UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2008
Commission file number 1-5654
EXX INC
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 88-0325271 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
| 1350 East Flamingo Road, Suite 689, Las Vegas, Nevada | 89119-5263 | |
| (Address or Principal Executive Offices) | (Zip Code) |
(702) 598-3223
(Registrant’s Telephone Number, Including Area Code)
NONE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer ¨ | 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 ¨ No x
Number of shares of common stock outstanding as of May 9, 2008: 9,515,642 Class A Shares and 786,409 Class B Shares.
| PART 1. | FINANCIAL INFORMATION |
| ITEM 1. | EXX INC AND SUBSIDIARIES |
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(In thousands, except number of shares and per share amounts)
| A. | Condensed Consolidated Balance Sheets |
| March 31, 2008 | December 31, 2007 | |||||||
| (unaudited) | ||||||||
| ASSETS |
||||||||
| Current assets |
||||||||
| Cash and cash equivalents |
$ | 14,421 | $ | 12,685 | ||||
| Short-term investments |
405 | 712 | ||||||
| Accounts receivable, less allowances of $931 and $733, respectively |
15,580 | 15,804 | ||||||
| Inventories |
10,712 | 9,687 | ||||||
| Other current assets |
996 | 1,146 | ||||||
| Deferred tax asset |
2,655 | 2,618 | ||||||
| Total current assets |
44,769 | 42,652 | ||||||
| Property and equipment, net |
17,584 | 17,677 | ||||||
| Other assets |
||||||||
| Goodwill |
592 | 1,015 | ||||||
| Intangible assets, net |
— | 282 | ||||||
| Other |
587 | 98 | ||||||
| 1,179 | 1,395 | |||||||
| $ | 63,532 | $ | 61,724 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities |
||||||||
| Long-term debt, current portion |
$ | 1,016 | $ | 1,104 | ||||
| Accounts payable and other current liabilities |
14,901 | 14,329 | ||||||
| Income taxes payable |
514 | 52 | ||||||
| Total current liabilities |
16,431 | 15,485 | ||||||
| Long-term liabilities |
||||||||
| Long-term debt, less current portion |
— | 403 | ||||||
| Post-retirement benefits, other than pension |
1,836 | 1,836 | ||||||
| Pension liability and other |
5,727 | 5,727 | ||||||
| Deferred tax liability |
14,107 | 14,118 | ||||||
| Total long-term liabilities |
21,670 | 22,084 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity |
||||||||
| Preferred stock, $.01 par value, authorized 5,000,000 shares, none issued common stock, Class A, $.01 par value, authorized 25,000,000 shares, 9,927,542 shares issued and 9,546,912 shares outstanding at March 31, 2008 and 9,927,542 shares issued and 9,648,167 shares outstanding at December 31, 2007 |
99 | 99 | ||||||
| Common stock, Class B, $.01 par value, authorized 1,000,000 shares, 831,479 shares issued and 787,134 shares outstanding at March 31, 2008 and 831,479 shares issued and 789,104 shares outstanding at December 31, 2007 |
9 | 9 | ||||||
| Capital in excess of par value |
547 | 547 | ||||||
| Accumulated other comprehensive loss |
(926 | ) | (835 | ) | ||||
| Retained earnings |
26,896 | 25,228 | ||||||
| Less treasury stock at cost 380,630 shares of Class A common stock and 44,345 shares of Class B common stock at March 31, 2008 and 279,375 shares of Class A common stock and 42,375 shares of Class B common stock at December 31, 2007 |
(1,194 | ) | (893 | ) | ||||
| Total stockholders’ equity |
25,431 | 24,155 | ||||||
| $ | 63,532 | $ | 61,724 | |||||
See notes to condensed consolidated interim financial statements.
