Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cautionary Note Regarding Forward Looking Statements
Information included or incorporated by reference in this Quarterly Report on
Form 10-Q may contain forward-looking statements. This information may involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements to be materially different than the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
Examples of forward-looking statements include, but are not limited to,
statements regarding efforts to grow revenue, expectations regarding fulfillment
of backlog, future benefits to operating margins and the adequacy of cash
resources. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" in our Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 30, 2012. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this Quarterly Report on Form 10-Q will
in fact be accurate. Further, we do not undertake any obligation to publicly
update any forward-looking statements. As a result, you should not place undue
reliance on these forward-looking statements.
Results of Operations
Three months ended September 30, 2012, compared to three months ended September
30, 2011
Consolidated Revenues and Gross Margin
Consolidated revenues decreased by $2,322,000, or 24.1%, to $7,307,000 for the
three-month period ended September 30, 2012, from $9,629,000 for the comparable
period in 2011. The decrease is primarily due to reduced demand from existing
customers for existing products in our Internet Communications Technology
("ICT") and Military, Aeronautics and Instrumentation ("Mil/Aero") market
segments, as well as the effects of weakness in the global macroeconomic
environment. Specifically, decreases in ICT were driven by weakness in
telecommunications network infrastructure spending during the second half of
2011 and the first three quarters of 2012, and decreases in Mil/Aero were due to
uncertainty related to government budget and spending cycles. The Company is
continuing its efforts to gain market share with new and existing customers in
all of its geographic regions, and by focusing research and development efforts
on the development of products that will serve additional segments of the timing
and frequency control markets, such as wireless infrastructure, energy
exploration, homeland security, avionics and military personnel protection.
As of September 30, 2012, the Company's order backlog was $8,745,000, which was
a decrease of 8.2% compared to the backlog as of June 30, 2012, which was
$9,526,000, and a decrease of 4.1% compared to the backlog as of September 30,
2011, which was $9,119,000. The decrease in backlog from June 30, 2012, is
primarily due to a modest decrease in order activity from our existing customers
in the Mil/Aero market segment, as well as continued delays in infrastructure
investment affecting our Telecommunications market segment. The backlog of
unfilled orders includes amounts based on signed contracts as well as other
agreements 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.
Backlog is adjusted quarterly to reflect project cancellations, deferrals,
revised project scope and cost, and sales of subsidiaries, if any. The Company
expects to fill substantially its entire current backlog within the next twelve
months, but cannot provide assurance as to the portion of the backlog to be
fulfilled in a given period.
Page 13
Consolidated gross margin, which is consolidated revenues less manufacturing
cost of sales, as a percentage of revenues decreased to 24.5% for the three
months ended September 30, 2012, from 28.0% for the comparable period in 2011.
This decrease is due primarily to the 24.1% decrease in revenues from the
comparable period in 2011, which eroded gross margin by spreading fixed
infrastructure costs over a smaller revenue base. The Company is continuing its
efforts to improve gross margins by increasing its revenue base and by seeking
cost efficiencies within its manufacturing supply chain.
Operating Income (Loss)
Operating loss was ($456,000) for the three months ended September 30, 2012,
compared to operating income of $122,000 for the comparable period in 2011.
This decrease is primarily the result of the 24.1% decrease in revenues as
compared to the same period in 2011. The decrease was offset by a reduction of
$328,000 in engineering, selling and administrative expenses as compared to the
same period in 2011, primarily due to the consolidation of certain
administrative functions into the Company's headquarters in Orlando, Florida,
and a decrease in sales commissions paid as a result of the lower level of
revenues.
Interest Expense
Interest expense was $23,000 for the three months ended September 30, 2012,
which was a decrease of $18,000 from $41,000 for the three months ended
September 30, 2011. The decrease was due to a reduction in the average
outstanding balance on MtronPTI's credit facilities for the quarter ended
September 30, 2012.
