Item 1. Financial Statements
ANAREN, INC.
Consolidated Balance Sheets
September 30, 2007 and June 30, 2007
Assets September 30, 2007 June 30, 2007
------ ------------------ -------------
(Unaudited)
Current assets
Cash and cash equivalents $ 7,379,493 $ 7,912,276
Securities available for sale (note 4) 6,000,000 14,150,000
Securities held to maturity (note 4) 22,254,574 20,951,788
Receivables, less allowances of $258,588
at September 30, 2007 and $255,677 at June 30, 2007 20,487,741 19,768,701
Inventories (note 5) 25,575,943 24,331,597
Other receivables 2,146,543 1,606,093
Prepaid expenses 734,917 771,251
Deferred income taxes 1,174,255 1,174,255
Other current assets 848,273 1,121,513
------------- -------------
Total current assets 86,601,739 91,787,474
Securities held to maturity (note 4) 24,122,451 31,540,247
Property, plant and equipment, net (note 6) 38,740,683 37,091,786
Deferred income taxes 28,890 31,447
Goodwill 30,715,861 30,715,861
Other intangible assets, net (note 2) -- 37,500
------------- -------------
Total assets $ 180,209,624 $ 191,204,315
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 9,528,342 $ 11,717,120
Accrued expenses (note 7) 1,381,149 3,907,652
Income taxes payable (note 1 and 9) 21,953 726,240
Customer advance payments 2,160,266 1,318,812
Other current liabilities (note 8) 1,665,965 1,259,616
------------- -------------
Total current liabilities 14,757,675 18,929,440
Deferred income taxes 1,440,353 1,373,353
Pension and postretirement benefit obligation 3,049,664 2,954,664
Other liabilities (note 8) 2,445,315 1,152,710
------------- -------------
Total liabilities 21,693,007 24,410,167
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 27,347,824 shares
at September 30, 2007 and 27,128,855 at June 30, 2007 273,478 271,288
Additional paid-in capital 189,066,953 187,877,944
Retained earnings 88,012,277 85,306,813
Accumulated other comprehensive loss (871,478) (984,640)
------------- -------------
276,481,230 272,471,405
Less cost of 11,616,789 treasury shares
at September 30, 2007 and 10,752,506 at June 30, 2007 117,964,613 105,677,257
------------- -------------
Total stockholders' equity 158,516,617 166,794,148
------------- -------------
Total liabilities and stockholders' equity $ 180,209,624 $ 191,204,315
============= =============
|
See accompanying notes to consolidated financial statements.
3
ANAREN, INC.
Consolidated Statements of Earnings
Three Months Ended
September 30, 2007 and 2006
(Unaudited)
September 30, September 30,
2007 2006
------------- --------------
Net sales $ 32,090,192 $ 30,203,110
Cost of sales 21,571,206 19,363,778
------------ ------------
Gross profit 10,518,986 10,839,332
------------ ------------
Operating expenses:
Marketing 1,757,367 1,812,706
Research and development 2,603,318 2,138,185
General and administrative 3,362,244 2,768,226
------------ ------------
Total operating expenses 7,722,929 6,719,117
------------ ------------
Operating income 2,796,057 4,120,215
Other income, primarily interest 750,043 896,606
Interest expense (36,636) (6,143)
------------ ------------
Total other income 713,407 $ 890,463
------------ ------------
Income before income taxes 3,509,464 5,010,678
Income tax expense 804,000 1,250,000
------------ ------------
Net income $ 2,705,464 $ 3,760,678
============ ============
Basic earnings per share: $ 0.17 $ 0.21
============ ============
Diluted earnings per share: $ 0.17 $ 0.21
============ ============
Shares used in computing net earnings per share:
Basic 16,042,333 17,492,157
============ ============
Diluted 16,365,305 17,975,795
============ ============
|
See accompanying notes to consolidated financial statements.
4
ANAREN, INC.
