Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
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 Identification No.)
Incorporation or Organization)
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 November 4, 2004, the Company had outstanding 8,326,068 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)
SEPTEMBER 30, JUNE 30,
2004 2004
------------- ----------
(unaudited)
ASSETS
Current assets
Cash (including cash equivalents of $1,003 and
$502, respectively) $ 6,307 $ 4,534
Investments 995 2,508
Accounts receivable, net 9,340 10,563
Inventories 22,833 22,268
Deferred income taxes, net 2,842 2,777
Other current assets 1,215 865
--------- ---------
TOTAL CURRENT ASSETS 43,532 43,515
--------- ---------
Property, plant and equipment, net of accumulated depreciation
and amortization of $43,450 and $42,092, respectively 27,911 26,141
Other assets 197 197
--------- ---------
TOTAL ASSETS $ 71,640 $ 69,853
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt (including related party debt of
$404 and $394, respectively) $ 580 $ 394
Accounts payable 2,336 2,065
Accrued expenses 4,582 5,107
Income taxes payable 1,202 1,049
--------- ---------
TOTAL CURRENT LIABILITIES 8,700 8,615
Long-term debt, net of current portion (including related party debt of
$2,791 and $2,896, respectively) 3,614 2,896
Deferred income taxes 3,377 3,515
--------- ---------
TOTAL LIABILITIES 15,691 15,026
--------- ---------
Commitments and Contingencies
Stockholders' Equity
Common Stock -- $0.01 par value; authorized 20,000 shares; issued 8,729
and 8,644 shares, outstanding 8,315 and 8,230 shares, respectively 87 86
Capital in excess of par value 12,637 12,051
Retained earnings 44,446 43,846
Accumulated other comprehensive income:
Unrealized loss on investments available-for-sale, net (3) (5)
Cumulative foreign currency translation adjustment 357 282
--------- ---------
354 277
--------- ---------
Less: Treasury stock, at cost (414 and 414 shares, respectively) 1,396 1,396
Deferred compensation 179 37
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 55,949 54,827
--------- ---------
$ 71,640 $ 69,853
========= =========
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
September 30,
2004 2003
---- ----
Net sales $ 16,928 $ 12,549
Cost of sales 11,636 9,673
-------- --------
Gross profit 5,292 2,876
-------- --------
Selling, general and administrative expenses 3,832 3,209
Research and development expenses 550 710
Other (10) (4)
-------- --------
Operating expenses 4,372 3,915
-------- --------
-------- --------
Income/(loss) from operations 920 (1,039)
-------- --------
Other (income) expense:
Interest expense 91 95
Interest income (15) (22)
Other 5 --
-------- --------
81 73
-------- --------
Income/(loss) before provision for income taxes 839 (1,112)
Provision for/(benefit from) income taxes 239 (329)
-------- --------
Net income/(loss) $ 600 $ (783)
======== ========
Basic net income/(loss) per common share $ 0.07 $ (0.10)
======== ========
Diluted net income/(loss) per common share $ 0.07 $ (0.10)
======== ========
Basic weighted average common
shares outstanding 8,263 8,096
======== ========
Diluted weighted average common
shares outstanding 8,642 8,096
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended September 30,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ 600 $ (783)
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Depreciation and amortization 1,429 1,269
(Gain)/loss on disposal of fixed assets (10) 75
Deferred income taxes (203) --
Stock-based compensation expense 20 83
Investment interest accretion, net (2) (4)
Realized loss on investments 1 --
Changes in operating assets and liabilities:
Accounts receivable 1,298 225
Inventories (506) (192)
Other assets (338) (13)
Accounts payable and accrued expenses (262) 209
Income taxes payable 223 (354)
-------- --------
Net cash provided by operating activities 2,250 515
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,203) (870)
Purchase of investments -- (1,486)
Proceeds from sale of investments 1,517 1,500
Proceeds from sale of fixed assets 17 11
-------- --------
Net cash used in investing activities (1,669) (845)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (109) (86)
Proceeds from the exercise of stock options 354 23
Proceeds from the issuance of long term debt 1,013 --
-------- --------
Net cash provided by/(used in) financing activities 1,258 (63)
-------- --------
-------- --------
Effect of exchange rate changes on cash (66) 38
-------- --------
Net increase/(decrease) in cash and cash equivalents 1,773 (355)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,534 8,685
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,307 $ 8,330
======== ========
Supplemental cash flow information:
Interest paid $ 91 $ 94
Taxes paid $ 220 $ 24
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 September 30, 2004, and the results of its operations for the
three month periods ended September 30, 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, 2004. Results for the three month period ended September 30, 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 Plan 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.