Net Income (Loss)
The net loss for the three months ended September 30, 2012, was ($314,000)
compared to net income of $91,000 for the comparable period in 2011. The
decrease was primarily attributable to the 24.1% decrease in revenues and a 3.5
percentage point decrease in gross margin for the three months ended September
30, 2012, as compared to the same period in 2011. Basic and diluted net loss per
share for the three months ended September 30, 2012, was ($0.12) compared with
basic and diluted net income per share of $0.03 for the three months ended
September 30, 2011.
Nine months ended September 30, 2012, compared to nine months ended September
30, 2011
Consolidated Revenues and Gross Margin
Consolidated revenues decreased by $6,232,000, or 22.0%, to $22,063,000 for the
nine-month period ended September 30, 2012, from $28,295,000 for the comparable
period in 2011. The decrease is primarily due to reduced demand from existing
customers for existing products in our ICT and Mil/Aero market segments, as well
as the effects of weakness in the global macroeconomic environment.
Specifically, decreases in ICT were driven by weakness in telecommunications
network infrastructure spending during the second half of 2011 and the first
three quarters of 2012, and decreases in Mil/Aero were due to uncertainty
related to government budget and spending cycles. The Company is continuing its
efforts to gain market share with new and existing customers in all of its
geographic regions, and by focusing research and development efforts on the
development of products that will serve additional segments of the timing and
frequency control markets, such as wireless infrastructure, energy exploration,
homeland security, avionics and military personnel protection.
As of September 30, 2012, the Company's order backlog was $8,745,000, which was
an increase of 1.3% compared to the backlog as of December 31, 2011, which was
$8,634,000, and a decrease of 4.1% compared to the backlog as of September 30,
2011, which was $9,119,000. The increase in backlog from December 31, 2011, is
primarily due to a modest increase in order activity from our existing customers
in the Mil/Aero market segment, as well as requests to accelerate existing order
request dates to fall within the 12-month timeframe reflected in the order
backlog. The backlog of unfilled orders includes amounts based on signed
contracts as well as other agreements 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.
Page 14
Backlog is adjusted quarterly to reflect project cancellations, deferrals,
revised project scope and cost, and sales of subsidiaries, if any. The Company
expects to fill substantially its entire current backlog within the next twelve
months, but cannot provide assurance as to the portion of the backlog to be
fulfilled in a given period.
Consolidated gross margin, which is consolidated revenues less manufacturing
cost of sales, as a percentage of revenues decreased to 24.5% for the nine-month
period ended September 30, 2012, from 30.8% for the comparable period in 2011.
This decrease is due primarily to the 22.0% decrease in revenues compared to
the comparable period in 2011, which reduced gross margin by spreading fixed
infrastructure costs over a smaller revenue base. The Company is continuing its
efforts to further improve its manufacturing and supply chain efficiency.
Operating Income (Loss)
Operating loss was ($1,547,000) for the nine months ended September 30, 2012,
compared to operating income of $1,069,000 for the comparable period in 2011.
This decrease was primarily the result of the 22.0% decrease in revenues as
compared to the same period in 2011. The decrease was offset by a reduction of
$691,000 in engineering, selling and administrative expenses as compared to the
same period in 2011, primarily due to the consolidation of certain
administrative functions into the Company's headquarters in Orlando, Florida,
and a decrease in sales commissions paid as a result of the lower level of
revenues.
Interest Expense
Interest expense was $78,000 for the nine-month period ended September 30, 2012,
which was a decrease of $4,000 from $82,000 for the comparable period in 2011.
The decrease was due to a reduction in the average outstanding balance on
MtronPTI's credit facilities for the nine months ended September 30, 2012.
Net Income (Loss)
Net loss for the nine-month period ended September 30, 2012, was ($1,122,000)
compared to net income of $678,000 for the comparable period in 2011. The
decrease was primarily attributable to a 22.0% decrease in revenues and a 6.3
percentage point decrease in gross margin for the nine-month period ended
September 30, 2012, as compared to the same period in 2011. Basic and diluted
net loss per share for the nine months ended September 30, 2012, was ($0.43)
compared with net earnings per share of $0.26 for the nine months ended
September 30, 2011.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 2012, were $9,484,000
as compared to $13,709,000 at December 31, 2011. At September 30, 2012,
MtronPTI had approximately $1,450,000 outstanding and available borrowing
capacity of $50,000 under the Chase Revolving Loan, compared with $3,026,000
outstanding and available borrowing capacity of $389,000 at December 31, 2011.
