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 December 31, 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 13057
East Syracuse, New York -----
----------------------- (Zip Code)
(Address of principal
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 February
5, 2004 was 20,547,782.
1
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
December 31, 2003 and June 30, 2003 (unaudited)
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended December 31,
2003 and 2002 (unaudited)
Consolidated Condensed Statements of Earnings 5
for the Six Months Ended December 31, 2003
and 2002 (unaudited)
Consolidated Condensed Statements of Cash Flows 6
for the Six Months Ended December 31,
2003 and 2002 (unaudited)
Notes to Consolidated Condensed Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis 13
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls & Procedures 25
PART II - OTHER INFORMATION
- ---------------------------
Item 5. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
Officer Certifications 27 - 30
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
December 31, 2003 and June 30, 2003
(Unaudited)
Assets December 31, 2003 June 30, 2003
------ ----------------- -------------
Current assets:
Cash and cash equivalents $ 12,841,702 $ 11,062,662
Securities available for sale (note 3) 5,767,763 5,682,260
Securities held to maturity (note 3) 59,162,017 87,584,016
Receivables, less allowance of $237,981
and $245,000, respectively 10,577,482 9,317,941
Inventories (note 4) 14,919,130 15,671,659
Interest and other receivables 751,554 823,189
Refundable income taxes 1,800,000 876,220
Deferred income taxes 1,392,977 1,132,016
Prepaid expenses and other current assets 1,209,528 1,235,325
------------- -------------
Total current assets 108,422,153 133,385,288
------------- -------------
Securities held to maturity (note 3) 36,308,077 23,394,382
Property, plant and equipment, net (note 5) 20,844,766 23,639,821
Goodwill 30,715,861 30,715,861
Other intangible assets, net of accumulated
amortization of $1,321,311 at
December 31, 2003 and $1,071,542 at
June 30, 2003 (note 1) 1,703,655 1,953,424
------------- -------------
$ 197,994,512 $ 213,088,776
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,278,047 $ 4,380,459
Accrued expenses (note 6) 2,345,731 2,477,670
Income taxes payable 1,194,277 66,594
Customer advance payments 880,368 --
Other current liabilities (note 8) 260,109 225,534
------------- -------------
Total current liabilities 7,958,532 7,150,257
Deferred income taxes 1,772,611 1,601,346
Postretirement benefit obligation 3,501,760 3,302,532
Other liabilities (note 8) 409,156 437,236
------------- -------------
Total liabilities 13,642,059 12,491,371
------------- -------------
Stockholders' equity:
Common stock of $.01 par value
Authorized 200,000,000 shares; issued
25,730,154 shares at December 31, 2003
and 25,681,854 at June 30, 2003 257,302 256,818
Additional paid-in capital 169,218,347 168,805,153
Unearned compensation (238,488) (381,588)
Accumulated other comprehensive loss (1,094,218) (1,216,961)
Retained earnings 46,329,995 43,290,143
------------- -------------
214,472,938 210,753,565
Less cost of 5,257,922 and 3,820,822
treasury shares at December 31, 2003
and June 30, 2003 30,120,485 10,156,160
------------- -------------
Total stockholders' equity 184,352,453 200,597,405
------------- -------------
$ 197,994,512 $ 213,088,776
============= =============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
December 31, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Net sales $19,593,930 $19,736,523
Cost of sales 12,952,703 13,542,715
----------- -----------
Gross profit 6,641,227 6,193,808
----------- -----------
Operating expenses:
Marketing 1,681,384 1,535,903
Research and development 1,133,246 1,527,747
General and administrative 1,863,784 2,228,267
----------- -----------
Total operating expenses 4,678,414 5,291,917
----------- -----------
Operating income 1,962,813 901,891
Other income, primarily interest 375,735 620,659
Interest expense (1,550) (10,111)
----------- -----------
Income before income taxes 2,336,998 1,512,439
Income tax expense 746,000 248,000
----------- -----------
Income from continuing operations 1,590,998 1,264,439
----------- -----------
Discontinued operations:
Loss from discontinued operations
of Anaren Europe (note 9) (335,053) (789,271)
----------- -----------
Net income $ 1,255,945 $ 475,168
=========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 0.08 $ 0.06
Income (loss) from discontinued
operations (0.02) (0.04)
------ ------
Net income $ 0.06 $ 0.02
====== ======
Diluted earnings (loss) per share:
Income from continuing operations $ 0.07 $ 0.05
Income (loss) from discontinued
operations (0.01) (0.03)
