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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 March 31, 2005
__ 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
6635 Kirkville Road Identification No.)
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 May 5,
2005 was 18,695,706.
ANAREN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
March 31, 2005 and June 30, 2004 (unaudited)
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended March 31,
2005 and 2004 (unaudited)
Consolidated Condensed Statements of Earnings 5
for the Nine Months Ended March 31,
2005 and 2004 (unaudited)
Consolidated Condensed Statements of Cash Flows 6
for the Nine Months Ended March 31,
2005 and 2004 (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 Proceeds 28
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
March 31, 2005 and June 30, 2004
(Unaudited)
Assets March 31, 2005 June 30, 2004
------ -------------- -------------
Current assets:
Cash and cash equivalents $ 11,051,577 $ 23,303,263
Securities available for sale (note 3) -- 2,961,710
Securities held to maturity (note 3) 61,451,299 59,076,923
Receivables, less allowance of $229,624
in 2005 and $145,500 in 2004 12,944,976 13,812,853
Inventories (note 4) 19,719,987 16,608,055
Interest and other receivables 934,560 1,040,838
Deferred income taxes 1,061,683 1,037,103
Prepaid expenses 741,956 995,590
Other current assets 286,045 230,784
------------- -------------
Total current assets 108,192,083 119,067,119
------------- -------------
Securities held to maturity (note 3) 23,540,851 35,113,068
Property, plant and equipment, net (note 5) 25,424,907 21,342,554
Goodwill 30,715,861 30,715,861
Other intangible assets, net of accumulated amortization
of $2,268,507 at March 31, 2005
and $1,781,080 at June 30, 2004 (note 1) 756,459 1,243,886
------------- -------------
Total assets $ 188,630,161 $ 207,482,488
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,889,872 $ 7,198,252
Accrued expenses (note 6) 2,215,325 3,092,370
Income taxes payable 1,650,248 1,331,895
Customer advance payments 3,950 411,486
Other current liabilities (note 8) 351,048 295,784
------------- -------------
Total current liabilities 9,110,443 12,329,787
Deferred income taxes 2,130,126 1,584,251
Postretirement benefit obligation 2,498,389 2,762,992
Other liabilities (note 8) 549,095 441,190
------------- -------------
Total liabilities 14,288,053 17,118,220
------------- -------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 26,064,204 shares
at March 31, 2005 and 25,950,704 at June 30, 2004 260,642 259,507
Additional paid-in capital 171,274,294 171,165,180
Unearned compensation (275,212) (95,388)
Retained earnings 56,069,849 51,247,271
Accumulated other comprehensive income 166,094 41,110
------------- -------------
227,495,667 222,617,680
Less cost of 7,101,558 and 5,400,026 treasury shares
at March 31, 2005 and June 30, 2004, respectively 53,153,559 32,253,412
------------- -------------
Total stockholders' equity 174,342,108 190,364,268
------------- -------------
Total liabilities and stockholders' equity $ 188,630,161 $ 207,482,488
============= =============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
March 31, 2005 and 2004
(Unaudited)
March 31, 2005 March 31, 2004
-------------- --------------
Net sales $ 21,783,418 $ 22,387,222
Cost of sales 14,630,770 14,473,285
------------ ------------
Gross profit 7,152,648 7,913,937
------------ ------------
Operating expenses:
Marketing 1,513,274 1,714,075
Research and development 1,635,048 1,394,269
General and administrative 2,256,819 2,068,795
------------ ------------
Total operating expenses 5,405,141 5,177,139
------------ ------------
Operating income 1,747,507 2,736,798
Other income, primarily interest 558,166 367,526
Interest expense (6,143) (2,997)
------------ ------------
Income before income taxes 2,299,530 3,101,327
Income tax expense 439,000 879,000
------------ ------------
Net income from continuing operations $ 1,860,530 $ 2,222,327
------------ ============
Discontinued operations:
Income (loss) from discontinued
operations of Anaren Europe (note 9) -- 38,579
------------ ------------
Net income $ 1,860,530 $ 2,260,906
============ ============
Basic earnings per share:
Income from continuing operations $ 0.10 $ 0.11
Income (loss) from discontinued operations 0.00 0.00
------------ ------------
Net income $ 0.10 $ 0.11
============ ============
Diluted earnings per share:
Income from continuing operations $ 0.09 $ 0.10
Income (loss) from discontinued operations 0.00 0.00
------------ ------------
Net income $ 0.09 $ 0.10
============ ============
Shares used in computing net earnings per share:
Basic 19,336,007 20,565,218
============ ============
Diluted 19,801,542 21,556,951
============ ============
See accompanying notes to consolidated condensed financial statements.
4
ANAREN, INC.
