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| NOIZ > SEC Filings for NOIZ > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
Forward Looking Statements
Certain statements in this report contain words such as "could," "expects," "may," "anticipates," "believes," "intends," "estimates," "plans," "envisions," and other similar language and are considered forward-looking statements. These statements are based on our expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate and are merely our current predictions of future events. In addition, other written or oral statements which are considered forward-looking may be made by us or others on our behalf. These statements are subject to important risks, uncertainties and assumptions, which are difficult to predict and the actual outcome may be materially different. Some of the factors which could cause results or events to differ from current expectations include, but are not limited to, the factors described here, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008, and in the other documents that we file with the Securities and Exchange Commission. We assume no obligation to update our forward-looking statements to reflect new information or developments.
An investment in our common stock involves a high degree of risk. We urge readers to review carefully the risk factors described herein, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008, and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements and the data used to prepare them. Our consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our judgments and estimates including those related to allowances for doubtful accounts and sales returns, inventory valuation and obsolescence, long-lived assets, business combination purchase price allocation and goodwill impairment, stock-based compensation, warranty obligations, and the valuation allowance on our deferred tax asset. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
During the thirteen weeks ended September 27, 2008, we revised our revenue recognition policy to include the percentage of completion method for certain types of contracts in accordance with SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type of Contracts". For these types of contracts we typically record revenue using labor hours to measure progress toward completion of the contract as we have determined this methodology best reflects the fundamentals of the contract. If estimates to complete the contract change materially from one period to the next, profit levels could significantly vary. There have been no other changes to our critical accounting policies from those described in our annual report on Form 10-K for the fiscal year ended March 31, 2008.
Recent Accounting Pronouncements
We discuss recently adopted and issued accounting standards in Item 1. Notes to Consolidated Financial Statements - Note 2.
Acquisition
On June 5, 2007, we acquired MICA Microwave, Inc. ("MICA"), a California corporation in a merger transaction pursuant to which MICA became a wholly-owned subsidiary of Micronetics, and the holders of MICA common stock were paid $3.0 million in cash and $2.0 million in shares of Micronetics' common stock. A post closing adjustment of $20,522 was recorded during the twenty-six weeks ended September 27, 2008 based upon MICA's net worth on the closing date.
The acquisition of MICA provides us with a broader range of RF/Microwave products, including high performance mixers and ferrites, and will provide us with further integrated microwave sub-systems and systems solutions.
Overview
Micronetics designs and manufactures high-end microwave and radio frequency (RF) components and integrated multifunction subassemblies used in a variety of commercial wireless, defense and aerospace products, including satellite communications, electronic warfare and electronic counter-measures. We also manufacture and design test equipment, subassemblies and components that are used to test the strength, durability and integrity of signals in communications equipment. Our products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless telecommunications and satellite equipment.
We sell our products primarily to original equipment manufacturers of communications equipment in either the commercial or the defense electronic marketplace. Many of our customers are prime contractors for defense work or larger Fortune 500 companies with world-wide operations.
A key driver of demand for Micronetics' products is the pervasive transformation of information from the analog domain to the digital domain. Because digital technologies require greater degrees of precision and rely more on miniature circuits than analog technologies, testing is critical for the rapid commercialization of reliable products necessitated by broadband and wireless communication technologies. As the speed to market challenges increase, larger companies are relying increasingly on other companies to manufacture a module or an integrated subassembly This module or subassembly is then integrated by the larger company into a piece of equipment and sold to a customer. Micronetics has been seeking to capitalize on this trend by increasing its capability to manufacture integrated subassemblies. Our goal is to leverage our high power and noise technology to continue to be a highly reliable supplier of integrated microwave subsystems.
