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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, 2004
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 (I.R.S. Employer
Incorporation or Organization) 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 May 3, 2004, the Company had outstanding 8,174,868 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)
MARCH 31, 2004 JUNE 30, 2003
-------------- -------------
(unaudited)
ASSETS
Current assets
Cash (including cash equivalents of $1,001 and
$996, respectively) $4,073 $8,685
Investments 3,009 3,011
Accounts receivable, net 9,276 6,721
Inventories 18,626 15,144
Deferred income taxes, net 2,065 1,989
Other current assets 1,046 940
------- -------
TOTAL CURRENT ASSETS 38,095 36,490
------- -------
Property, plant and equipment, net of accumulated depreciation
and amortization of $40,804 and $37,213, respectively 26,006 27,021
Other assets, net 30 37
------- -------
TOTAL ASSETS $64,131 $63,548
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term related party debt $384 $355
Accounts payable 1,747 1,025
Accrued expenses 4,149 2,843
Income taxes payable 250 782
------- -------
TOTAL CURRENT LIABILITIES 6,530 5,005
Long-term related party debt, net of current portion 2,998 3,290
Deferred income taxes 3,182 3,300
------- -------
TOTAL LIABILITIES 12,710 11,595
------- -------
Commitments and Contingencies
Stockholders' Equity
Common Stock -- $0.01 par value; authorized 20,000 shares; issued 8,555
and 8,503 shares, outstanding 8,141 and 8,089 shares, respectively 86 85
Capital in excess of par value 11,755 11,418
Retained earnings 40,756 41,670
Accumulated other comprehensive income:
Unrealized loss on investments available-for-sale, net 1 ---
Cumulative foreign currency translation adjustment 269 176
------- -------
270 176
------- -------
Less: Treasury stock, at cost (414 and 414 shares, respectively) 1,396 1,396
Deferred compensation 50 ---
------- -------
TOTAL STOCKHOLDERS' EQUITY 51,421 51,953
------- -------
$64,131 $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 For the Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $ 16,109 $ 11,930 $ 42,174 $ 35,978
Cost of sales 10,796 8,622 30,342 25,155
-------- -------- -------- --------
Gross profit 5,313 3,308 11,832 10,823
-------- -------- -------- --------
Selling, general and administrative expenses 3,935 3,040 10,589 8,815
Research and development expenses 796 694 2,248 2,027
Other 89 93 22 384
-------- -------- -------- --------
Operating expenses 4,820 3,827 12,859 11,226
-------- -------- -------- --------
Income/(loss) from operations 493 (519) (1,027) (403)
-------- -------- -------- --------
Other (income) expense:
Interest expense 90 98 277 262
Interest income (12) (22) (57) (80)
Other -- -- 2 --
-------- -------- -------- --------
78 76 222 182
-------- -------- -------- --------
Income/(loss) before provision for income taxes 415 (595) (1,249) (585)
Provision for/(benefit from) income taxes 100 (296) (335) (294)
-------- -------- -------- --------
Net income/(loss) $ 315 $ (299) $ (914) $ (291)
======== ======== ======== ========
Basic net income/(loss) per common share $ 0.04 $ (0.04) $ (0.11) $ (0.04)
======== ======== ======== ========
Diluted net income/(loss) per common share $ 0.04 $ (0.04) $ (0.11) $ (0.04)
======== ======== ======== ========
Basic weighted average common
shares outstanding 8,136 8,076 8,116 8,073
======== ======== ======== ========
Diluted weighted average common
shares outstanding 8,673 8,076 8,116 8,073
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended March 31,
2004 2003
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
Net loss $ (914) $ (291)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,846 4,000
Loss on disposal of fixed assets 353 469
Stock award compensation expense 109 12
Deferred income taxes (194) --
Realized gain on investments 2 --
Changes in operating assets and liabilities:
Accounts receivable (2,555) 418
Inventories (3,482) (417)
Other assets (116) 1,724
Accounts payable and accrued expenses 2,028 82
Income taxes payable (489) 629
------- -------
Net cash (used in)/provided by operating activities (1,412) 6,626
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,199) (1,168)
Purchase of investments (2,982) (2,491)
Proceeds from sale of investments 3,000 2,500
Proceeds from sale of fixed assets 22 --
------- -------
Net cash used in investing activities (3,159) (1,159)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (263) (4,317)
Proceeds from the exercise of stock options 136 13
------- -------
Net cash used in financing activities (127) (4,304)
------- -------
Effect of exchange rate changes on cash 86 130
------- -------
Net (decrease)/increase in cash and cash equivalents (4,612) 1,293
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,685 7,129
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,073 $ 8,422
======= =======
Supplemental cash flow information:
Interest paid $ 277 $ 300
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 March 31, 2004, and the results of its operations for the three
and nine month periods ended March 31, 2004 and 2003. 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 nine month periods ended March 31, 2004
are not necessarily indicative of results which could be expected for the entire
year.