2
| B. | EXX INC AND SUBSIDIARIES |
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except number of shares and per share amounts)
| Three Months Ended | ||||||||
| March 31, 2008 | March 31, 2007 | |||||||
| Net sales |
$ | 26,948 | $ | 29,849 | ||||
| Cost of sales |
22,414 | 25,734 | ||||||
| Gross profit |
4,534 | 4,115 | ||||||
| Selling, general and administrative expenses |
2,559 | 2,643 | ||||||
| Operating income |
1,975 | 1,472 | ||||||
| Other income (expense) |
||||||||
| Loss on investment |
— | (681 | ) | |||||
| Interest expense |
(41 | ) | (220 | ) | ||||
| Interest income |
133 | 176 | ||||||
| Other income (expense) |
(147 | ) | 107 | |||||
| (55 | ) | (618 | ) | |||||
| Income from continuing operations before income taxes |
1,920 | 854 | ||||||
| Income taxes |
652 | 290 | ||||||
| Income from continuing operations |
1,268 | 564 | ||||||
| Discontinued operations: |
||||||||
| Income (loss) from discontinued operations of a subsidiary and divisions of subsidiaries net of income taxes (benefit) |
400 | (179 | ) | |||||
| Net income |
$ | 1,668 | $ | 385 | ||||
| Basic net income (loss) per common share: |
||||||||
| Income from continuing operations |
$ | .12 | $ | .05 | ||||
| Income (loss) from discontinued operations |
$ | .04 | $ | (.02 | ) | |||
| Net income per common share-basic |
$ | .16 | $ | .03 | ||||
| Assuming dilution net income (loss) per common share: |
||||||||
| Income from continuing operations |
$ | .11 | $ | .04 | ||||
| Income (loss) from discontinued operations |
$ | .03 | $ | (.01 | ) | |||
| Net income per common share-diluted |
$ | .14 | $ | .03 | ||||
| Weighted average common shares outstanding |
||||||||
| Basic |
10,387,693 | 11,267,880 | ||||||
| Diluted |
11,800,755 | 12,751,810 | ||||||
See notes to condensed consolidated interim financial statements.
3
| C. | EXX INC AND SUBSIDIARIES |
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
| Three Months Ended | ||||||||
| March 31, 2008 | March 31, 2007 | |||||||
| Cash flows from operating activities |
||||||||
| Net income from continuing operations |
$ | 1,268 | $ | 564 | ||||
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |
||||||||
| Loss on sale of assets of subsidiary |
2 | — | ||||||
| Loss on disposal of marketable securities |
— | 681 | ||||||
| Depreciation and amortization |
1,056 | 1,433 | ||||||
| Deferred tax expense |
450 | 359 | ||||||
| Changes in operating assets and liabilities, net |
899 | (1,012 | ) | |||||
| Net cash provided by operating activities |
3,675 | 2,025 | ||||||
| Cash flows from investing activities |
||||||||
| Acquisition of property and equipment, net |
(1,027 | ) | (970 | ) | ||||
| Proceeds from sale of property and equipment |
18 | 770 | ||||||
| Proceeds from sale of short-term investments |
— | 430 | ||||||
| Net cash provided by (used in) investing activities |
(1,009 | ) | 230 | |||||
| Cash flows from financing activities |
||||||||
| Payments of long-term debt |
(491 | ) | (233 | ) | ||||
| Purchase of treasury stock |
(301 | ) | — | |||||
| Net cash used in financing activities |
(792 | ) | (233 | ) | ||||
| Net increase in cash and cash equivalents from continuing operations |
1,874 | 2,022 | ||||||
| Net cash and cash equivalents used in operating activities from discontinued operations |
(538 | ) | (413 | ) | ||||
| Net cash and cash equivalents provided by investing activities from discontinued operations |
400 | 371 | ||||||
| Net increase in cash and cash equivalents |
1,736 | 1,980 | ||||||
| Cash and cash equivalents, beginning of period |
12,685 | 19,154 | ||||||
| Cash and cash equivalents, end of period |
$ | 14,421 | $ | 21,134 | ||||
| Supplemental disclosure of cash flow information, cash paid during the period for: |
||||||||
| Interest |
$ | 52 | $ | 430 | ||||
| Income taxes |
$ | 48 | $ | 1,069 | ||||
See notes to condensed consolidated interim financial statements.
