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| NOIZ > SEC Filings for NOIZ > Form 10-Q on 10-Feb-2009 | All Recent SEC Filings |
10-Feb-2009
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 thirty-nine weeks ended December 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 thirty-nine weeks ended December 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 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 December 27, 2008 compared to December 31, 2007
Net sales
Net sales for the thirteen weeks ended December 27, 2008 ("Q3 FY 09") were $8,397,750, a decrease of $430,552, or 5% as compared to $8,828,302 for the thirteen weeks ended December 31, 2007 ("Q3 FY 08"). The decrease in sales for Q3 FY 09 is primarily attributable to a decrease in sales of high performance amplifiers for commercial WIMAX and public safety applications of approximately $2.0 million. This decrease was offset by increases in sales for defense jamming and electronic system modernization applications of approximately $0.9 million and an increase in other component sales of approximately $0.7 million. The high performance amplifier WIMAX and public safety contracts were largely completed in Q3 FY 2008. In addition we are experiencing a decline in the commercial market for high performance analog amplifiers necessary for wireless applications which is having an adverse affect on our high performance amplifier sales. We are investing in a digital product offering and shifting our customer mix as a result.
Backlog
Our backlog is approximately $24 million as of December 27, 2008 as compared to approximately $20 million as of September 27, 2008 and approximately $14 million as of March 31, 2008. The increase in our backlog is primarily a result of orders for integrated sub-assemblies.
Gross profit margin
Gross margin decreased to 33% for Q3 FY 09 from 41% for Q3 FY 08. The decrease is due primarily to lower sales of high power amplifiers without a corresponding decrease in fixed costs of approximately 2% as well as a change in the mix of products sold to more products with higher average costs of approximately 4%. In addition we took a charge of approximately $185,000 for inventory obsolescence related to the decline in our high performance amplifier business which adversely affected our gross margin percent of sales by approximately 2%.
Research and development
Research and development ("R&D") expense was $483,682 or an increase of $194,802 for Q3 FY 09 as compared to $288,880 for Q3 FY 08. The increase was primarily due to development work for an in-flight high-speed 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 $1,955,985 for Q3 FY 09 or a decrease of $30,442 as compared to $1,986,427 for Q3 FY 08.
Amortization of intangible assets
Amortization expense attributable to the intangible assets related to the acquisition of Stealth and MICA was $160,857 for Q3 FY 09 as compared to $183,357 for Q3 FY 08.
Impairment of Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142) we test goodwill for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is tested for impairment using a two-step process. The first step is to determine if there is an impairment and the second step is to determine the amount of the impairment.
During the thirteen weeks ended December 27, 2008, we experienced a significant decline in our stock price. As a result of this decline in stock price the Company's market capitalization fell significantly below and continues to remain significantly below the recorded value of its consolidated net assets. We experienced a decline in the commercial market for high performance analog amplifiers necessary for wireless applications, which is having an adverse affect on our high performance amplifier sales. Lastly, the recent dramatic downturn in the liquidity and economic outlook has caused us to re-evaluate our business outlook. We now believe we are in a one to two year period of slow growth which is driven by the global liquidity crisis and resultant economic decline. Prior to this time and at our March 31, 2008 goodwill assessment date we assumed an environment of good liquidity availability and healthy, sustained economic growth. Accordingly, in the thirteen weeks ended December 27, 2008, we performed a step 1 assessment of goodwill for impairment. The results of our step 1 assessment indicate that we have a goodwill impairment. SFAS No. 142 provides that if there is not enough time to complete the step 2 analysis prior to a filing date, we should book an estimate and adjust the estimate in the next filing period once the step 2 analysis has been completed. The Company has recorded an estimated goodwill impairment charge based upon the step 1 assessment of approximately $4.9 million and $3.1 million for the high performance amplifier and mixer/ferrite reporting units, respectively. The impairment charge is the result of the assumptions described above and are sensitive to an assumption of strong, sustained growth coupled with a rebound in the commercial, high performance amplifier business and customer base. There remains approximately $1.1 million of goodwill associated with our power amplifier, noise module, phase shifter, switches and attenuator product group for which the estimated fair value exceeded its carrying value at December 27, 2008. In preparing the goodwill impairment test for this reporting unit we assumed operating margin performance consistent with historical performance and revenue growth of approximately 3%. If actual results are significantly different than these assumptions, the associated goodwill may be subject to an impairment charge. We expect to complete the step 2 analysis in the fourth quarter of fiscal 2009.
