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, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 0-6620
------
ANAREN MICROWAVE, INC.
----------------------
(Exact name of Registrant as specified in its Charter)
New York 16-0928561
-------- ----------
(State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road 13057
East Syracuse, New York -----
- ------------------------ (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: 315-432-8909
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by Check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The number of shares of Registrant's Common Stock outstanding on November
9, 2001 was 22,432,120.
ANAREN MICROWAVE, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of 3
September 30, 2001 (unaudited) and June 30, 2001
Consolidated Condensed Statements of Earnings 4
for the Three Months Ended September 30,
2001 and 2000 (unaudited)
Consolidated Condensed Statements of Cash Flows 5
for the Three Months Ended September 30,
2001 and 2000 (unaudited)
Notes to Consolidated Condensed Financial 6
Statements (unaudited)
Item 2. Management's Discussion and Analysis 13
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
PART II - OTHER INFORMATION
Item 4. Exhibits and Reports on Form 8-K 20
2
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
September 30, 2001 and June 30, 2001
(Unaudited)
Assets September 30, 2001 June 30, 2001
------ ------------------ -------------
Current assets:
Cash and cash equivalents $ 11,986,954 $ 11,748,542
Marketable debt securities 89,382,401 108,557,983
Receivables, less allowance of $195,000 11,877,352 11,504,168
Inventories (note 3) 19,598,931 18,566,977
Accrued interest receivable 1,495,082 1,304,877
Deferred income taxes 1,006,010 956,759
Other current assets 986,490 1,762,203
------------- -------------
Total current assets 136,333,220 154,401,509
------------- -------------
Marketable debt securities 21,329,000 11,725,960
Property, plant and equipment, net (note 4) 21,049,679 18,805,901
Deferred income taxes -- 263,348
Patents, net of accumulated amortization
of $161,710 at September 30, 2001
and $143,742 at June 30, 2001 (note 2) 430,256 448,224
Goodwill (note 2) 30,715,861 23,410,534
Other intangible assets, net of accumulated
amortization of $35,639 at
September 30, 2001 (note 2) 2,414,361 --
------------- -------------
$ 212,272,377 $ 209,055,476
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 2,651,307 $ 2,985,793
Accrued expenses (note 5) 3,377,442 3,905,242
Customer advance payments 290,171 767,790
Other current liabilities (note 6) 65,000 65,000
------------- -------------
Total current liabilities 6,383,920 7,723,825
Deferred income taxes 932,051 --
Postretirement benefit obligation 1,391,496 1,391,496
Other liabilities (note 6) 553,622 486,380
------------- -------------
Total liabilities 9,261,089 9,601,701
------------- -------------
Stockholders' equity:
Common stock of $.01 par value. Authorized
200,000,000 shares; issued 25,609,942 shares
at September 30, 2001 and 25,496,238 shares
at June 30, 2001 256,099 254,962
Additional paid-in capital 168,074,056 166,051,341
Unearned compensation (1,564,200) (1,723,377)
Retained earnings 41,017,971 39,643,487
------------- -------------
207,783,926 204,226,413
Less cost of 3,060,822 treasury shares 4,772,638 4,772,638
------------- -------------
Total stockholders' equity 203,011,288 199,453,775
------------- -------------
$ 212,272,377 $ 209,055,476
============= =============
See accompanying notes to consolidated condensed financial statements.
3
ANAREN MICROWAVE, INC.
AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
Three Months Ended
September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
2001 2000
------------- -------------
Net sales $15,001,191 $22,223,974
Cost of sales 9,870,138 13,397,703
----------- -----------
Gross profit 5,131,053 8,826,271
----------- -----------
Operating expenses:
Marketing 1,519,035 1,574,422
Research and development 1,152,666 1,118,526
General and administrative 1,758,691 1,857,138
----------- -----------
Total operating expenses 4,430,392 4,550,086
----------- -----------
Operating income 700,661 4,276,185
Other income 1,281,071 1,868,668
Interest expense (16,248) (40,767)
----------- -----------
Income before income taxes 1,965,484 6,104,086
Income tax expense 591,000 2,123,000
----------- -----------
Net income $ 1,374,484 $ 3,981,086
=========== ===========
Net income per common and common
share equivalent:
Basic $ .06 $ .18
=========== ===========
Diluted $ .06 $ .17
=========== ===========
Shares used in computing net income
per common and common share equivalent:
Basic 22,250,148 21,928,138
=========== ===========
Diluted 23,133,196 23,626,288
=========== ===========
Dividends per share $ -- $ --
=========== ===========
See accompanying notes to consolidated condensed financial statements.
