-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UlmLbI7KHtPyIyxyenAg/YRCGYXUFjPE5FS8mxcJODO3rx+xt7gma6lLLH4SqIMI FZPuLrzWnjHPj/zVZo2lfw== 0000891092-08-000845.txt : 20080208 0000891092-08-000845.hdr.sgml : 20080208 20080208171941 ACCESSION NUMBER: 0000891092-08-000845 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080208 DATE AS OF CHANGE: 20080208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANAREN INC CENTRAL INDEX KEY: 0000006314 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 160928561 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06620 FILM NUMBER: 08590261 BUSINESS ADDRESS: STREET 1: 6635 KIRKVILLE RD CITY: EAST SYRACUSE STATE: NY ZIP: 13057 BUSINESS PHONE: 3154328909 MAIL ADDRESS: STREET 1: 6635 KIRKVILLE ROAD CITY: EAST SYRACUSE STATE: NY ZIP: 13057 FORMER COMPANY: FORMER CONFORMED NAME: MICRONETICS INC DATE OF NAME CHANGE: 19721103 10-Q 1 e30271_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2007 __ 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, 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 East Syracuse, New York 13057 - ----------------------- ----- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: 315-432-8909 - -------------------------------------------------------------------------------- (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 __ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Check One: Large accelerated filer __ Accelerated filer X Non-accelerated filer __ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __ No X The number of shares of Registrant's Common Stock outstanding on February 4, 2008 was 14,714,419. ANAREN, INC. INDEX PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets as of 3 December 31, 2007 and June 30, 2007 (unaudited) Consolidated Condensed Statements of Earnings 4 for the Three Months Ended December 31, 2007 and 2006 (unaudited) Consolidated Condensed Statements of Earnings 5 for the Six Months Ended December 31, 2007 and 2006 (unaudited) Consolidated Condensed Statements of Cash Flows 6 for the Six Months Ended December 31, 2007 and 2006 (unaudited) Notes to Consolidated Condensed Financial 7 Statements (unaudited) Item 2. Management's Discussion and Analysis 15 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls & Procedures 26 PART II - OTHER INFORMATION Item 1A. Risk Factors 27 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits 27 Officer Certifications 28 - 32 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ANAREN, INC. Consolidated Condensed Balance Sheets December 31, 2007 and June 30, 2007 (Unaudited)
Assets December 31, 2007 June 30, 2007 ------ ----------------- ------------- Current assets: Cash and cash equivalents $ 6,809,475 $ 7,912,276 Securities available for sale (note 4) 2,300,000 14,150,000 Securities held to maturity (note 4) 21,866,760 20,951,788 Receivables, less allowances of $231,722 at December 31, 2007 and $255,677 at June 30, 2007 20,702,128 19,768,701 Inventories (note 5) 27,275,055 24,331,597 Other receivables 2,161,776 1,606,093 Prepaid expenses 751,074 771,251 Deferred income taxes 1,252,255 1,174,255 Other current assets 901,537 1,121,513 ------------- ------------- Total current assets 84,020,060 91,787,474 Securities held to maturity (note 4) 16,742,135 31,540,247 Property, plant and equipment, net (note 6) 39,971,893 37,091,786 Deferred income taxes 26,668 31,447 Goodwill 30,715,861 30,715,861 Other intangible assets, net (note 2) -- 37,500 ------------- ------------- Total assets $ 171,476,617 $ 191,204,315 ============= ============= Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 10,338,255 $ 11,717,120 Accrued expenses (note 7) 2,316,977 3,907,652 Income taxes payable (note 1 and 9) 427,871 726,240 Customer advance payments 2,592,211 1,318,812 Other current liabilities (note 8) 1,960,595 1,259,616 ------------- ------------- Total current liabilities 17,635,909 18,929,440 Deferred income taxes 829,353 1,373,353 Pension and postretirement benefit obligation 3,144,664 2,954,664 Other liabilities (note 8) 2,467,667 1,152,710 ------------- ------------- Total liabilities 24,077,593 24,410,167 ------------- ------------- Stockholders' equity: Common stock of $.01 par value. Authorized 200,000,000 shares; issued 27,382,018 shares at December 31, 2007 and 27,128,855 at June 30, 2007 273,820 271,288 Additional paid-in capital 190,348,172 187,877,944 Retained earnings 90,563,591 85,306,813 Accumulated other comprehensive loss (note 13) (618,024) (984,640) ------------- ------------- 280,567,559 272,471,405 Less cost of 12,585,710 treasury shares at December 31, 2007 and 10,752,506 at June 30, 2007 133,168,535 105,677,257 ------------- ------------- Total stockholders' equity 147,399,024 166,794,148 ------------- ------------- Total liabilities and stockholders' equity $ 171,476,617 $ 191,204,315 ============= =============
See accompanying notes to consolidated condensed financial statements. 3 ANAREN, INC. Consolidated Condensed Statements of Earnings Three Months Ended December 31, 2007 and 2006 (Unaudited) December 31, 2007 December 31, 2006 ----------------- ----------------- Net sales $ 32,367,982 $ 30,322,785 Cost of sales 21,967,487 19,425,005 ------------ ------------ Gross profit 10,400,495 10,897,780 ------------ ------------ Operating expenses: Marketing 1,775,816 1,928,858 Research and development 2,286,673 2,192,823 General and administrative 3,363,262 2,760,742 ------------ ------------ Total operating expenses 7,425,751 6,882,423 ------------ ------------ Operating income 2,974,744 4,015,357 Other income, primarily interest 598,366 917,080 Interest expense (9,796) (6,143) ------------ ------------ Total other income $ 588,570 $ 910,937 ------------ ------------ Income before income taxes 3,563,314 4,926,294 Income tax expense 1,012,000 1,165,000 ------------ ------------ Net income $ 2,551,314 $ 3,761,294 ============ ============ 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 14,714,479 17,622,700 ============ ============ Diluted 14,993,433 18,088,109 ============ ============ See accompanying notes to consolidated condensed financial statements. 