Consolidated Statements of Cash Flows
Three Months Ended
September 30, 2007 and 2006
(Unaudited)
Cash flows from operating activities: September 30, 2007 September 30, 2006
------------------ ------------------
Net income $ 2,705,464 $ 3,760,678
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 1,562,685 1,323,094
Amortization 189,208 220,444
Gain on sale of land -- (77,508)
Deferred income taxes 70,000 145,000
Stock based compensation 896,138 829,666
Provision for receivables allowances 2,911 1,279
Changes in operating assets and liabilities:
Receivables (721,951) (3,669,997)
Inventories (1,259,403) (2,850,213)
Other receivables (540,450) 180,009
Prepaids and other current assets 309,574 (895,480)
Accounts payable (1,126,520) 678,172
Accrued expenses (2,526,503) (1,413,163)
Income taxes payable (704,287) 682,955
Customer advance payments 841,454 --
Other liabilities 1,698,510 57,573
Pension and postretirement benefit obligation 95,000 170,578
------------ ------------
Net cash (used in) provided by operating activities 1,491,830 (856,913)
------------ ------------
Cash flows from investing activities:
Capital expenditures (4,273,839) (2,270,268)
Proceeds from sales of land -- 134,508
Increase in other assets -- (341,448)
Maturities of held to maturity and available for sale securities 45,537,462 39,475,003
Purchase of held to maturity and available for sale securities (31,424,160) (40,476,573)
------------ ------------
Net cash (used in) provided by investing activities 9,839,463 (3,478,778)
------------ ------------
Cash flows from financing activities:
Stock options exercised 286,467 1,225,797
Tax benefit from exercise of stock options 23,651 422,080
Purchase of treasury stock (12,287,356) --
------------ ------------
Net cash (used in) provided by financing activities (11,977,238) 1,647,877
------------ ------------
Effect of exchange rates on cash 113,162 (12,151)
------------ ------------
Net decrease in cash and cash equivalents (532,783) (2,699,965)
Cash and cash equivalents at beginning of period 7,912,276 15,733,214
------------ ------------
Cash and cash equivalents at end of period $ 7,379,493 $ 13,033,249
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period For:
Interest $ 6,143 $ 6,143
Income taxes 101,377 --
Fixed asset purchases included in accounts payable 481,842 --
|
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements are unaudited and reflect all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2007. The results of operations for
the three months ended September 30, 2007 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2008, or any future interim
period.
The income tax rates utilized for interim financial statement purposes for the
three months ended September 30, 2007 and 2006 are based on estimates of income
and utilization of tax credits for the entire year.
NOTE 1: Adoption of Recent Accounting Pronouncements
Effective July 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48 ("FIN No. 48"), "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109." FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109. FIN
No. 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken on a tax return. Additionally, FIN No. 48 provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition (note 9).
NOTE 2: Intangible Assets
Intangible assets as of September 30, 2007 and June 30, 2007 are as follows:
September 30 June 30
---------------------------- ----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ----------- -------------- -----------
Patent $ 574,966 $ 574,966 $ 574,966 $ 574,966
Customer Relationships 1,350,000 1,350,000 1,350,000 1,312,500
Non-Competition Agreements 180,000 180,000 180,000 180,000
---------- ---------- ---------- ----------
Total $2,104,966 $2,104,966 $2,104,966 $2,067,466
========== ========== ========== ==========
|
Intangible asset amortization expense for the three month period ended September
30, 2007 and 2006 aggregated $37,500 and $80,218, respectively. The intangible
assets have been fully amortized during the first quarter ended September 30,
2007, and no future amortization expense related to these intangible assets will
occur in subsequent quarters.
6
NOTE 3: Equity Based Compensation
The components of equity based compensation expense in the statements of
earnings are as follows:
Three Months Ended
September 30
-------------------
2007 2006
---- ----
Stock options $594,422 $747,383
Restricted stock 301,716 82,283
-------- --------
Stock based compensation expense $896,138 $829,666
======== ========
|
During the quarter ending September 30, 2007, 186,069 shares of restricted stock
with an aggregate value of $3,027,343 were issued with a vesting period of 1 to
4 years.
NOTE 4: Securities
The amortized cost and fair value of securities are as follows:
September 30, 2007
------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Securities available for sale:
Auction securities $ 6,000,000 $ -- $ -- $ 6,000,000
----------- ----------- ----------- -----------
Total securities
available-for-sale $ 6,000,000 $ -- $ -- $ 6,000,000
=========== =========== =========== ===========
Securities held to maturity:
Municipal bonds $41,123,560 $ 29,040 $ -- $41,152,600
Commercial paper 1,674,188 -- -- 1,674,188
Corporate bonds 2,582,075 -- (507) 2,581,568
Federal Agency Bond 997,202 1,208 -- 998,410
----------- ----------- ----------- -----------
Total securities held to maturity $46,377,025 $ 30,248 $ (507) $46,406,766
=========== =========== =========== ===========
|
June 30, 2007
-------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Securities available for sale:
Auction rate securities $14,150,000 $ -- $ -- $14,150,000
----------- ---------- ----------- -----------
Total securities
Available-for-sale $14,150,000 $ -- $ -- $14,150,000
=========== ========== =========== ===========
Securities held to maturity:
Municipal bonds $47,059,882 $ -- $ (143,577) $46,916,305
Commercial paper 2,595,026 -- -- 2,595,026
Corporate bonds 2,238,166 -- (264) 2,237,902
Federal agency bonds 598,961 -- (411) 598,550
----------- ---------- ----------- -----------
Total securities held to maturity $52,492,035 $ -- $ (144,252) $52,347,783
=========== ========== =========== ===========
|
Contractual maturities of marketable debt securities held to maturity at
September 30, 2007 and June 30, 2007 are summarized as follows:
September 30, 2007 June 30, 2007
------------------ -------------
Fair Fair
Market Market
Cost Value Cost Value
---- ------ ---- ------
Within one year $22,254,574 $22,267,404 $20,951,788 $20,943,580
One year to five years 24,122,451 24,139,362 31,540,247 31,404,203
----------- ----------- ----------- -----------
Total $46,377,025 $46,406,766 $52,492,035 $52,347,783
=========== =========== =========== ===========
|
7
Contractual maturities of auction rate securities available for sale at
September 30, 2007 and June 30, 2007 are summarized as follows:
September 30, 2007 June 30, 2007
------------------ -------------
Fair Fair
Market Market
Cost Value Cost Value
---- ------ ---- ------
Within one year $ 6,000,000 $ 6,000,000 $14,150,000 $14,150,000
One year to five years -- -- -- --
----------- ----------- ----------- -----------
Total $ 6,000,000 $ 6,000,000 $14,150,000 $14,150,000
=========== =========== =========== ===========
|
The Company invests in auction rate securities. Auction rate securities have
long-term underlying maturities; however, the market is highly liquid and the
interest rates reset every 7, 28 or 35 days.