------ ------
Net income $ 0.06 $ 0.02
====== ======
Shares used in computing net earnings
(loss) per share:
Basic 21,123,035 22,301,824
=========== ===========
Diluted 21,887,468 22,821,430
=========== ===========
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Six Months Ended
December 31, 2003 and 2002
(Unaudited)
Dec. 31, 2003 Dec. 31, 2002
------------- -------------
Net sales $37,864,603 $38,934,340
Cost of sales 25,264,481 26,550,986
----------- -----------
Gross profit 12,600,122 12,383,354
----------- -----------
Operating expenses:
Marketing 3,266,850 3,133,386
Research and development 2,555,028 2,928,808
General and administrative 3,702,183 4,368,830
----------- -----------
Total operating expenses 9,524,061 10,431,024
----------- -----------
Operating income 3,076,061 1,952,330
Other income, primarily interest 843,711 1,267,670
Interest expense (4,522) (29,633)
----------- -----------
Income before income taxes 3,915,250 3,190,367
Income tax expense 1,127,000 626,000
----------- -----------
Income from continuing operations 2,788,250 2,564,367
Discontinued operations:
Loss from discontinued
operations
of Anaren Europe (note 9) (1,548,398) (2,362,993)
Income tax benefit (1,800,000) (420,000)
----------- -----------
Net income (loss) from
discontinued operations 251,602 (1,942,993)
----------- -----------
Net income $ 3,039,852 $ 621,374
=========== ===========
Basic earnings per share:
Income from continuing operations $0.13 $ 0.12
Income (loss) from discontinued
operations 0.01 (0.09)
----- ------
Net income $0.14 $ 0.03
===== ======
Diluted earnings per share:
Income from continuing operations $0.13 $ 0.11
Income (loss) from discontinued
operations 0.01 (.08)
----- ------
Net income $0.14 $ 0.03
===== ======
Shares used in computing net earnings
per share:
Basic 21,440,385 22,316,557
=========== ===========
Diluted 22,120,197 22,816,521
=========== ===========
See accompanying notes to consolidated condensed financial statements.
5
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Six Months Ended
December 31, 2003 and 2002
(Unaudited)
Dec. 31, 2003 Dec. 31, 2002
Cash flows from operating activities: ------------- -------------
Net income $ 3,039,852 $ 621,374
Net income (loss) from discontinued
operations 251,602 (1,942,993)
------------ -----------
Net income from continuing
operations $ 2,788,250 $ 2,564,367
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,999,534 1,924,826
Amortization of intangibles 249,769 249,769
Deferred income taxes (89,696) 62,599
Unearned compensation 143,100 318,354
Provision for doubtful accounts 75,949 28,580
Tax benefit from exercise of
stock options 137,280 --
Changes in operating assets and
liabilities, net of acquisition:
Receivables (1,928,666) 1,575,168
Inventories 262,124 2,132,897
Interest and other receivables 192,932 102,469
Other current assets (199,409) (239,335)
Refundable income taxes 876,220 --
Accounts payable (776,448) (1,437,636)
Accrued expenses 120,719 238,593
Income taxes payable 1,127,683 (114,928)
Customer advance payments 880,368 (244,831)
Other liabilities 6,495 20,664
Postretirement benefit
obligation 199,228 --
------------ -----------
Net cash provided by operating
activities from continuing
operations 6,065,432 7,181,556
Net cash used in operating
activities from discontinued
operations (157,244) (1,531,919)
------------ -----------
Net cash provided by operating
activities 5,908,188 5,649,637
------------ -----------
Cash flows from investing activities:
Capital expenditures (1,480,144) (3,597,185)
Maturities of marketable debt securities 142,295,305 69,935,000
Purchases of marketable debt and
equity securities (126,787,000) (67,958,281)
------------ -----------
Net cash provided by (used in)
investing activities from
continuing operations 14,028,161 (1,620,466)
Net cash provided by investing
activities from discontinued
operations 1,493,378 --
------------ -----------
Net cash provided by (used in)
investing activities 15,521,539 (1,620,466)
------------ -----------
Cash flows from financing activities:
Stock options exercised 276,398 199,931
Purchase of treasury stock (19,964,325) (593,700)
------------ -----------
Net cash used in financing
activities (19,687,927) (393,769)
------------ -----------
Effect of exchange rates 37,240 89,659
Net increase in cash
and cash equivalents 1,779,040 3,725,061
Cash and cash equivalents at
beginning of period 11,062,662 12,565,424
------------ -----------
Cash and cash equivalents at
end of period $ 12,841,702 $16,290,485
============ ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 4,522 $ 29,684
============ ===========
Income taxes $ 2,000 $ 750,000
============ ===========
See accompanying notes to consolidated condensed financial statements.
