UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
The number of shares of Registrant's Common Stock outstanding on November
1, 2004 was 19,586,183.
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
September 30, 2004 and June 30, 2004 (unaudited)
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended September 30,
2004 and 2003 (unaudited)
Consolidated Condensed Statements of Cash Flows 5
for the Three Months Ended September 30,
2004 and 2003 (unaudited)
Notes to Consolidated Condensed Financial 6
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 22
Item 4. Controls & Procedures 22
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 6. Exhibits 23
Officer Certifications 25 - 28
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
September 30, 2004 and June 30, 2004
(Unaudited)
Assets September 30, 2004 June 30, 2004
------ ------------------ -------------
Current assets:
Cash and cash equivalents $ 7,388,901 $ 23,303,263
Securities available for sale (note 3) 2,401,169 2,961,710
Securities held to maturity (note 3) 59,031,343 59,076,923
Receivables, less allowance of $139,759
and $145,500, respectively 15,879,932 13,812,853
Inventories (note 4) 18,231,601 16,608,055
Interest and other receivables 1,111,182 1,040,838
Deferred income taxes 1,037,103 1,037,103
Prepaid expenses 862,138 995,590
Other current assets 248,622 230,784
------------- -------------
Total current assets 106,191,991 119,067,119
------------- -------------
Securities held to maturity (note 3) 32,654,728 35,113,068
Property, plant and equipment, net (note 5) 25,468,793 21,342,554
Goodwill 30,715,861 30,715,861
Other intangible assets, net of accumulated amortization
of $2,102,072 at September 30, 2004
and $1,781,080 at June 30, 2004 (note 1) 922,894 1,243,886
------------- -------------
Total assets $ 195,954,267 $ 207,482,488
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 6,195,855 $ 7,198,252
Accrued expenses (note 6) 1,760,092 3,092,370
Income taxes payable 2,077,725 1,331,895
Customer advance payments 176,891 411,486
Other current liabilities (note 8) 313,622 295,784
------------- -------------
Total current liabilities 10,524,185 12,329,787
Deferred income taxes 1,657,551 1,584,251
Postretirement benefit obligation 2,717,441 2,762,992
Other liabilities (note 8) 477,156 441,190
------------- -------------
Total liabilities 15,376,333 17,118,220
------------- -------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 25,954,404 shares
at September 30, 2004 and 25,950,704 at June 30, 2004 259,544 259,507
Additional paid-in capital 171,193,795 171,165,180
Unearned compensation (23,838) (95,388)
Retained earnings 53,228,435 51,247,271
Accumulated other comprehensive loss (203,191) 41,110
------------- -------------
224,454,745 222,617,680
Less cost of 6,368,221 and 5,400,026 treasury shares
at September 30, 2004 and June 30, 2004 43,876,811 32,253,412
------------- -------------
Total stockholders' equity 180,577,934 190,364,268
------------- -------------
Total liabilities and stockholders' equity $ 195,954,267 $ 207,482,488
============= =============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
September 30, 2004 and 2003
(Unaudited)
2004 2003
---- ----
Net sales $ 24,907,357 $ 18,270,673
Cost of sales 17,016,539 12,311,778
------------ ------------
Gross profit 7,890,818 5,958,895
------------ ------------
Operating expenses:
Marketing 1,776,645 1,585,466
Research and development 1,645,077 1,421,782
General and administrative 2,102,185 1,838,399
------------ ------------
Total operating expenses 5,523,907 4,845,647
------------ ------------
Operating income 2,366,911 1,113,248
Other income, primarily interest 353,058 467,976
Interest expense (5,805) (2,972)
------------ ------------
Total other income net 347,253 465,004
------------ ------------
Income before income taxes 2,714,164 1,578,252
Income tax expense 733,000 381,000
------------ ------------
Net income from continuing operations $ 1,981,164 $ 1,197,252
------------ ------------
Discontinued operations:
Loss from discontinued
operations of Anaren Europe (note 9) -- (1,213,345)
Income tax benefit -- (1,800,000)
------------ ------------
Net income from discontinued operations -- 586,655
------------ ------------
Net income $ 1,981,164 $ 1,783,907
============ ============
Basic earnings per share:
Income from continuing operations $0.10 $0.05
Income from discontinued operations $ -- $0.03
----- -----
Net income $0.10 $0.08
===== =====
Diluted earnings per share:
Income from continuing operations $0.10 $0.05
Income from discontinued operations $ -- $0.03
----- -----
Net income $0.10 $0.08
===== =====
Shares used in computing net earnings per share:
Basic 20,144,447 21,757,734
============ ============
Diluted 20,678,163 22,352,927
============ ============
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Three Months Ended
September 30, 2004 and 2003
(Unaudited)
Cash flows from operating activities: 2004 2003
---- ----
Net income $ 1,981,164 $ 1,783,907
Net income from discontinued operations -- 586,655
------------ ------------
Net income from continuing operations 1,981,164 1,197,252
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation 1,252,667 997,964
Amortization of intangibles 320,992 124,885
Provision for doubtful accounts (5,741) (8,205)
Deferred income taxes 73,300 38,100
Loss on sale of equipment 67,397 --