4
ANAREN MICROWAVE, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
Three Months Ended
September 30, 2001 and 2000
(Unaudited)
Cash flows from operating activities: 2001 2000
---- ----
Net income $ 1,374,484 $ 3,981,086
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 826,689 567,937
Goodwill amortization -- 317,573
Amortization of intangibles 53,607 17,967
Deferred income taxes 146,482 (87,030)
Unearned compensation 159,177 74,404
Tax benefit from exercise of stock options 47,044 2,173,882
Changes in operating assets and liabilities,
net of acquisitions:
Receivables 936,434 358,191
Other receivables (187,947) 150,593
Inventories 49,406 (959,461)
Prepaid/Other Current Assets 860,351 (369,287)
Accounts payable (563,237) (1,200,153)
Accrued expenses (958,248) 232,621
Customer advance payments (477,619) (570,000)
Other liabilities 67,242 (22,558)
Postretirement benefit obligation -- 387
----------- ------------
Net cash provided by operating activities 2,333,865 4,666,152
----------- ------------
Cash flows from investing activities:
Capital expenditures (1,248,237) (2,597,769)
Net maturities of marketable debt securities 9,572,542 17,514,897
Purchase of business, net of cash acquired (note 1) (9,906,820) (17,835,577)
----------- ------------
Net cash used in investing activities (1,582,515) (2,918,449)
----------- ------------
Cash flows from financing activities:
Payment on long term debt (716,154) (407,864)
Stock options exercised 203,216 785,694
----------- ------------
Net cash provided by (used in)
financing activities (512,938) 377,830
----------- ------------
Net increase in cash
and cash equivalents 238,412 2,125,533
Cash and cash equivalents at beginning of period 11,748,542 6,179,202
----------- ------------
Cash and cash equivalents at end of period $11,986,954 $ 8,304,735
=========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 16,248 $ 39,383
=========== ============
Income taxes $ 662,500 $ 500,000
=========== ============
See accompanying notes to consolidated condensed financial statements.
5
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated condensed financial statements are unaudited (except for the
balance sheet information as of June 30, 2001, which is derived from the
Company's audited consolidated financial statements) and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated condensed financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2001. The results
of operations for the three months ended September 30, 2001 are not necessarily
indicative of the results for the entire fiscal year ending June 30, 2002, or
any future interim period.
The income tax rates utilized for interim financial statement purposes for the
three months ended September 30, 2001 and 2000 are based on estimates of income
and utilization of tax credits for the entire year.
NOTE 1: Acquisitions
On July 31, 2000, the Company acquired substantially all the net assets of Ocean
Microwave Corporation. Ocean was based in Neptune, New Jersey, and was primarily
engaged in the design and manufacture of isolator and circulator components. The
acquired Ocean business was conducted from the Company's subsidiary, Anaren
Power Products, Inc. The transaction was accounted for using the purchase method
of accounting for business combinations and, accordingly, the results of
operations of Anaren Power Products have been included in the Company's
consolidated financial statements since the date of acquisition.
The purchase price was $17,990,526, including cash and non-cash direct
acquisition costs, which was allocated to the net assets acquired and
liabilities assumed based upon respective fair market values. The fair market
values of plant and equipment were determined by an independent valuation which
also validated the non-existence of any identifiable intangible assets. The
excess consideration over such fair values is recorded as goodwill.
The allocation of the purchase price to the assets acquired and liabilities
assumed follows:
Accounts receivable $ 1,488,092
Inventories 1,197,728
Plant and equipment 269,390
Other assets 42,485
Accounts payable (2,531,384)
Accrued expenses (184,389)
Notes payable (407,864)
Goodwill 17,316,468
-----------
$17,990,526
===========
During the fourth quarter of fiscal 2001, Anaren consolidated the operations of
APPI into its Syracuse, New York facility.
On August 31, 2001 the Company acquired all of the outstanding stock of Amitron,
Inc. Amitron is based in North Andover, Massachusetts, and is primarily engaged
in the manufacture of precision thick film ceramic components and circuits for
the medical, telecommunications,
6
and defense electronics markets. Amitron's technology is very complimentary to
the Company's multi-layer stripline technology. Whereas the Company's
multi-layer stripline technology is well suited for large scale and high power
applications, Amitron's technology is well suited for miniaturization and low
power applications. The Company believes that Amitron's technology will enable
it to significantly increase its current addressable markets. The transaction
was accounted for using the purchase method of accounting for business
combinations and, accordingly, the results of operations of Amitron have been
included in the Company's consolidated financial statements since the date of
acquisition.
