10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 10, 2005
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended: March 31,
2005
Commission
File Number: 0-22175
EMCORE
Corporation
(Exact
name of Registrant as specified in its charter)
New
Jersey
(State
or other jurisdiction of incorporation or organization)
22-2746503
(IRS
Employer Identification No.)
145
Belmont Drive, Somerset,
NJ 08873
(Address
of principal executive offices)
(732)
271-9090
(Registrant's
telephone number)
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 o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act). Yes x
No o
The
number of shares outstanding of the registrant’s common stock, no par value, as
of April 29, 2005 was 47,416,008.
TABLE OF CONTENTS
EMCORE
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the three and six months ended March 31, 2005 and 2004
(in
thousands, except income (loss) per share)
(unaudited)
|
Three
Months Ended March 31,
|
Six
Months Ended March 31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Revenue
|
$
|
30,430
|
$
|
23,180
|
$
|
57,394
|
$
|
46,305
|
|||||
|
Cost
of revenue
|
24,901
|
20,499
|
49,790
|
40,444
|
|||||||||
|
Gross
profit
|
5,529
|
2,681
|
7,604
|
5,861
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
4,950
|
5,644
|
10,038
|
10,951
|
|||||||||
|
Research
and development
|
4,069
|
5,714
|
9,128
|
11,760
|
|||||||||
|
Severance
charges
|
177
|
-
|
649
|
-
|
|||||||||
|
Total
operating expenses
|
9,196
|
11,358
|
19,815
|
22,711
|
|||||||||
|
Operating
loss
|
(3,667
|
)
|
(8,677
|
)
|
(12,211
|
)
|
(16,850
|
)
|
|||||
|
Other
(income) expenses:
|
|||||||||||||
|
Interest
income
|
(249
|
)
|
(199
|
)
|
(482
|
)
|
(357
|
)
|
|||||
|
Interest
expense
|
1,202
|
1,685
|
2,404
|
3,710
|
|||||||||
|
Gain
from debt extinguishment
|
-
|
(12,312
|
)
|
-
|
(12,312
|
)
|
|||||||
|
Equity
in net loss (income) of GELcore
|
297
|
51
|
(75
|
)
|
(216
|
)
|
|||||||
|
Total
other expenses (income)
|
1,250
|
(10,775
|
)
|
1,847
|
(9,175
|
)
|
|||||||
|
(Loss)
income from continuing operations
|
(4,917
|
)
|
2,098
|
(14,058
|
)
|
(7,675
|
)
|
||||||
|
Discontinued
operations:
|
|||||||||||||
|
Loss
from discontinued operations
|
-
|
(348
|
)
|
-
|
(2,045
|
)
|
|||||||
|
Gain
on disposal of discontinued operations
|
12,476
|
-
|
12,476
|
19,584
|
|||||||||
|
Income
(loss) from discontinued operations
|
12,476
|
(348
|
)
|
12,476
|
17,539
|
||||||||
|
Net
income (loss)
|
$ |
7,559
|
$ |
1,750
|
$ |
(1,582
|
)
|
$ |
9,864
|
||||
|
Per
Share Data:
|
|||||||||||||
|
Basic
per share data:
|
|||||||||||||
|
(Loss)
income from continuing operations
|
$
|
(0.10
|
)
|
$
|
0.05
|
$
|
(0.30
|
)
|
$
|
(0.19
|
)
|
||
|
Income
(loss) from discontinued operations
|
0.26
|
(0.01
|
)
|
0.27
|
0.44
|
||||||||
|
Net
income (loss)
|
$
|
0.16
|
$
|
0.04
|
$
|
(0.03
|
)
|
$
|
0.25
|
||||
|
Diluted
per share data:
|
|||||||||||||
|
(Loss)
income from continuing operations
|
$
|
(0.10
|
)
|
$
|
0.05
|
$
|
(0.30
|
)
|
$
|
(0.19
|
)
|
||
|
Income
(loss) from discontinued operations
|
0.26
|
(0.01
|
)
|
0.27
|
0.44
|
||||||||
|
Net
income (loss)
|
$ |
0.16
|
$ |
0.04
|
$ |
(0.03
|
)
|
$ |
0.25
|
||||
|
Weighted
average basic shares outstanding used in
per
basic share calculations
|
47,265
|
41,904
|
47,128
|
39,872
|
|||||||||
|
Weighted
average diluted shares outstanding used in per diluted share
calculations
|
47,265
|
43,725
|
47,128
|
39,872
|
|||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
As
of March 31, 2005 and September 30, 2004
(in
thousands)
(unaudited)
|
|
As
of
March
31, 2005
|
As
of
September
30, 2004
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
24,049
|
$
|
19,422
|
|||
|
Marketable
securities
|
20,450
|
32,150
|
|||||
|
Accounts
receivable, net
|
24,906
|
20,775
|
|||||
|
Receivables,
related parties
|
3,867
|
215
|
|||||
|
Inventories,
net
|
16,399
|
14,839
|
|||||
|
Prepaid
expenses and other current assets
|
2,361
|
2,496
|
|||||
|
Total
current assets
|
92,032
|
89,897
|
|||||
|
Property,
plant and equipment, net
|
61,450
|
65,354
|
|||||
|
Goodwill
|
33,969
|
33,584
|
|||||
|
Intangible
assets, net
|
4,425
|
5,177
|
|||||
|
Investments
in GELcore
|
10,078
|
10,003
|
|||||
|
Receivables,
related parties
|
169
|
3,754
|
|||||
|
Other
assets, net
|
6,241
|
5,474
|
|||||
|
Total
assets
|
$ |
208,364
|
$ |
213,243
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
13,658
|
$
|
16,064
|
|||
|
Accrued
expenses
|
13,282
|
15,292
|
|||||
|
Total
current liabilities
|
26,940
|
31,356
|
|||||
|
Convertible
subordinated notes
|
96,051
|
96,051
|
|||||
|
Other
liabilities
|
13
|
27
|
|||||
|
Total
liabilities
|
123,004
|
127,434
|
|||||
|
Commitments
and contingencies
|
|||||||
|
|
|||||||
|
Shareholders’
equity:
|
|||||||
|
Preferred
stock, $0.0001 par, 5,882 shares authorized, no shares
outstanding
|
-
|
-
|
|||||
|
Common
stock, no par value, 100,000 shares authorized, 47,339 shares issued and
47,319 outstanding at March 31, 2005; 46,951 shares issued and 46,931
outstanding at September 30, 2004
|
390,738
|
389,750
|
|||||
|
Accumulated
deficit
|
(304,446
|
)
|
(302,864
|
)
|
|||
|
Accumulated
other comprehensive loss
|
-
|
(111
|
)
|
||||
|
Shareholders’
notes receivable
|
-
|
(34
|
)
|
||||
|
Treasury
stock, at cost; 20 shares
|
(932
|
)
|
(932
|
)
|
|||
|
Total
shareholders’ equity
|
85,360
|
85,809
|
|||||
|
Total
liabilities and shareholders’ equity
|
$ |
208,364
|
$ |
213,243
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the six months ended March 31, 2005 and 2004
(in
thousands)
(unaudited)
|
Six
Months Ended March 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
(loss) income
|
$
|
(1,582
|
)
|
$
|
9,864
|
||
|
Adjustments:
|
|||||||
|
Loss
from discontinued operations
|
-
|
2,045
|
|||||
|
Gain
on disposal of discontinued operations
|
(12,476
|
)
|
(19,584
|
)
|
|||
|
Net
cash used for operating activities of discontinued
operations
|
-
|
(4,218
|
)
|
||||
|
Gain
from debt extinguishment
|
-
|
(12,312
|
)
|
||||
|
Depreciation
and amortization
|
7,275
|
7,835
|
|||||
|
Provision
for doubtful accounts
|
(170
|
)
|
242
|
||||
|
Equity
in net income of GELcore
|
(75
|
)
|
(216
|
)
|
|||
|
Compensatory
stock issuances
|
361
|
426
|
|||||
|
Reduction
of note receivable due for services received
|
260
|
260
|
|||||
|
Forgiveness
of shareholder notes receivable
|
34
|
-
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(3,961
|
)
|
(2,737
|
)
|
|||
|
Receivables,
related parties
|
(67
|
)
|
(13
|
)
|
|||
|
Inventories
|
(1,560
|
)
|
(683
|
)
|
|||
|
Prepaid
and other current assets
|
135
|
636
|
|||||
|
Other
assets
|
(189
|
)
|
(205
|
)
|
|||
|
Accounts
payable
|
(2,406
|
)
|
4,491
|
||||
|
Accrued
expenses
|
(1,711
|
)
|
(1,911
|
)
|
|||
|
Total
change in operating assets and liabilities
|
(9,759
|
)
|
(422
|
)
|
|||
|
Net
cash used for operating activities
|
(16,132
|
)
|
(16,080
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Cash
proceeds from disposition of discontinued operations
|
13,197
|
62,043
|
|||||
|
Purchase
of plant and equipment
|
(2,442
|
)
|
(3,017
|
)
|
|||
|
Capitalized
patent costs
|
(15
|
)
|
-
|
||||
|
Investment
in associated company
|
(1,000
|
)
|
-
|
||||
|
Cash
purchase of business, net of cash acquired
|
(1,283
|
)
|
(1,281
|
)
|
|||
|
Purchase
of marketable securities
|
(8,325
|
)
|
(34,746
|
)
|
|||
|
Sale
of marketable securities
|
20,025
|
3,750
|
|||||
|
Net
cash provided by investing activities
|
20,157
|
26,749
|
|||||
|
Cash
flows from financing activities:
|
|||||||
|
Repurchase
of convertible subordinated notes
|
-
|
(10
|
)
|
||||
|
Payments
on capital lease obligations
|
(25
|
)
|
(39
|
)
|
|||
|
Proceeds
from exercise of stock options
|
133
|
2,525
|
|||||
|
Proceeds
from employee stock purchase plan
|
494
|
457
|
|||||
|
Convertible
debt/equity issuance costs
|
-
|
(2,500
|
)
|
||||
|
Net
cash provided by financing activities
|
602
|
433
|
|||||
|
Net
increase in cash and cash equivalents
|
4,627
|
11,102
|
|||||
|
Cash
and cash equivalents, beginning of period
|
19,422
|
28,439
|
|||||
|
Cash
and cash equivalents, end of period
|
$ |
24,049
|
$ |
39,541
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|||||||
|
Cash
paid during the period for interest
|
$
|
2,404
|
$
|
6,056
|
|||
|
Issuance
of common stock in conjunction with the subordinated debt
exchange
|
$
|
-
|
$
|
51,091
|
|||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
EMCORE
CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of March 31, 2005 and
for
the three and six months ended of March 31, 2005 and 2004
(unaudited)
NOTE
1. Basis of Presentation.
The
accompanying unaudited condensed consolidated financial statements include the
accounts of EMCORE Corporation and its subsidiaries (EMCORE). These statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim information, and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for annual
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
interim periods are not necessarily indicative of results that may be expected
for the full year.
