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| MRM > SEC Filings for MRM > Form 10-K on 20-Apr-2009 | All Recent SEC Filings |
20-Apr-2009
Annual Report
OVERVIEW
CONTINUING OPERATIONS
We are involved in the design, manufacture and sale of electronic component devices offering extremely broad frequency coverage and high performance characteristics, and microstrip, bonded stripline and thick metal-backed Teflon® (PIPE) and mixed dielectric multilayer circuits for communications, defense and aerospace applications. Our operations are conducted primarily through one business segment, electronic components and subsystems.
We are a versatile technologically oriented company specializing in radio frequency Multi-Mix®, stripline, microstrip and discreet element technologies. Of special significance has been the combination of two or more of these technologies into single components and integrated multifunction subassemblies to achieve superior performance and reliability while minimizing package size and weight. Our components and integrated assemblies are found in applications as diverse as satellites, military and commercial aircraft, radar, radio systems, medical diagnostic instruments communications systems and wireless connectivity. We maintain ISO 9001:2000 and AS 9100 registered quality assurance programs. Our components range in price from $0.50 to more than $10,000 and our subsystems range from $500 to more than $1,500,000.
In accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), the results of operations of FMI for the current and prior periods are reported as discontinued operations and not included in the continuing operations figures.
The following table presents our key customers and the percentage of net sales
made to such customers:
2008 2007
Raytheon Company 16.7 % 16.6 %
Northrop Grumman Corporation 14.6 % 7.0 %
The Boeing Company 14.2 % 6.7 %
Lockheed Martin Corporation 13.2 % 11.3 %
ITT Corporation 3.6 % 6.5 %
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We market and sell our products domestically and internationally through a direct sales force and manufacturers' representatives. We have traditionally developed and offered for sale products built to specific customer needs, as well as standard catalog items. The following table provides a breakdown of electronic components sales as derived from initial design orders for products custom designed for specific customer applications, repeat design orders for such products and from catalog sales:
2008 2007
Initial design orders 36 % 24 %
Repeat design orders 52 % 62 %
Catalog sale orders 12 % 14 %
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Orders from our defense and satellite customers were higher during fiscal year 2008 as compared to fiscal year 2007. Nevertheless, in times of armed conflict or war, military spending is concentrated on armaments build up, maintenance and troop support, and not on the research and development and specialty applications that are our core strengths and revenue generators. Our orders during fiscal year 2008 for our Multi-Mix® Microtechnology products exceeded 2007 levels. We anticipate orders to increase in the first quarter of 2009 as compared to the first quarter of 2008, based on inquiries from existing customers, requests to quote from prospective and existing customers and market research. We also expect improved first quarter 2009 sales, as compared to the first quarter of 2008, due to the higher backlog that resulted from the increase in orders for 2008.
In 2008, we had a 33.5% increase in sales over 2007 which led to an operating income from continuing operations of approximately $676,000. The increase in sales was a result of a strong backlog at the end of 2007 and a high volume of orders received throughout 2008. Included in the sales for 2008 were four large orders from major customers which combined were in excess of $4,000,000. The higher volume of sales during 2008 had a positive impact on the absorption of our fixed manufacturing costs. The resulting increase in our gross profit combined with reductions in our research and development costs and our efforts to keep selling, general and administrative expenses from growing relative to sales has restored us to profitability. We expect that due to the strong back log of orders we have at the end of 2008 and our efforts to keep costs down that we will remain profitable in 2009.
Our cost of sales consists of materials, salaries and related expenses, and outside services for manufacturing and certain engineering personnel and manufacturing overhead. Our products are designed and manufactured in our two facilities. Our manufacturing and production facilities infrastructure overhead are relatively fixed and are based on our expectations of future net sales. Should we experience a reduction in net sales in a quarter, we could have difficulty adjusting short-term expenditures and absorbing any excess capacity expenses. If this were to occur, our operating results for that quarter would be negatively impacted. In order to remain competitive, we must continually reduce our manufacturing costs through design and engineering innovations and increases in manufacturing efficiencies. There can be no assurance that we will be able to reduce our manufacturing costs.