The aggregate purchase consideration for Amitron was $11,693,256, consisting of
cash of $9,906,820 (including cash direct acquisition costs), non-cash direct
acquisiton costs in the form of stock options for services of $18,183 and 95,704
shares of the Company's common stock with an aggregate value of $1,755,409. The
purchase price was allocated to the net assets acquired and liabilities assumed
based upon respective fair market values. The fair market values of plant and
equipment and identifiable intangible assets were determined by an independent
valuation. The identifiable intangible assets aggregating $2,450,000 with a
weighted-average useful life of approximately seven years include Customer Base
of $1,350,000 (six-year weighted-average useful life), Favorable Leases of
$600,000 (ten-year weighted-average useful life), Trade Name of $320,000
(three-year weighted-average useful life), and Non-competition Agreements of
$180,000 (five-year weighted-average useful life). The excess consideration over
such fair values is recorded as goodwill and was assigned to the Company's
Wireless segment.
The allocation of the purchase consideration to the assets acquired and
liabilities assumed follows:
Cash $ 12,844
Accounts receivable 1,309,618
Other receivables 2,258
Inventories 1,081,360
Plant and equipment 1,822,230
Other assets 84,638
Accounts payable (228,751)
Accrued expenses (430,448)
Loans payable (716,154)
Deferred tax liability (999,666)
Intangible assets 2,450,000
Goodwill 7,305,327
-----------
$11,693,256
===========
The following unaudited pro forma financial information presents the combined
results of operations of the Company, Ocean, and Amitron as if the acquisitions
had taken place as of July 1, 2000. The pro forma information includes certain
adjustments, including the amortization of
7
goodwill, reduction of interest income, and certain other adjustments, together
with the related income tax effects. The pro forma financial information does
not necessarily reflect the results of operations that would have occurred had
the Company, Ocean, and Amitron constituted a single entity during such periods.
Three Months Ended
------------------
September 30 September 30
2001 2000
---- ----
Net sales $16,391,888 $25,404,279
Net income 1,242,554 3,712,664
Earnings per share:
Basic .06 .17
Diluted .05 .16
The pro forma information reflects no amortization expense for the RF Power,
Ocean, and Amitron acquisitions for the three months ended September 30, 2001
due to the adoption of FASB 142, "Goodwill and Intangible Assets", by the
Company. The pro forma information does reflect goodwill amortization for the
three months ended September 30, 2000, for the RF Power and Ocean acquisitions,
which aggregated $413,823.
Note 2: Adoption of Accounting Standards
Effective July 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 141, "Business Combinations" (FASB 141) and Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets" (FASB 142). FASB
141, which supercedes APB Opinion 16 and FASB Statement No. 38, requires all
business combinations be accounted for using the purchase method. SFAS 142,
which supercedes APB Opinion No. 17, eliminates the current requirement to
amortize goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses the
impairment testing and recognition of goodwill and intangible assets. The
following information provides the required disclosures and describes the impact
the early adoption of FASB 141 and 142 had on the Company during the periods
reported:
INTANGIBLE ASSETS:
Intangible assets as of September 30, 2001 are as follows:
Gross Carrying Accumulated
Amount Amortization
------ ------------
Patent $ 591,966 $161,710
Customer Base 1,350,000 18,750
Trade Name 320,000 8,889
Non-Competition Agreements 180,000 3,000
Favorable Lease 600,000 5,000
---------- --------
Total $3,041,966 $197,349
========== ========
Intangible asset amortization expense for the period ended September 30, 2001
and 2000 aggregated $53,607 and $17,967, respectively. Amortization expense
related to intangible assets for the next five years is as follows:
8
Year Ending June 30,
2002 $428,261
2003 $499,539
2004 $499,539
2005 $410,645
2006 $392,871
GOODWILL:
The changes in the carrying amount of goodwill for the periods ended September
30 are as follows:
2001 2000
---- ----
Balance as of June 30 $23,410,534 $ 7,647,108
Goodwill acquired during quarter 7,305,327 16,850,285
Goodwill amortization -- (317,573)
----------- -----------
Balance as of September 30 $30,715,861 $24,179,820
=========== ===========
In connection with the adoption of FASB 142, the Company will complete the
transitional impairment assesment within six months from the date of adoption as
allowed by the standard.
