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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, 2003
__ 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 0-6620
ANAREN, INC.
(Exact name of Registrant as specified in its Charter)
New York 16-0928561
-------- ----------
(State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road
East Syracuse, New York 13057
----------------------- -----
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: 315-432-8909
________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
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 __
The number of shares of Registrant's Common Stock outstanding on October
23, 2003 was 21,619,532.
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
September 30, 2003 and June 30, 2003 (unaudited)
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended September 30,
2003 and 2002 (unaudited)
Consolidated Condensed Statements of Cash Flows 5
for the Three Months Ended September 30,
2003 and 2002 (unaudited)
Notes to Consolidated Condensed Financial 6
Statements (unaudited)
Item 2. Management's Discussion and Analysis 12
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls & Procedures 21
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
Officer Certifications 23 - 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
September 30, 2003 and June 30, 2003
(Unaudited)
Assets September 30, 2003 June 30, 2003
------ ------------------ -------------
Current assets:
Cash and cash equivalents $ 8,423,228 $ 11,062,662
Securities available for sale (note 3) 6,296,327 5,682,260
Securities held to maturity (note 3) 79,270,848 87,584,016
Receivables, less allowance of $234,662
and $245,000, respectively 10,655,163 9,317,941
Inventories (note 4) 15,250,744 15,671,659
Interest and other receivables 2,438,000 823,189
Refundable income taxes 2,449,733 876,220
Deferred income taxes 1,093,916 1,132,016
Prepaid expenses and other current assets 1,264,618 1,235,325
------------- -------------
Total current assets 127,142,577 133,385,288
------------- -------------
Securities held to maturity (note 3) 31,730,102 23,394,382
Property, plant and equipment, net (note 5) 21,244,637 23,639,821
Goodwill 30,715,861 30,715,861
Other intangible assets, net of accumulated amortization
of $1,196,427 at September 30, 2003
and $1,071,542 at June 30, 2003 (note 1) 1,828,540 1,953,424
------------- -------------
Total assets $ 212,661,717 $ 213,088,776
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,556,868 $ 4,380,459
Accrued expenses (note 6) 2,111,987 2,477,670
Income taxes payable 407,494 66,594
Other current liabilities (note 8) 242,759 225,534
------------- -------------
Total current liabilities 7,319,108 7,150,257
Deferred income taxes 1,601,346 1,601,346
Postretirement benefit obligation 3,402,145 3,302,532
Other liabilities (note 8) 423,857 437,236
------------- -------------
Total liabilities 12,746,456 12,491,371
------------- -------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 25,712,354 shares
at September 30, 2003 and 25,681,854 at June 30, 2003 257,124 256,818
Additional paid-in capital 168,977,547 168,805,153
Unearned compensation (310,038) (381,588)
Accumulated other comprehensive loss (590,619) (1,216,961)
Retained earnings 45,074,050 43,290,143
------------- -------------
213,408,064 210,753,565
Less cost of 4,102,522 and 3,820,822 treasury shares
at September 30, 2003 and June 30, 2003 13,492,803 10,156,160
------------- -------------
Total stockholders' equity 199,915,261 200,597,405
------------- -------------
Total liabilities and stockholders' equity $ 212,661,717 $ 213,088,776
============= =============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
September 30, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Net sales $ 18,270,673 $ 19,197,817
Cost of sales 12,311,778 13,008,271
------------ ------------
Gross profit 5,958,895 6,189,546
------------ ------------
Operating expenses:
Marketing 1,585,466 1,597,483
Research and development 1,421,782 1,401,061
General and administrative 1,838,399 2,140,563
------------ ------------
Total operating expenses 4,845,647 5,139,107
------------ ------------
Operating income 1,113,248 1,050,439
Other income, primarily interest 467,976 647,011
Interest expense (2,972) (19,522)
------------ ------------
Income before income taxes 1,578,252 1,677,928
Income tax expense 381,000 378,000
------------ ------------
Net income from continuing operations $ 1,197,252 $ 1,299,928
============ ============
Discontinued operations:
Loss from discontinued
operations of Anaren Europe (note 9) (1,213,345) (1,483,722)
Income tax benefit (1,800,000) (330,000)
------------ ------------
Net income (loss) from discontinued
operations 586,655 (1,153,722)
------------ ------------
Net income $ 1,783,907 $ 146,206
============ ============
Basic earnings per share:
Income from continuing operations $0.05 $0.06
Income (loss) from discontinued
operations $0.03 ($0.05)
----- -----
Net income $0.08 $0.01
===== =====
Diluted earnings per share:
Income from continuing operations $0.05 $0.06
Income (loss) from discontinued
operations $0.03 ($0.05)
----- -----
Net income $0.08 $0.01
===== =====
Shares used in computing net earnings
per share:
Basic 21,757,734 22,331,289
============ ============
Diluted 22,352,927 22,811,612
============ ============
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Three Months Ended
September 30, 2003 and 2002
(Unaudited)
Cash flows from operating activities: 2003 2002
---- ----
Net income $ 1,783,907 $ 146,206
Net income (loss) from discontinued operations 586,655 (1,153,722)
------------ ------------
Net income from continuing operations 1,197,252 1,299,928
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 997,964 931,023
