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MICROWAVE FILTER CO INC /NY/ - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Microwave Filter Company, Inc. (MFC) operates primarily in the United States and principally in one industry. The Company extends credit to business customers, including original equipment manufacturers (OEMs), distributors and other end users, based upon ongoing credit evaluations. Microwave Filter Company, Inc. designs, develops, manufactures and sells electronic filters, both for radio and microwave frequencies, to help process signal distribution and to prevent unwanted signals from disrupting transmit or receive operations. Markets served include cable television, television and radio broadcast, satellite broadcast, mobile radio and commercial and defense electronics. Niagara Scientific, Inc. (NSI), a wholly owned subsidiary, custom designs case packing machines to automatically pack products into shipping cases. Customers are processors of food and other commodity products with a need to reduce labor cost with a modest investment and quick payback. NSI's sales consist of spare parts orders. RESULTS OF OPERATIONS -------------------------------------- The following table sets forth the Company's net sales by major product group for each of the fiscal years in the two year period ended September 30, 2011. Product group (in thousands) Fiscal 2011 Fiscal 2010 Microwave Filter: RF/Microwave $ 1,915 $ 1,440 Satellite 1,651 1,547 Cable TV 1,377 1,470 Broadcast TV 98 228 Niagara Scientific 3 6 ---------- ---------- Total $ 5,044 $ 4,691 ====== ====== Sales backlog at 9/30 $ 644 $ 413 ====== ====== Fiscal 2011 compared to fiscal 2010 Consolidated net sales for the fiscal year ended September 30, 2011 equaled $5,043,934, an increase of $352,412 or 7.5%, when compared to consolidated net sales of $4,691,522 during the fiscal year ended September 30, 2010. MFC's RF/Microwave product sales increased $475,220 or 33% to $1,915,241 during the fiscal year ended September 30, 2011 when compared to sales of $1,440,021 during the fiscal year ended September 30, 2010. Management attributes the increase in sales to the Company's efforts to encourage Original Equipment Manufacturer (OEM) relationships. MFC's RF/Microwave products are sold primarily to Original Equipment Manufacturers that serve the mobile radio, commercial communications and defense electronics markets. The Company continues to invest in production engineering and infrastructure development to penetrate OEM market segments as they become popular. MFC is concentrating its technical resources and product development efforts toward potential high volume customers as part of a concentrated effort to provide substantial long-term growth. Sales to one OEM customer represented approximately 18% of total sales for the fiscal year ended September 30, 2011 compared to approximately 15% of total sales for the fiscal year ended September 30, 2010. 12 -------------------------------------------------------------------------------- MFC's Satellite product sales increased $103,725 or 6.7% to $1,650,762 during the fiscal year ended September 30, 2011 when compared to sales of $1,547,037 during the fiscal year ended September 30, 2010. The increase can be attributed to an increase in demand for filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Although current economic conditions do impact sales, management expects demand for these types of filters to continue with the proliferation of earth stations world wide and increased sources of interference. MFC's Cable TV product sales decreased $93,630 or 6.4% to $1,376,572 during the fiscal year ended September 30, 2011 when compared to Cable TV product sales of $1,470,202 during the fiscal year ended September 30, 2010. The decrease can primarily be attributed to the shift from analog to digital television. Digital Television (DTV) is a new type of broadcasting modulation that will transform television viewing. DTV enables broadcasters and cable operators to offer television with movie-quality picture and sound (HDTV). It also offers greater multicasting and interactive capabilities. DTV is a more flexible and efficient technology than the NTSC "analog" modulation system. Rather than being limited to providing one analog programming channel, a broadcaster or cable operator will be able to provide a super sharp "high definition" (HDTV) program or multiple "standard definition" DTV programs simultaneously using the RF spectrum more efficiently. Providing several program streams on one cable or broadcast channel is called "multicasting." The number of programs a station can send on one digital channel depends on the level of picture detail, also known as "resolution." DTV can provide interactive video and data services that are not possible with "analog" technology. Converting to DTV will eventually free up parts of the scarce and valuable broadcast airwaves. Those portions of the spectrum can then be used for other important services, such as advanced wireless and public safety services (police, fire, rescue squads, etc.). Due to the inherent nature of digital modulation versus analog modulation, fewer filters will be required. The Company has developed filters for digital television and there will still be requirements for analog filters for limited applications in commercial and private cable systems; however, the demand for these filters is expected to decline. MFC's Broadcast TV product sales decreased $129,701 or 56.9% to $98,118 for the fiscal year ended September 30, 2011 when compared to sales of $227,819 for the fiscal year ended September 30, 2010. These products are primarily sold to system integrators for rural communities. At September 30, 2011, the Company's total backlog of orders, which represents firm orders from customers, equaled $643,925 compared to $413,159 at September 30, 2010. The total Company backlog at September 30, 2011 is scheduled to ship during fiscal 2012. However, backlog is not necessarily indicative of future sales. Accordingly, the Company does not believe that its backlog as of any particular date is representative of actual sales for any succeeding period. 