The impact of the adoption of FASB No. 142 had on net income and earnings per
share for the period presented is as follows:
Three Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
Reported net income for the period $1,374,484 $3,981,086
Add back: Goodwill amortization -- 317,573
---------- ----------
Adjusted net income for the period $1,374,484 $4,298,659
========== ==========
Basic earnings per share:
Reported net income $ 0.06 $ 0.18
Goodwill amortization -- 0.01
---------- ----------
Adjusted net income $ 0.06 $ 0.19
========== ==========
Diluted earnings per share:
Reported net income $ 0.06 $ 0.17
Goodwill amortization -- 0.01
---------- ----------
Adjusted net income $ 0.06 $ 0.18
========== ==========
9
NOTE 3: Inventories
Inventories at September 30, 2001 and June 30, 2001 are summarized as
follows:
September 30 June 30
------------ -------
Component parts $10,731,246 $ 9,995,712
Work in process 4,811,324 4,497,996
Finished goods 4,056,361 4,073,269
----------- -----------
$19,598,931 $18,566,977
=========== ===========
NOTE 4: Property, Plant and Equipment
Property, plant and equipment at September 30, 2001 and June 30, 2001
are summarized as follows:
September 30 June 30
------------ -------
Land and land improvements $ 1,595,821 $ 1,595,821
Buildings 9,206,893 9,095,944
Machinery and equipment 42,001,740 39,213,503
Construction in process 210,203 155,899
----------- -----------
$53,014,657 $50,061,167
Less accumulated depreciation
and amortization 31,964,978 31,255,266
----------- -----------
$21,049,679 $18,805,901
=========== ===========
NOTE 5: Accrued Expenses
Accrued expenses at September 30, 2001 and June 30, 2001 consist of the
following:
September 30 June 30
------------ -------
Compensation $1,020,743 $ 989,499
Commissions 694,175 790,609
Restructuring 217,231 307,843
Accrued pension cost 257,208 401,032
Income taxes 583,891 938,984
Other 604,194 477,275
---------- ----------
$3,377,442 $3,905,242
========== ==========
NOTE 6: Other Liabilities
Other liabilities at September 30, 2001 and June 30, 2001 consist of the
following:
September 30 June 30
------------ -------
Deferred compensation $547,285 $551,380
Other 71,337 --
-------- --------
618,622 551,380
Less current portion 65,000 65,000
-------- --------
$553,622 $486,380
======== ========
10
NOTE 7: Net Income Per Share
Basic income per share is based on the weighted average number of common shares
outstanding. Diluted income per share is based on the weighted average number of
common shares outstanding, as well as dilutive potential common shares which, in
the Company's case, comprise shares issuable under the stock option and
restricted stock plans. The 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
Numerator: 2001 2000
---- ----
Net income available to
Common stockholders $ 1,374,484 $ 3,981,086
=========== ===========
Denominator:
Denominator for basic net income per share:
Weighted average shares outstanding 22,250,148 21,928,138
=========== ===========
Denominator for diluted net income per share:
Weighted average shares outstanding 22,250,148 21,928,138
Common stock options
and restricted stock 883,048 1,698,150
Weighted average shares and conversions 23,133,196 23,626,288
NOTE 8: Segment Information
The Company operates predominately in the wireless communications, satellite
communications and space and defense electronics markets. The Company's two
reportable segments are the wireless group and the space and defense group.
These segments have been determined based upon the nature of the products and
services offered, customer base, technology, availability of discrete internal
financial information, homogeneity of products and delivery channel, and are
consistent with the way the Company organizes and evaluates financial
information internally for purposes of making operating decisions and assessing
performance.
The wireless segment designs, manufactures and markets commercial products used
mainly by the wireless communications market. The space and defense segment of
the business designs, manufactures and markets specialized products for the
radar and satellite communications markets.
