UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended March 29, 2008
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period
from
to
Commission
File No. 0-11201
Merrimac
Industries, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
DELAWARE
|
22-1642321
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
41
FAIRFIELD PLACE
WEST
CALDWELL, NEW JERSEY 07006
(Address
of Principal Executive Offices) (Zip Code)
(973)
575-1300
(Registrant’s
Telephone Number)
Former
name, former address and former fiscal year, if changed since last
report: N/A
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definition of "accelerated filer," "large accelerated filer" and a "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
As
of May
9, 2008, there were 2,939,581 shares of Common Stock, par value $.01 per share,
outstanding.
MERRIMAC
INDUSTRIES, INC.
41
Fairfield Place
West
Caldwell, NJ 07006
INDEX
|
|
Page
|
PART
I. |
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss)
|
|
|
for
the Quarters Ended March 29, 2008
|
|
|
and
March 31, 2007 (Unaudited)
|
1
|
|
|
|
Consolidated
Balance Sheets-March 29, 2008 (Unaudited) and
|
|
|
December
29, 2007
|
2
|
|
|
|
Consolidated
Statement of Stockholders’ Equity for the Quarter
|
|
|
Ended
March 29, 2008 (Unaudited)
|
3
|
|
|
|
Consolidated
Statements of Cash Flows for the Quarters
|
|
|
Ended
March 29, 2008 and March 31, 2007 (Unaudited)
|
4
|
|
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
14
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
23
|
|
|
|
Item
4.
|
Controls
and Procedures
|
23
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
23
|
|
|
|
Item
1A.
|
Risk
Factors
|
23
|
|
|
|
Item
5.
|
Other
Information
|
24
|
|
|
|
Item
6.
|
Exhibits
|
24
|
|
|
|
Signatures
|
25
|
PART
I.
FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
|
Quarters
Ended
|
|
|
|
March
29,
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CONTINUING
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,757,686
|
|
$
|
4,511,446
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
3,451,960
|
|
|
2,814,120
|
|
Selling,
general and administrative
|
|
|
2,244,570
|
|
|
2,217,002
|
|
Research
and development
|
|
|
372,818
|
|
|
484,245
|
|
|
|
|
6,069,348
|
|
|
5,515,367
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(311,662
|
)
|
|
(1,003,921
|
)
|
Interest
and other (expense) income, net
|
|
|
(60,573
|
)
|
|
20,632
|
|
Loss
from continuing operations before income taxes
|
|
|
(372,235
|
)
|
|
(983,289
|
)
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
Loss
from continuing operations
|
|
|
(372,235
|
)
|
|
(983,289
|
)
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(280,513
|
)
|
Net
loss
|
|
$
|
(372,235
|
)
|
$
|
(1,263,802
|
)
|
Loss
per common share from continuing operations-basic and
diluted
|
|
$
|
(.13
|
)
|
$
|
(.32
|
)
|
Loss
per common share from discontinued operations-basic and
diluted
|
|
$
|
-
|
|
$
|
(.09
|
)
|
Net
loss per common share-basic and diluted
|
|
$
|
(.13
|
)
|
$
|
(.41
|
)
|
Weighted
average number of shares outstanding-basic and diluted
|
|
|
2,932,521
|
|
|
3,096,315
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(372,235
|
)
|
$
|
(1,263,802
|
)
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
61,383
|
|
Comprehensive
loss
|
|
$
|
(372,235
|
)
|
$
|
(1,202,419
|
)
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
March 29,
|
|
December 29,
|
|
|
|
2008
|
|
2007
|
|
|
|
(UNAUDITED)
|
|
(Note
1)
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
626,882
|
|
$
|
2,004,471
|
|
Accounts
receivable, net
|
|
|
5,796,735
|
|
|
5,299,753
|
|
Inventories,
net
|
|
|
6,074,147
|
|
|
5,039,770
|
|
Other
current assets
|
|
|
741,803
|
|
|
774,007
|
|
Due
from assets sale contract
|
|
|
-
|
|
|
664,282
|
|
Total
current assets
|
|
|
13,239,567
|
|
|
13,782,283
|
|
Property,
plant and equipment
|
|
|
37,863,621
|
|
|
37,556,672
|
|
Less
accumulated depreciation and amortization
|
|
|
27,173,685
|
|
|
26,600,240
|
|
Property,
plant and equipment, net
|
|
|
10,689,936
|
|
|
10,956,432
|
|
Restricted
cash
|
|
|
-
|
|
|
250,000
|
|
Other
assets
|
|
|
539,117
|
|
|
531,633
|
|
Deferred
tax assets
|
|
|
52,000
|
|
|
52,000
|
|
Total
Assets
|
|
$
|
24,520,620
|
|
$
|
25,572,348
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
550,000
|
|
$
|
550,000
|
|
Accounts
payable
|
|
|
976,371
|
|
|
943,381
|
|
Accrued
liabilities
|
|
|
1,461,746
|
|
|
1,965,403
|
|
Customer
deposits
|
|
|
346,272
|
|
|
363,296
|
|
Deferred
income taxes
|
|
|
52,000
|
|
|
52,000
|
|
Total
current liabilities
|
|
|
3,386,389
|
|
|
3,874,180
|
|
Long-term
debt, net of current portion
|
|
|
3,375,000
|
|
|
3,762,500
|
|
Deferred
liabilities
|
|
|
62,038
|
|
|
61,300
|
|
Total
liabilities
|
|
|
6,823,427
|
|
|
7,697,980
|
|
Commitments
and contingencies Stockholders' equity:
|
|
|
|
|
|
|
|
Preferred
stock, par value $.01 per share: Authorized: 1,000,000 shares No
shares
issued
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share: 20,000,000 shares authorized; 3,300,289
and 3,289,103 shares issued; and 2,937,384 and 2,926,198 shares
outstanding, respectively
|
|
|
33,003
|
|
|
32,891
|
|
Additional
paid-in capital
|
|
|
19,984,665
|
|
|
19,789,717
|
|
Retained
earnings
|
|
|
801,689
|
|
|
1,173,924
|
|
|
|
|
20,819,357
|
|
|
|
|
Less
treasury stock, at cost – 362,905 shares at March 29, 2008 and
December 29, 2007
|
|
|
(3,122,164
|
)
|
|
(3,122,164
|
)
|
Total
stockholders' equity
|
|
|
17,697,193
|
|
|
17,874,368
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
24,520,620
|
|
$
|
25,572,348
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
QUARTER
ENDED MARCH 29, 2008
(UNAUDITED)
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
Treasury Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital(A)
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balance,
December 29, 2007
|
|
|
3,289,103
|
|
$
|
32,891
|
|
$
|
19,789,717
|
|
$
|
1,173,924
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
17,874,368
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(372,235
|
)
|
|
|
|
|
|
|
|
(372,235
|
)
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
120,346
|
|
|
|
|
|
|
|
|
|
|
|
120,346
|
|
Stock
Purchase Plan sales
|
|
|
7,104
|
|
|
71
|
|
|
46,312
|
|
|
|
|
|
|
|
|
|
|
|
46,383
|
|
Exercise
of stock options
|
|
|
4,082
|
|
|
41
|
|
|
28,290
|
|
|
|
|
|
|
|
|
|
|
|
28,331
|
|
Balance,
March 29, 2008
|
|
|
3,300,289
|
|
$
|
33,003
|
|
$
|
19,984,665
|
|
$
|
801,689
|
|
|
362,905
|
|
$
|
(3,122,164
|
)
|
$
|
17,697,193
|
|
(A)
Tax
benefits associated with the exercise of employee stock options are recorded
to
additional paid-in capital when such benefits are realized.
