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 March 31, 2004
|_| 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 April 27,
2004 was 20,684,682.
1
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
March 31, 2004 and June 30, 2003 (unaudited)
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended March 31,
2004 and 2003 (unaudited)
Consolidated Condensed Statements of Earnings 5
for the Nine Months Ended March 31, 2004
and 2003 (unaudited)
Consolidated Condensed Statements of Cash Flows 6
for the Nine Months Ended March 31,
2004 and 2003 (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 24
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.
Consolidated Condensed Balance Sheets
March 31, 2004 and June 30, 2003
(Unaudited)
Assets March 31, 2004 June 30, 2003
------ -------------- -------------
Current assets:
Cash and cash equivalents $ 21,662,525 $ 11,062,662
Securities available for sale (note 3) 2,487,557 5,682,260
Securities held to maturity (note 3) 60,924,875 87,584,016
Receivables, less allowance of $289,538
and $244,810, respectively 13,065,650 9,317,941
Inventories (note 4) 14,853,253 15,671,659
Interest and other receivables 818,244 823,189
Refundable income taxes 843,000 876,220
Deferred income taxes 2,349,977 1,132,016
Prepaid expenses and other current assets 1,304,535 1,235,325
------------ ------------
Total current assets 118,309,616 133,385,288
------------ ------------
Securities held to maturity (note 3) 33,781,899 23,394,382
Property, plant and equipment, net (note 5) 20,945,288 23,639,821
Goodwill 30,715,861 30,715,861
Other intangible assets, net of accumulated amortization
of $1,446,195 at March 31, 2004
and $1,071,542 at June 30, 2003 (note 1) 1,578,771 1,953,424
------------ ------------
$205,331,435 $213,088,776
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 6,053,199 $ 4,380,459
Accrued expenses (note 6) 2,803,566 2,477,670
Income taxes payable 1,197,578 66,594
Customer advance payments 631,339 --
Other current liabilities (note 8) 277,947 225,534
------------ ------------
Total current liabilities 10,963,629 7,150,257
Deferred income taxes 1,860,511 1,601,346
Postretirement benefit obligation 3,310,570 3,302,532
Other liabilities (note 8) 394,456 437,236
------------ ------------
Total liabilities 16,529,166 12,491,371
------------ ------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 25,942,604 shares
at March 31, 2004 and 25,681,854 at June 30, 2003 259,426 256,818
Additional paid-in capital 171,097,609 168,805,153
Unearned compensation (166,938) (381,588)
Accumulated other comprehensive loss (858,244) (1,216,961)
Retained earnings 48,590,901 43,290,143
------------ ------------
218,922,754 210,753,565
Less cost of 5,257,922 and 3,820,822 treasury shares
at March 31, 2004 and June 30, 2003 30,120,485 10,156,160
------------ ------------
Total stockholders' equity 188,802,269 200,597,405
------------ ------------
$205,331,435 $213,088,776
============ ============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC.
Consolidated Condensed Statements of Earnings
Three Months Ended
March 31, 2004 and 2003
(Unaudited)
2004 2003
---- ----
Net sales $22,387,222 $18,101,491
Cost of sales 14,473,285 12,420,998
----------- -----------
Gross profit 7,913,937 5,680,493
----------- -----------
Operating expenses:
Marketing 1,714,075 1,513,614
Research and development 1,394,269 1,789,137
General and administrative 2,068,795 1,918,469
Restructuring (note 7) -- 295,706
----------- -----------
Total operating expenses 5,177,139 5,516,926
----------- -----------
Operating income 2,736,798 163,567
Other income, primarily interest 367,526 499,530
Interest expense (2,997) (10,135)
----------- -----------
Income before income taxes 3,101,327 652,962
Income tax expense 879,000 41,812
----------- -----------
Income from continuing operations 2,222,327 611,150
----------- -----------
Discontinued operations:
Income (loss) from discontinued operations
of Anaren Europe (note 9) 38,579 (1,625,071)
Income tax benefit -- (55,812)
----------- -----------
Net income (loss) from discontinued operations 38,579 (1,569,259)
----------- -----------
Net income (loss) $ 2,260,906 $ (958,109)
=========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 0.11 $ 0.03
Income (loss) from discontinued operations 0.00 (0.07)
----------- -----------
Net income $ 0.11 $ (0.04)
=========== ===========
Diluted earnings (loss) per share:
Income from continuing operations $ 0.10 $ 0.03
Income (loss) from discontinued operations 0.00 (0.07)
----------- -----------
Net income $ 0.10 $ (0.04)
=========== ===========
Shares used in computing net earnings (loss) per share:
Basic 20,565,218 22,224,562
=========== ===========
Diluted 21,556,951 22,224,562
=========== ===========
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC.