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:
11
Space & Corporate and
Wireless Defense Unallocated Consolidated
-------- ------- ----------- ------------
Net sales:
Three months ended:
September 30, 2001 $ 8,542,975 6,458,216 -- 15,001,191
September 30, 2000 16,795,724 5,428,250 -- 22,223,974
Operating income (loss):
Three months ended:
September 30, 2001 $ (774,560) 1,475,221 -- 700,661
September 30, 2000 3,036,294 1,239,891 -- 4,276,185
Goodwill and intangible assets:
September 30, 2001 33,560,478 -- -- 33,560,478
June 30, 2001 23,858,758 -- -- 23,858,758
Identifiable assets:*
September 30, 2001 18,014,381 13,639,902 147,057,616 178,711,899
June 30, 2001 17,510,855 12,453,474 155,232,389 185,196,718
Depreciation:** Three months ended:
September 30, 2001 486,461 340,228 -- 826,689
September 30, 2000 361,730 206,207 -- 567,937
Goodwill and intangibles
amortization: ***
Three months ended:
September 30, 2001 53,607 -- -- 53,607
September 30, 2000 335,540 -- -- 335,540
* Segment assets primarily include receivables and inventories. The Company
does not segregate other assets on a products and services basis for
internal management reporting and, therefore, such information is not
presented. Assets included in corporate and unallocated principally are
cash and cash equivalents, marketable debt securities, other receivables,
prepaid expenses, deferred income taxes, refundable income taxes and
property, plant and equipment.
** Depreciation expense is allocated departmentally based on an estimate of
capital equipment employed by each department. Depreciation expense is
then further allocated within the department as it relates to the specific
business segment impacted by the consumption of the capital resources
utilized. Due to the similarity of the property, plant and equipment
utilized, the Company does not specifically identify these assets by
individual business segment for internal reporting purposes.
*** Amortization of goodwill and identifiable intangible assets arising from
business combinations, and patent amortization, is allocated to the
segments based on the sales segment classification of the acquired or
applicable operation.
12
NOTE 9: Subsequent Event
Effective October 1, 2001, the Company acquired all the outstanding capital
stock of The 5M Company Europe B.V. 5M is based in Almelo, Netherlands and is
primarily engaged in the manufacture of specialty printed circuit boards. The
purchase consideration was approximately $3.6 million. The acquisition will be
accounted for under the purchase method of accounting for business combinations.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis set forth below reviews the Company's
operating results for the three month period ended September 30, 2001 and its
financial condition at September 30, 2001. This review should be read in
conjunction with the accompanying consolidated condensed financial statements.
Statements contained in management's discussion and analysis, other than
historical facts, are forward-looking statements that are qualified by the
cautionary statements at the end of this discussion.
Overview
The consolidated condensed financial statements present the financial condition
of the Company as of September 30, 2001 and June 30, 2001, and the consolidated
results of operations and cash flows of the Company for the three months ended
September 30, 2001 and 2000.
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. The Company sells its products to
leading wireless communications equipment manufacturers such as Ericsson,
Motorola, Lucent Technologies, and Nortel Networks and to satellite
communications and defense electonic companies such as Boeing Satellite,
Lockheed Martin and Raytheon Co.
The Company operates predominantly in the wireless communications, satellite
communications, and defense electronics markets. The two reporting segments of
the Company are the Wireless group and the Space and Defense group. These groups
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 making operating decisions and assessing performance.
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 have passed to the customer. Payments received from
customers in advance of products delivered are recorded as customer advance
payments until earned. A small percentage of sales are derived from long-term
fixed-price contracts for the sale of large space and defense electronics
products. Sales and estimated profits under long-term contracts are recognized
using the percentage of completion method of accounting on a units-of-delivery
basis. Profit estimates are revised periodically based upon changes in sales
value and costs at completion. Any losses on these contracts are recognized in
the period in which such losses are determined.
Effective July 1, 2001, the Company adopted Financial Accounting Standard Board
(FASB) Statement No. 141 - Business Combinations and No. 142 - Goodwill and
Other Intangibles. As a result of the adoption of these new standards the
Company ceased amortization of the goodwill recorded as part of its previous
acquisition transactions. If the Company had continued to amortize goodwill in
the first quarter ended September 30, 2001, basic and diluted net earnings would
have been reduced by $318,000, or $0.01 per share.
13
On August 31, 2001, the Company acquired all of the outstanding capital stock of
Amitron. Amitron is based in North Andover, Massachusetts and is primarily
engaged in the design and manufacture of ceramic components and circuits for the
medical, telecommunications and defense electronics market. The aggregate
purchase consideration was $11,693,256, consisting of cash of $9,906,820
(including cash direct acquisition costs), non-cash direct acquisition costs in
the form of stock options for services of $18,183 and 95,704 shares of the
Company's common stock with an aggregate value of $1,755,409. The acquisition
will be accounted for under the purchase method of accounting for business
combinations.
