Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this section, and those discussed in the
Company's Form 10-K for the year ended September 30, 2000, in particular, within
the "Risk Factors" section thereof.
The following table sets forth, for the fiscal periods indicated, the percentage
of net sales represented by certain items in the Company's Condensed
Consolidated Statements of Operations.
Quarter Ended Six Months Ended
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March 31, April 1, March 31, April 1,
2001 2000 2001 2000
---- ---- ---- ----
Net sales 100% 100% 100% 100%
Cost of sales 72.0 72.0 71.5 72.7
---- ---- ---- ----
Gross margin 28.0 28.0 28.5 27.3
Selling, general and administrative expenses 14.7 16.8 15.0 16.5
Research, development and related expenses 3.4 4.1 3.6 4.0
---- ---- ---- ----
Income from operations 9.9 7.1 9.9 6.8
Interest expense 1.0 1.2 1.0 1.4
Other income (expense) (0.1) 1.1 0.1 0.6
---- ---- ---- ----
Income from operations before
income taxes 8.8 7.0 9.0 6.0
Provision for income taxes 3.6 2.7 3.6 2.4
---- ---- ---- ----
Net income 5.2% 4.3% 5.4% 3.6%
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Quarters ended March 31, 2001 and April 1, 2000
Net sales for the second quarter of fiscal 2001 ended March 31, 2001, increased
$10.9 million to $65.1 million or 20.1% from $54.2 million during the same
period in fiscal 2000.
The sales volume increase was primarily due to commercial sales to domestic and
foreign automotive customers partially offset by a decrease in sales to
customers in industrial markets. Automotive sensor sales increased by $14.8
million to $39.7 million in the second quarter of fiscal 2001, from $24.9
million in the comparable period of fiscal 2000. Sales of non-automotive
commercial products decreased by $4.2 million from the same period of fiscal
2000, while sales under government contracts increased $0.3 million from the
same period of fiscal 2000.
Cost of sales as a percentage of net sales in the second quarter of fiscal 2001
remained consistent with the comparable period of fiscal 2000 at 72.0%, due
primarily to the impact of increased automotive GyroChip sensor sales, which
have a higher cost of sales percentage than the average cost of sales percentage
for the Company. Cost of sales as a percentage of net sales for automotive
sensors decreased from the same quarter of the prior year due to the impact of
higher volumes and improved production efficiencies on automotive GyroChip
sensors. Future downward pressure on gross profit margins for the Company could
be expected if automotive sensors continue to become a larger proportion of the
Company's product mix, provided that there may be additional margin rate
variability due to the introduction of new products, changes in product
manufacturing processes and volumes and product life cycles.
Page 8 of 13
Selling, general and administrative expenses as a percentage of net sales
decreased in the second quarter of fiscal 2001 versus the comparable period of
fiscal 2000 due to higher sales volume. Actual selling, general and
administrative expenses for the Company increased $0.5 million over the prior
fiscal year period to support sales increases and, to a lesser extent, due to
recognition of slower customer payments and associated reserves.
Research, development and related expenses as a percentage of net sales for the
second quarter of fiscal 2001 decreased from the comparable period of fiscal
2000 due to higher sales volume. Actual spending on research, development and
related expenses in the second quarter of fiscal 2001 remained constant when
compared with the same period of the prior fiscal year.
Interest expense as a percentage of sales declined primarily due to increased
sales. The Company's fixed interest rate debt remains substantially unchanged
from the same period of the prior fiscal year.
Six Months ended March 31, 2001 and April 1, 2000
Net sales for the first six months of fiscal 2001 increased $27.4 million to
$125.3 million or 28.0% from $97.9 million during the same period in fiscal
2000.
The sales volume increase was primarily due to commercial sales to domestic and
foreign automotive customers. Automotive sensor sales increased by $30.2 million
to $73.6 million in the first six months of fiscal 2001, from $43.4 million in
the comparable period of fiscal 2000. Sales of non-automotive commercial
products decreased by $3.9 million from the same period of fiscal 2000, while
sales under government contracts increased $1.2 million from the same period of
fiscal 2000.