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Quarters Ended
|
|
|
|
March 29, 2008
|
|
March 31, 2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(372,235
|
)
|
$
|
(1,263,802
|
)
|
Less
loss from discontinued operations
|
|
|
-
|
|
|
(280,513
|
)
|
Loss
from continuing operations
|
|
|
(372,235
|
)
|
|
(983,289
|
)
|
Adjustments
to reconcile net loss from continuing operations to net cash provided
by
(used in) operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
618,341
|
|
|
571,361
|
|
Amortization
of deferred financing costs
|
|
|
8,040
|
|
|
7,196
|
|
Share-based
compensation
|
|
|
120,346
|
|
|
51,461
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(496,982
|
)
|
|
1,023,611
|
|
Inventories
|
|
|
(1,034,377
|
)
|
|
(174,565
|
)
|
Other
current assets
|
|
|
32,203
|
|
|
246,076
|
|
Other
assets
|
|
|
(15,524
|
)
|
|
17,297
|
|
Accounts
payable
|
|
|
32,890
|
|
|
(131,595
|
)
|
Accrued
liabilities
|
|
|
(503,656
|
)
|
|
47,631
|
|
Customer
deposits
|
|
|
(17,024
|
)
|
|
(14,229
|
)
|
Deferred
liabilities
|
|
|
738
|
|
|
5,865
|
|
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
(1,627,240
|
) |
|
666,820
|
|
Net
cash used in operating activities of discontinued
operations
|
|
|
-
|
|
|
(151,911
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(1,627,240
|
)
|
|
514,909
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of capital assets
|
|
|
(351,845
|
)
|
|
(400,524
|
)
|
Cash
proceeds from sale of discontinued operations
|
|
|
664,282
|
|
|
-
|
|
Net
cash provided by (used in) investing activities of continuing
operations
|
|
|
312,437
|
|
|
(400,524
|
)
|
Net
cash used in investing activities of discontinued
operations
|
|
|
-
|
|
|
(98,202
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
312,437
|
|
|
(498,726
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repurchase
of common stock for the treasury
|
|
|
-
|
|
|
(2,148,300
|
)
|
Repayment
of borrowings
|
|
|
(387,500
|
)
|
|
(137,500
|
)
|
Restricted
cash returned
|
|
|
250,000
|
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
28,331
|
|
|
43,750
|
|
Proceeds
from Stock Purchase Plan sales
|
|
|
46,383
|
|
|
7,495
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities of continuing
operations
|
|
|
(62,786
|
)
|
|
(2,234,555
|
)
|
Net
cash used in financing activities of discontinued
operations
|
|
|
-
|
|
|
(43,010
|
)
|
Net
cash used in financing activities
|
|
|
(62,786
|
)
|
|
(2,277,565
|
)
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
-
|
|
|
2,327
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,377,589
|
)
|
|
(2,259,055
|
)
|
Cash
and cash equivalents at beginning of period, including $0 and $562,205
reported under assets held for sale
|
|
|
2,004,471
|
|
|
5,961,538
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period including $0 and $271,409 reported
under assets held for sale
|
|
$
|
626,882
|
|
$
|
3,702,483
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
on credit facilities
|
|
$
|
62,044
|
|
$
|
91,341
|
|
See
accompanying notes.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS
OF PRESENTATION
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with the instructions to Form 10-Q and therefore do not include
all
information and footnote disclosures otherwise required by accounting principles
generally accepted in the United States of America for a full fiscal year.
The
financial statements do, however, reflect all adjustments of a normal recurring
nature which are, in the opinion of management, necessary for a fair
presentation of the financial position of Merrimac Industries, Inc. (“Merrimac”
or the “Company”) as of March 29, 2008 and its results of operations and cash
flows for the periods presented. Results of operations of interim periods are
not necessarily indicative of results for a full year.
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 related to Filtran Microcircuits Inc.
(“FMI”) for the first quarter of 2007 have been reported as discontinued
operations.
The
consolidated balance sheet at December 29, 2007 has been derived from the
audited financial statements at that date but does not include all the
information required by accounting principles generally accepted in the United
States of America for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto included
in
the Company’s Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 28, 2008 for the year ended December 29, 2007.
2.
DISCONTINUED OPERATIONS
Company
management determined, and the Board of Directors approved on August 9, 2007,
that the Company should divest its FMI operations. The divestiture enables
Merrimac to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
Beginning with the third quarter of 2007, the Company reflected FMI as a
discontinued operation and the Company reclassified prior consolidated financial
statements to reflect the results of operations, financial position and cash
flows of FMI as discontinued operations.
On
December 28, 2007, the Company sold substantially all of the assets of its
wholly-owned subsidiary, FMI, to Firan Technology Group Corporation (“FTG”), 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 closing 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 Merrimac’s microwave
micro-circuitry segment, are
summarized as follows:
|
|
Quarter ended
March 31,
2007
|
|
|
|
|
|
Net
sales
|
|
$
|
925,674
|
|
Net
loss
|
|
$
|
(280,513
|
)
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
3.
CONTRACT REVENUE RECOGNITION
The
Company recognizes revenue in accordance with the provisions of Staff Accounting
Bulletin No. 104. Contract revenue and related costs on fixed-price and
cost-reimbursement contracts that require customization of products to customer
specifications are recorded when title transfers to the customer, which is
generally on the date of shipment, collection of the related receivable is
probable, persuasive evidence of an arrangement exists and the sales price
is
fixed or determinable. Prior to shipment, accumulated manufacturing costs
incurred on such contracts are recorded as work-in-process inventory. The
Company currently has one contract for the engineering design, development
and
production of space electronics products. The Company accounts for this contract
in accordance with AICPA Statement of Position No. 81-1, “Accounting for
Performance of Construction-Type and Certain Production-Type Contracts”. Sales
and related contract costs for design and development services under this
contract are recognized based on the cost-to-cost method. Sales and related
contract costs for products delivered under this contract are recognized
on a
units-of-delivery basis. Revenue related to non-recurring engineering charges
is
generally recognized upon shipment of the related initial units produced
or
based upon contractually established stages of completion. Anticipated losses
on
contracts are charged to operations in the period when the loss becomes known.
The reserve for cost overruns is shown as a reduction of the accumulated
costs
recorded as work-in-process inventory.
The
cost
rates utilized for cost-reimbursement contracts are subject to review by third
parties and can be revised, which can result in additions to or reductions
from
revenue. Revisions which result in reductions to revenue are recognized in
the
period that the rates are reviewed and finalized; additions to revenue are
recognized in the period that the rates are reviewed, finalized, accepted by
the
customer, and collectability from the customer is reasonably assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is
no
reasonable basis on which to estimate such adjustments given the Company’s very
limited experience with these contracts. No revenue was recognized related
to
cost-reimbursement contracts during the first quarters of 2008 or 2007.
4.
ACCOUNTING PERIOD
The
Company's fiscal year is the 52-53 week period ending on the Saturday closest
to
December 31. The Company has quarterly dates that correspond with the Saturday
closest to the last day of each calendar quarter and each quarter consists
of 13
weeks in a 52-week year. Periodically, the additional
week to make a 53-week year (fiscal year 2008 will be the next) is added to
the
fourth quarter, making such quarter consist of 14 weeks.
5.
COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) is defined as the change in equity of a company during a period
from transactions and other events and circumstances from non-owner sources.
Accumulated other comprehensive income at March 31, 2007 was attributable solely
to the effects of foreign currency translation. Following
the sale of the Company’s discontinued operations, there is no foreign currency
translation adjustment at March 29, 2008.
6.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a
single authoritative definition of fair value, sets out a framework for
measuring fair value and requires additional disclosures about fair-value
measurements. SFAS No. 157 applies only to fair-value measurements that are
already required or permitted by other accounting standards and is expected
to
increase the consistency of those measurements. It will also affect current
practices by nullifying Emerging Issues Task Force guidance that prohibited
recognition of gains or losses at the inception of derivative transactions
whose
fair value is estimated by applying a model and by eliminating the use of
“blockage” factors by brokers, dealers and investment companies that have
been
applying
AICPA Guides. The Company adopted SFAS No. 157 On December 30, 2007. The Company
has no financial assets or liabilities subject to the requirements of SFAS
No.
157. The adoption of SFAS No. 157 did not have an impact on its financial
position or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains
and
losses on items for which the fair value option has been elected are reported
in
net income. The Company adopted SFAS No. 159 on December 30, 2007. The adoption
of SFAS No. 159 did not have an impact on its financial position or results
of
operations.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
principles and requirements for how an acquiring company recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest of the acquired company and the goodwill
acquired. SFAS 141R also established disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS
141R is effective for fiscal periods beginning after December 15, 2008. The
Company is currently evaluating the impact that SFAS 141R will have on its
financial position and results of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards of ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
160
is effective for fiscal periods beginning after December 15, 2008. The Company
is currently evaluating the impact that SFAS 160 will have on its financial
position and results of operations.
7.
SHARE-BASED COMPENSATION
On
January 1, 2006, the start of the first quarter of fiscal 2006, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R") which requires that the
costs resulting from all share-based payment transactions be recognized in
the
financial statements at their fair values. The Company adopted SFAS 123R using
the modified prospective application method under which the provisions of SFAS
123R
apply to new awards and to awards modified, repurchased, or cancelled after
the
adoption date. Additionally, compensation cost for the portion of the awards
for
which the requisite service has not been rendered that are outstanding as of
the
adoption date is recognized in the consolidated
statement of operations over the remaining service period after the adoption
date based on the award's original estimate of fair value.
Because
of the Company’s net operating loss carryforwards, no tax benefits resulting
from the exercise of stock options have been recorded, thus there was no effect
on cash flows from operating or financing activities.