6
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 six months ended December 31,
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
six months ended December 31, 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 December 31, 2003 are as follows:
Gross Carrying Accumulated
Amount Amortization
-------------- ------------
Patent $ 574,966 $ 323,419
Customer Base 1,350,000 525,000
Trade Name 320,000 248,892
Non-Competition Agreements 180,000 84,000
Favorable Lease 600,000 140,000
---------- ----------
Total $3,024,966 $1,321,311
========== ==========
Intangible asset amortization expense for the six month periods ended December
31, 2003 and December 31, 2002 was $249,769. 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
7
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 Six Months Ended
------------------------------- -------------------------------
December 31 December 31 December 31 December 31
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income, as reported $ 1,255,945 $ 475,168 $ 3,039,852 $ 621,374
Fair value-based stock based
Compensation cost, net of tax 2,317,672 2,187,164 4,393,664 4,374,328
----------- ----------- ----------- -----------
Pro forma net loss $(1,061,727) $(1,711,996) $(1,353,812) $(3,752,954)
=========== =========== =========== ===========
Net income (loss) per share:
Basic $ 0.06 $ 0.02 $ 0.14 $ 0.03
Diluted $ 0.06 $ 0.02 $ 0.14 $ 0.03
Pro forma net loss per share:
Pro forma basic $ (0.05) $ (0.08) $ (0.06) $ (0.17)
Pro forma diluted $ (0.05) $ (0.08) $ (0.06) $ (0.17)
NOTE 3: Marketable Securities
Marketable securities are summarized as follows:
December 31, 2003 June 30, 2003
----------------- -------------
Marketable debt securities -
held-to-maturity $ 95,470,094 $110,978,398
Marketable equity securities -
available for sale 5,767,763 5,682,260
------------ ------------
Total 101,237,857 116,660,658
Current portion 64,929,780 93,266,276
------------ ------------
Long term $ 36,308,077 $ 23,394,382
============ ============
NOTE 4: Inventories
Inventories are summarized as follows:
December 31, 2003 June 30, 2003
----------------- -------------
Component parts $ 8,912,662 $ 8,810,207
Work in process 5,413,095 5,627,150
Finished goods 2,569,737 2,656,029
----------- -----------
$16,895,494 $17,093,386
Reserve for obsolescence (1,976,364) (1,421,727)
----------- -----------
Net inventory $14,919,130 $15,671,659
=========== ===========
8
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31, 2003 June 30, 2003
----------------- -------------
Land and land improvements $ 1,595,821 $ 1,595,821
Buildings, furniture and fixtures 13,593,369 12,944,778
Machinery and equipment 46,146,842 47,590,955
------------ -----------
$ 61,336,032 $62,131,554
Less accumulated depreciation
and amortization (40,491,266) 38,491,733
------------ -----------
$ 20,844,766 $23,639,821
============ ===========
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
December 31, 2003 June 30, 2003
----------------- -------------
Compensation $ 1,174,927 $ 924,290
Commissions 387,713 355,098
Health insurance 175,413 290,424
Restructuring (note 7) 138,975 710,885
Other 468,703 196,973
----------- ----------
$ 2,345,731 $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 December 31,
2003 Expenditures Write-offs 2003
-------- ------------ ---------- ------------
Severance $677,251 $(538,276) $ -- $138,975
Outplacement services
and others 33,634 (33,634) -- --
-------- --------- ----- --------
Total $710,885 $(571,910) $ -- $138,975
======== ========= ===== ========
At December 31, 2003, outstanding liabilities related to the restructuring
totaled $138,975 and are included in accrued expenses in the accompanying
Balance Sheets and are expected to be paid in full over the next twelve months.
9
NOTE 8: Other Liabilities
Other liabilities consist of the following:
December 31, 2003 June 30, 2003
----------------- -------------
Deferred compensation $ 474,156 $ 502,236
Other 195,109 160,534
--------- ---------
669,265 662,770
Less current portion (260,109) 225,534
--------- ---------
$ 409,156 $ 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 of fiscal 2004, production at Anaren
Europe ceased and the remaining net assets of that operation were liquidated
through the sale of equipment via auction. Effective with the reporting of the
Company's operating results for the three months ended September 30, 2003, the
results of operations for Anaren Europe for both the current and prior year have
been reclassified as discontinued operations in the statement of earnings.