4 ANAREN, INC. Consolidated Condensed Statements of Earnings Six Months Ended December 31, 2007 and 2006 (Unaudited) December 31, 2007 December 31, 2006 ----------------- ----------------- Net sales $ 64,458,174 $ 60,525,895 Cost of sales 43,538,693 38,788,783 ------------ ------------ Gross profit 20,919,481 21,737,112 ------------ ------------ Operating expenses: Marketing 3,533,183 3,741,564 Research and development 4,889,991 4,331,008 General and administrative 6,725,506 5,528,968 ------------ ------------ Total operating expenses 15,148,680 13,601,540 ------------ ------------ Operating income 5,770,801 8,135,572 Other income, primarily interest 1,348,409 1,813,686 Interest expense (46,432) (12,286) ------------ ------------ Total other income $ 1,301,977 $ 1,801,400 ------------ ------------ Income before income taxes 7,072,778 9,936,972 Income tax expense 1,816,000 2,415,000 ------------ ------------ Net income $ 5,256,778 $ 7,521,972 ============ ============ Basic earnings per share: $0.34 $0.43 ===== ===== Diluted earnings per share: $0.34 $0.42 ===== ===== Shares used in computing net earnings per share: Basic 15,378,406 17,557,429 ============ ============ Diluted 15,679,369 18,032,032 ============ ============ See accompanying notes to consolidated condensed financial statements. 5 ANAREN, INC. Consolidated Condensed Statements of Cash Flows Six Months Ended December 31, 2007 and 2006 (Unaudited)
December 31, 2007 December 31, 2006 ----------------- ----------------- Cash flows from operating activities: Net income $ 5,256,778 $ 7,521,972 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,378,113 2,524,216 Amortization 333,150 386,028 Gain on sale of land -- (77,508) Deferred income taxes (616,000) 254,000 Stock based compensation 1,838,262 1,662,320 Provision for receivables allowances (23,955) (18,726) Changes in operating assets and liabilities: Receivables (834,472) (67,638) Inventories (2,747,012) (5,056,999) Other receivables (555,683) (427,900) Prepaids and other current assets 284,153 (781,618) Accounts payable (534,062) 1,368,873 Accrued expenses (1,596,675) (678,904) Income taxes payable (306,369) (512,068) Customer advance payments 1,273,399 -- Other liabilities 2,015,715 68,158 Pension and postretirement benefit obligation 190,000 234,650 ------------ ------------ Net cash provided by operating activities 7,355,342 6,398,856 ------------ ------------ Cash flows from investing activities: Capital expenditures (7,108,022) (6,172,903) Proceeds from sale of land -- 134,508 Increase in other assets -- -- Maturities of held to maturity and available for sale securities 57,761,650 62,568,681 Purchase of held to maturity and available for sale securities (32,324,160) (63,448,142) ------------ ------------ Net cash provided by (used in) investing activities 18,329,468 (6,917,856) ------------ ------------ Cash flows from financing activities: Stock options exercised 538,941 2,111,188 Tax benefit from exercise of stock options 106,110 628,756 Purchase of treasury stock (27,491,278) -- ------------ ------------ Net cash (used in) provided by financing activities (26,846,227) 2,739,944 ------------ ------------ Effect of exchange rates on cash 58,616 54,483 ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,102,801) 2,275,427 Cash and cash equivalents at beginning of period 7,912,276 15,733,214 ------------ ------------ Cash and cash equivalents at end of period $ 6,809,475 $ 18,008,641 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 46,432 $ 12,286 ============ ============ Income taxes, net of refunds $ 1,296,252 $ 2,044,312 ============ ============ Fixed asset purchases included in accounts payable $ 522,296 $ -- ============ ============
See accompanying notes to consolidated condensed financial statements. 6 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) The consolidated condensed 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 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, 2007. The results of operations for the six months ended December 31, 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 six months ended December 31, 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 December 31, 2007 and June 30, 2007 are as follows:
December 31 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 December 31, 2007 and 2006 aggregated $0 and $74,218, respectively; and $37,500 and $154,436 for the six month period ended December 31, 2007 and 2006, 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. 7 NOTE 3: Equity Based Compensation The components of equity based compensation expense in the statements of earnings are as follows:
Three Months Ended Six Months Ended December 31 December 31 ----------- ----------- 2007 2006 2007 2006 ---- ---- ---- ---- Stock option $573,254 $745,274 $1,167,676 $1,490,799 Restricted stock 368,870 108,609 670,586 190,892 -------- -------- ---------- ---------- Stock based compensation expense $942,124 $853,883 $1,838,262 $1,681,691 ======== ======== ========== ==========
In the six months ending December 31, 2007, 193,363 shares of restricted stock with an aggregate value of $3,144,482 were issued with a vesting period of 1 to 5 years. NOTE 4: Securities The amortized cost and fair value of securities are as follows:
December 31, 2007 ----------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- Securities available for sale: Auction rate securities $ 2,300,000 $ -- $ -- $ 2,300,000 ----------- -------- -------- ----------- Total securities available-for-sale $ 2,300,000 $ -- $ -- $ 2,300,000 ----------- -------- -------- ----------- Securities held to maturity: Municipal bonds $35,975,283 $162,445 $ -- $36,137,728 Commercial paper -- -- -- -- Corporate bonds 2,035,573 690 -- 2,036,263 Federal agency bonds 598,039 1,775 -- 599,814 ----------- -------- -------- ----------- Total securities held to maturity $38,608,895 $164,910 $ -- $38,773,805 =========== ======== ======== ===========
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 =========== ======== ========= ===========