Consolidated Condensed Statements of Earnings
Nine Months Ended
March 31, 2004 and 2003
(Unaudited)
Mar. 31, 2004 Mar. 31, 2003
------------- -------------
Net sales $60,251,825 $57,035,831
Cost of sales 39,737,766 38,971,984
----------- -----------
Gross profit 20,514,059 18,063,847
----------- -----------
Operating expenses:
Marketing 4,980,925 4,647,000
Research and development 3,949,297 4,717,945
General and administrative 5,770,978 6,287,299
Restructuring (note 7) -- 295,706
----------- -----------
Total operating expenses 14,701,200 15,947,950
----------- -----------
Operating income 5,812,859 2,115,897
Other income, primarily interest 1,211,237 1,767,200
Interest expense (7,519) (39,768)
----------- -----------
Income before income taxes 7,016,577 3,843,329
Income tax expense 2,006,000 667,812
----------- -----------
Income from continuing operations 5,010,577 3,175,517
Discontinued operations:
Loss from discontinued operations
of Anaren Europe (note 9) (1,509,819) (3,988,064)
Income tax benefit (1,800,000) (475,812)
----------- -----------
Net income (loss) from discontinued operations 290,181 (3,512,252)
----------- -----------
Net income (loss) $ 5,300,758 $ (336,735)
=========== ===========
Basic earnings (loss) per share:
Income from continuing operations $ 0.24 $ 0.14
Income (loss) from discontinued operations 0.01 (0.16)
----------- -----------
Net income (loss) $ 0.25 $ (0.02)
=========== ===========
Diluted earnings per share:
Income from continuing operations $ 0.23 $ 0.14
Income (loss) from discontinued operations 0.01 (.16)
----------- -----------
Net income (loss) $ 0.24 $ (0.02)
=========== ===========
Shares used in computing net earnings (loss) per share:
Basic 21,150,784 22,286,339
=========== ===========
Diluted 21,934,570 22,286,339
=========== ===========
See accompanying notes to consolidated condensed financial statements.
5
ANAREN, INC.
Consolidated Condensed Statements of Cash Flows
Nine Months Ended
March 31, 2004 and 2003
(Unaudited)
Cash flows from operating activities: Mar. 31, 2004 Mar. 31, 2003
------------- -------------
Net income (loss) $ 5,300,758 $ (336,735)
Net income (loss) from discontinued operations 290,181 (3,512,252)
------------ -------------
Net income from continuing operations $ 5,010,577 $ 3,175,517
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 3,070,731 2,930,206
Amortization of intangibles 374,653 374,654
Deferred income taxes (1,796) 1,072,228
Unearned compensation 214,650 400,681
Provision for doubtful accounts 127,506 (10,881)
Tax benefit from exercise of stock options 797,537 --
Changes in operating assets and liabilities,
net of acquisition:
Receivables (4,468,390) 1,405,171
Inventories 328,001 3,167,009
Interest and other receivables (160,418) 177,268
Other current assets (9,276) (696,316)
Refundable income taxes 876,220 --
Accounts payable 2,234,678 (779,843)
Accrued expenses 630,455 101,292
Income taxes payable 1,130,984 --
Customer advance payments 631,339 (244,831)
Other liabilities 9,632 34,821
Postretirement benefit obligation 8,039 --
------------ -------------
Net cash provided by operating activities
from continuing operations 10,805,122 11,106,976
Net cash used in operating activities from
discontinued operations (405,018) (2,517,882)
------------ -------------
Net cash provided by operating activities 10,400,104 8,589,094
------------ -------------
Cash flows from investing activities:
Capital expenditures (2,651,864) (4,185,103)
Dividend return of capital in equities held for resale 3,497,850 --
Maturities of marketable debt securities 167,816,623 118,751,324
Purchase of marketable debt and equity securities 151,545,000) (122,778,281)
------------ -------------
Net cash provided by (used in) investing activities
from continuing operations 17,117,609 (8,212,060)
Net cash provided by investing activities from
discontinued operations 1,493,378 --
------------ -------------
Net cash provided by (used in) investing activities 18,610,987 (8,212,060)
------------ -------------
Cash flows from financing activities:
Stock options exercised 1,497,527 248,035
Purchase of treasury stock (19,964,325) (2,209,118)
------------ -------------
Net cash used in financing activities (18,466,798) (1,961,083)
------------ -------------
Effect of exchange rates 55,570 57,165
