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 December 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 __
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 February
4, 2005 was 19,613,783.
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
December 31, 2004 and June 30, 2004 (unaudited)
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended December 31,
2004 and 2003 (unaudited)
Consolidated Condensed Statements of Earnings 5
for the Six Months Ended December 31,
2004 and 2003 (unaudited)
Consolidated Condensed Statements of Cash Flows 6
for the Six Months Ended December 31,
2004 and 2003 (unaudited)
Notes to Consolidated Condensed Financial 7
Statements (unaudited)
Item 2. Management's Discussion and Analysis 16
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls & Procedures 28
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Unregistered sales of equity securities and use of proceed 28
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits 29
Officer Certifications 30 - 34
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
December 31, 2004 and June 30, 2004
(Unaudited)
December 31, 2004 June 30, 2004
----------------- -------------
Assets
------
Current assets:
Cash and cash equivalents $ 11,571,034 $ 23,303,263
Securities available for sale (note 3) -- 2,961,710
Securities held to maturity (note 3) 61,390,210 59,076,923
Receivables, less allowance of $171,008
and $145,500, respectively 12,967,049 13,812,853
Inventories (note 4) 18,958,510 16,608,055
Interest and other receivables 885,081 1,040,838
Deferred income taxes 1,061,682 1,037,103
Prepaid expenses 863,998 995,590
Other current assets 267,334 230,784
------------ ------------
Total current assets 107,964,898 119,067,119
------------ ------------
Securities held to maturity (note 3) 30,904,428 35,113,068
Property, plant and equipment, net (note 5) 25,942,384 21,342,554
Goodwill 30,715,861 30,715,861
Other intangible assets, net of accumulated amortization
of $2,185,290 at December 31, 2004
and $1,781,080 at June 30, 2004 (note 1) 839,676 1,243,886
------------ ------------
Total assets $196,367,247 $207,482,488
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 4,982,021 $ 7,198,252
Accrued expenses (note 6) 2,238,456 3,092,370
Income taxes payable 1,560,116 1,331,895
Customer advance payments 274,070 411,486
Other current liabilities (note 8) 332,334 295,784
------------ ------------
Total current liabilities 9,386,997 12,329,787
Deferred income taxes 2,080,125 1,584,251
Postretirement benefit obligation 2,713,520 2,762,992
Other liabilities (note 8) 513,125 441,190
------------ ------------
Total liabilities 14,693,767 17,118,220
------------ ------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 25,982,004 shares
at December 31, 2004 and 25,950,704 at June 30, 2004 259,820 259,507
Additional paid-in capital 171,215,409 171,165,180
Unearned compensation (301,844) (95,388)
Retained earnings 54,209,319 51,247,271
Accumulated other comprehensive loss 167,587 41,110
------------ ------------
225,550,291 222,617,680
Less cost of 6,368,221 and 5,400,026 treasury shares
at December 31, 2004 and June 30, 2004, respectively 43,876,811 32,253,412
------------ ------------
Total stockholders' equity 181,673,480 190,364,268
------------ ------------
Total liabilities and stockholders' equity $196,367,247 $207,482,488
============ ============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
December 31, 2004 and 2003
(Unaudited)
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
Net sales $23,650,022 $19,593,930
Cost of sales 16,888,850 12,952,703
----------- ----------
Gross profit 6,761,172 6,641,227
----------- ----------
Operating expenses:
Marketing 1,860,973 1,681,384
Research and development 1,387,105 1,133,246
General and administrative 2,141,752 1,863,784
Restructuring 458,335 --
----------- ----------
Total operating expenses 5,848,165 4,678,414
----------- ----------
Operating income 913,007 1,962,813
Other income, primarily interest 179,714 375,735
Interest expense (9,837) (1,550)
----------- ----------
Income before income taxes 1,082,884 2,336,998
Income tax expense 102,000 746,000
----------- ----------
Net income from continuing operations $ 980,884 $ 1,590,998
----------- ----------
Discontinued operations:
Loss from discontinued
operations of Anaren Europe (note 9) -- (335,053)
----------- ----------
Net income $ 980,884 $1,255,945
=========== ==========
Basic earnings per share:
Income from continuing operations $0.05 $ 0.08
Income (loss) from discontinued operations $ -- (0.02)
----- ------
Net income $0.05 $ 0.06
===== ======
Diluted earnings per share:
Income from continuing operations $0.05 $ 0.07
Income (loss) from discontinued operations $ -- (0.01)
----- ------
Net income $0.05 $ 0.06
===== ======
Shares used in computing net earnings per share:
Basic 19,580,182 21,123,035
========== ==========
Diluted 20,167,087 21,887,468
========== ==========
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC.
