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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 DECEMBER 31, 2003
or
( ) 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 1-9125
-----------------------------
AMERICAN TECHNICAL CERAMICS CORP.
---------------------------------
(Exact Name of Company as Specified in Its Charter)
DELAWARE 11-2113382
- -------------------------------------------------------------- ------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
17 STEPAR PLACE, HUNTINGTON STATION, NY 11746
--------------------------------------- ------
(Address of Principal Executive Offices) (Zip Code)
(631) 622-4700
(Telephone Number, Including Area Code)
Indicate by check mark whether the Company (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 Company 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 Company is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
As of February 2, 2004, the Company had outstanding 8,133,268 shares of Common
Stock, par value $0.01 per share.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
DEC. 31, 2003 JUNE 30, 2003
--------------- -------------
(unaudited)
ASSETS
Current assets
Cash (including cash equivalents of $999 and $996, respectively) $ 7,654 $ 8,685
Investments 3,003 3,011
Accounts receivable, net 6,748 6,721
Inventories 15,719 15,144
Deferred income taxes, net 1,989 1,989
Other current assets 1,404 940
-------- --------
TOTAL CURRENT ASSETS 36,517 36,490
-------- --------
Property, plant and equipment, net of accumulated depreciation
and amortization of $39,604 and $37,213, respectively 25,856 27,021
Other assets, net 39 37
-------- --------
TOTAL ASSETS $ 62,412 $ 63,548
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term related party debt $ 374 $ 355
Accounts payable 883 1,025
Accrued expenses 3,396 2,843
Income taxes payable 293 782
-------- --------
TOTAL CURRENT LIABILITIES 4,946 5,005
Long-term related party debt, net of current portion 3,098 3,290
Deferred income taxes 3,299 3,300
-------- --------
TOTAL LIABILITIES 11,343 11,595
-------- --------
Commitments and Contingencies
Stockholders' Equity
Common Stock -- $0.01 par value; authorized 20,000 shares; issued 8,540
and 8,503 shares, outstanding 8,126 and 8,089 shares, respectively 85 85
Capital in excess of par value 11,674 11,418
Retained earnings 40,441 41,670
Accumulated other comprehensive income/(loss):
Unrealized loss on investments available-for-sale, net (2) --
Cumulative foreign currency translation adjustment 330 176
-------- --------
328 176
-------- --------
Less: Treasury stock, at cost (414 and 414 shares, respectively) 1,396 1,396
Deferred compensation 63 --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 51,069 51,953
-------- --------
$ 62,412 $ 63,548
======== ========
See accompanying notes to unaudited consolidated financial statements.
2
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Three Months Ended Dec. 31, For the Six Months Ended Dec. 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 13,516 $ 11,561 $ 26,065 $ 24,048
Cost of sales 9,873 8,132 19,546 16,533
-------- -------- -------- --------
Gross profit 3,643 3,429 6,519 7,515
-------- -------- -------- --------
Selling, general and administrative expenses 3,445 2,813 6,654 5,775
Research and development expenses 742 664 1,452 1,333
Other (63) 342 (67) 291
-------- -------- -------- --------
Operating expenses 4,124 3,819 8,039 7,399
-------- -------- -------- --------
-------- -------- -------- --------
(Loss)/ income from operations (481) (390) (1,520) 116
-------- -------- -------- --------
Other (income) expense:
Interest expense 92 104 187 164
Interest income (23) (21) (45) (58)
Other 2 -- 2 --
-------- -------- -------- --------
71 83 144 106
-------- -------- -------- --------
(Loss)/ income before provision for income taxes (552) (473) (1,664) 10
(Benefit from)/ provision for income taxes (106) (143) (435) 2
-------- -------- -------- --------
Net (loss)/ income $ (446) $ (330) $ (1,229) $ 8
======== ======== ======== ========
Basic net (loss)/ income per common share $ (0.05) $ (0.04) $ (0.15) $ 0.00
======== ======== ======== ========
Diluted net (loss)/ income per common share $ (0.05) $ (0.04) $ (0.15) $ 0.00
======== ======== ======== ========
Basic weighted average common shares outstanding 8,116 8,073 8,106 8,072
======== ======== ======== ========
Diluted weighted average common shares outstanding 8,116 8,073 8,106 8,224
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31,
2003 2002
-------------- -------------
(In thousands)
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $(1,229) $ 8
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities:
Depreciation and amortization 2,529 2,663
Loss on disposal of fixed assets 69 391
Stock award compensation expense 96 8
Changes in operating assets and liabilities:
Accounts receivable (27) 695
Inventories (575) 359
Other assets (476) (226)
Accounts payable and accrued expenses 411 16
Income taxes payable (474) --
------- -------
Net cash provided by operating activities 324 3,914
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,444) (674)
Purchase of investments (1,986) (993)
Proceeds from sale of investments 2,000 1,000
Proceeds from sale of fixed assets 22 --
------- -------
Net cash used in investing activities (1,408) (667)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (173) (4,229)
Proceeds from the exercise of stock options 83 13
------- -------
Net cash used in financing activities (90) (4,216)
------- -------
------- -------
Effect of exchange rate changes on cash 143 92
------- -------
Net decrease in cash and cash equivalents (1,031) (877)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,685 7,129
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,654 $ 6,252
======= =======
Supplemental cash flow information:
Interest paid $ 187 $ 201
Taxes paid $ 39 $ --
See accompanying notes to unaudited consolidated financial statements.