Depreciation and amortization expenses exceeded capital expenditures for new projects and production equipment during 2008 by approximately $1.7 million, and we anticipate that depreciation and amortization expenses will exceed capital expenditures in fiscal year 2009 by approximately $1.9 million. We intend to issue up to $600,000 of purchase order commitments for capital equipment from various vendors and we anticipate that such equipment will be purchased and become operational during fiscal year 2009. Our planned equipment purchases and other commitments are expected to be funded through cash resources and cash flows expected to be generated from operations, and supplemented by our $5,000,000 revolving credit facility with Wells Fargo.
Selling, general and administrative expenses consist of personnel costs for administrative, selling and marketing groups, sales commissions to employees and manufacturing representatives, travel, product marketing and promotion costs, as well as legal, accounting, information technology and other administrative costs. We do not expect to significantly increase our expenditures for selling, general and administrative expenses in the coming year.
Research and development expenses consist of materials, salaries and related expenses of certain engineering personnel, and outside services related to product development projects. We charge all research and development expenses to operations as incurred. We believe that continued investment in research and development is critical to our long-term business success. We intend to continue to invest in research and development programs in future periods focusing our efforts on Multi-Mix® process enhancements for military and space market applications. However, overall we expect to reduce our research and development expenditures in fiscal 2009 as a result of limiting our investment in speculative funding of the commercial segment.
DISCONTINUED OPERATIONS
Filtran Microcircuits Inc. ("FMI") was established in 1983, and we acquired FMI in February 1999. FMI is a manufacturer of microwave micro-circuitry for the high frequency communications industry. FMI has been engaged in the production of microstrip, bonded stripline, and thick metal-backed Teflon® (PTFE) microcircuits for RF applications including satellite, aerospace, PCS, fiber optic telecommunications, automotive, navigational and defense applications worldwide. FMI has supplied mixed dielectric multilayer and high speed interconnect circuitry to meet customer demand for high performance and cost-effective packaging.
Our management determined, and the Board of Directors approved on August 9, 2007, that the we should divest our FMI operations with the view to enable us to concentrate our resources on RF Microwave and Multi-Mix® Microtechnology product lines to generate sustainable, profitable growth. Beginning with the third quarter of 2007, we reflected FMI as a discontinued operation and the we reclassified prior financial statements to reflect the results of operations, financial position and cash flows of FMI as discontinued operations.
On December 28, 2007, we sold substantially all of the assets of FMI to Firan Technology Group Corporation, a manufacturer of high technology/high reliability printed circuit boards that has operations in Toronto, Ontario, Canada and Chatsworth, California. The transaction was effected pursuant to an asset purchase agreement entered into between Merrimac, FMI and FTG. The total consideration payable by FTG was $1,482,000 (Canadian $1,450,000) plus the assumption of certain liabilities of approximately $368,000 (Canadian $360,000). FTG paid $818,000 (Canadian $800,000) of the purchase price at the closing on December 28, 2007 and the balance was paid on February 21, 2008 following the conclusion of a transitional period.
Operating results of FMI, which were formerly represented as our microwave micro-circuitry segment, are summarized as follows:
January 3, 2009 December 29, 2007
Net sales $ - $ 3,628,000
Loss from discontinued operations before provision for
income taxes $ (142,000 ) $ (5,877,000 )
Gain on sale of assets of discontinued operation - 1,936,000
Provision for income taxes - 446,000
Loss from discontinued operations $ (142,000 ) $ (4,387,000 )
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CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our management makes certain assumptions and estimates that impact the reported amounts of assets, liabilities and stockholders' equity, and sales and expenses. These assumptions and estimates are inherently uncertain. The management judgments that are currently the most critical are related to the accounting for our investments in Multi-Mix® Microtechnology, contract revenue recognition, inventory valuation and valuation of deferred tax assets. Below is a further description of these policies as well as the estimates involved.