Consolidated Condensed Statements of Earnings
Six Months Ended
December 31, 2004 and 2003
(Unaudited)
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
Net sales $48,557,379 $37,864,603
Cost of sales 33,905,389 25,264,481
----------- -----------
Gross profit 14,651,990 12,600,122
----------- -----------
Operating expenses:
Marketing 3,637,618 3,266,850
Research and development 3,032,182 2,555,028
General and administrative 4,243,936 3,702,183
Restructuring 458,335 --
----------- -----------
Total operating expenses 11,372,071 9,524,061
----------- -----------
Operating income 3,279,919 3,076,061
Other income, primarily interest 532,771 843,711
Interest expense (15,642) (4,522)
----------- -----------
Income before income taxes 3,797,048 3,915,250
Income tax expense 835,000 1,127,000
----------- -----------
Income from continuing operations 2,962,048 2,788,250
Discontinued operations:
Loss from discontinued operations
of Anaren Europe (note 9) -- (1,548,398)
Income tax benefit -- (1,800,000)
----------- -----------
Net income from discontinued operations -- 251,602
----------- -----------
Net income $ 2,962,048 $ 3,039,852
=========== ===========
Basic earnings per share:
Income from continuing operations $0.15 $0.13
Income from discontinued operations -- 0.01
----- -----
Net income $0.15 $0.14
===== =====
Diluted earnings per share:
Income from continuing operations $0.15 $0.13
Income from discontinued operations -- 0.01
----- -----
Net income $0.15 $0.14
===== =====
Shares used in computing net earnings per share:
Basic 19,862,314 21,440,385
========== ==========
Diluted 20,422,625 22,120,197
========== ==========
See accompanying notes to consolidated condensed financial statements.
5
ANAREN, INC.
Consolidated Condensed Statements of Cash Flows
Six Months Ended
December 31, 2004 and 2003
(Unaudited)
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
Cash flows from operating activities:
Net income $ 2,962,048 $ 3,039,852
Net income from discontinued operations -- 251,602
------------ -------------
Net income from continuing operations $ 2,962,048 $ 2,788,250
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 2,502,172 1,999,534
Amortization of intangibles 404,210 249,769
Loss on sale of equipment 67,397 --
Loss on sale of securities available for sale 342,711 --
Deferred income taxes 139,117 (89,696)
Unearned compensation 113,143 143,100
Provision for doubtful accounts 25,508 75,949
Tax benefit from exercise of stock options 13,536 137,280
Changes in operating assets and liabilities,
net of acquisition:
Receivables 820,296 (1,928,666)
Inventories (2,350,455) 262,124
Interest and other receivables 155,757 192,932
Other current assets 95,042 (199,409)
Refundable income taxes -- 876,220
Accounts payable (2,216,230) (776,448)
Accrued expenses (853,914) 120,719
Income taxes payable 228,221 1,127,683
Customer advance payments (137,416) 880,368
Other liabilities 108,485 6,495
Postretirement benefit obligation (49,472) 199,228
------------ -------------
Net cash provided by operating activities
from continuing operations 2,370,156 6,065,432
Net cash used in operating activities from
discontinued operations -- (157,244)
------------ -------------
Net cash provided by operating activities 2,370,156 5,908,188
------------ -------------
Cash flows from investing activities:
Capital expenditures (7,329,399) (1,480,144)
Proceeds from sale of securities available for sale 2,746,130 --
Proceeds from sale of equipment 160,000 --
Maturities of marketable debt securities 49,099,454 142,295,305
Purchase of marketable debt securities (47,204,097) (126,787,000)
------------ -------------
Net cash provided by (used in) investing activities
from continuing operations (2,527,912) 14,028,161
Net cash provided by investing activities from
discontinued operations -- 1,493,378
------------ -------------
Net cash provided by (used in) investing activities (2,527,912) 15,521,539
------------ -------------
Cash flows from financing activities:
Stock options exercised 49,584 276,398
Purchase of treasury stock (11,623,399) (19,964,325)
------------ -------------
Net cash used in financing activities (11,573,815) (19,687,927)
------------ -------------
Effect of exchange rates (658) 37,240
Net increase (decrease) in cash and cash equivalents (11,732,229) 1,779,040
Cash and cash equivalents at beginning of period 23,303,263 11,062,662
------------ -------------
Cash and cash equivalents at end of period $ 11,571,034 $ 12,841,702
============ =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 15,642 $ 4,522
============ =============
Income taxes $ 472,389 $ 2,000
============ =============
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, 2004. The results of operations for the six months ended December 31,
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
six months ended December 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 December 31, 2004 and June 30, 2004 are as follows:
December 31 June 30
--------------------------------- --------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Patent $ 574,966 $ 395,290 $ 574,966 $ 359,354
Customer Base 1,350,000 750,000 1,350,000 637,500
Trade Name 320,000 320,000 320,000 302,226
Non-Competition Agreements 180,000 120,000 180,000 102,000
Favorable Lease 600,000 600,000 600,000 380,000
---------- ---------- ---------- ----------
Total $3,024,966 $2,185,290 $3,024,966 $1,781,080
========== ========== ========== ==========
Intangible asset amortization expense for the six month period ended December
31, 2004 and 2003 aggregated $404,210 and $249,769, respectively. Included in
the amortization expense for the six months ended December 31, 2004 and fiscal
year 2005 is $205,000 for acceleration of the favorable lease intangible caused
by the move of the Company's 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
7
NOTE 2: Stock-Based Compensation
The Company measures compensation expense for its stock option-based employee
compensation plans using the intrinsic value method. The following table sets
forth the pro forma effect of these plans as if the fair value-based method had
been used to measure compensation expense.