Cost of sales as a percentage of net sales in the first six months of fiscal
2001 decreased 1.2 percentage points to 71.5% from 72.7% in the comparable
period of fiscal 2000, due primarily to the impact of higher volumes and
improved production efficiencies on the automotive GyroChip sensors. However,
since cost of sales for products for automotive customers as a percentage of net
sales remains higher than the average for the Company, there could be future
downward pressure on gross profit margins if automotive sensors continue to
become a larger proportion of the Company's product mix, provided that there may
be additional margin rate variability due to the introduction of new products,
changes in product manufacturing processes and volumes and product life cycles.
Selling, general and administrative expenses as a percentage of net sales
decreased in the first six months of fiscal 2001 versus the comparable period of
fiscal 2000 due to higher sales volume. Actual selling, general and
administrative expenses for the Company increased $2.6 million over the prior
fiscal year period to support sales increases and, to a lesser extent, due to
recognition of slower customer payments and associated reserves.
Research, development and related expenses as a percentage of net sales for the
first six months of fiscal 2001 decreased slightly from the comparable period of
fiscal 2000 due to higher sales volume. Actual spending on research, development
and related expenses increased $0.5 million over the prior fiscal year period.
The higher research and development spending reflects management's dedication to
the development of new products and improvements to existing product families
and the inclusion of expenses related to OpticNet in the consolidated financial
statements of the first quarter of fiscal 2001. In the quarter ended March 31,
2001 and in future quarters, expenses related to OpticNet's operations will not
be included in the Company's results as the Company no longer controlled a
majority interest in OpticNet as of January 1, 2001.
Interest expense as a percentage of sales declined primarily due to increased
sales. The Company's fixed interest rate debt remains substantially unchanged
from the same period of the prior fiscal year.
Page 9 of 13
Liquidity and Capital Resources
During the first six months of fiscal 2001, total cash provided by operations
was $3.5 million. Cash provided by operations included net income of $6.8
million, and the positive impact of non-cash charges to income from depreciation
and amortization of $3.1 million and $1.6 million, respectively. In addition,
positive impacts to cash resources resulted from an increase in accrued
liabilities of $1.8 million, a decrease in accounts receivable of $1.6 million
and other net impacts of $1.1 million. Offsetting these items were increases to
other assets and inventory of $5.1 and $1.2 million, respectively. In addition,
negative impacts to cash resources resulted from decreases in accounts payable
of $3.8 million, as well as payments of current income taxes of $2.4 million.
Cash used in investing activities consisted of equipment purchases of $4.0
million primarily to expand production capacity, partially offset by a decrease
in other assets of $0.2 million.
Cash used in financing activities consisted of dividend payments of $0.8
million, cash purchases of stock at market prices for $0.3 million and
retirement of debt of $0.1 million. In addition, the Company distributed a
non-cash dividend to its stockholders of $0.3 million in the form of shares of
the common stock of OpticNet, Inc.
In February 2001, the Company completed an amendment to its credit agreement
with Wells Fargo Bank, originally entered into December 15, 1998, which
amendment was effective as of November 30, 2000. The amendment increased the
available borrowing on the line from an aggregate of $13 million to $25 million.
While the Company believes that its existing cash balances, and available credit
lines together with cash derived from operations, will be sufficient to meet the
Company's capital requirements for the next twelve months, the Company may need
to raise additional funds through public or private financing or other
arrangements. There can be no assurance that the Company will not require
additional funding, or that such additional funding, if needed, will be
available on terms attractive to the Company, or at all. Any additional equity
financing may be dilutive to the stockholders, and debt financing, if available,
may involve restrictive covenants.
The Company had no material capital commitments at March 31, 2001.
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a
material effect on the Company's operations.
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