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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q Quarterly Report Pursuant to Section
13 OR 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended June 30,
2012
Commission file number 0-10976
MICROWAVE FILTER COMPANY, INC.
(Exact name of registrant as specified in its
charter.)
(315) 438-4700
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____ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES __X__ NO____ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). Large accelerated filer ______ Accelerated filer ______ Non-accelerated filer ______ (Do not check if smaller reporting company) 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 ____ NO__X__ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value - 2,585,453 shares as of August 1, 2012.
Table of ContentsIndex
<PAGE>
2
Table of Contents
PART I. - FINANCIAL INFORMATION
Microwave
Filter Company and Subsidiaries
<FN> See Accompanying Notes to Condensed Consolidated Financial Statements <PAGE> 3
Table of Contents Microwave Filter
Company and Subsidiaries
<FN> See Accompanying Notes to Condensed Consolidated Financial Statements <PAGE> 4
Table of Contents
Microwave Filter Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
<FN> See Accompanying Notes to Condensed Consolidated Financial Statements <PAGE> 5
Table of ContentsMICROWAVE FILTER COMPANY, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS Inventories
net of reserve for obsolescence consisted of the
following:
The Company's reserve for obsolescence equaled $392,703 at June 30, 2012 and September 30, 2011. <PAGE> 6
Table of ContentsNote 4. Income Taxes The Company accounts for income taxes under FASB ASC 740-10. Deferred tax assets and liabilities are based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which are anticipated to be in effect when these differences reverse. The deferred tax provision is the result of the net change in the deferred tax assets and liabilities. A valuation allowance is established when it is necessary to reduce deferred tax assets to amounts expected to be realized. The Company has provided a full valuation allowance against its deferred tax assets. The Company adopted FASB ASC 740-10. FASB ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax position taken or expected to be taken on a tax return. Additionally, it provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company determined it has no uncertain tax positions and therefore no amounts are recorded. Note 5. Legal Matters The State of New York Workers’ Compensation
Board has commenced an action against Microwave
Filter Company, Inc. to recover for an underfunded
self insured program that Microwave Filter Company,
Inc. participated in. Due to the relatively short
period of time Microwave Filter Company, Inc.
participated in the program and the limited amount
of potential exposure, we do not expect the
resolution of this action will have a material
adverse effect on our financial condition, results
of operations or cash flows. The Company has accrued
$12,000 for this action in other current
liabilities. The Company currently does not trade in or utilize derivative financial instruments. Note 7. Significant Customers Sales to one customer represented
approximately 20% of total sales for the nine months
ended June 30, 2012 compared to 18% of total sales
for the nine months ended June 30, 2011. <PAGE> 7
Table of ContentsNote 8. Cash
Dividends
On June 20, 2012, the Board of Directors of Microwave Filter Company, Inc. approved a special cash dividend payment of $.05 per common share. The cash dividend was payable on July 31, 2012 to shareholders of record as of July 13, 2012. The cash dividend totaled $129,273. <PAGE>
8
Table of ContentsMICROWAVE FILTER
COMPANY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Microwave Filter Company, Inc. operates primarily in the United States and principally in one industry. The Company extends credit to business customers based upon ongoing credit evaluations. Microwave Filter Company, Inc. (MFC) 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, commercial communications and defense electronics.
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 condensed 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 stated at the lower of cost determined on the first-in, first-out method 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. <PAGE> 9
Table of ContentsThe 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 accounts for income
taxes under FASB ASC 740-10. Deferred tax
assets and liabilities are based on the
difference between the financial statement and
tax basis of assets and liabilities as
measured by the enacted tax rates which are
anticipated to be in effect when these
differences reverse. The deferred tax
provision is the result of the net change in
the deferred tax assets and liabilities. A
valuation allowance is established when it is
necessary to reduce deferred tax assets to
amounts expected to be realized. The Company
has provided a full valuation allowance
against its deferred tax assets.
Table of ContentsRESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2012 vs. THREE MONTHS ENDED JUNE 30, 2011 The following table
sets forth the Company's net sales by
major product group for the three months
ended June 30, 2012 and 2011.