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 31 December 31 December 31 December 31
2004 2003 2004 2003
---------- ----------- ---------- -----------
Net income, as reported $ 980,884 $ 1,255,946 $2,962,048 $ 3,039,852
Fair value-based stock based
Compensation cost, net of tax 1,858,491 2,317,672 3,562,741 4,393,664
---------- ----------- ---------- -----------
Pro forma net loss $ (877,607) $(1,061,726) $ (600,693) $(1,353,812)
========== =========== ========== ===========
Net income (loss) per share:
Basic $ 0.05 $ 0.06 $ 0.15 $ 0.14
Diluted $ 0.05 $ 0.06 $ 0.15 $ 0.14
Pro forma net loss per share:
Pro forma basic $ (0.04) $ (0.05) $ (0.03) $ (0.06)
Pro forma diluted $ (0.04) $ (0.05) $ (0.03) $ (0.06)
NOTE 3: Securities
The amortized cost and fair value of securities are as follows:
December 31, 2004
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- ------------
Securities held to maturity:
Municipal bonds $44,221,640 $ -- $(157,320) $44,064,320
Commercial paper 2,238,717 -- -- 2,238,717
Corporate bonds 10,329,963 -- (41,129) 10,288,834
Zero coupon bonds 4,575,035 -- (19,364) 4,555,671
Federal agency bonds 4,929,275 -- (14,697) 4,914,578
Tax free auction securities 26,000,008 -- (8) 26,000,000
----------- ---------- --------- -----------
Total securities held to maturity $92,294,638 $ -- $(232,518) $92,062,120
=========== ========== ========= ===========
8
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
=========== ======= ========= ===========
Marketable securities are summarized as follows:
December 31, 2004 June 30, 2004
----------------- -------------
Marketable debt securities - held-to-maturity $92,294,638 $94,189,991
Marketable equity securities - available for sale -- 2,961,710
Total 92,294,638 97,151,701
Current portion 61,390,210 62,038,633
----------- -----------
Long term $30,904,428 $35,113,068
=========== ===========
Contractual maturities of marketable debt securities held to maturity at
December 31, 2004 are summarized as follows:
December 31, 2004 June 30, 2004
------------------------- -------------------------
Fair Fair
Market Market
Cost Value Cost Value
----------- ----------- ----------- -----------
Within one year $61,390,210 $61,596,604 $59,076,923 $59,127,824
One year to five years 30,904,428 30,465,516 35,113,068 34,879,788
----------- ----------- ----------- -----------
Total $92,294,638 $92,062,120 $94,189,991 $94,007,612
=========== =========== =========== ===========
NOTE 4: Inventories
Inventories are summarized as follows:
December 31, 2004 June 30, 2004
----------------- -------------
Component parts $ 9,738,480 $ 9,136,401
Work in process 7,882,338 6,138,068
Finished goods 2,987,371 2,349,585
----------- -----------
$20,608,189 $17,624,054
Reserve for obsolescence (1,649,679) (1,015,999)
----------- -----------
Net inventory $18,958,510 $16,608,055
=========== ===========
9
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
December 31, 2004 June 30, 2004
----------------- -------------
Land and land improvements $ 2,208,073 $ 1,874,323
Buildings, furniture and fixtures 18,017,734 13,200,633
Machinery and equipment 49,795,507 48,213,982
$ 70,021,314 $ 63,288,938
------------ ------------
Less accumulated depreciation
and amortization (44,078,930) (41,946,384)
------------ ------------
$ 25,942,384 $ 21,342,554
============ ============
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
December 31, 2004 June 30, 2004
----------------- -------------
Compensation $1,082,962 $1,698,411
Commissions 395,702 386,075
Health insurance 324,522 371,010
Restructuring (note 7) 171,110 32,870
Lease buyout 45,000 350,000
Other 219,160 254,004
---------- ----------
$2,238,456 $3,092,370
========== ==========
NOTE 7: Restructuring
European Operations
The following is a rollforward of the balance of restructuring charges related
to operations ceased at the Company's European facility since the filing of the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2004.
Balance Balance
June 30, Cash Non-Cash December 31,
2004 Expenditures Write-offs 2004
-------- ------------ ---------- ------------
Severance $32,870 $(32,870) $ -- $ --
======= ======== ========== ==========
10
RF Power Components, Inc.
On October 26, 2004 the Company announced its decision to merge its RF Power
Components, Inc. operations into Anaren Ceramics. In doing so, the Company
closed its Long Island facility and relocated the operation to the Anaren
Ceramics New Hampshire location. All of RF Power's employees were either
terminated or transferred to the New Hampshire facility. Costs associated with
terminating 79 employees are included in the restructuring liability, as of
December 31, 2004:
Three months ended
December 31, 2004
Balance ------------------------ Balance
June 30, Costs Cash December 31,
2004 Incurred Expenditures 2004
-------- -------- ------------ ------------
Severance payments $ -- $391,575 $(270,175) $121,400
Outplacement services -- 66,760 (17,050) 49,710
-------- -------- --------- --------
$ -- $458,335 $(287,225) $171,110
======== ======== ========= ========
NOTE 8: Other Liabilities
Other liabilities consist of the following:
December 31, 2004 June 30, 2004
----------------- -------------
Deferred compensation $578,126 $506,190
Other 267,333 230,784
-------- --------
845,459 736,974
Less current portion 332,334 295,784
-------- --------
$513,125 $441,190
======== ========
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 three months and six months ended December 31 are as
follows:
Three Months Ended Six Months Ended
December 31 December 31
------------------ ------------------
2004 2003 2004 2003
---- --------- ---- -----------
Net sales $ -- $ 17,861 $ -- $ 658,329
Expenses -- (352,914) -- (1,424,438)
Loss on sale of equipment -- -- -- (782,289)
---- --------- ---- -----------
Net loss from discontinued operations $ -- $(335,053) $ -- $(1,548,398)
===== ========== ==== ===========
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.