4
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of
American Technical Ceramics Corp. and subsidiaries (the "Company") reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, necessary for a fair presentation of its consolidated financial
position as of December 31, 2003, and the results of its operations for the
three and six month periods ended December 31, 2003 and 2002. These consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2003. Results for the three and six month periods ended December 31,
2003 are not necessarily indicative of results which could be expected for the
entire year.
(2) IMPACT OF NEW ACCOUNTING STANDARDS:
In January 2004, the Company adopted the Financial Accounting Standards
Board Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN
No. 46). Previously, consolidation of variable interest entities was largely
based on controlling voting rights. This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to entities where the Company is vulnerable to a majority of the
entity's risk of loss or is entitled to receive a majority of the entity's
residual returns even if there is no controlling voting interest. The adoption
of FIN No. 46 did not have any impact on the Company's consolidated results of
operations or financial position.
(3) SUPPLEMENTAL CASH FLOW INFORMATION:
During the six months ended December 31, 2003, the Company (i) granted
deferred compensation stock awards with an aggregate value of $41 with respect
to which expense shall be recognized ratably throughout fiscal year 2004 (as of
December 31, 2003, $20 has been recognized as compensation expense), (ii)
granted stock options with respect to which compensation expense of $46 will be
recognized evenly over the next five years (as of December 31, 2003, $4 has been
recognized as compensation expense), (iii) recognized $116 in compensation
expense (including $44 relating to bonuses granted to defray taxes) in
connection with the grant of stock awards totaling 12 shares of common stock,
and (iv) recognized a $15 reduction of income taxes payable related to stock
options exercised.
(4) INVENTORIES:
Inventories included in the accompanying consolidated financial
statements consist of the following:
December 31, June 30,
2003 2003
------------ -----------
(unaudited)
Raw materials $ 7,642 $ 7,055
Work-in-process 4,540 4,361
Finished goods 3,537 3,728
----------- -----------
$ 15,719 $ 15,144
=========== ===========
5
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(5) EARNINGS PER SHARE:
The following represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computation.
For the Three Months Ended December 31,
2003 2002
---- ----
Net Loss Shares Per-Share Net Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- --------- ------------- ----------
Basic EPS $ (446) 8,116 $ (0.05) $ (330) 8,073 $ (0.04)
=========== ==========
Effect of Dilutive Securities:
Stock options -- -- -- --
Deferred compensation
stock awards -- -- -- --
----------- ------------- ----------- --------- ------------- ----------
Diluted EPS $ (446) 8,116 $ (0.05) $ (330) 8,073 $ (0.04)
=========== ============= =========== ========= ============= ==========
Options covering 520 and 665 shares have been omitted from the
calculation of dilutive EPS for the three months ended December 31, 2003 and
2002, respectively, because their inclusion would have been antidilutive.
For the Six Months Ended December 31,
2003 2002
---- ----
Net Loss Shares Per-Share Net Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ----------- --------- ------------- ----------
Basic EPS $ (1,229) 8,106 $ (0.15) $ 8 8,072 $ 0.00
=========== ==========
Effect of Dilutive Securities:
Stock options -- -- -- 145
Deferred compensation
stock awards -- -- -- 7
----------- ------------- ----------- ---------- -------------- ----------
Diluted EPS $ (1,229) 8,106 $ (0.15) $ 8 8,224 $ 0.00
=========== ============= =========== ========== ============== ==========
Options covering 552 and 906 shares have been omitted from the
calculation of dilutive EPS for the six months ended December 31, 2003 and 2002,
respectively, because their inclusion would have been antidilutive.