Amortization of intangibles 124,885 124,885
Provision for doubtful accounts (8,205) --
Deferred income taxes 38,100 (37,799)
Unearned compensation 71,550 159,177
Changes in operating assets and liabilities,
net of acquisition:
Receivables (1,366,549) 842,238
Inventories (69,491) (38,485)
Interest and other receivables 53,099 98,673
Other current assets (309,546) (191,125)
Refundable income taxes 226,487 --
Accounts payable 371,604 (253,003)
Accrued expenses 54,153 392,749
Customer advance payments -- (309,990)
Other liabilities 107,681 9,132
------------ ------------
Net cash provided by continuing operations 1,488,984 3,179,971
Net cash used for discontinued operations (75,750) (1,045,330)
------------ ------------
Net cash provided by operating activities 1,413,234 2,134,641
Cash flows from investing activities:
Capital expenditures (878,447) (2,116,052)
Net maturities (purchases) of marketable debt and
equity securities (22,553) 4,156,029
------------ ------------
Net cash provided by (used in) investing activities (901,000) 2,039,977
------------ ------------
Cash flows from financing activities:
Stock options exercised 172,701 --
Purchase of treasury stock (3,336,643) (593,700)
------------ ------------
Net cash used in financing activities (3,163,942) (593,700)
------------ ------------
Effect of exchange rates 12,274 (75,328)
------------ ------------
Net decrease in cash
and cash equivalents (2,639,434) 3,505,590
Cash and cash equivalents at beginning of period 11,062,662 12,565,424
------------ ------------
Cash and cash equivalents at end of period $ 8,423,228 $ 16,071,014
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ -- $ 19,522
============ ============
Income taxes, net of refunds $ 2,000 $ 150,000
============ ============
See accompanying notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated condensed financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2003. The results of operations for the three months ended September
30, 2003 are not necessarily indicative of the results for the entire fiscal
year ending June 30, 2004, or any future interim period.
The income tax rates utilized for interim financial statement purposes for the
three months ended September 30, 2003 and 2002 are based on estimates of income
and utilization of tax credits for the entire year.
NOTE 1: Intangible Assets
INTANGIBLE ASSETS:
Intangible assets as of September 30, 2003 are as follows:
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Patent $ 574,966 $ 305,451
Customer Base 1,350,000 468,750
Trade Name 320,000 222,225
Non-Competition Agreements 180,000 75,000
Favorable Lease 600,000 125,000
---------- ----------
Total $3,024,966 $1,196,426
========== ==========
Intangible asset amortization expense for the three month period ended September
30, 2003 and 2002 aggregated $124,885. Amortization expense related to
intangible assets for the next five years is as follows:
Year Ending June 30,
2004 $ 499,539
2005 $ 410,645
2006 $ 392,871
2007 $ 362,879
2008 $ 97,500
6
NOTE 2: Stock-Based Compensation
The Company measures compensation expense for its stock option-based employee
compensation plans using the intrinsic value method. The following table sets
forth the pro forma effect of these plans as if the fair value-based method had
been used to measure compensation expense.
Three months ended Three months ended
September 30, 2003 September 30, 2002
------------------ ------------------
Net income, as reported $ 1,783,907 $ 146,206
Fair value-based stock based
compensation cost, net of tax 2,075,992 2,187,164
------------- -------------
Pro forma net loss $ (292,085) $ (2,040,958)
============= =============
Net income (loss) per share:
Basic $ 0.08 $ 0.01
Diluted $ 0.08 $ 0.01
Pro forma net loss per share:
Pro forma basic $ (0.01) $ (0.09)
Pro forma diluted $ (0.01) $ (0.09)
NOTE 3: Marketable Securities
Marketable securities are summarized as follows:
September 30, 2003 June 30, 2003
------------------ -------------
Marketable debt securities - held-to-maturity $111,000,950 $110,978,398
Marketable equity securities - available for sale 6,296,327 5,682,260
------------ ------------
Total 117,297,277 116,660,658
Current portion 85,567,175 93,266,276
------------ ------------
Long term $ 31,730,102 $ 23,394,382
============ ============
NOTE 4: Inventories
Inventories are summarized as follows:
September 30, 2003 June 30, 2003
------------------ -------------
Component parts $ 9,080,521 $ 8,810,207
Work in process 5,255,439 5,627,150
Finished goods 2,751,965 2,656,029
------------ ------------
$ 17,087,925 $ 17,093,386
Reserve for obsolescence (1,837,181) (1,421,727)
------------ ------------
Net inventory $ 15,250,744 $ 15,671,659
============ ============
7
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
September 30, 2003 June 30, 2003
------------------ -------------
Land and land improvements $ 1,595,821 $ 1,595,821
Buildings, furniture and fixtures 13,670,416 12,944,778
Machinery and equipment 45,468,096 47,590,955
----------- -----------
$60,734,333 $62,131,554
Less accumulated depreciation
and amortization 39,489,696 38,491,733
----------- -----------
$21,244,637 $23,639,821
=========== ===========
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
September 30, 2003 June 30, 2003
------------------ -------------
Compensation $1,190,013 $ 924,290
Commissions 295,542 355,098
Health insurance 201,059 290,424
Restructuring (note 7) 196,604 710,885
Other 228,768 196,973
---------- ----------
$2,111,986 $2,477,670
========== ==========
NOTE 7: Restructuring
The following is a rollforward of the balance of restructuring charges since the
filing of the Company's Form 10-K Annual Report for the fiscal year ended June
30, 2003.