13 -------------------------------------------------------------------------------- Gross profit increased $162,317 or 9.6% to $1,857,426 during the fiscal year ended September 30, 2011 when compared to gross profit of $1,695,109 during the fiscal year ended September 30, 2010. As a percentage of sales, gross profit increased to 36.8% during the fiscal year ended September 30, 2011 compared to 36.1% during the fiscal year ended September 30, 2010. The increases in gross profit can primarily be attributed to the higher sales volume this year resulting in a higher base to absorb fixed expenses. Selling, general and administrative (SG&A) expenses increased $94,949 or 6.1% to $1,650,357 during the fiscal year ended September 30, 2011 when compared to SG&A expenses of $1,555,408 during the fiscal year ended September 30, 2010. The dollar increase can be attributed to higher payroll and payroll related expenses, a higher profit sharing contribution and higher promotional expenses this year when compared to last year. As a percentage of sales, SG&A expenses decreased to 32.7% during fiscal 2011 compared to 33.2% during fiscal 2010 due to the higher sales volume this year when compared to last year. Income from operations equaled $207,069 for the fiscal year ended September 30, 2011 compared to income from operations of $139,701 during the fiscal year ended September 30, 2010. The improvement can primarily be attributed to the higher sales volume this year when compared to last year. Other income increased $1,624 to $8,474 for the fiscal year ended September 30, 2011 when compared to other income of $6,850 for the fiscal year ended September 30, 2010. Other income is primarily interest income earned on invested cash balances. Other income may fluctuate based on market interest rates and levels of invested cash balances. The Company recorded a benefit for income taxes of $27,372 for the fiscal year ended September 30, 2011 compared to a provision for income taxes of $260 for the fiscal year ended September 30, 2010. The benefit for the current fiscal year can be attributed to a New York State qualified research expenses tax credit which was received during the quarter ended December 31, 2011 (the first quarter of Fiscal 2012.) Any benefit for losses has been subject to a valuation allowance since the realization of the deferred tax benefit is not considered more likely than not. As required by FASB ASC 740 (Prior Authoritative Literature: SFAS 109, Accounting for Income Taxes), the Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets. The Company has determined that, at this time, it is more likely than not that the Company will not realize all of the benefits of federal and state deferred tax assets, and, as a result, a valuation allowance was established. 14 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES ------------------------------------------------------- MFC defines liquidity as the ability to generate adequate funds to meet its operating and capital needs. The Company's primary source of liquidity has been funds provided by operations. September 30 2011 2010 Cash & cash equivalents $ 1,258,885 $ 1,466,719 Working capital $ 1,658,110 $ 1,981,150 Current ratio 3.59 to 1 4.68 to 1 Long-term debt $ 0 $ 0 Cash and cash equivalents decreased $207,834 to $1,258,885 at September 30, 2011 when compared to $1,466,719 at September 30, 2010. The decrease was a result of $466,023 in net cash provided by operating activities, $281,302 in net cash used for capital expenditures, $387,934 in net cash used to pay a special cash dividend and $4,621 in net cash used to purchase treasury stock. The net decrease of $71,612 in accounts receivable at September 30, 2011, when compared to September 30, 2010, can be attributable to the lower shipments during the quarter ended September 30, 2011 when compared to the quarter ended September 30, 2010. Sales for the quarter ended September 30, 2011 equaled $1,311,555 compared to sales of $1,433,608 for the quarter ended September 30, 2010. The increase of $31,257 in inventories at September 30, 2011, when compared to September 30, 2010, can be attributable to the higher sales order backlog of $643,925 at September 30, 2011 when compared to sales order backlog of $413,159 at September 30, 2010 and customer delivery schedules. The increase of $33,859 in accounts payable at September 30, 2011, when compared to September 30, 2010, can primarily be attributed to the higher inventories at September 30, 2011 when compared to September 30, 2010. The increase of $47,823 in other current liabilities at September 30, 2011, when compared to September 30, 2010, can primarily be attributed to a profit sharing contribution of $50,000 accrued at September 30, 2011. Capital expenditures consisted of building improvements, production equipment, test equipment, simulation software, computer hardware and a Company truck. The Company has committed to approximately $225,000 of capital equipment purchases for the six months ended March 31, 2012 (the first two quarters of fiscal 2012.) At September 30, 2011, the Company had unused aggregate lines of credit totaling $750,000 collateralized by all inventory, equipment and accounts receivable. Management believes that its working capital requirements for the foreseeable future will be met by its existing cash balances, future cash flows from operations and its current credit arrangements. 