8 Contractual maturities of marketable debt securities held to maturity at December 31, 2007 and June 30, 2007 are summarized as follows:
December 31, 2007 June 30, 2007 ----------------- ------------- Fair Fair Market Market Cost Value Cost Value ---- ----- ---- ----- Within one year $21,866,760 $21,923,847 $20,951,788 $20,943,580 One year to five years 16,742,135 16,849,958 31,540,247 31,404,203 ----------- ----------- ----------- ----------- Total $38,608,895 $38,773,805 $52,492,035 $52,347,783 =========== =========== =========== ===========
Contractual maturities of auction rate securities available for sale at December 31, 2007 and June 30, 2007 are summarized as follows:
December 31, 2007 June 30, 2007 ----------------- ------------- Fair Fair Market Market Cost Value Cost Value ---- ----- ---- ----- Within one year $2,300,000 $2,300,000 $14,150,000 $14,150,000 One year to five years -- -- -- -- ---------- ---------- ----------- ----------- Total $2,300,000 $2,300,000 $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 three and six months ending December 31, 2007 and 2006 amounted to $143,942 and $125,348, and $295,650 and $231,592, respectively. The amortization for the six months ending December 31, 2006 was reclassified from investing to operating cash flows on the consolidated statements of cash flows. NOTE 5: Inventories Inventories are summarized as follows: December 31, 2007 June 30, 2007 ----------------- ------------- Component parts $ 14,334,849 $ 11,841,427 Work in process 8,032,607 7,392,973 Finished goods 4,907,599 5,097,197 ------------ ------------ Total $ 27,275,055 $ 24,331,597 ============ ============ 9 NOTE 6: Property, Plant and Equipment Property, plant and equipment are summarized as follows: December 31, 2007 June 30, 2007 ----------------- ------------- Land and land improvements $ 4,157,617 $ 4,157,617 Construction in process 1,651,569 5,774,893 Buildings, furniture and fixtures 25,072,185 17,956,858 Machinery and equipment 67,775,594 64,683,378 ------------ ------------ $ 98,656,965 $ 92,572,746 Less accumulated depreciation (58,685,072) (55,480,960) ------------ ------------ $ 39,971,893 $ 37,091,786 ============ ============ NOTE 7: Accrued Expenses Accrued expenses consist of the following: December 31, 2007 June 30, 2007 ----------------- ------------- Compensation $1,422,738 $2,945,888 Commissions 784,819 654,596 Health insurance and other 109,420 307,168 ---------- ---------- $2,316,977 $3,907,652 ========== ========== NOTE 8: Other Liabilities Other liabilities consist of the following: December 31, 2007 June 30, 2007 ----------------- ------------- Deferred compensation $ 952,313 $ 937,811 Supplemental retirement plan 499,159 460,459 Accrued lease 950,735 542,056 Income tax liability 1,334,000 -- Warranty 685,800 472,000 Other 6,255 -- ---------- ---------- 4,428,262 2,412,326 Less current portion 1,960,595 1,259,616 ---------- ---------- $2,467,667 $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. Upon adoption the Company reclassified $1,315,000 of liabilities from 10 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 other liabilities in the Company's consolidated condensed balance sheet. 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. During the quarter, the company recognized additional interest and penalties of $19,000 in income tax expense. The liability for uncertain tax positions as of July 1, 2007 and December 31, 2007, included $115,000 and $149,000, respectively, net of tax benefit, for the possible payment of interest and penalties. 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. 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. Income taxes for the second quarter of fiscal 2008 were $1,012,000, representing an effective tax rate of 28.4% and included $61,000 of tax expense resulting from the establishment of a valuation allowance for deferred tax assets related to state net operating loss carryforwards. The second quarter of fiscal 2007 had an effective tax rate of 23.6%. The projected effective tax rate for fiscal 2008 is approximately 26% compared to an actual effective tax rate of 25.3% for fiscal 2007. 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 1,183,120 and 401,716 at December 31, 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. 11 The following table sets forth the computation of basic and fully diluted earnings per share:
Three Months Ended Six Months Ended December 31 December 31 ---------------------- ---------------------- 2007 2006 2007 2006 ---- ---- ---- ---- Numerator: Net income $2,551,314 $3,761,294 $5,256,778 $7,521,972 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 14,714,479 17,622,700 15,378,406 17,557,429 ========== ========== ========== ========== Denominator for diluted earnings per share: Weighted average shares outstanding 14,714,479 17,622,700 15,378,406 17,557,429 Common stock options and restricted stock 278,954 465,409 300,963 474,603 ---------- ---------- ---------- ---------- Weighted average shares and conversions 14,993,433 18,088,109 15,679,369 18,032,032 ========== ========== ========== ==========
NOTE 11: Components of Net Periodic Pension Benefit Costs
Three Months Ended Six Months Ended December 31 December 31 ------------------ ----------------- 2007 2006 2007 2006 ---- ---- ---- ---- Service cost $ 75,000 $ 71,588 $ 150,000 $ 143,176 Interest cost 175,000 164,700 350,000 329,400 Expected return on plan assets (225,000) (185,068) (450,000) (370,136) Amortization of prior service cost -- (325) -- (650) Amortization of the net loss -- 18,386 -- 36,772 --------- --------- --------- --------- Net periodic benefit cost $ 25,000 $ 69,281 $ 50,000 $ 138,562 ========= ========= ========= =========
Pension Contributions Required contributions for fiscal 2008 are $0. Discretionary contributions amounting to approximately $125,000 will be made for fiscal 2008. NOTE 12: Components of Net Periodic Postretirement Health Benefit Costs
Three Months Ended Six Months Ended December 31 December 31 ------------------ ---------------- 2007 2006 2007 2006 ---- ---- ---- ---- Service cost $20,000 $18,677 $ 40,000 $ 37,354 Interest cost 42,500 36,665 85,000 73,330 Amortization of the net loss 7,500 13,208 15,000 26,416 ------- ------- -------- -------- Postretirement health benefit cost $70,000 $68,550 $140,000 $137,100 ======= ======= ======== ========