11
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 2,579,938 and 2,326,210 at December 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 Six Months Ended
--------------------------- ---------------------------
December 31 December 31
2004 2003 2004 2003
---------- ---------- ---------- ----------
Numerator:
Net income from continuing operations $980,884 $1,255,945 $2,962,048 $3,039,852
======== ========== ========== ==========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 19,580,182 21,123,035 19,862,314 21,440,385
========== ========== ========== ==========
Denominator for diluted earnings per share:
Weighted average shares outstanding 19,580,182 21,123,035 19,862,314 21,440,385
Common stock options
and restricted stock 586,905 764,433 560,311 679,812
---------- ---------- ---------- ----------
Weighted average shares and conversions 20,167,087 21,887,468 20,422,625 22,120,197
========== ========== ========== ==========
NOTE 11: Components of Net Period Benefit Costs
Three Months Ended Six Months Ended
------------------------- -------------------------
December 31 December 31
2004 2003 2004 2003
--------- --------- --------- ---------
Service cost $ 65,712 $ 53,216 $ 131,424 $ 106,432
Interest cost 135,206 126,190 270,412 252,380
Expected return on plan assets (134,113) (128,259) (268,226) (256,259)
Amortization of prior service cost 4,560 3,774 9,120 7,548
Amortization of the net (gain) loss 27,066 4,560 54,132 9,120
--------- --------- --------- ---------
Net periodic benefit cost $ 98,431 $ 59,481 $ 196,862 $ 119,221
========= ========= ========= =========
Expected Pension Contributions
Expected contributions for fiscal 2005 are $519,000
12
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.
13
The following table reflects the operating results of the segments consistent
with the Company's internal financial reporting process. The following results
are used in part, by management, both in evaluating the performance of, and in
allocating resources to, each of the segments:
Space & Corporate and
Wireless Defense Unallocated Consolidated
-------- ------- ------------- ------------
Net sales:
Three months ended:
December 31, 2004 $16,006,066 $ 7,643,956 $ -- $ 23,650,022
December 31, 2003 12,993,731 6,600,199 -- 19,593,930
Six months ended:
December 31, 2004 33,774,359 14,783,020 -- 48,557,379
December 31, 2003 24,520,321 13,344,282 -- 37,864,603
Operating income (loss):
Three months ended:
December 31, 2004 (741,875) 1,654,882 -- 913,007
December 31, 2003 792,486 1,170,327 -- 1,962,813
Six months ended:
December 31, 2004 (87,950) 3,367,869 -- 3,279,919
December 31, 2003 682,678 2,393,383 -- 3,076,061
Goodwill and intangible assets:
December 31, 2004 31,555,537 -- -- 31,555,537
June 30, 2004 31,959,747 -- -- 31,959,747
Identifiable assets:*
December 31, 2004 20,420,663 11,675,904 132,690,564 164,787,131
June 30, 2004 19,681,543 10,884,864 144,956,334 175,522,741
Depreciation:**
Three months ended:
December 31, 2004 605,786 643,719 -- 1,249,505
December 31, 2003 495,099 506,470 -- 1,001,569
Six months ended:
December 31, 2004 1,450,027 1,052,145 -- 2,502,172
December 31, 2003 1,058,737 940,797 -- 1,999,534
Intangibles amortization: ***
Three months ended:
December 31, 2004 83,219 -- -- 83,219
December 31, 2003 124,885 -- -- 124,885
Six months ended:
December 31, 2004 404,210 -- -- 404,210
December 31, 2003 249,769 -- -- 249,769
* Segment assets primarily include receivables and inventories. The Company
does not segregate other assets on a products and services basis for
internal management reporting and, therefore, such information is not
presented. Assets included in corporate and unallocated principally are
cash and cash equivalents, marketable securities, other receivables,
prepaid expenses, deferred income taxes, property, plant and equipment not
specific to business acquisitions.
14
** 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
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. The
Company does not believe it will have to amend its plan to benefit from the Act,
nor does it expect the Act to have a material impact on its consolidated
financial position, results of operations or cash flows.
15
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 December 31, 2004 and June 30, 2004, and the consolidated results
of operations and cash flows of the Company for the three months and six months
ended December 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 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 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 and six months ended December
31, 2003 and 2004.
On July 8, 2004, Teledyne Technologies Inc. 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
16
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
777,300 shares of Celeritek Common Stock beneficially owned by Anaren were
disposed of during the six months ended December 31, 2004, resulting in a
realized loss of $343,000.
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 move of the RF
Power operation to the Salem, NH facility was completed during the second
quarter ended December 31, 2004. As a result of the facility closure and move,
the Company recognized one-time costs of $458,335 for severance and
outplacement, $91,000 for lease cancellation and closure and $300,000 for
additional inventory write-downs. Additionally, the Company expects to incur
further costs totaling $150,000 in the third quarter related to integrating the
RF Power operation into the Anaren Ceramics operation. 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.
Third Quarter of Fiscal 2005 Outlook
Based on current Wireless market demand and the Company's present Space and
Defense order backlog, the Company expects sales for the third quarter of fiscal
2005 to range between $21.0 and $23.0 million and net income per diluted share
to range between $0.07 and $0.09.