For
the
quarters ended March 29, 2008 and March 31, 2007, share-based compensation
expense related to the various stock option plans and the 2001 Employee Stock
Purchase Plan was allocated as follows:
|
|
Quarters Ended
|
|
|
|
March 29, 2008
|
|
March 31, 2007
|
|
|
|
|
|
|
|
Cost
of sales
|
|
$
|
45,000
|
|
$
|
8,000
|
|
Selling,
general and administrative
|
|
|
75,000
|
|
|
43,000
|
|
Total
share-based compensation
|
|
$
|
120,000
|
|
$
|
51,000
|
|
The
fair
value of the options granted was estimated on the date of grant using the
Black-Scholes option valuation model. There were no options granted in either
of
the quarters ended March
29,
2008 or March 31, 2007, respectively.
The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Share-Based
Compensation Plans:
On
June
22, 2006, the Company’s stockholders approved three share-based compensation
programs as follows: (i) 2006 Stock Option Plan; (ii) 2006 Key Employee
Incentive Plan; and (iii) 2006 Non-Employee Directors’ Stock Plan.
The
2006
Stock Option Plan authorizes the grant of an aggregate of 500,000 shares of
common stock to employees, directors and consultants of the Company. Under
the
2006 Stock Option Plan, the
Company may grant to eligible individuals incentive stock options, as defined
in
Section 422 of the Internal Revenue Code of 1986 (the “Code”), and/or
non-qualified stock options. The purposes of the 2006 Stock Option Plan are
to
attract, retain and motivate employees, compensate consultants, and to enable
employees, consultants and directors, including non-employee directors, to
participate in the long-term growth of the Company by providing for or
increasing the proprietary interests of such persons in the Company, thereby
assisting the Company to achieve its long-range goals. The 2006 Stock Option
Plan replaced the 2001 Stock Option Plan, and the remaining 19,700 unissued
options under the 2001 Stock Option Plan are no longer available for
grant.
At
March
29, 2008, there were 315,900 options outstanding under the 2006 Stock Option
Plan of which 25,167 were exercisable. Options are granted at the closing price
of the Company’s shares on the American Stock Exchange on the date immediately
prior to grant, pursuant to the 2006 Stock Option Plan. Options available for
grant under the 2006 Stock Option Plan were 184,100 at March 29,
2008.
At
March
29, 2008, the Company also maintains share-based compensation arrangements
under
the following plans: (i) 1993 Stock Option Plan; (ii) 1997 Long Term Incentive
Plan; and (iii) 2001 Stock Option Plan.
At
March
29, 2008, there were 192,480 options outstanding under the 1993 Stock Option
Plan, the 1997 Long Term Incentive Plan and the 2001 Stock Option Plan, of
which
all were exercisable. No options are available for future grant under the 1993
Stock Option Plan, the 1997 Long Term Incentive Plan or the 2001 Stock Option
Plan.
A
summary
of all stock option activity and information related to all options outstanding
for the quarter ended March 29, 2008 follows:
|
|
2008
|
|
|
|
Weighted
|
|
|
|
|
|
average
|
|
Shares
|
|
|
|
exercise
|
|
or
price
|
|
|
|
price
|
|
per
share
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
$
|
9.30
|
|
|
594,747
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
6.94
|
|
|
(4,082
|
)
|
Expired
|
|
|
8.46
|
|
|
(23,785
|
)
|
Forfeited
|
|
|
11.29
|
|
|
(58,500
|
)
|
Outstanding
at end of period
|
|
|
9.32
|
|
|
508,380
|
|
Exercisable
at end of period
|
|
$
|
9.20
|
|
|
222,647
|
|
Option
price range at end of period
|
|
|
|
|
Weighted
average estimated fair value of options granted during the
year
|
|
|
|
|
$
|
-
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
A
summary
of intrinsic and fair value stock option information follows:
Aggregate
intrinsic value of all options at March 29, 2008
|
|
$
|
65,000
|
|
Aggregate
intrinsic value of exercisable options at March 29, 2008
|
|
$
|
65,000
|
|
Intrinsic
value of options exercised during 2008
|
|
$
|
9,000
|
|
The
aggregate intrinsic value represents the total pre-tax intrinsic value (the
difference between the Company’s closing stock price on the last trading day of
the period and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option
holders exercised their options on March 29, 2008.
As
of
March 29, 2008, the total future compensation cost related to nonvested stock
options and the employee stock purchase plan not yet recognized in the statement
of operations was $731,000. Of that total, $283,000, $332,000 and $116,000
are
expected to be recognized in 2008, 2009 and 2010, respectively.
The
2006
Non-Employee Directors’ Stock Plan is a plan that authorizes the grant of an
aggregate of 100,000 shares of Common Stock to the non-employee directors of
the
Company. The plan authorizes each non-employee director to receive 1,500 shares
of restricted stock beginning in 2006, and 1,500 shares or such other amount
as
the Board of Directors may, from time to time, decide for each year in the
future following the Company’s Annual Meeting of Stockholders.
On
June
20, 2007, the Company issued a grant of 10,500 shares of restricted stock to
its
non-employee directors. The per share price of the grant was $9.78 (the closing
price of the Company’s shares on the American Stock Exchange on the date
immediately prior to the grant, pursuant to the terms of the plan). One third
of
such restricted stock vests on the anniversary of the grant date over a
three-year period. Share-based compensation expense for the quarters ended
March
29, 2008 and March 31, 2007 related to the grants of restricted stock was
approximately $16,000 and $7,000, which was based on a straight-line
amortization. Restricted shares of common stock available for grant under the
2006 Non-Employee Directors’ Stock Plan were 80,500 at March 29,
2008.
A
summary
of unvested restricted stock activity and information related to all restricted
stock outstanding follows:
|
|
Weighted-
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Day
|
|
|
|
|
|
Fair
Value
|
|
Shares
|
|
Outstanding
at December 29, 2007
|
|
$
|
9.69
|
|
|
16,500
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
-
|
|
Outstanding
at March 29, 2008
|
|
$
|
9.69
|
|
|
16,500
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
8.
INVENTORIES
Inventories
are stated at the lower of cost or market, using the average cost method. Cost
includes materials, labor, and manufacturing overhead related to the purchase
and production of inventories.
Inventories
consist of the following:
|
|
March 29,
2008
|
|
December 29,
2007
|
|
Finished
goods
|
|
$
|
278,096
|
|
$
|
239,503
|
|
Work
in process
|
|
|
3,684,579
|
|
|
2,979,632
|
|
Raw
materials and purchased parts
|
|
|
2,111,472
|
|
|
1,820,635
|
|
Total
|
|
$
|
6,074,147
|
|
$
|
5,039,770
|
|
Total
inventories are net of valuation allowances for obsolescence and cost overruns
of $1,469,000 at March 29, 2008 and $1,623,000 at December 29, 2007 of
which
$127,000 and $202,000, respectively,
represented cost overruns related to work-in-process inventory. The Company
recorded provisions for obsolescence and cost overruns of $(75,000) and $23,000
for the quarters ended March 29, 2008 and March 31, 2007,
respectively.
9.
LONG-LIVED
ASSETS
The
Company accounts for long-lived assets under SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The Company’s
fixed assets and intangible assets related to its Multi-Mix® product line have
been tested for recoverability at least annually since 2002 following the
guidance of SFAS No. 144. Based on the results of this testing the Company
has
concluded that the undiscounted cash flows expected to result from the use
of
these assets exceeds its carrying amount, and therefore there is no impairment
loss.
Management
assesses the recoverability of its long-lived assets, which consist primarily
of
fixed assets and intangible assets with finite useful lives, whenever events
or
changes in circumstances, as described in SFAS No. 144, indicate that the
carrying value may not be recoverable. Impairment charges would be included
with
costs and expenses in the Company's consolidated statements of operations,
and
would result in reduced carrying amounts of the related assets on the Company's
consolidated balance sheets.
10.