Loss on sale of securities held as investments 21,347 --
Unearned compensation 71,550 71,550
Changes in operating assets and liabilities,
Receivables (2,061,338) (1,366,549)
Inventories (1,623,546) (69,491)
Interest and other receivables 439,192 53,099
Other current assets (233,922) (309,546)
Refundable income taxes -- 226,487
Accounts payable (1,002,388) 371,604
Accrued expenses (1,332,278) 54,153
Income taxes payable 745,830 --
Customer advance payments (234,595) --
Other liabilities 8,254 107,681
------------ ------------
Net cash provided by (used in) continuing operations (1,512,115) 1,488,984
Net cash used for discontinued operations -- (75,750)
------------ ------------
Net cash provided by (used in) operating activities (1,512,115) 1,413,234
Cash flows from investing activities:
Capital expenditures (5,606,303) (878,447)
Proceeds from sale of stock 293,930 --
Purchases of marketable debt and equity securities (32,005,000) (78,207,553)
Maturities of marketable debt and
equity securities 34,508,921 (78,189,000)
------------ ------------
Net cash used in investing activities (2,808,452) (901,000)
------------ ------------
Cash flows from financing activities:
Stock options exercised 28,642 172,701
Purchase of treasury stock (11,623,399) (3,336,643)
------------ ------------
Net cash used in financing activities (11,594,757) (3,163,942)
------------ ------------
Effect of exchange rates 962 12,274
------------ ------------
Net decrease in cash
and cash equivalents (15,914,362) (2,639,434)
Cash and cash equivalents at beginning of period 23,303,263 11,062,662
------------ ------------
Cash and cash equivalents at end of period $ 7,388,901 $ 8,423,228
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid (Received) During the Period For:
Interest $ 6,554 $ --
============ ============
Income taxes, net of refunds $ (27,611) $ 2,000
============ ============
See accompanying notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated condensed financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2004. The results of operations for the three months ended September
30, 2004 are not necessarily indicative of the results for the entire fiscal
year ending June 30, 2005, or any future interim period.
The income tax rates utilized for interim financial statement purposes for the
three months ended September 30, 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 September 30, 2004 and June 30, 2004 are as follows:
September 30 June 30
--------------------------------- ---------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Patent $ 574,966 $ 377,322 $ 574,966 $ 359,354
Customer Base 1,350,000 693,750 1,350,000 637,500
Trade Name 320,000 320,000 320,000 302,226
Non-Competition Agreements 180,000 111,000 180,000 102,000
Favorable Lease 600,000 600,000 600,000 380,000
---------- ---------- ---------- ----------
Total $3,024,966 $2,102,072 $3,024,966 $1,781,080
========== ========== ========== ==========
Intangible asset amortization expense for the three month period ended September
30, 2004 and 2003 aggregated $320,992 and $124,885, respectively. Included in
the amortization expense for the three months ended September 30, 2004 and
fiscal year 2005 is $205,000 for acceleration of the favorable lease intangible
caused by the move of our Amitron facility. Amortization expense related to
intangible assets for the next five years is as follows:
Year Ending June 30,
2005 $ 570,643
2006 $ 332,869
2007 $ 302,879
2008 $ 37,495
2009 $ 0
6
NOTE 2: Stock-Based Compensation
The Company measures compensation expense for its stock option-based employee
compensation plans using the intrinsic value method. The following table sets
forth the pro forma effect of these plans as if the fair value-based method had
been used to measure compensation expense.
Three months ended Three months ended
September 30, 2004 September 30, 2003
------------------ ------------------
Net income, as reported $ 1,981,164 $ 1,783,907
Fair value-based stock based
compensation cost, net of tax 1,712,587 2,075,992
------------- -------------
Pro forma net income (loss) $ 268,577 $ (292,085)
============= =============
Net income (loss) per share:
Basic $ 0.10 $ 0.08
Diluted $ 0.10 $ 0.08
Pro forma net income (loss) per share:
Pro forma basic $ 0.01 $ (0.01)
Pro forma diluted $ 0.01 $ (0.01)
NOTE 3: Securities
The amortized cost and fair value of securities are as follows:
September 30, 2004
------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Securities available for sale:
Common Stock $ 2,773,370 $ -- $ (372,201) $ 2,401,169
----------- ----------- ----------- -----------
Total securities available-for-sale $ 2,773,370 $ -- $ (372,201) $ 2,401,169
=========== =========== =========== ===========
Securities held to maturity:
Municipal bonds $32,735,892 $ -- $ (96,785) $32,639,107
Commercial paper 2,834,229 -- -- 2,834,229
Corporate bonds 6,872,533 -- (18,371) 6,854,162
Zero coupon bonds 4,557,541 -- (12,211) 4,545,331
Federal agency bonds 17,885,743 -- (10,198) 17,875,545
Tax free auction securities 26,800,133 -- (133) 26,800,000
----------- ----------- ----------- -----------
Total securities held to maturity $91,686,071 $ -- $ (137,697) $91,548,373
=========== =========== =========== ===========
June 30, 2004
-------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
Securities available for sale:
Common Stock $ 3,088,679 $ -- $ (126,969) $ 2,961,710
----------- ----------- ----------- -----------
Total securities available-for-sale $ 3,088,679 $ -- $ (126,969) $ 2,961,710
=========== =========== =========== ===========
Securities held to maturity:
Municipal bonds $50,770,695 $ -- $ (227,638) $50,543,057
Commercial paper 2,596,712 83 -- 2,596,795
Corporate bonds 5,581,257 83,188 -- 5,664,445
Zero coupon bonds 5,138,853 -- (21,952) 5,116,901
Federal agency bonds 5,052,050 9,684 (24,720) 5,037,014
Tax free auction securities 25,050,424 -- (1,024) 25,049,400
----------- ----------- ----------- -----------
Total securities held to maturity $94,189,991 $ 92,955 $ (275,334) $94,007,612
=========== =========== =========== ===========
7
Marketable securities are summarized as follows:
September 30, 2004 June 30, 2004
------------------ -------------
Marketable debt securities - held-to-maturity $91,686,071 $94,189,991
Marketable equity securities - available for sale 2,401,169 2,961,710
----------- -----------
Total 94,087,240 97,151,701
Current portion 61,432,512 62,038,633
----------- -----------
Long term $32,654,728 $35,113,068
=========== ===========
Contractual maturities of marketable debt securities held to maturity at
September 30, 2004 are summarized as follows:
September 30, 2004 June 30, 2004
------------------ -------------
Fair Fair
Market Market
Cost Value Cost Value
---- ----- ---- -----
Within one year $59,031,343 $58,867,471 $59,076,923 $59,127,824
One year to five years 32,654,728 32,680,903 35,113,068 34,879,788
----------- ----------- ----------- -----------
Total $91,686,071 $91,548,374 $94,189,991 $94,007,612
=========== =========== =========== ===========
On July 11, 2002, the Company filed a Schedule 13D with the Securities and
Exchange Commission to disclose that it had, through open market purchases,
acquired an ownership position of approximately 6.35% of the common stock of
Celeritek, Inc. The Company's original investment in Celeritek common stock
averaged $8.47 a share and totaled $6.6 million. In March 2004, the Company
received a non-taxable return of capital dividend of $4.50 per share reducing
the Company's basis in Celeritek to $3.97 per share. On September 30, 2004 the
Company's cost basis in Celeritek totaled approximately $2.8 million. The
investment had a market value of $2.4 million on September 30 and a decline of
$372,201 has been recorded as a component of accumulated other comprehensive
loss. The Company considers its investment in Celeritek to be temporarily
impaired. If, at a future date, this decline in value is determined to be other
than temporary, then the decline in value, including the amount previously
charged as accumulated other comprehensive loss to shareholders' equity, would
at that time be recognized as a loss in the current period income statement.
NOTE 4: Inventories
Inventories are summarized as follows:
September 30, 2004 June 30, 2004
------------------ -------------
Component parts $ 9,519,956 $ 9,136,401
Work in process 7,206,091 6,138,068
Finished goods 2,751,292 2,349,585
------------ ------------
$ 19,477,339 $ 17,624,054
Reserve for obsolescence (1,245,738) (1,015,999)
------------ ------------
Net inventory $ 18,231,601 $ 16,608,055
============ ============
8
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
September 30, 2004 June 30, 2004
------------------ -------------
Land and land improvements $ 2,219,333 $ 1,874,323
Buildings, furniture and fixtures 17,661,822 13,200,633
Machinery and equipment 48,700,578 48,213,982
------------ ------------
$ 68,581,733 $ 63,288,938
Less accumulated depreciation
and amortization (43,112,940) (41,946,384)
------------ ------------
$ 25,468,793 $ 21,342,554
============ ============
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
September 30, 2004 June 30, 2004
------------------ -------------
Compensation $ 746,227 $1,698,411
Commissions 319,643 386,075
Health insurance 403,002 371,010
Restructuring (note 7) -- 32,870
Lease buyout -- 350,000
Other 291,220 254,004
---------- ----------
$1,760,092 $3,092,370
========== ==========
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, 2004.
Balance Balance
June 30, Cash Non-Cash September 30,
2004 Expenditures Write-offs 2004
---- ------------ ---------- ----
Severance $ 32,870 $(32,870) $ -- $ --
======== ======== ========= =========
NOTE 8: Other Liabilities
Other liabilities consist of the following:
September 30, 2004 June 30, 2004
------------------ -------------
Deferred compensation $542,156 $506,190
Other 248,622 230,784
-------- --------
790,778 736,974
Less current portion 313,622 295,784
-------- --------
$477,156 $441,190
======== ========
9
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 ceased at
Anaren Europe and the remaining net assets of that operation were liquidated
through the sale of equipment via auction. The results of operations for Anaren
Europe for the prior year have been classified as discontinued operations in the
statement of earnings. Components of the loss from discontinued operations of
Anaren Europe for the quarter ended September 30, are as follows:
2004 2003
---- ----
Net sales $ -- $ 640,468
Expenses -- (1,071,524)
Loss on sale of equipment -- (782,289)
----------- -----------
Net loss from discontinued operations $ -- $(1,213,345)
=========== ===========
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.