Effective October 1, 2001 the Company acquired all of the outstanding capital
stock of The 5M Company Europe B.V., a manufacturer of microwave circuits based
in Almelo, Netherlands. 5M's manufacturing technology, which is similar to the
Company's multi-layer stripline technology, uses a unique metal backing process
which offers both cost and performance advantages for high power applications.
The purchase consideration for this transaction was approximately $3.6 million
and the acquisition will be accounted for under the purchase method of
accounting for business combinations.
Net sales for the first quarter ended September 30, 2001 were $15,001,000, down
33% from net sales of $22,224,000 for the same period in fiscal 2001. The
Company recorded earnings of $1,374,000, or $.06 per diluted share, for the
first quarter of fiscal 2002 compared to earnings of $3,981,000, or $.17 per
diluted share, for the same quarter in fiscal 2001
Results of Operations
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 Sept. 30
2001 2000
---- ----
Net sales 100.0% 100.0%
Cost of sales 65.8% 60.3%
----- ------
Gross profit 34.2% 39.7%
----- ------
Operating expenses:
Marketing 10.1% 7.1%
Research and development 7.7% 5.0%
General and administrative 11.7% 8.4%
----- ------
Total operating expenses 29.5% 20.5%
----- ------
Operating income 4.7% 19.2%
Other income 8.5% 8.4%
Interest expense (0.1%) (0.2%)
----- ------
Income before income taxes 13.1% 27.4%
Income tax expense 3.9% 9.5%
----- ------
Net income 9.2% 17.9%
===== ======
14
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended
-----------------------
Sept. 30 Sept. 30
2001 2000
---- ----
Wireless $ 8,543 $16,796
Space and Defense 6,458 5,428
------- -------
$15,001 $22,224
======= =======
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Net Sales. Net sales decreased $7.2 million, or 33%, to $15.0 million for the
three months ended September 30, 2001, compared to $22.2 million for the first
quarter of the previous year. This decrease was caused by a 49% drop in Wireless
sales which was partially offset by a 19% rise in sales of Space and Defense
products.
The decrease in sales of Wireless products, which consist of standard surface
mount components and custom subassemblies for use in building wireless
basestation equipment, was caused by a rapid downturn in capital expenditures
for wireless infrastructure equipment which began in the latter part of the
third quarter of fiscal 2001. This downturn has resulted in an increasing number
of reductions in customer demand forecast and delivery pushouts beginning in
March 2001 and continuing through the first quarter ended September 30, 2001.
This market downturn has effected all the Company's Wireless product lines and
has most severely effected sales of Wireless standard components. This worldwide
Wireless market downturn is expected to continue beyond calendar 2001.
Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar countermeasures subsystems for the
military. Sales in the Space and Defense group rose $1.0 million, or 19%, in the
first quarter of fiscal 2002, compared to the same quarter in prior fiscal year.
This increase in shipments resulted from the initial production shipments for
the Boeing Spaceway program. This program, which has been in an engineering
design phase for the past year and a half, entered full factory production in
the fourth quarter of fiscal 2001. This satellite program is expected to place
Space and Defense shipments in the $6.0 - $6.5 million range, quarterly, for the
remainder of fiscal 2002.
Gross Profit. Cost of sales consists primarily of engineering design costs,
material, material fabrication costs, assembly costs and test costs. Gross
profit for the first quarter of fiscal 2002 was $5.1 million (34.2% of net
sales), down from $8.8 million (39.7% of net sales) for the first quarter of the
prior year. The decrease in gross margin resulted from the significant decline
in sales volume which caused significant under absorbtion of the factory
overhead compared to the previous year. Presently, the Company expects gross
margins to remain at or below current levels in the second quarter of fiscal
2002 and not to improve in the second half of fiscal 2002 without a significant
increase in sales volume.
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 decreased 3.5% to $1.5
million (10.1% of net sales) for the first quarter of
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fiscal 2002 from $1.6 million (7.1% of net sales) for the first quarter of
fiscal 2001. This decrease resulted from lower commission expense due to the
decline in sales volume and Company cost containment efforts instituted in the
fourth quarter of fiscal 2001. Marketing expense is expected to increase over
the remaining three quarters of fiscal 2002 due to the addition of new east and
west coast marketing offices and the marketing expense associated with the
Company's acquired businesses.