Contract Revenue Recognition
We derive our revenues from sales of the following: customized products, which include amounts billable for non-recurring engineering services and in some instances the production and delivery of prototypes, and the subsequent production and delivery of units under short-term, firm-fixed price contracts; the design, documentation, production and delivery of a series of complex components under long-term firm-fixed price contracts and the delivery of off-the-shelf standard products.
We account for all contracts, except those for the sale of off-the-shelf standard products, in accordance with AICPA Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1").
We recognize all amounts billable under short-term contracts involving non-recurring engineering ("NRE") services for customization of products in net sales and all related costs in cost of sales under the completed-contract method when the customized units are delivered. We periodically enter into contracts with customers for the development and delivery of a prototype prior to the shipment of units. Under those circumstances, we recognize all amounts billable for NRE services in net sales and all related costs in cost of sales when the prototype is delivered and recognizes all of the remaining amounts billable and the related costs when the units are delivered.
Increasingly, we have complex, long-term contracts for the engineering design, development and production of space electronics products for which revenue is recognized under the percentage-of-completion method. Sales and related contract costs for design and documentation services under this type of contract are recognized based on the cost-to-cost method. Sales and related contract costs for products delivered under these contracts are recognized on the units-of-delivery method. We have one contract which is primarily related to the design and development (and to a lesser extent, the production of space electronics) for which revenue under the entire contract is recognized under the percentage-of-completion method using the cost-to-cost method. For such contract we recognized revenues in excess of billings of approximately $1,880,000 at January 3, 2009.
Pursuant to SOP 81-1, anticipated losses on all contracts are charged to operations in the period when the losses become known.
Sales of off-the-shelf standard products and related costs of sales are recorded when title transfers to our customer, which is generally on the date of shipment, provided persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collection of the related receivable is probable.
Inventory Valuation
Inventories are valued at the lower of average cost or market. Inventories are periodically reviewed for their projected manufacturing usage utilization and, when slow-moving or obsolete inventories are identified, they are charged to operations. Total inventories are net of cost overruns of $52,000 and $202,000, respectively.
Procurement of inventories is based on specific customer orders and forecasts. Customers have certain rights of modification with respect to these orders and forecasts. As a result, customer modifications to orders and forecasts affecting inventories previously procured by us and our purchases of inventories beyond customer needs may result in excess and obsolete inventories for the related customers. Although we may be able to use some of these excess components and raw materials in other products we manufacture, a portion of the cost of this excess inventories may not be recoverable from customers, nor may any excess quantities be returned to the vendors. We also may not be able to recover the cost of obsolete inventories from vendors or customers.
Write offs or write downs of inventories generally arise from:
· declines in the market value of inventories;
· changes in customer demand for inventories, such as cancellation of orders; and
· our purchases of inventories beyond customer needs that result in excess quantities on hand and that we are not able to return to the vendor or charge back to the customer.
Valuation of Deferred Tax Assets
We currently have significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences, which should reduce taxable income in future periods. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax assets will not be realized. Our 2002, 2003, 2006 and 2007 net losses weighed heavily in our overall assessment. As a result of the assessment, we established a full valuation allowance for our remaining net domestic deferred tax assets at December 28, 2002. This assessment continued unchanged from 2003 through fiscal 2008.
CONSOLIDATED STATEMENTS OF OPERATIONS SUMMARY
The following table reflects the percentage relationships of items from the
consolidated statements of operations as a percentage of net sales.