4
| D. | EXX INC AND SUBSIDIARIES |
Notes to Condensed Consolidated Financial Statements
(In thousands, except number of shares and per share amounts)
Note 1: Basis of Presentation and Consolidation
The unaudited condensed consolidated interim financial statements of EXX INC (the “Company”) as of March 31, 2008 and for the three month periods ended March 31, 2008 and 2007 set forth in this Form 10-Q include the accounts of the Company and its wholly-owned subsidiaries and reflect all adjustments which are necessary in the opinion of management for a fair presentation of the results for the periods stated. All intercompany accounts and transactions have been eliminated in consolidation. All adjustments so made are of a normal recurring nature. The unaudited condensed consolidated interim financial statements do not include all information and footnotes necessary for a complete presentation in accordance with accounting principles generally accepted in the United States of America. The condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (“SEC”). The reader is referred to the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Results for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year ending December 31, 2008.
Note 2: Inventories
Inventories are summarized as follows:
| March 31, 2008 | December 31, 2007 | |||||
| (unaudited) | ||||||
| Raw materials |
$ | 7,022 | $ | 6,535 | ||
| Work-in-process |
160 | 46 | ||||
| Finished goods |
3,530 | 3,106 | ||||
| $ | 10,712 | $ | 9,687 | |||
Note 3: Long-term debt
A summary of long–term debt follows:
| March 31, 2008 | December 31, 2007 | ||||||||
| (unaudited) | |||||||||
| Revolving credit line at 2% over LIBOR |
(a | ) | $ | — | $ | — | |||
| Promissory notes secured by certain equipment, various fixed rates of 6.00% - 7.00% |
251 | 339 | |||||||
| Notes payable at 4% through 2015 collateralized by substantially all of the assets of a subsidiary |
(b | ) | 394 | 394 | |||||
| Notes payable at 4% through 2023 collateralized by substantially all of the assets of a subsidiary |
(b | ) | 371 | 371 | |||||
| Unsecured notes payable of a subsidiary, currently 6%, due 2013 |
(c | ) | — | 403 | |||||
| 1,016 | 1,507 | ||||||||
| Less current portion |
1,016 | 1,104 | |||||||
| $ | — | $ | 403 | ||||||
| (a) | In February 2004, Newcor entered into a credit agreement (“2004 Credit Agreement”) with National City Bank. The 2004 Credit Agreement as amended and adjusted allowed for $2,800 of borrowings reduced by a $700 outstanding letter of credit, resulting in $2,100 available under the line of credit. There were no borrowings under the line of credit which was allowed to expire in February 2007 since the Company deemed it unnecessary for current operations. A new $5,000 uncommitted line of credit was established in December 2007. There is no stated expiration date on the new agreement. The $700 letter of credit referred to above remains outstanding. |
| (b) | These notes are in default and, accordingly, have been classified as currently due. |
| (c) | All remaining unsecured notes were redeemed in accordance with their terms in January 2008. |
5
Note 4: Earnings Per Share
The Company complies with the accounting and reporting requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share”. The difference between the number of shares used to compute basic net income per common share and diluted net income per common share relates to additional shares to be issued upon the assumed exercise of stock options, net of shares hypothetically repurchased at the average price with the proceeds of exercise. For the three months ended March 31, 2008, these shares amounted to 1,413,062 shares. For the three months ended March 31, 2007, these additional shares amounted to 1,483,930 shares.