6
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(6) COMPREHENSIVE LOSS:
The Company's comprehensive (loss)/income is as follows:
For the Three Months Ended
December 31,
2003 2002
---------------- ------------------
Net loss $ (446) $ (330)
---------------- ------------------
Other comprehensive income:
Foreign currency translation
adjustments 111 114
Unrealized losses on investments,
net of tax (1) (1)
---------------- ------------------
Other comprehensive income 110 113
---------------- ------------------
Comprehensive loss $ (336) $ (217)
================ ==================
For the Six Months Ended
December 31,
2003 2002
---------------- ------------------
Net (loss)/income $ (1,229) $ 8
---------------- ------------------
Other comprehensive income:
Foreign currency translation
adjustments 154 98
Unrealized losses on investments,
net of tax (2) --
---------------- ------------------
Other comprehensive income 152 98
---------------- ------------------
Comprehensive (loss)/income $ (1,077) $ 106
================ ==================
(7) INDEBTEDNESS:
The Company leases an administrative office, manufacturing and research
and development complex located in Jacksonville, Florida (the "Jacksonville
Facility") from a partnership controlled by the Company's President, Chief
Executive Officer and principal stockholder under a capital lease. At June 30,
2003, the Jacksonville Facility has an aggregate cost of $5,104 and a net book
value of $2,705. The lease is for a period of 30 years, was capitalized using an
interest rate of 10.5% and expires on September 30, 2010. The lease provides for
base rent of approximately $719 per annum. The lease further provides for annual
increases in base rent for years beginning after May 1, 1999, based on the
increase in the Consumer Price Index ("CPI") since May 1, 1998 applied to base
rent. The lease also provides for increases to the base rent in connection with
any new construction at the Jacksonville Facility. Under the lease, upon any new
construction being placed into use, the base rental is subject to increase to
the fair market rental of the Jacksonville Facility, including the new
construction. Effective October 1, 2003, the Company is obligated to pay
approximately $734 per annum under this lease. The payments due over the
remaining seven years of this capital lease, including the portion related to
interest, total approximately $4,956.
7
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(8) STOCK-BASED COMPENSATION:
On April 1, 1997, the Board of Directors approved the American
Technical Ceramics Corp. 1997 Stock Option Plan (the "1997 Option Plan")
pursuant to which the Company may grant options to purchase up to 800,000 shares
of the Company's common stock. On April 11, 2000, the Board of Directors
approved the American Technical Ceramics Corp. 2000 Incentive Stock Plan (the
"2000 Plan", and collectively with the 1997 Option Plan, the "Plans") pursuant
to which the Company may grant options or stock awards covering up to 1,200,000
shares of the Company's common stock. Each of the Plans is administered by the
Board of Directors or by a committee appointed by the Board. Options granted
under the Plans may be either incentive or non-qualified stock options. The term
of each incentive stock option shall not exceed ten years from the date of grant
(five years for grants to employees who own 10% or more of the voting power of
the Company's common stock). Options vest in accordance with a vesting schedule
established by the plan administrator (traditionally 25% per year during the
first four years of their term). Unless terminated earlier by the Board, the
1997 Option Plan will terminate on March 31, 2007, and the 2000 Plan will
terminate on April 10, 2010.
Disposition of shares acquired pursuant to the exercise of incentive
stock options under both Plans may not be made by the optionees within two years
following the date that the option is granted, nor within one year after the
exercise of the option, without the written consent of the Company. The Company
measures compensation cost for options granted prior to July 1, 2003 pursuant to
Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to
Employees ("Opinion No. 25"). The Company has not recognized compensation cost
for these options upon grant as the exercise price was equal to the fair market
value of the underlying stock at the date of grant.
Stock option activity for the three months ended December 31, 2003 and 2002
is as follows:
December 31, 2003 December 31, 2002
---------------------------------- --------------------------------
Weighted Weighted
Average Shares Average
Shares Subject Exercise Subject to Exercise
to Options Price Options Price
------------------ -------------- --------------- --------------
Outstanding, beginning of period 1,384,800 $ 6.63 1,395,050 $ 6.68
Granted --- -- -- --
Canceled (5,250) 8.89 (11,750) 7.35
Expired (8,850) 6.75 (3,750) 9.73
Exercised (17,750) 3.41 (4,500) 2.94
------------------ ---------------
Outstanding, end of period 1,352,950 $ 6.67 1,375,050 $ 6.69
================== ===============
8
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(8) STOCK-BASED COMPENSATION (CONTINUED):
Stock option activity for the six months ended December 31, 2003 and 2002 is as
follows:
December 31, 2003 December 31, 2002
---------------------------------- -------------------------------
Weighted Weighted
Average Shares Average
Shares Subject Exercise Subject to Exercise
to Options Price Options Price
------------------ -------------- --------------- --------------
Outstanding, beginning of period 1,381,200 $ 6.64 919,800 $ 8.98
Granted 13,000 5.85 479,000 2.35
Canceled (6,500) 9.87 (11,750) 7.35
Expired (9,350) 8.08 (7,500) 11.93
Exercised (25,400) 3.27 (4,500) 2.94
------------------ ---------------
Outstanding, end of period 1,352,950 $ 6.67 1,375,050 $ 6.69
================== ===============
In July 2003, the Company adopted Statement of Financial Accounting
Standard No. 123 ("SFAS No. 123"), using the prospective method as prescribed in
Statement of Financial Accounting Standard No. 148 ("SFAS No. 148"). The Company
applies SFAS No. 123 in accounting for employee stock-based compensation awarded
or granted after June 30, 2003, and applies Opinion No. 25 in accounting for