Consolidated Condensed Statements of Earnings
Nine Months Ended
March 31, 2005 and 2004
(Unaudited)
Mar. 31, 2005 Mar. 31, 2004
------------- -------------
Net sales $ 70,340,797 $ 60,251,825
Cost of sales 48,536,159 39,737,766
------------ ------------
Gross profit 21,804,638 20,514,059
------------ ------------
Operating expenses:
Marketing 5,150,892 4,980,925
Research and development 4,667,230 3,949,297
General and administrative 6,500,755 5,770,978
Restructuring 458,335 --
------------ ------------
Total operating expenses 16,777,212 14,701,200
------------ ------------
Operating income 5,027,426 5,812,859
Other income, primarily interest 1,090,937 1,211,237
Interest expense (21,785) (7,519)
------------ ------------
Income before income taxes 6,096,578 7,016,577
Income tax expense 1,274,000 2,006,000
------------ ------------
Income from continuing operations 4,822,578 5,010,577
Discontinued operations:
Loss from discontinued operations
of Anaren Europe (note 9) -- (1,509,819)
Income tax benefit -- (1,800,000)
------------ ------------
Net income from discontinued operations -- 290,181
------------ ------------
Net income $ 4,822,578 $ 5,300,758
============ ============
Basic earnings per share:
Income from continuing operations $ 0.24 $ 0.24
Income from discontinued operations -- 0.01
------------ ------------
Net income $ 0.24 $ 0.25
============ ============
Diluted earnings per share:
Income from continuing operations $ 0.24 $ 0.23
Income from discontinued operations -- 0.01
------------ ------------
Net income $ 0.24 $ 0.24
============ ============
Shares used in computing net earnings per share:
Basic 19,689,024 21,150,784
============ ============
Diluted 20,217,742 21,934,570
============ ============
See accompanying notes to consolidated condensed financial statements.
5
ANAREN, INC.
Consolidated Condensed Statements of Cash Flows
Nine Months Ended
March 31, 2005 and 2004
(Unaudited)
Cash flows from operating activities: Mar. 31, 2005 Mar. 31, 2004
------------- -------------
Net income $ 4,822,578 $ 5,300,758
Net income from discontinued operations -- 290,181
------------- -------------
Net income from continuing operations $ 4,822,578 $ 5,010,577
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 3,676,678 3,070,731
Impairment loss 272,118 --
Amortization of intangibles 487,427 374,653
Loss on sale of equipment 67,397 --
Loss on sale of securities available for sale 342,711 --
Deferred income taxes 218,337 (1,796)
Unearned compensation 39,077 214,650
Provision for doubtful accounts 84,124 127,506
Tax benefit from exercise of stock options 13,536 797,537
Changes in operating assets and liabilities:
Receivables 783,753 (4,468,390)
Inventories (3,111,932) 328,001
Interest and other receivables 106,278 (160,418)
Other current assets 198,372 (9,276)
Refundable income taxes -- 876,220
Accounts payable (2,308,380) 2,234,678
Accrued expenses (877,045) 630,455
Income taxes payable 318,353 1,130,984
Customer advance payments (407,536) 631,339
Other liabilities 163,169 9,632
Postretirement benefit obligation (264,603) 8,039
------------- -------------
Net cash provided by operating activities
from continuing operations 4,624,412 10,805,122
Net cash used in operating activities from
discontinued operations -- (405,018)
------------- -------------
Net cash provided by operating activities 4,624,412 10,400,104
------------- -------------
Cash flows from investing activities:
Capital expenditures (8,258,546) (2,651,864)
Proceeds from sale of securities available for sale 2,746,130 --
Proceeds from sale of equipment 160,000 3,497,850
Maturities of marketable debt securities 89,422,942 167,816,623
Purchase of marketable debt securities (80,225,097) (151,545,000)
------------- -------------
Net cash provided by investing activities
from continuing operations 3,845,429 17,117,609
Net cash provided by investing activities from
discontinued operations -- 1,493,378
------------- -------------
Net cash provided by investing activities 3,845,429 18,610,987
------------- -------------
Cash flows from financing activities:
Stock options exercised 180,771 1,497,527
Purchase of treasury stock (20,900,147) (19,964,325)
------------- -------------
Net cash used in financing activities (20,719,376) (18,466,798)
------------- -------------
Effect of exchange rates (2,151) 55,570
Net increase (decrease) in cash and cash equivalents (12,251,686) 10,599,863
Cash and cash equivalents at beginning of period 23,303,263 11,062,662
------------- -------------
Cash and cash equivalents at end of period $ 11,051,577 $ 21,662,525
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period For:
Interest $ 21,785 $ 7,519
============= =============
Income taxes $ 742,036 $ 127,859
============= =============
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 nine months ended March 31,
2005 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
nine months ended March 31, 2005 and 2004 are based on estimates of income and
utilization of tax credits for the entire year.