At September 30, 2012, the Company's consolidated working capital was
$16,396,000 as compared to $18,118,000 at December 31, 2011. At September 30,
2012, the Company had current assets of $21,716,000 and current liabilities of
$5,320,000. The ratio of current assets to current liabilities was 4.08 to 1.00
at September 30, 2012, compared to 3.65 to 1.00 at December 31, 2011.
Cash provided by operating activities was $1,000 for the nine months ended
September 30, 2012, compared to cash provided by operating activities of
$1,600,000 for the nine months ended September 30, 2011. The decrease was due
primarily to a net loss of ($1,122,000) for the nine months ended September 30,
2012, as compared to net income of $678,000 for the nine months ended September
30, 2011, and a deferred tax benefit of $524,000 for the nine months ended
September 30, 2012, as compared to a deferred tax expense of ($213,000) during
the same period in 2011. The decrease in net income was partially offset by a
decrease in accounts receivable of $260,000 compared to an increase of ($38,000)
during the same period in 2011, and a decrease in inventory of $242,000 compared
to an increase of ($167,000) during the same period in 2011.
Page 15
Cash used in investing activities was ($805,000) for the nine months ended
September 30, 2012, compared to ($1,285,000) for the same period in 2011. The
decrease was due primarily to a reduction in spending on software to replace the
Company's enterprise resource planning systems since that project is nearing
completion.
Cash used by financing activities was ($3,421,000) for the nine months ended
September 30, 2012, compared with cash provided by financing activities of
$9,254,000 for the same period in 2011. The change was due primarily to net
repayments on notes payable to bank of ($1,576,000) as compared to net
borrowings of $3,351,000 for the same prior year period, an increase in
restricted cash of $1,500,000 which was assigned to Chase as additional security
for the MtronPTI's obligations under the Chase Loan Agreement, and due to the
Company's completion of its public offering of 350,000 shares of common stock in
February 2011, resulting in net proceeds of $6,562,000.
At September 30, 2012, total liabilities of $5,320,000 were $1,508,000 less than
the total liabilities at December 31, 2011, of $6,828,000. The decrease in
total liabilities was primarily due to a decrease in borrowings under the Chase
Revolving Loan of $1,576,000 and the Chase Term Loan of $255,000, offset by an
increase in accounts payable of $423,000. At September 30, 2012, the Company had
$145,000 in current maturities of long-term debt compared with $400,000 at
December 31, 2011. The decrease is due to the scheduled repayments of the Chase
Term Loan.
On June 30, 2011, MtronPTI entered into the Chase Loan Agreement with Chase. The
Chase Loan Agreement currently provides for the following credit facilities: (i)
a revolving line of credit in the amount of $1,500,000, to be used solely for
working capital needs, referred to as the Chase Revolving Loan, and (ii) a term
loan in the amount of $536,000, referred to as the Chase Term Loan. The Chase
Revolving Loan bears interest at the greater of (x) Chase's prime rate or (y)
the one-month LIBOR rate plus 2.50% per annum, referred to as the CB Rate, with
interest due and payable on a monthly basis and the outstanding principal
balance plus all accrued but unpaid interest due and payable on June 30, 2013.
The Chase Term Loan bears interest at 5.00% per annum, with principal and
interest due and payable in monthly installments of $29,500 and the outstanding
principal balance, plus all accrued but unpaid interest due and payable on
January 31, 2013. The Chase Loan Agreement previously provided for a commercial
line of credit in the amount of $2,000,000 (the "Chase Commercial Loan"), which
expired on June 30, 2012 and was not renewed. The Chase Commercial Loan bore
interest at the CB Rate, with interest due and payable on a monthly basis and
the outstanding principal balance plus all accrued but unpaid interest due and
payable on June 30, 2012. There was no amount outstanding under the Chase
Commercial Loan at the time it expired on June 30, 2012, or at December 31,
2011.