employee stock-based compensation awarded or granted prior to July 1, 2003, and
makes pro-forma disclosures of net income and net income per share as if the
fair value method under SFAS No. 123, as amended by SFAS No. 148, had been
applied. The Company has recorded $4 of compensation expense for options granted
after June 30, 2003. Had compensation expense with respect to options and awards
granted under the Plans been determined based on the fair value method on the
date of grant consistent with the methodology prescribed under SFAS No. 123
prior to July 1, 2003, the Company's net loss and loss per share would have
approximated the pro forma amounts indicated below:
Three Months Ended December 31,
--------------------------------------------
2003 2002
--------------------- -------------------
Net loss, as reported (446) (330)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 12 5
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (439) (353)
--------------------- -------------------
Pro forma loss (873) (678)
Loss per share:
Basic - as reported (0.05) (0.04)
Basic - pro forma (0.11) (0.08)
Diluted - as reported (0.05) (0.04)
Diluted - pro forma (0.11) (0.08)
9
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Six Months Ended December 31,
-----------------------------------------------
2003 2002
----------------------- --------------------
Net (loss)/income, as reported $ (1,229) $ 8
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 75 6
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (926) (755)
--------------------- --------------------
Pro forma loss $ (2,080) $ (741)
(Loss)/income per share:
Basic - as reported $ (0.15) $ 0.00
Basic - pro forma $ (0.26) $ (0.09)
Diluted - as reported $ (0.15) $ 0.00
Diluted - pro forma $ (0.26) $ (0.09)
The weighted-average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes option pricing
model and is amortized over an expected grant life of five years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In thousands, except per share data)
The following discussion and analysis should be read in conjunction
with the consolidated financial statements, related notes and other information
included in this Quarterly Report on Form 10-Q.
Statements in this Quarterly Report on Form 10-Q that are not
historical fact may constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All such
forward-looking statements are subject to risks and uncertainties, including,
but not limited to, market and economic conditions, the impact of competitive
products, product demand and market acceptance risks, changes in product mix,
costs and availability of raw materials, fluctuations in operating results,
delays in development of highly complex products, risks associated with
international sales and sales to the U.S. military, risk of customer contract or
sales order cancellations and other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission, including,
without limitation, those contained under the caption "Item 1. BUSINESS -
CAUTIONARY STATEMENTS REGARDING FORWARD - LOOKING STATEMENTS" in the Company's
Annual Report on Form 10-K. These risks could cause the Company's actual results
for future periods to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Any
forward-looking statement represents the Company's expectations or forecasts
only as of the date it was made and should not be relied upon as representing
its expectations or forecasts as of any subsequent date. The Company undertakes
no obligation to correct or update any forward-looking statement, whether as a
result of new information, future events or otherwise, even if its expectations
or forecasts change.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Overview
Three years ago, the electronics components industry experienced a
sharp downturn. As a result, the Company's average quarterly sales dropped
approximately 40% and have remained at this reduced level for the past two and a
half years. The decline was driven primarily by weakness in the wireless
infrastructure and semiconductor equipment markets which are important markets
for the Company's products.
There has been a trend of increasing bookings from the semiconductor
equipment market over the past nine months and from the wireless infrastructure
market over the past three months. Customers in these markets indicate that the
higher level of activity is expected to continue through the end of the current
fiscal year.
For the past three years, bookings have not been a useful indicator of
future business as customers had been placing orders with very short lead times.
The number of orders placed and shipped in the same month typically exceeded 40%
during this period. Recently, the Company has received some orders with longer
lead times. However, the ability to deliver product rapidly remains important in
securing orders.
Prices have remained relatively stable during most of the economic
downturn. However, as volume from selected wireless infrastructure customers
increases, price pressure in this market will increase. In addition, in order to
reduce costs many customers in the telecommunications market are outsourcing
production to contract manufacturers who often attempt to renegotiate the prices
agreed to with the customer, creating another source of price pressure.
In response to increased booking and quoting activity, the Company has
increased headcount in production and sales. This has decreased gross margin and
increased operating expenses. The Company believes that the additions to
personnel have improved lead times and customer service which has positioned the
Company to take advantage of opportunities in the coming quarters as demand
increases and opportunities in the market surface.
In response to growing volume, the Company will soon begin renovating
the building it purchased three years ago as part of its New York facility, as
well as purchasing the building that houses its Microcap product line in Florida
which it currently leases. These actions are designed to improve flexibility for
future product expansion. A byproduct of these actions will be an increase in
capacity which will enable the Company to produce certain products in higher
volumes. During the first six months of fiscal year 2004, the Company operated
at approximately one third of its equipment capacity.