In performing the step 1 goodwill assessment, we used, discounted cash flows, sales and EBITDA multiples as the best evidence of fair value. For purposes of testing impairment under SFAS No. 142, we have three separate reporting units with goodwill. Testing was performed separately for each of the three goodwill reporting units and an impairment charge was recorded at two of the goodwill reporting units (high power amplifier and mixer/ferrite product groups). Please see Footnote 6. Intangible Assets and Goodwill for further explanation.
Impairment of Long Lived Assets
In addition, in accordance with SFAS No, 144, Accounting for Impairment or Disposal of Long-Lived Assets, ("SFAS No. 144), in the third quarter of fiscal 2009 we determined that the customer list intangible asset related to the high performance amplifier business was impaired and we recorded a charge of approximately $1.3 million. Please see Footnote 6. Intangible Assets and Goodwill for further explanation.
Interest expense
Interest expense decreased $17,480 or 16% to $90,366 for Q3 FY 09 as compared to $107,846 for Q3 FY 08 primarily due to lower borrowings during Q3 FY 09. Average term debt decreased and was offset in part by an increase in average debt for our revolving line of credit during the third quarter.
Unrealized gain on interest rate swap
An unrealized loss of $112,850 was recorded for Q3 FY 09 as compared to an unrealized loss of $83,973 in Q3 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 33% for Q3 FY 09 as compared to 44% for Q3 FY 08. In the thirteen weeks ended December 27, 2008, we recorded a discrete item of $3.1 million related to a goodwill impairment charge that is non-tax deductible. In addition, there were true-up adjustment charges of approximately $17,000 associated with the filing of our Fiscal 2008 tax return and $3,000 of uncertain tax benefits recognized due to the statute of limitations expiring on the 2005 fiscal tax year for Micronetics, Inc. and Subsidiaries.
Thirty-nine Weeks Ended December 27, 2008 compared to December 31, 2007
The Consolidated Statements of Income for the thirty-nine weeks ended December 31, 2007 include the operations of MICA from the acquisition date of June 5, 2007.
Net sales
Net sales for the thirty-nine weeks ended December 27, 2008 were $22,029,860, a decrease of $2,872,071, or 12% as compared to $24,901,931 for the thirty-nine weeks ended December 31, 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 $6.3 million partially offset in part by an increase of $1.8 million in sales of integrated component sub-systems for jamming and electronic modernization. Component sales increased by approximately $1.6 million of which approximately $0.8 million was the result of the MICA Microwave sales being included for the full period in fiscal year 2009 and a partial period in fiscal year 2008. We are experiencing a decline in the commercial market for high performance amplifiers necessary for wireless applications, which is having an adverse affect on our high performance amplifier sales. We are investing in a digital product offering and shifting our customer mix as well.
Backlog
Our backlog has grown to approximately $24 million as of December 27, 2008 as compared to approximately $20 million as of September 27, 2008 and approximately $14 million as of March 31, 2008. The increase in our backlog is primarily a result of orders for integrated sub-assemblies.
Gross profit margin
Gross margin decreased slightly to 35% for the thirty-nine weeks ended December 27, 2008 as compared to 39% for the thirty-nine weeks ended December 31, 2007. The decrease is due primarily to lower sales of high power amplifiers without a corresponding decrease in fixed costs of approximately 2% and to a lesser degree product mix. In addition, we took a charge of approximately $185,000 for inventory obsolescence in our high performance amplifier business, which adversely affected our gross margin percent of sales by approximately 1%.
Research and development
Research and development ("R&D") expense was $1,214,248 or an increase of $612,904 for the thirty-nine weeks ended December 27, 2008 as compared to $601,344 for the thirty-nine weeks ended December 31, 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 $5,862,572 or an increase of $245,817 for the thirty-nine weeks ended December 27, 2008 as compared to $5,616,755 for the thirty-nine weeks ended December 31, 2007. The increase was primarily attributable to the inclusion of MICA's SG&A expenses for the full thirty-nine weeks ended December 27, 2008 as compared to twenty-eight weeks for the period ended December 31, 2007.
Amortization of intangible assets
Amortization expense attributable to the intangible assets related to the acquisition of Stealth and MICA was $498,820 for the thirty-nine weeks ended December 27, 2008 as compared to $549,807 for the thirty-nine weeks ended December 31, 2007.
Interest expense
Interest expense decreased $103,669 or 27% to $281,023 for the thirty-nine weeks ending December 27, 2008 as compared to $384,692 for the thirty-nine weeks ending December 31, 2007 primarily due to lower borrowings.