Percentage of Net Sales
Years Ended
January 3, December 29,
2009 2007
(Restated)
Net sales 100.0 % 100.0 %
Costs and expenses:
Cost of sales 62.3 60.2
Selling, general and administrative 31.5 38.6
Research and development 3.5 7.2
Restructuring charge 0.2 -
97.5 106.0
Operating income (loss) 2.5 (6.0 )
Interest and other expense, net (1.4 ) (.6 )
Income (loss) from continuing operations before income taxes 1.1 (6.6 )
Provision for income taxes (0.1 ) -
Income (loss) from continuing operations 1.0 (6.6 )
Loss from discontinued operations, net of income taxes (0.5 ) (20.0 )
Net income (loss) 0.5 % (26.6 )%
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All 2007 information presented reflects the consolidated financial information for 2007 as restated, see Item 8, Note 2 for further details of the restatement.
Net sales.
Consolidated results of operations for 2008 reflect an increase in net sales from continuing operations of $7,342,000 or 33.5% to $29,229,000 compared to $21,887,000 in 2007. The sales increase in 2008 was a result of a higher backlog at the beginning of the year and continued high levels of orders throughout the year including a higher level of sales of Multi-Mix® products. Also, included in fiscal year 2008's sales were four large orders shipped to major customers that totaled over $4,000,000. Sales for 2008 included $1,900,000 of revenue recognized in connection with a large design and development contract.
Backlog represents the amount of orders we have received that have not been shipped as of the end of a particular fiscal period. The orders in backlog are a measure of future sales and determine our upcoming material, labor and service requirements. The book-to-bill ratio for a particular period represents orders received for that period divided by net sales for the same period. We look for this ratio to exceed 1.0, indicating the backlog is being replenished at a higher rate than the sales being removed from the backlog.
The following table presents key performance measures that we use to monitor our operating results:
2008 2007
Beginning backlog $ 17,991,000 $ 11,490,000
Plus bookings 32,205,000 28,388,000
Less net sales 29,229,000 21,887,000
Ending backlog $ 20,967,000 $ 17,991,000
Book-to-bill ratio 1.10 1.30
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Orders of $32.2 million, a new Merrimac record for a fiscal year, were received during fiscal year 2008, an increase of $3.8 million or 13.4% compared to $28.4 million in orders received during fiscal year 2007. Backlog increased by $3.0 million or 16.7% to $21.0 million at the end of fiscal year 2008 compared to $18.0 at year-end 2007, due to the increased orders received during 2008. The book-to-bill ratio for fiscal year 2008 was 1.10 to 1 and for fiscal year 2007 was 1.30 to 1.
The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent, which we have determined are legally binding and likely to proceed. Although backlog represents only business that is considered likely to be performed, cancellations or scope adjustments may and do occur. The elapsed time from the award of a contract to completion of performance may be up to approximately four years. The dollar amount of backlog is not necessarily indicative of our future earnings related to the performance of such work due to factors outside our control, such as changes in project schedules, scope adjustment or project cancellations. We cannot predict with certainty the portion of backlog to be performed in a given year. Backlog is adjusted quarterly to reflect project cancellations, deferrals, revised project scope and cost, and sales of subsidiaries, if any.
Cost of sales and gross profit.
The following table provides comparative gross profit information for the past two years:
2007
2008 (Restated)
Increase/(Decrease) % of Increase/(Decrease) % of
$ From Prior Year Net Sales $ From Prior Year Net Sales
Gross profit $ 10,954,000 $ 2,251,000 37.5 % $ 8,703,000 $ (471,000 ) 39.8 %
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Gross profit for fiscal year 2008 was $10,954,000, an increase of $2,251,000 or 25.9%, over last year's gross profit of $8,703,000. Gross margin declined by 2.3% to 37.5% compared to 39.8% in fiscal year 2007. The small decline in gross margin was primarily due to the impact of an aggressive pricing strategy in 2007 and in early 2008 when our backlog was not as high. The pricing strategy had a significant impact on the four large jobs fulfilled in 2008.
Selling, general and administrative expenses.
Selling, general and administrative expenses were $9,198,000 an increase of $763,000 or 9.0% over the selling, general and administrative expenses of $8,435,000 for 2007. When expressed as a percentage of net sales, selling, general and administrative expense decreased from 38.5% in 2007 to 31.5% in 2008. The 2008 selling, general and administrative expenses increased due to a combination of increased selling costs related to the hiring of sales personnel to meet the demand of increased sales, sales commissions and increased professional fees.
