Merrimac Reports Second Quarter and Six Months 2007 Results

Record Orders and Highest Backlog Ever

WEST CALDWELL, N.J., Aug. 14 /PRNewswire-FirstCall/ -- Merrimac Industries, Inc. (AMEX: MRM), a leader in the design and manufacture of RF Microwave components, subsystem assemblies and micro-multifunction modules (MMFM(R)), today announced results for the second quarter and first six months of 2007.

Sales for the second quarter of 2007 were $6,225,000, a decrease of $2,026,000 or 24.6 percent compared to the second quarter of 2006 sales of $8,251,000. Sales for the second quarter of 2006 included both the shipment of a $750,000 order to a significant military customer and $1,200,000 of revenue recognized in connection with the early close out of a fixed price customer contract which did not recur in the second quarter of 2007. Sales for the microwave micro-circuitry segment decreased $285,000 for the second quarter of 2007 as compared to the second quarter of 2006 due to weakness in orders received in the first quarter of 2007. Gross profit for the second quarter of 2007 was $2,382,000, a decrease of $1,328,000 or 35.8 percent, and was 38.3 percent of sales as compared to gross profit of $3,710,000 or 45.0 percent of sales for the second quarter of 2006. The decrease in gross profit and gross profit percentage for the second quarter of 2007 was due to the impact of the lower level of sales having to absorb fixed manufacturing costs. Second quarter 2006 gross profit also included $1,060,000 from the early close out of a fixed price customer contract.

Operating loss for the second quarter of 2007 was $(2,892,000), compared to operating income of $549,000 for the second quarter of 2006. Operating loss for the second quarter of 2007 included a $2,630,000 non-cash charge related to a partial impairment of goodwill recorded in connection with the Company's 1999 acquisition of Filtran Microcircuits Inc. ("Filtran"). After the impairment charge, the remaining Filtran goodwill balance is approximately $1,063,000. Excluding the $2,630,000 goodwill impairment charge, the remaining operating loss for the second quarter of 2007 was due to the lower gross profit caused by the decrease in sales, partially offset by decreased research and development costs and administrative costs.

Net loss for the second quarter of 2007 was $(3,469,000) compared to net income of $529,000 for the second quarter of 2006. Net loss per share was $(1.19) for the second quarter of 2007, compared to net income per share of $.17 reported for the second quarter of 2006. Net loss for the second quarter of 2007 includes a non-cash income tax charge of $506,000 or $.17 per share to provide for a full valuation allowance against Filtran's deferred tax asset. Excluding the aforementioned charges for goodwill impairment of $.90 per share and taxes of $.17 per share, the adjusted loss per share for the second quarter of 2007 was $(.12). The components of the adjusted loss per share are attributed to a $.02 per share contribution from the Merrimac electronic components and subsystems sector and $(.14) per share loss from the Filtran microwave micro-circuitry sector.

Sales for the first six months of 2007 were $11,649,000, a decrease of $2,832,000 or 19.6 percent compared to sales of $14,482,000 for the first six months of 2006. Sales for the first six months of 2006 included both the shipment of a $750,000 order to a significant military customer and $1,200,000 of revenue recognized in connection with the early close out of a fixed price customer contract mentioned above which did not recur in the first six months of 2007. Sales for the first six months of 2007 reflected a sales reduction in the microwave micro-circuitry segment of $1,005,000 due to a reduced beginning of the year backlog and weakness in first quarter 2007 orders. Gross profit for the first six months of 2007 was $4,164,000, a decrease of $1,948,000 or 31.9 percent, and was 35.7 percent of sales as compared to gross profit of $6,112,000 or 42.2 percent of sales for the second quarter of 2006. The decrease in gross profit and gross profit percentage for the first six months of 2007 was due to the impact of the lower level of sales having to absorb fixed manufacturing costs. Gross profit for the first six months of 2006 also included $1,060,000 from the early close out of a fixed price customer contract.

Operating loss for the first six months of 2007 was $(4,113,000) compared to operating income for the first six months of 2006 of $93,000. Operating loss for the first six months of 2007 included a $2,630,000 non-cash charge related to a partial impairment of goodwill. Excluding the $2,630,000 impairment charge, the reduction in the remaining operating income for the first six months of 2007 as compared to the first six months of 2006 was due to the lower gross profit caused by the decrease in sales, partially offset by decreased selling, general and administrative expenses compared to the first six months of 2006.

Net loss for the first six months of 2007 was $(4,733,000) or $(1.58) per share compared to net income of $89,000 or $.03 per share for the first six months of 2006. Net loss for the first six months of 2007 includes a non-cash income tax charge of $506,000 or $.17 per share to provide a full valuation allowance against Filtran's deferred tax asset.

During the quarter ended June 30, 2007, the Company conducted an interim goodwill impairment test of its Filtran reporting unit. This occurred as a result of Filtran's failure to meet 2007 bookings and sales targets, which resulted in continuing operating losses and a reduction of its bank borrowing availability. Filtran's goodwill balance has increased since its acquisition in 1999 from the continued strengthening of the Canadian dollar versus the U.S. dollar. During the first six months of 2007, such goodwill amount increased $189,000 to $3,693,000 resulting from the Canadian dollar increase from $0.86 at December 30, 2006 to $0.94 at the end of June. The stronger Canadian dollar has an unfavorable impact on Filtran's cost structure and upon its U.S. dollar denominated export sales, which were approximately 75 percent of Filtran's sales during the first six months of 2007. As a result of the impairment test, the Company recorded a non-cash goodwill impairment charge of $2,630,000 to the Filtran reporting unit.

In conjunction with the determination that goodwill was impaired and the continuing losses at Filtran, the Company established a full valuation allowance of $506,000 during the second quarter of 2007 for Filtran's Canadian net deferred tax asset as management believed that it is more likely than not that its deferred tax asset will not be realized.

Company management has determined, and the Board of Directors has approved, that the Company should divest its Filtran operations and is in the process of seeking interested parties. The potential divestiture should enable Merrimac Industries, Inc. to concentrate its resources on RF Microwave and Multi-Mix(R) Microtechnology product lines to generate sustainable, profitable growth. Beginning with the third quarter of 2007, the Company will reflect Filtran as a discontinued operation and the Company intends to restate prior financial statements to reflect the results of operations, cash flows and financial position of Filtran as discontinued operations.

Orders of $9,974,000 were received during the second quarter of 2007, an increase of $1,055,000 or 11.8 percent compared to $8,919,000 in orders received during the second quarter of 2006. Orders of $16,459,000 were received during the first six months of 2007, an increase of $3,595,000 or 27.9 percent compared to $12,864,000 in orders received during the first six months of 2006. Backlog increased by $4,810,000 or 38.8 percent to $17,195,000 at the end of the second quarter of 2007 compared to $12,385,000 at year-end 2006, due to the increased orders received during the second quarter. The June 30, 2007 backlog is a record for the highest quarter-end backlog the Company has achieved. The book-to-bill ratio for the second quarter of 2007 was 1.60 to 1 and for the second quarter of 2006 was 1.08 to 1. The book-to-bill ratio for the first six months of 2007 was 1.41 to 1 and for the first six months of 2006 was 0.89 to 1.

Chairman and CEO Mason N. Carter commented, "While we were disappointed with the second quarter operating results, there were some distinct bright spots. In this quarter, Merrimac set a record for new orders received at nearly $10 million. This came following a first quarter bookings figure of $6.5 million. However, we also see this as positive feedback from the market that our strategy and actions are taking us in the right direction.

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