Results of Operations
Net sales from continuing operations for the second quarter ended December 31,
2004 were $23,650,000, up 21% from sales of $19,594,000 for the second quarter
of last fiscal year and down $1,257,000, or 5.0% from sales of $24,907,000 for
the first quarter of fiscal 2005. Operating income for the second quarter of
fiscal 2005 was $913,000 or 3.9% of sales, down $1,050,000 from $1,963,000 for
the second quarter of last year.
17
The following table sets forth the percentage relationships of certain items
from the Company's consolidated condensed statements of earnings as a percentage
of net sales.
Three Months Ended Six Months Ended
------------------------------ ------------------------------
Dec. 31, 2004 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2003
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 71.4% 66.1% 69.8% 66.7%
------ ------ ------ ------
Gross profit 28.6% 33.9% 30.2% 33.3%
------ ------ ------ ------
Operating expenses:
Marketing 7.9% 8.6% 7.5% 8.6%
Research and development 5.9% 5.8% 6.3% 6.8%
General and administrative 9.0% 9.5% 8.7% 9.8%
Restructuring 1.9% 0.0% 0.9% 0.0%
------ ------ ------ ------
Total operating expenses 24.7% 23.9% 23.4% 25.2%
------ ------ ------ ------
Operating income 3.9% 10.0% 6.8% 8.1%
------ ------ ------ ------
Other income (expense):
Other, primarily interest income 0.7% 1.9% 1.0% 2.2%
Interest expense 0.0% 0.0% 0.0% 0.0%
------ ------ ------ ------
Total other income (expense), net 0.7% 1.9% 1.0% 2.2%
------ ------ ------ ------
Income from continuing operations
before income taxes 4.6% 11.9% 7.8% 10.3%
Income taxes 0.4% 3.8% 1.7% 3.0%
------ ------ ------ ------
Income from continuing operations 4.2% 8.1% 6.1% 7.3%
------ ------ ------ ------
Discontinued operations:
Income (loss) from discontinued
operations of Anaren Europe 0.0% (1.7%) 0.0% (4.1%)
Income tax benefit 0.0% 0.0% 0.0% (4.8%)
------ ------ ------ ------
Net income (loss) from
discontinued operations 0.0% (1.7%) 0.0% 0.7%
------ ------ ------ ------
Net income 4.2% 6.4% 6.1% 8.0%
====== ====== ====== ======
Income from continuing operations for the second quarter of fiscal 2005 was
$981,000, down $610,000, or 38.3% from income from continuing operations of
$1,591,000 for the second quarter last year.
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Six Months Ended
-------------------- --------------------
December 31 December 31
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Wireless $16,006 $12,994 $33,774 $24,521
Space and Defense 7,644 6,600 14,783 13,344
------- ------- ------- -------
Total $23,650 $19,594 $48,557 $37,865
======= ======= ======= =======
18
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 second quarter has been classified as discontinued operations in the
statements of earnings filed as part of this Quarterly Report on form 10-Q.
Three Months Ended December 31, 2004 Compared to Three Months Ended December 31,
2003
Net sales. Net sales increased $4.1 million or 21% to $23.7 million for the
second quarter ended December 31, 2004 compared to $19.6 million for the second
quarter of last fiscal year. This increase resulted from a $3.0 million rise in
sales of Wireless infrastructure products and a $1.1 million increase in sales
of Space and Defense products.
The increase in the sales of Wireless products, which consist of standard
components, ferrite components and custom subassemblies for use in building
wireless basestation equipment, was the result of an increase in worldwide
demand for wireless basestation components over the last fifteen months, and
production shipments of a new custom subassembly product for Nokia.
Wireless product sales rose $3.0 million, or 23%, in the second quarter of
fiscal 2005 compared to the second quarter last year, due mainly to a $4.6
million increase in shipments of custom assembly products, of which $4.2 million
represented shipments to Nokia under a new contract which first entered
production in the fourth quarter of last fiscal year. This increase in custom
wireless product sales was off-set by a $1.6 million decline in sales of
standard and ferrite wireless components in this current second quarter compared
to the same quarter last year which has resulted from a slowing of demand for
these products over the last six months. Current Wireless product demand for
standard and ferrite components has continued to soften over the last three
months and sales levels of all wireless infrastructure products, including
custom subassemblies, are expected to be at or below second quarter levels for
the remainder of fiscal 2005.
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 $1.0 million, or 16% in the
second quarter of fiscal 2005 compared to the second quarter of last year. This
increase consisted of a $2.1 million rise in shipments of defense products,
which was partially offset by a $1.1 million decline in sales of Space products
in the first quarter, year over year. Defense product shipments are rising due
to the increased level of new defense business booked in fiscal 2004 which is
currently entering production. Defense product bookings in fiscal 2004 were
$37.7 million resulting in a book to bill ratio of 1.4 to 1.0. Space and Defense
quarterly shipments are expected to be between $7.5 and $8.0 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 second quarter of fiscal 2005 was
$6.8 million (28.6% of net sales), up $120,000 from $6.6 million (33.9% of net
sales) for the same quarter of the prior year.
The rise in gross margins in absolute dollars resulted from the 21% increase in
sales volume in the second quarter of fiscal 2005 compared to the same period in
2004. Gross margins as a percent of sales declined 530 basis points due to a
continuing shift in sales mix from higher
19
margin standard Wireless components to lower margin custom Wireless products in
the current quarter compared to the second quarter last year, as well as a
one-time $300,000 writedown of inventory at RF Power in conjunction with the
shut down of the Bohemia, NY facility and the operation relocation to Salem, NH.