CURRENT AND LONG-TERM DEBT
The
Company was obligated under the following debt instruments at March 29, 2008
and
December 29, 2007:
|
|
2008
|
|
2007
|
|
Capital
One, N.A.:
|
|
|
|
|
|
Revolving
line of credit, 2.00% above LIBOR or 0.50% below prime
|
|
$
|
-
|
|
$
|
-
|
|
Term
loan, due October 1, 2011, 2.25% above LIBOR or 0.50% below
prime
|
|
|
1,400,000
|
|
|
1,500,000
|
|
Mortgage
loan, due October 1, 2016, 2.25% above LIBOR or 0.50% below
prime
|
|
|
2,525,000
|
|
|
2,812,500
|
|
|
|
|
3,925,000
|
|
|
4,312,500
|
|
Less
current portion
|
|
|
550,000
|
|
|
550,000
|
|
Long-term
portion
|
|
$
|
3,375,000
|
|
$
|
3,762,500
|
|
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
October 18, 2006, the Company entered into a financing agreement with Capital
One, N.A. (previously North Fork Bank) (“Capital One”) which consists of a
two-year $5,000,000 revolving line of credit, a five-year $2,000,000 machinery
and equipment term loan due October 1, 2011 (“Term Loan”) and a ten-year
$3,000,000 real estate term loan due October 1, 2016 (“Mortgage Loan”). The
revolving line of credit is subject to an availability limit under a borrowing
base calculation (85% of eligible accounts receivable plus up to 50% of eligible
raw materials inventory plus up to 25% of eligible electronic components, with
an inventory advance sublimit not to exceed $1,500,000, as defined in the
financing agreement). The revolving line of credit expires
October 18, 2008. The Company anticipates the revolving credit facility will
be
renewed. At March 29, 2008, the Company had available borrowing capacity under
its revolving line of credit of $3,660,000. The revolving line of credit bears
interest at the prime rate less 0.50% (4.75% at March 29, 2008 and currently
4.50%) or LIBOR plus 2.00%. The principal amount of the Term Loan is payable
in
59 equal monthly installments of $33,333 and one final payment of the remaining
principal balance. The Term Loan bears interest at the prime rate less 0.50%
(4.75% at March 29, 2008 and currently 4.50%) or LIBOR plus 2.25%. The principal
amount of the Mortgage Loan is payable in 119 equal monthly installments of
$12,500 and one final payment of the remaining principal balance. The Mortgage
Loan bears interest at the prime rate less 0.50% (4.75% at March 29, 2008 and
currently 4.50%) or LIBOR plus 2.25%. At March 29, 2008, the Company had no
portion of its borrowings under LIBOR-based interest rates. The revolving line
of credit, the Term Loan and the Mortgage Loan are secured by substantially
all
assets located within the United States and the pledge of 65% of the stock
of
the Company's subsidiaries located in Costa Rica and Canada.
Capital
One and the Company amended the financing agreement, as of May 15, 2007, which
(i) eliminated the fixed charge coverage ratio covenant for the quarter ended
June 30, 2007, (ii) added a covenant related to earnings before interest, taxes,
depreciation and amortization (“EBITDA”) for the four quarters ended June 30,
2007 to require the Company to achieve a minimum level of EBITDA, and (iii)
modified the fixed charge coverage ratio covenant for periods after the quarter
ending September 29, 2007. The Company was in compliance with these amended
covenants at March 29, 2008.
On
August
9, 2007, Capital One and Merrimac entered into a Pledge and Security Agreement,
under which Capital One consented to the guaranty by Merrimac of FMI's
borrowings under the revolving credit agreement with The Bank of Nova Scotia
in
the amount of up to $250,000 (Canadian). In consideration for Capital One
providing such consent, Merrimac deposited $250,000 into a controlled collateral
account with Capital One and also agreed to prepay the mortgage loan portion
of
the credit facility with Capital One with fifty percent of the net proceeds
from
a sale of FMI, up to a maximum amount of $500,000. This agreement terminated
in
November 2007 when The Bank of Nova Scotia terminated FMI’s revolving credit
agreement. Upon the termination of such agreement, the Company agreed to repay
a
portion of its Mortgage Loan with the funds in the controlled collateral account
upon the expiration of the LIBOR contracts in January 2008. On January 18,
2008,
Merrimac paid $250,000 of the Mortgage Loan using the funds previously deposited
into the controlled collateral account.
At
March
29, 2008 and December 29, 2007, the fair value of the Company's debt
approximates carrying value. The fair value of the Company's long-term debt
is
estimated based on current interest rates.
11.
WARRANTIES
The
Company's products sold under contracts have warranty obligations. Estimated
warranty costs for each contract are determined based on the contract terms
and
technology-specific issues. The Company accrues estimated warranty costs at
the
time of sale and any additional amounts are recorded when such costs are
probable and can be reasonably estimated. Warranty expense was approximately
$50,000 and $51,000 for the quarters ended March 29, 2008 and March 31, 2007,
respectively. The warranty reserve at March 29, 2008 and December 29, 2007
was
$200,000.
12.
INCOME TAXES
As
of
March 29, 2008, the Company has 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 management assesses that it is more likely than not that all
or a
portion of a deferred tax asset will not be realized. The Company's 2002, 2003,
2006 and 2007 net losses have weighed heavily in the Company's overall
assessments. The Company 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 first
quarter of 2008.
On
December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
for uncertainty in tax positions. As of that date the Company had no uncertain
tax positions and did not record any additional benefits or liabilities. At
March 29, 2008 and December 29, 2007, the Company had no uncertain tax positions
and did not record any additional benefits or liabilities. The Company will
recognize any accrued interest or penalties related to unrecognized tax benefits
within the provision for income taxes.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Internal
Revenue Service Code Section 382 places a limitation on the utilization of
net
operating loss carryforwards when an ownership change, as defined in the tax
law, occurs. Generally, an ownership change occurs when there is a greater
than
50 percent change in ownership. If such a change should occur, the actual
utilization of net operating loss carryforwards, for tax purposes, would be
limited annually to a percentage of the fair market value of the Company at
the
time of such change. The Company may become subject to these limitations in
2008
depending on the extent of the changes in its ownership.
13.
BUSINESS SEGMENT DATA
The
Company's continuing operations are conducted primarily through one business
segment, electronic components and subsystems. This segment involves the design,
manufacture and sale of electronic component devices offering extremely broad
frequency coverage and high performance characteristics for communications,
defense and aerospace applications. Of the identifiable assets, 83% are located
in the United States and 17% are located in Costa Rica.
14.
NET
INCOME (LOSS) PER COMMON SHARE
Basic
net
income (loss) per common share is calculated by dividing net income (loss)
by
the weighted average number of common shares outstanding during the
period.
The
calculation of diluted net income (loss) per common share is similar to that
of
basic net income (loss) per common share, except that the denominator is
increased to include the number of additional common shares that would have
been
outstanding if all potentially dilutive common shares, principally those
issuable under stock options, were issued during the reporting period to the
extent they are not anti-dilutive, using the treasury stock method.
Because
of the net loss for the quarters ended March 29, 2008 and March 31, 2007
approximately 508,000 and 386,000 shares, respectively, underlying stock options
were excluded from the calculation of diluted net income (loss) per share as
the
effect would be anti-dilutive.
15.
RELATED PARTY TRANSACTIONS
During
the first quarter of 2008, the Company's outside general counsel Katten Muchin
Rosenman LLP was paid $73,000 for providing legal services to the Company.
During the first quarter of 2007, Katten Muchin Rosenman LLP was paid $88,000.
A
director of the Company is counsel to Katten Muchin Rosenman LLP but does not
share in the fees that the Company pays to such law firm and his compensation
is
not based on such fees.
During
2008 and 2007, the Company retained Career Consultants, Inc. and SK Associates
to perform executive searches and to provide other services to the Company.
The
Company paid an aggregate of $1,000 to these companies during the first quarter
of 2008. The Company paid an aggregate of $16,000 to these companies during
the
first quarter of 2007. A director of the Company is the chairman and chief
executive officer of these companies.
During
each of the first quarters of 2008 and 2007, a director of the Company was
paid
$9,000 for providing technology-related consulting services to the Company.
The
Company has an agreement with DuPont Electronic Technologies (“DuPont”), a
stockholder and the employer of a director, for providing technological and
marketing-related personnel and services on a cost-sharing basis to the Company
under the Technology Agreement dated February 28, 2002. No payments were made
to
DuPont during the first quarters of 2008 and 2007. A director of the Company
is
an officer of DuPont, but does not share in any of these payments.
Each
director who is not an employee of the Company receives a monthly director's
fee
of $1,500, plus an additional $500 for each meeting of the Board and of any
Committees of the Board attended. In addition, the Chair of the Audit Committee
receives an annual fee of $2,500 for his services in such capacity. The
directors are also reimbursed for reasonable travel expenses incurred in
attending Board and Committee meetings. In addition, pursuant to the 2006 Stock
Option Plan, each non-employee director is granted an option to purchase 2,500
shares of the Common
Stock of the Company on the date of each Annual Meeting of Stockholders. Such
options have a three-year vesting period. Each such grant has an exercise price
equal to the fair market value on the date of such grant and will expire on
the
tenth anniversary of the date of the grant. Pursuant to the 2006 Non-Employee
Directors’ Stock Plan, each non-employee director is granted 1,500 shares of
restricted Common Stock of the Company on the date of each Annual Meeting of
Stockholders. One third of such restricted stock vests on the anniversary of
the
grant date over a three-year vesting period.