All outstanding obligations of MtronPTI under the Chase Loan Agreement are
collateralized by a first priority security interest in all of the assets of
MtronPTI, excluding real property. Additionally, in connection with the Chase
Loan Agreement, PTI entered into a separate agreement with Chase providing that
PTI would not mortgage or otherwise encumber certain real property it owns in
Florida while the credit facilities under the Chase Loan Agreement are
outstanding.
The Chase Loan Agreement contains a variety of affirmative and negative
covenants, including, but not limited to, a financial covenant that MtronPTI
maintain tangible net worth not less than $8,000,000.
On June 28, 2012, MtronPTI entered into a First Amendment to Master Loan
Agreement with Chase, which amended the Chase Loan Agreement to delete financial
covenants relating to the maintenance of minimum levels of net income and a
minimum debt service coverage ratio. On May 15, 2012, MtronPTI made a cash
collateral deposit of $4,000,000 with Chase as additional security for its
obligations under the Chase Loan Agreement and entered into an Assignment of
Deposit agreement with Chase providing Chase with a security interest in the
account holding the deposit.
Page 16
On September 28, 2012, MtronPTI entered into a Second Amendment to Master Loan
Agreement with Chase, which (i) amended the minimum tangible net worth covenant
to set the amount at not less than $8,000,000, (ii) provided for the renewal and
reduction of the Chase Revolving Loan to $1,500,000 and (iii) adjusted the
requirements for calculating the Chase Revolving Loan borrowing base. In
connection with the reduction of the Chase Revolving Loan, Chase reduced the
amount of cash collateral deposit secured by the Assignment of Deposit agreement
to $1,500,000.
The amount of the cash collateral deposit with Chase is included in restricted
cash in the accompanying condensed consolidated balance sheet as of September
30, 2012. The related Assignment of Deposit agreement restricts MtronPTI's
ability to withdraw any portion of the deposit and does not allow MtronPTI to
assign the deposit or any part thereof.
As of September 30, 2012, MtronPTI was in compliance with all covenants under
the Chase Loan Agreement.
The Company believes that existing cash and cash equivalents, cash generated
from operations and available borrowings on its revolving line of credit will be
sufficient to meet its ongoing working capital and capital expenditure
requirements for the next 12 months. However, the Company may need to seek
additional capital to fund future growth in its business, to provide flexibility
to respond to dynamic market conditions, or to fund its strategic growth
objectives.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of such statements requires us to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
period and the reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical experience and other
assumptions that we consider to be reasonable given the circumstances. Actual
results may vary from our estimates.
The Company's most critical accounting policies include revenue recognition,
accounts receivable allowance, valuation of inventories, accounting for warranty
obligations, accounting for income taxes, and accounting for stock-based
compensation.
Revenue Recognition
The Company recognizes revenue from the sale of its product in accordance with
the criteria in ASC 605, Revenue Recognition, which are:
? Persuasive evidence that an arrangement exists;
? Delivery has occurred;
? The seller's price to the buyer is fixed and determinable; and
? Collectability is reasonably assured.
Page 17
The Company meets these conditions upon shipment because title and risk of loss
passes to the customer at that time. However, the Company offers a limited
right of return and/or authorized price protection provisions in its agreements
with certain electronic component distributors who resell the Company's products
to original equipment manufacturers or electronic manufacturing services
companies. As a result, the Company estimates and records a reserve for future
returns and other charges against revenue at the time of shipment consistent
with the terms of sale. The reserve is estimated based on historical experience
with each respective distributor. The amount of these reserves at September 30,
2012, is not material to the financial statements.
The Company recognizes revenue related to transactions with a right of return
and/or authorized price protection provisions when the following conditions are
met:
? Seller's price to the buyer is fixed or determinable at the date of sale;
? Buyer has paid the seller, or the buyer is obligated to pay the seller and the
obligation is not contingent on resale of the product;
? Buyer's obligation to the seller would not be changed in the event of theft or
physical destruction or damage of the product;
? Buyer acquiring the product for resale has economic substance apart from that
provided by the seller;
? Seller does not have obligations for future performance; and
? The amount of future returns can be reasonably estimated.