Components of the loss from discontinued operations of Anaren Europe for the
three months and six months ended December 31, 2003 are the following:
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 31 December 31
2003 2002 2003 2002
--------- ----------- ----------- -----------
Net sales $ 17,861 $ 1,148,615 658,329 $ 2,374,671
Expenses (352,914) (1,937,886) (1,424,438) (4,737,664)
Loss on sale of equipment -- -- (782,289) --
--------- ----------- ----------- -----------
Net loss from discontinued operations $(335,053) $ (789,271) $(1,548,398) $(2,362,993)
========= =========== =========== ===========
The Company also recorded an income tax benefit of $1,800,000 related to the
disposal of its Anaren Europe operations in the quarter ended September 30,
2003.
10
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 2,326,210 and 2,425,700 at December
31, 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 Six Months Ended
------------------------------- -------------------------------
December 31 December 31
Numerator: 2003 2002 2003 2002
----------- ----------- ----------- -----------
Earnings available to
common stockholders $ 1,255,945 $ 475,168 $ 3,039,852 $ 621,374
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 21,123,035 22,301,824 21,440,385 22,316,557
=========== =========== =========== ===========
Denominator for diluted earnings
per share:
Weighted average shares outstanding 21,123,035 22,301,824 21,440,385 22,316,557
Common stock options
and restricted stock 764,432 519,606 679,813 499,964
----------- ----------- ----------- -----------
Weighted average shares and conversions 21,887,468 22,821,430 22,120,197 22,816,521
=========== =========== =========== ===========
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.
11
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:
December 31, 2003 $12,993,731 6,600,199 -- $ 19,593,930
December 31, 2002 $12,167,696 7,568,827 -- $ 19,736,523
Six months ended
December 31, 2003 $24,520,321 13,344,282 -- $ 37,864,603
December 31, 2002 $24,049,986 14,884,354 -- $ 38,934,340
Operating income (loss):
Three months ended:
December 31, 2003 792,486 1,170,327 -- 1,962,813
December 31, 2002 (622,106) 1,523,997 -- 901,891
Six months ended:
December 31, 2003 682,678 2,393,383 -- 3,076,061
December 31, 2002 (1,231,817) 3,184,147 -- 1,952,330
Goodwill and intangible assets:
December 31, 2003 32,554,401 -- -- 32,554,401
June 30, 2003 32,669,285 -- -- 32,669,285
Identifiable assets:*
December 31, 2003 14,774,849 10,959,745 138,646,125 164,380,719
June 30, 2003 14,145,826 9,760,194 156,513,471 180,419,491
Depreciation:**
Three months ended:
December 31, 2003 495,099 506,470 -- 1,001,569
December 31, 2002 963,102 373,348 -- 1,336,450
Six months ended:
December 31, 2003 1,058,737 940,797 -- 1,999,534
December 31, 2002 1,181,436 743,390 -- 1,924,826
Goodwill and intangibles amortization:***
Three months ended:
December 31, 2003 124,885 -- -- 124,885
December 31, 2002 124,884 -- -- 124,884
Six months ended:
December 31, 2003 249,769 -- -- 249,769
December 30, 2002 249,769 -- -- 249,769
* 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
12
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.
*** 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.
NOTE 12: Other Postretirement Benefits
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) became law in the United States. The Act introduces a
prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is at
least actuarially equivalent to the Medicare benefit. In accordance with FASB
Staff Position FAS 106-1,"Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," the
Company has elected to defer recognition of the effects of the Act in any
measures of the benefit obligation or cost. Specific authoritative guidance on
the accounting for the federal subsidy is pending and that guidance, when
issued, could require the Company to change previously reported information.
Currently, the Company does not believe it will need to amend its plan to
benefit from the Act. The measurement date used to determine pension and other
postretirement benefit measures for the pension plan and the postretirement
benefit plan is June 30.
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 and six months ended December 31, 2003
and its financial condition at December 31, 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 December 31, 2003 and June 30, 2003, and the consolidated
results of operations and cash flows of the Company for the three months and six
months ended December 31, 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 and Raytheon.
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 have 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
13
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.
The Company expects to increase the utilization of its Suzhou China facility as
the result of the increase in customer demand for its wireless products and in
anticipation of initiating production of a new custom assembly. In addition, the
Company has been selected to receive an order in excess of $11.0 million (to be
shipped over 36 months) to supply digital RF memory jamming subsystems, which
will further strengthen the Company's Space and Defense backlog.
On July 10, 2003, after several restructurings, 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 of fiscal 2004, 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 the three and six
months ended December 31, 2003 and 2002. Included in the results of discontinued
operations for the first half of fiscal 2004 are a loss from European operations
of $1.5 million and a U.S. tax benefit of $1,800,000 resulting from losses
attributable to Anaren Europe.
Net sales from continuing operations for the second quarter ended December 31,
2003 were $19,594,000, relatively unchanged from the second quarter of last
fiscal year and up 7.0% from the first quarter of fiscal 2004. Operating income
for the second quarter was $2.0 million, or 10% of net sales, up 15.7% from the
second quarter of last year, and up 76% sequentially from the first quarter of
fiscal 2004.