(2) 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.
5
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(2) STOCK-BASED COMPENSATION (CONTINUED):
Stock option activity for the three months ended March 31, 2004 and 2003, is as
follows:
March 31, 2004 March 31, 2003
-------------- --------------
Weighted Weighted
Average Average
Shares Subject Exercise Shares Subject Exercise
to Options Price to Options Price
---------- ----- ---------- -----
Outstanding, beginning of period 1,352,950 $ 6.68 1,375,050 $ 6.69
Granted -- -- -- --
Canceled (250) 11.40 (5,100) 7.35
Expired -- -- (1,250) 11.40
Exercised (14,500) 3.65 -- --
--------- ---------
Outstanding, end of period 1,338,200 $ 6.71 1,368,700 $ 6.68
========= =========
Stock option activity for the nine months ended March 31, 2004 and 2003, is as
follows:
March 31, 2004 March 31, 2003
-------------- --------------
Weighted Weighted
Average Average
Shares Subject Exercise Shares Subject Exercise
to Options Price to Options Price
---------- ----- ---------- -----
Outstanding, beginning of period 1,381,200 $ 6.64 919,800 $ 9.00
Granted 13,000 5.85 479,000 2.35
Canceled (6,750) 9.93 (16,850) 7.35
Expired (9,350) 8.08 (8,750) 11.89
Exercised (39,900) 3.41 (4,500) 2.94
--------- ---------
Outstanding, end of period 1,338,200 $ 6.71 1,368,700 $ 6.68
========= =========
Prior to fiscal year 2004, the Company has not recognized compensation
cost for these options upon grant as the exercise price was equal to or greater
than the fair market value of the underlying stock at the date of grant. 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 Accounting Principals Board Opinion No. 25,
Accounting for Stock Issued to Employees ("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 $3 and $7 in compensation expense for the
three and nine months ended March 31, 2004, respectively, for options granted
after June 30, 2003. Had compensation expense with respect to all 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:
6
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Net income/(loss), as reported $ 315 $ (299)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 30 ---
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (725) (376)
------- -------
Pro forma loss $ (380) $ (675)
Earnings/(loss) per share:
Basic - as reported $ 0.04 $ (0.04)
Basic - pro forma $ (0.05) $ (0.08)
Diluted - as reported $ 0.04 $ (0.04)
Diluted - pro forma $ (0.05) $ (0.08)
Nine Months Ended March 31,
---------------------------
2004 2003
---- ----
Net loss, as reported $ (914) $ (291)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 105 6
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (1,651) (1,088)
------- -------
Pro forma loss $(2,460) $(1,373)
Loss per share:
Basic - as reported $ (0.11) $ (0.04)
Basic - pro forma $ (0.30) $ (0.17)
Diluted - as reported $ (0.11) $ (0.04)
Diluted - pro forma $ (0.30) $ (0.17)
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.
(3) 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.
7
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(4) SUPPLEMENTAL CASH FLOW INFORMATION:
During the nine months ended March 31, 2004, 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
March 31, 2004, $30 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 March 31, 2004, $7 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 $43 reduction of income taxes payable related to stock
options exercised.
