender, the Company would seek to establish a new credit facility. However, there can be no assurance that the Company would be successful in this effort. The credit facility is guaranteed by the Company's subsidiary and is secured by a lien and security interest against substantially all of the assets of the Company. The credit facility requires, among other covenants, that the Company maintain a consolidated tangible net worth of at least $12.0 million and working capital of at least $6.0 million. The credit facility also prohibits, without the lender's consent, the payment of cash dividends, significant changes

in management or ownership of the Company, business acquisitions, the incurrence of additional indebtedness, other than lease obligations for the purchase of equipment, and the guarantee of the obligations of others. Pursuant to the requirement of EITF 95-22, any amounts outstanding under this facility would be classified as current liabilities.

Funds anticipated to be generated from operations, together with available cash and borrowings under the credit facility, are believed to be adequate to finance the Company's current operational and capital needs for the next twelve months.

Contractual Obligations and Commercial Commitments

In February 2006, the Company entered into a contract with an unrelated third party to purchase a 20,000 square foot building in Edgewood, New York for $2.8 million, against which the Company has made a $292,000 deposit. The Company plans to consolidate its two New York facilities into this new building in late 2006 and is assessing the potential of consolidating its Puerto Rico operations into this same facility in the future. The Company's Board of Directors has approved a plan authorizing management to spend up to an additional $2.5 million to expand and improve this new building prior to moving in. The Company had anticipated that it would finance this project with a combination of cash and debt in the form of a mortgage on the property, but now expects to fund the project with cash given the recent increase in financing costs and available excess cash that the Company holds.

Seasonality

The Company's operations are subject to seasonal variations primarily due to the fact that the Company's principal products, NIDs, are typically installed on the side of homes. During the hurricane season, sales may increase depending upon the severity and location of hurricanes and the number of NIDs that are damaged and need replacement. Conversely, during winter months when severe weather hinders or delays the Telco's installation and maintenance of their outside plant network, the sales have been adversely affected until replacements can be installed (at which time sales increase).

Off Balance Sheet Financing

The Company has no off-balance sheet contractual arrangements, as that term is defined in Item 304 (a) (4) of Regulation S-K.

Critical Accounting Policies, Estimates and Judgments

TII's consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments. The Company believes that the determination of the carrying value of the Company's inventories and long-lived assets, the valuation allowance of deferred tax assets and valuation of share-based payment compensation are the most critical areas where management's judgments, assumptions and estimates most affect the Company's reported results. While the Company believes its estimates are reasonable, misinterpretation of the conditions that affect the valuation of these assets could result in actual results varying from reported results, which are based on the Company's estimates, assumptions and judgments as of the balance sheet date.

Inventories are required to be stated at net realizable value at the lower of cost or market. In establishing the appropriate inventory write-downs, management assesses the ultimate recoverability of the inventory, considering such factors as technological advancements in products as required by the Company's customers, average selling prices for finished goods inventory, changes within the marketplace, quantities of inventory items on hand, historical usage or sales of each inventory item, forecasted usage or sales of inventory and general economic conditions.

The Company reviews long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows undiscounted and without interest is less than the

carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value.

Consistent with the provisions of Statement of Financial Accounting Standards No. 109, the Company regularly estimates its ability to recover deferred tax assets, and reports such assets at the amount that is determined to be "more-likely-than-not" recoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. During the six months ended December 31, 2005, based primarily upon positive evidence derived from the Company's sustained levels of historical profitability and its projection for taxable income in the future, the Company reduced its valuation allowance against deferred tax assets to reflect the amount of deferred tax assets determined to be more-likely than not recoverable. In the event that evidence becomes available in the future to indicate that the valuation of the Company's deferred tax assets should be adjusted (e.g., significant changes in the Company's projections for future taxable income), our estimate of the recoverability of deferred taxes may change, resulting in an associated adjustment to earnings in that period.