Note 5: Pension Plan Information
The Company is required to report the following information on an interim basis under SFAS No 158, “Employers’ Accounting For Defined Benefit Pension and Other Postretirement Plans”, which supercedes SFAS No. 132 “Employer’s Disclosure about Pensions and Other Post Retirement Benefits-an amendment of FASB Statements Nos. 87, 88 and 106” with regard to its pension plans:
COMPONENTS OF NET PERIODIC BENEFITS COST (INCOME)
| (unaudited) | ||||||||
| Three Months Ended | ||||||||
| March 31, 2008 | March 31, 2007 | |||||||
| Service cost |
$ | 20 | $ | 15 | ||||
| Interest cost |
641 | 614 | ||||||
| Expected return on plan assets |
(741 | ) | (765 | ) | ||||
| Amortization |
15 | 13 | ||||||
| Net periodic pension cost (income) |
$ | (65 | ) | $ | (123 | ) | ||
In the consolidated financial statements for December 31, 2006 the Company indicated it intended to contribute and has contributed $59 to its pensions plans in April 2007. In the consolidated financial statements for December 31, 2007, the Company indicated it intended to contribute $1,811 to its pensions plans during the year ending December 31, 2008. To date in 2008, the Company has contributed $531.
6
Note 6: Segment Reporting
The Company is organized into two business segments: the Mechanical Equipment segment and the Plastics and Rubber segment. The Mechanical Equipment segment produces transmission, powertrain and engine components and assemblies for the automotive, medium and heavy-duty truck and agricultural vehicle industries, machine tools, electric motors and telecommunications equipment. The Plastics and Rubber segment produces cosmetic and functional seals and boots and functional engine compartment products primarily for the automotive industry, toys and vinyl wall coverings.
The Company complies with the reporting requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The accounting policies of the segments are the same as those of the Company. There are no inter-segment sales and management does not allocate any corporate expenses to the segments. The Company evaluates the performance of its segments and allocates resources to them based on operating income from continuing operations. Information by operating segment is summarized below:
| (unaudited) | ||||||||||||||
| Mechanical Equipment |
Plastics & Rubber |
Corporate | Total | |||||||||||
| Net sales to unaffiliated customers three months ended March 31, |
||||||||||||||
| 2008 |
$ | 22,754 | $ | 4,194 | $ | — | $ | 26,948 | ||||||
| 2007 |
$ | 24,508 | $ | 5,341 | $ | — | $ | 29,849 | ||||||
| Operating income (loss) three months ended March 31, |
||||||||||||||
| 2008 |
$ | 2,659 | $ | (378 | ) | $ | (306 | ) | $ | 1,975 | ||||
| 2007 |
$ | 1,695 | $ | 335 | $ | (558 | ) | $ | 1,472 | |||||
| Income (loss) from continuing operations before income taxes three months ended March 31, |
||||||||||||||
| 2008 |
$ | 2,518 | $ | (367 | ) | $ | (231 | ) | $ | 1,920 | ||||
| 2007 |
$ | 1,730 | $ | 344 | $ | (1,220 | ) | $ | 854 | |||||
The following is a listing of sales by major product group sold by the operating segments of the Company for the following periods.
| (unaudited) | ||||||
| Three Months Ended | ||||||
| March 31, 2008 | March 31, 2007 | |||||
| Mechanical Equipment |
||||||
| Machined production components |
$ | 22,013 | $ | 23,543 | ||
| Electric motors and cable pressurization equipment |
741 | 965 | ||||
| $ | 22,754 | $ | 24,508 | |||
| Plastics and Rubber |
||||||
| Manufactured, molded plastic and rubber components |
$ | 596 | $ | 882 | ||
| Impulse toys and other |
3,598 | 4,459 | ||||
| $ | 4,194 | $ | 5,341 | |||
7
Note 7: Recent Developments
In January 2008, the Company redeemed in accordance with their terms the remaining $403 principal amount of the unsecured notes for a total of $415 which included accrued interest of $12. The $403 of unsecured notes were cancelled by the Trustee and are no longer considered outstanding.