Balance Balance
June 30, Cash Non-Cash September 30,
2003 Expenditures Write-offs 2003
---- ------------ ---------- ----
Severance payment $677,251 $(480,647) $ -- $196,604
Outplacement services
and others 33,634 (33,634) -- --
-------- --------- --- --------
Total $710,885 $(514,281) $ -- $196,604
======== ========= === ========
At September 30, 2003, outstanding liabilities related to the restructuring
totaled $196,604 and are included in accrued expenses in the accompanying
Balance Sheets and are expected to be paid in full over the next twelve months.
8
NOTE 8: Other Liabilities
Other liabilities consist of the following:
September 30, 2003 June 30, 2003
------------------ -------------
Deferred compensation $488,857 $502,236
Other 177,759 160,534
-------- --------
666,616 662,770
Less current portion 242,759 225,534
-------- --------
$423,857 $437,236
======== ========
NOTE 9: Discontinued Operations
On July 10, 2003, the Company announced its decision to dispose of its Anaren
Europe operation. After completing production of the remaining customer orders
under contract, during the first quarter, the Company ceased production at
Anaren Europe and liquidated the remaining net assets of that operation through
sale of equipment via auction. Included in other receivables, in the
accompanying balance sheet, is a $1,493,377 receivable from the sale of the
equipment. Effective with the reporting of our operating results for the first
quarter ended September 30, 2003, the results of operations for Anaren Europe
for both the current and prior year first quarters have been reclassified as
discontinued operations in the statement of earnings. Components of the loss
from discontinued operations of Anaren Europe for the quarter ended September
30, are the following:
2003 2002
---- ----
Net sales $ 640,468 $ 1,226,056
Expenses (1,071,524) (2,709,778)
Loss on sale of equipment (782,289) --
----------- -----------
Net loss from discontinued operations $(1,213,345) $(1,483,722)
=========== ===========
The Company also recorded an income tax benefit of $1,800,000 related to the
disposal of its Anaren Europe operations.
9
NOTE 10: Net Income (Loss) Per Share
Basic income (loss) per share is based on the weighted average number of common
shares outstanding. Diluted income (loss) per share is based on the weighted
average number of common shares outstanding, as well as dilutive potential
common shares which, in the Company's case, comprise shares issuable under the
stock option and restricted stock plans. The weighted average number of common
shares utilized in the calculation of the diluted income (loss) per share does
not include antidilutive shares aggregating 2,137,400 and 2,115,700 at September
30, 2003 and 2002, respectively. The treasury stock method is used to calculate
dilutive shares, which reduces the gross number of dilutive shares by the number
of shares purchasable from the proceeds of the options assumed to be exercised.
The following table sets forth the computation of basic and fully diluted
earnings per share:
Three Months Ended
------------------
September 30
Numerator: 2003 2002
---- ----
Net income from continuing operations $ 1,197,252 $ 1,299,928
=========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 21,757,734 22,331,289
=========== ===========
Denominator for diluted earnings per share:
Weighted average shares outstanding 21,757,734 22,331,289
Common stock options
and restricted stock 595,193 480,323
----------- -----------
Weighted average shares and conversions 22,352,927 22,811,612
=========== ===========
NOTE 11: Segment Information
The Company operates predominately in the wireless communications, satellite
communications and defense electronics markets. The Company's two reportable
segments are the wireless group and the space and defense group. These segments
have been determined based upon the nature of the products and services offered,
customer base, technology, availability of discrete internal financial
information, homogeneity of products and delivery channel, and are consistent
with the way the Company organizes and evaluates financial information
internally for purposes of making operating decisions and assessing performance.
The wireless segment designs, manufactures and markets commercial products used
mainly by the wireless communications market. The space and defense segment of
the business designs, manufactures and markets specialized products for the
defense electronics and satellite communications markets. The revenue
disclosures for the Company's reportable segments depict products that are
similar in nature.