Net increase (decrease) in cash
and cash equivalents 10,599,863 (1,526,884)
Cash and cash equivalents at beginning of period 11,062,662 12,565,424
------------ -------------
Cash and cash equivalents at end of period $ 21,662,525 $ 11,038,540
============ =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 7,519 $ 40,177
============ =============
Income taxes $ 127,859 $ 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 nine months ended March 31,
2004 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
nine months ended March 31, 2004 and 2003 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 March 31, 2004 are as follows:
Gross Carrying Accumulated
Amount Amortization
------ ------------
Patent $ 574,966 $ 341,386
Customer Base 1,350,000 581,250
Trade Name 320,000 275,559
Non-Competition Agreements 180,000 93,000
Favorable Lease 600,000 155,000
---------- ----------
Total $3,024,966 $1,446,195
========== ==========
Intangible asset amortization expense for the nine month periods ended March 31,
2004 and March 31, 2003 was $374,653. Amortization expense related to intangible
assets for the next five fiscal years is as follows:
Fiscal 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 Nine Months Ended
------------------ -----------------
March 31 March 31 March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $2,260,906 $ (958,109) $ 5,300,758 $ (336,735)
Fair value-based stock based
compensation cost, net of tax 2,317,672 2,190,454 6,711,336 6,571,361
---------- ----------- ----------- -----------
Pro forma net loss $ (56,766) $(3,148,563) $(1,410,578) $(6,908,096)
========== =========== =========== ===========
Net income (loss) per share:
Basic $ 0.11 $ (0.04) $ 0.25 $ (0.02)
Diluted $ 0.10 $ (0.04) $ 0.24 $ (0.02)
Pro forma net loss per share:
Pro forma basic $ 0.00 $ (0.14) $ (0.07) $ (0.31)
Pro forma diluted $ 0.00 $ (0.14) $ (0.06) $ (0.31)
NOTE 3: Marketable Securities
Marketable securities are summarized as follows:
March 31, 2004 June 30, 2003
-------------- -------------
Marketable debt securities - held-to-maturity $94,706,774 $110,978,398
Marketable equity securities - available for sale 2,487,557 5,682,260
----------- ------------
Total 97,194,331 116,660,658
Current portion 63,412,432 93,266,276
----------- ------------
Long term $33,781,899 $ 23,394,382
=========== ============
March 31, 2004
--------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Securities available for sale $ 3,088,648 $ -- $(601,091) $ 2,487,557
Securities held to maturity $94,706,774 $170,288 $ -- $94,877,062
June 30, 2003
-------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Securities available for sale $ 6,586,529 $ -- $(904,269) $ 5,682,260
Securities held to maturity $110,978,398 $113,366 $ (14,684) $111,077,080
8
Contractual maturities of marketable equitable securities held to maturity at
March 31, 2004, are summarized as follows:
Cost FMV
---- ---
Within one year $60,924,875 $58,576,145
One year to five years 33,781,899 36,300,917
----------- -----------
Total $94,706,774 $94,877,062
=========== ===========
NOTE 4: Inventories
Inventories are summarized as follows:
March 31, 2004 June 30, 2003
-------------- -------------
Component parts $ 8,541,121 $ 8,810,207
Work in process 6,319,149 5,627,150
Finished goods 2,175,436 2,656,029
----------- -----------
$17,035,706 $17,093,386
Reserve for obsolescence (2,182,453) (1,421,727)
----------- -----------
Net inventory $14,853,253 $15,671,659
=========== ===========
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
March 31, 2004 June 30, 2003
-------------- -------------
Land and land improvements $ 1,599,323 $ 1,595,821
Buildings, furniture and fixtures 13,072,155 12,944,778
Machinery and equipment 46,994,643 47,590,955
------------ ------------
$ 61,666,121 $ 62,131,554
Less accumulated depreciation
and amortization (40,720,833) (38,491,733)
------------ ------------
$ 20,945,288 $ 23,639,821
============ ============
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
March 31, 2004 June 30, 2003
-------------- -------------
Compensation $1,674,012 $ 924,290
Commissions 473,028 355,098
Health insurance 193,360 290,424
Restructuring (note 7) 46,160 710,885
Other 417,006 196,973
---------- ----------
$2,803,566 $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.