MERRIMAC
INDUSTRIES, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
On
December 13, 2004, Infineon Technologies AG (“Infineon”), at such time the
beneficial owner of approximately 15% of the Company’s common stock, sold
475,000 shares of the Company’s common stock to four purchasers in a
privately-negotiated transaction. Two purchasers in such transaction, K
Holdings, LLC and Hampshire Investments, Limited, each of which is affiliated
with Ludwig G. Kuttner, who was President and Chief Executive Officer of
Hampshire Group, Limited (“Hampshire”), purchased 300,000 shares representing an
aggregate of approximately 9.6% of the Company’s common stock. Mr. Kuttner was
elected to the Company’s Board of Directors at its 2006 Annual Meeting of
Stockholders. As a result of an ongoing investigation by Hampshire's audit
committee, the Securities and Exchange Commission, and the Department of Justice
of allegations of certain improprieties and possibly unlawful conduct involving
Mr. Kuttner and other Hampshire executives, Mr. Kuttner's employment with
Hampshire has been terminated and he remains as a director. Mr. Kuttner took
a
leave of absence from his position as a director of Merrimac. During his leave
of absence, Mr. Kuttner was not entitled to any compensation from the Company.
Mr. Kuttner rescinded his leave of absence from his position as a director
of
Merrimac as of June 20, 2007. Infineon also assigned to each purchaser certain
registration rights to such shares under the existing registration rights
agreements Infineon had with the Company. In connection with the transaction,
the Company and Infineon terminated the Stock Purchase and Exclusivity Letter
Agreement dated April 7, 2000, as amended, which provided that the Company
would
design, develop and produce exclusively for Infineon certain Multi-Mix® products
that incorporate active RF power transistors for use in certain wireless base
station applications, television transmitters and certain other applications
that are intended for Bluetooth transceivers.
DuPont
and two of the purchasers above hold registration rights, which currently give
them the right in perpetuity to register an aggregate of 828,413 shares of
Common Stock of the Company. There are no settlement alternatives and the
registration of the shares of Common Stock would be on a “best efforts” basis.
15.
REPURCHASE OF COMMON STOCK
On
March
13, 2007, the Company repurchased in a private transaction 238,700 shares of
its
Common Stock for the treasury at $9.00 per share for an aggregate total of
$2,148,300 from a group of investors.
16.
LEGAL
PROCEEDINGS
On
February 22, 2008, a statement of claim in Ontario Superior Court of Justice
was
filed by a former FMI employee against FMI seeking damages for approximately
$77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
assets to FTG. The Company agreed to settle this claim in May 2008 for a minimal
amount.
On
March
10, 2008, a statement of claim in Ontario Superior Court of Justice was filed
by
nineteen (19) former FMI employees against Merrimac, FMI and FTG seeking damages
for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
following the sale of FMI’s assets to FTG. The former FMI employees are alleging
that an employment contract existed between FMI and the plaintiffs and are
seeking additional damages for termination of the alleged contract.
The
Company believes it has been improperly named in this claim and is petitioning
the Court to be removed as a defendant.
The
Company has an Employment Practices Liability insurance policy that extends
coverage to its subsidiaries. The insurance carrier agreed to provide a defense
in this matter on April 24, 2008 and they retained Canadian counsel to defend
this claim. The Company made provision for the deductible amount of the
insurance policy which is $25,000. In accordance with the requirements of SFAS
No. 5, after discussions with counsel, The Company cannot presently determine
if
the likelihood of an unfavorable outcome is probable, reasonably possible or
remote. In addition, The Company cannot reasonably estimate the amount of a
probable loss, other than the minimal deductible amount under the insurance
policy. The Company and its insurance carrier intend to defend these claims
vigorously.
ITEM
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains statements relating to future results
of
Merrimac (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. In this report, the words “we”, “us” and “our” refer to
Merrimac and its subsidiaries. Actual results may differ materially from those
projected as a result of certain risks and uncertainties. These risks and
uncertainties include, but are not limited to: risks associated with demand
for
and market acceptance of existing and newly developed products as to which
the
Company has made significant investments, particularly its Multi-Mix® products;
the possibilities of impairment charges to the carrying value of our Multi-Mix®
assets, thereby resulting in charges to our earnings; risks associated with
adequate capacity to obtain raw materials and reduced control over delivery
schedules and costs due to reliance on sole source or limited suppliers; slower
than anticipated penetration into the satellite communications, defense and
wireless markets; failure of our Original Equipment Manufacturer, or OEM,
customers to successfully incorporate our products into their systems; changes
in product mix resulting in unexpected engineering and research and development
costs; delays and increased costs in product development, engineering and
production; reliance on a small number of significant customers; the emergence
of new or stronger competitors as a result of consolidation movements in the
market; the timing and market acceptance of our or our OEM customers’ new or
enhanced products; general economic and industry conditions; the ability to
protect proprietary information and technology; competitive products and pricing
pressures; our ability and the ability of our OEM customers to keep pace with
the rapid technological changes and short product life cycles in our industry
and gain market acceptance for new products and technologies; risks relating
to
governmental regulatory actions in communications and defense programs; and
inventory risks due to technological innovation and product obsolescence, as
well as other risks and uncertainties as are detailed from time to time in
the
Company's Securities and Exchange Commission filings. These forward-looking
statements are made only as of the date of the filing of this Form 10-Q, and
the
Company undertakes no obligation to update or revise the forward-looking
statements, whether as a result of new information, future events or
otherwise.
OVERVIEW
Continuing
operations.
Merrimac
Industries, Inc. is 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® (PTFE) and mixed dielectric multilayer circuits for
communications, defense and aerospace applications. The Company's operations
are
conducted primarily through one business segment, electronic components and
subsystems.
Merrimac
is 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. Merrimac
components and integrated assemblies are found in applications as diverse as
satellites, military and commercial aircraft, radar, cellular radio systems,
medical and dental diagnostic instruments, personal communications systems
and
wireless connectivity. Merrimac maintains ISO 9001:2000 and AS 9100 registered
quality assurance programs. Merrimac's components range in price from $0.50
to
more than $10,000 and its subsystems range from $500 to more than
$1,500,000.
The
Company continued to experience losses from continuing operations in the first
quarter of 2008 despite increased orders and backlog as such increased orders
and backlog required
additional hiring resulting in increased personnel costs. Improved orders and
the increased opening backlog from 2007 provided the increase in sales during
the first quarter of 2008 compared to the first quarter of 2007, particularly
sales of Multi-Mix® products to the defense industry. The increased gross profit
from the higher sales level, along with lower research and development expenses
resulted in a lower operating loss for the first quarter of 2008 as compared
to
the first quarter of 2007. Backlog increased by $2,397,000 or 13.3% to
$20,388,000 at the end of the first quarter of 2008 from the end of 2007. The
March 29, 2008 backlog is the highest quarter-end backlog the Company has
achieved.
The
Company markets and sells its products domestically and internationally through
a direct sales force and manufacturers’ representatives. Merrimac has
traditionally developed and offered for sale products built to specific customer
needs, as well as standard catalog items.
Cost
of
sales for the Company 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 the
Company’s facilities. The Company’s manufacturing and production facilities
infrastructure overhead are relatively fixed and are based on its expectations
of future net revenues. Should the Company experience a reduction in net
revenues in a quarter, it could have difficulty adjusting short-term
expenditures and absorbing any excess capacity expenses. If this were to occur,
the Company’s operating results for that quarter would be negatively impacted.
In order to remain competitive, the Company must continually reduce its
manufacturing costs through design and engineering innovations and increases
in
manufacturing efficiencies. There can be no assurance that the Company will
be
able to reduce its manufacturing costs.
The
Company anticipates that depreciation and amortization expenses will exceed
capital expenditures in fiscal year 2008 by approximately $900,000. The Company
intends to issue commitments to purchase $1,300,000 of capital equipment from
various vendors for the remainder of 2008. The Company anticipates that such
equipment will be purchased and become operational during the remainder of
2008.
The Company’s 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 the Company’s $5,000,000 revolving credit
facility, which expires October 18, 2008. The Company anticipates the revolving
credit facility will be renewed.
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. As discussed below, the Company expects to continue to make significant
and increasing expenditures for selling, general and administrative expenses,
especially in connection with implementation of its strategic plan for
generating and expanding sales of Multi-Mix® products.
Research
and development expenses consist of materials, salaries and related expenses
of
certain engineering personnel, and outside services related to product
development projects. The Company charges all research and development expenses
to operations as incurred. The Company believes that continued investment in
research and development is critical to the Company’s long-term business
success. The Company intends to continue to invest in research and development
programs in future periods, and expects that these costs will increase over
time, in order to develop new products, enhance performance of existing products
and reduce the cost of current or new products.
The
Company anticipates 2008 orders from its defense and satellite customers will
be
comparable to fiscal year 2007 levels. 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 the Company’s core strengths and revenue generators.
Discontinued
operations.
Filtran
Microcircuits Inc. (“FMI”) was established in 1983, and was acquired by Merrimac
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.
