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| NOIZ > SEC Filings for NOIZ > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 revenue recognition, allowances for doubtful accounts, inventory valuation and obsolescence, long-lived assets, business combination purchase price allocation for acquired businesses 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 performance 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 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 applications and/or Fortune 500 companies with world-wide operations.
A key driver of demand for our 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 26, 2009 compared to September 27, 2008
Net sales
Net sales for the thirteen weeks ended September 26, 2009 ("Q2 FY 10") were $8,820,211, an increase of $2,274,758, or 35% as compared to $6,545,453 for the thirteen weeks ended September 27, 2008 ("Q2 FY 09"). Approximately $0.7 million of the increase is due to our recently acquired RFID technology and is for the beta test portion of a purchase agreement containing an option for full scale production roll-out upon successful completion of this phase. The beta test is currently underway. Approximately $0.6 million of the increase is due to a contract for components for a space based application. We expect this contract to be largely completed by the fourth quarter of Fiscal 2010. Approximately $0.6 million of the increase is due to an increase in sales of integrated component sub-systems for defense jamming and electronic system modernization applications. Approximately $0.4 million of the increase is due to component sales.
Gross margin
Gross margin for Q2 FY 10 was approximately 33% as compared to 32% for Q2 FY 09. The gross margin increased due to improved margins in commercial components and was offset to some degree by start-up costs to support our growing backlog related to integrated component sub-systems.
Research and development
Research and development ("R&D") expense for Q2 FY 10 was $539,640 as compared to $388,473 for Q2 FY 09 or an increase of $151,167 or 39%. The increase in R&D spending is due to a new high power, digital pre-distortion amplifier product line for commercial applications and a complex integrated assembly for a defense application which more than offset decreased spending on an in-flight high-speed internet transceiver product. 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. 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 expense for Q2 FY 10 was $1,812,821 as compared to $1,707,000 for Q2 FY 09, representing a increase of $105,821 or 6%. Stock compensation expense decreased by approximately $120,000. Approximately half of the decrease is due to forfeitures and the remainder is due primarily to options being fully expensed. Bad debt expense increased by approximately $110,000 and all other expenses increased by approximately $115,000 as compared to Q2 FY 09.
Amortization of intangible assets
Amortization expense attributable to our intangible assets related to the acquisitions of Stealth, MICA and RFID was $87,023 in Q2 FY 10 as compared to $160,857 in Q2 FY 09 or a decrease of $73,834. Approximately $104,000 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 Q2 FY 10 was $138,213 as compared to $91,790 for Q2 FY 09 or an increase of $46,423. The increase was primarily due to higher average borrowings during Q2 FY 10 and to a lesser degree by slightly higher average borrowings in the first two quarters of Fiscal 2010.
Interest rate swap
An unrealized gain of $18,927 was recorded for Q2 FY 10 as compared to $11,067 recorded in Q2 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 Q2 FY 10 was 42% as compared to 44% for Q2 FY 09.
Backlog
Our backlog is approximately $31 million as of September 26, 2009 as compared to approximately $20 million as of September 27, 2008. The increase in our backlog is primarily a result of orders for integrated sub-assemblies.
Twenty-Six Weeks Ended September 26, 2009 compared to September 27, 2008
Net sales
Net sales for the twenty-six weeks ended September 26, 2009 were $16,733,167, an increase of $3,101,057, or 23% as compared to $13,632,110 for the twenty-six weeks ended September 27, 2008. Of the increase approximately $1.6 million is due to an increase in sales of integrated component sub-systems for defense jamming and electronic system modernization applications. Approximately $0.7 million of the increase is due to our recently acquired RFID technology and is for the beta test portion of a purchase agreement containing an option for full scale production roll-out upon successful completion of this phase. The beta test is currently underway. Approximately $0.7 million of the increase is due to a contract for components for a space based application. We expect this contract to be largely completed by the fourth quarter of Fiscal 2010.
Gross margin
Gross margin decreased to 32% for the twenty-six weeks ended September 26, 2009 as compared to 37% for the twenty-six weeks ended September 27, 2008. The decrease in gross margin was due to lower margins related to weakness in commercial components, start-up costs associated with the March 2009 acquisition of our RFID product line and start-up costs to support our growing backlog related to integrated component sub-systems.