Net sales for the three months ended June 30, 2012 equaled $1,147,336, a decrease of $32,160 or 2.7%, when compared to net sales of $1,179,496 for the three months ended June 30, 2011. MFC’s RF/Microwave product sales decreased $28,404 or 6.4% to $412,104 for the three months ended June 30, 2012 when compared to RF/Microwave product sales of $440,508 during the same period last year. Management attributes the decrease in sales to the economy. MFC’s RF/Microwave products are sold primarily to Original Equipment Manufacturers (OEM) 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 22% of total sales for the quarter ended June 30, 2012 compared to approximately 17% of total sales for the quarter ended June 30, 2011. MFC’s Satellite product sales decreased $71,431 or 17.9% to $326,759 for the three months ended June 30, 2012 when compared to Satellite product sales of $398,190 during the same period last year. The decrease can be attributed to a decrease in demand for the Company's filters which suppress strong out-of-band interference caused by military and civilian radar systems and other sources. Although 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. <PAGE> 11
Table of Contents MFC’s Cable
TV product sales increased $58,637 or
18.8% to $370,369 for the three months
ended June 30, 2012 when compared to Cable
TV product sales of $311,732 during the
same period last year. Despite the quarter
over quarter increase, management
continues to project a decrease in demand
for Cable TV products due to the shift
from analog to digital television. 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. MFC's sales order backlog equaled $394,680 at June 30, 2012 compared to sales order backlog of $671,978 at June 30, 2011. 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. Approximately 70% of the total sales order backlog at June 30, 2012 is scheduled to ship by September 30, 2012. Gross profit for the three months
ended June 30, 2012 equaled $434,143, a
decrease of $7,661 or 1.7%, when compared
to gross profit of $441,804 for the three
months ended June 30, 2011. The dollar
decrease in gross profit can primarily be
attributed to the lower sales volume this
year when compared to the same period last
year. As a percentage of sales, gross
profit equaled 37.8% for the three months
ended June 30, 2012 compared to 37.5% for
the three months ended June 30, 2011. Selling, general and administrative (SGA) expenses for the three months ended June 30, 2012 equaled $381,294, a decrease of $14,178 or 3.6%, when compared to SGA expenses of $395,472 for the three months ended June 30, 2011. The decrease can primarily be attributed to a decrease in payroll expense when compared to the same period last year. As a percentage of sales, SGA expenses equaled 33.2% for the three months ended June 30, 2012 when compared to 33.5% for the three months ended June 30, 2011. The Company recorded income from operations of $52,849 for the three months ended June 30, 2012 compared to income from operations of $46,332 for the three months ended June 30, 2011. The increase in operating income can primarily be attributed to the lower SGA expenses this year when compared to the same period last year. The Company recorded a benefit for income taxes of $38,582 for the three months ended June 30, 2012 compared to $0 for the three months ended June 30, 2011. The benefit for the current year can be attributed to a New York State qualified research expenses tax credit which was received in July of 2012. We have not recognized any (benefit) provision for income taxes. 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, 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.
Table of Contents
The following table sets forth the Company's net sales by major product group for the nine months ended June 30, 2012 and 2011.
Net sales for the nine months ended June 30, 2012 equaled $3,490,463, a decrease of $241,916 or 6.5%, when compared to net sales of $3,732,379 for the nine months ended June 30, 2011. MFC’s RF/Microwave
product sales decreased $64,930 or 4.7%
to $1,307,148 for the nine months ended
June 30, 2012 when compared to
RF/Microwave product sales of $1,372,078
during the same period last year.
Management attributes the decrease in
sales to the economy. 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 20% of total sales for the
nine months ended June 30, 2012 compared
to approximately 18% of total sales for
the nine months ended June 30, 2011. MFC’s Satellite product
sales decreased $190,692 or 15.6% to
$1,029,089 for the nine months ended
June 30, 2012 when compared to satellite
product sales of $1,219,781 during the
same period last year. The decrease can
be attributed to a decrease in demand
for the Company’s filters which suppress
strong out-of-band interference caused
by military and civilian radar systems
and other sources. Although 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.