NOTE 1: Intangible Assets
INTANGIBLE ASSETS:
Intangible assets as of March 31, 2005 and June 30, 2004 are as follows:
March 31 June 30
---------------------------------- ----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Patent $ 574,966 $ 413,257 $ 574,966 $ 359,354
Customer Base 1,350,000 806,250 1,350,000 637,500
Trade Name 320,000 320,000 320,000 302,226
Non-Competition Agreements 180,000 129,000 180,000 102,000
Favorable Lease 600,000 600,000 600,000 380,000
---------- ---------- ---------- ----------
Total $3,024,966 $2,268,507 $3,024,966 $1,781,080
========== ========== ========== ==========
Intangible asset amortization expense for the nine month period ended March 31,
2005 and 2004 aggregated $487,427 and $374,653, respectively. Included in the
amortization expense for the nine months ended March 31, 2005 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 Nine Months Ended
----------------------------------- -----------------------------------
March 31 March 31 March 31 March 31
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income, as reported $ 1,860,530 $ 2,260,906 $ 4,822,578 $ 5,300,758
Fair value-based stock based
Compensation cost, net of tax 1,862,920 2,317,672 5,588,760 6,711,336
------------- ------------- ------------- -------------
Pro forma net loss $ (2,390) $ (56,766) $ (766,182) $ (1,410,578)
============= ============= ============= =============
Net income (loss) per share:
Basic $ 0.10 $ 0.11 $ 0.24 $ 0.25
Diluted $ 0.09 $ 0.10 $ 0.24 $ 0.24
Pro forma net loss per share:
Pro forma basic $ 0.00 $ 0.00 $ (0.04) $ (0.07)
Pro forma diluted $ 0.00 $ 0.00 $ (0.04) $ (0.06)
NOTE 3: Securities
The amortized cost and fair value of securities are as follows:
March 31, 2005
--------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- --------------- ----------- -----------
Securities held to maturity:
Municipal bonds $38,025,106 $ -- $ (276,539) $37,748,567
Commercial paper 3,038,994 -- -- 3,038,994
Corporate bonds 11,755,671 -- (69,625) 11,686,046
Zero coupon bonds 4,592,496 -- (19,102) 4,573,394
Federal agency bonds 4,279,883 -- (38,911) 4,240,972
Tax free auction securities 23,300,000 -- -- 23,300,000
----------- --------------- ----------- -----------
Total securities held to maturity $84,992,150 $ -- $ (404,177) $84,587,973
=========== =============== =========== ===========
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:
March 31, 2005 June 30, 2004
-------------- -------------
Marketable debt securities - held-to-maturity $84,992,150 $94,189,991
Marketable equity securities - available for sale -- 2,961,710
----------- -----------
Total 84,992,150 97,151,701
Current portion 61,451,299 62,038,633
----------- -----------
Long term $23,540,851 $35,113,068
=========== ===========
Contractual maturities of marketable debt securities held to maturity at March
31, 2005 are summarized as follows:
March 31, 2005 June 30, 2004
-------------- -------------
Fair Fair
Market Market
Cost Value Cost Value
----------- ----------- ----------- -----------
Within one year $61,451,299 $61,287,242 $59,076,923 $59,127,824
One year to five years 23,540,851 23,300,731 35,113,068 34,879,788
----------- ----------- ----------- -----------
Total $84,992,150 $84,587,973 $94,189,991 $94,007,612
=========== =========== =========== ===========
NOTE 4: Inventories
Inventories are summarized as follows:
March 31, 2005 June 30, 2004
-------------- -------------
Component parts $ 10,303,219 $ 9,136,401
Work in process 8,342,524 6,138,068
Finished goods 2,567,753 2,349,585
------------ ------------
$ 21,213,496 $ 17,624,054
Reserve for obsolescence (1,493,509) (1,015,999)
------------ ------------
Net inventory $ 19,719,987 $ 16,608,055
============ ============
9
NOTE 5: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
March 31, 2005 June 30, 2004
-------------- ------------
Land and land improvements $ 2,207,823 $ 1,874,323
Buildings, furniture and fixtures 17,111,898 13,200,633
Machinery and equipment 50,934,729 48,213,982
------------ ------------
$ 70,254,450 $ 63,288,938
Less accumulated depreciation
and amortization (44,829,543) (41,946,384)
------------ ------------
$ 25,424,907 $ 21,342,554
============ ============
NOTE 6: Accrued Expenses
Accrued expenses consist of the following:
March 31, 2005 June 30, 2004
-------------- -------------
Compensation $1,122,771 $1,698,411
Commissions 651,661 386,075
Health insurance 339,517 371,010
Restructuring (note 7) 29,863 32,870
Lease buyout -- 350,000
Other 71,513 254,004
---------- ----------
