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| NOIZ > SEC Filings for NOIZ > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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, 2009, 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, 2009, 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.
There have been no changes to our critical accounting policies from those described in our annual report on Form 10-K for the fiscal year ended March 31, 2009.
Recent Accounting Pronouncements
We discuss recently adopted and issued accounting standards in Item 1. Notes to Consolidated Financial Statements - Note 2.
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 June 27, 2009 compared to June 28, 2008
Net sales
Net sales for the thirteen weeks ended June 27, 2009 ("Q1 FY 10") were $7,912,956, an increase of $826,299, or 12% as compared to $7,086,657 for the thirteen weeks ended June 28, 2008 ("Q1 FY 09"). The increase in net sales is primarily attributable to an increase in sales of integrated component sub-systems.
Gross profit margin
Gross margin for Q1 FY 10 was approximately 31% as compared to 42% for Q1 FY 09. The decrease is due primarily to weakness in our commercial components and start-up costs associated with the March 2009 acquisition of our RFID product line.
Research and development
Research and development ("R&D") expense for Q1 FY 10 was $306,422 as compared to $342,093 for Q1 FY 09 or a decrease of $35,671 or 1%. Our research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our assessment of future business opportunities. The amount of reduction in research and development expense in Q1 FY 10 as compared to FY Q1 09 reflects normal variability in the context of our product development requirements. We expect total year research and development expense for Fiscal 2010 to be lower than Fiscal 2009 due to lower spending requirements for in-flight, high-speed internet transceiver and commercial telecom products.
Selling, general and administrative
Selling, general and administrative ("SG&A") expense for Q1 FY 10 was $2,023,743 as compared to $2,199,587 for Q1 FY 09, representing a decrease of $175,844 or 8%. Approximately half of the reduction is due to cost reductions in our commercial components business, which have experienced sales and margin erosion. The remaining other half of the reduction is primarily due to lower non-cash stock compensation expense.
Amortization of intangible assets
Amortization expense attributable to our intangible assets related to the acquisitions of Stealth, MICA and RFID was $87,023 in Q1 FY 10 as compared to $177,106 in Q1 FY 09 or a decrease of $90,083. Approximately $110,000 of the decrease was due to an intangible asset impairment charge, which we recorded in the third quarter of Fiscal 2009, which was offset in part by an increase of approximately $20,000 associated with the acquisition of our RFID product line.
Interest expense
Interest expense for Q1 FY 10 was $130,230 as compared to $98,867 for Q1 FY 09 or an increase of $31,363. The increase was primarily due to higher average borrowings during Q1 FY 10 offset in part by lower average interest rates.
Interest rate swap
An unrealized gain of $35,683 was recorded for Q1 FY 10 as compared to $102,801 recorded in Q1 FY 09 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 for Q1 FY 10 was 42% as compared to 44% for Q1 FY 09.
Backlog
Our backlog is approximately $27 million as of June 27, 2009 as compared to approximately $23 million as of June 28, 2008. The increase in our backlog is primarily a result of orders for integrated sub-assemblies.
Financial Condition, Liquidity and Capital Resources
We finance our operating and investment requirements primarily through operating cash flows and borrowings. Cash equivalents and marketable securities was $388,370 and $620,259, respectively, at June 27, 2009 and March 31, 2009. Working capital defined as accounts receivable, inventory, prepaid expenses, other current assets net of accounts payable and accrued expenses was $12,486,354 and $11,549,933 at June 27, 2009 and March 31, 2009, respectively. Borrowings under our revolving line of credit were $4,179,878 and $3,502,620 at June 27, 2009 and March 31, 2009, respectively.
Our current ratio was approximately 1.84 at June 27, 2009 as compared to 1.92 at March 31, 2009.
Net cash used in operating activities was $265,439 in Q1 FY 10 compared to cash provided by operating activities of $377,358 during Q1 FY 09. In Q1 FY 10, cash provided by net loss after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately $548,000. Approximately $814,000 was used to fund working capital needs, principally receivables of approximately $.6 million and inventory of approximately $.2 million.
In Q1 FY 09, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately $765,000. Approximately $388,000 was used to fund working capital needs. Of this amount, approximately $1 million was provided by the collection of receivables offset by approximately $.9 million used to fund increases in inventory. Approximately $0.4 million was used to fund prepaid expenses and approximately $.1 million was used to fund accounts payable and accrued expenses.
Net cash used in investing activities was $238,103 during Q1 FY 10 as compared to cash provided by investing activities of $249,824 in Q1 FY 09. Q1 FY 10 investing activities was solely comprised of purchased equipment. In Q1 FY 09, we sold investments of $.4 million offset by purchased equipment of $.2 million.
Net cash provided by financing activities was $271,653 during Q1 FY 10 as compared to cash used in financing activities of $360,395 during Q1 FY 09.
In Q1 FY 10, we borrowed approximately $.7 million from our line of credit and repaid term debt and capital lease obligations of approximately $.4 million. In Q1 FY 09, we repaid mortgage and term debt obligations of approximately $.4 million.
In summary, during Q1 FY 10 we used cash of approximately $.2 million and drew on our revolving line of credit for an additional approximately $.7 million for a total use of approximately $.9 million. We generated cash of approximately $.6 million from net income after adjusting for non-cash items. We used approximately $.8 million to fund accounts receivable and inventory, approximately $.4 million to repay debt and approximately $.2 million for capital expenditures.
In Q1 FY 10, we applied for a federal tax refund associated with our prepaid tax asset. In July, we received the refund in the amount of approximately $850,000.
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, we 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.
We 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 we record 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 our 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 rate of 5.2% plus the applicable margin. At June 27, 2009, our interest rate was 8.95%. The final payment for the term loan is in April 2012.
The revolving line of credit bears interest at LIBOR plus the applicable margin. At June 27, 2009, our interest rate was 4.56%. We had $.8 million available under the line at June 27, 2009. The revolving line of credit 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, a minimum current ratio of 1.25:1 and minimum tangible net worth of $7.5 million. We obtained an amendment to the term loan and revolver agreements to include the goodwill and intangible asset impairment charges as an add-back to the EBITDA covenants. We also obtained an Amendment and Waiver Agreement to the term loan and revolver agreements to waive our EBITDA covenants for the thirteen weeks ended June 27, 2009 and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of our amendment, our interest rate will increase from a maximum of LIBOR plus 2.5% to a maximum of LIBOR plus 4.25% for our revolving line of credit and a maximum adjusted LIBOR plus 3.75% for our term loan. The rate decreases to a minimum of LIBOR plus 2.5% based upon future performance. We do not expect the change in rate will have a material adverse affect on our cash flows for Fiscal 2010. At June 27, 2009 we were in compliance with the terms of our amended bank agreement.
Capital leases
Commercial capital leases payable are reflected at their present value based upon interest rates that range from 6.4% to 10.6% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $232,810 for capital lease obligations. Included in long-term debt net of current portion is $135,050 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $24,000 over the lease terms.
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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