Accounts Receivable Allowance
Accounts receivable on a consolidated basis consists principally of amounts due
from both domestic and foreign customers. Credit is extended based on an
evaluation of the customer's financial condition and collateral is not generally
required. In relation to export sales, the Company generally requires letters
of credit supporting a significant portion of the sales price prior to
production to limit exposure to credit risk. Certain credit sales are made to
industries that are subject to cyclical economic changes. The Company maintains
an allowance for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments.
Estimates are based on historical collection experience, current trends, credit
policy and relationship between accounts receivable and revenues. In
determining these estimates, the Company examines historical write-offs of its
receivables and reviews each client's account to identify any specific customer
collection issues. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payment,
additional allowances might be required. The Company's failure to estimate the
losses for doubtful accounts accurately and ensure that payments are received on
a timely basis could have a material adverse effect on its business, financial
condition and results of operations.
Inventory Valuation
Inventories are stated at the lower of cost or market value using the FIFO
(first-in, first-out) method.
The Company maintains a reserve for inventory based on estimated losses that
result from inventory that becomes obsolete as of period end. In determining
these estimates, the Company performs an analysis on demand and usage for each
inventory item over historical time periods. Based on that analysis, the
Company reserves a percentage of the inventory amount within each time period
based on historical demand and usage patterns of specific items in inventory.
Page 18
Warranties
The Company offers a standard one-year warranty. The Company tests its products
prior to shipment in order to ensure that they meet each customer's requirements
based upon specifications received from each customer at the time its order is
received and accepted. The Company's customers may request to return products
for various reasons, including but not limited to the customers' belief that the
products are not performing to specification. The Company's return policy states
that it will accept product returns only with prior authorization and if the
product does not meet customer specifications, in which case the product would
be replaced or repaired. To accommodate the Company's customers, each request
for return is reviewed, and if and when it is approved, a return materials
authorization ("RMA") is issued to the customer. Each month the Company records
a specific warranty reserve for approved RMAs covering products that have not
yet been returned. The Company does not maintain a general warranty reserve
because, historically, valid warranty returns resulting from a product not
meeting specifications or being non-functional have been immaterial.
Income Taxes
The Company's deferred income tax assets represent temporary differences between
the financial statement carrying amount and the tax basis of existing assets and
liabilities that will result in deductible amounts in future years, including
net operating loss carryforwards. Based on estimates, the carrying value of our
net deferred tax assets assumes that it is more likely than not that the Company
will be able to generate sufficient future taxable income in certain tax
jurisdictions. Our judgments regarding future profitability may change due to
future market conditions, changes in U.S. or international tax laws and other
factors. If, in the future, the Company experiences losses for a sustained
period of time, the Company may not be able to conclude that it is more likely
than not that the Company will be able to generate sufficient future taxable
income to realize our deferred tax assets. If this occurs, the Company may be
required to increase the valuation allowance against the deferred tax assets
resulting in additional income tax expense.
Stock-Based Compensation
The Company measures the cost of employee services in exchange for an award of
equity instruments based on the grant-date fair value of the award and
recognizes the cost over the requisite service period, typically the vesting
period.
The Company estimates the fair value of stock options on the grant date using
the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton
option-pricing model requires subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. There is no expected dividend rate. Historical Company
information was the basis for the expected volatility assumption as the Company
believes that the historical volatility over the life of the option is
indicative of expected volatility in the future. The risk-free interest rate is
based on the U.S. Treasury zero-coupon rates with a remaining term equal to the
expected term of the option. The Company also estimates forfeitures at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Based on past history of actual performance, a zero
forfeiture rate has been assumed. Restricted stock awards are granted at a
value equal to the market price of our common stock on the date of the grant.
Add
LGL to Portfolio
Set Alert
Email to a
Friend