Income from continuing operations for the second quarter of fiscal 2004 was
$1,591,000, or $0.07 per diluted share, while the loss from discontinued
operations was $335,000 or $0.01 per diluted share, resulting in net income of
$1,256,000, or $0.06 per diluted share. This compares to income from continuing
operations of $1,264,000, or $0.05 per diluted share and a loss from
discontinued operations of ($789,000), or ($0.03) per diluted share, resulting
in net income of $475,000, or $0.02 per diluted share, for the second quarter of
last year, and $0.08 per diluted share (including net income from discounted
operations of $587,000) for the first quarter of fiscal 2004.
14
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 Six Months Ended
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.1% 68.6% 66.7% 68.2%
---- ---- ---- ----
Gross profit 33.9% 31.4% 33.3% 31.8%
---- ---- ---- ----
Operating expenses:
Marketing 8.6% 7.8% 8.6% 8.1%
Research and development 5.8% 7.7% 6.8% 7.5%
General and administrative 9.5% 11.3% 9.8% 11.2%
---- ---- ---- ----
Total operating expenses 23.9% 26.8% 25.2% 26.8%
---- ---- ---- ----
Operating income 10.0% 4.6% 8.1% 5.0%
---- ---- ---- ----
Other income (expense):
Other, primarily interest income 1.9% 3.2% 2.2% 3.3%
Interest expense (0.0%) (0.1%) (0.0%) (0.1%)
---- ---- ---- ----
Total other income (expense), net 1.9% 3.1% 2.2% 3.2%
---- ---- ---- ----
Income (loss) before income taxes
and extraordinary item 11.9% 7.7% 10.3% 8.2%
Income taxes 3.8% 1.3% 3.0% 1.6%
---- ---- ---- ----
Income from continuing operations 8.1% 6.4% 7.3% 6.6%
---- ---- ---- ----
Discontinued operations:
Income (loss) from discontinued
Operations of Anaren Europe (1.7%) (4.5%) (4.1%) (6.1%)
---- ---- ---- ----
Income tax benefit 0.0% (0.5%) (4.8%) (1.1%)
---- ---- ---- ----
Net income (loss) from
Discontinued operations (1.7%) (4.0%) 0.7% (5.0%)
---- ---- ---- ----
Net income 6.4% 2.4% 8.0% 1.6%
==== ==== ==== ====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Six Months Ended
----------------------- -----------------------
December 31 December 31
2003 2002 2003 2002
------- ------- ------- -------
Wireless $12,994 $12,168 $24,521 $24,050
Space and Defense 6,600 7,569 13,344 14,884
------- ------- ------- -------
$19,594 $19,737 $37,865 $38,934
======= ======= ======= =======
15
Three Months Ended December 31, 2003 Compared to Three Months Ended December 31,
2002
Net sales. Net sales decreased $143,000, or 0.7%, to $19.6 million for the three
months ended December 31, 2003, compared to $19.7 million for the second quarter
of the previous fiscal year. This decrease resulted from a $969,000 decline in
sales of Space and Defense products which was largely offset by a $826,000
increase in sales of Wireless infrastructure products.
The increase 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 a significant increase in worldwide demand
for wireless base station components over the last six months which generated
increased orders from the Company's base station infrastructure original
equipment manufacturer customers in the second quarter. Sales of standard
surface mount components were $4.1 million in the second quarter, up 72% from
the second quarter last year. This increase was partially offset by a $618,000,
or 31%, decrease in sales of ferrite component products in the current second
quarter compared to last year as a result of the Company's continuing efforts to
eliminate unprofitable and low margin ferrite products in fiscal 2004.
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 $969,000, or 12.8%, in the
second 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 second quarter of that year. Sales in the Space and Defense segment are
expected to average approximately $6.7 to $7.2 million per quarter throughout
the remainder of 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 second quarter of fiscal 2004 was
$6.6 million (33.9% of net sales), up $447,000 from $6.2 million (31.4% of net
sales) for the same quarter of the prior year. The rise in gross margin as a
percent of sales, despite the drop in revenue year over year, was a result of
the $618,000 decrease in sales of unprofitable and low margin ferrite products,
coupled with an increase in sales of higher margin surface mount wireless
components, in the current second quarter compared to the second 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 $1.7 million (8.6%
of net sales) for the second quarter of fiscal 2004, up $146,000 from $1.5
million (7.8% of net sales) for the second quarter of fiscal 2003. This increase
is a result of the addition of three new geographic product line marketing
positions and a general increase in sales and marketing support costs to meet
the increased demand in both the Wireless and Space and Defense markets that the
Company has experienced over the last six months.