Merrimac
management determined, and the Board of Directors approved on August 9, 2007,
that the Company should divest its FMI operations with the view to enable
Merrimac to concentrate its resources on RF Microwave and Multi-Mix®
Microtechnology product lines to generate sustainable, profitable growth.
Beginning with the third quarter of 2007, the Company reflected FMI as a
discontinued operation and the Company reclassified prior financial statements
to reflect the results of operations, financial position and cash flows of
FMI
as discontinued operations.
Operating
results of FMI, which were formerly represented as Merrimac’s microwave
micro-circuitry segment, are
summarized as follows:
|
|
March 31,
2007
|
|
|
|
|
|
Net
sales
|
|
$
|
926,000
|
|
Net
loss
|
|
$
|
(281,000
|
)
|
On
December 28, 2007, the Company 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.
CRITICAL
ACCOUNTING ESTIMATES AND POLICIES
The
Company's management makes certain assumptions and estimates that impact the
reported amounts of assets, liabilities and stockholders' equity, and revenues
and expenses. The management judgments that are currently the most critical
are
related to the accounting for the Company's investments in Multi-Mix®
Microtechnology, contract revenue recognition, inventory valuation and valuation
of deferred tax assets.
Impairment
of long-lived assets
The
following is a summary of the carrying amounts of the Multi-Mix® Microtechnology
net assets included in the Company's consolidated financial statements at March
29, 2008 and the related future planned purchases and lease obligation
commitments through January 2011.
Net
assets:
|
|
|
|
Property,
plant and equipment, at cost
|
|
$
|
14,851,000
|
|
Less
accumulated depreciation and amortization
|
|
|
9,706,000
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
5,145,000
|
|
Inventories
|
|
|
488,000
|
|
Other
assets, net
|
|
|
144,000
|
|
|
|
|
|
|
Total
net assets at March 29, 2008
|
|
|
5,777,000
|
|
|
|
|
|
|
Commitments:
|
|
|
|
|
Planned
equipment purchases for the remainder of 2008
|
|
|
625,000
|
|
Lease
obligations through January 2011
|
|
|
550,000
|
|
|
|
|
|
|
Total
commitments
|
|
|
1,175,000
|
|
|
|
|
|
|
Total
net assets and commitments
|
|
$
|
6,952,000
|
|
Approximately
35% of the property, plant and equipment may be utilized in other areas of
our
electronic components and subsystems operations.
Any
future demand for Multi-Mix® for the wireless market is dependent on various
third-party programs and is directly related to the timing of our customers’ and
potential customers’ phase-out of existing programs and their migration, which
is not assured and has not yet commenced commercially, toward new programs
to
meet their customers’ new requirements. While these circumstances have resulted
in the delay or cancellation of Multi-Mix® Microtechnology product purchases
that had been anticipated from certain specific customers or programs, the
Company has implemented a strategic plan utilizing product knowledge and
customer focus to expand specific sales opportunities. However, continued
extended delay or reduction from planned levels in new orders expected from
customers for these products could require the Company to pursue alternatives
related to the utilization or realization of these assets and commitments,
the
net result of which could be materially adverse to the financial results and
position of the Company. In accordance with the Company’s evaluation of
Multi-Mix® under SFAS No. 144 at December 29, 2007, the Company has determined
no provision for impairment was required at that time. Management will continue
to monitor the recoverability of the Multi-Mix® assets.
Contract
Revenue Recognition
The
Company recognizes revenue in accordance with the provisions of Staff Accounting
Bulletin No. 104. Contract revenue and related costs on fixed-price and
cost-reimbursement contracts that require customization of products to customer
specifications are recorded when title transfers to the customer, which is
generally on the date of shipment, collection of the related receivable is
probable, persuasive evidence of an arrangement exists and the sales price
is
fixed or determinable. Prior to shipment, accumulated manufacturing costs
incurred on such contracts are recorded as work-in-process inventory. The
Company currently has one contract for the engineering design, development
and
production of space electronics products. The Company accounts for this contract
in accordance with AICPA Statement of Position No. 81-1, “Accounting for
Performance of Construction-Type and Certain Production-Type Contracts”. Sales
and related contract costs for design and development services under this
contract are recognized based on the cost-to-cost method. Sales and related
contract costs for products delivered under this contract are recognized
on a
units-of-delivery basis. Revenue related to non-recurring engineering charges
is
generally recognized upon shipment of the related initial units produced
or
based upon contractually established stages of completion. Anticipated losses
on
contracts are charged to operations in the period when the loss becomes known.
The reserve for cost overruns is shown as a reduction of the accumulated
costs
recorded as work-in-process inventory.
The
cost
rates utilized for cost-reimbursement contracts are subject to review by third
parties and can be revised, which can result in additions to or reductions
from
revenue. Revisions which result in reductions to revenue are recognized in
the
period that the rates are reviewed and finalized; additions to revenue are
recognized in the period that the rates are reviewed, finalized, accepted by
the
customer, and collectability from the customer is reasonably assured. The
Company submits financial information regarding the cost rates on
cost-reimbursement contracts for each fiscal year in which the Company performed
work on cost-reimbursement contracts. The Company does not record any estimates
on a regular basis for potential revenue adjustments, as there currently is
no
reasonable basis on which to estimate such adjustments given the Company’s very
limited experience with these contracts. No revenue was recognized related
to
cost-reimbursement contracts during the first quarters of 2008 or 2007.
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, a provision for a potential
loss is made and charged to operations. Total inventories are net of valuation
allowances for obsolescence and cost overruns of $1,469,000 at March 29, 2008
and $1,623,000 at December 29, 2007. The Company recorded provisions for
obsolescence and cost overruns of $(75,000) and $23,000 for the quarters ended
March 29, 2008 and March 31, 2007, respectively.
Procurement
of inventory 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 inventory
previously procured by us and our purchases of inventory beyond customer needs
may result in excess and obsolete inventory for the related customers. Although
the Company may be able to use some of these excess components and raw materials
in other products it manufactures, a portion of the cost of this excess
inventory may not be recoverable from customers, nor may any excess quantities
be returned to the vendors. The Company also may not be able to recover the
cost
of obsolete inventory from vendors or customers.
Write
offs or write downs of inventory generally arise from:
· |
declines
in the market value of inventory;
|
· |
changes
in customer demand for inventory, such as cancellation of orders;
and
|
· |
our
purchases of inventory beyond customer needs that result in excess
quantities on hand that may not be returned to the vendor or charged
back
to the customer.
|
Valuation
of Deferred Tax Assets
As
of
March 29, 2008, the Company has 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 management assesses that it is more likely than not that all
or a
portion of a deferred tax asset will not be realized. The Company's 2002, 2003,
2006 and 2007 net losses have weighed heavily in the Company's overall
assessments. The Company 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 first
quarter of 2008.
CONSOLIDATED
STATEMENTS OF OPERATIONS SUMMARY
(UNAUDITED)
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
|
|
|
|
Quarters
Ended
|
|
|
|
March 29,
|
|
March 31,
|
|
Continuing
operations
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
60.0
|
|
|
62.4
|
|
Selling,
general and administrative
|
|
|
39.0
|
|
|
49.2
|
|
Research
and development
|
|
|
6.4
|
|
|
10.7
|
|
|
|
|
105.4
|
|
|
122.3
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(5.4
|
)
|
|
(22.3
|
)
|
Interest
and other (expense) income, net
|
|
|
(1.1
|
)
|
|
0.5
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(6.5
|
)
|
|
(21.8
|
)
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
Loss
from continuing operations
|
|
|
(6.5
|
)
|
|
(21.8
|
)
|
Loss
from discontinued operations
|
|
|
-
|
|
|
(6.2
|
)
|
Net
loss
|
|
|
(6.5
|
)%
|
|
(28.0
|
)%
|
FIRST
QUARTER OF 2008 COMPARED TO THE FIRST QUARTER OF 2007-CONTINUING
OPERATIONS
Net
sales.
Net
sales
from continuing operations for the first quarter of 2008 were $5,758,000, an
increase of $1,247,000 or 27.6 percent compared to the first quarter of 2007
net
sales of $4,511,000. Net sales from continuing operations increased due to
the
higher level of orders received during 2007 and the resultant higher backlog
at
the beginning of the 2008 fiscal year, including
higher sales of Multi-Mix® products to defense industry related customers.