Preparation
of EMCORE's financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates. For a more complete understanding of EMCORE’s financial position,
operating results, risk factors and other matters, please refer to EMCORE's
Annual Report on Form 10-K for the fiscal year ended September 30, 2004, which
was filed with the Securities and Exchange Commission on December 14,
2004.
EMCORE
has reclassified certain immaterial prior period balances to conform to the
current period presentation.
NOTE 2. Stock Compensation
EMCORE has long-term incentive plans authorizing various types of
market and performance based incentive awards that may be granted to officers
and employees. Statement of Financial Accounting Standard (SFAS) No. 123 and
SFAS No. 148, Accounting for Stock-Based Compensation, allow companies
to measure compensation expense in connection with employee stock option plans
using a fair value based method or to continue to use an intrinsic value based
method as defined by Accounting Principles Board (APB) No. 25, which generally
does not result in a compensation expense at time of grant. EMCORE accounts for
stock compensation under APB 25, and does not recognize stock-based compensation
expense upon the grant of its stock options because the option terms are fixed
and the exercise price equals the market price of the underlying stock on the
grant date. All granted stock options have a term of ten years.
The following table illustrates the effect on net income (loss)
and basic and diluted earnings (loss) per share if EMCORE had recognized
compensation expense upon grant of the options, based on the Black-Scholes
option-pricing model.
|
(in
thousands, except per share data)
|
For
the Three Months Ended March 31,
|
For
the Six Months Ended March 31,
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
income (loss)
|
$
|
7,559
|
$
|
1,750
|
$
|
(1,582
|
)
|
$
|
9,864
|
||||
|
Deduct:
Total stock based employee compensation expense determined under fair
value based methods for all awards, net of related tax
effects
|
(721
|
)
|
(746
|
)
|
(1,344
|
)
|
(1,603
|
)
|
|||||
|
Pro
forma net income (loss)
|
$ |
6,838
|
$ |
1,004
|
$ |
(2,926
|
)
|
$ |
8,261
|
||||
|
Earnings
(loss) per share:
|
|||||||||||||
|
Basic
and diluted share - as reported
|
$ |
0.16
|
$ |
0.04
|
$ |
(0.03
|
)
|
$ |
0.25
|
||||
|
Basic
and diluted share - pro forma
|
$ |
0.14
|
$ |
0.02
|
$ |
(0.06
|
)
|
$ |
0.21
|
||||
The
Black-Scholes model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility. EMCORE’s options
have characteristics significantly different from traded options, and the input
assumptions used in the model can materially affect the fair value estimate. The
assumptions used in this model to estimate fair value and resulting values are
as follows:
|
|
For
the Three Months Ended March 31,
|
For
the Six Months Ended March 31,
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
|||||
|
Expected
stock price volatility
|
107
|
%
|
111
|
%
|
107
|
%
|
111
|
%
|
|||||
|
Risk-free
interest rate
|
3.89
|
%
|
2.98
|
%
|
3.69
|
%
|
3.11
|
%
|
|||||
|
Weighted
average expected life (in years)
|
5
|
5
|
5
|
5
|
|||||||||
NOTE
3. Accumulated Other Comprehensive Income (Loss)
The
components of other comprehensive income (loss) are as
follows:
|
For the Three Months Ended March
31,
|
For the Six Months Ended March
31,
|
||||||||||||
|
(in
thousands)
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
Net
income (loss)
|
$
|
7,559
|
$
|
1,750
|
$
|
(1,582
|
)
|
$
|
9,864
|
||||
|
Other
comprehensive income:
|
|||||||||||||
|
Unrealized
gain (loss)
|
-
|
4
|
-
|
4
|
|||||||||
|
Translation
adjustment
|
111
|
-
|
111
|
(25
|
)
|
||||||||
|
Comprehensive
income (loss)
|
$ |
7,670
|
$ |
1,754
|
$ |
(1,471
|
)
|
$ |
9,843
|
||||
The
components of accumulated other comprehensive income (loss) are as
follows:
(in
thousands)
|
||||
|
Accumulated
other comprehensive loss:
|
||||
|
Beginning
balance - as of September 30, 2004
|
$
|
(111
|
)
|
|
|
Translation
adjustment
|
111
|
|||
|
Ending
balance - as of March 31, 2005
|
$ |
-
|
||
NOTE 4. Discontinued Operations
As discussed in our Annual Report, EMCORE sold its TurboDisc
capital equipment business in an asset sale in November 2003 to a subsidiary of
Veeco Instruments Inc. (Veeco) in a transaction that is valued at up to $80.0
million. The selling price was $60.0 million in cash at closing, with an
additional aggregate maximum payout of $20.0 million over the next two years.
In March 2005, EMCORE received $13.2 million of earn-out payment
from Veeco in connection with its first year of net sales of TurboDisc products.
After offsetting this receipt against expenses related to the discontinued
operation, EMCORE recorded a net gain from the disposal of discontinued
operations of $12.5 million. EMCORE will receive, in either cash or stock, 50%
of all calendar year 2005 revenues from the TurboDisc capital equipment business
that exceeds $40.0 million. EMCORE’s maximum second year earn-out payment from
Veeco is $6.8 million.
NOTE 5. Severance
As part of ongoing efforts to lower operating expenses and improve
margins, EMCORE continued its focus on reducing corporate overhead expense and a
realignment of certain of its operations. During fiscal 2005, EMCORE’s Fiber
Optics segment recognized approximately $0.6 million in severance costs, fringe
benefit charges and outplacement services to be provided to the employees that
were involuntary affected by a reduction in workforce. EMCORE terminated 19
employees, of whom 6 employees were engaged in manufacturing, 6 employees in
selling, general and administrative, and 7 employees in research and
development. The balance of the severance accrual is scheduled to be paid by
August 31, 2005.
The following table sets forth changes in the severance accrual
account:
(in
thousands) |
||||
|
Severance
Accrual:
|
||||
|
Beginning
balance - as of September 30, 2004
|
$
|
522
|
||
|
New
charges
|
649
|
|||
|
Payments
|
(809
|
)
|
||
|
Accrual
adjustments
|
60
|
|||
|
Ending
balance - as of March 31, 2005
|
$ |
422
|
NOTE 6. Receivables
Accounts
receivable consisted of the following:
|
(in
thousands)
|
As
of
March
31, 2005
|
As
of
September
30, 2004
|
|||||
|
Accounts
receivable
|
$
|
22,581
|
$
|
19,270
|
|||
|
Accounts
receivable - unbilled
|
2,791
|
2,171
|
|||||
|
Subtotal
|
25,372
|
21,441
|
|||||
|
Allowance
for doubtful accounts
|
(466
|
)
|
(666
|
)
|
|||
|
Total
|
$ |
24,906
|
$ |
20,775
|
Receivables
from related parties consisted of the following:
|
(in
thousands)
|
As
of
March
31, 2005
|
As
of
September
30, 2004
|
|||||
|
Current
assets:
|
|||||||
|
GELcore
joint venture
|
$ | 195 | $ | 215 | |||
|
Employee
loans
|
3,000
|
-
|
|||||
|
Employee
loans - interest portion
|
672
|
-
|
|||||
|
Subtotal
|
3,867
|
215
|
|||||
|
Long-term
assets:
|
|||||||
|
Employee
loans
|
169
|
3,169
|
|||||
|
Employee
loans - interest portion
|
-
|
585
|
|||||
|
Subtotal
|
169
|
3,754
|
|||||
|
Total
|
$ |
4,036
|
$ |
3,969
|
Employee Loans:
From time
to time, prior to July 2002, EMCORE has loaned money to certain of its executive
officers and directors. Pursuant to due authorization from EMCORE's Board of
Directors, EMCORE loaned $3.0 million to the Chief Executive Officer in February
2001. The promissory note matures on February 22, 2006 and bears interest
(compounded annually) at a rate of (a) 5.18% per annum through May 23, 2002 and
(b) 4.99% from May 24, 2002 through maturity. All interest is payable at
maturity. The note is partially secured by a pledge of shares of EMCORE's common
stock. Accrued interest at March 31, 2005 totaled $0.7 million.
In
addition, pursuant to due authorization of the Company's Board of Directors,
EMCORE loaned $82,000 to the Chief Financial Officer (CFO) of EMCORE in December
1995. The loan does not bear interest and provides for offset of the loan via
bonuses payable to the CFO over a period of up to 25 years. The remaining
balance relates to $87,260 of loans from the Company to an officer (who is not a
Named Executive Officer) that were made during 1997 through 2000, and are
payable on demand.
NOTE 7. Inventories, net
Inventories are stated at the lower of cost or market, with cost
being determined using the standard cost method that includes material, labor
and manufacturing overhead costs. The components of inventory, consisted of the
following:
|
(in
thousands)
|
As
of
March
31, 2005
|
As
of
September
30, 2004
|
|||||
|
Raw
materials
|
$
|
10,122
|
$
|
9,000
|
|||
|
Work-in-process
|
3,688
|
4,140
|
|||||
|
Finished
goods
|
7,049
|
5,754
|
|||||
|
Subtotal
|
20,859
|
18,894
|
|||||
|
Less:
reserves
|
(4,460
|
)
|
(4,055
|
)
|
|||
|
Total
|
$ |
16,399
|
$ |
14,839
|
|||
NOTE
8. Goodwill and Intangible Assets, net
The
following table sets forth changes in the carrying value of goodwill by
reportable segment:
|
(in
thousands)
|
Fiber
Optics
|
Photovoltaics
|
Total
|
|||||||
|
Beginning
balance - as of September 30, 2004
|
$
|
13,200
|
$
|
20,384
|
$
|
33,584
|
||||
|
Acquisition
- earn out payment
|
385
|
-
|
385
|
|||||||
|
Ending
balance - as of March 31, 2005
|
$ |
13,585
|
$ |
20,384
|
$ |
33,969
|
||||
The
following table sets forth changes in the carrying value of intangible assets by
reportable segment:
|
As
of March 31, 2005
|
As
of September 30, 2004
|
||||||||||||||||||
|
(in
thousands)
|
Gross
Assets
|
Accumulated
Amortization
|
Net
Assets
|
Gross
Assets
|
Accumulated
Amortization
|
Net
Assets
|
|||||||||||||
|
Fiber
Optics:
|
|||||||||||||||||||
|
Patents
|
$
|
368
|
$
|
(99
|
)
|
$
|
269
|
$
|
360
|
$
|
(61
|
)
|
$
|
299
|
|||||
|
Ortel
acquired IP
|
3,274
|
(1,422
|
)
|
1,852
|
3,274
|
(1,098
|
)
|
2,176
|
|||||||||||
|
Alvesta
acquired IP
|
193
|
(87
|
)
|
106
|
193
|
(68
|
)
|
125
|
|||||||||||
|
Molex
acquired IP
|
558
|
(167
|
)
|
391
|
558
|
(112
|
)
|
446
|
|||||||||||
|
Corona
acquired IP
|
1,000
|
(166
|
)
|
834
|
1,000
|
(66
|
)
|
934
|
|||||||||||
|
Subtotal
|
5,393
|
(1,941
|
)
|
3,452
|
5,385
|
(1,405
|
)
|
3,980
|
|||||||||||
|
Photovoltaics:
|
|||||||||||||||||||
|
Patents
|
271
|
(74
|
)
|
197
|
265
|
(49
|
)
|
216
|
|||||||||||
|
Tecstar
acquired IP
|
1,900
|
(1,160
|
)
|
740
|
1,900
|
(970
|
)
|
930
|
|||||||||||
|
Subtotal
|
2,171
|
(1,234
|
)
|
937
|
2,165
|
(1,019
|
)
|
1,146
|
|||||||||||
|
Electronic
Materials & Devices:
|
|||||||||||||||||||
|
Patents
|
235
|
(199
|
)
|
36
|
235
|
(184
|
)
|
51
|
|||||||||||
|
Total
|
$ |
7,799
|
$ |
(3,374
|
)
|
$ |
4,425
|
$ |
7,785
|
$ |
(2,608
|
)
|
$ |
5,177
|
|||||
Based on
the carrying amount of the intangible assets as of March 31, 2005, the estimated
future amortization expense is as follows:
(in
thousands) |
||||
|
|
Amortization
|
|||
|
Period
ending:
|
||||
|
Six
months ending September 30, 2005
|
$
|
767
|
||
|
Year
ended September 30, 2006
|
1,520
|
|||
|
Year
ended September 30, 2007
|
1,122
|
|||
|
Year
ended September 30, 2008
|
575
|
|||
|
Year
ended September 30, 2009
|
235
|
|||
|
Thereafter
|
206
|
|||
|
Total
future amortization expense
|
$ |
4,425
|
EMCORE
evaluates its goodwill for impairment on an annual basis, during the quarter
ended March 31st, or whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Circumstances that could trigger an
impairment test include but are not limited to: a significant adverse change in
the business climate or legal factors; an adverse action or assessment by a
regulator; unanticipated competition; loss of key personnel; the likelihood that
a reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; results of testing for recoverability of a significant asset
group within a reporting unit; and recognition of a goodwill impairment loss in
the financial statements of a subsidiary that is a component of a reporting
unit. The determination as to whether a write down of goodwill is necessary
involves significant judgment based on the short-term and long-term projections
of the future performance of the reporting unit to which the goodwill is
attributed. The assumptions supporting the estimated future cash flows of the
reporting unit, including the discount rate used reflect management’s best
estimates. During the three and six-month periods ended March 31, 2005 and 2004,
EMCORE recorded no impairment charges on any of EMCORE’s patents, other
intangibles assets, or goodwill.