Amortization expense relating to the net discounts and premiums on securities
held to maturity for the quarters ending September 30, 2007 and 2006 amounted to
$151,708 and $140,226, respectively. The amortization for the period ending
September 30, 2006 was reclassified from investing to operating cash flows on
the consolidated statements of cash flows.
NOTE 5: Inventories
Inventories are summarized as follows:
September 30, 2007 June 30, 2007
------------------ -------------
Component parts $12,197,226 $11,841,427
Work in process 7,816,523 7,392,973
Finished goods 5,562,194 5,097,197
----------- -----------
Total $25,575,943 $24,331,597
=========== ===========
|
NOTE 6: Property, Plant and Equipment
Property, plant and equipment are summarized as follows:
September 30, 2007 June 30, 2007
------------------ -------------
Land and land improvements $ 4,157,617 $ 4,157,617
Construction in process 613,344 5,774,893
Buildings, furniture and fixtures 24,668,798 17,956,858
Machinery and equipment 66,344,569 64,683,378
------------ ------------
$ 95,784,328 $ 92,572,746
Less accumulated depreciation (57,043,645) (55,480,960)
------------ ------------
$ 38,740,683 $ 37,091,786
============ ============
|
NOTE 7: Accrued Expenses
Accrued expenses consist of the following:
September 30, 2007 June 30, 2007
------------------ -------------
Compensation $ 595,673 $ 2,945,888
Commissions 682,025 654,596
Health insurance 174,253 280,819
Other (70,802) 26,349
----------- -----------
$ 1,381,149 $ 3,907,652
=========== ===========
|
NOTE 8: Other Liabilities
8
Other liabilities consist of the following:
September 30, 2007 June 30, 2007
------------------ -------------
Deferred compensation $ 927,704 $ 937,811
Supplemental retirement plan 479,809 460,459
Accrued lease 937,016 542,056
Income tax liability 1,315,000 --
Warranty 448,623 472,000
Other 3,128 --
---------- ----------
4,111,280 2,412,326
Less current portion 1,665,965 1,259,616
---------- ----------
$2,445,315 $1,152,710
========== ==========
|
NOTE 9: Income Taxes
As discussed in Note 1, effective July 1, 2007 the Company adopted FIN No. 48.
The Company did not record a cumulative effect adjustment to retained earnings
as a result of this adoption. Upon adoption, the Company has unrecognized tax
benefits of $414,000 related to continuing operations. The Company has
unrecognized tax benefits of $770,000 resulting from deductions related to the
liquidation of a subsidiary which would be recorded as discontinued operations
if recognized. Unrecognized tax benefits of $414,000 would affect the Company's
effective tax rate if recognized.
In accordance with the Company's accounting policy, the Company recognizes
accrued interest and penalties related to unrecognized tax benefits as a
component of income tax expense. This policy did not change as a result of the
adoption of FIN No. 48. As of the date of adoption, $115,000, net of tax
benefit, was included in the liability for uncertain tax positions for the
possible payment of interest and penalties.
The Company reclassified $1,315,000 of liabilities from current to non-current
liabilities because payment of cash is not anticipated within one year of the
balance sheet date. These liabilities are recorded in the other non-current
liabilities line in the Company's Consolidated Balance Sheet.
Various state income tax examinations are currently in progress. It is
reasonably possible that the liability associated with the Company's
unrecognized tax benefits will increase or decrease within the next twelve
months as a result of these examinations or the expiration of the statutes of
limitations. At this time, an estimate of the range of reasonably possible
outcomes cannot be made, however the change could include the entire amount of
unrecognized tax benefits related to discontinued operations.
As of July 1, 2007 the Company is subject to income tax examinations for its
U.S. federal and foreign income taxes for the fiscal years 2004 through 2007,
for state and local taxes for the fiscal years 1999 through 2007.