Results of Operations
Thirteen Weeks Ended September 27, 2008 compared to September 30, 2007
Net sales
Net sales for the thirteen weeks ended September 27, 2008 ("Q2 FY 09") were $6,545,453, a decrease of $3,217,511, or 33% as compared to $9,762,964 for the thirteen weeks ended September 30, 2007 ("Q2 FY 08"). The decrease in net sales for Q2 FY 09 is primarily attributable to a decrease in net sales of high performance amplifiers for commercial WIMAX and public safety applications. Commercial and defense revenues were 53% and 47%, respectively, of the total revenues for Q2 FY 09, as compared to 74% and 26%, respectively, for Q2 FY 08 primarily due to the reduction in net sales of higher performance power amplifiers to the commercial market offset by increased spending in the defense market for jamming and electronic system modernization. We expect sales in each of the third and fourth quarters of fiscal year 2009 to increase as compared to Q2 FY 09.
In Q2 FY 09 we have participated in development sales. Development sales consist of small quantities of product engineered for new applications. We expect these development sales will result in future higher volume sales contracts for such applications.
Backlog
Our backlog has grown to approximately $20 million as of September 27, 2008 as compared to approximately $14 million as of March 31, 2008. Consistent with our strategy, the increase in our backlog is primarily a result of orders for integrated sub-assemblies. We expect to increase our rate of shipping against our backlog in the second half of fiscal year 2009.
Gross profit margin
Gross profit as a percent of sales decreased to 32% for Q2 FY 09 from 37% for Q2 FY 08. The decrease is due primarily to lower sales of high power amplifiers without a corresponding decrease in fixed costs. We expect our gross profit as a percent of sales to increase in each of the third and fourth quarters of fiscal 2009 as compared to Q2 FY 09 as a result of higher sales.
Research and development
Research and development ("R&D") expense was $388,473 or an increase of $229,873 for Q2 FY 09 as compared to $158,600 for Q2 FY 08. The increase was primarily due to development work on an in-flight high-speed internet transceiver product, high power products for defense applications and a new product line for commercial telecom applications. We plan to continue to invest in these product areas over the remainder of the year
Selling, general and administrative
Selling, general and administrative ("SG&A") expense was $1,696,401 for Q2 FY 09 or a decrease of $295,272 as compared to $1,991,673 for Q2 FY 08. Approximately $105,000 of the decrease was due to a reduction in accounting fees incurred in Q2 FY 08 related to the MICA acquisition and FIN 48 adoption. Approximately $61,000 of the decrease was due to a reduction in bad debt expense as a result of improved accounts receivables collections. The remainder of the decrease was due principally to lower compensation expense associated with lower profitability.
Amortization of intangible assets
Amortization expense attributable to the intangible assets related to the acquisition of Stealth and MICA was $171,456 for Q2 FY 09 as compared to $183,357 for Q2 FY 08.
Interest expense
Interest expense decreased $70,310 or 43% to $91,790 for Q2 FY 09 as compared to $162,100 for Q2 FY 08 primarily due to lower borrowings during Q2 FY 09 and the change in term loan rates from 3 month libor plus 1.8% to 3 month libor plus 1.5%.
Unrealized gain on interest rate swap
An unrealized gain of $11,067 was recorded for Q2 FY 09 as compared to an unrealized loss of $70,068 in Q2 FY 08 to reflect the change in fair value of the mark to market valuation for the interest rate swap agreement entered into in April 2007 to mitigate the interest rate fluctuations on our term loan.
Provision for income taxes
Our effective tax rate was 44% for Q2 FY 09 as compared to 43% for Q2 FY 08. In addition, during Q2 FY 09, $72,000 of uncertain tax benefits were recorded in the tax provision due to the statute of limitations expiring on the 2004 calendar year tax return filed by one of our subsidiaries.
Twenty-six Weeks Ended September 27, 2008 compared to September 30, 2007
The Consolidated Statements of Income for the twenty-six weeks ended September 30, 2007 include the operations of MICA from the acquisition date of June 5, 2007.
