UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE TRANSITION PERIOD FROM ________ TO _________ COMMISSION FILE NUMBER 1-9125 ----------------------------- AMERICAN TECHNICAL CERAMICS CORP. --------------------------------- (Exact Name of Company as Specified in Its Charter) DELAWARE 11-2113382 ------------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1 NORDEN LANE, HUNTINGTON STATION, NY 11746 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (631) 622-4700 --------------------------------------- (Telephone Number, Including Area Code) Indicate by check mark whether the Company (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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of February 5, 2007, the Company had outstanding 8,982,323 shares of Common Stock, par value $0.01 per share. PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) DECEMBER 31, JUNE 30, 2006 2006 -------------- ------------- ASSETS (unaudited) Current assets Cash (including cash equivalents of $1 and $2, respectively) $ 3,765 $ 6,230 Investments 5,146 2,094 Accounts receivable (net of allowance for doubtful accounts and sales returns of $284 and $401, respectively) 9,567 12,719 Inventories 38,329 33,255 Deferred income taxes, net 3,473 3,472 Prepaid and other current assets 2,345 1,035 -------------- ------------- TOTAL CURRENT ASSETS 62,625 58,805 -------------- ------------- Property, plant and equipment (net of accumulated depreciation and amortization of $54,888 and $52,827, respectively) 30,985 31,375 Other assets 326 363 -------------- ------------- TOTAL ASSETS $ 93,936 $ 90,543 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt (including related party debt of $511 and $485, respectively) $ 2,043 $ 1,957 Accounts payable 2,907 3,005 Accrued expenses 5,979 6,192 Income tax payable -- 1,002 -------------- ------------- TOTAL CURRENT LIABILITIES 10,929 12,156 Long-term debt, net of current portion (including related party debt of $1,712 and $1,974, respectively) 6,083 7,229 Deferred income taxes 3,091 3,091 -------------- ------------- TOTAL LIABILITIES 20,103 22,476 -------------- ------------- Commitments and contingencies Stockholders' equity Common Stock -- $0.01 par value; authorized 20,000 shares; issued 9,246 and 9,105 shares, outstanding 8,832 and 8,690 shares, respectively 93 91 Capital in excess of par value 16,351 15,000 Retained earnings 58,434 54,102 Accumulated other comprehensive income: Unrealized loss on investments available-for-sale, net -- (1) -------------- ------------- Cumulative foreign currency translation adjustment 351 271 -------------- ------------- 351 270 -------------- ------------- Less: Treasury stock, at cost (414 and 414 shares, respectively) 1,396 1,396 -------------- ------------- TOTAL STOCKHOLDERS' EQUITY 73,833 68,067 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 93,936 $ 90,543 ============== ============= See accompanying notes to unaudited consolidated financial statements. 2 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) For the Three Months Ended For the Six Months Ended December 31, December 31, 2006 2005 2006 2005 -------- -------- -------- -------- Net sales $ 20,634 $ 19,678 $ 43,691 $ 37,180 Cost of sales 13,549 11,713 26,711 25,340 -------- -------- -------- -------- Gross profit 7,085 7,965 16,980 11,840 -------- -------- -------- -------- Selling, general and administrative expenses 4,633 4,497 9,161 8,667 Research and development expenses 536 459 1,060 1,061 Other 45 16 27 6 -------- -------- -------- -------- Operating expenses 5,214 4,972 10,248 9,734 -------- -------- -------- -------- Income from operations 1,871 2,993 6,732 2,106 -------- -------- -------- -------- Other (income) expense: Interest expense 168 148 355 288 Interest income (31) (31) (56) (44) -------- -------- -------- -------- 137 117 299 244 -------- -------- -------- -------- Income before provision for income taxes 1,734 2,876 6,433 1,862 Provision for income taxes 542 947 2,101 624 -------- -------- -------- -------- Net income $ 1,192 $ 1,929 $ 4,332 $ 1,238 ======== ======== ======== ======== Basic net income per common share $ 0.14 $ 0.23 $ 0.50 $ 0.15 ======== ======== ======== ======== Diluted net income per common share $ 0.13 $ 0.22 $ 0.48 $ 0.14 ======== ======== ======== ======== Basic weighted average common shares outstanding 8,762 8,538 8,730 8,527 ======== ======== ======== ======== Diluted weighted average common shares outstanding 9,038 8,816 9,006 8,833 ======== ======== ======== ======== See accompanying notes to unaudited consolidated financial statements. 