Stock option activity for the three months ended September 30, 2004 and
2003, is as follows:
September 30, 2004 September 30, 2003
--------------------------------- ----------------------------------
Weighted Weighted
Average Average
Shares Subject Exercise Shares Subject Exercise
to Options Price to Options Price
---------------- ------------ ---------------- ----------
Outstanding, beginning of period 1,257,400 $ 6.97 1,381,200 $ 6.64
Granted 25,000 8.79 13,000 5.85
Canceled (25,250) 7.62 (1,250) 9.59
Expired (4,750) 18.22 (500) 11.40
Exercised (78,000) 4.39 (7,650) 4.74
------------- -------------
Outstanding, end of period 1,174,400 $ 7.12 1,384,800 $ 6.63
============= =============
5
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(2) STOCK-BASED COMPENSATION (CONTINUED):
Prior to fiscal year 2004, the Company did not recognize 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 $9 and $1 in compensation expense for the
three months ended September 30, 2004 and September 30, 2003, 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 income/(loss) and
earnings/(loss) per share would have approximated the pro forma amounts
indicated below:
Three Months Ended September 30,
----------------------------------------------
2004 2003
----------------------- --------------------
Net income/(loss), as reported $ 600 $ (783)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects 20 101
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (159) (525)
--------------------- --------------------
Pro forma income/(loss) $ 461 $ (1,207)
Earnings/(loss) per share:
Basic - as reported $ 0.07 $ (0.10)
Basic - pro forma $ 0.06 $ (0.15)
Diluted - as reported $ 0.07 $ (0.10)
Diluted - pro forma $ 0.05 $ (0.15)
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) SUPPLEMENTAL CASH FLOW INFORMATION:
During the three months ended September 30, 2004, the Company (i)
granted deferred compensation stock awards with an aggregate value of $47 with
respect to which expense shall be recognized ratably throughout fiscal year
2005, (ii) granted stock options with respect to which compensation expense of
$116 will be recognized evenly over the next five years, and (iii) recognized a
$70 reduction of income taxes payable related to stock options exercised.
6
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(4) INVENTORIES:
Inventories included in the accompanying consolidated financial
statements consist of the following:
September 30, June 30,
2004 2004
---------------- ------------
(unaudited)
Raw materials $ 11,181 $ 11,772
Work-in-process 7,202 6,722
Finished goods 4,450 3,774
----------- ---------
$ 22,833 $ 22,268
=========== =========
(5) EARNINGS PER SHARE:
The following represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share ("EPS") computation.
For the Three Months Ended September 30,
2004 2003
---- ----
Net Income Shares Per-Share Net Loss Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS $ 600 8,263 $ 0.07 $ (783) 8,096 $ (0.10)
======== ========
Effect of Dilutive Securities:
Stock options -- 372 -- --
Deferred compensation
stock awards -- 7 -- --
--------- ----- -------- --------- ----- --------
Diluted EPS $ 600 8,642 $ 0.07 $ (783) 8,096 $ (0.10)
========= ===== ======== ========= ===== ========
Options covering 500 and 1,385 shares have been omitted from the
calculation of dilutive EPS for the three months ended September 30, 2004 and
2003, respectively, because their inclusion would have been antidilutive.
7
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(6) COMPREHENSIVE INCOME/(LOSS):
The Company's comprehensive income/(loss) is as follows:
For the Three Months Ended
September 30,
2004 2003
-------- --------
Net income/(loss) $ 600 $ (783)
-------- -------
Other comprehensive income:
Foreign currency translation
adjustments 75 43
Unrealized gains/(losses) on investments,
net of tax 2 (1)
-------- -------
Other comprehensive income 77 42
-------- -------
Comprehensive income/(loss) $ 677 $ (741)
======== =======
(7) INDEBTEDNESS:
Long-term debt consists of the following:
Sept. 30, 2004 June 30, 2004
---------------- -----------------
Notes payable to banks $ 999 $ --
Obligations under capital leases 3,195 3,290
------- --------
4,194 3,290
Less: Current portion 580 394
------- --------
Long-term debt $ 3,614 $ 2,896
======= ========
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 had outstanding $999 under
this line as of September 30, 2004.