With the adoption of SFAS No. 123(R) on June 25, 2005, the Company is required to record the fair value of share-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and expected term assumptions require a greater level of judgment. The Company estimates expected stock-price volatility based primarily on a simple average historical volatility of its common stock over a period equal to the expected term of the option, but also considers whether other factors are present that indicate that exclusive reliance on historical volatility may not be a reliable indicator of expected volatility. With regard to the Company's estimate of expected term, as adequate information with respect to historical share option exercise experience is not available, the Company primarily considers the vesting term and original contractual term of options granted.

Recently Issued Accounting Pronouncements

In February 2006, the FASB issued FASB Staff Position ("FSP") No. FAS 123(R)-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event," which amends SFAS No. 123(R) to require that options issued with a cash settlement feature that can be exercised upon the occurrence of a contingent event that is outside the employee's control should not be classified as liabilities until it becomes probable that the event will occur. For companies that adopted SFAS No. 123(R) prior to the issuance of the FSP, application is required in the first reporting period beginning after February 3, 2006. Currently, the Company has no stock options outstanding with contingent cash settlement features and, as a result, the FSP will not impact the Company's consolidated financial statements.

Forward-Looking Statements

Certain statements in this Report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as "may," "should," "seek," "believe," "expect," "anticipate," "estimate," "project," "intend," "strategy" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect the Company's future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause the Company's actual results, performance or achievements to differ materially from those described or implied in the forward-looking statements as a result of several factors, including, but not limited to:
 
ora capisco il candelozzo in chiusura :yes:
 
Buoni i dati considerato anche il fatto che la cassa è aumentata da 5,3 a 6,3 milioni e in genere il primo quarto per tiii è quello piu' brutto (ha quasi sempre riportato perdite) anche a causa delle severe condizioni climatiche che hanno impedito di fare una serie di istallazioni impattando in questo modo negativamente le vendite.
Ora puo' iniziare un lento uptrend di lungo.




Paolo :)
 
qohe1959 ha scritto:

Vendite buonissime ...l'unica cosa che può "spaventare" il mercato e però il margine netto di profitto che "apparentemente" è molto più basso

9.400.000 $di vendite per fare 0.03 cents ad azione

a giugno 2005 7.600.000 $ di vendite ha fatto 0.05 cents

spero si accorgano che ciò è dovuto al fatto che questo trimestre hanno messo in conto le tasse che l'anno scorso non han pagato.

ciao
 
Ho letto la trimestrale molto velocemente pero' a detta di alcuni forumisti di yahoo questo è stato uno dei migliori quarti per tiii non solo perche' ha sempre riportato perdite in questo trimestre ma anche perche' il dato dell'eps sarebbe stato piu' alto se non fossero state contabilizzate alcune voci.
Interessante inoltre l'aumento di cassa da 0,43 a 0,51$ e interessante sara' leggere lunedi anche il book value che dovrebbe aver approssimato i 2$.





Paolo
 
simulpaolo ha scritto:
Ho letto la trimestrale molto velocemente pero' a detta di alcuni forumisti di yahoo questo è stato uno dei migliori quarti per tiii non solo perche' ha sempre riportato perdite in questo trimestre ma anche perche' il dato dell'eps sarebbe stato piu' alto se non fossero state contabilizzate alcune voci.
Interessante inoltre l'aumento di cassa da 0,43 a 0,51$ e interessante sara' leggere lunedi anche il book value che dovrebbe aver approssimato i 2$.





Paolo

infatti ...sembrano quasi interessati a non farla "VOLARE" per poter accumulare intorno a questi prezzi ....

l'utile per azione, se non fossero intervenute voci nuove, sarebbe stato di 0.07 - 0.08 cents ...ed allora lunedi un +50 +100 % non glielo levava nessuno.

ciao e buon week end ;)
 
maxlago ha scritto:
Vendite buonissime ...l'unica cosa che può "spaventare" il mercato e però il margine netto di profitto che "apparentemente" è molto più basso