NOTE 10: Net Income (Loss) Per Share
Basic income per share is based on the weighted average number of common shares
outstanding. Diluted income 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 per share does not include antidilutive
shares aggregating 1,314,662 and 2,137,400 at September 30, 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
------------------
September 30
Numerator: 2004 2003
---- ----
Net income from continuing operations $ 1,981,164 $ 1,197,252
=========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 20,144,447 21,757,734
=========== ===========
Denominator for diluted earnings per share:
Weighted average shares outstanding 20,144,447 21,757,734
Common stock options and restricted stock 533,716 595,193
----------- -----------
Weighted average shares and conversions 20,678,163 22,352,927
=========== ===========
10
NOTE 11: Components of Net Period Benefit Costs
Three Months Ended September 30
-------------------------------
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
========= =========
Expected Pension Contributions
Expected contributions for fiscal 2005 are $750,000.
Estimated Future Pension Benefit Payments
The following estimated benefit payments, which reflect future service, as
appropriate, are expected to be paid:
July 1, 2004 - June 30, 2005 ................................. $ 365,000
July 1, 2005 - June 30, 2006 ................................. 395,000
July 1, 2006 - June 30, 2007 ................................. 405,000
July 1, 2007 - June 30, 2008 ................................. 470,000
July 1, 2008 - June 30, 2009 ................................. 480,000
Years 2009 - 2013 ............................................ 2,875,000
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 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:
September 30, 2004 $ 17,768,293 7,139,064 -- $ 24,907,357
September 30, 2003 $ 11,526,589 6,744,084 -- $ 18,270,673
Operating income (loss):
Three months ended:
September 30, 2004 653,925 1,712,986 -- 2,366,911
September 30, 2003 (109,807) 1,223,055 -- 1,113,248
Goodwill and intangible assets:
September 30, 2004 31,638,755 -- -- 31,638,755
June 30, 2004 31,959,747 -- -- 31,959,747
Identifiable assets:*
September 30, 2004 22,426,157 11,285,134 130,604,221 164,315,512
June 30, 2004 19,681,543 10,884,864 144,956,334 175,522,741
Depreciation:**
Three months ended:
September 30, 2004 844,242 408,425 -- 1,252,667
September 30, 2003 563,637 434,327 -- 997,964
Intangibles amortization: ***
Three months ended:
September 30, 2004 320,992 -- -- 320,992
September 30, 2003 124,885 -- -- 124,885
* Segment assets primarily include receivables and inventories. The
Company does not segregate other assets on a products and services
basis for internal management reporting and, therefore, such
information is not presented. Assets included in corporate and
unallocated principally are cash and cash equivalents, marketable
securities, other receivables, prepaid expenses, deferred income
taxes, property, plant and equipment not specific to business
acquisitions.
** 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.
12
*** 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
On May 19, 2004, the FASB released FASB Staff Position No. FAS 106-2 "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003." Net periodic benefit costs for
postretirement benefits in Note 11 above do not reflect any amount associated
with the federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to the Medicare
benefit because the Company was unable to conclude whether the benefits provided
by the plan are actuarially equivalent to Medicare Part D under the Act. We do
not believe we will have to amend our plan to benefit from the Act, nor do we
expect the Act to have a material impact on our consolidated financial position,
results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this Form
10-Q. The following discussion, other than historical facts, contains
forward-looking statements that involve a number of risks and uncertainties. The
Company's 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.
Overview
The consolidated financial statements present the financial condition of the
Company as of September 30, 2004 and September 30, 2003, and the consolidated
results of operations and cash flows of the Company for the three months ended
September 30, 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 produce compact, lightweight microwave
products for use in base stations for wireless communications systems, in
satellites and in defense electronics systems. In 2004, the Company introduced
new components addressing consumer wireless applications such as wireless local
area networks, Bluetooth, cellular handsets and satellite telecommunications.
The Company sells its products to leading wireless communications equipment
manufacturers such as Ericsson, Lucent Technologies, Motorola, Nokia, Nortel
Networks, and Andrew 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 has passed to the customer. Title and the risks and
rewards of ownership of products are generally transferred at the time of
shipment. Payments received from customers in advance of products delivered are
recorded as customer advance payments until earned. Annually, a small percentage
of sales are derived from long-term
13
fixed-price contracts for the sale of large space and defense electronics
products. Sales and estimated profits under long-term contracts are recognized
using the percentage of completion method of accounting on a units-of-delivery
basis. Profit estimates are revised periodically based upon changes in sales
value and costs at completion. Any losses on these contracts are recognized in
the period in which such losses are determined.
In July 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 accounted for as a discontinued operation
in the statements of earnings for the three months ended September 30, 2003.
On July 8, 2004, Teledyne Technologies Incorporated and Celeritek, Inc. jointly
announced that Teledyne, through its subsidiary Teledyne Wireless, Inc., had
entered into an agreement to acquire Celeritek's defense electronics business.