In February 2008, the Company sold certain assets of a subsidiary within the Mechanical Equipment segment to an unrelated party for a sale price of $900. The gain on the transaction is reflected in discontinued operations in the first quarter of 2008. In the fourth quarter of 2007, in light of the sales price allocable to the patents, an impairment charge was recorded in the amount of $656. Included in the consolidated balance sheet at December 31, 2007 are assets and liabilities related to the subsequent sale of this subsidiary, classified as held for sale, as follows:
| DECEMBER 31, 2007 | |||
| ASSETS |
|||
| Accounts receivable, net |
$ | 594 | |
| Inventories |
66 | ||
| Other current assets |
35 | ||
| Property and equipment, net |
22 | ||
| Intangible assets, net |
282 | ||
| Total assets |
$ | 999 | |
| LIABILITIES |
|||
| Accounts payable and other current liabilities |
$ | 2,674 | |
| Total liabilities |
$ | 2,674 | |
Note 8: Other
At the end of March and the beginning of April 2007, EXX sold 361,000 or 9.02% of the issued and outstanding common shares of All American Semiconductor Inc. in open market transactions for an aggregate sale price of approximately $430, resulting in a loss to EXX of $681 which was recorded in the first quarter condensed consolidated interim financial statements. As reported previously, EXX acquired shares in All American Semiconductor Inc. as an investment and then pursued discussions with its management which did not produce any arrangements or agreements between the two companies.
In February 2007, the Company sold a subsidiary’s unused building and related property to an unrelated party for net proceeds of $770 resulting in a loss of $177 which was recorded in the fourth quarter of 2006 as an impairment of the related property to an unrelated party.
On March 31, 2007, the Company sold substantially all the operating assets of its electric motor manufacturing subsidiary to an unrelated party for a sale price of $371. The gain on the transaction totaling $206 is reflected in discontinued operations in the condensed consolidated interim financial statements for the three months ended March 31, 2007.
Note 9: Adoption of New Accounting Pronouncements
Effective January 1, 2008 the Company implemented the Securities and Exchange Commission Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (“SAB 109”). SAB 109 provides guidance on the accounting for written loan commitments recorded at fair value under “Generally Accepted Accounting Principles (“GAAP”). Specifically, the SAB revised the Staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. SAB 109, which supersedes SAB 105, Application of Accounting Principles to Loan Commitments, requires the expected net future cash flows related to the associated servicing of the loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The adoption of SAB 109 does not have a material impact on the Company’s condensed consolidated interim financial statements.
Effective January 1, 2008, the Company implemented Statement of Financial Accounting Standard No. 157, Fair Value Measurement or SFAS 157, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In accordance with the provisions of FSP No. FAS 157-2, Effective Date of FASB Statement No. 157, the Company elected to defer implementation of SFAS 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. The Company is evaluating the impact, if any, this Standard will have on our consolidated non-financial assets and liabilities.
8
SFAS No. 157 defines fair value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. SFAS No. 157 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1 – unadjusted quoted prices for identical assets or liabilities in active markets accessible by the Company at the measurement date.
Level 2 – inputs that are observable in the marketplace other than those inputs classified as Level 1.
Level 3 – inputs that are unobservable in the marketplace and significant to the valuation.
SFAS No. 157 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument will be categorized based upon the lowest level of input that is significant to the fair value calculation.
The Company’s financial assets and liabilities measured at fair value on a recurring basis include those securities classified as cash and cash equivalents on the condensed consolidated interim balance sheet. All securities owned are valued under Level 1, where the assets are measured using quoted prices in active markets for identical assets.
In January 1, 2008, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. The adoption of SFAS No. 159 did not have any material impact on the Company’s consolidated financial statements.
Note 10: Recent Accounting Pronouncements
On December 21, 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110, (“SAB 110”). SAB 110 provides guidance to issuers on the method allowed in developing estimates of expected term of “plain vanilla” share options in accordance with SFAS No. 123(R), “Share-Based Payment”. The staff will continue to accept, under certain circumstances, the use of a the simplified method beyond December 31, 2007 which amends question 6 of Section D.2 as included in SAB 107, “Valuation of Share-Based Payment Arrangements for Public Companies”, which stated that the simplified method could not be used beyond December 31, 2007. SAB 110 is effective January 1, 2008. The Company is currently evaluating the potential impact, if any, that the adoption of SAB 110 will have on its consolidated financial statements.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141(R)”). This statement replaces SFAS No. 141, “Business Combinations” (“SFAS 141”). This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the expected effect, if any, SFAS 141(R) will have on its financial statements.