$2,215,325 $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 March 31,
2004 Expenditures Write-offs 2005
-------- ------------ ---------- ---------
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
March 31, 2005:
Balance Nine months ended March 31, 2005 Balance
June 30, Costs Cash March 31,
2004 Incurred Expenditures 2005
--------- --------- --------- ---------
Severance payments $ -- $ 391,575 $(361,712) $ 29,863
Outplacement services -- 66,760 (66,760) --
--------- --------- --------- ---------
$ -- $ 458,335 $(428,472) $ 29,863
========= ========= ========= =========
NOTE 8: Other Liabilities
Other liabilities consist of the following:
March 31, 2005 June 30, 2004
-------------- -------------
Deferred compensation $614,095 $506,190
Other 286,048 230,784
-------- --------
900,143 736,974
Less current portion 351,048 295,784
-------- --------
$549,095 $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 nine months ended March 31 are as
follows:
Three Months Ended Nine Months Ended
------------------------- -------------------------
March 31 March 31
2005 2004 2005 2004
------- ----------- ------- -----------
Net sales $ -- $ -- $ -- $ 675,340
Income (Expenses) -- 38,579 -- (1,402,870)
Loss on sale of equipment -- -- -- (782,289)
------- ----------- ------- -----------
Net loss from discontinued operations $ -- $ 38,579 $ -- $(1,509,819)
======= =========== ======= ===========
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 March 31, 2005 and 2004,
respectively. The treasury stock method is used to calculate dilutive shares,
which reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised.
The following table sets forth the computation of basic and fully diluted
earnings per share:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 31 March 31
Numerator: 2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income from continuing operations $ 1,860,530 $ 2,260,906 $ 4,822,578 $ 5,300,758
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 19,336,007 20,565,218 19,689,024 21,150,784
=========== =========== =========== ===========
Denominator for diluted earnings
per share:
Weighted average shares outstanding 19,336,007 20,565,218 19,689,024 21,150,784
Common stock options
and restricted stock 465,535 991,733 528,718 783,786
----------- ----------- ----------- -----------
Weighted average shares and conversions 19,801,542 21,556,951 20,217,742 21,934,570
=========== =========== =========== ===========
NOTE 11: Components of Net Period Benefit Costs
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 31 March 31
2005 2004 2005 2004
--------- --------- --------- ---------
Service cost $ 61,825 $ 65,712 $ 185,475 $ 197,136
Interest cost 141,090 135,206 423,270 405,618
Expected return on plan assets (156,687) (134,113) (470,060) (402,339)
Amortization of prior service cost 2,623 4,560 7,868 13,680
Amortization of the net (gain) loss 12,414 27,066 37,242 81,198
--------- --------- --------- ---------
Net periodic benefit cost $ 61,265 $ 98,431 $ 183,795 $ 295,293
========= ========= ========= =========
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:
March 31, 2005 $ 14,155,895 7,627,523 -- $ 21,783,418
March 31, 2004 $ 15,505,871 6,881,351 -- $ 22,387,222
Nine months ended:
March 31, 2005 $ 47,930,254 22,410,543 -- $ 70,340,797
March 31, 2004 $ 40,026,192 20,225,633 -- $ 60,251,825
Operating income (loss):
Three months ended:
March 31, 2005 482,772 1,264,735 -- 1,747,507
March 31, 2004 1,908,628 828,170 -- 2,736,798
Nine months ended:
March 31, 2005 394,802 4,632,623 -- 5,027,426
March 31, 2004 2,757,935 3,054,924 -- 5,812,859
Goodwill and intangible assets:
March 31, 2005 31,472,320 -- -- 31,472,320
June 30, 2004 31,959,747 -- -- 31,959,747
Identifiable assets:*
March 31, 2005 18,685,707 14,256,484 124,215,650 157,157,841
June 30, 2004 19,681,543 10,884,864 144,956,334 175,522,741
Depreciation:**
Three months ended:
March 31, 2005 673,888 500,618 -- 1,174,506
March 31, 2004 532,393 538,805 -- 1,071,198
Nine months ended:
March 31, 2005 2,223,986 1,452,692 -- 3,676,678
March 31, 2004 1,591,128 1,479,603 -- 3,070,731
Intangibles amortization: ***
Three months ended:
March 31, 2005 83,217 -- -- 83,217
March 31, 2004 124,885 -- -- 124,885
Nine months ended:
March 31, 2005 487,427 -- -- 487,427
March 31, 2004 374,653 -- -- 374,653
* 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 March 31, 2005 and June 30, 2004, and the consolidated results of
operations and cash flows of the Company for the three months and nine months
ended March 31, 2005 and 2004.