10
The following table reflects the operating results of the segments consistent
with the Company's internal financial reporting process. The following results
are used in part, by management, both in evaluating the performance of, and in
allocating resources to, each of the segments:
Space & Corporate and
Wireless Defense Unallocated Consolidated
-------- ------- ----------- ------------
Net sales:
Three months ended:
September 30, 2003 $ 11,526,589 6,744,084 -- $ 18,270,673
September 30, 2002 $ 11,882,290 7,315,527 -- $ 19,197,817
Operating income (loss):
Three months ended:
September 30, 2003 (109,808) 1,223,055 -- 1,113,247
September 30, 2002 (609,710) 1,660,149 -- 1,050,439
Goodwill and intangible assets:
September 30, 2003 32,544,401 -- -- 32,544,401
June 30, 2003 32,669,285 -- -- 32,669,285
Identifiable assets:*
September 30, 2003 14,716,365 10,633,899 154,767,052 180,117,316
June 30, 2003 14,145,826 9,760,194 156,513,471 180,419,491
Depreciation:**
Three months ended:
September 30, 2003 563,637 434,327 -- 997,964
September 30, 2002 560,981 370,042 -- 931,023
Intangibles amortization: ***
Three months ended:
September 30, 2003 124,885 -- -- 124,885
September 30, 2002 124,885 -- -- 124,885
* Segment assets primarily include receivables and inventories. The
Company does not segregate other assets on a products and services
basis for internal management reporting and, therefore, such
information is not presented. Assets included in corporate and
unallocated principally are cash and cash equivalents, marketable
securities, other receivables, prepaid expenses, deferred income
taxes, property, plant and equipment not specific to business
acquisitions and assets associated with discontinued operations of
Anaren Europe.
** Depreciation expense related to acquisition - specific property,
plant and equipment is included in the segment classification of the
acquired business. Depreciation expense related to non business
combination assets is allocated departmentally based on an estimate
of capital equipment employed by each department. Depreciation
expense is then further allocated within the department as it
relates to the specific business segment impacted by the consumption
of the capital resources utilized. Due to the similarity of the
property, plant and equipment utilized, the Company does not
specifically identify these assets by individual business segment
for internal reporting purposes.
11
*** Amortization of identifiable intangible assets arising from business
combinations and patent amortization is allocated to the segments
based on the segment classification of the acquired or applicable
operation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis set forth below reviews the Company's
operating results for the three months ended September 30, 2003 and 2002 and its
financial condition at September 30, 2003. This review should be read in
conjunction with the accompanying consolidated condensed financial statements.
Statements contained in management's discussion and analysis, other than
historical facts, are forward-looking statements that are qualified by the
cautionary statements at the end of this discussion.
Overview
The consolidated condensed financial statements present the financial condition
of the Company as of September 30, 2003 and June 30, 2003, and the consolidated
results of operations and cash flows of the Company for the three months ended
September 30, 2003 and 2002.
The Company designs, develops and markets microwave components and assemblies
for the wireless communications, satellite communications and defense
electronics markets. The Company's distinctive manufacturing and packaging
techniques enable it to cost-effectively produce compact, lightweight microwave
products for use in base stations for wireless communications systems, in
satellites and in defense electronics systems. The Company sells its products to
leading wireless communications equipment manufacturers such as Ericsson, Lucent
Technologies, Motorola, Nokia, Nortel Networks, and Powerwave and to satellite
communications and defense electronics companies such as Boeing Satellite,
I.T.T., Lockheed Martin, Northrup Grumman, Raytheon and TRW.
The Company generally recognizes sales at the time products are shipped to
customers, provided that persuasive evidence of an arrangement exists, the sales
price is fixed or easily determinable, collectibility is reasonably assured and
title and risk of loss has passed to the customer. Title and the risks and
rewards of ownership of products are generally transferred at the time of
shipment. Payments received from customers in advance of products delivered are
recorded as customer advance payments until earned. Annually, a small percentage
of sales are derived from long-term fixed-price contracts for the sale of large
space and defense electronics products. Sales and estimated profits under
long-term contracts are recognized using the percentage of completion method of
accounting on a units-of-delivery basis. Profit estimates are revised
periodically based upon changes in sales value and costs at completion. Any
losses on these contracts are recognized in the period in which such losses are
determined.
In February 2002, the Company created a new subsidiary, Anaren Communications
Suzhou Company, Ltd., and leased a 24,000 square foot facility in Suzhou
Industrial Park in Suzhou China. Presently, the facility has a staff of 33 and
is expected to continue to add personnel during the second quarter to support
production for a custom wireless program for a European based customer. It is
anticipated that this facility will serve all of the Company's Asian customers
and, when possible, will be used to facilitate procurement of raw materials in
China for all the Company's subsidiaries.
12
On July 10, 2003, after several reorganizations and restructuring, the Company
announced its decision to dispose of its Anaren Europe subsidiary due to
continuing low sales levels and large operating losses. This facility ceased
production during the first quarter, an auction was held and all remaining
equipment was sold in September 2003. This subsidiary is now being accounted for
as a discontinued operation in the statements of earnings for both the first
quarters ended September 30, 2003 and 2002. Included in the results of
discontinued operations for the first quarter of fiscal 2004 are a loss on the
sale of equipment of $782,000 and a U.S. tax benefit of $1,800,000 resulting
from losses attributable to Anaren Europe.
