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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 1999.
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________________
to ____________________.
Commission File Number: 0-8574
MICROWAVE POWER DEVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3622306
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
49 Wireless Boulevard
Hauppauge, New York 11788-3935
(Address of principal executive offices, including zip code)
(631) 231-1400
(Registrant's telephone number, including area code)
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 |_|
As of October 31, 1999, there were 10,637,824 shares outstanding of the
registrant's Common Stock, $.01 par value.
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<PAGE>
MICROWAVE POWER DEVICES, INC.
INDEX
PART I -- FINANCIAL INFORMATION Page No.
--------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998 ................... 3
Consolidated Statements of Operations --
Three and nine months ended September 30, 1999 and 1998 .... 4
Consolidated Statements of Cash Flows --
Nine months ended September 30, 1999 and 1998 .............. 5
Notes to Consolidated Financial Statements ................. 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.. 15
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings .......................................... 15
ITEM 6. Exhibits and Reports on Form 8-K ........................... 15
SIGNATURES ............................................................ 16
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 645 $ 667
Accounts receivable, net of allowance for doubtful accounts of
$90 and $75, respectively .............................................. 14,249 12,178
Inventories, net .......................................................... 23,107 18,861
Prepaid expenses and other current assets ................................. 759 476
Deferred income taxes ..................................................... 3,836 3,426
-------- --------
Total current assets ................................................. 42,596 35,608
PROPERTY, PLANT AND EQUIPMENT, net ............................................. 9,639 8,834
INTANGIBLE ASSETS, net ......................................................... 270 307
OTHER LONG-TERM ASSETS ......................................................... 492 673
DEFERRED INCOME TAXES .......................................................... -- 1,453
-------- --------
$ 52,997 $ 46,875
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ......................................... $ 1,418 $ 1,082
Accounts payable .......................................................... 8,280 8,970
Accrued liabilities ....................................................... 3,804 2,959
Customer advance payments ................................................. -- 921
-------- --------
Total current liabilities ............................................ 13,502 13,932
-------- --------
LONG-TERM DEBT ................................................................. 14,457 12,162
-------- --------
DEFERRED INCOME TAXES .......................................................... 350 --
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding ........................................ -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
10,637,824 and 10,397,520 shares issued and outstanding, respectively .. 106 104
Additional paid-in capital ................................................ 24,781 23,406
Notes receivable from shareholders ........................................ (123) (188)
Retained earnings (accumulated deficit) ................................... (76) (2,541)
-------- --------
Total shareholders' equity ........................................... 24,688 20,781
-------- --------
$ 52,997 $ 46,875
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
Page 3
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES .................................................. $ 16,417 $ 13,098 $ 52,813 $ 38,049
COST OF SALES .............................................. 11,794 9,164 36,697 26,143
-------- -------- -------- --------
Gross profit ..................................... 4,623 3,934 16,116 11,906
-------- -------- -------- --------
OPERATING EXPENSES:
General and administrative ............................ 957 921 2,971 2,999
Selling ............................................... 1,031 926 3,219 2,756
Research and development .............................. 1,802 1,531 5,110 4,365
-------- -------- -------- --------
3,790 3,378 11,300 10,120
-------- -------- -------- --------
Income from operations ........................... 833 556 4,816 1,786
INTEREST EXPENSE, net ...................................... 331 315 928 879
OTHER INCOME, net .......................................... 0 0 (3) 0
-------- -------- -------- --------
Income before income taxes ....................... 502 241 3,891 907
PROVISION FOR INCOME TAXES ................................. 157 36 1,426 183
-------- -------- -------- --------
Net income ....................................... $ 345 $ 205 $ 2,465 $ 724
======== ======== ======== ========
PER SHARE INFORMATION:
Net income per common share:
Basic ............................................ $ 0.03 $ 0.02 $ 0.23 $ 0.07
======== ======== ======== ========
Diluted .......................................... $ 0.03 $ 0.02 $ 0.23 $ 0.07
======== ======== ======== ========
Common shares used in computing per share amounts:
Basic ............................................ 10,565 10,379 10,503 10,379
======== ======== ======== ========
Diluted .......................................... 10,953 10,433 10,860 10,474
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 4
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 2,465 $ 724
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization .............................. 1,159 1,074
Provision for doubtful accounts ............................ 15 --
Deferred income taxes ...................................... 1,393 150
Gain on sale of property, plant and equipment .............. (4) --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (2,086) 1,064
Inventories ................................................ (4,246) (4,037)
Prepaid expenses and other assets .......................... (102) 267
Accounts payable and accrued liabilities ................... 155 2,380
Customer advance payments .................................. (921) 249
------- -------
Net cash (used in) provided by operating activities ... (2,172) 1,871
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................. (1,895) (1,679)
Proceeds from sale of property, plant and equipment ........ 5 10
Investment in marketable securities ........................ -- 6
------- -------
Net cash used in investing activities ................. (1,890) (1,663)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................... 1,659 2,133
Principal payments of long-term debt ....................... (972) (640)
Net proceeds from (repayments on) revolving credit loans ... 1,944 (1,736)
Deferred financing costs ................................... (33) (22)
Repayment of notes receivable from shareholder ............. 65 --
Net proceeds from exercise of common stock options ......... 1,377 2
------- -------
Net cash provided by (used in) financing activities ... 4,040 (263)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS ................................ (22) (55)
CASH AND CASH EQUIVALENTS, beginning of year ......................... 667 687
------- -------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 645 $ 632
======= =======
SUPPLEMENTAL DATA:
Cash paid for interest .......................................... $ 970 $ 921
======= =======
Cash paid for income taxes ...................................... $ 85 $ 136
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 5
<PAGE>
MICROWAVE POWER DEVICES, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(in thousands, except per share data)
(unaudited)
1. Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1998 audited consolidated financial
statements included in the Company's 1998 Annual Report and the Company's 1998
Annual Report on Form 10-K filed with the SEC on March 19, 1999. In the opinion
of Management, the interim unaudited financial statements included herein
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented therein. The consolidated results of operations for
interim periods are not necessarily indicative of the results to be expected for
a full year.
2. The Company accounts for earnings per share pursuant to SFAS No. 128,
"Earnings Per Share." Basic net income per common share ("Basic EPS") is
computed by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted net income per common share ("Diluted
EPS") is computed by dividing net income by the weighted average number of
common shares and dilutive common share equivalents outstanding during the
period. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS
on the face of the consolidated statement of operations. A reconciliation
between the numerator and denominator of Basic EPS and Diluted EPS is as
follows:
<TABLE>
<CAPTION>
Net Income Per
Net Income Common Shares Common Share
---------- ------------- ------------
For the quarter ended September 30, 1999
----------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income attributable to common stock $ 345 10,565 $ 0.03
Effect of dilutive securities: stock options -- 388 --
------ ------ ------
Diluted EPS
Net income attributable to common stock and
assumed option exercises $ 345 10,953 $ 0.03
====== ====== ======
<CAPTION>
For the quarter ended September 30, 1998
----------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income attributable to common stock $ 205 10,379 $ 0.02
Effect of dilutive securities: stock options -- 54 --
------ ------ ------
Diluted EPS
Net income attributable to common stock and
assumed option exercises $ 205 10,433 $ 0.02
====== ====== ======
<CAPTION>
For the nine months ended September 30, 1999
--------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income attributable to common stock $2,465 10,503 $ 0.23
Effect of dilutive securities: stock options -- 357 --
------ ------ ------
Diluted EPS
Net income attributable to common stock and
assumed option exercises $2,465 10,860 $ 0.23
====== ====== ======
<CAPTION>
For the nine months ended September 30, 1998
--------------------------------------------
<S> <C> <C> <C>
Basic EPS
Net income attributable to common stock $ 724 10,379 $ 0.07
Effect of dilutive securities: stock options -- 95 --
------ ------ ------
Diluted EPS
Net income attributable to common stock and
assumed option exercises $ 724 10,474 $ 0.07
====== ====== ======
</TABLE>
Page 6
<PAGE>
Diluted EPS, for the three months and nine months ended September 30, 1999
and 1998, does not include the impact of other stock options then outstanding as
their inclusion would be anti-dilutive.