Unrealized gain on interest rate swap
An unrealized gain of $1,018 was recorded for the thirty-nine weeks ended December 27, 2008 as compared to an unrealized loss of $154,041 for the thirty-nine weeks ended December 31, 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 32% for the thirty-nine weeks ended December 27, 2008 as compared to 45% for the thirty-nine weeks ended December 31, 2007. In the thirty-nine weeks December 27, 2008, we recorded a discrete item of $3.1 million related to a goodwill impairment charge that is non-tax deductible. In addition, approximately $56,000 of uncertain tax benefits were recognized due to statute of limitations expiring for previously filed tax returns.
Financial Condition, Liquidity and Capital Resources
We finance our operating and investment requirements primarily through operating cash flows and borrowings. We had cash of $49,621 and $3,163,415 at December 27, 2008 and March 31, 2008, respectively. Working capital, defined as accounts receivable, inventory, prepaid expenses net of accounts payable and accrued expenses was $13,518,839 and $8,491,849 at December 27, 2008 and March 31, 2008, respectively. Borrowings under our revolving line of credit were $2,373,042 and zero at December 27, 2008 and March 31, 2008, respectively.
Net cash used in operating activities was $3,161,361 during the thirty-nine weeks ended December 27, 2008 as compared to net cash provided by operating activities of $3,132,796 during the thirty-nine weeks ended December 31, 2007.
In the thirty-nine weeks ended December 27, 2008 cash provided by net loss after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and goodwill and intangible asset impairment charges was approximately $2.2 million. Approximately $3.4 million was used for inventory related largely to contracts in anticipation of future sales. Approximately $1.4 million was used for prepaid expenses, principally prepaid income taxes. Approximately $.6 million was used for receivables resulting from increased sales.
In the thirty-nine weeks ended December 31, 2007 cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and goodwill and intangible asset impairment charges was approximately $3.7 million. Approximately $.4 million was used to fund receivables resulting from increased sales. Approximately $.1 million was used to fund increases in inventory and approximately $0.1 million was used to fund accounts payable and accrued expenses.
Net cash provided by investing activities was $24,687 during the thirty-nine weeks ended December 27, 2008 as compared to net cash used in investing activities of $5,598,706 during the thirty-nine weeks ended December 31, 2007. During the thirty-nine weeks ended December 27, 2008 we purchased equipment of $645,835 and sold investments of $650,000.
During the thirty-nine weeks ended December 30, 2007, we acquired MICA for $3,120,933 and the final earnout payment of $1.5 million was made to the former stockholders of Stealth. Additionally, we purchased equipment of $789,671 and received proceeds of $461,898 related to the sale of the Enon condominium.
Net cash provided by financing activities was $22,880 during the thirty-nine weeks ended December 27, 2008 as compared to cash used in financing activities of $1,584,155 during the thirty-nine weeks ended December 31, 2007.
In the thirty-nine weeks ended December 27, 2008 we borrowed approximately $2.4 million from our line of credit, repaid mortgage obligations of approximately $1.1 million and re-purchased shares of our common stock for approximately $1.2 million.
In the thirty-nine weeks ended December 31, 2007, we re-paid mortgage obligations of approximately $1.7 million and received proceeds from the issuance of common stock of approximately $0.1 million.
In summary, during the thirty-nine weeks ended December 27, 2008 we used cash of approximately $3.1 million and drew on our revolving line of credit for an additional approximately $2.4 million for a total use of approximately $5.5 million. We generated cash of approximately $2.2 million from net income after adjusting for non-cash items and approximately $0.7 million from the sale of investments. We used approximately $3.4 million to fund inventory largely for contracts, approximately $2.0 million for receivables and prepaid taxes, approximately $1.3 million to re-purchase shares of our common stock, approximately $1.1 million to re-pay term debt and approximately $0.6 million for capital expenditures.
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.
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 1.8%, which at December 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 December 27, 2008 was 3.25%. We had $2.6 million available under the line at December 27, 2008. In December 2008 we extended our revolving line of credit by two years. The revolving line of credit now expires in March 2012.
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. The Company obtained an amendment to its term loan and revolver agreements to include the goodwill and intangible asset impairment charges as an add-back to its EBITDA covenants. At December 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 Repurchase Plan
In November 2008 our Board of Directors approved a stock repurchase plan. Pursuant to such plan, in November 2008 we re-purchased 454,107 shares of our common stock for $1,248,314. Under the terms of the stock repurchase plan we may purchase up to a total of 500,000 shares of our common stock.
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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