Backlog
represents the amount of orders the Company has 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 the Company’s 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. The
Company looks for this ratio to exceed 1.0, indicating the backlog is being
replenished by new orders 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 for the quarters ended March 29, 2008 and March 31,
2007:
|
|
2008
|
|
2007
|
|
Beginning
backlog
|
|
$
|
17,991,000
|
|
$
|
11,490,000
|
|
Plus
orders
|
|
|
8,155,000
|
|
|
5,969,000
|
|
Less
net sales
|
|
|
5,758,000
|
|
|
4,511,000
|
|
Ending
backlog
|
|
$
|
20,388,000
|
|
$
|
12,948,000
|
|
Book-to-bill
ratio
|
|
|
1.42
|
|
|
1.32
|
|
Orders
of
$8,155,000 were received during the first quarter of 2008, an increase of
$2,186,000 or 36.6% compared to $5,969,000 in orders received during the first
quarter of 2007. Backlog increased by $2,397,000 or 13.3% to $20,388,000 at
the
end of the first quarter of 2007 compared to $17,991,000 at year-end 2007,
due
to the increased orders received during the first three months from defense
industry related customers that are scheduled for shipment later in 2008 and
2009. The book-to-bill ratio for the first quarter of 2008 was 1.42 to 1 and
for
the first quarter of 2007 was 1.32 to 1. The orders, backlog and book-to-bill
data for the first quarter of 2007 exclude FMI information.
Cost
of sales and Gross profit.
The
following table provides comparative gross profit information between the
quarters ended March 29, 2008 and March 31, 2007.
|
|
Quarter ended March 29, 2008
|
|
Quarter ended March 31, 2007
|
|
|
|
$
|
|
Increase/
(Decrease)
from prior
period
|
|
% of
Net Sales
|
|
$
|
|
Increase/
(Decrease)
from prior
period
|
|
% of
Net Sales
|
|
Consolidated
gross profit
|
|
$
|
2,306,000
|
|
$
|
609,000
|
|
|
40.0
|
%
|
$
|
1,697,000
|
|
$
|
(171,000
|
)
|
|
37.6
|
%
|
The
increase in consolidated gross profit and consolidated gross profit percentage
for the first quarter of 2008 was due to the impact of the higher level of
sales
allowing the Company to better absorb fixed manufacturing costs.
Depreciation
expense included in consolidated cost of sales for the first quarter of 2008
was
$572,000, an increase of $45,000 compared to the first quarter of 2007. For
the
first quarter of 2008, approximately $398,000 of depreciation expense was
associated with Multi-Mix® Microtechnology capital assets. For the first quarter
of 2007, approximately $375,000 of depreciation expense was associated with
Multi-Mix® Microtechnology capital assets.
Selling,
general and administrative expenses.
Selling,
general and administrative expenses of $2,245,000 for the first quarter of
2008
increased by $28,000 or 1.2%, and when expressed as a percentage of net sales,
decreased by 10.2 percentage points to 39.0% compared to the first quarter
of
2007. The increase in such expenses for the first quarter of 2008 was due to
higher commissions and selling costs related to additional sales personnel
hired
and
higher professional fees.
Research
and development expenses.
Research
and development expenses for new products were $373,000 for the first quarter
of
2008, a decrease of $111,000 or 23.0%, and when expressed as a percentage of
net
sales, decreased by 4.3 percentage points to 6.4% compared to the first quarter
of 2007. Substantially all of the research and development expenses were related
to Multi-Mix® Microtechnology products. The Company anticipates that these
expenses will increase in future periods in connection with implementation
of
our strategic plan for Multi-Mix®.
Operating
loss from continuing operations.
Operating
loss from continuing operations for the first quarter of 2008 was $312,000,
compared to an operating loss from continuing operations of $1,004,000 for
the
first quarter of 2007. The
decrease in operating loss from continuing operations for the first quarter
of
2008 as compared to the first quarter of 2007 was due to the improved gross
profit caused by the increase in sales and lower research and development costs
as compared to the first quarter of 2007.
Interest
and other (expense) income, net.
Interest
and other (expense) income, net was $(61,000) for the first quarter of 2008
compared to interest and other (expense) income, net of $21,000 for the first
quarter of 2007. Interest expense for the first quarter of 2008 and 2007 was
principally incurred on borrowings under the term loans which the Company
entered into during the fourth quarter of 2003 and refinanced in October 2006.
Interest expense for the first quarter of 2008 was higher than the first quarter
of 2007 due to the lower levels of investable cash that provided less interest
income as compared to the first quarter of 2007.
Income
taxes.
As
of
March 29, 2008, the Company has 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 management assesses that it is more likely than not that all
or a
portion of a deferred tax asset will not be realized. The Company's 2002, 2003,
2006 and 2007 net losses have weighed heavily in the Company's overall
assessments. The Company 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 first three
months of 2008.
On
December 31, 2006, the Company adopted FIN 48, which clarifies the accounting
for uncertainty in tax positions. As of that date the Company had no uncertain
tax positions and did not record any additional benefits or liabilities.
At
March 29, 2008 and December 29, 2007, the Company had no uncertain tax positions
and did not record any additional benefits or liabilities. The Company will
recognize any accrued interest or penalties related to unrecognized tax benefits
within the provision for income taxes.
Internal
Revenue Service Code Section 382 places a limitation on the utilization of
net
operating loss carryforwards when an ownership change, as defined in the tax
law, occurs. Generally, an ownership change occurs when there is a greater
than
50 percent change in ownership. If such a change should occur, the actual
utilization of net operating loss carryforwards, for tax purposes, would be
limited annually to a percentage of the fair market value of the Company at
the
time of such change. The Company may become subject to these limitations in
2008
depending on the extent of the changes in its ownership.
Loss
from continuing operations.
For
the
reasons set forth above, loss from continuing operations for the first quarter
of 2008 was $372,000 compared to a loss from continuing operations of $983,000
for the first quarter of 2007. Loss from continuing operations for the first
quarter of 2008 was $.13 per share compared to a loss from continuing operations
of $.32 per share for the first quarter of 2007.
Discontinued
operations.
There
was
no loss from discontinued operations in the first quarter of 2008. Loss from
discontinued operations for the first quarter of 2007 was $281,000. Loss from
discontinued operations for the first quarter of 2007 was $.09 per
share.
Net
loss.
For
the
reasons set forth above, net loss for the first quarter of 2008 was $372,000
compared to a net loss of $1,264,000 for the first quarter of 2007. Net loss
for
the first quarter of 2008 was $.13 per share compared to a net loss of $.41
per
share for the first quarter of 2007.
LIQUIDITY
AND CAPITAL RESOURCES
The
Company had liquid resources comprised of cash and cash equivalents totaling
approximately $627,000 at the end of the first quarter of 2008 compared to
approximately $2,000,000 at the end of 2007. The principal reasons for the
reduction in cash at March 29, 2008 were capital expenditures of $352,000,
operating cash used of $1,627,000 as described below, and repayments of
borrowings of $388,000 offset, in part, by restricted cash returned of $250,000
and the proceeds of the sale of FMI’s assets of $664,000. The Company's working
capital was approximately $9,800,000 and its current ratio was 3.9 to 1 at
the
end of the first quarter of 2008 compared to $9,900,000 and 3.5 to 1,
respectively, at the end of 2007. At March 29, 2008, the Company had available
borrowing capacity under its revolving line of credit of
$3,660,000.
The
Company's activities from continuing operations used operating cash flows of
$1,627,000 during the first quarter of 2008 compared to generating $667,000
of
operating cash flows during the first quarter of 2007. The primary uses of
operating cash flows from continuing operations for the first quarter of 2008
were the quarterly loss from continuing operations of $372,000 which was reduced
by depreciation and amortization of $618,000 and share-based compensation of
$120,000, an increase in accounts receivable of $497,000 as a result of the
higher first quarter sales level, an increase in inventories of $1,034,000
to
meet the production associated with the increase in backlog
and an aggregate decrease in accounts payable, customer deposits and accrued
liabilities of $488,000. The primary sources of operating cash flows from
continuing operations for the first quarter of 2007 were a decrease in accounts
receivable of $1,024,000 and a decrease in other current assets of $246,000,
offset by the loss from continuing operations of $983,000 which was reduced
by
depreciation and amortization of $571,000 and share-based compensation of
$51,000, an increase in inventory of $175,000 and an aggregate decrease in
accounts payable, customer deposits and accrued liabilities of $98,000.
The
Company made net cash investments in property, plant and equipment of $352,000
during the first quarter of 2008 compared to net cash investments made in
property, plant and equipment of $401,000 during the first quarter of 2007.
These capital expenditures are related to new production and test equipment
capabilities in connection with the introduction of new products and
enhancements to existing products. The depreciated cost of capital equipment
associated with Multi-Mix® Microtechnology was $5,145,000 at the end of the
first quarter of 2008, a decrease of $336,000 compared to $5,481,000 at the
end
of fiscal year 2007.
The
Company’s 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 the Company’s $5,000,000 revolving credit
facility, which expires October 18, 2008.