3 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Six Months Ended December 31, 2006 2005 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,332 $ 1,238 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,187 2,994 Loss/(gain) on disposal of fixed assets 101 (9) Deferred income taxes (1) 9 Stock based compensation expense 135 208 Excess tax benefits from stock based compensation arrangements (312) (100) Provision for doubtful accounts and sales returns (117) 106 Investment interest accretion, net (50) (18) Changes in operating assets and liabilities: Accounts receivable 3,352 668 Inventories (4,997) (549) Other assets (1,291) 71 Accounts payable and accrued expenses (339) (802) Income taxes payable (690) 219 ------- ------- Net cash provided by operating activities 3,310 4,035 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,893) (5,180) Purchase of investments (5,130) (1,045) Proceeds from sale of investments 2,129 1,034 Proceeds from sale of fixed assets 37 19 ------- ------- Net cash used in investing activities (5,857) (5,172) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt (1,126) (540) Proceeds from the exercise of stock options 906 166 Excess tax benefits from stock based compensation arrangements 312 100 Proceeds from the issuance of long term debt -- 3,956 ------- ------- Net cash provided by financing activities 92 3,682 ------- ------- ------- ------- Effect of exchange rate changes on cash (10) 24 ------- ------- Net (decrease)/increase in cash and cash equivalents (2,465) 2,569 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,230 4,927 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,765 $ 7,496 ======= ======= Supplemental cash flow information: Interest paid $ 273 $ 297 Taxes paid $ 3,939 $ 229 See accompanying notes to unaudited consolidated financial statements. 4 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) (1) BASIS OF PRESENTATION: The accompanying unaudited interim consolidated financial statements of American Technical Ceramics Corp. and subsidiaries (the "Company") reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of its consolidated financial position as of December 31, 2006, and the results of its operations for the three and six month periods ended December 31, 2006 and 2005. These consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2006. Results for the three and six month periods ended December 31, 2006 are not necessarily indicative of results which could be expected for the entire year. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. (2) STOCK-BASED COMPENSATION: On April 1, 1997, the Board of Directors approved the American Technical Ceramics Corp. 1997 Stock Option Plan (the "1997 Option Plan") pursuant to which the Company may grant options to purchase up to 800 shares of the Company's common stock. On April 11, 2000, the Board of Directors approved the American Technical Ceramics Corp. 2000 Incentive Stock Plan (the "2000 Plan", and collectively with the 1997 Option Plan, the "Plans") pursuant to which the Company may grant options or stock awards covering up to 1,200 shares of the Company's common stock. Options granted under the Plans may be either incentive or non-qualified stock options. The term of each incentive stock option shall not exceed ten years from the date of grant (five years for grants to employees who own 10% or more of the voting power of the Company's common stock), and options may vest in accordance with a vesting schedule established by the plan administrator (traditionally 25% per year during the first four years of their term). Unless terminated earlier by the Board, the 1997 Option Plan will terminate on March 31, 2007. Unless terminated earlier by the Board, the 2000 Plan will terminate on April 10, 2010. Shares issued upon the exercise of options are generally issued from the Company's authorized and unissued shares. Disposition of shares acquired pursuant to the exercise of incentive stock options under both Plans may not be made by the optionees within two years following the date that the option is granted, nor within one year after the exercise of the option, without the written consent of the Company. The Company records its stock-based compensation at fair value in accordance with Financial Accounting Standards No. 123 (revised 2004). 5 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share and percentage data) There were 10,000 stock options granted during the six months ended December 31, 2006 and 40,000 granted during the six months ended December 31, 2005. The weighted average grant-date fair value of stock options granted during the six months ended December 31, 2006 and 2005 was $8.66 and $8.33 per share, respectively, as determined by the Black-Scholes option pricing model (assuming a risk-free interest rate of 4.80% and 3.98%, respectively, expected life of six years and five years, respectively, expected volatility of 65.3% and 73.7%, respectively, and no dividends). The total intrinsic value of options exercised during the periods ended December 31, 2006 and 2005 was $1,012 and $298, respectively. Expected volatility is calculated using historical volatility. The expected term (life) of options granted represents the period of time that options granted are expected to be outstanding. In determining expected life, the Company uses historical data to estimate