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 increased 3.0% to $1.2
million (7.7% of net sales) in the first quarter of fiscal 2002 from $1.1
million (5.0% of net sales) for the first quarter of fiscal 2001. Research and
development expenditures are supporting further development of wireless
infrastructure products and new broadband fixed wireless product opportunities.
Despite the current wireless market downturn, the Company does not expect to
reduce its current research and development efforts in the near term.
General and Administrative. General and administrative expenses consist of
employee related expenses, professional services, goodwill and amortization,
travel related expenses and other corporate costs. General and administrative
expenses decreased 5.3% to $1.8 million (11.7% of net sales) for the first
quarter of fiscal 2002 from $1.9 million (8.4% of net sales) for the first
quarter of fiscal 2001. General and administrative expenses have decreased
primarily due to the adoption of FASB Statement No. 142 which eliminated the
amortization of goodwill in the first quarter of fiscal 2001. The reduction in
goodwill reduced general and administrative expenses by $318,000 in the current
quarter compared to the first quarter last year. This reduction in goodwill
amortization was partially offset by an increase in identifiable intangible
amortization of $36,000 in the first quarter of fiscal 2002 associated with the
Company's acquisition of Amitron. Additionally, general and administrative
expense for the first quarter of fiscal 2002 includes one month expense for
Amitron.
Operating Income: Operating income decreased 83.6%, to $701,000 (4.7% of net
sales) for the first quarter of fiscal 2002, down $3.6 million from $4.3 million
(19.2% of net sales) for the same period in fiscal 2001. On a reporting segment
basis, the Wireless operating loss was $775,000 for the first quarter of fiscal
2002, down 125.5% or $3.8 million from $3.0 million in the first quarter of
fiscal 2001. The principal reason for the decrease in wireless operating income
in the first quarter of fiscal 2002 compared to the same period in fiscal 2001
was the 49.1% decrease in wireless sales year over year due to the large
decrease in wireless base station equipment demand worldwide which began in the
third quarter of fiscal 2001 and continues at the present time. The large
decrease in sales levels in the wireless segment resulted in significant under
absorption of fixed overhead within the group during the current quarter.
Space and defense operating income rose $235,000 or 19.0% for the first quarter
of fiscal 2002 compared to first quarter of fiscal 2001. This increase resulted
from a $1.0 million rise in space and defense revenues year over year, in the
first quarter, due to the Boeing Spaceway Program entering full production at
the end of the previous quarter. The higher sales levels resulted in better
absorption of fixed overhead in fiscal 2002 compared to the previous year.
Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 31% to $1.3 million (8.5% of net sales)
for the quarter ended September 30, 2001 from $1.9 million (8.4% of net sales)
for the same quarter last year. This decrease was
16
caused mainly by the decline in market interest rates over the last 12 months
brought about by reductions in the Federal Fund rates. Interest income will
fluctuate based on the level of interest rates and the level of investable cash
balances.
Interest Expense: Interest expense represents commitment fees and interest paid
on certain deferred obligations. Interest expense for the first quarter of
fiscal 2002 was $16,000 (0.1% of net sales) compared to $41,000 (0.2% of net
sales) for the first quarter of fiscal 2001. The decrease in interest expense
resulted from the pay-off of a deferred obligation in the third quarter of
fiscal year 2001.
Income Taxes. Income tax expense for the first quarter of fiscal 2002 was
$591,000 (3.9% of net sales), representing an effective tax rate of 30%. This
compared to $2.1 million (9.5% of net sales) for the first quarter of fiscal
2001, representing an effective tax rate of 35%. The Company's reduced effective
tax rate is a direct result of the proportion of federally exempt state
municipal bond income in relation to reduced levels of taxable income.
Liquidity and Capital Resources
Net cash provided by operations for the three months ended September 30, 2001
and the three months ended September 30, 2000 were $2.3 million and $4.7
million, respectively. The positive flow from operations in the first three
months of both fiscal 2002 and 2001 was due primarily to the profit attained in
both periods.
Net cash used in investing activities consists of funds used to purchase capital
equipment and cash used to purchase the capital stock of Amitron in August 2001.
Capital equipment placed in service amounted to $1.2 million in the first
quarter ended September 30, 2001 compared to $2.6 million in the first quarter
of the previous fiscal year. In the first quarter of fiscal 2002, the Company
expended $9.9 million in cash to purchase all the capital stock of Amitron, a
thick film circuit manufacturer located in North Andover, Massachusetts. Funds
for this transaction were obtained through the proceeds of matured marketable
securities in the amount of $9.6 million.