Research and development
Research and development ("R&D") expense was $846,062 an increase of $115,496 for the twenty-six weeks ended September 26, 2009 as compared to $730,566 for the twenty-six weeks ended September 27, 2008. The increase in R&D spending is due to a new high power, digital pre-distortion amplifier product line for commercial applications and a complex integrated assembly for a defense application which more than offset decreased spending on an in-flight high-speed internet transceiver product. 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 expense was $3,836,564 a decrease of $70,023 for the twenty-six weeks ended September 26, 2009 as compared to $3,906,587 for the twenty-six weeks ended September 27, 2008. Stock compensation decreased by approximately $228,000. Approximately $55,000 of the decrease is due to forfeitures and the remainder is primarily due to options being fully expensed. In addition, bad debt expense increased by approximately $127,000.
Amortization expense
Amortization expense attributable to the intangible assets related to the acquisition of Stealth, MICA and RFID was $174,046 for the twenty-six weeks ended September 26, 2009 as compared to $337,963 for the twenty-six weeks ended September 27, 2008 or a decrease of $163,917. Approximately $215,000 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 $40,000 associated with the acquisition of our RFID product line.
Interest rate swap
An unrealized gain of $54,610 was recorded for the twenty-six weeks ended September 26, 2009 as compared to an unrealized gain of $113,868 for the twenty-six weeks ended September 27, 2008 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 42% for the twenty-six weeks ended September 26, 2009 as compared to 44% for the twenty-six weeks ended September 27, 2008. In addition, we recorded $72,000 in uncertain tax benefits in the tax provision for the twenty-six weeks ended September 27, 2008 which did not recur in the twenty-six weeks ended September 26, 2009 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 flows and borrowings. Cash equivalents and marketable securities were $542,761 and $620,259, respectively, at September 26, 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 $12,078,870 and $11,549,933 at September 26, 2009 and March 31, 2009, respectively. Borrowings under our revolving line of credit were $4,231,478 and $3,502,620 at September 26, 2009 and March 31, 2009, respectively.
Our current ratio was approximately 1.77 at September 26, 2009 as compared to 1.92 at March 31, 2009.
In the twenty-six weeks ended September 26, 2009 net cash provided by operating activities was $751,683 as compared to cash used in operating activities of $798,722 for the twenty-six weeks ended September 27, 2008.
In the twenty-six weeks ended September 26, 2009, 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 $1.2 million. Approximately $.5 million was used to fund working capital needs. Of the amount, approximately $1.4 million was used to fund receivables as a result of higher sales and approximately $.4 million was used to fund inventory requirements. A tax refund net of tax payments provided approximately $.6 million, increases in accounts payable and accrued expenses provided approximately $.5 million and cash received and recorded as deferred revenue provided approximately $.2 million
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.
Net cash used in investing activities was $735,382 during the twenty-six weeks ended September 26, 2009 as compared to cash used in investing activities of $44,232 in the twenty-six weeks ended September 27, 2008. In the twenty-six weeks ended September 26, 2009 investing activities was solely comprised of purchased equipment. In the twenty-six weeks ended September 27, 2008, we sold investments of $.4 million offset by purchased equipment of approximately $.5 million.
Net cash used for financing activities was $93,799 during the twenty-six weeks ended September 26, 2009 as compared to net cash used for financing activities of $730,522 during the twenty-six weeks ended September 27, 2008.
In the twenty-six weeks ended September 26, 2009, we borrowed approximately $.7 million from our line of credit and repaid term debt and capital lease obligations of approximately $.8 million. In the twenty-six weeks ended September 27, 2008, we repaid mortgage, term debt obligations and capital leases of approximately $.7 million.
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 September 26, 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 September 26, 2009, our interest rate was 4.51%. We had $.8 million available under the line at September 26, 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 and to substitute modified quarterly EBITDA covenants through March 31, 2010. Under the terms of our amendment, our interest rate increased 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. In October 2009 we obtained an additional waiver and amendment to our quarterly EBITDA covenants and remain in compliance with our amended bank covenants. We obtained the additional waiver and amendment because the second quarter EBITDA test did not anticipate an acceleration of EBITDA into the first quarter and out of the second quarter.
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 $160,061 for capital lease obligations. Included in long-term debt net of current portion is $115,747 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $18,000 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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