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 $1.9 million (7.9%
of net sales) for the second quarter of fiscal 2005, up 10.7% from $1.7 million
(8.6% of net sales) for the second 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 in the current
year.
Research and Development. Research and development expenses consist of material
and salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses were $1.4 million
(5.9% of net sales) in the second quarter of fiscal 2005, up 22.4% from $1.1
million (5.8% of net sales) for the second 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 second quarter of fiscal 2005
over second quarter fiscal 2004 levels due to the higher level of opportunities
in the marketplace. Although quarterly research and development expenditures are
expected to fluctuate based on customer funded engineering requirements in our
Space and Defense group, 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 14.9% to $2.1 million (9.0% of net sales) for the second
quarter of fiscal 2005 from $1.9 million (9.5% of net sales) for the second
quarter of fiscal 2004. The increase resulted primarily from a one time charge
to recognize the cost of buying out the RF Power Bohemia, NY facility lease and
moving the operation to Salem, NH, as well as, rising administrative costs
related to Sarbanes Oxley regulation compliance.
Restructuring. Restructuring cost which consisted of wages, health insurance,
payroll taxes and outplacement costs were $458,000 in the second quarter. These
costs were related to the termination of 79 people in conjunction with the
closure of the RF Power Bohemia, NY facility and the move of that operation to
Salem, NH.
Operating Income. Operating income declined in the second quarter of fiscal 2005
to $913,000 (3.9% of sales) from $2.0 million (10.0% of net sales) for the
second quarter of fiscal 2004. On a reporting segment basis, the Wireless
operating loss was $(742,000) for the second quarter of fiscal 2005, a decrease
of $1.5 million from a Wireless operating income of $792,000 for the second
quarter of fiscal 2004. Wireless operating income fell in the second quarter of
fiscal 2005 compared to the second quarter of fiscal 2004 due to the $850,000 in
one-time charges for severance, lease cancellation and inventory write-downs
associated with the facility closure and move of the RF Power operation to
Salem, NH. Additionally, during the second quarter of fiscal 2005 sales of
higher margin standard wireless components continued to fall, dropping over $1.1
million, further negatively impacting Wireless gross and operating margins.
20
Space and Defense operating income rose $485,000 in the second quarter of fiscal
2005 to $1.7 million compared to $1.2 million in the second quarter of fiscal
2004. This increase resulted from higher sales volume in the current second
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 second quarter of fiscal 2005 was $10,000
compared to $2,000 for the second quarter of fiscal 2004.
Other Income. Other income is primarily interest income received on invested
cash balances, rental income and losses on the sale of securities available for
sale and capital equipment. Other income decreased 52% to $180,000 (0.7% of net
sales) for the quarter ended December 31, 2004, from $376,000 (1.9% of net
sales) for the same quarter last year. This decrease was caused mainly by a
$67,000 loss on the sale of capital equipment and a $321,000 loss on the sale of
shares of Celeritek common stock during the second quarter, which were was
partially offset by higher interest rates and $66,000 in rental income.
Additionally, Company cash balances were reduced by $19.0 million at the
beginning of the quarter due to the purchase of the Salem, NH facility for $4.8
million and $11.7 million used to repurchase treasury shares in the first
quarter. Interest income will fluctuate based on interest rates and the level of
investable cash balances.
Income Taxes. Income taxes for the second quarter of fiscal 2005 were $102,000
(0.4% of net sales), representing an effective tax rate of 9.4%. This compares
to income tax expense of $746,000 (3.8% of net sales) for the second quarter of
fiscal 2004, representing an effective tax rate of 31.9%. 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. During the second quarter, the Company
reduced its expected annual tax rate for fiscal 2005 to approximately 22%, from
27%, based on lower expected income levels for the 2005 fiscal year, resulting
in the lower effective rate in the second quarter.
Six Months Ended December 31, 2004 Compared to Six Months Ended December 31,
2003.
Net Sales. Net sales increased $10.7 million or 28%, to $48.6 million for the
six months ended December 31, 2004 compared to $37.9 million for the first half
of last fiscal year. This increase resulted from a $9.3 million rise in Wireless
infrastructure equipment sales and $1.4 million increase in sales of Space and
Defense products.
The increase in sales of Wireless products was the result of a rise in worldwide
demand for base station components during fiscal 2004, and was further bolstered
by shipments to Nokia of a new custom subassembly.
Wireless product sales rose $9.2 million, or 28%, in the first half of fiscal
2005 compared to the first half of last year, due to a $6.4 million increase in
shipments of custom subassembly products of which, through six months, $6.3
million represented shipments to Nokia under a new production contract which is
expected to generate between $7.0 and $10.0 million in revenue on an annual
basis. Additionally, shipments of standard Wireless components rose $2.8 million
during the first six months, with large increases in the first quarter which
were subsequently offset by declines in second quarter related to the softening
in market demand for these products beginning in September 2004. Current market
demand for standard components and custom subassemblies remains soft and sales
levels of all Wireless infrastructure products are expected to remain at or
below current second quarter levels for the remainder of fiscal 2005.
21
Sales of Space and Defense products rose $1.4 million, or 11% in the first half
of fiscal 2005 compared to the first half of the previous fiscal year. This
increase consisted of a $3.0 million rise in sales of defense products, which
was partially off-set by a $1.6 million decline in Space product shipments
during the first six months of the current fiscal year compared to the same
period in fiscal 2004. Defense product sales are increasing due to the higher
level of new defense business booked by the Company in fiscal 2004, which is now
starting to enter production. Defense product bookings in fiscal 2004 were $37.7
million resulting in a book-to-bill ratio of 1.4 to 1.0.