NOTE
9. Accrued Expenses
The
components of accrued expenses consisted of the following:
|
(in
thousands)
|
As
of
March
31, 2005
|
As
of
September
30, 2004
|
|||||
|
Compensation
|
$
|
4,474
|
$
|
4,875
|
|||
|
Interest
|
1,814
|
1,814
|
|||||
|
Warranty
|
1,998
|
2,152
|
|||||
|
Professional
fees
|
657
|
1,223
|
|||||
|
Royalty
and earn-out payments
|
376
|
1,554
|
|||||
|
Self
insurance
|
743
|
1,182
|
|||||
|
Other
|
3,220
|
2,492
|
|||||
|
Total
|
$ |
13,282
|
$ |
15,292
|
NOTE
10. Contingencies
EMCORE is
involved in lawsuits and proceedings that arise in the ordinary course of
business. There are no matters pending that we expect to be material in relation
to our business, consolidated financial condition, results of operations, or
cash flows.
NOTE 11. Segment Data and Related
Information
Effective January 1, 2005, EMCORE reorganized its reporting
structure into three segments: Fiber Optics, Photovoltaics, and Electronic
Materials and Devices. EMCORE allocates resources to these segments based upon
their business prospects, competitive factors, net revenue and operating
results.
EMCORE's Fiber Optics revenues are derived primarily from sales of
optical components and subsystems for cable TV (CATV), fiber to the premise
(FTTP), enterprise routers and switches, telecom grooming switches, core
routers, high performance servers, supercomputers and satellite communications
data links (Satcom). EMCORE's Photovoltaics revenues are derived primarily from
the sales of solar power conversion products, including solar cells, covered
interconnect solar cells (CICs), and solar panels. EMCORE's Electronic Materials
and Devices revenues are derived primarily from sales of wireless components,
such as RF materials including HBTs and enhancement-mode pHEMTS, GaN materials
for wireless base stations, MR sensors, and process development
technology.
The following tables set forth the revenues and percentage of
total revenues attributable to each operating segment:
|
(in
thousands)
|
For
the Three Months Ended March 31, 2005
|
%
of revenue
|
For
the Three Months Ended March 31, 2004
|
%
of revenue
|
|||||||||
| Segment Revenue | |||||||||||||
|
Fiber
Optics
|
$
|
19,030
|
62.6
|
%
|
$
|
14,156
|
61.1
|
%
|
|||||
|
Photovoltaics
|
7,829
|
25.7
|
%
|
6,113
|
26.4
|
%
|
|||||||
|
Electronic
Materials and Devices
|
3,571
|
11.7
|
%
|
2,911
|
12.5
|
%
|
|||||||
|
Total
revenues
|
$ |
30,430
|
100.0
|
%
|
$ |
23,180
|
100.0
|
%
|
|
(in
thousands)
|
For
the Six Months Ended March 31, 2005
|
|
%
of revenue
|
For
the Six Months Ended March 31, 2004
|
%
of revenue
|
||||||||
|
Segment
Revenue
|
|||||||||||||
|
Fiber
Optics
|
$
|
36,719
|
64.0
|
%
|
$
|
29,649
|
64.0
|
%
|
|||||
|
Photovoltaics
|
15,277
|
26.6
|
%
|
10,639
|
23.0
|
%
|
|||||||
|
Electronic
Materials and Devices
|
5,398
|
9.4
|
%
|
6,017
|
13.0
|
%
|
|||||||
|
Total
revenues
|
$ |
57,394
|
100.0
|
%
|
$ |
46,305
|
100.0
|
%
|
The
following tables set forth operating (loss) income attributable to each
operating segment. The “other” category includes corporate level operating
expenses not allocated to the operating segments.
|
(in
thousands)
|
For
the Three Months Ended March 31, 2005
|
For
the Three Months Ended March 31, 2004
|
For
the Six Months Ended March 31, 2005
|
For
the Six Months Ended March 31, 2004
|
|||||||||
|
Operating
(loss) income by segment:
|
|||||||||||||
|
Fiber
Optics
|
$
|
(3,282
|
)
|
$
|
(6,154
|
)
|
$
|
(8,518
|
)
|
$
|
(9,892
|
)
|
|
|
Photovoltaics
|
6
|
(2,233
|
)
|
(1,052
|
)
|
(4,972
|
)
|
||||||
|
Electronic
Materials and Devices
|
157
|
471
|
(892
|
)
|
730
|
||||||||
|
Corporate
|
(548
|
)
|
(761
|
)
|
(1,749
|
)
|
(2,716
|
)
|
|||||
|
Total
operating loss
|
(3,667
|
)
|
(8,677
|
)
|
(12,211
|
)
|
(16,850
|
)
|
|||||
|
Other
(income) expenses:
|
|||||||||||||
|
Interest
expense, net
|
953
|
1,486
|
1,922
|
3,353
|
|||||||||
|
Gain
from debt extinguishment
|
-
|
(12,312
|
)
|
-
|
(12,312
|
)
|
|||||||
|
Equity
in net loss (income) of GELcore
|
297
|
51
|
(75
|
)
|
(216
|
)
|
|||||||
|
Total
other expenses (income)
|
1,250
|
(10,775
|
)
|
1,847
|
(9,175
|
)
|
|||||||
|
(Loss)
income from continuing operations
|
$ |
(4,917
|
)
|
$ |
2,098
|
$ |
(14,058
|
)
|
$ |
(7,675
|
)
|
Long-lived
assets, (consisting of property, plant and equipment, goodwill and intangible
assets) for each operating segment are as follows:
|
(in
thousands)
|
As
of
March
31, 2005
|
As
of
September
30, 2004
|
|||||
| Long-Lived Assets | |||||||
|
Fiber
Optics
|
$
|
56,987
|
$
|
59,802
|
|||
|
Photovoltaics
|
37,621
|
38,577
|
|||||
|
Electronic
Materials and Devices
|
5,236
|
5,736
|
|||||
|
Total
|
$ |
99,844
|
$ |
104,115
|
For the
three months ended March 31, 2005 and 2004, sales to Cisco Systems and Motorola,
Inc. accounted for 20% and 13% of total revenue, respectively. For the six
months ended March 31, 2005 and 2004, sales to Cisco Systems and Motorola, Inc.
accounted for 22% and 15% of total revenue, respectively.
The
following tables sets forth EMCORE's consolidated revenues by geographic region.
North American sales include sales to Canada, which historically have not been
material. Revenue was assigned to geographic regions based on the customers’
shipment locations.
|
(in
thousands)
|
For
the Three Months Ended March 31, 2005
|
%
of revenue
|
For
the Three Months Ended March 31, 2004
|
%
of revenue
|
|||||||||
| Revenue by Geographic Region | |||||||||||||
|
United
States
|
$
|
25,013
|
82.2
|
%
|
$
|
14,480
|
62.5
|
%
|
|||||
|
South
America
|
-
|
-
|
416
|
1.8
|
%
|
||||||||
|
Asia
|
3,696
|
12.1
|
%
|
4,766
|
20.5
|
%
|
|||||||
|
Europe
|
1,721
|
5.7
|
%
|
3,518
|
15.2
|
%
|
|||||||
|
Total
revenue
|
$ |
30,430
|
100.0
|
%
|
$ |
23,180
|
100.0
|
%
|
|
(in
thousands)
|
For
the Six Months Ended March 31, 2005
|
%
of revenue
|
For
the Six Months Ended March 31, 2004
|
%
of revenue
|
|||||||||
|
Revenue
by Geographic Region
|
|||||||||||||
|
United
States
|
$
|
45,712
|
79.6
|
%
|
$
|
30,731
|
66.4
|
%
|
|||||
|
South
America
|
-
|
-
|
416
|
0.9
|
%
|
||||||||
|
Asia
|
8,022
|
14.0
|
%
|
9,942
|
21.4
|
%
|
|||||||
|
Europe
|
3,660
|
6.4
|
%
|
5,216
|
11.3
|
%
|
|||||||
|
Total
revenue
|
$ |
57,394
|
100.0
|
%
|
$ |
46,305
|
100.0
|
%
|
NOTE
12. Recent Financial Accounting Pronouncements
In
November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
151, Inventory Costs, An Amendment of Accounting Research
Bulletin No. 43. SFAS No. 151 clarifies treatment of abnormal amounts of
idle facility expense, freight, handling costs and spoilage, specifying that
such costs should be expensed as incurred and not included in overhead. The new
statement also requires that allocation of fixed production overheads to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. EMCORE does not
believe that the impact of this new standard will have a material effect on our
financial statements or results of operations.
In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS
No. 123R requires all share-based compensation awards, including grants of
employee stock options and shares issued under employee stock purchase plans, to
be recognized as an expense in the income statement based on a fair value
valuation method on the date of issuance. SFAS No. 123R is effective beginning
in our first quarter of fiscal 2006. We are currently evaluating the provisions
of SFAS No. 123R and it is expected to have a material impact on our financial
position and results of operations.