Income taxes for the first quarter of fiscal 2008 were $804,000, representing an
effective tax rate of 22.9% and included a $65,000 tax benefit resulting from
deductible interest accrued on prior year's tax liabilities. The first quarter
of fiscal 2007 had an effective tax rate of 25.0%. The projected effective tax
rate for fiscal 2008 is approximately 25% compared to an actual effective tax
rate of 25.3% for fiscal 2007.
9
NOTE 10: Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding, as well as dilutive potential common shares
which, in the Company's case, comprise shares issuable under the Company's
Comprehensive Long-Term Incentive Plan. The weighted average number of common
shares utilized in the calculation of the diluted earnings per share does not
include antidilutive shares aggregating 1,055,364 and 946,950 at September 30,
2007 and 2006, respectively. The treasury stock method is used to calculate
dilutive shares, which reduces the gross number of dilutive shares by the number
of shares purchasable from the proceeds of the options assumed to be exercised.
The following table sets forth the computation of basic and fully diluted
earnings per share:
Three Months Ended
--------------------
September 30
2007 2006
---- ----
Numerator:
Net income $ 2,705,464 $ 3,760,678
========== ==========
Denominator:
Denominator for basic earnings
per share:
Weighted average shares outstanding 16,042,333 17,492,157
========== ==========
Denominator for diluted earnings
per share:
Weighted average shares outstanding 16,042,333 17,492,157
Common stock options
and restricted stock 322,972 483,638
---------- ----------
Weighted average shares and conversions 16,365,305 17,975,795
========== ==========
|
NOTE 11: Components of Net Periodic Pension Benefit Costs
Three Months Ended
-----------------------
September 30
2007 2006
---- ----
Service cost $ 75,000 $ 85,587
Interest cost 175,000 151,795
Expected return on plan assets (225,000) (173,365)
Amortization of prior service cost -- (808)
Amortization of the net loss -- 47,436
--------- ---------
Net periodic benefit cost $ 25,000 $ 110,645
========= =========
Expected Pension Contributions
|
Required contributions for fiscal 2008 are $0.
NOTE 12: Components of Net Periodic Postretirement Health Benefit Costs
Three Months Ended
-----------------------
September 30
2007 2006
---- ----
Service cost $ 20,000 $ 18,677
Interest cost 42,500 36,665
Amortization of the net loss 7,500 13,208
--------- ---------
Postretirement Health $ 70,000 $ 68,550
========= =========
|
10
Expected Postretirement Health Contributions
Expected contributions for fiscal 2008 are approximately $90,000.
NOTE 13: Segment Information
The Company operates predominately in the wireless communications, satellite
communications and defense electronics markets. The Company's two reportable
segments are Wireless and Space and Defense. These segments have been determined
based upon the nature of the products and services offered, customer base,
technology, availability of discrete internal financial information, homogeneity
of products and delivery channel, and are consistent with the way the Company
organizes and evaluates financial information internally for purposes of making
operating decisions and assessing performance.
The Wireless segment designs, manufactures and markets commercial products used
mainly by the wireless communications market. The Space and Defense segment of
the business designs, manufactures and markets specialized products for the
defense electronics and satellite communications markets. The revenue
disclosures for the Company's reportable segments depict products that are
similar in nature.
The following table reflects the operating results of the segments consistent
with the Company's internal financial reporting process. The following results
are used in part, by management, both in evaluating the performance of, and in
allocating resources to, each of the segments:
Space & Corporate and
Wireless Defense Unallocated Consolidated
-------- ------- ----------- ------------
Net sales:
Three months ended:
September 30, 2007 21,103,429 10,986,763 -- 32,090,192
September 30, 2006 19,827,407 10,375,703 -- 30,203,110
Operating income:
Three months ended:
September 30, 2007 1,742,429 1,053,628 -- 2,796,057
September 30, 2006 2,735,062 1,385,153 -- 4,120,215
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this Form
10-Q. The following discussion, other than historical facts, contains
forward-looking statements that involve a number of risks and uncertainties. The
Company's results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including factors
described elsewhere in this Quarterly Report on Form 10-Q.
11
Overview
The consolidated financial statements present the financial condition of the
Company as of September 30, 2007 and June 30, 2007, and the consolidated results
of operations and cash flows of the Company for the three months ended September
30, 2007 and 2006.
The Company designs, develops and markets microwave components and assemblies
for the wireless communications, satellite communications and defense
electronics markets. The Company's distinctive manufacturing and packaging
techniques enable it to cost-effectively produce compact, lightweight microwave
products for use in base stations for wireless communications systems, in
satellites and in defense electronics systems. Beginning in 2004, the Company
has introduced new components addressing consumer wireless applications such as
wireless local area networks, Bluetooth, WiFi, cellular handsets and satellite
telecommunications. The Company sells its products to leading wireless
communications equipment manufacturers such as Ericsson, Motorola, Nokia, Nortel
Networks, and Andrew, and to satellite communications and defense electronics
companies such as Boeing Satellite, ITT, Lockheed Martin, Northrup Grumman and
Raytheon.