Significant cash used in investing activities in the first quarter of the prior
year was $17.6 million used to purchase the assets of Ocean. Funds for this
transaction were obtained through the proceeds of matured marketable securities
in the amount of $18.5 million.
Net cash used by financing activities was $513,000 for the first three months of
fiscal 2002 and consisted of $716,000 used to pay off loans of Amitron and
$203,000 generated by the exercise of stock options. In the first quarter of the
prior year funds generated by financing activities amounted to $378,000 and
consisted of $786,000 generated through the exercise of stock options and
$408,000 used to pay off loans of Ocean which were assumed as part of the asset
purchase.
During the remainder of fiscal 2002, the Company's main cash requirements will
be for additions to capital equipment. Capital expenditures have been budgeted
at approximately $4.0 million for fiscal 2002 and consist mainly of upgrades and
replacements of production equipment.
In addition to the Company's cash and marketable debt securities, the Company
has a credit facility providing an unsecured $10 million working capital
revolving line of credit bearing interest at prime and maturing December 31,
2003. The terms of the credit facility require maintenance of minimum tangible
net worth, ratio of cash flows to maturities, and leverage ratio as defined in
the loan agreement. The Company believes that it was in compliance with all
17
restrictions and covenants at September 30, 2001. At September 30, 2001, $0 was
outstanding under the credit facility.
The Company believes that its cash requirements for the foreseeable future will
be satisfied by currently invested cash balances, expected cash flows from
operations, and funds available under its credit facilities.
Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations." FASB 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. FASB 143 is required for adoption for fiscal
years beginning after June 14, 2002. The Company has reviewed the provisions of
FASB 143, and believes that upon adoption, the Statement will not have a
significant effect on its consolidated financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment of
Disposal of Long-Lived Assets." FASB 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. FASB 144 is required for adoption for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. The
Company has reviewed the provisions of FASB 144, and believes that upon
adoption, the Statement will not have a significant effect on its consolidated
financial statements.
Forward-Looking Cautionary Statement
In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Quarterly Report on Form 10-Q
includes comments by the Company's management about future performance. Because
these statements are forward-looking statements pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, management's
forecasts involve risks and uncertainties, and actual results could differ
materially from those predicted in the forward-looking statements. Among the
factors that could cause actual results to differ materially are the following:
o further decline in the general economy, and particularly the wireless
telecommunications sector;
o loss of one or more of a limited number of original equipment
manufacturers as customers;
o the unavailability of component parts and services from a limited number
of suppliers;
o additional cancellation of existing contracts or orders;
o difficulties in successfully integrating the businesses of Amitron and 5M;
o inability to effectively manage possible future growth;
o increased pricing pressure and increased competition;
o the failure of wireless customers' annual procurement forecasts to result
in future sales; and
o litigation involving antitrust, intellectual property, product warranty,
and other issues.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Quarterly Report on Form 10-Q.
As of September 30, 2001, the Company had cash, cash equivalents and marketable
debt securities of $122.7 million, of which approximately $110.7 million
consisted of highly liquid investments in marketable debt securities. These
investments at the date of purchase normally have maturities between one and 18
months, are exposed to interest rate risk and will decrease in value if market
interest rates increase. A hypothetical increase or decrease in market interest
rate of 10% from September 30, 2001 rates would cause the market price of these
securities to fluctuate by an insignificant amount. Due to the relatively short
maturities of the securities and its ability to hold those investments to
maturity, the Company does not believe that an immediate decrease in interest
rates would have a significant effect on its financial condition or results of
operations. Over time, however, declines in interest rates will reduce the
Company's interest income.
The Company does not currently own any material equity investments. Therefore,
the Company does not currently have any direct equity price risk.
All of the Company's sales to foreign customers are denominated in United States
dollars and, accordingly, the Company is not currently exposed to foreign
currency exchange risk.
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Item 6. Exhibits and Reports on Form 8-K
Item 6(a) Exhibits
None
Item 6(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on September 14, 2001
related to its acquisition of Amitron, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Anaren Microwave, Inc.
----------------------
(Registrant)
Date: November 14, 2001 S/Lawrence A. Sala
----------------------------------------
President & Chief Executive Officer
Date: November 14, 2001 S/Joseph E. Porcello
----------------------------------------
Vice President of Finance and Treasurer
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