9
Balance Balance
June 30, Cash Non-Cash March 31,
2003 Expenditures Write-offs 2004
---- ------------ ---------- ----
Severance $677,251 $(631,091) $-- $46,160
Outplacement services
and others 33,634 (33,634) -- --
-------- --------- --- -------
Total $710,885 $(664,725) $-- $46,160
======== ========= === =======
At March 31, 2004, outstanding liabilities related to the restructuring totaled
$46,160 and are included in accrued expenses in the accompanying Balance Sheets
and are expected to be paid in full over the next twelve months.
NOTE 8: Other Liabilities
Other liabilities consist of the following:
March 31, 2004 June 30, 2003
-------------- -------------
Deferred compensation $ 459,456 $ 502,236
Other 212,947 160,534
--------- ---------
672,403 662,770
Less current portion (277,947) (225,534)
--------- ---------
$ 394,456 $ 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 nine months ended March 31, 2004, 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 nine months ended March 31, 2004 are the following:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ -- $ 1,115,497 $ 675,340 $ 3,490,168
Income (expense) 38,579 (2,684,756) (1,402,870) (7,478,232)
Loss on sale of equipment -- -- (782,289) --
------- ----------- ----------- -----------
Net income (loss) from discontinued operations $38,579 $(1,569,259) $(1,509,819) $(3,988,064)
======= =========== =========== ===========
The Company also recorded an income tax benefit of $1,800,000 resulting from the
investment losses attributable to Anaren Europe.
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
10
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 2,004,987 and 2,417,300
at March 31, 2004 and 2003, 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 Nine Months Ended
------------------ -----------------
March 31 March 31
Numerator: 2004 2003 2004 2003
---- ---- ---- ----
Earnings available to
common stockholders $ 2,260,906 $ (958,109) $ 5,300,758 $ (336,735)
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 20,565,218 22,224,562 21,150,784 22,286,339
=========== =========== =========== ===========
Denominator for diluted earnings
per share:
Weighted average shares outstanding 20,565,218 22,224,562 21,150,784 22,286,339
Common stock options
and restricted stock 991,733 -- 783,786 --
----------- ----------- ----------- -----------
Weighted average shares and conversions 21,556,951 22,224,562 21,934,570 22,286,339
=========== =========== =========== ===========
NOTE 11: Components of Net Period Benefit Costs
Three Months Ended March 31
---------------------------
Pension Benefits
----------------
2004 2003
---- ----
Service cost $ 65,712 $ 53,216
Interest cost 135,206 126,190
Expected return on plan assets (134,113) (128,259)
Amortization of prior service cost 4,560 3,774
Amortization of the net (gain) loss 27,066 4,560
--------- ---------
Net periodic benefit cost $ 98,431 $ 59,481
========= =========
NOTE 12: 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
11
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.
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:
March 31, 2004 $15,505,871 6,881,351 -- $ 22,387,222
March 31, 2003 $10,800,782 7,300,709 -- $ 18,101,491
Nine months ended
March 31, 2004 $40,026,192 20,225,633 -- $ 60,251,825
March 31, 2003 $34,850,768 22,185,063 -- $ 57,035,831
Operating income (loss):
Three months ended:
March 31, 2004 1,908,628 828,170 -- 2,736,798
March 31, 2003 (1,414,902) 1,578,469 -- 163,567
Nine months ended:
March 31, 2004 2,757,935 3,054,924 -- 5,812,859
March 31, 2003 (2,646,719) 4,762,616 -- 2,115,897
Goodwill and intangible assets:
March 31, 2004 32,294,632 -- -- 32,294,632
June 30, 2003 32,669,285 -- -- 32,669,285
Identifiable assets:*
March 31, 2004 17,826,136 10,382,305 144,828,362 173,036,803
June 30, 2003 14,145,826 9,760,194 156,513,471 180,419,491
Depreciation:**
Three months ended:
March 31, 2004 532,393 538,805 -- 1,071,198
March 31, 2003 613,312 392,068 -- 1,005,380
Nine months ended:
March 31, 2004 1,591,128 1,479,603 -- 3,070,731
March 31, 2003 1,794,748 1,135,458 -- 2,930,206
Goodwill and intangibles amortization: ***
Three months ended:
March 31, 2004 124,885 -- -- 124,885
March 31, 2003 124,835 -- -- 124,885
Nine months ended:
March 31, 2004 374,653 -- -- 374,653
March 31, 2003 374,654 -- -- 374,654
* 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
12
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.