The Company has benefited from lower precious metal costs for the past
three years. As economic conditions continue to improve, the demand for precious
metals used in the Company's manufacturing processes has increased. As a result,
the Company has seen a rise in the market prices of these metals and has
purchased quantities of them to protect against rising prices. Given current
levels of demand, it is likely that additional purchases will be necessary in
the near future.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
RESULTS OF OPERATIONS
- ---------------------
KEY COMPARATIVE PERFORMANCE INDICATORS
Three Months Ended Six Months Ended
-------------------------------------------- --------------------------------------------
Dec. 31, 2003 Dec. 31, 2002 Dec. 31, 2003 Dec. 31, 2002
-------------------- ------------------- -------------------- --------------------
Sales $ $ 13,516 $ 11,561 $ 26,065 $ 24,048
Bookings $ $ 14,186 $ 13,248 $ 26,460 $ 25,481
Gross Margin $ $ 3,643 $ 3,429 $ 6,519 $ 7,515
Gross Margin % 27.0% 29.7% 25.0% 31.3%
Operating Expenses $ $ 4,124 $ 3,819 $ 8,039 $ 7,399
Operating Expenses % 30.5% 33.0% 30.8% 30.8%
SIGNIFICANT HIGHLIGHTS
Sales for the three and six months ended December 31, 2003 increased
17% and 8%, respectively, over the comparable periods in the prior fiscal year.
Bookings for the three and six months ended December 31, 2003 increased
7% and 4%, respectively, over the comparable periods in the prior fiscal year.
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 2002
- ----------------------------------------------------------------------
Net sales for the three months ended December 31, 2003 increased 17% to
$13,516, compared to $11,561 recorded in the comparable period in the prior
fiscal year. The improvement was attributable to higher shipments to the
wireless infrastructure, semiconductor equipment and military markets, a trend
the Company expects to continue for the next several quarters.
Gross margin for the three months ended December 31, 2003 was 27.0% of
net sales, compared to 29.7% for the comparable period in the prior fiscal year.
The decrease in gross margin was principally due to increasing labor and
overhead costs to support higher production levels. The Company has increased
headcount to increase production volume in response to increased booking and
quoting activity, to improve product delivery, and to support new products
entering later stages of preproduction.
The Company has experienced lower raw material costs offset by lower
precious metal recovery compared to the comparable period last fiscal year. Both
decreases are primarily due to the lower carrying cost of palladium compared to
a year ago. Precious metal recovery is also lower due to a lower quantity of
metal reclaimed during the period compared to the second quarter of last fiscal
year. Precious metal recovery last year was higher than normal due to higher
than normal scrap reclamation from excess inventory.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Selling, general and administrative expenses for the three months ended
December 31, 2003 increased 22% to $3,445, compared to $2,813 in the comparable
period in the prior fiscal year. The increase was mainly due to increased
selling expense. The Company has increased the number of sales personnel in its
existing offices in the US and Europe and established a new sales office in the
Far East. These actions were taken in response to increased booking and quoting
activity and to take advantage of market opportunities in an improving economy.
The Company believes that offering exceptional customer service and quick
delivery will help increase sales volume.
Research and development expenses for the three months ended December
31, 2003 increased 12% to $742, compared to $664 in the comparable period in the
prior fiscal year. The increase is due to increased efforts to develop new
products and improve processes and materials. The Company strives to be a
quality leader in the industry and must continually improve its products to
maintain that position.
The Company recorded other income of $63 for the three months ended
December 31, 2003, compared to other expense of $342 in the comparable period in
the prior fiscal year. The other expense recorded during the second quarter of
last fiscal year related primarily to a pretax charge of $362 due to the
disposal of certain assets no longer used in the Company's manufacturing
processes.
The effective tax rate for the three months ended December 31, 2003 was
approximately 19%. The decrease in the effective tax rate was primarily due to
increased tax benefits in relation to income.
Bookings for the three months ended December 31, 2003 were $14,186,
compared to $13,248 for the three months ended December 31, 2002. The increase
is due to increased activity from the wireless infrastructure and semiconductor
markets. Delivery times and price are key factors in obtaining orders. The
Company is taking steps to maintain short delivery times in the face of
increased demand. These steps include increasing inventory levels.
The backlog of unfilled orders was $9,528 at December 31, 2003,
compared to $10,814 at December 31, 2002 and $9,129 at June 30, 2003. The
increase in backlog from June 30, 2003 was primarily due to the increase in
orders from the wireless infrastructure and semiconductor equipment markets.
Recently, customers have been placing some orders with longer lead times. This
trend typically occurs when customers are anticipating higher production levels
and want to secure a supply of material. It also provides the Company some
forward planning ability. The decrease in backlog from December 31, 2003 is
mainly due to shipments against a large military order received in the second
quarter of last fiscal year.