The Company generally recognizes sales at the time products are shipped to
customers, provided that persuasive evidence of an arrangement exists, the sales
price is fixed or easily determinable, collectibility is reasonably assured and
title and risk of loss has passed to the customer. Title and the risks and
rewards of ownership of products are generally transferred at the time of
shipment. Payments received from customers in advance of products delivered are
recorded as customer advance payments until earned. Annually, a small percentage
of sales are derived from fixed-price contracts for the sale of engineering
design and development efforts for space and defense electronics products. Sales
and estimated profits under long-term contracts are recognized according to
customer contractual milestones on a units-of-delivery basis. Profit estimates
are revised periodically based upon changes in sales value and costs at
completion. Any losses on these contracts are recognized in the period in which
such losses are determined.
In July 2006, the Company began construction on a 54,000 square foot addition to
its facility in East Syracuse, New York. This addition is needed primarily to
accommodate the growth of the Company's Space and Defense business. The
expansion project was completed during the third quarter of calendar 2007 at an
estimated cost of $6.1 million for the building addition. During the remainder
of fiscal 2008, the Company plans to renovate the space in its existing facility
at a cost of approximately $2.5 million.
In February 2007, the Company was selected to receive a contract valued in
excess of $8.0 million from Alcatel-Alenia Space (now Thales Alenia Space)
(France) for development and production of integrated beamforming assemblies
that will be deployed on the Globalstar-2 satellite payload. The contract award,
which was finalized in September 2007, covers design services and manufacture of
up to 48 beamforming networks. Work has been authorized to begin immediately,
with production deliveries starting in May 2008.
In July 2007, the Company was selected to receive a contract valued in excess of
$11.0 million from Northrop Grumman Corporation, located in Baltimore, Maryland.
The contract is for Integrated Ferrite Assemblies used in the S-Band radar which
is part of the Mission Equipment for the Cobra Judy Replacement Program. The
contract calls for the first full-rate production and deliveries starting in
November of 2007 and continuing for a 15 month period.
12
In August 2007, the Company was selected to receive a contract valued at $5.8
million from Lockheed Martin for electronic subassemblies that will help U.S.
Navy helicopters detect and identify enemy radar. Designed to process radar
signals detected by a receiver, Anaren's Passive Ranging Subsystem is a major
component of Lockheed Martin's AN/ALQ-210 Electronic Support Measures (ESM)
system, a sophisticated device carried aboard military helicopters and fixed
wing aircraft to warn of possible threats.
In August 2007, the Company announced that pre-tax income for the three months
ended December 31, 2006 and March 31, 2007 were overstated by $238,000 and
$676,000, respectively, due to certain accounting errors related to
reconciliation of inventory and recording of vendor payables at its China
subsidiary, and errors related to stock based compensation and pension expense
as well as errors involving warranty expense and allowance for sale returns. The
Company reported a material weakness in its Annual Report on Form 10-K that its
company-level risk assessment and oversight controls were not effective for the
fiscal year 2007. The restatement was reported in the Company's Annual Report on
Form 10-K for the year ended June 30, 2007 and was also reported in amendments
to its Quarterly Reports on Form 10-Q/A for the second and third quarters of
fiscal year 2007 ended December 31, 2006 and March 31, 2007, respectively in
October 2007.
Second Quarter of Fiscal 2008 Outlook
For the second quarter, the Company expects a decline in demand for wireless
infrastructure products, comparable demand for the consumer component product
line and increased sales for the Space & Defense segment. As a result, the
Company expects net sales to be in the range of $29.0 - $32.0 million for the
second quarter of fiscal 2008. With an anticipated tax rate of approximately
25.0% and an expected stock based compensation expense of approximately $0.04
per diluted share, net earnings per diluted share are expected to be in the
range of $0.14 - $0.17 for the second quarter.
Results of Operations
Net sales from continuing operations for the three months ended September 30,
2007 were $32.1 million, up $1.9 million from $30.2 million for the first
quarter of fiscal 2007. Net income for the first three months of fiscal 2008 was
$2.7 million, or 8.4% of net sales, down $1.1 million, or 28.1% from net income
of $3.8 million in the first three months of fiscal 2007.
13
The following table sets forth the percentage relationships of certain items
from the Company's consolidated condensed statements of earnings as a percentage
of net sales.