Postretirement Health Benefit Contributions Expected contributions for fiscal 2008 are approximately $90,000. 12 NOTE 13: Other comprehensive income Comprehensive income consists of the following:
Three months ended Six months ended December 31, December 31, 2007 2006 2007 2006 ---- ---- ---- ---- Net income $2,551,314 $3,761,294 $5,256,778 $7,521,972 Other comprehensive income: Foreign currency translation adjustment 253,454 66,634 366,616 54,483 ---------- ---------- ---------- ---------- Comprehensive income $2,804,768 $3,827,928 $5,623,394 $7,576,455 ========== ========== ========== ==========
Accumulated other comprehensive loss consists of the following:
Accumulated Minimum Cumulative Other Pension Translation Comprehensive Liability Adjustments Income (loss) Balance, June 30, 2007 $(1,350,246) $365,606 $(984,640) Foreign currency translation adjustments -- 366,616 366,616 ----------- -------- --------- Balance, December 31, 2007 $(1,350,246) $732,222 $(618,024) =========== ======== =========
NOTE 14: Segment Information The Company operates predominately in the wireless communications, satellite communications and defense electronics markets. The Company's two operating 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 operating segments depict products that are similar in nature. 13 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: December 31, 2007 $17,857,680 $14,510,302 $ -- $32,367,982 December 31, 2006 16,998,534 13,324,251 -- 30,322,785 Six months ended: December 31, 2007 38,961,110 25,497,064 -- 64,458,174 December 31, 2006 36,825,941 23,699,954 -- 60,525,895 Operating income: Three months ended: December 31, 2007 437,246 2,741,154 (203,656) 2,974,744 December 31, 2006 1,199,641 2,815,716 -- 4,015,357 Six months ended: December 31, 2007 2,179,675 3,794,782 (203,656) 5,770,801 December 31, 2006 3,934,703 4,200,869 -- 8,135,572
NOTE 15: Accounting Pronouncements Not Yet Adopted In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (revised 2007), "Business Combinations" (SFAS 141(R)). The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination. Specifically, it establishes principles and requirements over how the acquirer (1) recognizes and measures the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase, and; (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement is effective for fiscal years beginning after December 15, 2008 (fiscal year 2010). The Company does not believe this Statement will have a material impact on the financial statements. In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, "Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51" (SFAS 160). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary (minority interests) and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008 (fiscal year 2010). The Company is currently assessing the impact of this Statement on the financial statements. 14 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 and factors described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2007. Overview The consolidated financial statements present the financial condition of the Company as of December 31, 2007 and June 30, 2007, and the consolidated results of operations and cash flows of the Company for the three months and six months ended December 31, 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. The Company also produces microwave 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 portions of its existing facility at a cost of approximately $2.5 million. 15 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 covers design services and manufacture of up to 48 beamforming networks. 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. 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. Third Quarter of Fiscal 2008 Outlook For the 3rd quarter of fiscal 2008, we expect a slight decline in sales for the Space & Defense Group and comparable demand for wireless infrastructure and consumer component products. As a result, we expect net sales to be in the range of $29.5 - $32.5 million. With an anticipated tax rate of approximately 25%, an anticipated equity based compensation expense of approximately $0.05 per diluted share, we expect net earnings per diluted share to be in the range of $0.14 - $0.18 for the 3rd quarter. Results of Operations Net sales for the three months ended December 31, 2007 were $32.4 million, up 6.7% from sales of $30.3 million for the second quarter of fiscal 2007. Net income for the second quarter of fiscal 2008 was $2.6 million , or 7.9% of net sales, down $1.2 million, or 32.2% from net income of $3.8 million in the second quarter of fiscal 2007. 16 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 Six Months Ended Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 ------------- ------------- ------------- ------------- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 67.9% 64.1% 67.5% 64.1% ----- ----- ----- ----- Gross profit 32.1% 35.9% 32.5% 35.9% ----- ----- ----- ----- Operating expenses: Marketing 5.5% 6.4% 5.5% 6.2% Research and development 7.1% 7.2% 7.6% 7.2% General and administrative 10.3% 9.1% 10.4% 9.1% ----- ----- ----- ----- Total operating expenses 22.9% 22.7% 23.5% 22.5% ----- ----- ----- ----- Operating income 9.2% 13.2% 9.0% 13.4% ----- ----- ----- ----- Other income (expense): Other, primarily interest income 1.8% 3.0% 2.1% 3.0% Interest expense 0.0% 0.0% (0.1)% 0.0% ----- ----- ----- ----- Total other income (expense), net 1.8% 3.0% 2.0% 3.0% ----- ----- ----- ----- Income before income taxes 11.0% 16.2% 11.0% 16.4% Income taxes 3.1% 3.8% 2.8% 4.0% ----- ----- ----- ----- Net income 7.9% 12.4% 8.2% 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 Six months Ended Dec. 31, 2007 Dec. 31, 2006 Dec. 31, 2007 Dec. 31, 2006 ------------- ------------- ------------- ------------- Wireless $17,858 $16,999 $38,961 $36,826 Space and Defense 14,510 13,324 25,497 23,700 ------- ------- ------- ------- Total $32,368 $30,323 $64,458 $60,526 ======= ======= ======= =======