In light of this development, the Company has determined that it no longer has
an interest in acquiring the business or assets of, or engaging in any other
form of business combination with, Celeritek. The shares of Celeritek Common
Stock beneficially owned by Anaren will, for so long as Anaren retains such
ownership be held for investment purposes and not with a view towards
effectuating a business combination. As set forth in its latest Amendment to
Schedule 13D, Anaren has disposed of a portion of the Celeritek Common Stock
previously held by it. Depending on the results of its ongoing evaluation of the
investment in the Common Stock, prevailing market conditions, other investment
opportunities, and/or other investment considerations, Anaren may dispose of
some or all of its remaining holdings in privately negotiated or open market
transactions, or may retain such shares for investment purposes as described in
its latest Amendment to Schedule 13D. As of September 30, 2004, Anaren has
disposed of 79,343 shares of Celeritek's Common Stock and still owns 697,957
shares.
On August 3, 2004, the Company acquired a 65,000 square foot building situated
on approximately 12 acres in Salem, New Hampshire for a purchase price of $5.0
million. The Company commenced the move of its Amitron operation to the new
facility in September 2004 and will operate the business under the name of
Anaren Ceramics, Inc., a newly created wholly owned subsidiary of the Company.
This newly acquired facility will provide adequate space for anticipated future
growth of that business. In conjunction with the decision to move to this new
facility, the Company negotiated a buyout of the remaining lease of the North
Andover facility for a one-time charge of $350,000 and accelerated amortization
of the leasehold improvements and lease related intangibles amounting to
$250,000 recognized in the fourth quarter of fiscal 2004 and $250,000 recognized
in the first quarter of fiscal 2005.
On October 26, 2004 the Company announced that in order to accelerate ceramic
product growth initiatives and improve operating efficiency, it had decided to
consolidate its RF Power subsidiary with the Company's Amitron subsidiary and
close RF Power's facility in Bohemia, New York. This consolidation will create
one organization with the depth and strength of talent and capital resources
capable of achieving sustainable growth and profitability. The consolidated
company, Anaren Ceramics, Inc., will operate at the Company's newly acquired
Salem, NH facility, which will fully accommodate the current capacity needs of
the combined entity as well as significant future growth. The Company
anticipates that the transition of the RF Power operations to the Salem, NH
facility will be completed by the end of the second fiscal quarter, and all
severance and facility closure expenses will be incurred in that quarter. As a
result, the Company expects to recognize one-time expenses for severance and
facility closure costs of
14
approximately $1.1 million or $0.04 per diluted share in the second quarter. It
is anticipated that the consolidation and closure of the RF Power facility will
reduce annual operating expenses by approximately $1.5 to $2.0 million, or
approximately $0.05 to $0.07 per diluted share.
Results of Operations
Net sales from continuing operations for the three months ended September 30,
2004 were $24.9 million, up 36.3% from $18.3 million for the first quarter of
fiscal 2004. Income from continuing operations for the first three months of
fiscal 2005 was $2.0 million, or 8.0% of net sales, up $800,000 or 65.5% from
income from continuing operations of $1.2 million in the first three months of
fiscal 2004.
The following table sets forth the percentage relationships of certain items
from the Company's consolidated condensed statements of earnings as a percentage
of net sales.
Three Months Ended
Sept. 30, 2004 Sept. 30, 2003
-------------- --------------
Net Sales 100.0% 100.0%
Cost of sales 68.3% 67.4%
----- -----
Gross profit 31.7% 32.6%
----- -----
Operating expenses:
Marketing 7.1% 8.7%
Research and development 6.6% 7.8%
General and administrative 8.5% 10.0%
----- -----
Total operating expenses 22.2% 26.5%
----- -----
Operating income 9.5% 6.1%
----- -----
Other income (expense):
Interest expense (0.0%) (0.0%)
Other, primarily interest income 1.4% 2.6%
----- -----
Total other income, net 1.4% 2.6%
----- -----
Income from continuing operations
before income taxes 10.9% 8.7%
Income taxes 2.9% 2.1%
----- -----
Income from continuing operations 8.0% 6.6%
----- -----
Discontinued operations:
Loss from discontinued operations
of Anaren Europe 0.0% (6.6%)
Income tax benefit 0.0% (9.8%)
----- -----
Income (loss) from discontinued operations 0.0% 3.2%
----- -----
Net income 8.0% 9.8%
===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended
September 30
------------
2004 2003
---- ----
Wireless $17,768 $11,527
Space and Defense 7,139 6,744
------- -------
$24,907 $18,271
15
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
Net sales. Net sales increased $6.6 million, or 36.3% to $24.9 million for the
quarter ended September 30, 2004, compared to $18.3 million for the first
quarter of fiscal 2004. This increase resulted from a $6.2 million rise in sales
of Wireless infrastructure equipment and a $400,000 increase in sales of Space
and Defense products.
The increase in sales of Wireless products, which consisted of standard
components, ferrite components, and custom subassemblies for use in building
wireless base station equipment, was the result of a significant increase in
worldwide demand for wireless basestation components over the last twelve
months. This demand generated increased orders across the entire spectrum of the
Company's Wireless infrastructure products and resulted in a 58% increase in
shipments of standard components and custom subassemblies and a 19% rise in
shipment of ferrite products compared to the first quarter in fiscal 2004.