The Company's original investment in Celeritek common stock averaged
approximately $8.47 a share and totaled $6.6 million. During the three month
period ended September 30, 2003 the market value of Celeritek common stock has
fluctuated substantially, and the stock has at times traded above the cost of
the Company's investment. This investment had a market value at September 30,
2003 of approximately $6,296,130, a decline of $290,368. The Company considers
this to be a temporary decline in market value and it has been recorded as a
component of "accumulated other comprehensive loss" in shareholders equity.
Net sales from continuing operations for the first quarter ended September 30,
2003 were $18,271,000, down 4.8% from net sales from continuing operations of
$19,198,000 for the first quarter of last fiscal year. Income from continuing
operations for the first quarter of fiscal 2004 was $1,197,000, or $0.05 a
share, while the income from discontinued operations, including a federal tax
benefit of $1.8 million, was $587,000, or $0.03 a share, resulting in net income
of $1,784,000, or $0.08 a share. This compares to income from continuing
operations of $1,300,000, or $0.06 per diluted share, and a loss of
($1,154,000), or ($0.05) per diluted share, from discontinued operations,
resulting in net income of $146,000, or $0.01 per share, for the first quarter
of last year.
13
Results of Operations
The following table sets forth the percentage relationships of certain items
from the Company's consolidated condensed statements of earnings as a percentage
of net sales.
Three Months Ended
Sept. 30, 2003 Sept. 30, 2002
-------------- --------------
Net Sales 100.0% 100.0%
Cost of sales 67.4% 67.8%
----- -----
Gross profit 32.6% 32.2%
----- -----
Operating expenses:
Marketing 8.7% 8.3%
Research and development 7.8% 7.3%
General and administrative 10.0% 11.1%
----- -----
Total operating expenses 26.5% 26.7%
----- -----
Operating income 6.1% 5.5%
----- -----
Other income (expense):
Interest expense (0.0%) (0.1%)
Other, primarily interest income 2.6% 3.4%
----- -----
Total other income, net 2.6% 3.3%
----- -----
Income from continuing operations
before income taxes 8.7% 8.8%
Income taxes 2.1% 2.0%
----- -----
Income from continuing operations 6.6% 6.8%
----- -----
Discontinued operations:
Loss from discontinued operations
of Anaren Europe (6.6%) (7.7%)
Income tax benefit (9.8%) (1.7%)
----- -----
Income (loss) from discontinued operations 3.2% (6.0%)
----- -----
Net income 9.8% 0.8%
===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended
September 30
------------------
2003 2002
---- ----
Wireless $11,527 $11,882
Space and Defense 6,744 7,316
------- -------
$18,271 $19,198
======= =======
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Net sales. Net sales decreased $927,000, or 4.8%, to $18.3 million for the three
months ended September 30, 2003, compared to $19.2 million for the first quarter
of the previous fiscal year. This decrease resulted from a $355,000 (3.0%) drop
in shipments of Wireless infrastructure products and a $572,000 (7.8%) decrease
in sales of Space and Defense products.
14
The decrease in sales of Wireless products, which consist of standard surface
mount components and custom subassemblies for use in building wireless base
station equipment, was the result of Company efforts to eliminate certain
unprofitable ferrite products from its product lines. This effort resulted in a
decline of $1.2 million in shipments of low or no margin ferrite products in the
first quarter of fiscal 2003. This decline was partially offset by a $292,000,
or 10.7%, increase in sales of surface mount components and a $587,000, or
23.5%, increase in sales of wireless custom components, both of which reflect a
small increase in worldwide base station component demand during the quarter.
Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar and countermeasure subsystems for the
military. Sales in the Space and Defense group fell $572,000, or 7.8%, in the
first quarter of fiscal 2004, compared to the same quarter in the prior fiscal
year. This decrease in shipments resulted from the completion of shipments under
the Boeing Spaceway program in the fourth quarter of fiscal 2003. This program
accounted for over $4.0 million in shipments in fiscal 2003 and $1.0 million in
the first quarter of last year. Sales in the Space and Defense segment are
expected to average approximately $6.5 million per quarter in fiscal 2004.
Gross Profit. Cost of sales consists primarily of engineering design costs,
materials, material fabrication costs, assembly costs, direct and indirect
overhead, and test costs. Gross profit for the first quarter of fiscal 2004 was
$6.0 million (32.6% of net sales), down $200,000 from $6.2 million (32.2% of net
sales) for the same quarter of the prior year. The small rise in gross margin as
a percent of sales, despite the drop in revenue year over year and an additional
$235,000 increase in the inventory obsolescence reserve, was a result of the
$1.2 million decrease in sales of low margin ferrite products, coupled with an
increase in sales of higher margin surface mount and custom wireless components
in the current first quarter compared to the first quarter last year. The
Company expects gross margins to continue to improve with further increases in
sales levels.
Marketing. Marketing expenses consist mainly of employee related expenses,
commissions paid to sales representatives, trade show expenses, advertising
expenses and related travel expenses. Marketing expenses were $1.6 million (8.7%
of net sales) for the first quarter of fiscal 2004, unchanged from $1.6 million
(8.3% of net sales) for the first quarter of fiscal 2003, as a budgeted decline
in advertising expenditures was large enough to offset the increase in expense
to fund three new geographic product line marketing positions.