Three Months Ended December 31, 2007 Compared to Three Months Ended December 31, 2006 Net sales. Net sales increased 6.7% to $32.4 million for the second quarter ended December 31, 2007, compared to $30.3 million for the second quarter of fiscal 2007. This increase resulted from a $859,000 rise in shipments of Wireless products and a $1.2 million rise in sales of Space and Defense 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 a customer demand for custom Wireless components during the current second quarter compared to the second quarter of last year. Shipments of custom Wireless components rose $1.6 million, or 26.5% in the second quarter of fiscal 2008 compared to the second quarter last year, led by a significant increase in demand from Nokia Corp. for a 17 new basestation ferrite product which began shipping in the third quarter of fiscal 2007. This increase and a small increase in sales of standard components more than offset a $1.1 million decline in consumer products. Shipments to Nokia Corp. for all Wireless products in the second quarter of fiscal 2008 were $5.2 million, which represents 29.2% of total Wireless sales and 16.1% of total Company sales for the quarter. Demand for Wireless products in the third quarter of fiscal 2008 is expected to be comparable with second quarter levels. 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 $1.2 million, or 8.9% in the second quarter of fiscal 2008 compared to the second 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 segment backlog of $59.9 million. Quarterly shipments of Space and Defense products for the remainder of fiscal 2008 are expected to range between $13.0 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 second quarter of fiscal 2008 was $10.4 million, (32.1% of net sales), down $497,000 from $10.9 million (35.9% of net sales) for the same quarter of the prior year. Gross profit on sales decreased in the second quarter of fiscal 2008 over the second 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 and defense Counter Improvised Explosive Device products (Counter IED). Margins were negatively impacted by the $250,000 increase in warranty reserve related to anticipated repairs to a custom assembly product in the Wireless group. 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 second quarter of fiscal 2008, down 7.9% from $1.9 million (6.4% of net sales) for the second quarter of fiscal 2007. Marketing expenses in the current second quarter were $153,000 below the second quarter of last fiscal year due to lower commission expense on defense products and lower payroll costs due to 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 $2.3 million (7.1% of net sales) in the second quarter of fiscal 2008, up 4.3% from $2.2 million (7.2% of net sales) for the second 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 second quarter of fiscal 2008 versus the second 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 21.8% to $3.4 million (10.3% of 18 net sales) for the second quarter of fiscal 2008, from $2.8 million (9.1% of net sales) for the second quarter of fiscal 2007. The increase in general and administrative expense in the second quarter of fiscal 2008 compared to the second quarter last year resulted from additional compensation costs from new restricted stock grants in August 2007 that have a shorter vesting schedule than the traditional stock option grants in the comparable period and new additional personnel in the Finance, Human Resource and Information Technology functions. Additionally, the Company recorded an additional $204,000 lease liability for expected costs in excess of sub-lease income. Operating Income. Operating income fell 25.9% in the second quarter of fiscal 2008 to $3.0 million, (9.2% of net sales), compared to $4.0 million (13.2% of net sales) for the second quarter of fiscal 2007. On an operating segment basis, Wireless operating income was $437,000 for the second quarter of fiscal 2008, down $762,000, or 63.6%, from Wireless operating income of $1.2 million in the second quarter of fiscal 2007. The decline in Wireless segment operating income in the second quarter of fiscal 2008 compared to the second 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 and consumer Wireless components due to significantly higher material content as a percentage of sales compared to standard components. Margins were further eroded by the $250,000 increase in warranty reserve related to anticipated repairs to a custom assembly product in the Wireless group. Space and Defense operating income was $2.7 million in the second quarter of fiscal 2008, which is down $75,000 from the second quarter of fiscal 2007 of $2.8 million. Operating margins in this segment declined in the second quarter due to a shift in product mix from higher margin Counter IED products to other lower margin defense products, 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 lease liability charge in the quarter. Interest Expense. Interest expense represents interest paid on deferred obligations. Interest expense for the second quarter of fiscal 2008 was $10,000; compared to $6,000 for the second quarter of fiscal 2007. Other Income. Other income is primarily interest income received on invested cash balances and rental income. Other income decreased 34.8% to $598,000 in the second quarter of fiscal 2008 compared to $917,000 for the second quarter of last year. This decrease was caused by the decline in available investable cash due to the use of $53.2 million to purchase treasury shares. Other income will fluctuate based on short term market interest rates and the level of investable cash balances. Income Taxes. Income taxes for the second quarter of fiscal 2008 were $1.0 million (3.1% of net sales), representing an effective tax rate of 28.4% and included $61,000 of tax expense resulting from the establishment of a valuation allowance for deferred tax assets related to state net operation loss carryforwards. This compares to income tax expense of $ 1.2 million (3.8% of net sales) for the second quarter of fiscal 2007, representing an effective tax rate of 23.6%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bonds 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 26% compared to an actual effective tax rate of 25.3% for fiscal year 2007. 