As a result of the foregoing, net loss for the three months ended
December 31, 2003 was $446, or ($0.05) per common share and per common share
assuming dilution, compared to net loss of $330, or ($0.04) per common share and
per common share assuming dilution, for the comparable period in the prior
fiscal year.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
SIX MONTHS ENDED DECEMBER 31, 2003 COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 2002
- -----------------------------------------------------------------
Net sales for the six months ended December 31, 2003 increased 8% to
$26,065, compared to $24,048 in the comparable period in the prior fiscal year.
The increase in net sales was primarily the result of higher shipments to the
wireless infrastructure, semiconductor equipment and military markets.
Gross margin for the six months ended December 31, 2003 was 25.0% of
net sales, compared to 31.3% for the comparable period in the prior fiscal year.
The decrease in gross margin percentage was principally due to increasing labor
and overhead costs to support higher production levels, offset partially by
lower material costs. As mentioned above, the Company has increased headcount to
increase production volume in response to increased booking and quoting
activity, to improve product delivery, and to support new products entering
later stages of preproduction.
The Company experienced lower raw material costs offset by lower
precious metal recovery compared to the comparable period last fiscal year. Both
decreases are primarily due to the lower carrying cost of palladium compared to
a year ago. Precious metal recovery is also lower due to a lower quantity of
metal reclaimed during the period compared to the second quarter of last fiscal
year. Precious metal recovery last year was higher than normal due to higher
than normal scrap reclamation from excess inventory.
Selling, general and administrative expenses for the six months ended
December 31, 2003 increased 15% to $6,654, compared to $5,775 in the comparable
period in the prior fiscal year. The increase was due mainly to increased
selling expense. The Company has increased the number of sales personnel in
response to increased booking and quoting activity and to take advantage of
market opportunities in an improving economy.
Research and development expenses for the six months ended December 31,
2003 increased 9% to $1,452, compared to $1,333 in the comparable period in the
prior fiscal year. The increase is due to increased efforts to develop new
products and improve processes and materials.
The Company recorded other income of $67 for the six months ended
December 31, 2003, compared to other expense of $291 in the comparable period in
the prior fiscal year. The other expense for the six month period ended December
31, 2002 related primarily to a pretax charge of $362 due to the disposal of
certain assets no longer used in the Company's manufacturing processes.
The effective tax rate for the six months ended December 31, 2003 was
approximately 26%. Income tax benefit for the six months ended December 31, 2003
included a $65 gain related to tax audit settlements in the quarter ended
September 30, 2003.
As a result of the foregoing, net loss for the six months ended
December 31, 2003 was $1,229, or ($0.15) per common share and per common share
assuming dilution, compared to net income of $8, essentially breakeven on a per
share basis, for the comparable period in the prior fiscal year.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Dec. 31, 2003 Sept. 30, 2003 June 30, 2003 Dec. 31, 2002
---------------------- ------------------- -------------------- ----------------------
Cash and Investments $ 10,657 $ 11,311 $ 11,696 $ 9,265
Working Capital $ 31,571 $ 31,252 $ 31,485 $ 30,601
Quarter Ended:
Operating Cash Flow $ (189) $ 513 $ 813 $ 1,602
Capital Expenditures $ 576 $ 868 $ 540 $ 343
Depreciation $ 1,259 $ 1,270 $ 1,391 $ 1,351
Current Ratio 7.4:1 7.4:1 7.3:1 7.8:1
Quick Ratio 3.5:1 3.7:1 3.7:1 3.3:1
The Company's financial position at December 31, 2003 remains strong as
evidenced by working capital of $31,571 and stockholders' equity of $51,069. The
Company's current and quick ratios at December 31, 2003 also remain strong.
Cash, cash equivalents and investments decreased by $1,039 from June
30, 2003, primarily as a result of capital expenditures in excess of operating
cash flows. Inventories increased by $575 from June 30, 2003, primarily as the
result of precious metal purchases during the quarter ended December 31, 2003.
The purchases during the quarter were to bring precious metal stock to normal
operating levels. Subsequent to December 31, 2003, the Company purchased
additional supplies of palladium, gold and silver to protect against shortages
and rising prices.
The Company has benefited from lower precious metal costs for the past
three years. However, as economic conditions improve, the demand for the
precious metals the Company uses in its manufacturing processes is increasing
throughout the electronics industry and other industries. As a result, the
Company has seen a rise in the market prices of these metals. The Company has
purchased quantities of these metals to protect against rising prices. It is
likely that additional purchases at the then available market price will be
necessary in the near future.
Other current assets increased by $464 from June 30, 2003, mainly due
to the timing of payments for real estate taxes, value added tax and payroll.