3. The following stock options were granted, cancelled or exercised during
the third quarter of 1999 under either the 1995 or 1996 Stock Option Plans:
Granted Cancelled Exercised
------- --------- ---------
1 @ $10.5625 5 @ $2.875 - $10.00 123 @ $2.875 - $11.125
4. Segment Information
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Reportable operating segments are determined based on the Company's management
approach. The management approach, as defined by SFAS No. 131, is based on the
way that the chief operating decision maker organizes the segments within an
enterprise for making operating decisions and assessing performance. While the
Company's results of operations are primarily reviewed on a consolidated basis,
the chief operating decision maker also manages the enterprise in two segments:
(i) wireless products and (ii) satellite, medical and military products. The
following represents selected consolidated financial information for the
Company's segments for the three and nine months ended September 30, 1999 and
1998:
Three Months Satellite, Medical
September 30, 1999 Wireless Products and Military Products Total
------------------ ----------------- --------------------- -----
Net sales................. $7,837 $8,580 $16,417
Gross profit.............. 2,072 2,551 4,623
Net income (loss)......... (475) 820 345
Total assets.............. 21,761 31,236 52,997
Three Months Satellite, Medical
September 30, 1998 Wireless Products and Military Products Total
------------------ ----------------- --------------------- -----
Net sales................. $3,204 $9,894 $13,098
Gross profit.............. 778 3,156 3,934
Net income (loss)......... (1,055) 1,260 205
Total assets.............. 10,618 34,316 44,934
Nine Months Satellite, Medical
September 30, 1999 Wireless Products and Military Products Total
------------------ ----------------- --------------------- -----
Net sales................. $25,316 $27,497 $52,813
Gross profit.............. 6,999 9,117 16,116
Net income (loss)......... (831) 3,296 2,465
Total assets.............. 21,761 31,236 52,997
Page 7
<PAGE>
Nine Months Satellite, Medical
September 30, 1998 Wireless Products and Military Products Total
------------------ ----------------- --------------------- -----
Net sales................. $11,857 $26,192 $38,049
Gross profit.............. 2,706 9,200 11,906
Net income (loss)......... (2,950) 3,674 724
Total assets.............. 10,618 34,316 44,934
5. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity during a period, except
those resulting from investment by owners and distribution to owners, for the
period in which they are recognized. Comprehensive income is the total of net
income and all other nonowner changes in equity (or other comprehensive income)
such as unrealized gains/losses on securities classified as available-for-sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Comprehensive and other comprehensive income must be reported on
the face of annual financial statements or in the case of interim reporting, the
footnote approach may be utilized. The Company's operations did not give rise to
items includible in comprehensive income which were not already included in net
income for the three and nine months ended September 30, 1999 and 1998.
Accordingly, the Company's comprehensive income is the same as its net income
for all periods presented.
6. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
An Amendment of FASB Statement No. 133", which was issued in June 1999, SFAS No.
133 will be effective for fiscal years beginning after June 15, 2000. A company
may also implement the Statement as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1999 and thereafter). SFAS
No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after either
December 31, 1997 or 1998, at the company's election.
While the Company operates in international markets, it does so presently
without the use of derivatives and therefore these new pronouncements are not
applicable.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Microwave Power Devices, Inc. ("Microwave Power Devices" or the "Company")
commenced operations in 1967. During the past 32 years, the Company has
designed, manufactured and marketed high power, solid-state, radio frequency
("RF") and microwave power amplifiers and related subsystems for military,
medical, satellite and wireless telecommunications applications.
The Company historically has been dependent upon the military market as
its principal source of revenue. In 1992, as the military market was declining,
the Company leveraged its military technological leadership position and
increased the scope of its business by entering commercial markets, thereby
broadening its product offerings. In 1994, the Company started producing power
amplifiers for the wireless telecommunications market. The Company now develops
precision high-power amplifiers for a variety of commercial uses. As a result of
these efforts, the Company is now well positioned to service the low, medium and
high volume needs of all of its military and commercial customers.
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's 1998 Annual Report on Form 10-K, filed
March 19, 1999, under Item 1, "Business - Risk Factors," together with other
factors that appear with the forward-looking statements, or in the Company's
other Securities and Exchange Commission filings, including its Registration
Statement on Form S-1 dated September 29, 1995, could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company in this Quarterly Report on Form 10-Q.
Results of Operations --
Third Quarters Ended September 30, 1999 and September 30, 1998
Net Sales. Net sales increased by 25% to $16.4 million in the third
quarter of 1999 from $13.1 million in the third quarter of 1998. This sales
increase was primarily due to higher shipments of the Company's commercial
products, partially offset by lower shipments of the Company's military
products. Sales of commercial products increased by 96% to $10.2 million in the
third quarter of 1999 from $5.2 million in the third quarter of 1998,
representing 62% and 40%, respectively, of net sales in such periods. The
commercial sales increase was predominantly due to higher shipments to one
domestic wireless telecommunications original equipment manufacturer ("OEM").
Sales of military products decreased by 21% to $6.2 million in the third quarter
of 1999 from $7.9 million in the third quarter of 1998, representing 38% and
60%, respectively, of net sales in such periods. The military sales decrease was
predominantly due to lower shipments on a U.S. Government military program and a
domestic military program, partially offset by higher shipments on two foreign
military programs and one domestic military program.
International sales increased by 270% to $4.3 million in the third quarter
of 1999 from $1.2 million in the third quarter of 1998, totaling 26% of net
sales in the third quarter of 1999 compared to 9% in the third quarter of 1998.