<PAGE>
13
Table of ContentsMFC’s Cable TV product sales decreased $11,514 or 1.1% to $1,051,438 for the nine months ended June 30, 2012 when compared to Cable TV product sales of $1,062,952 during the same period last year. Management continues to project a decrease in demand for Cable TV products due to the shift from analog to digital television. 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. MFC’s Broadcast TV/Wireless
Cable product sales increased $22,318
or 29.4% to $98,344 for the nine
months ended June 30, 2012 when
compared to sales of $76,026 during
the same period last year. The
increase can be attributed to an
increase in demand for UHF Broadcast
products which are primarily sold to
system integrators for rural
communities. The Company recorded income from operations of $968 for the nine months ended June 30, 2012 compared to income from operations of $115,498 for the nine months ended June 30, 2011. The decrease in operating income can primarily be attributed to the lower sales volume and the higher SGA expenses this year when compared to the same period last year. Other income for the nine months ended June 30, 2012 equaled $26,673, an increase of $19,927 when compared to other income of $6,746 for the nine months ended June 30, 2011. The increase can be attributed to a $20,000 gain on the sale of a fixed asset. The Company recorded a
benefit for income taxes of $38,582
for the nine months ended June 30,
2012 compared to $0 for the nine
months ended June 30, 2011. The
benefit for the current year can be
attributed to a New York State
qualified research expenses tax credit
which was received in July of 2012. We
have not recognized any (benefit)
provision for income taxes. 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, 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. <PAGE>
14
Table of ContentsOff-Balance Sheet ArrangementsAt June 30, 2012 and 2011, 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. LIQUIDITY and CAPITAL RESOURCES
Cash and cash equivalents decreased $158,302 to $1,100,583 at June 30, 2012 when compared to cash and cash equivalents of $1,258,885 at September 30, 2011. The decrease was a result of $20,586 in net cash provided by operating activities, $198,225 in net cash used for capital expenditures, $20,000 provided by the sale of fixed assets and $663 used to purchase treasury stock. The decrease in inventories of $69,231 at June 30, 2012 when compared to September 30, 2011 can primarily be attributed to the slowdown in orders and customers scheduled delivery dates. The decrease in accounts payable of $77,302 at June 30, 2012 when compared to September 30, 2011 can primarily be attributed to the decrease in inventories. The decrease in accrued
compensated absences of $59,643 at
June 30, 2012 when compared to
September 30, 2011 can primarily be
attributed to accrued vacation used
or paid during the nine months ended
June 30, 2012. The decrease in other
current liabilities of $52,740 at
June 30, 2012 when compared to
September 30, 2011 can primarily be
attributed to the payment of a
$50,000 profit sharing contribution
which was accrued at September 30,
2011. Capital expenditures totaling $198,225 for the nine months ended June 30, 2012 consisted primarily of machinery. On June 20, 2012, the Board
of Directors of Microwave Filter
Company, Inc. approved a special
cash dividend payment of $.05 per
common share. The cash dividend was
payable on July 31, 2012 to
shareholders of record as of July
13, 2012. The cash dividend totaled
$129,273. At June 30, 2012, the
Company had unused aggregate lines
of credit totaling $750,000
collateralized by all inventory,
equipment and accounts receivable.
Table of ContentsSAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995In an effort to provide investors a balanced view of the Company's current condition and future growth opportunities, this Quarterly Report on Form 10-Q includes 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no significant change in our exposures to market risk during the nine months ended June 30, 2012. For a detailed discussion of market risk, see our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk. <PAGE> 16
Table of ContentsITEM 4. CONTROLS AND PROCEDURESEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. <PAGE> 17
Table of ContentsPART II - OTHER INFORMATION Item 1. Legal Proceedings The State of New York Workers’ Compensation Board has commenced an action against Microwave Filter Company, Inc. to recover for an underfunded self insured program that Microwave Filter Company, Inc. participated in. Due to the relatively short period of time Microwave Filter Company, Inc. participated in the program and the limited amount of potential exposure, we do not expect the resolution of this action will have a material adverse effect on our financial condition, results of operations or cash flows. The Company has accrued $12,000 for this action in other current liabilities. Item 1A. Risk Factors Not applicable. Item 2. Changes in Securities None during this reporting period. Item 3. Defaults Upon Senior Securities The Company has no senior securities. Item 4. Mine Safety Disclosures Not applicable. Item 5. Other Information None. Item 6. Exhibits a. Exhibits 31.1 Section 13a-14(a)/15d-14(a) Certification of Carl F. Fahrenkrug 31.2 Section 13a-14(a)/15d-14(a) Certification of Richard L. Jones 32.1 Section 1350 Certification of Carl F. Fahrenkrug 32.2 Section 1350 Certification of Richard L. Jones <PAGE> 18
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