NOTE
13. Subsequent Events.
In April 2005, EMCORE announced plans
to consolidate solar panel operations by closing its City of Industry,
California facility and moving its operations to EMCORE’s Albuquerque, New
Mexico facility. Photovoltaic operations at the City of Industry facility are
expected to cease during the fourth quarter of fiscal 2005, and the entire
facility is expected to be closed during the first quarter of fiscal 2006.
In April
2005, the Company spun-off product technology focused on gallium nitride based
power electronic devices for the power device
industry. The new company, Velox Semiconductor Corporation
(Velox), raised $6.0 million from various venture capital partnerships. EMCORE
contributed intellectual property and equipment receiving an approximate 20%
stake in Velox. Five employees also became full time Velox personnel.
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934. These forward-looking statements are based
largely on our current expectations and projections as they relate to our future
results, prospects, developments, and business strategies. These forward-
looking statements may be identified by the use of terms and phrases such as
"expects", "anticipates", "intends", "plans", believes", "estimate", “predict”,
“target”, “may”, “could”, “will”, and variations of these terms and phrases
including references to assumptions. These forward-looking statements are
subject to known and unknown risks, business, economic, and other risks and
uncertainties, that may cause actual results to be materially different from
those discussed in these forward-looking statements. The cautionary statements
made in this report should be read as being applicable to all forward-looking
statements wherever they appear in this report. This discussion should be read
in conjunction with the consolidated financial statements, including the related
footnotes. If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected or projected.
These
forward-looking statements include, without limitation, any and all statements
or implications regarding:
| · |
The
ability of EMCORE Corporation (EMCORE) to remain competitive and a leader
in its industry and the future growth of the company, the industry, and
the economy in general;
|
| · |
Difficulties
in integrating recent or future acquisitions into our
operations;
|
| · |
The
expected level and timing of benefits to EMCORE from on-going cost
reduction efforts, including (i) expected cost reductions and their impact
on our financial performance, (ii) our continued leadership in technology
and manufacturing in its markets, and (iii) our belief that the cost
reduction efforts will not impact product development or manufacturing
execution;
|
| · |
Expected
improvements in our product and technology development
programs;
|
| · |
Whether
our products will (i) be successfully introduced or marketed, (ii) be
qualified and purchased by our customers, or (iii) perform to any
particular specifications or performance or reliability standards;
and/or
|
| · |
Guidance
provided by EMCORE regarding our expected financial performance in current
or future periods, including, without limitation, with respect to
anticipated revenues, income, or cash flows for any period in fiscal 2005
and subsequent periods.
|
These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected, including without
limitation, the following:
| · |
EMCORE’s
cost reduction efforts may not be successful in achieving their expected
benefits, or may negatively impact our
operations;
|
| · |
The
failure of our products (i) to perform as expected without material
defects, (ii) to be manufactured at acceptable volumes, yields, and cost,
(iii) to be qualified and accepted by our customers, and (iv) to
successfully compete with products offered by our competitors;
and/or
|
| · |
Other
risks and uncertainties described in EMCORE’s filings with the Securities
and Exchange Commission (SEC) such as: cancellations, rescheduling, or
delays in product shipments; manufacturing capacity constraints; lengthy
sales and qualification cycles; difficulties in the production process;
changes in semiconductor industry growth; increased competition; delays in
developing and commercializing new products; and other
factors.
|
We
assume no obligation to update the matters discussed in this Quarterly Report on
Form 10-Q or our Annual Report on Form 10-K, which was filed with the Securities
and Exchange Commission on December 14, 2004, except as required by applicable
law or regulation.
Company Overview
EMCORE Corporation (EMCORE), a New Jersey corporation established
in 1984, offers a broad portfolio of compound semiconductor-based components and
subsystems for the broadband, fiber optic, satellite, and wireless
communications markets. EMCORE continues to expand its comprehensive product
portfolio to enable the transport of voice, data, and video over copper, hybrid
fiber/coax (HFC), fiber, satellite, and wireless networks. EMCORE is building
upon its leading-edge compound semiconductor materials and device expertise to
provide cost-effective components and subsystems for the cable television
(CATV), fiber-to-the-premise, business, curb or home (FTTP), telecommunications,
data and storage, satellite, and wireless communications markets.
| · |
CATV and FTTP Networks - The communications
industry in which we participate continues to be dynamic. Cable operators
and telephone companies compete with each other to offer the lowest price
for unlimited "triple play" (voice, data, and video) communications
through a single network connection. As a market leader in radio frequency
(RF) transmission over fiber products for the CATV industry, EMCORE
enables cable companies to offer multiple forms of communications to meet
the expanding demand for high-speed Internet, on-demand and interactive
video, and other new services (such as Voice over IP, or VoIP). In
response to this triple play strategy from the cable companies, the
telephone companies plan to offer competing voice, data, and video
services through the deployment of new fiber-based systems. These growing
applications should increase demand for EMCORE’s FTTP products and
subsystems. Our CATV and FTTP products include broadcast analog and
digital fiber optic transmitters, Quadrature Amplitude Modulation (QAM)
transmitters, video receivers, Passive Optical Network (PON) transceivers,
avalanche photodetectors (APD), PIN (P-type, intrinsic, and N-type
semiconductor materials) photodetectors, and Distributed Feedback (DFB)
and Fabry-Perot (FP) 1310 nanometer (nm), 1490 nm and 1550 nm analog and
digital lasers.
|
| · |
Telecommunications - Our state-of-the-art
optical components and modules enable high-speed (up to an aggregate 40
gigabits per second or Gb/s) optical interconnections that drive
architectures in next-generation carrier class switching and routing
networks. Our parallel optical modules facilitate high channel count
optical interconnects in multi-shelf central office equipment. These
systems sit in the network core and in key metro nodes of voice telephony
and Internet infrastructures, and are highly expandable with
pay-as-you-grow capacity scaling. EMCORE is a leader in providing optical
modules to the telecom equipment market area with its recently acquired
OptoCubeTM
transceiver product and its 4- and 12-channel parallel optics
products.
|
| · |
Data Communications - EMCORE’s leading-edge
optical components and modules for data applications include 10G Ethernet
LX4, 10G Ethernet EX4, 10G Ethernet CX4, SmartLink TM
transceivers for optical Infiniband, and parallel optical modules
for enterprise Ethernet and High Performance Computing (HPC), also called
"Super Computing" applications. These high-speed modules enable
switch-to-switch, router-to-router, and server-to-server backbone
connections at aggregate speeds of 10 Gb/s and above. Pluggable LX4
modules in X2 or XENPAK form factors provide a "pay-as-you-populate" cost
structure during installation. The LX4 can transmit data over both
multi-mode and single-mode optical fiber, enabling transmission of optical
10G Ethernet signals over 300 meters of legacy milti-mode fiber or 10km of
single-moder fiber. The EX4 extends optical span lengths to over 1km of
multi-mode and 40km of single-mode fiber. CX4 modules similarly allow the
cost-effective transmission of Ethernet signals over legacy copper cable.
EMCORE’s parallel optical modules also are used in switched bus
architectures that are needed for next-generation blade servers, clustered
and grid interconnected servers, Super Computers and network-attached
storage.
|
| · |
Storage Area Networks - Our optical
components also are used in the high-end data storage market, and include
high-speed, 850 nm vertical cavity surface emitting lasers (VCSELs) and
PIN photodiode components, and 10 Gb/s transmit and receive optical
subassemblies (TOSAs/ROSAs). In the future, EMCORE anticipates selling our
integrated pluggable X2 or XENPAK form factor modules into the emerging
10G Fibre Channel segment. These products provide optical interfaces for
switches and storage systems used in large enterprise mission-critical
applications, such as inventory control or financial
systems.
|
| · |
Satellite Communications - EMCORE
manufactures high-efficiency solar cells and solar panels for global
satellite communications (satcom), and expect to see increased
applications for solar cells in terrestrial power products in fiscal 2005.
EMCORE also manufactures satellite communications fiber optics products,
including transmitters, receivers, subsystems, and systems, that transport
wideband microwave signals between satellite hub equipment and antenna
dishes.
|
| · |
Wireless Communications - EMCORE
manufactures compound semiconductor RF materials for the wireless handset,
cell phone, and base station markets. Our products include 4-inch and
6-inch InGaP Hetero-junction Bipolar Transistor (HBT), AlGaAs
pseudomorphic high electron mobility transistors (pHEMT), and E-mode
transistor wafers that are used for power amplifiers and switches within
next-generation wireless networks. We also produce GaN high electron
mobility transistors (HEMT) RF materials that are designed to meet future
wireless base station infrastructure requirements for higher power and
frequency, along with high temperature operation at industry-leading
efficiencies.
|
EMCORE also is involved in a joint venture with General Electric
Lighting to address the solid-state lighting market with High Brightness Light
Emitting Diode-based (HB-LED) lighting systems. General Electric Lighting and
EMCORE have agreed that this joint venture will be the exclusive vehicle for
each party’s participation in solid-state lighting. Through its 49% ownership in
GELcore, LLC. (GELcore), EMCORE participates in the development and
commercialization of next-generation LED technology for use in the general and
specialty illumination markets. GELcore's products include traffic lights,
channel letters, and other signage and display products that incorporate
HB-LEDs. In the near term, GELcore expects to deploy its HB-LED products in the
commercial and industrial markets, including medical, aerospace, commercial
refrigeration, transportation, appliance, and general and specialty illumination
applications. GELcore financial reporting is on a calendar year basis and
anticipates revenues in the $90.0 million range for 2005.
Backlog
As of March 31, 2005, EMCORE had a backlog it believes to be firm
of approximately $33.7 million. This compares favorably to a backlog of $28.8
million as reported at September 30, 2004. This increase in backlog is primarily
attributable to increased demand for EMCORE’s 10G CWDM fiber optic
communications transceiver, the LX4 module. A majority of EMCORE’s products
typically ship within the same quarter as the purchase order is received. We
believe that substantially all of our backlog can be shipped during the next 12
months. But given the current market environment, customers may delay shipment
of certain orders. Backlog also could be adversely affected if customers
unexpectedly cancel purchase orders accepted by us.
Critical Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results may differ from
those estimates. Critical accounting policies include those policies that are
reflective of significant judgments and uncertainties, which potentially could
produce materially different results under different assumptions and conditions.
EMCORE's most significant estimates relate to accounts receivable bad debt
reserves, inventory valuation reserves specifically relating to excess and
obsolete inventory, product warranty accruals, the valuation of goodwill,
intangibles and other long-lived assets, and revenue recognition on contracts
utilizing the percentage-of-completion method.
| · |
Bad Debt Reserves - EMCORE regularly evaluates its accounts
receivable and accordingly maintains allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to meet
their financial obligation to us. The allowance for doubtful accounts at
March 31, 2005 and September 30, 2004 was $0.5 and $0.7 million,
respectively. If the financial condition of our customers were to
deteriorate, additional allowances may be
required.
|
| · |
Inventory Reserves - EMCORE reserves against inventory once
it has been determined that: (i) conditions exist that may not allow the
inventory to be sold for its intended purpose, (ii) the inventory’s value
is determined to be less than cost, (iii) or the inventory is determined
to be obsolete. The charge related to inventory reserves is recorded as a
cost of revenue. Inventory that is identified as being obsolete is
disposed of.