The increase in international sales was predominantly due to higher shipments on
two foreign military programs. In the third quarter of 1999, sales to a domestic
commercial OEM (Customer B) and a foreign military OEM (Customer D) accounted
for 44% and 14%, respectively, of the Company's net sales. In the third quarter
of 1998, sales to two domestic military OEMs (Customer F and Customer G) and one
domestic commercial OEM (Customer B) accounted for 29%, 18% and 11%,
respectively, of the Company's net sales.
Page 9
<PAGE>
The Company has recently begun to enter into arrangements with its major
wireless OEM customers whereby those customers stock the Company's amplifiers on
a consignment basis until they are consumed in the customer's production
process, at which time revenue is recognized by the Company. Under these
arrangements, the Company receives a forecast each week from the customer
reflecting the customer's estimated future product requirements. These forecasts
provide the Company with a one year forward-look which details the expected
weekly requirements for the first 26 weeks and monthly requirements for the
remaining six months. The Company's business, financial condition and results of
operations could be materially adversely affected if the customer's actual
product needs ultimately are less than the customer's forecasted expectations
or, conversely, if the customer's actual product needs ultimately substantially
exceed the customer's forecasted expectations such that the Company cannot
fulfill them.
Gross Profit. Gross profit increased by 18% to $4.6 million in the third
quarter of 1999 from $3.9 million in the third quarter of 1998. The Company's
gross profit margin (gross profit as a percentage of net sales) decreased
however to 28.2% in the third quarter of 1999 from 30.0% in the third quarter of
1998. The decrease in gross profit margin was primarily due to a lower MPD
military products gross profit margin, partially offset by a higher satellite
and wireless products gross profit margins and a more favorable absorption of
overhead expenses, as compared to the same period in 1998. In addition to the
above, the following factors adversely affected the gross profit margin for the
third quarter of 1999: (i) low gross profit margins the Company is experiencing
on three foreign military OEM contracts (the result of competitive pricing
pressures and/or technical problems), (ii) the low gross profit margin the
Company is experiencing on one of its wireless telecommunications product lines
(the result of a break in production during the third quarter with its
associated manufacturing inefficiencies and a continued slower than anticipated
progression toward volume production efficiencies) and (iii) the low gross
profit margins the Company is experiencing on certain other wireless
telecommunications products (the result of sluggish demand which has also
created manufacturing inefficiencies).
Certain of the Company's inventory costing techniques involve developing a
standard cost which estimates the average, or standard, cost per unit over the
extended life cycle of a product. Such costs include labor, material, other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable certainty that product maturation
will take place within the near future, write-offs of work-in-process inventory
would be required. Such write-offs could materially adversely affect the
Company's gross profit and results of operations.
Certain of the purchase orders or contracts comprising backlog at
September 30, 1999 set forth product specifications not yet achieved by the
Company that would require the Company to complete additional product
development. Failure to develop products meeting such specifications could lead
to the cancellation of the related purchase orders or contracts. The reduction,
delay or cancellation of orders or contracts from one or more significant
customers could materially adversely affect the Company's business, financial
condition and results of operations.
There can be no assurances that gross profit will improve. If the Company
is not able to reduce its production costs to the extent anticipated, or to
introduce new products with greater gross profit margins, and if average selling
prices decline beyond current expectations, the Company's gross profit and
results of operations could be materially adversely affected. The Company's
gross profit may also be affected by a variety of other factors, including the
mix of systems and equipment sold; production, reliability or quality problems;
and price competition.
General and Administrative Expenses. General and administrative expenses
increased by 4% to $1.0 million in the third quarter of 1999 from $0.9 million
in the third quarter of 1998, representing 5.8% and 7.0%, respectively, of net
sales.
Selling Expenses. Selling expenses increased by 11% to $1.0 million in the
third quarter of 1999 from $0.9 million in the third quarter of 1998,
representing 6.3% and 7.1%, respectively, of net sales. The increase in selling
expenses resulted primarily from higher bid and proposal activity.
Research and Development Expenses. Research and development expenses
increased by 18% to $1.8 million in the third quarter of 1999 from $1.5 million
in the third quarter of 1998, representing 11.0% and 11.7%, respectively, of net
sales. The increase in research and development expenses resulted primarily from
increased
Page 10
<PAGE>
wireless telecommunications product development. The Company believes that the
continued introduction of new products is essential to its competitiveness,
especially in the wireless telecommunications market, and is committed to
continued investment in research and development.
Interest Expense. Interest expense remained relatively stable at $0.3
million in both the third quarters of 1999 and 1998, representing 2.0% and 2.4%,
respectively, of net sales.