15 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements At September 30, 2011 and 2010, the Company did not have any unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which might have been established for the purpose of facilitating off-balance sheet arrangements. Critical Accounting Policies The Company's consolidated financial statements are based on the application of accounting principles generally accepted in the United States of America (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. The Company believes its use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis throughout the Company. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenues, receivables, inventories, and taxes. Revenues from product sales are recorded as the products are shipped and title and risk of loss have passed to the customer, provided that no significant vendor or post-contract support obligations remain and the collection of the related receivable is probable. Billings in advance of the Company's performance of such work are reflected as customer deposits in the accompanying consolidated balance sheet. Allowances for doubtful accounts are based on estimates of losses related to customer receivable balances. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. The Company's inventories are valued at the lower of cost or market. The Company uses certain estimates and judgments and considers several factors including product demand and changes in technology to provide for excess and obsolescence reserves to properly value inventory. The Company established a warranty reserve which provides for the estimated cost of product returns based upon historical experience and any known conditions or circumstances. Our warranty obligation is affected by product that does not meet specifications and performance requirements and any related costs of addressing such matters. The Company has deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income streams and the impact of tax planning strategies. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company's future taxable income levels. The Company has provided a full valuation allowance against its deferred tax assets. 16 -------------------------------------------------------------------------------- NEW ACCOUNTING PRONOUNCEMENTS ---------------------------------------------------------- In June 2011, the FASB issued an Accounting Standard Update ("ASU"), bringing amendments to how other comprehensive income (OCI) is presented in the financial statements. This update outlines that OCI and its components cannot be reported in the Company's consolidated statements of changes in stockholders' equity. This guidance is effective from the beginning of the Company's 2013 fiscal year. This update will not have a material impact to the Company and the Company will comply with the OCI disclosure changes required by the update. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 ---------------------------------------------------------------------------------------------------------------------------------------- In an effort to provide investors a balanced view of the Company's current condition and future growth opportunities, this Annual Report on Form 10-K may include comments by the Company's management about future performance. These statements which are not historical information are "forward-looking statements" pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. 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; general economic and industry conditions; slower than anticipated penetration into the satellite communications, mobile radio and commercial and defense electronics markets; competitive products and pricing pressures; increased pricing pressure from our customers; risks relating to governmental regulatory actions in broadcast, communications and defense programs; as well as other risks and uncertainties, including but not limited to those 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 hereof, 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. You are encouraged to review Microwave Filter Company's 2011 Annual Report and Form 10-K for the fiscal year ended September 30, 2011 and other Securities and Exchange Commission filings. Forward looking statements may be made directly in this document or "incorporated by reference" from other documents. You can find many of these statements by looking for words like "believes," "expects," "anticipates," "estimates," or similar expressions. 17 -------------------------------------------------------------------------------- |