8
AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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 September
30, 2004, the Jacksonville Facility has an aggregate cost of $5,104 and a net
book value of $2,237. 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, 2004, the Company is
obligated to pay approximately $756 per annum under this lease. The payments due
over the remaining six years of this capital lease, including the portion
related to interest, total approximately $4,536.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Overview
Fiscal year 2004 marked the end of the long economic downturn
experienced by the electronic component industry. In the second half of fiscal
year 2004, the Company's sales increased substantially and the Company increased
production to meet rapidly growing demand. During the quarter ended September
30, 2004, bookings and sales were significantly greater than the levels achieved
during the first quarter of fiscal year 2004, but declined compared to the
fourth quarter of fiscal year 2004. The Company believes that bookings and sales
will increase during the remainder of fiscal year 2005. As such, the Company is
maintaining a high level of production to meet anticipated future demand and to
replenish depleted levels of inventory of certain products.
The Company continues to benefit from the efficiencies of operating at
higher production levels. The Company is converting the vacant building adjacent
to its existing New York facilities into additional production space. It will
begin using this space in the second quarter of fiscal year 2005. This new
facility will expand the Company's current capacity enabling it to replenish
stock and meet future increased demand. During the quarter ended September 30,
2004, the Company incurred approximately $1 million in borrowings under its line
of credit with General Electric Capital Corporation ("GECC") to fund part of
this expansion. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - LIQUIDITY".
RESULTS OF OPERATIONS
KEY COMPARATIVE PERFORMANCE INDICATORS
Three Months Ended
----------------------------------------------------
September 30, September 30,
2004 2003
------------------------- -----------------------
Sales ($) 16,928 12,549
Bookings ($) 14,464 12,274
Gross Margin ($) 5,292 2,876
Gross Margin (%) 31.3 22.9
Operating Expenses ($) 4,372 3,915
Operating Expenses (%) 25.8 31.2
SIGNIFICANT HIGHLIGHTS
Sales for the three months ended September 30, 2004 increased 35% over
the comparable period in the prior fiscal year.
Bookings for the three months ended September 30, 2004 increased 18%
over the comparable period in the prior fiscal year.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Three Months Ended September 30, 2004 Compared with Three Months Ended
September 30, 2003
Net sales for the three months ended September 30, 2004 increased 35%
from the comparable period in the prior fiscal year. The increase was due to
higher volume of product shipped as a result of the economic recovery in the
electronic components industry. The volume improvement was mainly from sales to
customers in the wireless infrastructure market. The volume increase was
partially offset by lower average selling prices on high volume orders.
Gross margin for the three months ended September 30, 2004 was 31% of
net sales, compared to 23% of net sales for the comparable period in the prior
fiscal year. Gross margins increased due to higher sales volume and higher
material reclamation, partially offset by lower average selling prices,
increased labor and overhead costs and inventory writedowns to net realizable
value. Labor and overhead increases primarily relate to increased headcount and
the redesignation of certain personnel from research and development to
production support. Over the past year, the Company has added personnel and
incurred other expenses in connection with its efforts to increase production,
reduce lead times and improve market share. Precious metal recovery increased
primarily due to a higher amount of metal reclaimed.
Selling, general and administrative expenses for the three months ended
September 30, 2004 increased 19% from the comparable period in the prior fiscal
year. The increase was primarily the result of salary increases, severance
costs, commission expense and expansion of the Company's foreign sales offices
in China and Sweden, partially offset by lower bad debt expense, bonuses and
professional fees.
Research and development expenses for the three months ended September
30, 2004 decreased 23% from the comparable period in the prior fiscal year,
primarily resulting from the redesignation of certain personnel to production
support, as discussed above.
Bookings for the three months ended September 30, 2004 were $14,464,
compared to $12,274 for the three months ended September 30, 2003. The
improvement in bookings was due primarily to improved bookings from the wireless
infrastructure market.
The backlog of unfilled orders at September 30, 2004 was $11,014,
compared to $8,848 at September 30, 2003 and $13,422 at June 30, 2004.
As a result of the foregoing, net income for the three months ended
September 30, 2004 was $600, or $0.07 per common share and per common share
assuming dilution, compared to net loss of $783, or ($0.10) per common share and
per common share assuming dilution, for the comparable period in the prior
fiscal year.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
LIQUIDITY AND CAPITAL RESOURCES
September 30, June 30, September 30,
2004 2004 2003
--------------- ---------- --------------
Cash and Investments ($) 7,302 7,042 11,331
Working Capital ($) 34,832 34,900 31,250
Quarter Ended:
Operating Cash Flow ($) 2,250 1,142 515
Capital Expenditures ($) 3,203 1,130 870
Depreciation ($) 1,429 1,306 1,269
Current Ratio 5.0:1 5.1:0 7.4:0
Quick Ratio 1.9:0 2.0:0 3.7:0
The Company's financial position at September 30, 2004 remains strong
as evidenced by working capital of $34,832. The Company's current and quick
ratios at September 30, 2004 also remain strong.