Three Months Ended
Sept. 30, 2007 Sept. 30, 2006
-------------- --------------
Net Sales 100.0% 100.0%
Cost of sales 67.2% 64.1%
---- ----
Gross profit 32.8% 35.9%
---- ----
Operating expenses:
Marketing 5.5% 6.0%
Research and development 8.1% 7.1%
General and administrative 10.5% 9.2%
---- ----
Total operating expenses 24.1% 22.3%
---- ----
Operating income 8.7% 13.6%
Other income (expense):
Other, primarily interest income 2.3% 3.0%
Interest expense (0.1)% 0.0%
---- ----
Total other income (expense), net 2.2% 3.0%
---- ----
Income before income taxes 10.9% 16.6%
Income taxes 2.5% 4.2%
---- ----
Net income 8.4% 12.4%
==== ====
|
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended
----------------------
September 30
2007 2006
---- ----
Wireless $ 21,103 $ 19,827
Space and Defense 10,988 10,376
--------- ---------
Total $ 32,091 $ 30,203
========= =========
|
Three Months Ended September 30, 2007 Compared to Three Months Ended September
30, 2006
Net sales. Net sales increased $1.9 million, or 6.2% to $32.1 million for the
first quarter ended September 30, 2007 compared to $30.2 million for the first
quarter of fiscal 2007. This increase resulted from a $1.3 million rise in
shipments of wireless infrastructure and consumer products and a $600,000
increase in sales of Space and Defense segment products.
The increase in sales of Wireless products, which consist of standard
components, ferrite components and custom subassemblies for use in building
wireless basestation and consumer equipment, was a result of a rise in customer
demand for custom Wireless components during the current first quarter compared
to the first quarter of last year. Shipments of custom Wireless components rose
$3.6 million, or 50% in the first quarter of fiscal 2008 compared to the first
quarter last year, led by a significant increase in demand from Nokia Corp. for
a new basestation ferrite product which began shipping in the third quarter of
fiscal 2007. This increase more than
14
offset a $1.0 million decline in consumer products and a $1.4 million decrease
in sales of standard wireless products. Shipments to Nokia Corp. for all
Wireless products in the first quarter of fiscal 2008 were $10.1 million, which
represents 48% of total Wireless sales and 31.5% of total Company sales for the
quarter. Demand for Wireless products is expected to decline from first quarter
levels in the second quarter of fiscal 2008.
Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar, receiver, and countermeasure
subsystems for the military. Sales of Space and Defense products rose $612,000,
or 5.9% in the first quarter of fiscal 2008 compared to the first quarter of the
previous fiscal year. Space and Defense product sales continue to benefit from
the higher level of business won by the Company over the past few fiscal years
which has resulted in the current record segment backlog of over $62 million.
Quarterly shipments of Space and Defense products for the remainder of fiscal
2008 are expected to range between $12.0 and $14.0 million.
Gross Profit. Cost of sales consists primarily of engineering design costs,
materials, material fabrication costs, assembly costs, direct and indirect
overhead, and test costs. Gross profit for the first quarter of fiscal 2008 was
$10.5 million, (32.8% of net sales), down $320,000 from $10.8 million (35.9% of
net sales) for the same quarter of the prior year. Gross profit on sales
decreased in the first quarter of fiscal 2008 over the first quarter of last
year due to the substantial rise in shipments of lower margin custom Wireless
products and a decline in sales of higher margin standard Wireless components.
Marketing. Marketing expenses consist mainly of employee related expenses,
commissions paid to sales representatives, trade show expenses, advertising
expenses and related travel expenses. Marketing expenses were $1.8 million (5.5%
of net sales) for the first quarter of fiscal 2008, unchanged from $1.8 million
(6.0% of net sales) for the first quarter of fiscal 2007. Marketing expenses in
the current first quarter were relatively unchanged, falling $55,000 over the
first quarter of last fiscal year due to a reduction in payroll costs resulting
from a reduction in sales personnel.
Research and Development. Research and development expenses consist of material
and salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses were $2.6 million
(8.1% of net sales) in the first quarter of fiscal 2008, up 21.8% from $2.1
million (7.1% of net sales) for the first quarter of fiscal 2007. Research and
development expenditures are supporting further development of Wireless
infrastructure and consumer component opportunities, as well as new technology
development in the Space and Defense Group. Research and Development
expenditures have increased in the first quarter of fiscal 2008 versus the first
quarter of last year due to the higher level of opportunities in the marketplace
which have resulted in the hiring of additional personnel over the last 12
months to do development work. The Company does not expect to reduce its current
research and development efforts and is presently working on a number of new
standard and custom Wireless and Space and Defense opportunities.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, intangible amortization,
travel related expenses and other corporate costs. General and administrative
expenses increased 21.5% to $3.4 million (10.5% of net sales) for the first
quarter of fiscal 2008 from $2.8 million (9.2% of net sales) for the first
quarter of fiscal 2007. The increase resulted primarily from additional
professional service costs associated with the restatement of the Company's
second and third quarter fiscal 2007 financial
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statements. Costs related to these restatements and subsequent increased year
end audit procedures were in excess of $350,000 in the first quarter of fiscal
2008.