Research and Development. Research and development expenses consist of material
and salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses were $1.4 million
(7.8% of net sales) in the first quarter of fiscal 2004, unchanged from $1.4
million (7.3% of net sales) for the first quarter of fiscal 2003. Research and
development expenditures are supporting further development of wireless
infrastructure products and new wireless networking product opportunities. The
Company does not expect to significantly reduce its current research and
development efforts in the near term and is presently working on a number of new
standard wireless products.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, and intangible amortization,
travel related expenses and other corporate costs. General and administrative
expenses decreased 14.1% to $1.8 million (10.0% of
15
net sales) for the first quarter of fiscal 2004 from $2.1 million (11.1% of net
sales) for the first quarter of fiscal 2003.
The decrease in general and administrative costs in the first quarter of fiscal
2004 compared to the first quarter of fiscal 2003 was a result of restructuring
by the Company in the second half of fiscal 2003 and reductions in spending for
professional services and outside consulting in the current first quarter.
Operating Income. Operating income increased slightly in the first quarter of
fiscal 2004 to $1,113,000 (6.1% of sales) from $1,030,000 (5.5% of net sales)
for the first quarter of fiscal 2003. On a reporting segment basis, the Wireless
operating loss was $110,000 for the first quarter of fiscal 2004 an improvement
of $500,000 from a Wireless operating loss of $610,000 for the first quarter of
fiscal 2003. The main reason for the decrease in Wireless loss in the current
first quarter was the restructuring and cost reduction activities in the second
half of fiscal 2003, which lowered Wireless operating costs, and the
discontinuation of some low margin wireless ferrite products.
Space and Defense operating income fell $437,000 in the first quarter of fiscal
2004 to $1.2 million compared to $1.7 million in the first quarter of fiscal
2003. This decrease resulted from the lower sales volume and a change in product
mix during the current first quarter compared to the first quarter last year.
This year's first quarter sales included more volume attributable to military
programs, while sales in the first quarter last year consisted of more
profitable commercial space programs.
Interest Expense. Interest expense represents interest paid on a deferred
obligation. Interest expense for the first quarter of fiscal 2004 was $3,000
(0.0% of net sales) compared to $20,000 (0.1% of net sales) for the first
quarter of fiscal 2003.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 27.7% to $468,000 (2.6% of net sales) for
the quarter ended September 30, 2003, from $647,000 (3.4% of net sales) for the
same quarter last year. This decrease was caused mainly by the decline in market
interest rates over the last 12 months brought about by reductions in the
Federal Fund rates. Interest income will fluctuate based on the level of
interest rates and the level of investable cash balances.
Income Taxes. Income taxes for the first quarter of fiscal 2004 were $381,000
(2.1% of net sales), representing an effective tax rate of 24.1%. This compares
to income tax expense of $378,000 (2.0% of net sales) for the first quarter of
fiscal 2003, representing an effective tax rate of 22.5%. The Company's
effective tax rate is a direct result of the proportion of federally exempt
state municipal bond income and federal tax credits and benefits in relation to
the levels of taxable income or loss.
Discontinued Operations. On July, 10, 2003, the Company announced its decision
to dispose of its Anaren Europe operation. During the first quarter, the Company
ceased production at Anaren Europe and liquidated the remaining net assets of
that operation. Effective with this 10-Q Quarterly Report for the first quarter
ended September 30, 2003, the results of operations for Anaren Europe for both
the current and prior year first quarters have been reclassified as discontinued
operations in the statements of earnings. The results from discontinued
operations for the first quarter ended September 30, 2003 include a loss of
$782,000 to recognize the difference between the estimated and actual realized
value of liquidated equipment, and a federal tax benefit of $1.8 million
resulting from losses attributable to Anaren Europe. It is anticipated
16
that an additional $600,000 to $700,000 of expenses from discontinued operations
will be incurred over the next 3 to 6 months to return the facility to its
original condition, pay lease termination costs, and pay cost of employees to
close the facility.
Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's
most critical accounting policies have a significant impact on the results
reported in the Company's financial statements. The U.S.Securities and Exchange
Commission has defined the most critical accounting policies as the ones that
are most important to the portrayal of Anaren's financial condition and results,
and that require management to make the most difficult and subjective judgments,
often as a result of the need to make estimates of matters that are inherently
uncertain. Based on this definition, the Company's most critical policies
include: valuation of accounts receivable, which impacts general and
administrative expense; valuation of inventory, which impacts cost of sales and
gross margin; the assessment of recoverability of goodwill and other intangible
and long-lived assets, which impacts write-offs of goodwill, intangibles and
long-lived assets; and accounting for income taxes, which impacts the valuation
allowance and the effective tax rate. Management reviews the estimates,
including but not limited to allowance for doubtful accounts, inventory reserves
and income tax valuations, on a regular basis and makes adjustments based on
historical experiences, current conditions and future expectations. The reviews
are performed regularly and adjustments are made as required by current
available information. The Company believes these estimates are reasonable, but
actual results could differ from these estimates.