option exercise and employee departure behavior. Groups of employees that have similar historical behavior are considered separately for valuation purposes. The risk free interest rate is based on the US Treasury Yield curve in effect at the time of grant for the expected life of the option. Stock option activity for the six months ended December 31, 2006 is as follows: Weighted Weighted Average Shares Average Remaining Subject Exercise Contractual Aggregate to Options Price Term Intrinsic Value ---------- -------- ----------- ---------------- Outstanding, beginning of period 863 $ 8.83 Granted 10 13.50 Forfeited (13) 10.33 Expired (6) 25.28 Exercised (142) 6.40 ---------- Outstanding, end of period 712 $ 9.21 4.5 $ 5,268 ---------- ----------- Exercisable, end of period 619 $ 8.85 3.9 $ 4,838 ========== =========== 6 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share and percentage data) A summary of the status of the Company's nonvested shares at December 31, 2006, and changes during the six months then ended is presented below: Weighted Shares Average Subject to Grant Date Options Fair Value ---------- ------------ Nonvested, beginning of period 120 $ 6.88 Granted 10 8.66 Vested (24) 5.60 Forfeited (13) 6.66 ---------- Nonvested, end of period 93 $ 6.50 ========== As of December 31, 2006, there was $586 of total unrecognized compensation costs related to nonvested options granted under the Plans. That cost is expected to be recognized over a weighted average period of 3.0 years. The total fair value of shares vested during the three and six month periods ended December 31, 2006 was nil and $134, respectively. Compensation cost capitalized in inventory and fixed assets for the three and six months ended December 31, 2006 was $2 and $2, respectively. Compensation cost recognized in income for amounts previously capitalized in inventory and fixed assets for the three and six months ended December 31, 2006 was $1 and $12, respectively. Cash received from the exercise of options for the three months ended December 31, 2006 and 2005 was $821 and $50, respectively. The related tax benefit recognized for the three months ended December 31, 2006 and 2005 was $274 and $27, respectively. The total compensation cost related to options was $48 and $79 for the three months ended December 31, 2006 and 2005, respectively. Cash received from the exercise of options for the six months ended December 31, 2006 and 2005 was $906 and $166, respectively. The related tax benefit recognized for the six months ended December 31, 2006 and 2005 was $312 and $100, respectively. The total compensation cost related to options for the six months ended December 31, 2006 and 2005 was $112 and $172, respectively. At December 31, 2006, an aggregate of 177 shares were available for option grants or awards under the Plans. Other Stock-Based Compensation During the six months ended December 31, 2006 and 2005, the Company granted stock awards for an aggregate of 7 and 7 shares, respectively. These awards resulted in compensation expense of $38 and $49, respectively (including $14 and $13 of payments made to offset tax liabilities associated with these awards), measured by the market value of the shares on their respective grant dates. 7 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share and percentage data) (3) SUPPLEMENTAL CASH FLOW INFORMATION: During the six months ended December 31, 2006, the Company (i) granted stock awards with an aggregate value of $93 with respect to which expense shall be recognized ratably throughout fiscal year 2007, (ii) granted stock options with respect to which compensation expense of $87 will be recognized evenly over the service period, and (iii) recognized a $312 reduction of income taxes payable related to disqualifying dispositions upon the exercise of incentive stock options. During the six months ended December 31, 2005, the Company (i) granted stock awards with an aggregate value of $85 with respect to which expense was recognized ratably throughout fiscal year 2006, (ii) granted stock options with respect to which compensation expense of $333 will be recognized evenly over the service period, and (iii) recognized a $100 reduction of income taxes payable related to disqualifying dispositions upon the exercise of incentive stock options. (4) INVENTORIES: Inventories included in the accompanying consolidated financial statements consist of the following: December 31, June 30, 2006 2006 ------------- ----------- Raw materials $ 18,415 $ 17,095 Work-in-process 7,877 8,605 Finished goods 12,037 7,555 ------------- ----------- $ 38,329 $ 33,255 ============= =========== (5) EARNINGS PER SHARE: The following represents a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computation: For the Three Months Ended December 31, ----------------------------------------------------------------------------------------- 2006 2005 ------------- ------------- Net Income Shares Per Share Net Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------- ------------- ----------- ----------- ------------ ----------- Basic EPS $ 1,192 8,762 $ 0.14 $ 1,929 8,538 $ 0.23 =========== ========== Effect of dilutive securities: Stock options -- 271 -- 271 Deferred compensation stock awards -- 5 -- 7 ---------- ------------- ----------- ----------- ------------ ----------- Diluted EPS $ 1,192 9,038 $ 0.13 $ 1,929 8,816 $ 0.22 ========== ============= =========== =========== ============ ========== Options covering 167 and 400 shares have been omitted from the calculation of dilutive EPS for the three months ended December 31, 2006 and 2005, respectively, because their inclusion would have been antidilutive. 