Gross Profit. Gross profit in the first half of fiscal 2005 was $14.7 million
(30.2% of net sales), up $2.1 million from $12.6 million (33.3% of net sales)
for the first six months of the prior year. The $2.1 million rise in gross
profit resulted from the 28% increase in sales volume in the first half of
fiscal 2005 compared to the same period in fiscal 2004. Gross margin as a
percent of sales declined 3.1percentage points due to a change in sales mix from
higher margin standard Wireless component products to lower margin custom
Wireless products in the first six months of fiscal 2005, compared to the first
half of last year. Additionally, margins were eroded by a one-time write-down of
inventory at RF Power in conjunction with the closure of the Bohemia, NY
facility and the relocation of that operation to Salem, NH.
Marketing. Marketing expenses increased 11.4% to $3.6 million (7.5% of net
sales) for the first six months of fiscal 2005 from $3.3 million (8.6% of net
sales) for the first half of last year. This increase is a result of higher
commission expense caused by the sales increase and rising travel and support
costs due to the higher level of business. Research and development expenses
were $3.0 million (6.3% of net sales) in the first half of fiscal 2005, up 18.7%
from $2.6 million (6.8% of net sales) for the first half of fiscal 2004.
Research and development expenditures are supporting further development of
Wireless infrastructure products and consumer components opportunities. Research
and Development expenditures have increased in the first half of fiscal 2005
over fiscal 2004 expenditures due to the higher level of opportunities in the
marketplace. Although research and development expenditures are expected to
fluctuate based on customer funded engineering requirements in our Space and
Defense group, the Company does not expect to reduce its current research and
development efforts and is presently working on a number of new standard and
custom Wireless products.
General and Administrative. General and administrative expenses increased 14.6%
to $4.2 million (8.7% of net sales) for the first half of fiscal 2005 from $3.7
million (9.8% of net sales) for the first half of fiscal 2004. The increase
resulted primarily from one time charges to recognize the cost of buying out the
RF Power and the Amitron leases and moving both operations to Salem, NH,
writing-off certain Amitron lease intangibles, and rising administrative costs
related to Sarbanes Oxley regulation compliance.
Restructuring. Restructuring costs which consisted of wages, health insurance,
payroll taxes and outplacement costs were $458,000 in the first six months of
fiscal 2005. These costs were related to the termination of 79 people in
conjunction with the closure of RF Power's facility and the move of that
operation to Salem, NH.
Operating Income. Operating income increased in the first half of fiscal 2005 to
$3.3 million (6.8% of net sales) from $3.1 million (8.1% of net sales) for the
first half of fiscal 2004. On a reporting segment basis, the Wireless operating
loss was $(88,000) for the first half of fiscal 2005, a decline of $771,000 from
Wireless operating income of $683,000 for the first half of last fiscal year.
22
Wireless operating income fell in the first six months of fiscal 2005 compared
to the same period in fiscal 2004 due to the $850,000 of one-time charges
related to the facility closure and move of the RF Power operation to Salem, NH
and the $250,000 first quarter accelerated write-off of certain Amitron lease
intangibles.
Space and Defense operating income rose $1.0 million in the first half of fiscal
2005 to $3.4 million compared to $2.4 million in the first half of last fiscal
year. This increase resulted from the higher sales volume in fiscal 2005
compared to fiscal 2004 and better production efficiencies within the Space and
Defense group.
Interest Expenses. The Company does not have any long term debt and interest
expenses represents interest paid on a deferred obligation. Interest expense for
the first half of fiscal 2005 was $16,000 (0.0% of net sales) compared to $5,000
(0.0% of net sales) for the first half of fiscal 2004.
Other Income. Other income decreased 37% to $533,000 (1.0% of net sales) for the
six month ended December 31, 2004, from $844,000 (2.2% of net sales) for the
same period last year. This decrease was caused mainly by a $67,000 loss on the
sale of capital equipment and a $343,000 loss on the sale of shares of Celeritek
common stock. Additionally, Company cash balances were reduced $19.0 million
over the six months due to the purchase of the Salem, NH facility for $4.8
million and $11.7 million used 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 half of fiscal 2005 were $835,000 (1.7%
of net sales), representing an effective tax rate of 22%. This compares to tax
expense of $1.1 million (3.0% of net sales) for the first half of fiscal 2004,
representing an effective tax rate of 28.8%. 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 decrease in the effective tax rate in fiscal 2005 compared
to fiscal 2004 resulted from higher estimated foreign sales tax benefits due to
a rise in expected foreign export sales levels this year.
Discontinued Operation. 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 six months has been classified as discontinued operations in the
statements of earnings filed as part of this Quarterly Report on form 10-Q.
23
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 over those estimated
useful lives.
Long-lived assets with estimated useful lives are depreciated to their residual
values over those useful lives on a straight line basis. 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 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.
24
Goodwill, generally, 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 flows related to those revenues.
Actual revenues and related cash flows or changes in anticipated revenues and
related cash flows could result in changes in this assessment and result in an
impairment charge. The use of different assumptions could increase or decrease
the related impairment charge.