Accrued expenses increased by $553 during the same period due to the timing of
payments relating to vacation pay and payroll taxes as well as to increased
commission accruals as the result of increased bookings and sales. Taxes payable
decreased $489 from June 30, 2003, primarily due to taxable losses incurred
during the period.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
The Company leases a facility in Jacksonville, Florida from a
partnership controlled by the Company's President, Chief Executive Officer and
principal stockholder under a capital lease. The rental payments under this
lease have been adjusted several times, most recently as of October 2003,
primarily to reflect fair market rental adjustments as a result of certain
additions or improvements to the facility or annual increases based on the
consumer price index as required by the terms of the lease. Each fair market
rental adjustment has been based upon an independent appraisal of the fair
market rental of the facility giving effect to the addition or improvement at
issue. Effective October 1, 2003, the Company is obligated to pay approximately
$734 per annum under this lease. The payments due over the remaining seven years
of this capital lease, including the portion related to interest, total
approximately $4,956.
Capital expenditures for the six months ended December 31, 2003 totaled
$1,444, including expenditures for machinery and equipment and leasehold
improvements. The Company intends to use cash on hand and cash generated through
operations to finance budgeted capital expenditures of approximately $4,000 for
the remainder of fiscal year 2004, primarily for equipment acquisitions and
building acquisitions and renovations including $500 for the purchase of the
building in Jacksonville Florida and $1,000 for the renovation of an existing
idle building in New York.
Aggregate contractual obligations as of December 31, 2003 mature as
follows:
Payments Due by Period (in 000's)
------------------------------------------------------------------------------------
Less
than 1 1- 3 4- 5 After 5
Contractual Obligations Total year years years years
- ------------------------------------------ ------------- --------------- ------------- -------------- -------------
Bank Debt $ -- $ -- $ -- $ -- $ --
Capital Lease Obligations 3,472 374 1,386 1,196 516
Operating Leases 1,565 420 1,145 -- --
------------- --------------- ------------- -------------- -------------
Total Contractual Obligations $ 5,037 $ 794 $ 2,531 $ 1,196 $ 516
============= =============== ============= ============== =============
The Company routinely enters into binding and non-binding purchase
obligations in the ordinary course of business, primarily covering anticipated
purchases of inventory and equipment. The terms of these commitments generally
do not extend beyond six months. None of these obligations are individually
significant. The Company does not expect that these commitments will materially
adversely affect its liquidity in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Securities and Exchange Commission (the "SEC") issued disclosure
guidance for "critical accounting policies." The SEC defines "critical
accounting policies" as those that require the application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The Company's significant accounting policies are
described in Note 1 to its consolidated financial statements contained in its
Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The Company
believes that the following accounting policies require the application of
management's most difficult, subjective or complex judgments:
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Allowances for Doubtful Accounts Receivable
- -------------------------------------------
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and a customer's current
creditworthiness, as determined by its review of the customer's current credit
information. The Company continuously monitors collections and payments from its
customers and maintains an allowance for estimated credit losses based upon its
historical experience and any specific customer collection issues that the
Company has identified. While such credit losses have historically been within
the Company's expectations and the allowances established, the Company cannot
guarantee that it will continue to experience the same credit loss rates that it
has in the past. Should the financial position of its customers deteriorate
resulting in an impairment of their ability to pay amounts due, the Company's
revised estimate of such losses and any actual losses in excess of previous
estimates may negatively impact its operating results.
Sales Returns and Allowances
- ----------------------------
In the ordinary course of business, the Company accepts returns of
products sold for various reasons and grants sales allowances to customers.
While the Company engages in extensive product quality control programs and
processes, its level of sales returns is affected by, among other things, the
quality of its manufacturing processes. The Company maintains an allowance for
sales returns and allowances based upon historical returns and allowances
granted. While such returns and allowances have historically been within the
Company's expectations, actual return and allowance rates in the future may
differ from current estimates, which could negatively impact its operating
results.
Inventory Valuation
- -------------------
The Company values inventory at the lower of aggregate cost (first-in,
first-out) or market. When the cost of inventory is determined by management to
be in excess of its market value, such inventory is written down to its
estimated net realizable value. This requires the Company to make estimates and
assumptions about several factors (e.g., future sales quantities and selling
prices, and percentage complete and failure rates for work in process) based
upon historical experience and its projections for future periods. Changes in
factors such as the level of order bookings, the product mix of order bookings
and the Company's manufacturing processes could have a material impact on the
Company's assessment of the net realizable value of inventory in the future.
Valuation of Deferred Tax Assets
- --------------------------------
The Company regularly evaluates its ability to recover the reported
amount of its deferred income taxes considering several factors, including its
estimate of the likelihood of the Company generating sufficient taxable income
in future years during the period over which temporary differences reverse.
Presently, the Company believes that it is more likely than not that it will
realize the benefits of its deferred tax assets based primarily on its history
of and projections for taxable income in the future, and its intention to carry
back net operating losses to generate refunds of income taxes previously paid.