On
October 18, 2006, the Company entered into a financing agreement with Capital
One, N.A. (previously North Fork Bank) (“Capital One”) which consists of a
two-year $5,000,000 revolving line of credit, a five-year $2,000,000 machinery
and equipment term loan due October 1, 2011 (“Term Loan”) and a ten-year
$3,000,000 real estate term loan due October 1, 2016 (“Mortgage Loan”). The
revolving line of credit is subject to an availability limit under a borrowing
base calculation (85% of eligible accounts receivable plus up to 50% of eligible
raw materials inventory plus up to 25% of eligible electronic components, with
an inventory advance sublimit not to exceed $1,500,000, as defined in the
financing agreement). The revolving line of credit expires October 18, 2008. The
Company anticipates the revolving credit facility will be renewed. At March
29,
2008, the Company had available borrowing capacity under its revolving line
of
credit of $3,660,000. The revolving line of credit bears interest at the prime
rate less 0.50% (4.75% at March 29, 2008 and currently 4.50%) or LIBOR plus
2.00%. The principal amount of the Term Loan is payable in 59 equal monthly
installments of $33,333 and one final payment of the remaining principal
balance. The Term Loan bears interest at the prime rate less 0.50% (4.75% at
March 29, 2008 and currently 4.50%) or LIBOR plus 2.25%. The principal amount
of
the Mortgage Loan is payable in 119 equal monthly installments of $12,500 and
one final payment of the remaining principal balance. The Mortgage Loan bears
interest at the prime rate less 0.50% (4.75% at March 29, 2008 and currently
4.50%) or LIBOR plus 2.25%. At March 29, 2008, the Company had no portion of
its
borrowings under LIBOR-based interest rates. The revolving line of credit,
the
Term Loan and the Mortgage Loan are secured by substantially all assets located
within the United States and the pledge of 65% of the stock of the Company's
subsidiaries located in Costa Rica and Canada.
Capital
One and the Company amended the financing agreement, as of May 15, 2007, which
(i) eliminated the fixed charge coverage ratio covenant for the quarter ended
June 30, 2007, (ii) added a covenant related to earnings before interest, taxes,
depreciation and amortization (“EBITDA”) for the four quarters ended June 30,
2007 to require the Company to achieve a minimum level of EBITDA, and (iii)
modified the fixed charge coverage ratio covenant for periods after the quarter
ending September 29, 2007. The Company was in compliance with these amended
covenants at March 29, 2008.
On
August
9, 2007, Capital One and Merrimac entered into a Pledge and Security Agreement,
under which Capital One consented to the guaranty by Merrimac of FMI's
borrowings under the revolving credit agreement with The Bank of Nova Scotia
in
the amount of up to $250,000 (Canadian). In consideration for Capital One
providing such consent, Merrimac deposited $250,000 into a controlled collateral
account with Capital One and also agreed to prepay the mortgage loan portion
of
the credit facility with Capital One with fifty percent of the net proceeds
from
a sale of FMI, up to a maximum amount of $500,000. This agreement terminated
in
November 2007 when The Bank of Nova Scotia terminated FMI’s revolving credit
agreement. Upon the termination of such agreement, the Company agreed to repay
a
portion of its Mortgage Loan with the funds in the controlled collateral account
upon the expiration of the LIBOR contracts in January 2008. On January 18,
2008,
Merrimac paid $250,000 of the Mortgage Loan using the funds previously deposited
into the controlled collateral account.
Depreciation
and amortization expenses exceeded capital expenditures for production equipment
during the first three months of 2008 by approximately $266,000, and the Company
anticipates that depreciation and amortization expenses will exceed capital
expenditures in fiscal year 2008 by approximately $900,000. The Company intends
to issue commitments to purchase $1,300,000 of capital equipment from various
vendors for the remainder of 2008. The Company anticipates that such equipment
will be purchased and become operational during 2008.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a
single authoritative definition of fair value, sets out a framework for
measuring fair value and requires additional disclosures about fair-value
measurements. SFAS No. 157 applies only to fair-value measurements that are
already required or permitted by other accounting standards and is expected
to
increase the consistency of those measurements. It will also affect current
practices by nullifying Emerging Issues Task Force guidance that prohibited
recognition of gains or losses at the inception of derivative transactions
whose
fair value is estimated by applying a model and by eliminating the use of
“blockage” factors by brokers, dealers and investment companies that have
been
applying
AICPA Guides. The Company adopted SFAS No. 157 On December 30, 2007. The Company
has no financial assets or liabilities subject to the requirements of SFAS
No.
157. The adoption of SFAS No. 157 did not have an impact on its financial
position or results of operations.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains
and
losses on items for which the fair value option has been elected are reported
in
net income. The Company adopted SFAS No. 159 On December 30, 2007. The adoption
of SFAS No. 159 did not have an impact on its financial position or results
of
operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R established
principles and requirements for how an acquiring company recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest of the acquired company and the goodwill
acquired. SFAS 141R also established disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination.
SFAS
141R is effective for fiscal periods beginning after December 15, 2008. The
Company is currently evaluating the impact that SFAS 141R will have on its
financial position and results of operations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No.
160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
of Accounting Research Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes
accounting and reporting standards of ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
160
is effective for fiscal periods beginning after December 15, 2008. The Company
is currently evaluating the impact that SFAS 160 will have on its financial
position and results of operations.
ITEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For
quantitative and qualitative disclosures about the market risks affecting
Merrimac, see “Quantitative and Qualitative Disclosures about Market Risk” in
Item 7A of Part II of the Company’s Annual Report on Form 10-K for the fiscal
year ended December 29, 2007, which is incorporated herein by reference. Our
exposure to market risk has not changed materially since December 29, 2007.
ITEM
4.
CONTROLS AND PROCEDURES
As
of
March 29, 2008 (the end of the period covered by this report), the Company's
management carried out an evaluation, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of March
29, 2008, the Company's disclosure controls and procedures were effective.
In
designing and evaluating the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934),
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurances of achieving
the
desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We believe that our disclosure
controls and procedures provide such reasonable assurance.
No
change
occurred in the Company's internal controls concerning financial reporting
during the Company's first quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART
II
OTHER INFORMATION
ITEM
1.
LEGAL PROCEEDINGS.
Merrimac
is a party to lawsuits, arising in the normal course of business. It is the
opinion of Merrimac's management that the disposition of these various lawsuits
will not individually or in the aggregate have a material adverse effect on
the
consolidated financial position or the results of operations of
Merrimac.
On
February 22, 2008, a statement of claim in Ontario Superior Court of Justice
was
filed by a former FMI employee against FMI seeking damages for approximately
$77,000 ($75,000 Canadian) for wrongful dismissal following the sale of FMI’s
assets to FTG. The Company agreed to settle this claim in May 2008 for a minimal
amount.
On
March
10, 2008, a statement of claim in Ontario Superior Court of Justice was filed
by
nineteen (19) former FMI employees against Merrimac, FMI and FTG seeking damages
for wrongful dismissal for approximately $1,000,000 (Canadian $977,000)
following the sale of FMI’s assets to FTG. The former FMI employees are alleging
that an employment contract existed between FMI and the plaintiffs and are
seeking additional damages for termination of the alleged contract.
The
Company believes it has been improperly named in this claim and is petitioning
the Court to be removed as a defendant.
The
Company has an Employment Practices Liability insurance policy that extends
coverage to its subsidiaries. The insurance carrier agreed to provide a defense
in this matter on April 24, 2008 and they retained Canadian counsel to defend
this claim. The Company made provision for the deductible amount of the
insurance policy which is $25,000. In accordance with the requirements of SFAS
No. 5, after discussions with counsel, The Company cannot presently determine
if
the likelihood of an unfavorable outcome is probable, reasonably possible or
remote. In addition, The Company cannot reasonably estimate the amount of a
probable loss, other than the minimal deductible amount under the insurance
policy. The Company and its insurance carrier intend to defend these claims
vigorously.
ITEM
1A.
RISK FACTORS.
There
have been no material changes to our Risk Factors from those presented in our
Form 10-K for fiscal year 2007.
ITEM
5.
OTHER INFORMATION.
None.
ITEM
6.
EXHIBITS
Exhibits:
EXHIBIT
NUMBER
|
|
DESCRIPTION
OF EXHIBIT
|
31.1+
|
|
Chief
Executive Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2+
|
|
Chief
Financial Officer's Certificate, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1+
|
|
Chief
Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
32.2+
|
|
Chief
Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
+ Indicates
that exhibit is filed as an exhibit hereto.
SIGNATURES
In
accordance with the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERRIMAC
INDUSTRIES, INC.
Date:
May 13, 2008
|
By:
|
/s/
Mason N. Carter
|
|
Mason
N. Carter
|
|
Chairman,
President and
|
|
Chief
Executive Officer
|
Date:
May 13, 2008
|
By:
|
/s/
Robert V. Condon
|
|
Robert
V. Condon
|
|
Vice
President, Finance and
|
|
Chief
Financial Officer
|