Liquidity and Capital Resources
Net cash provided by operations for the six months ended December 31, 2004 was
$2.4 million. The positive cash flow from operations was due primarily to income
before depreciation and amortization for the period coupled with a $1.0 million
decline in trade and other receivables which off-set a $2.4 million increase in
inventory and a $2.8 million pay down of current liabilities. Net cash provided
by operations in the first half of fiscal 2004 was $5.9 million and was due
primarily to the income before depreciation in that period and a $1.5 million
decline in current liabilities.
Net cash used in, or provided by, investing activities consists of funds used to
purchase capital equipment, proceeds from the sale of investments and funds used
or provided by the net purchase or maturity of marketable debt securities.
Capital expenditures were $7.3 million and $1.5 million in the first half of
fiscal 2005 and fiscal 2004, respectively, with the large increase in 2005
resulting from a $5.0 million expenditure to purchase and renovate a new
facility in Salem, NH. Additionally, in fiscal 2005, $2.7 million was generated
by the sale of the Company's investment in Celeritek, Inc. common stock and $1.9
million was generated by the net maturities of marketable securities, while in
fiscal 2004, $15.5 million was produced by the maturity of marketable securities
and $1.5 million was generated in discontinued operations in Europe through the
auction sale of capital equipment.
Net cash used in financing activities in the first half of fiscal 2005 and 2004
was $11.6 million and $19.7, respectively. The Company used $11.6 million in the
first half of fiscal 2005 to purchase 968,195 treasury shares, while cash used
in the first half of fiscal 2004 to purchase 1,437,100 treasury shares was $20.0
million, and cash generated by the exercise of stock options was $276,000.
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 $7.3
million made in the first six months, are expected to total between $8.0 and
$8.5 million for fiscal 2005 and will be funded by existing cash balances.
25
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 December 31, 2004, the Company
repurchased an additional 968,195 shares, leaving 1,959,301 under the current
authorization.
At December 31, 2004, the Company had approximately $104.0 million in cash, cash
equivalents, and marketable securities. The Company has no debt, and on a 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 $4,694,109 $545,657 $1,005,685 $1,005,685 $2,137,082
Deferred compensation 424,537 65,000 130,000 130,000 99,537
Pension plan contributions 382,196 382,196 -- -- --
Recent Accounting Pronouncements
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.
26
In December 2004, the FASB published Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment. Statement 123 (revised 2004)
requires registrants to recognize the cost of share-based payments, including
previously issued share-based payments, in the income statement and is effective
for awards that are granted, modified, or settled in cash in interim or annual
periods beginning after June 15, 2005. Statement 123 (revised 2004) is effective
for the Company's 2006 fiscal year and the Company is currently evaluating the
expected impact on its financial statements.
In November 2004, the FASB published Statement of Financial Accounting Standards
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151
amends the guidance in Chapter 4, "Inventory Pricing" of ARB No. 43 and
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Statement 151 requires that
those items be recognized as current-period charges. Statement 151 also requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. Statement 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Statement 151 is effective for the Company's 2006 fiscal year and is
not expected to have a material impact on the Company's financial statements.
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 difficulties combining the Company's Amitron and RF Power
subsidiaries in the Company's Salem, New Hampshire facility; unanticipated loss
of engineering and other technical resources; 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, 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
27
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 December 31, 2004, the Company had cash, cash equivalents and marketable
securities of $104.0 million, all of which consisted of highly liquid
investments in marketable debt. 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 December 31, 2004
rates, or 0.15%, would have reduced net income and cash flow by approximately
$39,000, 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.
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.
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On August 10, 2004, the Board of Directors increased the number of shares of
common stock that the Company was authorized to repurchase in open market or by
privately negotiated transactions through its previously announced stock
repurchase program, by 2,000,000 shares. The program, which may be suspended at
any time without notice, has no expiration date. The
28
following table sets forth information regarding shares repurchased and
purchasable under the program during and as of the end of the periods indicated.
At December 31, 2004, 1,959,301 shares remained authorized for purchase.
- ----------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------
October 2004 -- -- -- 1,959,301
- ----------------------------------------------------------------------------------------------------------------------
November 2004 -- -- -- 1,959,301
- ----------------------------------------------------------------------------------------------------------------------
December 2004 -- -- -- 1,959,301
- ----------------------------------------------------------------------------------------------------------------------
Total -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Shareholders' meeting was held on November 4,
2004, at which time the election of Directors was conducted. The
following named individuals were nominated and re-elected as
Directors.
Votes Votes
For Withheld
----- --------
Herbert I. Corkin 16,958,558 1,414,339
Matthew S. Robison 17,005,065 1,367,832
Messrs. Corkin and Robison were elected to terms expiring in 2007.
The terms of Directors Lawrence A. Sala, Dale F. Eck, Carl W. Gerst,
James G. Gould, and Dr. David Wilemon continued after the meeting.
Additionally, a proposal to amend and restate the Company's existing
equity compensation plans to establish a single comprehensive
long-term plan was approved by a vote of 13,292,700 for and 235,136
withheld.
Additionally, the selection of KPMG LLP was approved as the
Company's independent registered public accounting firm for fiscal
2005 was ratified by a vote of 18,148,837 for and 222,079 withheld.
Item 6. Exhibits
31 RULE 13a-14(a) CERTIFICATIONS
32 SECTION 1350 CERTIFICATIONS
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Anaren, Inc.
------------
(Registrant)
Date: February 7, 2005 S/ Lawrence A. Sala
---------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: February 7, 2005 S/ Joseph E. Porcello
---------------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
30