19 Six months Ended December 31, 2007 Compared to Six months Ended December 31, 2006 Net Sales. Net sales increased 6.5% to $64.5 million for the first six months ended December 31, 2007 compared to $60.5 million for the first six months of fiscal 2007. This increase resulted from a $2.1 million rise in shipments of Wireless products and a $1.8 million rise in sales of Space and Defense products. The increase in sales of Wireless products resulted from a rise in customer demand for custom Wireless components during the current first six months compared to the first six months of last year. Shipments of custom Wireless components rose $5.2 million, or 39.8% in the first six months of fiscal 2008 compared to the first six months last year, led by a significant increase in demand from Nokia Corp. for a new basestation ferrite product which began shipping in the second half of fiscal 2007. This increase offset a $2.0 million decline in consumer products and a $1.0 million decrease in sales of standard wireless products. Shipments to Nokia Corp. for all Wireless products in the first half of fiscal 2008 were $15.3 million, which represents 39.3% of total Wireless sales and 23.7% of total Company sales for the six months. Sales of Space and Defense products rose $1.8 million, or 7.6% in the first half of fiscal 2008 compared to the first half 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 segment backlog of $59.9 million. Gross Profit. Gross profit for the first half of fiscal 2008 was $20.9 million, (32.5% of net sales), down $818,000 from $21.7 million (35.9% of net sales) for the same period of the prior year. Gross profit on sales decreased in the first half of fiscal 2008 over the first half 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 and defense Counter IED products. Marketing. Marketing expenses were $3.5 million (5.5% of net sales) for the first half of fiscal 2008, down $208,000 from $3.7 million (6.2% of net sales) for the first half of fiscal 2007. Marketing expenses in the current first six months fell $208,000 over the first half of last fiscal year due to lower commission expense on defense products and a reduction in payroll costs resulting from a reduction in sales personnel. Research and Development. Research and development expenses were $4.9 million (7.6% of net sales) in the first half of fiscal 2008, up 12.9% from $4.3 million (7.2% of net sales) for the first half 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 half of fiscal 2008 versus the first half 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 increased 21.6% to $6.7 million (10.4% of net sales) for the first half of fiscal 2008 from $5.5 million (9.1% of net sales) for the first half of fiscal 2007. The increase resulted primarily from additional professional service costs ($350,000) associated with the restatement of the Company's second and third quarter fiscal 2007 financial statements, additional costs from new restricted stock grants issued 20 in August 2007 that have a shorter vesting schedule than the traditional stock option grants in the comparable period, additional personnel in Finance, Human Resources and Information Technology functions and, in the second quarter a $204,000 charge for additional lease liability expense for expected lease cost under a Company lease in excess of expected sub-lease income. Operating Income. Operating income fell 29.1% in the first half of fiscal 2008 to $5.8 million, (9.0% of net sales) compared to $8.1 million (13.4% of net sales) for the first half of fiscal 2007. On an operating segment basis, Wireless operating income was $2.2 million for the first half of fiscal 2008, down 44.6% from the Wireless operating income of $3.9 million in the first quarter of fiscal 2007. The decline in Wireless segment operating income in the first half of fiscal 2008 compared to the first half 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 and consumer Wireless components due to significantly higher material content as a percentage of sales compared to standard and consumer components. Margins were further eroded by the increase in General and Administrative expense in the first half of fiscal 2008 and a $250,000 charge for anticipated costs to repair a custom assembly product in the Wireless group. Space and Defense operating income was $3.8 million in the first half of fiscal 2008 down $406,000 from $4.2 million for the first half of fiscal 2007. Operating margins in this segment declined in the first six months due to manufacturing inefficiencies encountered on some programs which had material delays, a change in product mix due to a decline in higher margin Counter IED products, a higher level of internal research and development spending for the segment year over year and the increase in general and administrative expense in the first half of fiscal 2008. Interest Expense. Interest expense represents interest incurred on deferred obligations. Interest expense for the first half of fiscal 2008 was $46,000; compared to $12,000 for the first half of fiscal 2007. Other Income. Other income is primarily interest income received on invested cash balances and rental income. Other income decreased 25.7% to $1.3 million in the first half of fiscal 2008 compared to $1.8 million for the first half of last year. This decrease was caused by the decline in available investable cash due to the use of $53.2 million to purchase treasury shares over the last twelve months. 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 half of fiscal 2008 were $1.8 million (2.8% of net sales), representing an effective tax rate of 25.7%. This compares to income tax expense of $2.4 million (4.0% of net sales) for the first half of fiscal 2007, representing an effective tax rate of 24.3%. 