EMCORE recorded write-downs of inventory of $1.1 million and
$2.0 million for the three and six months ended March 31, 2005,
respectively. By comparison, EMCORE recorded write-downs of inventory of
$0.3 million and $1.3 million for the three and six months ended March 31,
2004, respectively. The majority of the inventory write-downs are related
to estimated allowances for inventory whose carrying value is in excess of
net realizable value and on excess raw material components resulting from
finished product obsolescence. In most cases where EMCORE sells previously
written down inventory, it is typically sold as a component part of a
finished product. The finished product is sold at market price at the time
resulting in higher average gross margin on such revenue. EMCORE does not
track the selling price of individual raw material components that have
been previously written off, since such raw material components usually
are only a portion of the resultant finished products and related sales
price.
EMCORE evaluates inventory levels at least quarterly against
sales forecasts on a significant part-by-part basis, in addition to
determining its overall inventory risk. Reserves are adjusted to reflect
inventory values in excess of forecasted sales, as well as overall
inventory risk assessed by management. We have incurred, and may in the
future incur, charges to write down our inventory. While we believe, based
on current information, that the amount recorded for inventory is properly
reflected on our balance sheet, if market conditions are less favorable
than our forecasts, our future sales mix differs from our forecasted sales
mix, or actual demand from our customers is lower than our estimates, we
may be required to record additional inventory
write-downs.
|
| · |
Product Warranty Reserves - EMCORE provides its customers
with limited rights of return for non-conforming shipments and warranty
claims for certain products. In accordance with FASB Interpretation No.
45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, EMCORE makes
estimates using historical experience rates as a percentage of revenue and
accrues estimated warranty expense as a cost of revenue.
The following table sets forth changes in the product
warranty accrual account:
|
(in
thousands) |
||||
|
Beginning
balance - as of September 30, 2004
|
$
|
2,152
|
||
|
Accruals
for warranty expense
|
423
|
|||
|
Reversals
due to use of liability
|
(667
|
)
|
||
|
Accrual
adjustment
|
90
|
|||
|
Ending
balance - as of March 31, 2005
|
$ |
1,998
|
||
| · |
Valuation of Goodwill and Intangible Assets - EMCORE
evaluates its goodwill for impairment on an annual basis, during the
quarter ended March 31st, or whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Circumstances that could trigger an impairment test include but are not
limited to: a significant adverse change in the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition; loss of key personnel; the likelihood that a reporting unit
or significant portion of a reporting unit will be sold or otherwise
disposed; results of testing for recoverability of a significant asset
group within a reporting unit; and recognition of a goodwill impairment
loss in the financial statements of a subsidiary that is a component of a
reporting unit. The determination as to whether a write down of goodwill
is necessary involves significant judgment based on the short-term and
long-term projections of the future performance of the reporting unit to
which the goodwill is attributed. The assumptions supporting the estimated
future cash flows of the reporting unit, including the discount rate used
reflect management’s best estimates.
During the three and six-month periods ended March 31, 2004
and 2005, EMCORE recorded no impairment charges on any of EMCORE’s
patents, other intangibles assets, or goodwill. As part of our quarterly
review of financial results, we did not identify any impairment indicators
that the carrying value of our goodwill may not be recoverable. We tested
for impairment of goodwill on an annual basis. Under the first step of the
SFAS No. 142 analysis, the fair value of the reporting units was
determined. Based on that analysis, we determined that the carrying amount
of the reporting units did not exceed their fair
value.
|
| · |
Valuation of Long-lived Assets - EMCORE reviews long-lived
assets on an annual basis or whenever events or circumstances indicate
that the assets may be impaired. A long-lived asset is considered impaired
when its anticipated undiscounted cash flow is less than its carrying
value. In making this determination, EMCORE uses certain assumptions,
including, but not limited to: (a) estimates of the fair market value of
these assets; and (b) estimates of future cash flows expected to be
generated by these assets, which are based on additional assumptions such
as asset utilization, length of service that assets will be used in our
operations, and estimated salvage values. During the three and six-month
periods ended March 31, 2005 and 2004, we recorded no impairment charges
on any of EMCORE’s long-lived assets.
|
| · |
Revenue Recognition - Revenue is generally recognized upon
shipment provided persuasive evidence of a contract exists, (such as when
a purchase order or contract is received from a customer), the price is
fixed, the product meets its specifications, title and ownership have
transferred to the customer, and there is reasonable assurance of
collection of the sales proceeds. In those few instances where a given
sale involves post shipment obligations, formal customer acceptance
documents, or subjective rights of return, revenue is not recognized until
all post-shipment conditions have been satisfied and there is reasonable
assurance of collection of the sales proceeds.
The majority of our products have shipping terms that are
free on board (FOB) or free carrier alongside (FCA) shipping point, which
means that EMCORE fulfills its delivery obligation when the goods are
handed over to the freight carrier at our shipping dock. This means the
buyer bears all costs and risks of loss or damage to the goods from that
point. In certain cases, EMCORE ships its products cost insurance and
freight (CIF). Under this arrangement, revenue is recognized under FCA
shipping point terms, but EMCORE pays (and bills the customer) for the
cost of shipping and insurance to the customer's designated location.
EMCORE accounts for shipping and related transportation costs by recording
the charges that are invoiced to customers as revenue, with the
corresponding cost recorded as cost of revenue. In those instances where
inventory is maintained at a consigned location, revenue is recognized
only when our customer pulls product for its use and title and ownership
have transferred to the customer.
Distributors - EMCORE uses a number of distributors
around the world. In accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition, EMCORE recognizes revenue upon shipment of
product to these distributors. Title and risk of loss pass to the
distributors upon delivery, and our distributors are contractually
obligated to pay EMCORE on standard commercial terms, just like our other
direct customers. EMCORE does not sell to its distributors on consignment
and, except in the event of a product discontinuance, does not give
distributors a right of return.
Solar Panel Contracts - EMCORE records revenues
from solar panel contracts using the percentage-of-completion method.
Revenue is recognized in proportion to actual costs incurred compared to
total anticipated costs expected to be incurred for each contract. If
estimates of costs to complete long-term contracts indicate a loss, a
provision is made for the total loss anticipated. EMCORE has numerous
contracts that are in various stages of completion. Such contracts require
estimates to determine the appropriate cost and revenue recognition.
EMCORE uses all available information in determining dependable estimates
of the extent of progress towards completion, contract revenues, and
contract costs. Estimates are revised as additional information becomes
available. At March 31, 2005 and September 30, 2004, EMCORE's accrued
program losses totaled approximately $44,000 and $120,000, respectively.
Government Research & Development (R&D)
Contracts -R&D contract revenue represents reimbursement by
various U.S. Government entities to aid in the development of new
technology. The applicable contracts generally provide that EMCORE may
elect to retain ownership of inventions made in performing the work,
subject to a non-exclusive license retained by the government to practice
the inventions for government purposes. The R&D contract funding may
be based on a cost-plus, cost reimbursement, cost-share, or a firm fixed
price arrangement. The amount of funding under each R&D contract is
determined based on cost estimates that include both direct and indirect
costs. Cost-plus funding is determined based on actual costs plus a set
margin. As we incur costs under cost reimbursement type contracts, we
record revenue. Contract costs include material, labor, special tooling
and test equipment, sub-contracting costs, as well as an allocation of
indirect costs. For cost-share contracts, the actual costs of performance
are divided between the U.S. Government and EMCORE based on the R&D
contract terms. An R&D contract is considered complete when all
significant costs have been incurred, milestones have been reached, and
any reporting obligations to the customer have been met. Revenues from
Government R&D contracts amounted to approximately $1.8 million and
$1.6 million for the three months ended March 31, 2005 and 2004,
respectively. For the six months ended March 31, 2005, revenues from
Government R&D contracts amounted to approximately $3.3 million and
$2.6 million, respectively.
|
Recent Financial Accounting Pronouncements.
In November 2004, the FASB issued SFAS No. 151, Inventory
Costs, An Amendment of Accounting Research Bulletin No.
43. SFAS No. 151 clarifies treatment of abnormal amounts of idle facility
expense, freight, handling costs and spoilage, specifying that such costs should
be expensed as incurred and not included in overhead. The new statement also
requires that allocation of fixed production overheads to conversion costs
should be based on normal capacity of the production facilities. The provisions
in SFAS 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. EMCORE does not believe that the impact of
this new standard will have a material effect on our financial statements or
results of operations.
In December 2004, the FASB issued SFAS No. 123R, Share-Based
Payment. SFAS No. 123R requires all share-based compensation awards,
including grants of employee stock options and shares issued under employee
stock purchase plans, to be recognized as an expense in the income statement
based on a fair value valuation method on the date of issuance. SFAS No. 123R is
effective beginning in our first quarter of fiscal 2006. We are currently
evaluating the provisions of SFAS No. 123R and it is expected to have a material
impact on our financial position and results of operations.
Results
of Operations
The
following table sets forth the consolidated statements of operations data of
EMCORE expressed as a percentage of total revenues for the three and six-month
periods ended March 31, 2005 and 2004:
|
For
the Three Months Ended March 31,
|
For
the Six Months Ended March 31,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Revenue
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
|
Cost
of revenue
|
81.8
|
%
|
88.4
|
%
|
86.8
|
%
|
87.3
|
%
|
|||||
|
Gross
profit
|
18.2
|
%
|
11.6
|
%
|
13.2
|
%
|
12.7
|
%
|
|||||
|
Operating
expenses:
|
|||||||||||||
|
Selling,
general and administrative
|
16.3
|
%
|
24.3
|
%
|
17.5
|
%
|
23.6
|
%
|
|||||
|
Research
and development
|
13.4
|
%
|
24.7
|
%
|
15.9
|
%
|
25.4
|
%
|
|||||
|
Severance
charges
|
0.5
|
%
|
-
|
1.1
|
%
|
-
|
|||||||
|
Total
operating expenses
|
30.2
|
%
|
49.0
|
%
|
34.5
|
%
|
49.0
|
%
|
|||||
|
Operating
loss
|
(12.0
|
)%
|
(37.4
|
)%
|
(21.3
|
)%
|
(36.3
|
)%
|
|||||
|
Other
(income) expenses:
|
|||||||||||||
|
Interest
income
|
(0.8
|
)%
|
(0.8
|
)%
|
(0.8
|
)%
|
(0.8
|
)%
|
|||||
|
Interest
expense
|
4.0
|
%
|
7.3
|
%
|
4.1
|
%
|
8.0
|
%
|
|||||
|
Gain
from debt extinguishment
|
-
|
(53.1
|
)%
|
-
|
(26.5
|
)%
|
|||||||
|
Equity
in net loss (income) of GELcore
|
1.0
|
%
|
0.2
|
%
|
(0.1
|
)%
|
(0.4
|
)%
|
|||||
|
Total
other expenses (income)
|
4.2
|
%
|
(46.4
|
)%
|
3.2
|
%
|
(19.7
|
)%
|
|||||
|
(Loss)
income from continuing operations
|
(16.2
|
)%
|
9.0
|
%
|
(24.5
|
)%
|
(16.6
|
)%
|
|||||
|
Discontinued
operations:
|
|||||||||||||
|
Loss
from discontinued operations
|
-
|
(1.5
|
)%
|
-
|
(4.4
|
)%
|
|||||||
|
Gain
on disposal of discontinued operations
|
41.0
|
%
|
-
|
21.7
|
%
|
42.3
|
%
|
||||||
|
Income
(loss) from discontinued operations
|
41.0
|
%
|
(1.5
|
)%
|
21.7
|
%
|
37.9
|
%
|
|||||
|
Net
income (loss)
|
24.8
|
%
|
7.5
|
%
|
(2.8
|
)%
|
21.3
|
%
|
|||||
Comparison
of the three and six-month periods ended March 31, 2005 and
2004
Consolidated
Revenue. For the three months ended March 31, 2005 and 2004, EMCORE’s
consolidated revenue increased $7.2 million or 31% to
$30.4 million from $23.2 million, respectively. International sales accounted
for 18% of revenues for the three months ended March 31, 2005 and 38% of
revenues for the three months ended March 31, 2004. Revenue from R&D
government contracts increased $0.2 million to
$1.8 million from $1.6 million. With increased government
focus on energy conservation, national security, and fiber optic communications,
we expect revenues from government contracts to increase in fiscal 2005 when
compared to fiscal 2004.