Operating Income. Operating income fell 32.1% in the first quarter of fiscal
2008 to $2.8 million, (8.7% of net sales) compared to $4.1 million (13.6% of net
sales) for the first quarter of fiscal 2007. On a reporting segment basis,
Wireless operating income was $1.7 million for the first quarter of fiscal 2008,
down $1.0 million, or 36.3%, from Wireless operating income of $2.7 million in
the first quarter of fiscal 2007.
The decline in Wireless segment operating income in the first quarter of fiscal
2008 compared to the first quarter of fiscal 2007 was due primarily to a shift
in product mix to more custom Wireless products. Custom Wireless products are
typically lower margin compared to standard Wireless components due to
significantly higher material content as a percentage of sales compared to
standard components. Margins were further eroded by the increase in General and
Administrative expense related to the fiscal year 2007 restatements.
Space and Defense operating income was $1.1 million in the first quarter of
fiscal 2008 down $332,000 from $1.4 million for the first quarter of fiscal
2007. Operating margins in this segment declined in the first quarter due to
manufacturing inefficiencies encountered on some programs which had material
delays, a higher level of internal research and development spending for the
segment year over year and the increase in general and administrative expense
related to the Company's fiscal year 2007 restatements.
Interest Expense. Interest expense represents interest incurred on deferred
obligations. Interest expense for the first quarter of fiscal 2008 was $37,000;
compared to $6,000 for the first quarter of fiscal 2007.
Other Income. Other income is primarily interest income received on invested
cash balances and rental income. Other income decreased 16.3% to $750,000 in the
first quarter of fiscal 2008 compared to $897,000 for the first quarter of last
year. This decrease was caused by the decline in available investable cash due
to the use of $22.3 million to purchase treasury shares over the last two
quarters. Other income will fluctuate based on short term market interest rates
and the level of investable cash balances.
Income Taxes. Income taxes for the first quarter of fiscal 2008 were $804,000
(2.5% of net sales), representing an effective tax rate of 22.9% and included a
$65,000 tax benefit resulting from deductible interest accrued on prior year's
tax liabilities. This compares to income tax expense of $1.3 million (4.1% of
net sales) for the first quarter of fiscal 2007, representing an effective tax
rate of 25.0%. The Company's effective tax rate is a direct result of the
proportion of federally exempt state municipal bond income and federal tax
credits and benefits in relation to the levels of United States and foreign
taxable income or loss. The projected effective tax rate for fiscal 2008 is
approximately 25% compared to an actual effective tax rate of 25.3% for fiscal
2007.
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Critical Accounting Policies
The methods, estimates and judgments management uses in applying the Company's
most critical accounting policies have a significant impact on the results
reported in the Company's financial statements. The U.S. Securities and Exchange
Commission has defined the most critical accounting policies as the ones that
are most important to the portrayal of the Company's financial condition and
results, and that require management to make the most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the Company's most critical
policies include: 1) valuation of accounts receivable, which impacts general and
administrative expense; 2) valuation of inventory, which impacts cost of sales
and gross margin; 3) the assessment of recoverability of goodwill and other
intangible and long-lived assets, which impacts write-offs of goodwill,
intangibles and long-lived assets; 4) accounting for stock based compensation,
which impacts multiple expense components throughout the statements of income;
and 5) accounting for income taxes, which impacts the valuation allowance and
the effective tax rate. Management reviews the estimates, including, but not
limited to, allowance for doubtful accounts, inventory reserves and income tax
valuations on a regular basis and makes adjustments based on historical
experiences, current conditions and future expectations. The reviews are
performed regularly and adjustments are made as required by current available
information. The Company believes these estimates are reasonable, but actual
results could and have differed at times from these estimates.
The Company's accounts receivable represent those amounts which have been billed
to its customers but not yet collected. The Company analyzes various factors
including historical experience, credit worthiness of customers and current
market and economic conditions. The allowance for doubtful accounts balance is
established based on the portion of those accounts receivable which are deemed
to be potentially uncollectible. Changes in judgments on these factors could
impact the timing of costs recognized.
The Company states inventories at the lower of cost or market, using a standard
cost methodology to determine the cost basis for the inventory. This method
approximates actual cost on a first-in-first-out basis. The recoverability of
inventories is based on the types and levels of inventory held, forecasted
demand, pricing, competition and changes in technology.
The Company records valuation allowances to reduce deferred tax assets when it
is more likely than not that some portion of the amount may not be realized. The
Company evaluates the need for valuation allowances on a regular basis and
adjusts the allowance as needed. These adjustments, when made, would have an
impact on the Company's financial statements in the period that they were
recorded.
Long-lived assets with estimated useful lives are depreciated to their residual
values over those useful lives in proportion to the economic value consumed.
Long-lived assets are tested for impairment at the group level, which is usually
an economic unit such as a manufacturing facility or department, which has a
measurable economic output or product. Long-lived assets are tested for
impairment when events or changes in circumstances indicate that the carrying
amount of a long-lived asset may not be recoverable, and exceeds its fair market
value. This circumstance exists if the carrying amount of the assets in question
exceeds the sum of the undiscounted cash flows expected to result from the use
of the asset. The impairment loss is measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value as determined by
the discounted cash flow or in the case of negative cash flow, an independent
market appraisal of the asset.