The Company's accounts receivable represent those amounts which have been billed
to its customers but not yet collected. The Company analyzes various factors
including historical experience, credit worthiness of customers and current
market and economic conditions. The allowance for doubtful accounts balance is
established based on the portion of those accounts receivable which are deemed
to be potentially uncollectible. Changes in judgments on these factors could
impact the timing of costs recognized.
The Company states inventories at the lower of cost or market, using a standard
cost methodology to determine the cost basis for the inventory. This method
approximates actual cost on a first-in-first-out basis. The recoverability of
inventories is based on the types and levels of inventory held, forecasted
demand, pricing, competition and changes in technology.
The Company records valuation allowances to reduce deferred tax assets when it
is more likely than not that some portion of the amount may not be realized. The
Company evaluates the need for valuation allowances on a regular basis and
adjusts the allowance as needed. These adjustments, when made, would have an
impact on the Company's financial statements in the period that they were
recorded.
Intangible assets with estimable useful lives are amortized to their residual
values over those estimated useful lives in proportion to the economic benefit
consumed.
Long-lived assets with estimated useful lives are depreciated to their residual
values over those useful lives in proportion to the economic value consumed.
Long-lived assets are tested for impairment at the group level, which is usually
an economic unit such as a manufacturing facility or department, which has a
measurable economic output or product. Long-lived assets are tested for
impairment when events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable and exceeds its fair market
value. This circumstance
17
exists if the carrying amount of the assets in question exceeds the sum of the
undiscounted cash flows expected to result from the use of the asset. The
impairment loss is measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value as determined by the discounted cash
flow, or in the case of negative cash flow an independent market appraisal, of
the asset.
Goodwill is tested annually, or sooner if indicators of impairment exist, for
impairment by the Company at the reporting unit level by comparing the fair
value of the reporting unit with its carrying value. Valuation methods for
determining the fair value of the reporting unit include reviewing quoted market
prices and discounted cash flows. If the goodwill is indicated as being impaired
(the fair value of the reporting unit is less than the carrying amount), the
fair value of the reporting unit is then allocated to its assets and liabilities
in a manner similar to a purchase price allocation in order to determine the
implied fair value of the reporting unit goodwill. This implied fair value of
the reporting unit goodwill is then compared with the carrying amount of the
reporting unit goodwill and, if it is less, the Company would then recognize an
impairment loss.
The projection of future cash flows for the goodwill impairment analysis
requires significant judgments and estimates with respect to future revenues
related to the assets and the future cash outlays related to those revenues.
Actual revenues and related cash flows or changes in anticipated revenues and
related cash flows could result in changes in this assessment and result in an
impairment charge. The use of different assumptions could increase or decrease
the related impairment charge.
Liquidity and Capital Resources
Net cash provided by operations for the three months ended September 30, 2003
and the three months ended September 30, 2002 was $1.4 million and $2.1 million,
respectively. The positive cash flow from operations was due primarily to the
profit before depreciation in both years and in the current year was decreased
by the rise in receivables, while the prior fiscal year was augmented by the
decline in accounts receivable.
Net cash used in investing activities consists of funds used to purchase capital
equipment in both years. Capital equipment purchases in the first quarter of
fiscal 2004 were $878,000, down 59% from $2.1 million in capital equipment
expenditures in the first quarter of fiscal 2003. Additionally, in fiscal 2003
maturities of marketable securities provide $4.2 million of investing activities
cash.
Net cash used for financing activities was $3.2 million in the first quarter of
fiscal 2004 and $594,000 in the first quarter of last year. Cash was used in the
current first quarter of fiscal 2004 for the purchase of 281,700 treasury
shares, net of $173,000 received for the exercise of stock options. Funds used
in the first quarter of last fiscal year were used to purchase 71,800 treasury
shares.
During the remainder of fiscal 2003, the Company anticipates that its main cash
requirements will be for additions to capital equipment and the purchase of
additional Treasury shares. Capital expenditures, including purchases of
$878,000 made in the first quarter, are expected to total between $3.0 and $4.0
million for fiscal 2004 (4-5% of sales) and will be funded by existing cash
balances.
18
The Company expects to continue to purchase Treasury shares in the open market
under the current board authorization, depending on market conditions. At
September 30, 2003, under the current board authorization of 2.0 million shares,
the Company has 958,000 shares remaining to purchase.
At September 30, 2003, the Company had approximately $125.8 million in cash,
cash equivalents, and marketable securities and no debt, and has had positive
operating cash flow for over eight years. The Company believes that its cash
requirements for the foreseeable future will be satisfied by currently invested
cash balances and expected cash flows from operations.