(5) INVENTORIES:
Inventories included in the accompanying consolidated financial
statements consist of the following:
March 31, June 30,
2004 2003
--------- --------
(unaudited)
Raw materials $ 10,088 $ 7,055
Work-in-process 5,190 4,361
Finished goods 3,348 3,728
----------- -----------
$ 18,626 $ 15,144
=========== ===========
(6) 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 March 31,
2004 2003
---- ----
Net Income Shares Per-Share Net Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS $ 315 8,136 $ 0.04 $(299) 8,076 $ (0.04)
-------- --------
Effect of Dilutive Securities:
Stock options --- 530 --- ---
Deferred compensation
stock awards --- 7 --- ---
----- ----- -------- ----- ----- --------
Diluted EPS $ 315 8,673 $ 0.04 $(299) 8,076 $ (0.04)
===== ===== ======== ===== ===== ========
Options covering 345 and 1,369 shares have been omitted from the
calculation of dilutive EPS for the three months ended March 31, 2003 and 2004,
respectively, because their inclusion would have been antidilutive.
8
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
For the Nine Months Ended March 31,
2004 2003
---- ----
Net Loss Shares Per-Share Net Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS $(914) 8,116 $ (0.11) $(291) 8,073 $ (0.04)
--------
Effect of Dilutive Securities:
Stock options --- --- --- ---
Deferred compensation
stock awards --- --- --- ---
----- ----- -------- ----- ----- --------
Diluted EPS $(914) 8,116 $ (0.11) $(291) 8,073 $ (0.04)
===== ===== ======== ===== ===== ========
Options covering 1,346 and 1,369 shares have been omitted from the
calculation of dilutive EPS for the nine months ended March 31, 2003 and 2004,
respectively, because their inclusion would have been antidilutive.
(7) COMPREHENSIVE INCOME/(LOSS):
The Company's comprehensive income/(loss) is as follows:
For the Three Months Ended
March 31,
2004 2003
---- ----
Net income/(loss) $ 315 $(299)
----- -----
Other comprehensive (loss)/income:
Foreign currency translation
adjustments (61) 32
Unrealized losses/(gains) on investments,
net of tax 3 (4)
----- -----
Other comprehensive (loss)/income (58) 28
----- -----
Comprehensive income/(loss) $ 257 $(271)
===== =====
For the Nine Months Ended
March 31,
2004 2003
---- ----
Net loss $(914) $(291)
----- -----
Other comprehensive income:
Foreign currency translation
adjustments 93 130
Unrealized losses/(gains) on investments,
net of tax 1 (4)
----- -----
Other comprehensive income 94 126
----- -----
Comprehensive loss $(820) $(165)
===== =====
9
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(8) INDEBTEDNESS:
In April 2004, the Company entered into a $4,000 credit facility with
General Electric Capital Corporation for the purchase of equipment. The line
bears interest, at the Company's option, at either a fixed rate of 3.47% above
the five year Treasury Bond yield or a floating rate of 3.65% above LIBOR.
Borrowings under the line will be secured by the equipment purchased thereunder.
Each separate borrowing under the line will be a fully amortizing term loan with
a maturity of five years from the date the funds are drawn down. The line of
credit will expire on March 31, 2005.
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 $4,773.
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
During the first two quarters of the current fiscal year, the markets
served by the Company's products began to show signs of breaking out of the
three year downturn. The third quarter provided strong evidence of a break
through, as the Company experienced substantial increases in sales and bookings
in all the major markets it serves. The wireless infrastructure and
semiconductor equipment markets exhibited the strongest growth. The wireless
infrastructure market has historically been the Company's largest.
The trend of orders with longer lead times that started last quarter
has continued and expanded this quarter. Bookings for the quarter exceeded sales
by $2,600 due mainly to customers placing more orders for future delivery.
However, the ability to deliver product rapidly remains important to securing
orders.
Prices have remained relatively stable during most of the economic
downturn. However, as volume from selected wireless infrastructure customers
increases, we expect that 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 previously agreed to by the customer, creating another
source of price pressure.