*** 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 13: 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 nine months ended March 31, 2004 and
its financial condition at March 31, 2004. 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 March 31, 2004 and June 30, 2003, and the consolidated
results of operations and cash flows of the Company for the three months and
nine months ended March 31, 2004 and 2003.
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
13
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 Andrew, 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
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 due
to the pending ramp up of a new custom assembly.
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 nine
months ended March 31, 2004 and 2003. Included in the results of discontinued
operations for the first nine months of fiscal 2004 are a loss from European
operations of $1.5 million and a U.S. tax benefit of $1.8 million resulting from
investment losses attributable to Anaren Europe.
Net sales from continuing operations for the third quarter ended March 31, 2004
were $22,387,000, up 23.7% from the third quarter of last fiscal year and up
14.3% from the second quarter of fiscal 2004. Operating income for the third
quarter was $2.7 million, or 12.2% of net sales, up $2.6 million from the third
quarter of last year, and up 39.4% sequentially from the second quarter of
fiscal 2004.
Income from continuing operations for the third quarter of fiscal 2004 was
$2,222,000, or $0.10 per diluted share, while the income from discontinued
operations was $39,000 or $0.00 per diluted share, resulting in current third
quarter net income of $2,261,000, or $0.10 per diluted share. This compares to
income from continuing operations of $611,000, or $0.03 per diluted share and a
loss from discontinued operations of ($1,569,000), or ($0.07) per diluted share,
resulting in a net loss of ($958,000), or $(0.04) per diluted share, for the
third quarter of last year, and net income of $1,256,000 or $0.07 per diluted
share (including a net loss from discounted operations of $(335,000) for the
second 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 Nine Months Ended
Mar. 31, 2004 Mar. 31, 2003 Mar. 31, 2004 Mar. 31, 2003
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.7% 68.6% 66.0% 68.3%
----- ----- ----- -----
Gross profit 35.3% 31.4% 34.0% 31.7%
----- ----- ----- -----
Operating expenses:
Marketing 7.7% 8.4% 8.3% 8.2%
Research and development 6.2% 9.9% 6.5% 8.3%
General and administrative 9.2% 10.6% 9.6% 11.0%
Restructuring 0.0% 1.6% 0.0% 0.5%
----- ----- ----- -----
Total operating expenses 23.1% 30.5% 24.4% 28.0%
----- ----- ----- -----
Operating income 12.2% 0.9% 9.6% 3.7%
----- ----- ----- -----
Other income (expense):
Other, primarily interest income 1.6% 2.8% 2.0% 3.1%
Interest expense (0.0%) (0.1%) (0.0%) (0.1%)
----- ----- ----- -----
Total other income (expense), net 1.6% 2.7% 2.0% 3.0%
----- ----- ----- -----
Income from continuing operations
before income taxes 13.8% 3.6% 11.6% 6.7%
Income taxes 3.9% 0.2% 3.3% 1.1%
----- ----- ----- -----
Income from continuing operations 9.9% 3.4% 8.3% 5.6%
----- ----- ----- -----
Discontinued operations:
Income (loss) from discontinued
operations of Anaren Europe 0.2% (9.0%) (2.5%) (7.0%)
Income tax benefit 0.0% (0.3%) (3.0%) (0.8%)
----- ----- ----- -----
Net income (loss) from
discontinued operations 0.2% (8.7%) 0.5% (6.2%)
----- ----- ----- -----
Net income (loss) 10.1% (5.3%) 8.8% (0.6%)
===== ===== ===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Nine Months Ended
March 31 March 31
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Wireless $15,506 $10,800 $40,026 $34,851
Space and Defense 6,881 7,301 20,226 22,185
------- ------- ------- -------
$22,387 $18,101 $60,252 $57,036
======= ======= ======= =======
15
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003
Net sales. Net sales increased $4.3 million, or 23.7%, to $22.4 million for the
three months ended March 31, 2004, compared to $18.1 million for the third
quarter of fiscal 2003. This increase resulted from a $4.7 million rise in sales
of Wireless infrastructure equipment which more than offset a $420,000 decline
in sales of Space and Defense 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 nine months. This demand
generated increased orders from a majority of the Company's base station
infrastructure original equipment manufacturing customers in fiscal 2004. Sales
of standard surface mount components were $4.7 million in the third quarter of
fiscal 2004, up 74% from the third quarter last year, while sales of custom
components rose $2.0 million, or 80% in the current quarter compared to the same
quarter last year. This increase was partially offset by a $1.2 million, or 54%
decrease in sales of ferrite component products in the current third quarter
compared to the third quarter of 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 $420,000, or 5.8% in the
third quarter of fiscal 2004 to $6.9 million, compared to the same quarter 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 $850,000 in the third quarter of that fiscal year. The decline in commercial
space revenue in fiscal 2004 was partially off-set by a $430,000 increase in
defense product sales. Sales in the Space and Defense segment are expected to
average approximately $6.7 to $7.2 million per quarter through the first half of
fiscal 2005.