For the
six months ended March 31, 2005 and 2004, EMCORE’s consolidated revenue
increased $11.1 million or 24% to $57.4 million from $46.3
million, respectively. International sales accounted for 20% of revenues for the
six months ended March 31, 2005 and 34% of revenues for the six months ended
March 31, 2004. Revenue from government contracts increased $0.7 million to $3.3
million from $2.6 million.
The
following tables sets forth EMCORE's consolidated revenues by geographic region.
North American sales include sales to Canada, which historically have not been
material. Revenue was assigned to geographic regions based on the customers’
shipment locations.
|
(in
thousands)
|
For
the Three Months Ended March 31, 2005
|
%
of revenue
|
For
the Three Months Ended March 31, 2004
|
%
of revenue
|
|||||||||
| Revenue by Geographic Region | |||||||||||||
|
United
States
|
$
|
25,013
|
82.2
|
%
|
$
|
14,480
|
62.5
|
%
|
|||||
|
South
America
|
-
|
-
|
416
|
1.8
|
%
|
||||||||
|
Asia
|
3,696
|
12.1
|
%
|
4,766
|
20.5
|
%
|
|||||||
|
Europe
|
1,721
|
5.7
|
%
|
3,518
|
15.2
|
%
|
|||||||
|
Total
revenue
|
$ |
30,430
|
100.0
|
%
|
$ |
23,180
|
100.0
|
%
|
|
(in
thousands)
|
For
the Six Months Ended March 31, 2005
|
%
of revenue
|
For
the Six Months Ended March 31, 2004
|
%
of revenue
|
|||||||||
|
Revenue
by Geographic Region
|
|||||||||||||
|
United
States
|
$
|
45,712
|
79.6
|
%
|
$
|
30,731
|
66.4
|
%
|
|||||
|
South
America
|
-
|
-
|
416
|
0.9
|
%
|
||||||||
|
Asia
|
8,022
|
14.0
|
%
|
9,942
|
21.4
|
%
|
|||||||
|
Europe
|
3,660
|
6.4
|
%
|
5,216
|
11.3
|
%
|
|||||||
|
Total
revenue
|
$ |
57,394
|
100.0
|
%
|
$ |
46,305
|
100.0
|
%
|
For the
three months ended March 31, 2005 and 2004, sales to Cisco Systems and Motorola,
Inc. accounted for 20% and 13% of total revenue, respectively. For the six
months ended March 31, 2005 and 2004, sales to Cisco Systems and Motorola, Inc.
accounted for 22% and 15% of total revenue, respectively.
The
following tables below sets forth the revenues and percentage of total revenues
attributable to each operating segment:
|
(in
thousands)
|
For
the Three Months Ended March 31, 2005
|
%
of revenue
|
For
the Three Months Ended March 31, 2004
|
%
of revenue
|
|||||||||
| Segment Revenue | |||||||||||||
|
Fiber
Optics
|
$
|
19,030
|
62.6
|
%
|
$
|
14,156
|
61.1
|
%
|
|||||
|
Photovoltaics
|
7,829
|
25.7
|
%
|
6,113
|
26.4
|
%
|
|||||||
|
Electronic
Materials and Devices
|
3,571
|
11.7
|
%
|
2,911
|
12.5
|
%
|
|||||||
|
Total
revenues
|
$ |
30,430
|
100.0
|
%
|
$ |
23,180
|
100.0
|
%
|
|
(in
thousands)
|
For
the Six Months Ended March 31, 2005
|
|
%
of revenue
|
For
the Six Months Ended March 31, 2004
|
%
of revenue
|
||||||||
|
Segment
Revenue
|
|||||||||||||
|
Fiber
Optics
|
$
|
36,719
|
64.0
|
%
|
$
|
29,649
|
64.0
|
%
|
|||||
|
Photovoltaics
|
15,277
|
26.6
|
%
|
10,639
|
23.0
|
%
|
|||||||
|
Electronic
Materials and Devices
|
5,398
|
9.4
|
%
|
6,017
|
13.0
|
%
|
|||||||
|
Total
revenues
|
$ |
57,394
|
100.0
|
%
|
$ |
46,305
|
100.0
|
%
|
FIBER OPTICS
Over the past several years, communications networks have
experienced dramatic growth in data transmission traffic due to worldwide
Internet access, e-mail, and e-commerce. As Internet content expands to include
full motion video on-demand (including HDTV), multi-channel high quality audio,
online video conferencing, image transfer, online gaming, and other broadband
applications, the delivery of such data will place a greater demand on available
bandwidth. The bulk of this traffic is already routed through the optical
networking infrastructure used by local and long distance carriers, as well as
Internet service providers. Optical fiber offers substantially greater bandwidth
capacity, is less error prone, and is easier to administer than older copper
wire technologies.
EMCORE's Fiber Optics segment serves the CATV, FTTP,
telecommunications, data and satellite communications, and storage area network
markets. It manufactures high-speed optical and copper transmitter, receiver,
and transceiver modules that utilize our leading-edge laser and photodiode
components for the data communications and telecommunications markets. EMCORE's
products modules are designed to help solve data bottleneck problems for short
and intermediate distance applications in central office, enterprise, and
point-of-presence (POP) environments.
Revenues from our Fiber Optics segment are derived primarily from
sales of optical components and subsystems for CATV, FTTP, enterprise routers
and switches, telecom grooming switches, core routers, high performance servers,
supercomputers and satellite communications data links.
For the
three months ended March 31, 2005 and 2004, fiber optics revenues increased $4.8
million or 34% to $19.0 million from $14.2 million. For
the six months ended March 31, 2005 and 2004, revenues from fiber optics
products increased $7.1 million or 24% to $36.7 million from $29.6 million. New
transceiver module product launches were the reason for this significant
increase in quarterly revenues. In 2005 EMCORE expects to continue
increasing sales of this product, develop and qualify next generation product
lines, and anticipates continuing its market leadership in this industry
segment. During fiscal 2005, EMCORE also experienced increased demand for its
existing parallel optical products: SNAP-12, CX4 and SmartlinkTM
transceivers. Each of these products were initially launched and
sold within the second quarter of fiscal 2004.
The
increase in demand for EMCORE’s transceiver module product lines has replaced
revenue from lower margin products. While the overall demand for legacy VCSEL
products has declined, it remains a stable market, and the company has
experienced a dramatic increase in demand for its 10G VCSEL products.
Management is carefully reviewing this product market to identify other
applications for its laser products. Fiber optics
revenue represented 63% and 61% of EMCORE's total revenues for the three months
ended March 31, 2005 and 2004, respectively. Fiber optics
revenue represented 64% of EMCORE's total revenues for both the six-month
periods ended March 31, 2005 and 2004. Key customers for the fiber optics
product line include Agilent Technologies, Inc., Alcatel, BUPT-GUOAN Broadband,
Cisco Systems, Inc., Hewlett-Packard Corporation, Intel Corporation, JDS
Uniphase Corporation, Motorola, Inc., Scientific-Atlanta, Inc., and Sycamore
Networks, Inc. In the remainder of fiscal year 2005, EMCORE expects to
continue to increase sales of its fiber optics products, develop and qualify
next generation product lines, and anticipates continuing its market leadership
in this industry segment.
PHOTOVOLTAICS
EMCORE serves the global satellite communications market by
providing advanced solar cell products and solar panels. Compound semiconductor
solar cells are used to power satellites because they are more resistant to
radiation levels in space and convert substantially more power from light,
therefore weighing less per unit of power than silicon-based solar cells. These
characteristics increase satellite useful life, increase payload capacity, and
reduce launch costs.
EMCORE’s Photovoltaics segment designs and manufactures
multi-junction compound semiconductor solar cells for commercial and military
satellite applications. We currently manufacture one of the most efficient and
reliable commercially available, radiation resistant advanced triple-junction
solar cells in the world, with an average "beginning of life" efficiency of
27.5%. EMCORE is also the only manufacturer to supply true monolithic bypass
diodes for shadow protection utilizing several EMCORE patented methods. A
satellite’s broadcast success and corresponding revenue depend on its power
efficiency and its capacity to transmit data.
EMCORE also provides covered interconnect solar cells (CICs) and
solar panel lay-down services, giving us the capacity to manufacture complete
solar panels. We can provide satellite manufacturers with proven integrated
satellite power solutions that considerably improve satellite economics.
Satellite manufacturers and solar array integrators rely on EMCORE to meet their
satellite power needs with proven flight heritage. Through well-established
partnerships with major satellite manufacturers and a proven qualification
process, we play a vital role in the evolution of satellite communications
around the world.
For the three months ended March 31, 2005 and 2004, revenues from
EMCORE’s Photovoltaics segment increased $1.7 million or 28% to $7.8 million
from $6.1 million. For the six months ended March 31, 2005 and 2004, revenues
increased $4.7 million or 44% to $15.3 million from $10.6 million. This increase
in revenue was attributable to both increases in solar cell and solar panel
contracts. The space power generation market continues to
depend on government programs as a result of the continued weakness in
commercial satellite infrastructure spending and significant sales price erosion
for commercial solar products. Commercial satellite awards
decreased from 19 in 2003 to 13 in 2004. However, there have been indications
that the commercial satellite market is stabilizing, with future awards expected
for high definition TV and satellite radio. Military procurement remains steady,
and we are focusing on gaining market share in that area. Private equity groups
also have acquired a number of the satellite operators, and it is unclear what
impact this will have on satellite procurement in the near term. In addition, on
July 15, 2003, SS/L together with its parent corporation, Loral Space &
Communications, Ltd., filed for bankruptcy. On March 22, 2005, SS/L filed an
amended plan of reorganization to emerge from bankruptcy. The plan is subject to
approval by SS/L's bankruptcy court. During the pendency of SS/L's bankruptcy,
EMCORE has continued to do business with SS/L. Over the
last two quarters, orders from SS/L have increased substantially as they prepare
to emerge from bankruptcy. Sales from our Photovoltaics segment
represented 26% of EMCORE's total revenues for both the three-month periods
ended March 31, 2005 and 2004. Sales of our Photovoltaics products represented
27% and 23% of EMCORE's total revenues for the six months ended March 31, 2005
and 2004, respectively. In fiscal 2005, we expect to see increased applications
for our solar cells in terrestrial products, as well as the satellite industry
continuing to develop a communications backbone for voice, data, and video
communications.