In response to increased booking and quoting activity, the Company
began increasing headcount in production and sales late last fiscal year. This
initially decreased gross margins and increased operating expenses; however, the
Company believes that the additions to personnel have improved lead times and
customer service. This positioned the Company to take advantage of opportunities
in the quarter ended March 31, 2004 and should continue to do so in the coming
quarters as demand increases and opportunities arise in the markets the Company
serves.
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, additional purchases will be necessary in the near future. In
response to the increased demand, the Company has committed to purchase an
additional $6.5 million of precious metals (primarily palladium and silver) over
the next twelve months to lock in current prices.
During the quarter ended March 31, 2004, the Company incurred unusually
high medical expense. Medical expenses for the quarter were 89%, or
approximately $800, higher than the average of the previous four quarters. In
contrast, the Company's headcount has increased 15% over the past year. The
increase was due primarily to an increase in claims for which the Company is
self-insured. The Company believes that self-insurance is a cost effective
option for providing employees with health coverage; however, it results in
fluctuations in costs from period to period.
In response to growing volume, the Company will soon begin renovating
the building it purchased three years ago next to its other facilities in
Huntington Station, New York. The Company has also purchased the building that
houses its Microcap product line in Florida which it previously leased. These
actions are designed to improve flexibility for future product expansion. They
will also result in an increase in capacity which will enable the Company to
produce certain products in higher volumes.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
During the first six months of fiscal year 2004, the Company operated
at approximately 33% of its equipment capacity. During the third quarter, the
Company operated above 50% of its equipment capacity.
The combination of increased capital expenditures, increased working
capital requirements and unprofitable operations required the Company to draw
upon cash. In response, the Company has secured a $4 million line of credit from
General Electric Capital Corporation ("GECC") to help fund future capital
expenditures.
RESULTS OF OPERATIONS
KEY COMPARATIVE PERFORMANCE INDICATORS
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, 2004 March 31, 2003 March 31, 2004 March 31, 2003
-------------- -------------- -------------- --------------
Sales ($) 16,109 11,930 42,174 35,978
Bookings ($) 18,721 11,818 45,181 37,299
Gross Margin ($) 5,313 3,308 11,832 10,823
Gross Margin (%) 33.0 27.7 28.1 30.1
Operating Expenses ($) 4,820 3,827 12,859 11,226
Operating Expenses (%) 29.9 32.1 30.5 31.2
SIGNIFICANT HIGHLIGHTS
Sales for the three and nine months ended March 31, 2004 increased 35%
and 17%, respectively, over the comparable periods in the prior fiscal year.
Bookings for the three and nine months ended March 31, 2004 increased
58% and 21%, respectively, over the comparable periods in the prior fiscal year.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003
Net sales for the three months ended March 31, 2004 increased 35% to
$16,109, compared to the $11,930 recorded in the comparable period in the prior
fiscal year. The increase in sales was due to increased sales volume in all of
the Company's major product lines primarily as a result of strong demand from
the wireless infrastructure, semiconductor equipment and military markets.
Gross margin for the three months ended March 31, 2004 was 33.0% of net
sales, compared to 27.7% for the comparable period in the prior fiscal year. The
increase in gross margin was primarily due to higher revenues and lower precious
metal costs, partially offset by higher labor and overhead costs and lower
precious metal recovery than in the comparable period last year. The increase in
overhead costs was primarily due to the result of increased headcount and
increased production output to keep pace with the growing sales volumes and to
greater than normal medical expenses.
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
March 31, 2004 increased 29% to $3,935, compared to $3,040 in the comparable
period in the prior fiscal year. The increase was due to increased commissions,
headcount and advertising and the expansion of the Company's international sales
offices. As a percentage of sales, selling, general and administrative expenses
decreased from 25.5% to 24.4%.
Research and development expenses for the three months ended March 31,
2004 increased 15% to $796, compared to $694 in the comparable period in the
prior fiscal year. The Company has put additional emphasis on developing new
products as well as improving the performance and manufacturing efficiency of
its existing products.