In December 2007, the Financial Accounting Standards Board issued SFAS 160, “Non controlling Interests in Consolidated Financial Statements” (“FAS 160”), an amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). FAS 160 establishes accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be re characterized as non controlling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. This pronouncement is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 160 on our consolidated financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”). FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS 161 is effective for fiscal years beginning after November 15, 2008. Management is currently evaluating the impact FAS 161 will have on the Company’s consolidated financial statements.
9
| ITEM 2. | EXX INC AND SUBSIDIARIES |
Management's Discussion and Analysis of Financial Condition and Results of Operations
(In thousands, except for per share amounts)
This Quarterly Report on Form 10-Q contains certain forward-looking statements which are covered under the safe harbor provisions of the Private Securities Legislation Reform Act of 1995 with respect to the Company’s future financial performance. Although the Company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be realized. Forward-looking statements involve known and unknown risks which may cause the Company’s actual results and corporate developments to differ materially from those expected. Factors that could cause results and developments to differ materially from the Company’s expectations include, without limitation, changes in manufacturing and shipment schedules, delays in completing plant construction and acquisitions, new product and technology developments, competition within each business segment, cyclicality of the markets for the products of a major segment, litigation, significant cost variances, the effects of acquisitions and divestitures, and other risks.
Results of Operations
The Company is organized into two business segments, the Mechanical Equipment segment and the Plastics and Rubber segment. The Mechanical Equipment segment produces transmission, powertrain and engine components and assemblies for the automotive, medium and heavy-duty truck and agricultural vehicle industries, as well as electric motors and telecommunications equipment. The Plastics and Rubber segment produces cosmetic and functional seals and boots and functional engine components primarily for the automotive industry, toys and vinyl wall coverings.
Net sales for the first quarter of 2008 were $26,948 compared to $29,849 in the first quarter of 2007, a $2,901 decrease. The Mechanical Equipment segment reported first quarter 2008 total sales of $22,754, which was a decrease of $1,754 or 7% of sales of $24,508 in the first quarter of 2007. The decrease was primarily due to decreased sales in the heavy-duty truck and specialty machining markets, and also by decreased sales in the automotive industry. The increased cost of fuel has also hampered sales. The Company believes that the downward sales trend is being encountered throughout these industries by the firms supplying comparable products. The Plastics and Rubber segment first quarter 2008 sales were $4,194 compared to $5,341 in the same period in 2007, a $1,147 decrease or 21%. The decrease in the Plastics and Rubber segment was due to decreased volume primarily caused by the factors mentioned above.
Gross profit for the first quarter of 2008 totaled $4,534 or 17% of sales compared to $4,115 or 14% of sales for the comparable period in 2007. The Mechanical Equipment segment accounted for a gross profit of $3,690 in the first quarter of 2008 compared to $2,814 for the comparable three-month period in 2007. Gross profit as a percentage of sales in the Mechanical Equipment segment for the first quarter of 2008 increased to 16% compared to 11% for the first quarter of 2007, principally due to changes in the cost structure and operating efficiencies. The Plastics and Rubber segment accounted for a gross profit of $844 in the first quarter of 2008 compared to $1,301 for the comparable three-month period in 2007. Gross profit as a percentage of sales in the first quarter of 2008 decreased to 20% from 24% for the first quarter of 2007. The percentage decrease was the result of the product mix and the decrease of sales within the segment.
Selling, general & administrative expenses were $2,559 for the first quarter of 2008, compared to $2,643 for the first quarter of 2007. Management continues to pursue a concerted effort to control and reduce these costs in the areas of efficient personnel management, strategic supply, purchasing, administrative cost controls and other areas.