Net sales
Net sales for the twenty-six weeks ended September 27, 2008 were $13,632,110, a decrease of $2,441,519, or 15% as compared to $16,073,629 for the twenty-six weeks ended September 30, 2007. The decrease in net sales is primarily attributable to a decrease in net sales of high performance amplifiers for commercial WIMAX and public safety applications of approximately $4.3 million offset in part by an increase of $1.0 million in sales of components and $.9 million in sales of integrated component sub-systems for jamming and electronic modernization. Commercial and defense revenues were 54% and 46%, respectively, of the total revenues for the twenty-six weeks ended September 27, 2008, as compared to 72% and 28%, respectively, for the twenty-six weeks ended September 30, 2007 primarily due to the reduction in net sales of higher performance power amplifiers to the commercial market offset by increased spending in the defense market for jamming and electronic system modernization. We expect sales to increase in the second half of fiscal year 2009 as compared to the first half of fiscal year 2009.
Over the first half of fiscal year 2009 we have participated in development sales. Development sales consist of small quantities of product engineered for new applications. We expect these development sales will result in future higher volume sales contracts for such applications.
Backlog
Our backlog has grown to approximately $20 million as of September 27, 2008 as compared to approximately $14 million as of March 31, 2008. Consistent with our strategy, the increase in our backlog is primarily a result of orders for integrated sub-assemblies. We expect to increase our rate of shipping against our backlog in the second half of fiscal year 2009.
Gross profit margin
Gross profit as a percent of sales decreased slightly to 37% for the twenty-six weeks ended September 27, 2008 as compared to 38% for the twenty-six weeks ended September 30, 2007. We expect our gross margin percent will increase in the second half of fiscal year 2009 as compared to the first half of fiscal year 2009 as a result of higher sales.
Research and development
Research and development ("R&D") expense was $730,566 or an increase of $418,102 for the twenty-six weeks ended September 27, 2008 as compared to $312,464 for the twenty-six weeks ended September 30, 2007. The increase was primarily due to development work on an in-flight high-speed internet transceiver product, high power products for defense applications and a new product line for commercial telecom applications. We plan to continue to invest in these product areas over the remainder of the year.
Selling, general and administrative
Selling, general and administrative ("SG&A") expense was $3,895,988 or an increase of $265,660 for the twenty-six weeks ended September 27, 2008 as compared to $3,630,328 for the twenty-six weeks ended September 30, 2007. The increase was primarily attributable to the inclusion of MICA's SG&A expenses for the full twenty-six weeks ended September 27, 2008 as compared to fifteen weeks for the period ended September 30, 2007.
Amortization of intangible assets
Amortization expense attributable to the intangible assets related to the acquisition of Stealth and MICA was $348,562 for the twenty-six weeks ended September 27, 2008 as compared to $366,450 for the twenty-six weeks ended September 30, 2007.
Interest expense
Interest expense decreased $86,189 or 31% to $190,657 for the twenty-six weeks ending September 27, 2008 as compared to $276,846 for the twenty-six weeks ending September 30, 2007 primarily due to lower borrowings.
Unrealized gain on interest rate swap
An unrealized gain of $113,868 was recorded for the twenty-six weeks ended September 27, 2008 as compared to an unrealized loss of $70,068 for the twenty-six weeks ended September 30, 2007 to reflect the change in fair value of the mark to market valuation for the interest rate swap agreement entered into in April 2007 to mitigate the interest rate fluctuations on our term loan.
Provision for income taxes
Our effective tax rate was 44% for the twenty-six weeks ended September 27, 2008 as compared to 46% for the twenty-six weeks ended September 30, 2007. In addition, $72,000 in uncertain tax benefits were recorded in the tax provision due to the statute of limitations expiring on the 2004 calendar year tax return filed by one of our subsidiaries.
Financial Condition, Liquidity and Capital Resources
We finance our operating and investment requirements primarily through operating cash flow and borrowings. We had cash and working capital at September 27, 2008 of $1,589,909 and $11,583,462, respectively, as compared with cash and working capital of $3,163,415 and $11,197,241, respectively at March 31, 2008. Our current ratio was approximately 3.33 to 1 at September 27, 2008, as compared to 3.06 to 1 at March 31, 2008.