Bookings for the three months ended March 31, 2004 increased 58% to
$18,721, compared to $11,818 for the three months ended March 31, 2003. The
increase was primarily due to increased orders from the wireless infrastructure
and semiconductor equipment markets, although bookings levels increased from
most of the major markets the Company serves. The trend of orders with longer
lead times that started last quarter has continued and expanded this quarter.
This trend is not a function of lack of available inventory to ship, but rather
customers placing more orders for future delivery. However, the ability to
deliver product rapidly remains important to securing orders.
The backlog of unfilled orders was $12,142 at March 31, 2004, compared
to $10,718 at March 31, 2003 and $9,129 at June 30, 2003. The increase in
backlog was primarily due to the increase in orders from the wireless
infrastructure and semiconductor equipment markets, partially offset by a
decrease in open orders from the military market. The Company experiences
fluctuation in orders from the military market as certain of these orders are
for large quantities of product for delivery over longer periods. Shipments
during the quarter ended March 31, 2004 to customers in this market were against
orders placed in previous quarters with long lead times.
NINE MONTHS ENDED MARCH 31, 2004 COMPARED WITH NINE MONTHS ENDED MARCH 31, 2003
Net sales for the nine months ended March 31, 2004 increased 17% to
$42,174, compared to $35,978 in the comparable period in the prior fiscal year.
The increase in net sales was primarily the result of increased sales volume in
all of the Company's major product lines primarily due to strong demand from the
wireless infrastructure, semiconductor equipment and military markets.
Gross margin for the nine months ended March 31, 2004 was 28.1% of net
sales, compared to 30.1% for the comparable period in the prior fiscal year. The
decrease in gross margin was principally due to lower material reclamation and
higher labor and overhead costs, partially offset by increased sales and lower
precious metal costs. Over the past four quarters, the Company has added
personnel and increased production in anticipation of an economic recovery and
to improve customer service and product delivery times. Initially this strategy
adversely affected gross margins as sales grew at a slower pace than the rise in
costs. The Company is now able to benefit from the increased sales levels while
focusing on product quality, customer service and delivery.
13
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 nine months ended
March 31, 2004 increased 20% to $10,589, compared to $8,815 in the comparable
period in the prior fiscal year. The increase was due to increased commissions,
headcount, and advertising and the expansion of the Company's international
sales offices.
Research and development expenses for the nine months ended March 31,
2004 increased 11% to $2,248, compared to $2,027 in the comparable period in the
prior fiscal year. The Company has put additional emphasis on developing new
products as well as improving the performance and manufacturing efficiency of
its existing products.
The Company recorded other expense of $22 for the nine months ended
March 31, 2004, compared to other expense of $384 in the comparable period in
the prior fiscal year. The other expense for the nine month period ended March
31, 2003, related primarily to a pretax charge of $436 due to the disposal of
certain assets no longer used in the Company's manufacturing process.
LIQUIDITY AND CAPITAL RESOURCES
March 31, 2004 Dec. 31, 2003 June 30, 2003 March 31, 2003
-------------- ------------- ------------- --------------
Cash and Investments $ 7,082 10,657 11,696 11,424
Working Capital $ 31,565 31,571 31,485 31,157
Quarter Ended:
Operating Cash Flow $ (1,736) (189) 813 2,712
Capital Expenditures $ 1,755 576 540 494
Depreciation $ 1,317 1,260 1,391 1,337
Current Ratio 5.8:1 7.4:1 7.3:1 7.0:1
Quick Ratio 2.5:1 3.5:1 3.7:1 3.3:1
The Company's financial position at March 31, 2004 remains strong as
evidenced by working capital of $31,565 and stockholders' equity of $51,421. The
Company's current and quick ratios at March 31, 2004 also remain strong.
Cash, cash equivalents and investments decreased by $4,614 from June
30, 2003, primarily as a result of capital expenditures and cash used for
working capital. Accounts receivable increased by $2,555 from June 30, 2003,
primarily due to increased sales revenue and, to a lesser extent, to customers
extending payment terms. Inventories increased by $3,482 from June 30, 2003,
primarily as a result of precious metal purchases during the nine months ended
March 31, 2004. These purchases were made in anticipation of future production
requirements and potential price increases.