Provision for Income Taxes. The Company's effective tax rate increased to
31.3% in the third quarter of 1999 from 14.9% in the third quarter of 1998. The
effective tax rate for both the third quarters of 1999 and 1998 was favorably
impacted by the partial recovery of previously reserved deferred tax assets as a
result of the Company's improved profitability position compared to the same
periods in 1998 and 1997. Without the benefit of this change in the reserve, the
effective tax rate for both the third quarter of 1999 and 1998 would have been
40.0%. The Company will continue to assess its reserved deferred tax asset each
reporting quarter.
Nine Months Ended September 30, 1999 and September 30, 1998
Net Sales. Net sales increased by 39% to $52.8 million in the first nine
months of 1999 from $38.0 million in the first nine months of 1998. This sales
increase was primarily due to higher shipments of the Company's commercial
products. Sales of commercial products increased by 71% to $31.4 million in the
first nine months of 1999 from $18.4 million in the first nine months of 1998,
representing 59% and 48%, respectively, of net sales in such periods. The
commercial sales increase was predominantly due to higher shipments to one
domestic wireless telecommunications OEM as well as higher foreign wireless
telecommunications business, partially offset by lower shipments to one domestic
wireless telecommunications OEM. Sales of military products increased by 9% to
$21.4 million in the first nine months of 1999 from $19.6 million in the first
nine months of 1998, representing 41% and 52%, respectively, of net sales in
such periods. The military sales increase was predominantly due to higher
shipments on one foreign and one domestic military program, partially offset by
lower shipments on a U.S. Government military program.
International sales increased by 122% to $10.5 million in the first nine
months of 1999 from $4.7 million in the first nine months of 1998, totaling 20%
of net sales in the first nine months of 1999 compared to 12% in the first nine
months of 1998. The increase in international sales was predominantly due to
higher shipments to a foreign military OEM and higher market demand for foreign
wireless telecommunications business. In the first nine months of 1999, sales to
one domestic commercial OEM (Customer B) and one domestic military OEM (Customer
F) accounted for 40% and 12%, respectively, of the Company's net sales. In the
first nine months of 1998, sales to one domestic military OEM (Customer F) and
one domestic commercial OEM (Customer B) accounted for 26% and 18%,
respectively, of the Company's net sales.
The Company has recently begun to enter into arrangements with its major
wireless OEM customers whereby those customers stock the Company's amplifiers on
a consignment basis until they are consumed in the customer's production
process, at which time revenue is recognized by the Company. Under these
arrangements, the Company receives a forecast each week from the customer
reflecting the customer's estimated future product requirements. These forecasts
provide the Company with a one year forward-look which details the expected
weekly requirements for the first 26 weeks and monthly requirements for the
remaining six months. The Company's business, financial condition and results of
operations could be materially adversely affected if the customer's actual
product needs ultimately are less than the customer's forecasted expectations
or, conversely, if the customer's actual product needs ultimately substantially
exceed the customer's forecasted expectations such that the Company cannot
fulfill them.
Gross Profit. Gross profit increased by 35% to $16.1 million in the first
nine months of 1999 from $11.9 million in the first nine months of 1998. The
Company's gross profit margin (gross profit as a percentage of net sales)
decreased however to 30.5% in the first nine months of 1999 from 31.3% in the
first nine months of 1998. The decrease in gross profit margin was primarily due
to lower MPD military gross profit margin business, partially offset by a more
favorable absorption of overhead expenses, as compared to the same period in
1998. In addition to the above, the following factors adversely affected the
gross profit margin for the first nine months of 1999: (i) low gross profit
margins the Company is experiencing on four foreign military OEM contracts (the
result of competitive
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pricing pressures and/or technical problems), (ii) the low gross profit margin
the Company is experiencing on one of its wireless telecommunications product
lines (the result of the break in production during the third quarter with its
associated manufacturing inefficiencies and a continued slower than anticipated
progression toward volume production efficiencies) and (iii) the low gross
profit margins the Company is experiencing on certain other wireless
telecommunications products (the result of sluggish demand which has also
created manufacturing inefficiencies).
Certain of the Company's inventory costing techniques involve developing a
standard cost which estimates the average, or standard, cost per unit over the
extended life cycle of a product. Such costs include labor, material, other
direct costs and related overheads. If the extended life cycle of a product does
not materialize or if there is no reasonable certainty that product maturation
will take place within the near future, write-offs of work-in-process inventory
would be required. Such write-offs could materially adversely affect the
Company's gross profit and results of operations.