Net cash used in operating activities was $798,722 during the twenty-six weeks ended September 27, 2008 as compared to net cash provided by operating activities of $620,544 during the twenty-six weeks ended September 30, 2007.
In the twenty-six weeks ended September 27, 2008 cash provided by net income after adjusting for non-cash items was approximately $1.3 million. An additional approximately $1.3 million was provided by accounts receivables due to lower sales and improved collections. Approximately $1.7 million was used for inventory in anticipation of future sales. Approximately $1.4 million was used for prepaid expenses, principally prepaid income taxes. Approximately $.7 million was used to fund accounts payable and accrued expenses and approximately $.4 million was provided due to cash received and recorded as deferred revenue.
In the twenty-six weeks ended September 30, 2007 cash provided by net income after adjusting for non-cash items was approximately $2.2 million. Approximately $1.4 million was used to fund receivables resulting from increased sales. Approximately $.1 million was used to fund increases in inventory and approximately $.3 million was used to fund accounts payable and accrued expenses. Prepaid expenses and other assets provided approximately $.2 million.
Net cash used in investing activities was $44,232 during the twenty-six weeks ended September 27, 2008 as compared to net cash used in investing activities of $5,133,528 during the twenty-six weeks ended September 30, 2007. During the twenty-six weeks ended September 27, 2008 we purchased equipment of $464,754 and sold investments of $400,000. We also received $20,522 as an adjustment to the purchase price of MICA.
During the twenty-six weeks ended September 30, 2007, we acquired MICA for $3,112,814 and the final earnout payment of $1.5 million was made to the former stockholders of Stealth. Additionally, we purchased equipment of $482,612.
Net cash used in financing activities was $730,552 during the twenty-six weeks ended September 27, 2008 as compared to $913,916 during the twenty-six weeks ended September 30, 2007 primarily due to repayments on our mortgages and term loans.
Term Loan and Revolver
In March 2007, the Company entered into a credit facility consisting of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which replaced the then existing $6.0 million term loan entered into in June 2005.
The Company entered into an interest rate swap agreement in April 2007 to mitigate interest rate fluctuations on the term loan. At the end of each reporting period the Company records the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss on the swap is charged to earnings.
The term loan is guaranteed by the Company's subsidiaries and secured by substantially all of our assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the 3 month LIBOR rate plus 1.5%, which at September 27, 2008 was 5.38%. The term loan expires in June 2012.
The revolving line of credit bears interest at the current prime rate, which at September 27, 2008 was 5.0%. We had $5.0 million available under the line at September 27, 2008. The revolving line of credit expires in March 2010.
Under the terms of the term loan and the revolver, we are required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, and minimum tangible net worth of $7.5 million. At September 27, 2008, we were in compliance with all financial debt covenants.
Mortgage payable, NH
In February 2004, Micronetics refinanced the mortgage on its headquarters, entering into a new five-year mortgage payable for $630,000. The note bears interest at 5.75% per annum and is payable in monthly installments, including interest, of $12,107. This loan is secured by the land and building of Micronetics' headquarters.
Mortgage payable, MA
In March 2003, in connection with the purchase of a portion of a commercial condominium housing Micronetics' Enon division, Micronetics entered into a mortgage payable for $352,750. In May 2007, the commercial condominium was sold and the remaining mortgage was settled.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates that range from 8.67% to 10.6% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives.
Stock Buyback Plan
On November 6, 2008 our Board of Directors authorized a share repurchase program to acquire up to 500,000 shares of our common stock in the open market or in privately negotiated transactions.
We believe that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our line of credit will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or demand for our products would likely adversely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are no assurances that we will be able to consummate any such transaction. There are no current plans to raise additional debt or equity capital, nor is there a projected need to raise any such capital.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, other than operating leases, that have or are, in the opinion of management, likely to have a current or future material effect on our financial statements.
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