As a result primarily of the increase in gross profit reported in the Mechanical Equipment segment and cost containment measures, operating income for the first quarter of 2008 was $1,975 compared to $1,472 for the first quarter of 2007.
Other income (expense) for the first quarter of 2008 was ($55) compared to other income (expense) of ($618) for the first quarter of 2007. In 2007, this included a loss of $681 from the sale in open market transactions of common stock of All American Semi Conductor Inc. EXX had made an investment in this Company, but discussions with that Company’s management did not produce any agreements or arrangements between the two companies.
Interest expense for the first quarter of 2008 was ($41) compared to ($220) for the first quarter of 2007. The interest reduction was due to reduced debt balances between the periods.
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Income (loss) from discontinued operations for the first quarter 2008 was $400 compared to ($179) for the first quarter 2007. These results related to operations of a subsidiary and divisions of subsidiaries which were disposed of and are discussed elsewhere in this report.
Net income for the first quarter of 2008 was $1,668 or $.16 per common share-basic and $.14 per common share-diluted compared to a net income of $385 or $.03 per common share-basic and $.03 per common share-diluted in the comparable period of 2007.
Liquidity and Capital Resources
In February 2004, Newcor entered into a credit agreement (“2004 Credit Agreement”) with National City Bank. The 2004 Credit Agreement as amended and adjusted allowed for $2,800 of borrowings reduced by a $700 outstanding letter of credit, resulting in $2,100 available under the line of credit. There were no borrowings under the line of credit which was allowed to expire in February 2007 since the Company deemed it unnecessary for current operations. A new uncommitted $5,000 line of credit was established in December 2007. There is no stated expiration date on the new agreement. There have been no borrowings under this line of credit. The $700 letter of credit referred to above remains outstanding.
For the three months ended March 31, 2008, operating activities generated $3,675 of cash as compared to generating $2,025 of cash in the corresponding period of the preceding year. For the three months ended March 31, 2008, the Company utilized $1,009 in its investment activities which included $18 proceeds from the sale of property and equipment less $1,027 cost of acquisition of property and equipment, net. In the corresponding period of the preceding year, the Company generated $230 in its investment activities which included $770 proceeds from the sale of property and equipment and $430 from the sale of short-term investments less $970 for the acquisition of property and equipment. Cash totaling $792 was used in financing activities during the three months ended March 31, 2008 and included payments of $301 for the purchase of treasury stock and $491 for the repayment of Newcor debt which included the redemption of the remaining $403 of the Newcor notes, compared to the use of $233 for the three months ended March 31, 2007 principally for repayment of the long-term debt.
At March 31, 2008, the Company reported working capital of approximately $28,338 and a current ratio of 2.7 to 1. The Company is obtaining its working capital needs through its existing cash balances which the Company considers to be adequate for its current working capital needs for the foreseeable future.
| ITEM 4T. | Controls and Procedures |
As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer, David A. Segal, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934 as amended). Based on that evaluation, he has concluded that the Company’s disclosure controls and procedures in place are effective in all material respects to insure that the information relating to the Company in the reports that it filed under the Securities and Exchange Act of 1934, as amended, is recorded, processed and summarized as and when required.
With regards to internal controls, his review did not indicate any significant changes in internal controls or other factors that have materially affected or is reasonably likely to materially affect the registrant’s internal controls over financial reporting. The evaluation process and its results were reported to the Company’s Audit Committee and to the outside auditors.
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| PART II. | OTHER INFORMATION |
| Item 1. | Legal Proceedings |
In September 2007, the Company reported that the Detroit, Michigan Regional Office of the National Labor Relations Board (“NLRB”) issued a recommended notice of compliance determination on September 25, 2007 with respect to the Newcor Bay City Division in favor of approximately 32 UAW members, recommending a total of approximately $1,900 in back pay, benefits, and interest to the 32 individuals. The NLRB’s notice of compliance determination relates to a previously disclosed unfair labor practice charge filed by the UAW following implementation of a final contract offer. The Company has recorded an accrual of $2,100 in connection with this announcement.