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Goodwill is tested annually during the fourth fiscal quarter, or sooner if
indicators of impairment exist, for impairment by the Company at the reporting
unit level by comparing the fair value of the reporting unit with its carrying
value. Valuation methods for determining the fair value of the reporting unit
include reviewing quoted market prices and discounted cash flows. If the
goodwill is indicated as being impaired (the fair value of the reporting unit is
less than the carrying amount), the fair value of the reporting unit is then
allocated to its assets and liabilities in a manner similar to a purchase price
allocation in order to determine the implied fair value of the reporting unit
goodwill. This implied fair value of the reporting unit goodwill is then
compared with the carrying amount of the reporting unit goodwill and, if it is
less, the Company would then recognize an impairment loss.
The projection of future cash flows for the goodwill impairment analysis
requires significant judgments and estimates with respect to future revenues
related to the assets and the future cash outlays related to those revenues.
Actual revenues and related cash flows or changes in anticipated revenues and
related cash flows could result in changes in this assessment and result in an
impairment charge. The use of different assumptions could increase or decrease
the related impairment charge.
The Company accounts for stock based compensation by recognizing expense over
the vesting period for any unvested stock option awards granted. Stock option
grants are valued by using a Black-Scholes method at the date of the grant.
There are assumptions and estimates made by management which go into the
valuation of the options granted, such as volatility, expected option term, and
forfeiture rate. The Company recognizes expense on options granted using a
straight-line method over the vesting period. Restricted stock grants are
expensed over the vesting period, which is determined at the date of the grant.
Liquidity and Capital Resources
Net cash provided by operations for the first quarter of fiscal 2008 was $1.5
million and resulted from the high level of net income before depreciation and
non-cash equity based compensation expense. The positive cash flow from earnings
for the current first quarter was partially off-set by increases in inventory
and receivables totaling $2.0 million, as well as a pay down of accrued expenses
and accounts payable of $3.7 million. Net cash used in operations for the first
quarter ended September 30, 2006 was $857,000. The negative cash flow from
operations for the first quarter of fiscal 2007 was due to the $3.7 million and
$2.9 million rise in accounts receivable and inventory, respectively, resulting
from the increased levels of Company business.
New cash provided by investing activities in the first quarter of fiscal 2008
was $9.8 million and consisted of $14.1 million provided by the maturity of
marketable debt securities, net of $4.3 million used to pay for capital
additions. Net cash used in investing activities in the first quarter of fiscal
2007 was $3.5 million and consisted of capital additions of $2.3 million, and
net purchases of marketable securities totaling $1.0 million.
Net cash used in financing activities in the first quarter of fiscal 2008 was
$12.0 million and consisted of $12.3 million used to purchase 864,000 treasury
shares net of $310,000 generated by cash receipts and tax benefits from the
exercise of stock options. Net cash provided by financing activities was $1.6
million in the first quarter of fiscal 2007 and consisted of cash and tax
benefits provided by the exercise of stock options.
During the remainder of fiscal 2008, the Company anticipates that its main cash
requirement will be for capital expenditures and continued repurchase of the
Company's common stock. Capital
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expenditures for the remainder of fiscal 2008 are expected to total between $5.0
- $6.0 million and will be funded from existing cash and investments.
The Company expects to continue to repurchase shares of its common stock in the
open market and/or through private negotiated transactions under the current
Board authorization, depending on market conditions. At September 30, 2007 there
were 710,733 shares remaining under the current Board repurchase authorization.
On November 5, 2007, the Company announced that the Board of Directors
authorized the repurchase of an additional 2 million shares of the Company's
common stock in addition to the 200,733 shares remaining from prior
authorizations.
At September 30, 2007, the Company had approximately $59.8 million in cash, cash
equivalents, and marketable securities. The Company has no debt, and on a fiscal
year basis has had positive operating cash flow for over ten years. The Company
believes that its cash requirements for the foreseeable future will be satisfied
by currently invested cash balances and expected cash flows from operations.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157, "Fair Value Measurements" which is effective for fiscal years beginning
after November 15, 2007 (the Company's 2009 fiscal year) and for interim periods
within those years. This statement defines fair value, establishes a framework
for measuring fair value and expands the related disclosure requirements. The
Company is currently evaluating the potential impact of this statement.
In February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115" (SFAS 159). This Statement
provides companies with an option to measure, at specified election dates, many
financial instruments and certain other items at fair value that are not
currently measured at fair value. A company that adopts SFAS 159 will report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. This Statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective for fiscal
years beginning after November 15, 2007 (the Company's 2009 fiscal year). The
Company is currently evaluating the potential impact of this statement.
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