Certain of the purchase orders or contracts comprising backlog at
September 30, 1999 set forth product specifications not yet achieved by the
Company that would require the Company to complete additional product
development. Failure to develop products meeting such specifications could lead
to the cancellation of the related purchase orders or contracts. The reduction,
delay or cancellation of orders or contracts from one or more significant
customers could materially adversely affect the Company's business, financial
condition and results of operations.
There can be no assurances that gross profit will improve. If the Company
is not able to reduce its production costs to the extent anticipated, or to
introduce new products with greater gross profit margins, and if average selling
prices decline beyond current expectations, the Company's gross profit and
results of operations could be materially adversely affected. The Company's
gross profit may also be affected by a variety of other factors, including the
mix of systems and equipment sold; production, reliability or quality problems;
and price competition.
General and Administrative Expenses. General and administrative expenses
remained relatively stable at $3.0 million in both the first nine months of 1999
and 1998, representing 5.6% and 7.9%, respectively, of net sales.
Selling Expenses. Selling expenses increased by 17% to $3.2 million in the
first nine months of 1999 from $2.8 million in the first nine months of 1998,
representing 6.1% and 7.2%, respectively, of net sales. The increase in selling
expenses resulted primarily from higher bid and proposal activity (predominantly
directed toward wireless telecommunications products) and from higher sales
representative commissions (the result of product sales mix variations and the
higher overall sales volume).
Research and Development Expenses. Research and development expenses
increased by 17% to $5.1 million in the first nine months of 1999 from $4.4
million in the first nine months of 1998, representing 9.7% and 11.5%,
respectively, of net sales. The increase in research and development expenses
resulted primarily from increased wireless telecommunications product
development. The Company believes that the continued introduction of new
products is essential to its competitiveness, especially in the wireless
telecommunications market, and is committed to continued investment in research
and development.
Interest Expense. Interest expense remained relatively stable at $0.9
million in both the first nine months of 1999 and 1998, representing 1.7% and
2.3%, respectively, of net sales.
Provision for Income Taxes. The Company's effective tax rate increased to
36.6% for the first nine months of 1999 from 20.2% in the first nine months of
1998. The effective tax rate for both the first nine months of 1999 and 1998 was
favorably impacted by the partial recovery of previously reserved deferred tax
assets as a result of the Company's improved profitability position as compared
to the same periods in 1998 and 1997. Without the benefit of this change in the
reserve, the effective tax rate for both the first nine months of 1999 and 1998
would have been 40.0%. The Company will continue to assess its reserved deferred
tax asset each reporting quarter.
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Liquidity and Capital Resources
Since the successful completion of its initial public offering in 1995,
the Company has financed its operations and met its capital requirements through
the following two sources: (i) a credit facility and/or (ii) cash provided by
operating activities.
In May 1999, the Company amended its loan agreement with IBJ Whitehall
Business Credit Corporation ("IBJ"). The loan agreement now provides for a
$20.68 million credit facility consisting of a revolving line of credit in the
amount of $13.75 million, a term loan in the amount of $1.4 million and two
capital equipment ("Capex") loan facilities, Capex #1 and Capex #2, in the
amounts of $2.53 million and $3.0 million, respectively. The revolving line of
credit and both the term loan and Capex loans bear interest at annual rates
equal to the prime rate and the prime rate plus 0.25%, respectively. The credit
facility matures in February 2002 and automatically renews for one-year periods
thereafter, unless terminated by either the Company or IBJ. Aggregate borrowings
under the revolving line of credit are limited by a borrowing base, which is
calculated as the sum of 85% of eligible accounts receivable and 40% of eligible
raw materials and work-in-process inventories (with borrowings based on
aggregate eligible inventory limited to $7.0 million). The term loan requires a
monthly principal payment of $0.05 million. The Capex loans require monthly
principal payments that are recalculated each month based on the prior month's
Capex borrowings, if any, amortized over 60 months. Capex #2 loan borrowings
must occur prior to May 19, 2000. At September 30, 1999, credit facility
borrowings totaled $11.4 million which consisted of a term loan balance of $1.2
million, a Capex #1 loan balance of $2.3 million, Capex #2 loan balance of $0.8
million and revolving line of credit borrowings of $7.1 million. In addition,
$3.5 million of the revolving line of credit is committed to the Company's
outstanding letters of credit. The credit facility is subject to customary
covenants, including, among other things, limitations with respect to incurring
indebtedness, payment of dividends and affiliate advances, and a provision for
maintaining a certain fixed charge coverage ratio.