In the event that actual results differ from its estimates or the Company
adjusts these estimates in future periods, the Company may need to establish a
valuation allowance against a portion or all of its deferred tax assets, which
could materially impact its financial position or results of operations in
future periods.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Valuation of Long-lived Assets
- ------------------------------
The Company assesses the recoverability of long-lived assets whenever
the Company determines that events or changes in circumstances indicate that the
carrying amount may not be recoverable. Its assessment is primarily based upon
its estimate of future cash flows associated with these assets. The Company
believes that the carrying amount of its long-lived assets is recoverable.
However, should its operating results deteriorate, or anticipated new product
launches not occur or not attain the commercial acceptance that the Company
anticipates, the Company may determine that some portion of its long-lived
assets are impaired. Such determination could result in non-cash charges to
income that could materially affect its financial position or results of
operations for that period.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In January 2004, the Company adopted the Financial Accounting Standards
Board Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN
No. 46). Previously, consolidation of variable interest entities was largely
based on controlling voting rights. This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to entities where the Company is vulnerable to a majority of the
entity's risk of loss or is entitled to receive a majority of the entity's
residual returns even if there is no controlling voting interest. The adoption
of FIN No. 46 did not have any impact on the Company's consolidated results of
operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at December 31, 2003 as it relates
to currency exchange rate and security price risks is consistent with the types
of market risk and amount of exposures presented in its Annual Report on Form
10-K for the fiscal year ended June 30, 2003.
Commodity price risk. The Company uses certain precious metals in the
manufacturing of its products (primarily palladium and gold), and is therefore
subject to certain commodity price risks. The Company believes that, based upon
its current levels of production and inventories of palladium and gold, it will
need to buy additional quantities of palladium and gold during the next year at
prevailing market prices. The price of palladium and gold have begun to rise due
to the higher demand coming from the electronics industry and other industries.
Consequently, the Company has decided to purchase a quantity of these metals to
protect against rising prices.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
In response to the requirements of the Sarbanes-Oxley Act of 2002, as
of the end of the period covered by this Quarterly Report on Form 10-Q (the
"Evaluation Date"), the Company's President and Chief Executive Officer and Vice
President - Controller carried out an evaluation of the effectiveness of the
Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based on that evaluation,
these officers concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company and the Company's consolidated
subsidiaries was made known to them by others within those entities,
particularly during the period in which this report was being prepared.
Changes in Internal Controls
- ----------------------------
There were no changes in the Company's internal controls over financial
reporting identified in connection with the evaluation of such internal controls
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
PART II - OTHER INFORMATION
ITEMS 1. THROUGH 3. Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on November 19,
2003 (the "Annual Meeting"), the stockholders elected the individuals named
below as directors for one-year terms. Votes were cast as follows:
For Withheld
--------------- ---------------
Victor Insetta 7,809,194 68,307
Dov S. Bacharach 7,831,386 46,115
Chester E. Spence 7,772,330 105,171
O. Julian Garrard III 7,831,386 46,115
Stuart P. Litt 7,772,330 105,171
Thomas J. Volpe 7,831,386 46,115
The stockholders also ratified the appointment of KPMG LLP as the
independent public accountants to audit the Company's consolidated financial
statements for the fiscal year ending June 30, 2004. The holders of 7,829,292
shares of Common Stock voted to ratify the appointment, 42,395 voted against
ratification and the holders of 5,814 shares of Common Stock abstained from
voting on the issue.
19
ITEM 5. Not Applicable
--------------
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10(h) - Employment Agreement, dated October 1, 2003, between the
Company and Richard Monsorno.
10(ii) - Officers Profit Bonus Plan, dated October 30, 2003 and
effective June 30, 1992.
10(t) - Severance Agreement, dated November 1, 2003, between the
Company and Kathleen M. Kelly.
10(u) - Severance Agreement, dated November 1, 2003, between the
Company and Andrew Perz.
10(v) - Severance Agreement, dated November 1, 2003, between the
Company and Harrison Tarver.
31.1 - Section 302 Certification of Principal Executive Officer.
31.2 - Section 302 Certification of Principal Accounting Officer.
32.1 - Section 906 Certification of Principal Executive Officer.
32.2 - Section 906 Certification of Principal Accounting Officer.
(b) REPORTS ON FORM 8-K
-------------------
1. On November 3, 2003, the Company furnished a report on Form 8-K together
with the Company's Press Release announcing its first quarter financial
results for the period ended September 30, 2003. The Form 8-K contained the
information required by Item 9. "Regulation FD Disclosure" and Item 12.
"Disclosure of Results of Operations and Financial Condition," in
accordance with SEC Release 33-8216.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated:
AMERICAN TECHNICAL CERAMICS CORP.
(Company)
DATE: February 12, 2003 BY: /s/ VICTOR INSETTA
------------------
Victor Insetta
President and Director
(Principal Executive Officer)
DATE: February 12, 2003 BY: /s/ ANDREW R. PERZ
------------------
Andrew R. Perz
Vice President, Controller
(Principal Accounting Officer)
21