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 third quarter of fiscal 2004 was
$7.9 million (35.3% of net sales), up $2.2 million from $5.7 million (31.4% of
net sales) for the same quarter of the prior year. The rise in gross margin as a
percent of sales was a result of the $1.2 million decrease in sales of
unprofitable and low margin ferrite products, coupled with an increase in sales
of higher margin wireless products in the current third quarter compared to the
third quarter last year. The Company expects gross margins to continue at
current levels over the next few quarters as the Company anticipates its
projected sales increases will result primarily from initial production of a new
custom assembly product.
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 (7.7%
of net sales) for the third quarter of fiscal 2004, up $200,000 from $1.5
million (8.4% of net sales) for the third 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 nine 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
16
expenses were $1.4 million (6.2% of net sales) in the third quarter of fiscal
2004, down 22.1% from $1.8 million (9.9% of net sales) for the third quarter of
fiscal 2003. Research and development expenditures are supporting further
development of wireless infrastructure products and new wireless networking
product opportunities. Research and development expenditures fell in the third
quarter of fiscal 2004 compared to the same quarter last year due to a much
higher level of customer funded development activity in the Space and Defense
group, resulting in a higher level of engineering costs being included in cost
of goods sold. 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, intangible amortization,
travel related expenses and other corporate administrative costs. General and
administrative expenses increased 7.9% to $2.1 million (9.2% of net sales) for
the third quarter of fiscal 2004 from $1.9 million (10.6% of net sales) for the
third quarter of last fiscal year. This increase resulted primarily from rising
administrative costs due to Sarbanes-Oxley regulations and a rise in corporate
donations to support development of new microwave engineering talent.
Restructuring. There were no restructuring charges in the third quarter of
fiscal 2004. In March 2003, the Company recorded a restructuring charge of
$296,000 related to the Company's restructuring plan at its RF Power subsidiary.
This plan was primarily aimed at reducing the cost of excess personnel in this
operation and included the termination of 16 employees.
Operating Income. Operating income increased in the third quarter of fiscal 2004
to $2.7 million (12.2% of sales) from $164,000 (0.9% of net sales) for the third
quarter of fiscal 2003. On a reporting segment basis, Wireless operating income
was $1.9 million for the third quarter of fiscal 2004, an improvement of $3.3
million from a Wireless operating loss of ($1.4 million) for the third quarter
of fiscal 2003. The main reasons for the increase in Wireless income in the
current third 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 $2.0 million increase in Wireless sales in the current quarter
compared to the same period during the prior year. Wireless operating margins
are expected to continue at current levels during the remainder of fiscal 2004.
Space and Defense operating income fell $750,000 in the third quarter of fiscal
2004 to $828,000, compared to $1.6 million in the third quarter of fiscal 2003.
This decrease resulted from the lower sales volume and a change in product mix
during the current third quarter compared to the third quarter of last year.
This year's third quarter sales included more sales volume attributable to
military programs, while sales in the third quarter last year consisted of more
profitable shipments for commercial space programs. Going forward, we expect
Space and Defense sales to be driven primarily by defense related programs over
the next four to five quarters.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 26.4% to $368,000 (1.6% of net sales) for
the quarter ended March 31, 2004, from $500,000 (2.8% 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 for Treasury
shares in the first
17
half of fiscal 2004. Interest income will fluctuate based on the level of
interest rates and the level of investable cash balances.
Income Taxes. Income taxes for the third quarter of fiscal 2004 were $879,000
(3.9% of net sales), representing an effective tax rate of 28.3%. This compares
to income tax expense of $42,000 (0.2% of net sales) for the third quarter of
fiscal 2003, representing an effective tax rate of 6.4%. 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 of fiscal 2004,
the Company ceased production at Anaren Europe and the remaining net assets of
that operation were liquidated. Effective with the Company's Form 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 third quarter ended March 31, 2004 included
income of $39,000 reflecting the results of that operation in the third quarter.
Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003
Net Sales. Net sales increased $3.3 million, or 5.6% to $60.3 million for the
first nine months of fiscal 2004, compared to $57.0 million for the first nine
months of fiscal 2003. This increase resulted from a $5.1 million, or 14.8%
increase in shipments of Wireless products, which more than offset a $2.0
million decline in Space and Defense product shipments.
The increase in sales of Wireless products was a result of a significant
increase in worldwide demand for Wireless basestation components over the past
nine months. This rising demand generated increased orders from a majority of
the Company's base station infrastructure original equipment manufacturing
customers in fiscal 2004. Sales of standard components, including resistive
products, rose to $21.1 million for the first nine months of fiscal 2004, up
50.7% from $14.0 million for the first nine months of last year, while sales of
custom components increased $1.2 million, or 13.5% in the current nine months
compared to the same period last year. These increases more than offset a $3.0
million decline in ferrite product sales, which resulted from the Company's
continuing effort to discontinue production of unprofitable and low margin
ferrite products in fiscal 2004.
Sales in the Space and Defense group fell $2.0 million, or 8.8%, in the first
nine months of fiscal 2004, compared to the same period in the prior fiscal
year. This decrease in sales resulted from the completion of shipments for the
Boeing Spaceway program in the fourth quarter of fiscal 2003. This program
accounted for over $4.0 million in shipments in fiscal 2003, of which $2.9
million generated in the first nine months of that year. Sales in the Space and
Defense segment are expected to average approximately $6.8 to $7.2 million per
quarter through the first half of fiscal 2005.
Gross Profit. Gross profit in the first nine months of fiscal 2004 was $20.5
million (34.0% of net sales), up $2.4 million from $18.1 million (31.7% of net
sales) for the first nine months of the prior year. The increase in gross margin
as a percent of sales was a result of the $3.0 million decrease in shipments of
unprofitable and low margin ferrite products and the $8.3 million increase in
shipments of higher margin standard and custom Wireless components in the
current first nine months compared to the same period last year.
18
Marketing. Marketing expenses increased 7.2% to $5.0 million (8.3% of net sales)
for the first nine months of fiscal 2004 from $4.6 million (8.2% of net sales)
for the first nine months of last year. This increase is a result of the
addition of three new geographic product line marketing positions, increased
commissions 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 nine months.
Research and Development. Research and development expenses were $3.9 million
(6.5% of net sales) in the first nine months of fiscal 2004, down 16.3% from
$4.7 million (8.3% of net sales) for the first nine months of fiscal 2003.
Research and development expenditures are supporting further development of
Space and Defense subsystems, Wireless infrastructure and subscriber products.
Research and development expenditures declined in the first nine months of
fiscal 2004 due to a higher level of customer funded development activity in the
Space and Defense group 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 8.2% to
$5.8 million (9.6% of net sales) for the first nine months of fiscal 2004, from
$6.3 million (11.0% of net sales) for the first nine months of last fiscal year.
This decrease 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 and consulting services in the current year.
Restructuring. There were no restructuring charges in the first nine months of
fiscal 2004. In March 2003, the Company recorded a restructuring charge of
$296,000 related to the Company's restructuring plan at its RF Power subsidiary.
This plan was primarily aimed at reducing the cost of excess personnel in this
operation and included the termination of 16 employees.
Operating Income. Operating income increased 175% in the first nine months of
fiscal 2004 to $5.8 million (9.6% of sales) from $2.1 million (3.7% of net
sales) for the first nine months of fiscal 2003. On a reporting segment basis,
the Wireless operating income was $2.8 million for the first nine months of
fiscal 2004, an improvement of $5.4 million from a Wireless operating loss of
$2.6 million for the first nine months of fiscal 2003. The main reasons for the
improvement in Wireless operating profitability in the current first nine months
were the 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, the large increase
in sales of higher margin Wireless products in the current fiscal year.
Space and Defense operating income fell $1.7 million in the first nine months of
fiscal 2004 to $3.1 million, compared to $4.8 million in the first nine months
of fiscal 2003. This decrease resulted from the lower sales volume and a change
in product mix during the current nine months compared to the first nine months
of last year. Sales for the first nine months of fiscal 2004 included more
volume attributable to military programs, while sales in the first nine months
of last year consisted of more profitable commercial space programs.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 31.5% to $1.2 million (1.6% of net sales)
for the nine months ended March 31, 2004, from $1.8 million (3.1% of net sales)
for the first nine months of last year. This decrease was caused by the decline
in market interest rates over the last 12 months and the
19
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 nine months of fiscal 2004 were $2.0
million (3.3% of net sales), representing an effective tax rate of 28.6%. This
compares to income tax expense of $668,000 (1.1% of net sales) for the first
nine months of fiscal 2003, representing an effective tax rate of 17.4%. 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 levels of taxable income or loss. The effective tax rate has
risen year over year for the first nine 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 28-29%.