In April 2005, EMCORE announced plans to consolidate solar panel
operations located in City of Industry, CA into its state-of-the-art facility
located in Albuquerque, NM. The Albuquerque solar panel facility will utilize
automation for many of the production operations, which should enable superior
product consistency, as well as reduced manufacturing costs. EMCORE will ensure
that the space qualification of this facility is commensurate with the heritage
of its existing solar panel operation. This highly efficient manufacturing
operation also will be capable of the production of solar panels for grid-tied
terrestrial concentrator applications, which will enable EMCORE to further
broaden its photovoltaics product portfolio. By consolidating operations into a
single location, EMCORE expects to incur shutdown costs of approximately $1.2
million and realize annual cost savings of approximately $3.0 million, which
will enable it to better compete in the terrestrial and space power markets.
Production operations at the City of Industry solar panel facility will cease
during the fourth quarter of fiscal 2005, and the facility will be closed during
the first quarter of fiscal 2006.
ELECTRONIC MATERIALS & DEVICES
RF materials are compound semiconductor materials used in wireless
communications. These materials have a broader bandwidth and superior
performance at higher frequencies compared to silicon-based materials. EMCORE
currently produces 4-inch and 6-inch InGaP HBT and AlGaAs pHEMT materials and
E-mode transistor wafers that are used for power amplifiers and switches in GSM,
CDMA multiband wireless handsets, cell phones, and in wireless LAN applications.
InGaP HBT materials provide higher linearity, higher power-added efficiency, as
well as greater reliability than first generation AlGaAs HBT technologies.
EMCORE also makes GaN HEMT RF materials that are designed to meet future
wireless base station infrastructure requirements for higher power and
frequency, along with temperature operation at industry leading efficiencies. We
believe that our ability to produce high volumes of RF materials at a low cost
will encourage their adoption in new applications and products.
We also manufacture magneto-resistive (MR) sensors that are
compound semiconductor devices used in position sensing applications. MR sensors
improve vehicle performance through the more accurate control of engine and
crank shaft timing, which allows for improved spark plug efficiency and reduced
emissions.
For the three months ended March 31, 2005 and 2004, revenues from
EMCORE’s EMD segment increased $0.7 million, or 23% to
$3.6 million from $2.9 million. Sales of our EMD products
represented 12% and 13% of EMCORE's total revenues for the three months ended
March 31, 2005 and 2004, respectively. For the six months ended March 31, 2005
and 2004, revenues from our EMD segment decreased $0.6 million, or 10% to
$5.4 million from $6.0 million. Sales of our EMD products
represented 9% and 13% of EMCORE's total revenues for the six months ended March
31, 2005 and 2004, respectively. In the first half of fiscal year 2005,
development of advanced GaN RF material was funded primarily through government
contract programs administered by The Defense Advanced Research Projects Agency
(DARPA) and the United States Air Force. EMCORE expects funding from current
contracts to significantly increase during the second half of fiscal year 2005.
As discussed in our Annual Report, our contract with General Motors for MR
sensors expired in the first quarter of fiscal 2004. EMCORE completed the
fulfillment of a “last time buy” opportunity during the second quarter of fiscal
2005. Overall, the market that this segment competes in is highly competitive,
raw materials are extremely expensive, and average selling prices have been
declining over the past several years. Management anticipates the introduction
of new GaN RF materials to drive revenue growth in fiscal 2005 as major RF
product manufacturers roll out new commercial infrastructure devices.
Gross Profit
Gross profit increased $2.8 million, or 104% to $5.5 million for
the three months ended March 31, 2005 from $2.7 million for the three months
ended March 31, 2004. Compared to the prior year, gross margins increased to 18%
from 12% of revenue. On a segment basis, quarterly margins for Fiber Optics
increased to 16% from 15% for the three months ended March 31, 2005 and 2004,
respectively. Quarterly margins for Photovoltaics improved from (8%) to
19% due to manufacturing yield improvements and completion
of profitable solar panel contracts. Margins for the EMD
segment decreased from 36% to 31% as a result of lower average selling prices
offset slightly by favorable margins on the “last time buy” for MR sensors by
General Motors. Gross profit increased $1.7 million, or 29% to
$7.6 million for the six months ended March 31, 2005 from $5.9 million for the
six months ended March 31, 2004. Compared to the prior year, gross margins
remained flat at 13% of revenue. On a segment basis, margins for Fiber Optics
decreased to 14% from 19% for the six months ended March 31, 2005 and 2004,
respectively as a result of a change in product mix. Margins for Photovoltaics
improved from (15%) to 12%, again, due to manufacturing yield improvements and
completion of profitable solar panel contracts. Margins
for the EMD segment decreased from 31% to 13%, as a result of pricing pressure
and high raw material costs.
Improvement to gross margins is highly dependent upon the amount
of revenue EMCORE earns. Gross margins continue to be negatively impacted by the
underutilization of fixed costs and overhead resulting from expansions
previously deployed through fiscal 2001. As revenues increase, our margins
should increase as well since a significant portion of our facility costs is
fixed, so higher throughput should result in lower costs per unit produced.
Management does expect gains in gross margins to be somewhat offset by lower
sales prices due to competitive pricing pressures. Fiscal 2005 gross margins
should also increase as product lines continue to be transferred to contract
manufacturers for high volume production and as management implements additional
programs to improve manufacturing process yields.
Operating Expenses
Selling, General and Administrative. SG&A expenses
decreased $0.6 million or 11% to $5.0 million for the three months ended March
31, 2005 from $5.6 million for the three months ended March 31,
2004. As a percentage of revenue, SG&A decreased from
24% to 16%. For the six months ended March 31, 2005 and 2004, SG&A expenses
decreased $1.0 million or 9% to $10.0 million from $11.0 million. As a
percentage of revenue, SG&A expenses decreased to 18% for the six months
ended March 31, 2005 from 24% for the six months ended March 31, 2004. Assuming
no further non-recurring charges and acquisitions, management expects annual
SG&A expenses in fiscal year 2005 to be lower than fiscal year 2004 as a
percentage of revenue due to cost reduction measures and revenue growth.
Research and Development. R&D expenses decreased $1.6
million or 28% to $4.1 million for the three months ended March 31, 2005 from
$5.7 million for the three months ended March 31, 2004. The decrease was
primarily due to completion of R&D projects that resulted in recent new
product launches that occurred in the later half of fiscal
2004. As a percentage of revenue, R&D decreased from
25% to 13%. For the six months ended March 31, 2005 and 2004, R&D expenses
decreased $2.7 million or 23% to $9.1 million from $11.8 million.
As a percentage of revenue, R&D expenses decreased to
16% for the six months ended March 31, 2005 from 25% for the six months ended
March 31, 2004. In April, the Company spun-off product technology focused on
gallium nitride based power electronic devices for the power device industry.
This technology is directed towards the development of 200-600 volt GaN-based
Schottky diode devices for power conversion applications in consumer
electronics. The new company, named Velox Semiconductor Corporation (Velox),
will initially commercialize fast, high voltage diodes, which will address
problems of size and efficiency in the power supply industry. Velox raised $6.0
million from various venture capital partnerships. EMCORE contributed
intellectual property and equipment receiving an approximate 20% stake in Velox.
Five employees also became full time Velox personnel. EMCORE management
estimates that its operating expenses will be reduced approximately $1.2 million
annually through the formation and spin-off of Velox.
Severance Charges. In fiscal 2005, EMCORE continued
its focus on cutting corporate overhead expenses and the realignment of certain
shared service operations. During the three and six-month periods ended March
31, 2005, EMCORE incurred approximately $0.2 million and $0.6 million,
respectively, in severance costs, fringe benefit charges and outplacement
services to be provided to the employees that were involuntary affected by a
reduction in workforce. Management expects additional severance costs during the
remainder of fiscal year 2005.
Other Income & Expenses
Interest Expense, net. Interest expense, net decreased
$0.5 million, or 33%, to $1.0 million for the three months ended March 31, 2005
from $1.5 million for the three months ended March 31, 2004. For the six months
ended March 31, 2005 and 2004, interest expense, net decreased $1.5 million, or
44%, to $1.9 million from $3.4 million. This decrease is due to the retirement
of approximately $65.7 million of EMCORE’s subordinated debt through the debt
exchange accomplished in February 2004. As a result of this debt exchange, net
interest expense will decrease by approximately $3.3 million for fiscal year
2005 when compared to the prior year.
Gain From Debt Extinguishment. In May 2001, EMCORE issued
$175.0 million aggregate principal amount of its 5% convertible subordinated
notes due in May 2006 (2006 Notes). In December 2002, EMCORE purchased $13.2
million principal amount of the notes at prevailing market prices for an
aggregate of approximately $6.3 million. In February 2004, EMCORE exchanged
approximately $146.0 million, or $90.2%, of the remaining 2006 Notes for
approximately $80.3 million aggregate principal amount of new 5% Convertible
Senior Subordinated Notes due May 15, 2011 and approximately 7.7 million shares
of EMCORE common stock. As a result of this transaction, EMCORE recorded a gain
from early debt extinguishment of approximately $12.3 million.
Equity in Net Loss (Income) of GELcore. EMCORE's share of
GELcore's net loss increased $0.2 million, or 200%, to a net loss of $(0.3)
million for the three months ended March 31, 2005 from a net loss of ($0.1)
million for the three months ended March 31, 2004. EMCORE's share of GELcore's
net income decreased $0.1 million, or 50%, to net income of $0.1 million for the
six months ended March 31, 2005 from net income of $0.2 million for the six
months ended March 31, 2004. Based on information provided by GELcore,
management believes that GELcore's results (net of the transfer of work
described below) will continue to improve in fiscal 2005 when compared to fiscal
2004 as a result of increased unit volumes, changes in LED product mix and less
manufacturing inefficiencies associated with newer product introductions. In
April 2005, GELcore announced the closing of their Lechine, Quebec manufacturing
operation. Production operations will be transferred to Mexico, and GELcore
expects the transfer to be complete by the end of July 2005. Savings from the
relocation will be significant, however, upfront costs associated with the
transfer will impact operating results in the near term.
Income Taxes. EMCORE did not incur any income tax expense
in both the three and six-month periods ended March 31, 2005 or 2004 and we do
not expect to generate a tax liability in excess of our net operating loss
carryforwards.