Current Wireless product demand has declined slightly over the current first
quarter. Sales levels of Wireless infrastructure products are expected to be at
or below first quarter levels during the second quarter of fiscal 2005 and the
percentage of sales from lower margin custom Wireless products is expected to
rise during quarter two.
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 rose $400,000, or 5.9% in the
first quarter of fiscal 2005 compared to the first quarter of last year. This
increase consisted of a $900,000 rise in shipments of defense products, which
was partially offset by a $500,000 decline in sales of Space products in the
first quarter, year over year. Space and Defense quarterly shipments are
expected to be between $7.0 and $7.5 million for the remainder 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 first quarter of fiscal 2005 was
$7.9 million (31.7% of net sales), up $1.8 million from $6.0 million (32.6% of
net sales) for the same quarter of the prior year.
The rise in gross margins in absolute dollars resulted from the 36% increase in
sales volume in the first quarter of fiscal 2005 compared to the same period in
2004. Gross margins as a percent of sales declined .9% due primarily to a shift
in sales mix from higher margin standard Wireless components to lower margin
custom Wireless products in the current quarter compared to the first quarter
last year. This product mix shift is expected to continue in the second quarter.
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 $1.8 million (7.1%
of net sales) for the first quarter of fiscal 2005, up 12.1% from $1.6 million
(8.7% of net sales) for the first quarter of fiscal 2004. This increase is a
result of higher commission expense resulting from the sales increase and rising
travel and support costs due to the higher volume of business.
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
16
activities associated with new products and technology development. Research and
development expenses were $1.6 million (6.6% of net sales) in the first quarter
of fiscal 2005, up 15.7% from $1.4 million (7.8% of net sales) for the first
quarter of fiscal 2004. Research and development expenditures are supporting
further development of Wireless infrastructure products and consumer component
opportunities. Research and Development expenditures have increased in the first
quarter of fiscal 2005 over first quarter fiscal 2004 levels due to the higher
level of opportunities in the marketplace. The Company does not expect to reduce
its current research and development efforts 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 increased 14.1% to $2.1 million (8.5% of net sales) for the first
quarter of fiscal 2005 from $1.8 million (10.0% of net sales) for the first
quarter of fiscal 2004. The increase resulted primarily from a one time charge
amounting to $250,000 to write-off the remaining leasehold and intangible costs
associated with Amitron's North Andover facility and rising administrative costs
due to Sarbanes Oxley regulation compliance.
Operating Income. Operating income increased in the first quarter of fiscal 2005
to $2.4 million (9.5% of sales) from $1.1 million (6.1% of net sales) for the
first quarter of fiscal 2004. On a reporting segment basis, the Wireless
operating income was $654,000 for the first quarter of fiscal 2005 an
improvement of $764,000 from a Wireless operating loss of $110,000 for the first
quarter of fiscal 2004. The main reason for the increase in Wireless operating
income was the 54% rise in Wireless sales volume in the first quarter of fiscal
2005 over the first quarter of fiscal 2004.
Space and Defense operating income rose $500,000 in the first quarter of fiscal
2005 to $1.7 million compared to $1.2 million in the first quarter of fiscal
2004. This increase resulted from higher sales volume in the current first
quarter of fiscal 2005 compared to last year and slightly higher production
efficiencies in the Space and Defense group.
Interest Expense. Interest expense represents interest paid on a deferred
obligation. Interest expense for the first quarter of fiscal 2005 was $6,000
compared to $3,000 for the first quarter of fiscal 2004.
Other Income. Other income is primarily interest income received on invested
cash balances and losses on the sale of stock and capital equipment. Other
income decreased 24.6% to $353,000 (1.4% of net sales) for the quarter ended
September 30, 2004, from $468,000 (2.6% of net sales) for the same quarter last
year. This decrease was caused mainly by the decline in market interest rates
brought about by reductions in the Federal Fund rates and a $67,000 loss on the
sale of capital equipment and a $21,000 loss on the sale of shares of Celeritek
common stock. Additionally, Company cash balances were reduced $19.0 million
over the quarter due to the purchase of the Salem, New Hampshire facility for
$4.8 million and $11.7 million to repurchase treasury shares. Interest income
will fluctuate based on interest rates and the level of investable cash
balances.
Income Taxes. Income taxes for the first quarter of fiscal 2005 were $733,000
(2.9% of net sales), representing an effective tax rate of 27.0%. This compares
to income tax expense of $381,000 (2.1% of net sales) for the first quarter of
fiscal 2004, representing an effective tax rate of 24.1%. The Company's
effective tax rate is a direct result of the proportion of federally
17
exempt state municipal bond income and federal tax credits and benefits in
relation to the levels of taxable income or loss.
Discontinued Operations. In July 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 liquidated the remaining net
assets of that operation. The results of operations for Anaren Europe for the
prior year first quarters have been classified as discontinued operations in the
statements of earnings filed as part of this Quarterly Report on form 10-Q.
Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's
most critical accounting policies have a significant impact on the results
reported in the Company's financial statements. The U.S. Securities and Exchange
Commission has defined the most critical accounting policies as the ones that
are most important to the portrayal of the Company's financial condition and
results, and that require management to make the most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the Company's most critical
policies include: valuation of accounts receivable, which impacts general and
administrative expense; valuation of inventory, which impacts cost of sales and
gross margin; the assessment of recoverability of goodwill and other intangible
and long-lived assets, which impacts write-offs of goodwill, intangibles and
long-lived assets; and accounting for income taxes, which impacts the valuation
allowance and the effective tax rate. Management reviews the estimates,
including, but not limited to, allowance for doubtful accounts, inventory
reserves and income tax valuations on a regular basis and makes adjustments
based on historical experiences, current conditions and future expectations. The
reviews are performed regularly and adjustments are made as required by current
available information. The Company believes these estimates are reasonable, but
actual results could differ from these estimates.
The Company's accounts receivable represent those amounts which have been billed
to its customers but not yet collected. The Company analyzes various factors
including historical experience, credit worthiness of customers and current
market and economic conditions. The allowance for doubtful accounts balance is
established based on the portion of those accounts receivable which are deemed
to be potentially uncollectible. Changes in judgments on these factors could
impact the timing of costs recognized.
The Company states inventories at the lower of cost or market, using a standard
cost methodology to determine the cost basis for the inventory. This method
approximates actual cost on a first-in-first-out basis. The recoverability of
inventories is based on the types and levels of inventory held, forecasted
demand, pricing, competition and changes in technology.
The Company records valuation allowances to reduce deferred tax assets when it
is more likely than not that some portion of the amount may not be realized. The
Company evaluates the need for valuation allowances on a regular basis and
adjusts the allowance as needed. These adjustments, when made, would have an
impact on the Company's financial statements in the period that they were
recorded.
Intangible assets with estimable useful lives are amortized to their residual
values over those estimated useful lives in proportion to the economic benefit
consumed.
Long-lived assets with estimated useful lives are depreciated to their residual
values over those useful lives in proportion to the economic value consumed.
Long-lived assets are tested for impairment at the group level, which is usually
an economic unit such as a manufacturing facility or department, which has a
measurable economic output or product. Long-lived assets are tested for
impairment when events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable and exceeds its fair market
value. This circumstance exists if the carrying amount of the assets in
18
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 used in operations for the three months ended September 30, 2004 was
$1.5 million. The negative cash flow from operations was due primarily to the
$3.7 million rise in receivables and inventory and the $2.3 million paydown of
current liabilities. Net cash provided by operations in the first quarter of
fiscal 2004 was $1.4 million and was due primarily to the income before
depreciation in that quarter.
Net cash used in investing activities in the first quarter of fiscal 2005 and
2004 was $2.8 million and $901,000, respectively, and consisted mainly of
expenditures for capital additions, net of funds provided by the sale and
maturity of marketable investments. In the first quarter of fiscal 2005, capital
additions were $5.6 million, including approximately $5.0 million for the
purchase and renovation of the Salem, New Hampshire manufacturing facility, and
were offset by funds provided by the maturity and sale of marketable securities
totaling $3.3 million. In the first quarter of fiscal 2004, capital additions
amounted to $878,000.
Net cash used in financing activities was $11.6 million in the first quarter of
fiscal 2005 and $3.2 million in the first quarter of last year. Cash used in the
first quarter of fiscal 2005 was for the purchase of 968,195 treasury shares,
while cash was used in the first quarter of fiscal 2004 for the purchase of
281,700 treasury shares, net of $173,000 received from the exercise of stock
options.
During the remainder of fiscal 2005, the Company anticipates that its main cash
requirements will be for additions to capital equipment and the purchase of
additional treasury shares. Capital expenditures, including purchases of $5.6
million made in the first quarter, are expected to total between $7.0 and $8.0
million for fiscal 2005 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 June 30, 2004 there was
927,000 shares remaining under the current Board repurchase authorization. On
August 10, 2004, the Board increased its repurchase authorization by two million
shares, and for the period July 1 through September 30, 2004, the Company
19
repurchased an additional 968,195 shares, leaving 1,959,301 under the current
authorization.
At September 30, 2004, the Company had approximately $101.5 million in cash,
cash equivalents, and marketable securities. The Company has no debt, and on
fiscal year basis has had positive operating cash flow for over eight years. The
Company believes that its cash requirements for the foreseeable future will be
satisfied by currently invested cash balances and expected cash flows from
operations.
Disclosures About Contractual Obligations and Commercial Commitments
Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, such as debt, lease
agreements, and under contingent commitments, such as debt guarantees. The
Company's obligations and commitments are as follows:
Payment Due by Period
---------------------
Less
Total than 1 Yr. 2-3 Yrs 4-5 Yrs Over 5 Yrs
----- ---------- ------- ------- ----------
Contractual obligations
- -----------------------
Operating leases - facilities $4,634,140 $ 618,496 $1,002,099 $ 939,287 $2,074,258
Deferred compensation 434,644 65,000 130,000 130,000 109,644
Recent Accounting Pronouncements
20
In December 2003, the FASB issued SFAS No. 132 (revised) Employers' Disclosures
about Pensions and Other Postretirement Benefits, which revise employers'
disclosures about pension plans and other post retirement benefits. The
disclosure provisions are effective for fiscal years ending after June 15, 2004.