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 $1.1 million
(5.8% of net sales) in the second quarter of fiscal 2004, down 25.8% from $1.5
million (7.7% of net sales) for the second quarter of fiscal 2003. Research and
16
development expenditures are supporting further development of wireless
infrastructure products and new wireless networking product opportunities.
Research and development expenditures fell in the second quarter of fiscal 2004
compared to the same quarter last year due to a much higher level of customer
funded development activity in the current year. Despite the current temporary
decline in spending, the Company does not expect to significantly reduce its
current research and development efforts in the long 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 16.3% to $1.9 million (9.5% of net sales) for the second
quarter of fiscal 2004 from $2.2 million (11.3% of net sales) for the second
quarter of last fiscal year. This decrease was due to a decline in personnel as
a result of the Company's restructuring in the second half of fiscal 2003. The
decline was further augmented by current year reductions in spending for
professional services and outside consulting.
Operating Income. Operating income increased in the second quarter of fiscal
2004 to $1,963,000 (10.0% of sales) from $902,000 (4.6% of net sales) for the
second quarter of fiscal 2003. On a reporting segment basis, Wireless operating
income was $792,000 for the second quarter of fiscal 2004, an improvement of
$1.4 million from a Wireless operating loss of ($622,000) for the second quarter
of fiscal 2003. The main reasons for the increase in Wireless income in the
current second quarter were the Company's restructuring and cost reduction
activities in the second half of fiscal 2003 (which lowered Wireless operating
costs), the discontinuation of some unprofitable and low margin wireless ferrite
products, and the $800,000 increase in Wireless sales in current quarter
compared to the same period during the prior year. Wireless operating margins
are expected to continue to improve during the remainder of fiscal 2004 with
higher expected sales levels and further cost reduction initiatives.
Space and Defense operating income fell $354,000 in the second quarter of fiscal
2004 to $1.2 million, compared to $1.5 million in the second quarter of fiscal
2003. This decrease resulted from the lower sales volume and a change in product
mix during the current second quarter compared to the second quarter last year.
This year's second quarter sales included more shipment volume attributable to
military programs, while sales in the second quarter last year consisted of more
profitable sales for commercial space programs. Going forward, we expect Space
and Defense sales to be driven primarily by defense related programs.
Interest Expense. The Company does not have any long term debt, and interest
expense represents interest paid on a deferred obligation. Interest expense for
the second quarter of fiscal 2004 was $2,000 (0.0% of net sales) compared to
$10,000 (0.1% of net sales) for the second quarter of fiscal 2003.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 39.5% to $376,000 (1.9% of net sales) for
the quarter ended December 31, 2003, from $621,000 (3.2% of net sales) for the
same quarter last year. This decrease was caused by the decline in market
interest rates over the last 12 months brought about by reductions in the
Federal Funds rate and the decrease in investable cash balances due to the $20.0
million expenditure to repurchase shares of the Company's common stock on
Treasury shares. Interest income will fluctuate based on the level of interest
rates and the level of investable cash balances.
17
Income Taxes. Income taxes for the second quarter of fiscal 2004 were $746,000
(3.8% of net sales), representing an effective tax rate of 31.9%. This compares
to income tax expense of $248,000 (1.3% of net sales) for the second quarter of
fiscal 2003, representing an effective tax rate of 16.4%. 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 anticipated levels of taxable income for the entire fiscal year.
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 the remaining net assets of that
operation were liquidated. Effective with the Company's 10-Q Quarterly Report
for the first quarter ended September 30, 2003, the results of operations for
Anaren Europe for all periods reported on have been reclassified as discontinued
operations in the statements of earnings. The results from discontinued
operations for the second quarter ended December 31, 2003 include a loss of
$335,000 reflecting the cost of that operation in the second quarter.
Six Months Ended December 31, 2003 Compared to Six Months Ended December 31,
2002
Net Sales. Net sales decreased $1.0 million, or 2.7%, to $37.9 million for the
first six months of fiscal 2004, compared to $38.9 million for the first half of
the prior fiscal year. This decrease resulted from a $1.5 million decline in
Space and Defense product sales, which was partially offset by a $470,000, or
2.0%, rise in shipments of Wireless products.
The increase in sales of Wireless products resulted from a worldwide surge in
demand for Wireless base station infrastructure equipment beginning in the
Company's first quarter of fiscal 2004. This increase in sales of surface mount
components and custom products amounted to $2.3 million and more than offset the
$1.8 million decline in sales of ferrite products, which resulted from the
Company's continuing efforts to discontinue production of unprofitable and low
margin ferrite products in fiscal 2004.