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 began
introducing 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 nine months ended March
31, 2005 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 had
16
determined that it no longer had 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 is operating 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. The consolidated company, Anaren
Ceramics, Inc., operates 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
consolidation costs of $458,335 for severance and outplacement, $91,000 for
lease cancellation and $300,000 for additional inventory write-downs during the
second quarter. Additionally, the Company incurred further consolidation costs
totaling approximately $397,000, including equipment write-downs of $272,000, 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.
Fourth 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 fourth quarter of
fiscal 2005 to range between $20.0 and $22.0 million and net income per diluted
share to range between $0.08 and $0.10.
Results of Operations
Net sales from continuing operations for the third quarter ended March 31, 2005
were $21,783,000, down 3% from sales of $22,387,000 for the third quarter of
last fiscal year and down $1,867,000, or 7.9% from sales of $23,650,000 for the
second quarter of fiscal 2005. Operating income for the third quarter of fiscal
2005 was $1,748,000 or 8.0% of sales, down $989,000 from $2,737,000 for the
third quarter of fiscal 2004.
Income from continuing operations for the third quarter of fiscal 2005 was
$1,861,000, down $361,000, or 16.2% from income from continuing operations of
$2,222,000 for the third quarter 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 Nine Months Ended
Mar. 31, 2005 Mar. 31, 2004 Mar. 31, 2005 Mar. 31, 2004
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 67.2% 64.7% 69.0% 66.0%
----- ----- ----- -----
Gross profit 32.8% 35.3% 31.0% 34.0%
----- ----- ----- -----
Operating expenses:
Marketing 6.9% 7.7% 7.3% 8.3%
Research and development 7.5% 6.2% 6.6% 6.5%
General and administrative 10.4% 9.2% 9.3% 9.6%
Restructuring 0.0% 0.0% 0.7% 0.0%
----- ----- ----- -----
Total operating expenses 24.8% 23.1% 23.9% 24.4%
----- ----- ----- -----
Operating income 8.0% 12.2% 7.1% 9.6%
----- ----- ----- -----
Other income (expense):
Other, primarily interest income 2.5% 1.6% 1.6% 2.0%
Interest expense 0.0% 0.0% 0.0% 0.0%
----- ----- ----- -----
Total other income (expense), net 2.5% 1.6% 1.6% 2.0%
----- ----- ----- -----
Income from continuing operations
before income taxes 10.5% 13.8% 8.7% 11.6%
Income taxes 2.0% 3.9% 1.8% 3.3%
----- ----- ----- -----
Income from continuing operations 8.5% 9.9% 6.9% 8.3%
----- ----- ----- -----
Discontinued operations:
Income (loss) from discontinued
operations of Anaren Europe 0.0% 0.2% 0.0% (2.5%)
Income tax benefit 0.0% 0.0% 0.0% (3.0%)
----- ----- ----- -----
Net income (loss) from
discontinued operations 0.0% 0.2% 0.0% 0.5%
----- ----- ----- -----
Net income 8.5% 10.1% 6.9% 8.8%
===== ===== ===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Nine Months Ended
-------------------- --------------------
March 31 March 31
-------------------- --------------------
2005 2004 2005 2004
------- ------- ------- -------
Wireless $14,156 $15,506 $47,930 $40,026
Space and Defense 7,628 6,881 22,411 20,226
------- ------- ------- -------
Total $21,784 $22,387 $70,341 $60,252
======= ======= ======= =======
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 third quarter and first nine months have been classified as
discontinued operations in the statements of earnings filed as part of this
Quarterly Report on form 10-Q.
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Net sales. Net sales decreased $603,000, or 2.7%, to $21.8 million for the third
quarter ended March 31, 2005 compared to $22.4 million for the third quarter of
fiscal 2004. This decline resulted from a $1.4 million drop in shipments of
Wireless infrastructure products in the current third quarter, which was
partially off-set by a $747,000 increase in sales of Space and Defense products.
The decrease in sales of Wireless products, which consist of standard
components, ferrite components and custom subassemblies for use in building
Wireless basestation equipment, was a result of a decline in customer demand
during the third quarter for standard Wireless components compared to the third
quarter of last year.
Wireless product sales fell $1.4 million, or 8.7%, in the third quarter of
fiscal 2005 compared to the same quarter last year, due to a $1.5 million, or
13.5% decline in shipments of standard Wireless components. Revitalized demand
for and sales of standard Wireless components peaked in the third and fourth
quarters of fiscal 2004 and has fallen back to current levels in fiscal 2005.
The Company feels that these sales levels for standard Wireless components
should continue for the remainder of the current fiscal year.
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 $747,000, or 10.9% in the
third quarter of fiscal 2005 compared to the third quarter of last year. This
increase consisted of a $2.5 million rise in shipments of defense products,
which was partially offset by a $1.8 million decline in sales of Space products.