We have provided the required disclosures.
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 106-2,"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, we do not believe we will need to amend our plan to benefit from the
Act, nor do we expect the Act to have a material impact on our consolidated
financial position, results of operations or cash flows.
EITF Issue No 03-1 "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments" must be applied in reporting periods
beginning after June 15, 2004. The disclosure requirements are effective for all
fiscal years after December 15, 2003. We have complied with the disclosure
requirements.
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. These
statements which are not historical information are "forward-looking statements"
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These, and other forward-looking statements, are subject to
business and economic risks and uncertainties that could cause actual results to
differ materially from those discussed. The risks and uncertainties described
below are not the only risks and uncertainties facing our Company. Additional
risks and uncertainties not presently known to us or that are currently deemed
immaterial may also impair our business operations. If any of the following
risks actually occur, our business could be adversely affected, and the trading
price of our common stock could decline, and you may lose all or part of your
investment. Such known factors include, but are not limited to: the Company's
ability to timely ramp up to meet some of our customers' increased demands;
unanticipated delays and/or difficulties relocating the Company's Amitron
subsidiary from North Andover, Massachusetts to Salem, New Hampshire; similar
unanticipated delays and/or difficulties relocating the RF Power subsidiary from
Long Island to the Salem, New Hampshire facility; increased pricing pressure
from our customers; decreased capital expenditures by wireless service
providers; the possibility that the Company may be unable to or have
difficulties in successfully execute its business strategies or achieve its
operating objectives, generate revenue growth or achieve profitability
expectations; successfully securing new design wins from our original equipment
manufacturer customers, reliance on a limited number of key component suppliers,
unpredictable difficulties or delays in the development of new products; order
cancellations or extended postponements; the risks associated with any
technological shifts away from the Company's technologies and core competencies;
unanticipated impairments of assets including investment values and goodwill;
diversion of defense spending away from the Company's products and/or
technologies due to on-going military operations; and litigation involving
antitrust, intellectual property, environmental,
21
product warranty, product liability, and other issues. You are encouraged to
review Anaren's 2004 Annual Report and Anaren's Form 10-K for the fiscal year
ended June 30, 2004 and exhibits to those Reports 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 revenue,
earnings and stock price. Unless required by law, Anaren disclaims any
obligation to update or revise any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Quarterly Report on Form 10-Q.
As of September 30, 2004, the Company had cash, cash equivalents and marketable
securities of $101.5 million, of which approximately $91.7 million consisted of
highly liquid investments in marketable debt securities and $2.4 million
consisted of marketable equity securities. The marketable debt securities at
date of purchase normally have maturities between one and 18 months, are exposed
to interest rate risk and will decrease in value if market interest rates
increase. A hypothetical decrease in market interest rate of 10.0% from
September 30, 2004 rates, or 0.15%, would have reduced net income and cash flow
by approximately $34,000, or $0.002 per share for the year. 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 available for sale with a market
value of approximately $2.4 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 $240,000 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 statement of earnings.
All of the Company's sales from its domestic U.S. subsidiaries to foreign
customers are denominated in United States dollars and, accordingly, are not
exposed to foreign currency exchange risk.
Item 4. Controls and Procedures
1. Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Rules 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.
22
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On November 10, 2003, the Board of Directors increased the number of shares of
common stock that the Company was authorized to repurchase in open market or
privately negotiated transactions through its previously announced stock
repurchase program, up to 2,000,000. The program, which may be suspended at any
time without notice, has no expiration date. The following table sets forth
information regarding shares repurchased and purchasable under the program
during and as of the end of the periods indicated. On August 10, 2004, the Board
increased its repurchase authorization by 2,000,000 shares, which when combined
with the remaining shares from the prior authorization left a total
authorization of 2,927,496 shares.
- -----------------------------------------------------------------------------------------------------------------------
Period Total Number of Average Price Paid Total Number of Maximum Number (or
Shares (or Units) per Share (or Unit) Shares (or Units) Approximate Dollar
Purchased Purchased as Part of Value) of Shares (or
Publicly Announced Units) that May Yet
Plans or Programs Be Purchased Under
the Plans or Programs
- -----------------------------------------------------------------------------------------------------------------------
July 2004 -- -- -- 927,496
- -----------------------------------------------------------------------------------------------------------------------
August 2004 794,395 $11.81 794,395 2,133,101
- -----------------------------------------------------------------------------------------------------------------------
September 2004 173,800 $12.90 173,800 1,959,301
- -----------------------------------------------------------------------------------------------------------------------
Total 968,195 $12.01 968,195 --
- -----------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits
31 RULE 13a-14(a) CERTIFICATIONS
32 SECTION 1350 CERTIFICATIONS
23
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: November 3, 2004 /s/ Lawrence A. Sala
---------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: November 3, 2004 /s/ Joseph E. Porcello
---------------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
24