9.400.000 $di vendite per fare 0.03 cents ad azione

a giugno 2005 7.600.000 $ di vendite ha fatto 0.05 cents

spero si accorgano che ciò è dovuto al fatto che questo trimestre hanno messo in conto le tasse che l'anno scorso non han pagato.

ciao


Grazie ad entrambi...Max e Paolo, I mean...Have a good W-E. OK!
 
maxlago ha scritto:
infatti ...sembrano quasi interessati a non farla "VOLARE" per poter accumulare intorno a questi prezzi ....

l'utile per azione, se non fossero intervenute voci nuove, sarebbe stato di 0.07 - 0.08 cents ...ed allora lunedi un +50 +100 % non glielo levava nessuno.

ciao e buon week end ;)


+50 o +100? Non so, se avessero annunciato i risultati una o due settimane fa quando il mercato era ancora euforico sono convinto che cio' sarebbe accaduto ma sara' difficile dopo i due candeloni rossi della scorsa settimana.
A salire salira' di sicuro , se poi fara' uno spike verso i 5 tanto meglio per noi.




Paolo :)
 
Trasparente ha scritto:
stiamo carburando....
allacciarsi le cinture....

salicchia a fatica con volumi al lumicimino,,,
hanno aspettato tanto a dare i dati,,
proprio in questi giorni dovevano uscire,,, :rolleyes: :wall: :wall: :wall:
 
rieccomi,,ciao trasp,,
io con TIII ebbi pazienza già l'anno scorso e ne venni fuori con + 90%

da vari mesi come sai sono rientrata,,,
i dati usciti sono buoni,,
a grafico è messa bene,,
sopra i 3 vedo ampi spazi :D
siamo sopra tutte le triangolari e sma 200,,
anch'io vado long,,,
ovviamente con gli okki sempre aperti,,,
 
2,65...
 

Allegati

  • tiii.gif
    tiii.gif
    13,3 KB · Visite: 91
Davanti vedo solo praterie, go tiiii.





paolo :)
 
tiii,,grafico ritardato di un giorno,,ora 2,49,,,se perde la rialzista nera,,,ce sempre il supportone della gialla ribassista partente dai massimi assoluti,,,interessante
 

Allegati

  • ScreenHunter_3.gif
    ScreenHunter_3.gif
    20,4 KB · Visite: 105
Purtroppo in questi frangenti di mini panico si butta tutto anche il bambino con l'acqua sporca. Ma ormai la correzione è terminata e ben presto il mercato cerchera' di ristabilire i valori . Sono convinto che tiii possa puntare al raddoppio dai valori correnti e dunque questa è sola una buona occasione per incrementare le posizioni.


paolo
 
Max Lago...teniamo duro??? Ci credi ancora???
 
qohe1959 ha scritto:
Max Lago...teniamo duro??? Ci credi ancora???

Si...io ci credo OK! ...in un'altra giornataccia del Nasdy è una delle pochissime che si salvano...ho riletto adesso tutto il thread e sono confortato dai sentiment di Trasparente e Simulpaolo...scusate se non apporto conoscenze nè di AT nè di AF (che non ho)...vado a naso e seguo i più preparati fra di voi...(fra cui Max Lago) OK!
 
Non c'è niente da fare, in questo clima sidi sell off generale nulla riesce a salire.
Un solo rammarico, hanno fornito i risultati nel momento sbagliato.
L'avessero fatto non dico due settimane prima ma anche una settimana prima il +100% non glielo toglieva nessuna. Ora purtoppo dobbiamo aspettare altri 3 o 4 mesi.
 
simulpaolo ha scritto:
Non c'è niente da fare, in questo clima sidi sell off generale nulla riesce a salire.
Un solo rammarico, hanno fornito i risultati nel momento sbagliato.
L'avessero fatto non dico due settimane prima ma anche una settimana prima il +100% non glielo toglieva nessuna. Ora purtoppo dobbiamo aspettare altri 3 o 4 mesi.
...il cento per cento mi sembra esagerato :eek: ...o conta così tanto il sentiment del mercato?... :confused:
 
Indietro