Subsequent to March 31, 2004, the Company committed to purchase an
additional $6,500 of precious metals (primarily palladium and silver) over the
next twelve months 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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Accounts payable increased by $722, due in part to increased purchasing
activity to keep pace with higher production levels and in part to capital
expenditures. Accrued expenses increased by $1,306 during the same period due to
the timing of payments relating to vacation pay and payroll taxes as well as
increased commission accruals as the result of increased bookings and sales.
Taxes payable decreased $532 from June 30, 2003, primarily due to taxable losses
incurred during the period.
On March 1, 2004, the Company purchased a building it was leasing to
house its Microcap product line in Jacksonville Florida, for $523.
In April 2004, the Company entered into a $4,000 credit facility with
GECC for the purchase of equipment. The line bears interest, at the Company's
option, at either a fixed rate of 3.47% above the five year Treasury Bond yield
or a floating rate of 3.65% above LIBOR. Borrowings under the line will be
secured by the equipment purchased thereunder. Each separate borrowing under the
line will be a fully amortizing term loan with a maturity of five years from the
date the funds are drawn down. The line will expire on March 31, 2005.
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 $4,773.
Capital expenditures for the nine months ended March 31, 2004 totaled
$3,199, including expenditures for machinery and equipment, leasehold
improvements and the purchase of a building that was previously leased by the
Company. The Company intends to use cash on hand, cash generated through
operations and the new line of credit with GECC to finance budgeted capital
expenditures of approximately $2,000 for the remainder of fiscal year 2004,
primarily for equipment acquisitions and building renovations, including $500
for the renovation of an existing building in New York which is not presently in
use.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Aggregate contractual obligations as of March 31, 2004 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 3,382 384 1,422 1,227 349
Operating Leases 1,457 416 1,041 --- ---
------ ------ ------ ------ ------
Total Contractual Obligations $4,839 $ 800 $2,463 $1,227 $ 349
====== ====== ====== ====== ======
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 one year. At March 31, 2004, the Company had commitments to
purchase an aggregate of $6,500 of precious metals at various times over the
next twelve months.
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:
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.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
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.
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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
IMPACT OF NEW ACCOUNTING STANDARDS
None
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at March 31, 2004 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, gold and silver), and is
therefore subject to certain commodity price risks. The Company believes that,
based upon its current levels of production and inventories of precious metals,
it will need to buy additional quantities of precious metals during the next
year. The price of precious metals have begun to rise due to the higher demand
coming from the electronics industry and other industries. Consequently, the
Company has purchased a quantity of these metals to protect against rising
prices and has committed to purchasing additional amounts of palladium and
silver over the next year in order to lock in current market prices. There is no
guarantee that if the market price of silver or palladium were to decrease, the
Company would not be required to purchase the palladium or silver at above
market prices. Should the Company need to buy gold during the next year it will
do so at the prevailing market price.
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.
18
PART II - OTHER INFORMATION
ITEMS 1. THROUGH 5. Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10(k) - Consulting Agreement, dated January 1, 2004, between the Company
and Stuart P. Litt.
10(o) - Master Loan Agreement, dated April 2, 2004, between the Company
and General Electric Capital Corporation.
10(r) - Employment Agreement, dated January 1, 2004, between the Company
and David Ott.
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 February 3, 2004, the Company furnished a report on Form 8-K together
with the Company's Press Release announcing its second quarter financial
results for the period ended December 31, 2003. The Form 8-K contained the
information required by Item 12. "Disclosure of Results of Operations and
Financial Condition".
19
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: May 13, 2004 BY: /s/ VICTOR INSETTA
----------------------
Victor Insetta
President and Director
(Principal Executive Officer)
DATE: May 13, 2004 BY: /s/ ANDREW R. PERZ
------------------------------
Andrew R. Perz
Vice President, Controller
(Principal Accounting Officer)
20