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 third quarter of fiscal 2005 was
$7.2 million (32.8% of net sales), down $761,000 from $7.9 million (35.3% of net
sales) for the same quarter of the prior year.
The decline in gross margin in both absolute dollars and as a percent of sales
resulted from the 3% decline in sales volume in the third quarter of fiscal 2005
compared to the third quarter of fiscal 2004 and a continuing shift in Wireless
product mix. While not as severe as the first six months of fiscal 2005,
Wireless product sales in the third quarter of fiscal 2005 continued to show a
shift in sales mix from higher margin standard Wireless components to lower
margin custom Wireless products compared to the third quarter of last year.
Marketing. Marketing expenses consist mainly of employee related expenses,
commissions paid to sales representatives, trade show expenses, advertising
expenses and related travel expenses.
19
Marketing expenses were $1.5 million (6.9% of net sales) for the third quarter
of fiscal 2005, down 11.7% from $1.7 million (7.7% of net sales) for the third
quarter of fiscal 2004. This decrease resulted from cost saving realized through
the merging of the RF Power and Amitron operations into Anaren Ceramics during
December 2004, as well as lower commission expense due to lower sales volume and
a decline in expected advertising expenditures in the current third quarter
compared to the third quarter of last 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 $1.6 million
(7.5% of net sales) in the third quarter of fiscal 2005, up 17.3% from $1.4
million (6.2% of net sales) for the third 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 third quarter of fiscal 2005 over
third quarter fiscal 2004 levels due to the higher level of opportunities in the
marketplace which the Company has responded to by adding new product development
engineering personnel over the last nine months. 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 Defense and Wireless products.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, intangible amortization,
travel related expenses and other corporate costs. General and administrative
expenses increased 9.0% to $2.3 million (10.4% of net sales) for the third
quarter of fiscal 2005 from $2.1 million (9.2% of net sales) for the third
quarter of fiscal 2004. This increase resulted from further consolidation
charges of $397,000 in the current quarter, including a charge of $272,000 to
write-down certain RF Power custom automated equipment and escalating
administrative costs associated with complying with Sarbanes-Oxley 404
regulations. This increase was partially offset by quarterly cost savings
realized from the merging of the Company's RF Power and Amitron operations into
Anaren Ceramics in December 2004.
Operating Income. Operating income declined in the third quarter of fiscal 2005
to $1.7 million (8.0% of sales) from $2.7 million (12.2% of net sales) for the
third quarter of fiscal 2004. On a reporting segment basis, Wireless operating
income was $483,000 for the third quarter of fiscal 2005, compared to operating
income of $1.9 million for the third quarter of fiscal 2004. Wireless operating
income fell in the third quarter of fiscal 2005 compared to the third quarter of
fiscal 2004 due to the overall $1.4 million decline in Wireless sales and the
continuing decline in sales levels of standard Wireless components. Higher
margin standard Wireless components sales fell $1.5 million in the current third
quarter compared to the third quarter last year, negatively impacting Wireless
gross and operating margins. Additionally, Wireless operating income was further
depressed by $397,000 of Anaren Ceramics consolidation charges in the current
quarter.
Space and Defense operating income rose $437,000 in the third quarter of fiscal
2005 to $1.3 million compared to $828,000 in the third quarter of fiscal 2004.
This increase resulted from higher sales volume in the current third quarter of
fiscal 2005 compared to last year and better production efficiencies in the
Space and Defense group.
20
Interest Expense. Interest expense represents interest paid on a deferred
obligation. Interest expense for the third quarter of fiscal 2005 was $6,000
compared to $3,000 for the third 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 increased 52% to $558,000 (2.5% of net
sales) for the quarter ended March 31, 2005 from $368,000 (1.6% of net sales)
for the same quarter last year. This increase was caused by the significant
increase in market interest rates over the last twelve months and the addition
of $66,000 in quarterly rental income from the Company's new Salem, N.H.
property. Other income will fluctuate based on market interest rates and the
level of investable cash balances.
Income Taxes. Income taxes for the third quarter of fiscal 2005 were $439,000
(2.0% of net sales), representing an effective tax rate of 19.4%. This compares
to income tax expense of $879,000 (3.9% of net sales) for the third quarter of
fiscal 2004, representing an effective tax rate of 28.3%. 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 Company is experiencing a lower
effective tax rate in fiscal 2005 compared to 2004 due to increased foreign
sales which are generating higher tax credits in the current fiscal year.
Nine Months Ended March 31, 2005 Compared to Nine Months Ended March 31, 2004.