Operating activities used net cash of $2.2 million and provided net cash
of $1.9 million in the first nine months of 1999 and 1998, respectively. From
December 31, 1998 to September 30, 1999, inventory increased by $4.2 million,
accounts payable and accrued liabilities increased by $0.2 million, customer
advance payments decreased by $0.9 million and accounts receivable increased by
$2.1 million. The increase in inventory was primarily due to an increase in
work-in-process and raw materials inventories for wireless telecommunications
products and MPD military products. The build-up of wireless inventory is
directly related to the break in shipments that occurred during most of the
month of August 1999, the continuation of a downward learning curve progression
toward volume production efficiencies on one wireless program and a customer
directed slowdown (through the weekly consignment reports) on another wireless
program. The MPD military inventory increase is the result of build-up on one
long-term program, partially offset by a reduction on another long-term program
which was recently completed. The decrease in customer advance payments was
primarily due to the use of advance payments received in the fourth quarter of
1997 and in the second quarter of 1998, from a foreign military OEM. The
increase in accounts receivable was primarily due to extended payment terms with
certain foreign customers and temporary administrative difficulties with a U.S.
Government paying office. Investing activities, which consisted primarily of
equipment acquisitions, used net cash of $1.9 million and $1.7 million in the
first nine months of 1999 and 1998, respectively. Financing activities, which
consisted primarily of proceeds from long-term debt, principal payments of
long-term debt, net proceeds from (repayments on) the revolving line of credit
and net proceeds from the exercise of common stock options, provided net cash of
$4.0 million and used net cash of $0.3 million in the first nine months of 1999
and 1998, respectively.
Capital expenditures were $1.9 million and $1.7 million in the first nine
months of 1999 and 1998, respectively. These expenditures were funded primarily
through cash provided by the Company's credit facility. Principal expenditures
for the first nine months of 1999 included engineering and manufacturing test
equipment (including a discounted buy-out of an off-balance-sheet lease), a
third stencil printer and convection oven and a tinning machine to support the
Company's automated assembly efforts, a manufacturing execution software and
hardware system, enhancements to the Company's CAD systems and sales
demonstration equipment. The Company anticipates making additional capital
expenditures of approximately $0.6 million during the remainder of 1999,
including the purchase of additional engineering and manufacturing test
equipment, computer equipment upgrades, continued enhancements to its CAE/CAD
systems and possibly the purchase of a third automated surface-mount
pick-n-place
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machine. It is anticipated that capital expenditures for the remainder of 1999
and into 2000 will be financed by the Company's credit facility, cash provided
by operating activities and/or third party financing sources.
As of September 30, 1999, the Company had working capital of approximately
$29.1 million, compared to approximately $21.7 million as of December 31, 1998.
Working capital as of September 30, 1999 included approximately $14.2 million
and $23.1 million in accounts receivable and inventory, respectively, compared
to December 31, 1998 working capital which included approximately $12.2 million
and $18.9 million in accounts receivable and inventory, respectively. The
Company's current ratio (ratio of current assets to current liabilities) as of
September 30, 1999 was 3.2:1, compared with a current ratio of 2.6:1 as of
December 31, 1998. As of both September 30, 1999 and December 31, 1998, the
Company's debt to equity ratio was 0.6:1.
The Company believes that cash generated from operations, amounts
available under its credit facility, and/or third party financing will be
sufficient to fund necessary capital expenditures and to provide adequate
working capital for at least the next 12 months. There can be no assurance,
however, that the Company will not require additional financing prior to such
date to fund its operations, and, if required, that such financing will be
available on commercially reasonable terms. In addition, the Company may require
additional financing after such date to fund its operations.
YEAR 2000 - The Company has developed a Year 2000 Readiness Plan. This
plan addresses three main areas: (a) information technology systems (including
the Company's business systems, engineering and test equipment, both hardware
and software related), (b) non-information technology systems (including
embedded technology such as microcontrollers, typically found in such equipment
as telephone systems, fax systems, elevators, security systems, HVAC, etc.) and
(c) supply chain readiness or third party issues (including customers as well as
inventory and non-inventory suppliers). The Company's Chief Operating and
Financial Officer has been tasked with overseeing this process and reports
periodically to the Company's Board of Directors.
The Company has identified potential deficiencies related to Year 2000 in
its information technology systems and is in the process of addressing them
through upgrades or other remediation. For example, in 1997 the Company's
business and computing system was upgraded and is now Year 2000 compliant
(according to the Company's software providers). The Company completed testing
and remediation of its internal systems in the third quarter of 1999. In terms
of non-information technology systems, the Company has identified those material
items which may require remediation or replacement. The Company has addressed
those items and has completed testing and remediation or replacement of its
non-information technology systems in the third quarter of 1999. As for third
parties, the Company is in the process of identifying and contacting suppliers,
both inventory and non-inventory, as well as customers. This process includes
the solicitation of written responses to questionnaires and/or meetings with
certain third parties. As a result, the Company believes it has a better
understanding of the Year 2000 readiness of these third parties and anticipates
completing as much remediation as possible with these third parties by year-end.