Discontinued Operations. On July 10, 2003, the Company announced its decision to
dispose of its Anaren Europe operation due to further deterioration in its
business. During the first quarter, production at Anaren Europe ceased and the
remaining net assets of that operation were liquidated. Effective with the
Company's Form 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 have been reclassified as discontinued operations in the statements of
earnings. The results from discontinued operations for the first nine months
ended March 31, 2004 include a loss of ($1.5) million reflecting the cost of
that operation in the first nine months, and a federal tax benefit of $1.8
million resulting from the investment losses attributable to Anaren Europe.
Fourth 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 fourth quarter of
fiscal 2004 to range between $23.0 and $25.0 million and net earnings per
diluted share are expected to be approximately $0.11.
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
20
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 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.
21
Liquidity and Capital Resources
Net cash provided by operations for the nine months ended March 31, 2004 and the
nine months ended March 31, 2003 was $10.4 million and $8.6 million,
respectively. The positive cash flow from operations was due primarily to profit
before depreciation in both years. In the current year cash flow was decreased
by a rise in receivables, while the prior fiscal year was improved due to a
decline in receivables and inventory.
Net cash provided by investing activities for the first nine months of fiscal
2004 was $17.1 million and consisted of net maturities of marketable debt
securities of $16.3 million, plus a return of capital dividend on equity
securities (Celeritek, Inc.) held for resale of $3.5 million, less $2.7 million
used to fund capital equipment acquisitions. Net cash used in investing
activities in the first nine months of fiscal 2003 was $8.2 million and
consisted of $4.2 million used to acquire capital equipment and net purchases of
marketable debt securities amounting to $4.0 million. Additionally, in fiscal
2004, $1.5 million was generated in discontinued operations in Europe through
the auction sale of capital equipment.
Net cash used for financing activities was $18.5 million in the first nine
months of fiscal 2004 and $2.0 million in the first nine months of last year.
$20.0 million in cash was used in the first nine months of fiscal 2004 for the
purchase of 1,437,100 shares of the Company's common stock, net of $1.5 million
received from the exercise of stock options. Funds used in the first nine months
of fiscal 2003 were $2.2 million to purchase 271,900 shares of the Company's
common stock, while funds provided by financing activities were $248,035
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 possible
purchase of additional shares of the Company's common stock. Capital
expenditures, including purchases of $2.7 million made in the first nine 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 March 31, 2004, there
were 1,070,000 shares remaining under the current Board repurchase
authorization. The Company repurchased no shares during the third quarter ended
March 31, 2004.
At March 31, 2004, the Company had approximately $118.8 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 and lease
agreements, and under contingent commitments, such as debt guarantees.
22
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 $6,541,000 $1,045,000 $1,790,000 $1,363,000 $2,343,000
Deferred compensation 731,250 65,000 130,000 130,000 406,250
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, 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, including the new Wireless
custom assembly placed into production during the third quarter, 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.
23
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 March 31, 2004, the Company had cash, cash equivalents and marketable
securities of $118.8 million, of which approximately $116.3 million consisted of
cash and highly liquid investments in marketable debt securities and $2.5
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 $44,000, 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 $2.5 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 $250,000 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
None.
Item 6. Exhibits and Reports on Form 8-K
Item 6(a) Exhibits
--------
10.1 Employment Agreement, effective as of February 14, 2004,
between Anaren, Inc. and Carl W. Gerst, Jr.
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
Item 6(b) Reports on Form 8-K
The Company filed a current report on Form 8-K on January 27, 2004
with respect to its Results of Operations for the quarter ended
December 31, 2003.
The Company filed a current report on Form 8-K on January 26, 2004
with respect to the receipt by the Company of an $11.0 million
contract from Raytheon Company for Digital Radio Frequency Memory
subsystems used in the Raytheon AN/ALQ-187 internal jammer.
25
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: April 30, 2004 S/Lawrence A. Sala
-----------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: April 30, 2004 S/Joseph E. Porcello
-----------------------------------
Joseph E. Porcello
Vice President of Finance and
Treasurer
26