Net Sales. Net sales increased $10.1 million or 16.7% to $70.3 million for the
nine months ended March 31, 2005 compared to $60.3 million for the first nine
months of last fiscal year. This increase resulted from a $7.9 million rise in
Wireless infrastructure component and subassembly sales and $2.2 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 beginning in the second half of fiscal 2004,
and was further bolstered by shipments to Nokia under a new custom subassembly
contract. Wireless product sales rose $7.9 million, or 19.7%, in the nine months
of fiscal 2005 compared to the first nine months of last year, due to a $6.5
million increase in shipments of custom subassembly products, which included
$8.2 million in shipments to Nokia under a new production contract.
Additionally, shipments of standard Wireless components rose $1.4 million during
the first nine months, with a large increase in the first quarter of fiscal 2005
which was subsequently offset by declines in the second and third quarters
related to the softening in market demand for these products beginning in
September 2004. Current market demand for standard components and custom
subassemblies is expected to remain at current third quarter levels for the
fourth quarter of fiscal 2005.
Sales of Space and Defense products rose $2.2 million, or 10.8% in the first
nine months of fiscal 2005 compared to the first three quarters of the previous
fiscal year. This increase consisted of a $5.5 million rise in sales of defense
products, which was partially off-set by a $3.3 million decline in Space product
shipments during 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 and 2005, which is now
starting to enter production. Defense product bookings in fiscal 2004 were $37.7
million and in fiscal 2005 have amounted to $28.2 million through March 31st.
Gross Profit. Gross profit in the first nine months of fiscal 2005 was $21.8
million (31.0% of net sales), up $1.3 million from $20.5 million (34.0% of net
sales) for the first nine months of the
21
prior year. The $1.3 million rise in gross profit resulted from the 16.7%
increase in sales volume in the first nine months of fiscal 2005, compared to
the same period in fiscal 2004. Gross margin as a percent of sales declined 3.0
percentage points due to a change in sales mix from higher margin standard
Wireless component products to lower margin custom Wireless products in the
first nine months of fiscal 2005, compared to the first nine months 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 in the second quarter of fiscal 2005.
Marketing. Marketing expenses increased 3.4% to $5.2 million (7.3% of net sales)
for the first nine months of fiscal 2005 from $5.0 million (8.3% of net sales)
for the first nine months 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 $4.7 million (6.6% of net sales) in the
first nine months of fiscal 2005, up 18.1% from $3.9 million (6.5% of net sales)
for the first nine months 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 nine months 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 Defense and Wireless products.
General and Administrative. General and administrative expenses increased 12.6%
to $6.5 million (9.3% of net sales) for the first nine months of fiscal 2005
from $5.8 million (9.6% of net sales) for the first nine months 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, moving both operations to Salem,
NH, writing-off certain Amitron lease intangibles and RF Power fixed assets, and
rising administrative costs related to Sarbanes-Oxley 404 regulation compliance.
Restructuring. Restructuring costs which consisted of wages, health insurance,
payroll taxes and outplacement costs were $458,000 in the first nine 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 in December 2004.
Operating Income. Operating income decreased in the first nine months of fiscal
2005 to $5.0 million (7.1% of net sales) from $5.8 million (9.6% of net sales)
for the first nine months of fiscal 2004. On a reporting segment basis, Wireless
operating income was $395,000 for the first nine months of fiscal 2005, a
decline of $1.5 million from Wireless operating income of $1.9 million for the
first nine months of last fiscal year.
Wireless operating income fell in the first nine months of fiscal 2005 compared
to the same period in fiscal 2004 due to the $1.2 million of consolidation
charges related to the facility closure and move of the RF Power operation to
Salem, NH, and the additional $250,000 first quarter accelerated write-off of
certain Amitron lease intangibles. Additionally, sales of higher margin standard
Wireless components fell $1.5 million in the first nine months of fiscal 2005
compared to fiscal 2004, further negatively impacting Wireless operating
margins.
22
Space and Defense operating income rose $1.5 million in the first nine months of
fiscal 2005 to $4.6 million compared to $3.1 million in the first nine months 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 in the current fiscal year.
Other Income. Other income decreased 10% to $1.1 million (1.6% of net sales) for
the nine months ended March 31, 2005 from $1.2 million (2.0% 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 $24.0
million over the nine months due to the purchase of the Salem, NH facility for
$5.0 million and $20.9 million used to repurchase treasury shares. The decrease
in other income caused by the loss on Celeritek stock and sale of equipment was
partially offset by higher interest rates resulting in an increase in interest
income of approximately $115,000 in the first nine months of fiscal 2005
compared to the same period in fiscal 2004. Interest income will fluctuate based
on interest rates and the level of investable cash balances.
Interest Expense. The Company does not have any long term debt and interest
expense represents interest paid on a deferred obligation. Interest expense for
the first nine months of fiscal 2005 was $22,000 (0.0% of net sales) compared to
$8,000 (0.0% of net sales) for the first nine months of fiscal 2004.