Discontinued Operations. In March 2005, EMCORE received
$13.2 million of earn-out payment from Veeco in connection with its first year
of net sales of TurboDisc products. After offsetting this receipt against
expenses related to the discontinued operation, EMCORE recorded a net gain from
the disposal of discontinued operations of $12.5 million. For the three months
ended March 31, 2004 EMCORE recognized a net loss from discontinued operations
of $0.3 million. For the six months ended March 31, 2004, EMCORE recognized a
net loss from discontinued operations of $2.0 million and a gain on the disposal
of the TurboDisc capital equipment business of $19.6 million. EMCORE does not
have any material contingent liabilities resulting from this sale of
assets.
Liquidity and Capital Resources
Working Capital
At March 31, 2005, EMCORE had working capital of approximately
$65.1 million. Cash, cash equivalents, and marketable securities at March 31,
2005 and September 30, 2004 totaled $44.5 million and $51.6 million,
respectively. This reflects a net cash decrease of $7.1 million for the six
months ended March 31, 2005.
Cash Flow
Net Cash Used For Operations— Net cash used for
operations remained flat at $(16.1) million for both the six month periods ended
March 31, 2005 and 2004. However, as shown in the table below, cash used in
operations not including changes in working capital and discontinued operations,
decreased by $5.1 million for the six months ended March 31, 2005 as compared to
the six months ended March 31, 2004. Following is a summary of the major items
accounting for the increase in cash used in operations:
|
For
the Six Months Ended March 31,
|
||||||||||
|
(in
thousands)
|
2005
|
2004
|
Favorable
(Unfavorable)
|
|
||||||
|
Loss
from continuing operations
|
$
|
(14,058
|
)
|
$
|
(7,675
|
)
|
$
|
(6,383
|
)
|
|
|
Adjustments
(non cash items):
|
||||||||||
|
Depreciation
|
7,275
|
7,835
|
(560
|
)
|
||||||
|
Gain
from debt extinguishment
|
-
|
(12,312
|
)
|
12,312
|
||||||
|
Other
non-cash items
|
410
|
712
|
(302
|
)
|
||||||
|
Cash
used in operations, net of working capital and discontinued operations
charges
|
(6,373
|
)
|
(11,440
|
)
|
5,067
|
|||||
|
Other
adjustments:
|
||||||||||
|
Changes
in working capital
|
(9,759
|
)
|
(422
|
)
|
(9,337
|
)
|
||||
|
Discontinued
operations
|
-
|
(4,218
|
)
|
4,218
|
||||||
|
Cash
used in operations
|
$ |
(16,132
|
)
|
$ |
(16,080
|
)
|
$ |
(52
|
)
|
|
The $4.2 million of discontinued operations in fiscal year 2004
represents costs incurred on the TurboDisc capital equipment business sold to
Veeco in November 2003. EMCORE owned this product line for approximately 35 days
in fiscal 2004. As a result, expenses exceeded revenues and a loss of $4.2
million was incurred for the period during which EMCORE still owned the
TurboDisc business. Revenues during this 35-day period were de minimis
since, historically, the majority of our TurboDisc revenues were generated
in the latter part of each fiscal quarter. The $9.3 million increase in changes
in working capital resulted from a reduction of liabilities of $6.7 million, an
increase in inventory of $0.9 million, an increase in accounts receivable of
$1.2 million, and an increase of $0.5 million in prepaid and other assets.
Net Cash Provided By Investing Activities— For the six
months ended March 31, 2005 net cash provided by investing activities decreased
$6.6 million to $20.1 million from $26.7 million. Changes in cash flow consisted
of:
|
•
|
Divestiture
— The sale of the TurboDisc business generated $62.0 million in cash in
fiscal 2004. In addition to the initial cash payment, EMCORE will also
receive in either cash or stock, 50% of all revenues from the TurboDisc
capital equipment business that exceed $40.0 million in each of the next
two years, beginning January 1, 2004. Net
sales of TurboDisc products for the 12 months ended December 31, 2004,
amounted to $66.3 million resulting in an earn-out of $13.2 million for
year one of the two-year earn-out agreement.
|
|
•
|
Capital
expenditures — Capital expenditures decreased to $2.4 million from $3.0
million.
|
|
•
|
Acquisitions
— In October 2003, EMCORE acquired Molex’s 10G Ethernet transceiver
business for an initial $1.0 million in cash. In accordance with the
agreement, EMCORE paid an additional $1.3 million in cash earn out during
the first half of fiscal 2005.
|
|
•
|
Marketable
securities — For the six months ended March 31, 2005, EMCORE’s net
investment in marketable securities decreased by $11.7 million in order to
fund acquisitions and operations. In the prior year, EMCORE’s net
investment in marketable securities increased by $31.0 million in order to
take advantage of higher interest bearing instruments.
|
|
•
|
Investment
in K2 — In October 2004, EMCORE invested $1.0 million in K2 Optronics,
Inc., a California-based company specializing in the design and
manufacture of external cavity lasers, to strengthen its partnership in
designing next-generation long wavelength components for the CATV and FTTP
markets. EMCORE does not exercise significant influence over financial and
operating policies, and the investment represents approximately 6.6%
ownership.
|
Net Cash Provided By Financing Activities— For the six
months ended March 31, 2005, net cash provided by financing activities increased
$0.2 million to $0.6 million from $0.4 million in the prior year. Proceeds
received from the exercise of common stock options amounted to $0.1 million and
$2.5 million in the six months ended March 31, 2005 and 2004, respectively.
Issuance costs related to the convertible subordinated note exchange were $2.5
million.
Conclusion
We believe that our current liquidity should be sufficient to meet
our cash needs for working capital through the next 12 months. If cash generated
from operations and cash on hand are not sufficient to satisfy EMCORE's
liquidity requirements, EMCORE will seek to obtain additional equity or debt
financing. Additional funding may not be available when needed, or on terms
acceptable to EMCORE. If EMCORE is required to raise additional financing and if
adequate funds are not available or not available on acceptable terms, our
ability to continue to fund expansion, develop and enhance products and
services, or otherwise respond to competitive pressures may be severely limited.
Such a limitation could have a material adverse effect on EMCORE's business,
financial condition, results of operations, and cash flow.
We are exposed to financial market risks, including changes in
currency exchange rates, interest rates, and non-marketable equity security
prices. We do not use derivative financial instruments for speculative
purposes.
Currency Exchange Rates. Although EMCORE occasionally
enters into transactions denominated in foreign currencies, the total amount of
such transactions is not material. Accordingly, fluctuations in foreign currency
values would not have a material effect on our future financial condition or
results of operations. However, some of our foreign suppliers may adjust their
prices (in $US) from time to time to reflect currency exchange fluctuations, and
such price changes could impact our future financial condition or results of
operations. To mitigate the potential impact of significant fluctuations in
currency exchange rates, EMCORE may from time to time purchase foreign supplies
in foreign currencies or enter into other currency hedge arrangements in
connection with purchases of foreign supplies. Nearly all of our sales
agreements are denominated in $US.
Interest Rates. We maintain an investment portfolio in a
variety of high-grade (AAA), short-term debt and money market instruments, which
carry a minimal degree of interest rate risk. Due in part to these factors, our
future investment income may be slightly less than expected because of changes
in interest rates, or we may suffer insignificant losses in principal if forced
to sell securities that have experienced a decline in market value because of
changes in interest rates.
Non-Marketable Equity Securities .Our strategic
investments in non-marketable equity securities would be affected by an adverse
movement of equity market prices, although the impact cannot be directly
quantified. Such a movement and the related underlying economic conditions would
negatively affect the prospects of the companies in which we invest, their
ability to raise additional capital, and the likelihood of our being able to
realize our investments through liquidity events, such as initial public
offerings, mergers, and private sales. These types of investments involve a
great deal of risk, and there can be no assurance that any specific company will
grow or will become successful. Consequently, we could lose all or part of our
investment.
(a) Evaluation
of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended
(Exchange Act). This term refers to the controls and procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report. They have concluded that, as of March
31, 2005, our disclosure controls and procedures were effective at ensuring that
required information will be disclosed on a timely basis in our reports filed
under the Exchange Act.
(b) Changes
in Internal Controls over Financial Reporting
No change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the fiscal quarter ended March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
We are
involved in lawsuits and proceedings which arise in the ordinary course of
business. There are no matters pending that we expect to be material in relation
to our business, consolidated financial condition, results of operations, or
cash flows.
None.
None.
The
following matters were submitted to a vote of shareholders at EMCORE's 2005
Annual Meeting of Shareholders, held in Somerset, NJ on February 28,
2005:
a) Election
of Directors:
|
Nominee
|
Number of Shares For |
Withheld Authority |
|
Thomas J. Russell
|
45,614,217 |
245,073 |
|
Reuben F. Richards, Jr.
|
45,513,083 |
346,207 |
|
Robert Bogomolny
|
45,062,369 |
796,921 |
b) Ratify the selection
of Deloitte & Touche LLP as EMCORE’s independent auditors for the fiscal
year ended September 30, 2005:
Number of Shares For |
Number of Shares Against |
Abstain |
45,538,716 |
312,728 |
7,846 |
Effective
as of March 15, 2005, the following wholly-owned subsidiaries were merged into
EMCORE Corporation, pursuant to Section 253 of the Delaware General Corporation
Law and Sections 14A: 10-7(4) and 14A:10-5.1 of the New Jersey Business
Corporation Act, such that EMCORE Corporation was the surviving
corporation:
| · |
EMCORE
Real Estate Holding Corporation
|
| · |
MicroOptical Devices, Inc.
|
| · |
TPS Acquisition Corporation
|
| · |
TPS Financing Corporation
|
Exhibit
No. |
Description |
|
Certificate
of Chief Executive Officer, pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002, dated May 10, 2005.
|
|
|
Certificate
of Chief Financial Officer, pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to §
302
of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.
|
|
|
Certificate
of Chief Executive Officer, pursuant to 18 U.S.C. § 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002, dated May 10,
2005.
|
|
|
Certificate
of Chief Financial Officer, pursuant to 18 U.S.C. § 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002, dated May 10,
2005.
|
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.
|
EMCORE
CORPORATION
|
|
|
Date: May
10, 2005
|
By:
/s/ Reuben F. Richards, Jr.
|
|
Reuben
F. Richards, Jr.
President
& Chief Executive Officer
(Principal
Executive Officer)
|
|
|
Date: May
10, 2005
|
By:
/s/ Thomas G. Werthan
|
|
Thomas
G. Werthan
Executive
Vice President & Chief Financial Officer
(Principal
Accounting and Financial
Officer)
|
Exhibit
No. |
Description |
|
Certificate
of Chief Executive Officer, pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002, dated May 10, 2005.
|
|
|
Certificate
of Chief Financial Officer, pursuant to Securities Exchange Act Rules
13a-14(a) and 15d-14(a), as Adopted Pursuant to §
302
of the Sarbanes-Oxley Act of 2002, dated May 10, 2005.
|
|
|
Certificate
of Chief Executive Officer, pursuant to 18 U.S.C. § 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002, dated May 10,
2005.
|
|
|
Certificate
of Chief Financial Officer, pursuant to 18 U.S.C. § 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002, dated May 10,
2005.
|