Newcor intends to vigorously contest this recommendation through the administrative procedures of the NLRB and, if necessary, the federal court system. There will be a hearing before an NLRB administrative Law Judge after the Regional Office issues its final compliance specification. The Administrative Law Judge will issue a decision on the specification, which can be appealed to the National Labor Relations Board in Washington, D.C. The NLRB will rule on an appeal from the Administration Law Judge’s decision. The NLRB’s decision can be appealed to a federal court of appeals.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
| Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet be purchased Under the Plans or Programs | |||||
| Jan. 1, 2008 – Jan. 31, 2008 |
29,718 Class A 1,020 Class B |
$ $ |
3.00 3.08 |
— — |
— — | ||||
| Feb. 1, 2008 – Feb 29, 2008 |
34,622 Class A 400 Class B |
$ $ |
2.94 2.90 |
— — |
— — | ||||
| Mar. 1, 2008 – Mar. 31, 2008 |
36,915 Class A 550 Class B |
$ $ |
2.96 2.98 |
— — |
— — | ||||
| Total |
101,255 Class A 1,970 Class B |
$ $ |
2.96 3.01 |
— — |
— — | ||||
| (1) | All shares acquired through open market purchases and were not part of any publicly announced program. |
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| ITEM 6. | Exhibits |
| (a) | Exhibits |
| 2.1 | Agreement of Merger and Plan of Reorganization, EXX INC. | (1 | ) | ||
| 2.2 | Amendment to Agreement of Merger and Plan of Reorganization, EXX INC. | (2 | ) | ||
| 3.1 | Articles of Incorporation, EXX INC. | (1 | ) | ||
| 4.1 | Newcor Senior Increasing Rate Notes due 2013 Indenture. | (6 | ) | ||
| 10.1 | Amendment dated March 27, 1998 to employment agreement with David A. Segal. | (3 | ) | ||
| 10.2 | Employment Agreement covering Newcor employment with David A. Segal dated September 3, 2001. | (4 | ) | ||
| 10.3 | Addendum to Employment Agreement covering Newcor employment with David A. Segal. | (5 | ) | ||
| 10.4 | Credit Agreement between Newcor and its subsidiaries and National City Bank of Michigan-Illinois dated February 20, 2004. | (7 | ) | ||
| 10.5 | First Amendment to 2004 Credit Agreement between Newcor and its subsidiaries and National City Bank dated March 28, 2005. | (8 | ) | ||
| 31 | Certification of Chief Executive Officer and Chief Financial Officer under Section 302 of the Sarbanes- Oxley Act of 2002. | ||||
| 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||||
| (1) | Incorporated by reference to EXX INC Form S-4 Registration Statement dated July 25, 1994. |
| (2) | Incorporated by reference to EXX INC Form S-4 Amendment No. 1 dated August 16, 1994. |
| (3) | Incorporated by reference to EXX INC Form 10-K Report for the year ended December 31, 1997 filed March 31, 1998. |
| (4) | Incorporated by reference to Newcor Form 10-Q Report dated September 30, 2001. |
| (5) | Incorporated by reference to EXX INC Form 10-Q Report dated September 30, 2003. |
| (6) | Incorporated by reference to EXX INC Form 10-Q Report dated June 30, 2003. |
| (7) | Incorporated by reference to EXX INC Form 10-Q Report dated March 31, 2004. |
| (8) | Incorporated by reference to EXX INC Form 10-Q Report dated June 30, 2005. |
SIGNATURE
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.
| EXX INC | ||||||
| Date: May 13, 2008 | By: | /s/ David A. Segal | ||||
| David A. Segal | ||||||
| Chairman of the Board | ||||||
| Chief Executive Officer | ||||||
| Chief Financial Officer | ||||||
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