Income Taxes. Income taxes for the first nine months of fiscal 2005 were $1.3
million (1.8% of net sales), representing an effective tax rate of 20.9%. This
compares to tax expense of $2.0 million (3.3% of net sales) for the first nine
months of fiscal 2004, representing an effective tax rate of 28.6%. The
Company's effective tax rate is a direct result of the proportion of federally
exempt state municipal bond income and federal tax credits and benefits in
relation to the levels of taxable income or loss. The decrease in the effective
tax rate in fiscal 2005 compared to fiscal 2004 resulted from higher estimated
foreign sales benefits due to a rise in expected foreign export sales levels
this year.
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 nine 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 nine months ended March 31, 2005 was
$4.6 million. The positive cash flow from operations was due primarily to income
before depreciation and amortization for the period coupled with a $1.1 million
decline in trade and other receivables which off-set a $3.1 million increase in
inventory and a $3.1 million pay down of current liabilities. Net cash provided
by operations in the first nine months of fiscal 2004 was $10.4 million and was
due primarily to the income before depreciation and amortization in that period
and a $3.8 million rise in current liabilities which was partially offset by a
$4.5 million increase in trade and interest receivables.
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 $8.3 million and $2.7 million in the first nine months
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 $9.2
million was generated by the net maturities of marketable securities. In fiscal
2004, $16.3 million was produced by the maturity of marketable securities, $3.5
million was generated by a return of capital dividend on the Company's
investment in Celeritek common stock, and $1.5 million was generated by
discontinued operations in Europe through the auction sale of capital equipment.
Net cash used in financing activities in the first nine months of fiscal 2005
and 2004 was $20.7 million and $18.6, respectively. The Company used $20.9
million in the first nine months of fiscal 2005 to purchase 1,701,532 treasury
shares and received $181,000 through the exercise of stock options. Cash used in
the first nine months of fiscal 2004 to purchase 1,437,100 treasury shares was
$20.0 million, and cash generated by the exercise of stock options was $1.5
million.
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 $8.3
million made in the first nine months, are expected to total between $8.5 and
$9.0 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 privately negotiated transactions under the current
Board authorization, depending on market conditions. At June 30, 2004 there were
927,496 shares remaining under the then current Board repurchase authorization.
On August 10, 2004, the Board increased its repurchase authorization by $2.0
million shares, and for the period July 1, 2004 through March 31, 2005, the
Company repurchased an additional 1,701,532 shares, leaving 1,225,964 under the
current authorization at March 31, 2005.
At March 31, 2005, the Company had approximately $96.0 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 at March 31, 2005 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 $4,552,963 $536,816 $1,073,633 $980,838 $1,961,676
Deferred compensation 408,287 65,000 130,000 130,000 83,287
Recent Accounting Pronouncements
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.
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,
26
in the income statement and is effective for awards that are granted, modified,
or settled in cash in 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 the Company or that are currently
deemed immaterial may also impair our business operations. If any of the
following risks actually occur, the Company's business could be adversely
affected, and the trading price of the 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 potential inability to timely ramp up to meet some of
its customers' increased demands; unanticipated delays and/or difficulties
associated with effectively operating the Company's recently consolidated Anaren
Ceramics subsidiary; unanticipated loss of engineering and other technical
resources; increased pricing pressure from customers; decreased capital
expenditures by wireless service providers; the possibility that the Company may
have difficulties in successfully executing its business strategies or achieving
its operating objectives, generating revenue growth or achieving profitability
expectations; lack of success in securing new design wins from 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 Annual Report on 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.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Quarterly Report on Form 10-Q.
As of March 31, 2005, the Company had cash, cash equivalents and marketable
securities of $96.0 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 March 31, 2005 rates, or 0.225%,
would have reduced net income and cash flow by approximately $51,000, or $0.003
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 by 2,000,000 the number of
shares that the Company was authorized to repurchase in open market or by
privately negotiated transactions through its previously announced stock
repurchase program. 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. At March 31, 2005, 1,225,964 shares remained
authorized for purchase.
28
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
January 2005 -- -- -- 1,959,301
- ---------------------------------------------------------------------------------------------------------------------
February 2005 399,637 12.61 399,637 1,559,664
- ---------------------------------------------------------------------------------------------------------------------
March 2005 333,700 12.70 333,700 1,225,964
- ---------------------------------------------------------------------------------------------------------------------
Total 733,337 -- 733,337 --
- ---------------------------------------------------------------------------------------------------------------------
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: May 9, 2005 /s/Lawrence A. Sala
---------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: May 9, 2005 /s/Joseph E. Porcello
---------------------------------------
Joseph E. Porcello
Vice President of Finance and Treasurer
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