Based upon the Company's current estimates, additional out-of-pocket costs
associated with its Year 2000 compliance are not expected to be material. These
costs are anticipated to be incurred primarily in 1999 and include third party
consultants, remediation of existing computer software and replacement or
remediation of embedded chips. Such costs do not include internal management
time and the deferral of other projects, the effects of which are not expected
to be material to the Company's results of operations or financial condition. At
this point in time, the Company believes that it is difficult to specifically
identify the cause of the most reasonable worst case Year 2000 scenario. As with
all engineering and manufacturing companies, a reasonable worst case scenario
would be the result of failures of third parties (including, without limitation,
governmental entities and entities with which the Company has no direct
involvement) that continue for more than several days in various geographic
areas from which the Company's raw materials and components are sourced or to
which the Company's products are sold. In connection with the production of
products and the procurement of raw materials and components, the Company is
considering various contingency plans. Continuing failures in key geographic
areas in the United States and in certain European and Asian countries that
limit procurement or delivery of product would most likely have a material
adverse effect on the Company's results of operations. The extent of such lost
revenue cannot be estimated at this time; however, the Company is considering
contingency plans to limit, to the extent possible, the effect of such lost
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<PAGE>
revenue on the Company's result of operations. Any such plans would necessarily
be limited to matters over which the Company can reasonably control.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
ability of third parties with whom the Company relies on directly, or
indirectly, to be Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instrument is long-term debt under a
credit facility (consisting of a revolving line of credit, term loan and two
Capex loan facilities) that provides for interest at the prime rate or the prime
rate plus 0.25% (depending upon the individual credit facility component). The
Company is affected by market risk exposure primarily through the effect of
changes in interest rates on amounts payable by the Company under this credit
facility. A significant rise in the prime rate could materially adversely affect
the Company's business, financial condition and results of operations. At
September 30, 1999, an aggregate principal amount of $11.4 million was
outstanding under the Company's credit facility and represented a weighted
average annual interest rate of 9.3%. If principal amounts outstanding under the
Company's credit facility remained at this level for an entire year and the
prime rate increased or decreased, respectively, by 0.9%, the Company would pay
or save, respectively, an additional $0.1 million in interest in that year. The
Company does not utilize derivative financial instruments to hedge against
changes in interest rates or for any other purpose.
Where appropriate, the Company requires that letters of credit be provided
on foreign sales. In addition, all transactions by the Company are denominated
in U.S. dollars. As such, the Company has shifted foreign currency exposure onto
its foreign customers. As a result, if exchange rates move against foreign
customers, the Company could experience difficulty collecting unsecured accounts
receivable, the cancellation of existing orders or the loss of future orders.
The foregoing could materially adversely affect the Company's business,
financial condition and results of operations.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
On January 30, 1998, a complaint was filed against the Company in the
United States Bankruptcy Court for the Northern District of Texas, Dallas
Division, alleging the Company's failure to turn over property to the estate of
Pinpoint Communications, Inc. ("Pinpoint") which, as of August 13, 1996, is in
Chapter 7 liquidation. The suit alleges that the Company has failed to return
advance monies of approximately $0.5 million paid by Pinpoint pursuant to an
equipment purchase agreement dated March 31, 1995 between the parties. On April
16, 1998, the Chapter 7 bankruptcy trustee (the "Trustee") for Pinpoint, filed
an amended complaint objecting to the Company's claim for $0.6 million in unpaid
contract obligations and asserting a counterclaim for the return of $0.5 million
that Pinpoint paid to the Company under the terms of the purchase agreement
between the parties. The Company answered the Trustee's amended complaint and
began to defend against the Trustee's claims and counterclaim. In September
1999, such action was settled through a payment by the Company of an immaterial
amount followed by the exchange of mutual releases.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter ending
September 30, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICROWAVE POWER DEVICES, INC.
(Registrant)
Dated: November 3, 1999 /s/ Edward J. Shubel
-------------------- ------------------------------------------------
By: Edward J. Shubel
President and CEO
Dated: November 3, 1999 /s/ Paul E. Donofrio
-------------------- ------------------------------------------------
By: Paul E. Donofrio
Executive Vice President, COO and CFO
(Principal Financial and Accounting Officer)
Page 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
financial statements found on the Quarterly Report on Form 10-Q, September 30,
1999, and is qualified in Its entirety by reference to such financial
statements.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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