Research and development expenses.
Research and development expenses for new products were $1,019,000 for 2008, a decrease of $560,000 or 35.5%. The decrease reflects our decision to focus our research and development efforts on military and space applications and reduce our investment in speculative commercial applications. Substantially all of the research and development expenses were related to Multi-Mix® Microtechnology.
Restructuring charge
In 2008, we reduced our headcount by 8 persons, principally involved in production and manufacturing support. The restructuring charges of $61,000 consisted of severance and certain other personnel costs, during the third quarter of 2008. We did not incur any restructuring charges in 2007.
Operating income (loss) from continuing operations.
Consolidated operating income from continuing operations was $676,000 for 2008 compared to consolidated operating loss from continuing operations of $1,311,000 for 2007. The increase in income (loss) from continuing operations was primarily due to the increase in gross profit resulting from higher sales and the reduction of research and development expenses. These were somewhat offset by increased selling general and administrative expenses and our restructuring charge.
Interest expense.
Interest and other expense, net was $459,000 for 2008 compared to interest and other expense, net of $277,000 for 2007. The increase in interest expense of $182,000 was primarily due to the accelerated amortization of approximately $196,000 of unamortized deferred debt costs charged to interest expense that related to our terminated financing agreement with Capital One, N.A.
Other income, net
Other income, net was $42,000 for 2008 compared to $154,000 in 2007. The decrease of $112,000 was primarily due to the decrease in interest income that resulted from a combination of lower average cash balances in 2008 compared to 2007 and declining interest rates in 2008.
Income taxes.
The provision for income taxes from continuing operations for 2008 was approximately $20,000. There was no provision or benefit for income taxes from continuing operations for 2007.
As of January 3, 2009, we had significant deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences, which should reduce our income taxes in future periods. A valuation allowance is required when management assesses that it is more likely than not that all or a portion of a deferred tax asset will not be realized. Our 2002, 2003, 2006 and 2007 net losses have weighed heavily in our overall assessments. We established a full valuation allowance for its remaining U.S. net deferred tax assets as a result of its assessment at December 28, 2002. This assessment continued unchanged from 2003 through the end of fiscal year 2008.
Income (loss) from continuing operations.
For the reasons set forth above, income from continuing operations for 2008 was $240,000 compared to a loss from continuing operations of $1,435,000 for 2007. Income from continuing operations for 2008 was $0.08 per share compared to a loss from continuing operations of $0.48 per share for 2007.
Discontinued operations.
Loss from discontinued operations for 2008 was $142,000 compared to a loss from discontinued operations of $4,387,000 for 2007. The 2008 loss from discontinued operations consisted of certain ongoing professional fees, claim defense deductibles and certain other expenses. The loss from discontinued operations in 2007 includes a partial goodwill impairment charge of $3,576,000 and a charge of $506,000 to provide a full valuation allowance of a Canadian net deferred tax asset, for a total of $4,082,000 of non cash charges. Loss per share from discontinued operations for 2008 was $0.05 compared to a loss from discontinued operations of $1.48 per share for 2007.
Net income (loss).
Net income for 2008 was $98,000 compared to a net loss of $5,821,000 for 2007 for the reasons described above. Net income per share basic and diluted for 2008 was $0.03, compared to a net loss of per share basic and diluted for 2007 of $1.96.
LIQUIDITY AND CAPITAL RESOURCES
Liquid resources comprised of cash and cash equivalents totaled approximately $1,192,000 at January 3, 2009 compared to approximately $2,004,000 at December 29, 2007. Our working capital was approximately $11,090,000 and our current ratio was 4.5 to 1 at January 3, 2009 compared to $9,565,000 and 3.5 to 1, respectively, at December 29, 2007. At January 3, 2009, we had available . . .
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