Disclosures About Contractual Obligations and Commercial Commitments
Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, such as debt, lease
agreements, and under contingent commitments, such as debt guarantees. The
Company's obligations and commitments are as follows:
Payment Due by Period
---------------------
Less
Total than 1 Yr. 2-3 Yrs 4-5 Yrs Over 5 Yrs
----- --------- ------- ------- ----------
Contractual obligations
Operating leases - facilities $5,545,798 $893,912 $1,424,798 $870,226 $2,356,862
Deferred compensation 483,807 65,000 130,000 130,000 158,807
Forward-Looking Cautionary Statement
In 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. Because
these statements are forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, management's
forecasts involve risks and uncertainties, and actual results could differ
materially from those predicted in the forward-looking statements. The risks and
uncertainties described below are not the only ones facing our Company.
Additional risks and uncertainties not presently known to us or that are
currently derived immaterial may also impair our business operations. If any of
the following risks actually occur, our business could be adversely effected and
the trading price of our common stock could decline and you may lose all or part
of your investment. Such factors include, but are not limited to:
o current unpredictable wireless market conditions;
o the possibility that the Company may be unable to successfully execute its
business strategies or achieve its operating objectives, generate revenue
growth or achieve profitability;
o decreased capital expenditures by wireless service providers;
o successfully securing new designs wins from our OEM customers;
o loss of one or more of a limited number of original equipment
manufacturers as customers;
o costs associated with potential product recalls;
o unpredictable difficulties or delays in the development of new products;
o the timely availability of component parts and services from a limited
number of suppliers;
o the risks associated with any technological market shifts away from the
Company's technologies and core competencies;
19
o cancellation of existing contracts or orders, or other declines in demand
for the Company's products;
o diversion of defense spending away from the Company's products and/or
technologies due to on-going military operations;
o increased pricing pressure and increased competition;
o the failure of wireless customers' annual procurement forecasts to result
in future sales;
o our ability to successfully finalize the shutdown of our Anaren Europe
operation which may result in additional costs related to disposal of its
assets, environmental clean-up, termination of Anaren Europe's facility
lease and other related issues;
o potential impairments of assets including investment values and goodwill;
o foreign currency fluctuations;
o litigation relating to Anaren's ownership interest in Celeritek or a
potential transaction with Celeritek, or litigation or adverse regulatory
action involving antitrust, intellectual property, product warranty,
product liability, tax and other issues.
Anaren disclaims any obligation, unless required by law, to update or revise any
forward-looking statement. Readers are advised to carefully review the risk
factors set forth in this Quarterly Report on Form 10-Q and the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission to learn
more about the various risks and uncertainties facing Anaren's business and
their potential impact on Anaren's revenues and earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Quarterly Report on Form 10-Q.
As of September 30, 2003, the Company had cash, cash equivalents and marketable
securities of $125.8 million, of which approximately $119.5 million consisted of
cash and highly liquid investments in marketable debt securities and $6.3
million consisted of marketable equity securities. The marketable debt
securities at date of purchase normally have maturities between one and eighteen
months, are exposed to interest rate risk and will decrease in value if market
interest rates increase. A hypothetical decrease in market interest rate of
10.0% from September 30, 2003 rates, or 0.15%, would have reduced net income and
cash flow by approximately $45,000, or $0.002 per share for the quarter. Due to
the relatively short maturities of the securities and its ability to hold those
investments to maturity, the Company does not believe that an immediate decrease
in interest rates would have a significant effect on its financial condition or
results of operations. Over time, however, declines in interest rates will
reduce the Company's interest income.
The Company currently owns equity investments held for sale with a market value
of approximately $6.3 million. Fluctuations in market value of these securities
are presently considered to be temporary and are charged to stockholders' equity
monthly. A theoretical 10.0% decline in market value of these securities would
result in a $630,000 reduction in stockholders' equity. In the future, if the
decline in value of these securities is considered other than temporary, then
the full decline in value experienced to the date of impairment will be
reflected in the then current period income statement.
20
All of the Company's sales from its domestic U.S. subsidiaries to foreign
customers are denominated in United States dollars and, accordingly, are not
exposed to foreign currency exchange risk.
Item 4. Controls and Procedures
1. Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this
Quarterly Report on Form 10-Q, the Company's chief executive officer
and chief financial officer have concluded that the Company's
disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective
manner.
2. Changes in internal controls. During the period covered by this
Quarterly Report on Form 10-Q, there were no changes in the
Company's internal control over financial reporting (as defined in
Rule 13a-15(f)) that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
Item 5. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
Item 6(a) Exhibits
31 RULE 13a-14(a) CERTIFICATION,
32 SECTION 1350 CERTIFICATION,
Item 6(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on July 10, 2003 with
respect to the announcement of the disposal of its Anaren Europe facility.
The Company filed a current report on Form 8-K on August 12, 2003 with
respect to its Results of Operations for the fourth quarter and year ended
June 30, 2003.
The Company filed a current report on Form 8-K on October 23, 2003 with
respect to its Results of Operations for the first quarter ended September
30, 2003.
21
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.
Anaren, Inc.
(Registrant)
Date: October 30, 2003 /s/ Lawrence A. Sala
---------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: October 30, 2003 /s/ Joseph E. Porcello
---------------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
22