Sales in the Space and Defense group fell $1.5 million, or 10.4%, in the first
half of fiscal 2004, compared to the same period in the prior fiscal year. This
decrease in sales 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 $2.0 million in the first
half of that year. Sales in the Space and Defense segment are expected to
average approximately $6.7 to $7.2 million per quarter for the remainder of
fiscal 2004.
Gross Profit. Gross profit in the first half of fiscal 2004 was $12.6 million
(33.3% of net sales), up $217,000 from $12.4 million (31.8% of net sales) for
the first six months of the prior year. The increase in gross margin as a
percent of sales despite the decline in sales levels was a result of the $1.8
million decrease in shipments of unprofitable and low margin ferrite products
and the $1.3 million increase in shipments of higher margin surface mount and
custom Wireless components in the current first six months compared to the same
period last year. The Company expects that gross margins will continue to rise
as shipment levels improve.
Marketing. Marketing expenses increased 4.3% to $3.3 million (8.6% of net sales)
for the first six months of fiscal 2004 from $3.1 million (8.0% of net sales)
for the first half of last year. This increase is a result of the addition of
three new geographic product line marketing positions and a general increase in
sales and marketing support costs, such as travel and administrative personnel,
to support the rising customer demand levels the Company has experienced over
the last six months.
18
Research and Development. Research and development expenses were $2.6 million
(6.8% of net sales) in the first half of fiscal 2004, down 12.8% from $2.9
million (7.5% of net sales) for the first half of fiscal 2003. Research and
development expenditures are supporting further development of Space and Defense
subsystems, Wireless infrastructure products and new Wireless networking product
opportunities. Research and development expenditures declined in the first half
of fiscal 2004 due to a higher level of customer funded development activity in
the current fiscal year. Despite the current decline, the Company does not
expect to significantly reduce its 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 declined 15.3%
to $3.7 million (9.8% of net sales) for the first six months of fiscal 2004,
from $4.4 million (11.2% of net sales) for the first half of last fiscal year.
The decrease in general and administrative expense in the current year compared
to fiscal 2003 was due to a decline in personnel as a result of the Company's
restructurings in the second half of fiscal 2003 as well as reduced spending for
professional services and outside consulting.
Operating Income. Operating income increased 57.6% in the first half of fiscal
2004 to $3.1 million (8.1% of sales) from $2.0 million (57.6% of net sales) for
the first half of fiscal 2003. On a reporting segment basis, the Wireless
operating income was $683,000 for the first six months of fiscal 2004, an
improvement of $1.8 million from a Wireless operating loss of $1.1 million for
the first six months of fiscal 2003. The main reasons for the improvement in
Wireless results operating profitability in the current first six months were
the restructuring and cost reduction activities in the second half of fiscal
2003 (which lowered Wireless operating costs), and the discontinuation of some
unprofitable and low margin Wireless ferrite products, and better factory
utilization.
Space and Defense operating income fell $791,000 in the first half of fiscal
2004 to $2.4 million, compared to $3.2 million in the first half of fiscal 2003.
This decrease resulted from the lower sales volume and a change in product mix
during the current six months compared to the first half of last year. Sales for
the first six months of fiscal 2004 included more volume attributable to
military programs, while sales in the first six months of last year consisted of
more profitable commercial space programs.
Interest Expense. The Company does not have any long term debt and interest
expense represents interest paid on a deferred obligation. Interest expense for
the first half of fiscal 2004 was $5,000 (0.0% of net sales) compared to $30,000
(0.1% of net sales) for the first half of fiscal 2003.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 33.4% to $844,000 (2.2% of net sales) for
the six months ended December 31, 2003, from $1.3 million (3.3% of net sales)
for the first six months of last year. This decrease was caused by the decline
in market interest rates over the last 12 months brought about by reductions in
the Federal Funds rate and the decline in investable cash balances due to the
use of $20.0 million to repurchase shares of the Company's common stock.
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 six months of fiscal 2004 were $1.1
million (3.0% of net sales), representing an effective tax rate of 28.8%. This
compares to income tax expense of $626,000 (1.6% of net sales) for the first six
months of fiscal 2003, representing an effective tax
19
rate of 19.6%. 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. The
effective tax rate has risen year over year for the first six months due to a
higher level of taxable income coupled with a 33% decline in nontaxable
municipal income. The effective tax rate for the remainder of fiscal 2004 is
expected to range between 27-29%.