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 26% compared to an actual effective tax rate of 25.3% for fiscal 2007. 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 21 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. 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 22 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 six months of fiscal 2008 was $7.4 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 six months was partially off-set by increases in inventory and receivables totaling $3.6 million, as well as a pay down of accrued expenses and accounts payable of $2.1 million. Net cash provided by operations for the first half of fiscal 2007 was $6.4 million. The cash flow from operations for the first half of fiscal 2007 was due to the high level of income before depreciation and non cash equity based compensation and was partially offset by the $5.1 million increase in inventory. Net cash provided by investing activities in the first half of fiscal 2008 was $18.3 million and consisted of $25.4 million provided by the maturity of marketable debt securities, net of $7.1 million used to pay for capital additions. Net cash used in investing activities in the first half of fiscal 2007 was $6.7 million and consisted of capital additions of $6.2 million, and net purchases of marketable securities totaling $648,000. Net cash used in financing activities in the first six months of fiscal 2008 was $26.8 million and consisted of $27.5 million used to purchase 1.8 million treasury shares net of $645,000 generated by cash receipts and tax benefits from the exercise of stock options. Net cash provided by financing activities was $2.7 million in the first six months 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 expenditures for the remainder of fiscal 2008 are expected to total between $3.0 - $4.0 million and will be funded from existing cash and investments. 23 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 December 31, 2007, there were 1,741,812 shares remaining under the current Board repurchase authorization. At December 31, 2007, the Company had approximately $47.7 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. In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141 (revised 2007), "Business Combinations" (SFAS 141(R)). The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination. Specifically, it establishes principles and requirements over how the acquirer (1) recognizes and measures the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase, and; (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement is effective for fiscal years beginning after December 15, 2008 (fiscal year 2010). The Company does not believe this Statement will have a material impact on the financial statements. 24 In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, "Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51" (SFAS 160). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary (minority interests) and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008 (fiscal year 2010). The Company is currently assessing the impact of this Statement on the financial statements. 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 and factors described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2007. As of December 31, 2007, the Company had cash, cash equivalents and marketable securities of $47.7 million, all of which consisted of highly liquid investments in marketable debt securities. The marketable debt securities at 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 decrease in market interest rate of 10.0% from December 31, 2007 rates, or 0.350%, would have reduced net income and cash flow by approximately $42,000, or $.003 per diluted share for the quarter. 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 rate will reduce the Company's interest income. Forward-Looking Cautionary Statement The statements contained in this Quarterly Report which are not historical information are "forward-looking statements". These forward looking statements are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. The risks and uncertainties described below are not the only risks and uncertainties facing our Company. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business operations. If any of the following risks actually occur, our business could be adversely affected, the trading price of our common stock could decline, and you may lose all or part of your investment. These known risks include, but are not limited to: the Company's ability to timely ramp up to meet some of our customers' increased demands; unanticipated delays in successfully completing customer orders within contractually required timeframes; unanticipated penalties resulting from failure to meet contractually imposed delivery schedules; unanticipated costs and damages resulting from repair of replacement of products found to include latent defects; increased pricing pressure from our customers; decreased capital expenditures by wireless service providers; the possibility that the Company may be unable to successfully execute its business strategies or achieve its operating objectives, generate revenue growth or achieve profitability expectations; inability to successfully secure new design wins from our OEM customers, reliance on a limited number of key component suppliers; unpredictable difficulties or delays in the development of new products; order cancellations or extended postponements; the risks associated with any 25 technological shifts away from the Company's technologies and core competencies; unanticipated impairments of assets including investment values and goodwill; diversion of defense spending away from the Company's products and/or technologies due to on-going military operations; and litigation involving antitrust, intellectual property, environmental, product warranty, product liability, and other issues. You are encouraged to review Anaren's 2007 Annual Report, on Anaren's Form 10-K for the fiscal year ended June 30, 2007 and any exhibits to that Report filed with the Securities and Exchange Commission to learn more about the various risks and uncertainties facing Anaren's business and their potential impact on Anaren's revenue, earnings and stock price. Unless required by law, Anaren disclaims any obligation to update or revise any forward-looking statement. Item 4. Controls and Procedures A. Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) was carried out under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer and the Senior Vice President-Finance and Chief Financial Officer ("the Certifying Officers") as of December 31, 2007. Based on that evaluation, the Certifying Officers concluded that the Company's disclosure controls and procedures are effective. B. Changes in Internal Control Over Financial Reporting There have been no changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 26 PART II OTHER INFORMATION Item 1A. Risk Factors The Company is exposed to certain risk factors that may affect operations and/or financial results. The significant factors known to the Company are described in the Company's most recently filed Annual Report on Form 10-K. There have been no material changes from the risk factors as previously disclosed in the Company's Annual Report on Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Issuer Purchases of Equity Securities On November 5, 2007, the Board of Directors increased by an additional 2,000,000 the number of shares that the Company was authorized to repurchase in open market or by privately negotiated transactions through its previously announced stock repurchase program. The program (originally announced on March 5, 2001), which may be suspended at any time without notice, has no expiration date. The following table sets forth information regarding shares repurchased and purchasable under the program during and as of the end of the periods indicated. On December 31, 2007, 1,741,812 shares remained authorized for purchase, depending on market conditions.
- --------------------------------------------------------------------------------------------------------------------- Period Total Number of Average Price Paid Total Number of Maximum Number (or Shares (or Units) per Share (or Unit) Shares (or Units) Approximate Dollar Purchased Purchased as Part of Value) of Shares (or Publicly Announced Units) that May Yet Plans or Programs Be Purchased Under the Plans or Programs - --------------------------------------------------------------------------------------------------------------------- October 2007 510,000 $15.25 510,000 200,733 - --------------------------------------------------------------------------------------------------------------------- November 2007 345,261 16.18 345,261 1,855,472 - --------------------------------------------------------------------------------------------------------------------- December 2007 113,660 16.17 113,660 1,741,812 - --------------------------------------------------------------------------------------------------------------------- Total 968,921 15.69 968,921 -- - ---------------------------------------------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual shareholders' meeting was held on November 3, 2007, at which time the election of Directors was conducted. The following named individuals were nominated and re-elected as Directors. Votes Votes For Withheld --- -------- John Smucker 9,701,196 1,150,447 Matthew S. Robison 9,568,655 1,282,988 Messr. Smucker and Robison were elected to terms expiring in 2010. The terms of Directors Lawrence A. Sala, Robert U. Roberts, Dr. David Wilemon, Dale F. Eck, Carl W. Gerst, Jr. and James G. Gould continued after the meeting. Item 6. Exhibits 31 Rule 13a-14(a) Certifications 32 Section 1350 Certifications 27 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, Inc. (Registrant) Date: February 8, 2008 /s/ Lawrence A. Sala ------------------------------------------- Lawrence A.Sala President & Chief Executive Officer Date: February 8, 2008 /s/ Joseph E. Porcello ------------------------------------------- Joseph E. Porcello Sr. Vice President of Finance and Treasurer 28 EX-31 2 e30271ex31.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS Exhibit 31 CERTIFICATIONS I, Lawrence A. Sala, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Anaren, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this c report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over a financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 8, 2008 /s/ Lawrence A. Sala ------------------------------------- Lawrence A. Sala President and Chief Executive Officer 29 Exhibit 31 I, Joseph E. Porcello, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Anaren, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this c report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over a financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: February 8, 2008 /s/ Joseph E. Porcello ----------------------------- Joseph E. Porcello Sr. Vice President of Finance and Treasurer 30 EX-32 3 e30271ex32.txt SECTION 1350 CERTIFICATIONS Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Anaren, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence A. Sala, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Lawrence A. Sala - ------------------------------------- Lawrence A. Sala President and Chief Executive Officer Date: February 8, 2008 A signed original of this written statement required by Section 906 has been provided to Anaren, Inc. and will be retained by Anaren, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 31 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Anaren, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Joseph E. Porcello, Vice President of Finance and Treasurer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joseph E. Porcello - ------------------------------------------- Joseph E. Porcello Sr. Vice President of Finance and Treasurer Date: February 8, 2008 A signed original of this written statement required by Section 906 has been provided to Anaren, Inc. and will be retained by Anaren, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 32 -----END PRIVACY-ENHANCED MESSAGE-----