Cash, cash equivalents and investments increased by $260 from June 30,
2004, primarily as a result of positive operating cash flow and borrowings under
the Company's equipment line of credit, partially offset by capital
expenditures. Accounts receivable decreased by $1,223 from June 30, 2004,
primarily due to decreased sales revenue in the quarter ended September 30, 2004
compared to the quarter ended June 30, 2004. Inventories increased by $565 from
June 30, 2004, primarily as a result of higher production levels offset by
writedowns of certain inventory to net realizable value. Other current assets
increased $350 from June 30, 2004, primarily due to the timing of certain
prepayments and short-term non-customer receivables.
The current portion of long-term debt increased $186 due to borrowings
incurred under the GECC equipment line of credit. Accounts payable increased by
$271, due in part to increased purchasing activity to keep pace with higher
production levels and in part to capital expenditures. Accrued expenses
decreased by $525 during the same period due to payments of year end bonuses and
lower commission accruals. Taxes payable increased $153 from June 30, 2004,
primarily due to taxable income generated during the quarter ended September 30,
2004.
The Company is committed to purchase an additional $4,500 of precious
metals (primarily palladium and silver) over the next six months to protect
against shortages and rising prices. The Company's commitments are above the
current prevailing market rates for these metals, but well below peak levels
experienced three years ago. The Company has benefited from declining precious
metal market prices 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
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. As of
September 30, 2004, the Company had borrowed an aggregate of $1,013 under the
credit facility bearing interest at 7.15%.
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 2004,
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, 2004, the Company is obligated to pay approximately
$756 per annum under this lease. The payments due over the remaining six years
of this capital lease, including the portion related to interest, total
approximately $4,537.
Capital expenditures for the three months ended September 30, 2004
totaled $3,203, including expenditures for machinery and equipment and leasehold
improvements. The Company intends to use cash on hand, cash generated through
operations and the line of credit with GECC to finance budgeted capital
expenditures of approximately $3,400 for the remainder of fiscal year 2005,
primarily for equipment acquisitions and building renovations.
The Company is negotiating the terms of a one-year credit facility with
a major bank. Under the terms being discussed, the Company may request advances
under the facility from time to time up to an aggregate of $5,000. Any advance
made would bear interest at the Prime Rate as reported in the Wall Street
Journal. Borrowings under the facility would be secured by a lien on the
Company's accounts receivable and inventory. The facility would be subject to
certain financial covenants, including minimum tangible net worth and liability
percentage ratios. There can be no assurance that these negotiations will result
in the Company obtaining a new credit facility or that, if obtained, the bank
will approve any request by the Company for an advance thereunder. If the
Company is unable to secure such financing on acceptable terms, the Company
believes that it will be able to fund its cash needs from cash on hand, cash
generated from operations and borrowings under the GECC line.
Aggregate contractual obligations as of September 30, 2004 mature as
follows:
Payments Due by Period
-----------------------------------------------------------------------------------
Less than 1 1- 3 3- 5 After 5
Contractual Obligations Total year years years years
----------------------------- ------------- --------------- ----------- ----------- -----------
Bank Debt $ 1,188 $ 242 $ 483 $ 463 $ --
Capital Lease Obligations 4,537 756 1,512 1,512 757
Operating Leases 1,324 479 845 -- --
Purchase Obligations 6,432 6,432 -- -- --
-------- ------- ------ ------ -------
Total Contractual Obligations $ 13,481 $ 7,909 $2,840 $1,975 $ 757
======== ======= ====== ====== =======
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
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 September 30, 2004, the Company had
commitments to purchase an aggregate of $4,500 of precious metals at various
times over the next six 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, 2004. 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.
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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
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. 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.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure at September 30, 2004 is consistent
with the types of market risk and amount of exposures, including foreign
currency exchange rate, commodity price, security price and interest rate risks,
presented in its Annual Report on Form 10-K for the fiscal year ended June 30,
2004.
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 5. Not Applicable
ITEM 6. Exhibits
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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.
16
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: November 12, 2004 BY: /S/ VICTOR INSETTA
-------------------------------
Victor Insetta
President and Director
(Principal Executive Officer)
DATE: November 12, 2004 BY: /S/ ANDREW R. PERZ
-------------------------------
Andrew R. Perz
Vice President, Controller
(Principal Accounting Officer)
17