Discontinued Operations. On July 10, 2003, the Company announced its decision to
dispose of its Anaren Europe operation. During the first quarter, production at
Anaren Europe ceased and the remaining net assets of that operation were
liquidated. Effective with the Company's 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 six months ended December 31, 2003 include
a loss of $1.5 million reflecting the cost of that operation in the first six
months, and a federal tax benefit of $1.8 million resulting from losses
attributable to Anaren Europe.
Third Quarter of Fiscal 2004 outlook
Based on current Wireless market demand and the Company's present Space and
Defense order backlog, the Company expects sales for the third quarter of fiscal
2004 to range between $20.0 and $21.5 million and net income per diluted share
to range between $0.07 and $0.09.
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 United States 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 materially 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
20
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 exists if the carrying amount of the asset 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 six months ended December 31, 2003 and
the six months ended December 31, 2002 was $5.9 million and $5.6 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 receivables.
Net cash used in investing activities consists of funds used to purchase capital
equipment in both years as well as net maturities of marketable debt securities.
Capital equipment purchases in the first half of fiscal 2004 were $1.5 million,
down 61% from $3.6 million in capital equipment expenditures in the first half
of fiscal 2003. Additionally, in fiscal 2004 $1.5 million was generated in
discontinued operations in Europe through the auction sale of capital equipment,
21
and maturities of marketable securities produced $15.5 million of investing
activities cash, which was used to purchase shares of the Company's common
stock.
Net cash used for financing activities was $19.7 million in the first half of
fiscal 2004 and $394,000 in the first half of last year. $20.0 million in cash
was used in the first half of fiscal 2004 for the purchase of 1,437,100 shares
of the Company's common stock, net of $276,000 received for the exercise of
stock options. Funds used in the first half of last fiscal year were $594,000 to
purchase 71,800 shares of the Company's common stock, while funds provided by
investing activities were $200,000 generated by stock option exercises.
During the remainder of fiscal 2004, the Company anticipates that its main cash
requirements will be for additions to capital equipment and the purchase of
additional shares of the Company's common stock. Capital expenditures, including
purchases of $1.5 million made in the first six months, are expected to total
between $3.0 and $4.0 million for fiscal 2004 (4.0-5.0% of sales) and will be
funded by existing cash balances.
The Company expects to continue to purchase shares of its common stock in the
open market and/or through private negotiated transactions under the current
Board authorization, depending on market conditions. At December 31, 2003 there
were 1,070,000 shares remaining under the current Board repurchase
authorization.
At December 31, 2003, the Company had approximately $114.1 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 and 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 $6,711,494 $1,039,647 $1,862,432 $1,411,108 $2,398,307
Deferred compensation 747,500 65,000 130,000 130,000 422,500
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 including
future sales and net income. 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 the Company. Additional risks and uncertainties not
presently known to management that are currently immaterial may also impair our
business operations. If any of the following risks actually occur, the Company's
business could be adversely effected,
22
and the trading price of its common stock could decline, and
shareholders could lose all or part of their 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 failure to successfully secure new design wins from the Company's original
equipment manufacturer 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 lack of 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;
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 potential impairments of assets including investment values and goodwill;
o litigation relating to potential transactions, or litigation or adverse
regulatory action involving antitrust, intellectual property,
environmental, 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 December 31, 2003, the Company had cash, cash equivalents and marketable
securities of $114.1 million, of which approximately $108.3 million consisted of
cash and highly liquid investments in marketable debt securities and $5.8
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 December 31, 2003 rates, or 0.15%, would have reduced net income and
cash flow by approximately
23
$40,000, 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 $5.8 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 $580,000 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.
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.
24
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
The Company's Annual Shareholders' meeting was held on
November 6, 2003, at which time the election of Directors was
conducted. The following named individuals were nominated and
re-elected as Directors.
Votes Votes
For Against
---------- -------
Dale F. Eck 19,915,985 14,919
Carl W. Gerst, Jr. 19,915,835 15,069
James G. Gould 19,915,985 14,919
Messrs. Eck, Gerst and Gould were elected to terms expiring in
2006. The terms of Directors Lawrence A. Sala, Matthew
Robison, Herbert I. Corkin and Dr. David Wilemon continued
after the meeting.
Additionally, the selection of KPMG LLP was approved as the
Company's independent auditors for fiscal 2004 was ratified by
a vote of 19,646,249 for and 277,379 against.
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 October 23,
2003 with respect to its Results of Operations for the first
quarter ended September 30, 2003.
25
The Company filed a current report on Form 8-K on November 10,
2003 with respect to the Board's common stock repurchase
authorization.
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: February 5, 2004 /s/ Lawrence A. Sala
---------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: February 5, 2004 /s/ Joseph E. Porcello
---------------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
26