8 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share and percentage data) For the Six Months Ended December 31, --------------------------------------------------------------------------------------- 2006 2005 ------------- ------------- Net Income Shares Per Share Net Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ---------- ------------- ----------- ----------- ------------ ---------- Basic EPS $ 4,332 8,730 $ 0.50 $ 1,238 8,527 $ 0.15 =========== ========= Effect of dilutive securities: Stock options 274 -- 299 Deferred compensation stock awards 2 -- 7 ---------- ------------- ----------- ----------- ------------ ---------- Diluted EPS $ 4,332 9,006 $ 0.48 $ 1,238 8,833 $ 0.14 ========== ============= =========== =========== ============ ========== Options covering 168 and 395 shares have been omitted from the calculation of dilutive EPS for the six months ended December 31, 2006 and 2005, respectively, because their inclusion would have been antidilutive. (6) COMPREHENSIVE INCOME: The Company's comprehensive income is as follows: Three Months Ended Six Months Ended ------------------- -------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2006 2005 2006 2005 -------- -------- --------- -------- Net income $ 1,192 $ 1,929 $ 4,332 $ 1,238 ------- -------- --------- -------- Other comprehensive income: Foreign currency translation adjustments 114 (4) 80 2 Unrealized gains on investments, net of tax -- -- 1 -- ------- -------- -------- -------- Other comprehensive income/(loss) 114 (4) 81 2 ------- -------- -------- -------- Comprehensive income $ 1,306 $ 1,925 $ 4,413 $ 1,240 ======= ======== ======== ======== (7) INDEBTEDNESS: Long-term debt consists of the following: December 31, June 30, 2006 2006 ------------ --------- Notes payable to banks $ 5,903 $ 6,72 Obligations under capital leases 2,223 2,459 ------------ --------- 8,126 9,186 Less: current portion 2,043 1,957 ------------ --------- Long-term debt $ 6,083 $ 7,229 ============ ========= 9 AMERICAN TECHNICAL CERAMICS CORP. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share and percentage data) In April 2004, the Company entered into a $4,000 credit facility with General Electric Capital Corporation ("GECC") for the purchase of equipment. In May 2005, the credit facility was increased to $6,000. Borrowings under the line bear interest, at the Company's option, at either a fixed rate of 3.47% above the five year Treasury Bond yield at the time of election or a floating rate of 3.65% above LIBOR. Borrowings under the line are secured by the equipment purchased thereunder. Each separate borrowing under the line will be a fully amortizing term loan with a maturity of five years from the date the funds are drawn down. The line of credit has been extended several times and currently will expire on March 24, 2007. GECC has the option to securitize these loans with a third party. Loans securitized with a third party increase the available line of credit to the Company. As of December 31, 2006, the Company had $4,500 of borrowings outstanding under this facility at fixed interest rates ranging from 7.15% and 7.93%. In December 2004, the Company entered into a credit facility with Commerce Bank, N.A. Under the terms of this facility, the Company may request advances from time to time up to an aggregate of $5,000. Any advance made bears interest at the Prime Rate as reported in the Wall Street Journal. Borrowings under the facility are secured by a lien on the Company's accounts receivable. This facility has been extended several times and currently will expire on November 30, 2007. The facility is subject to certain financial covenants, including minimum tangible net worth and liability percentage ratios. As of December 31, 2006, the Company had no outstanding borrowings under this credit facility. In September 2005, the Company's wholly-owned subsidiary in Sweden obtained a series of five term loans aggregating 12,000 Swedish Krona ("SEK") (approximately $1,500) from Svenska Handelsbanken, AB ("Handelsbanken"). The loans are unsecured and bear interest at fixed rates ranging from 3.56% to 4.59%. The five loans are each for a principal amount of 2,400 SEK and are fully amortizing. The loans mature in one to five years with the first having matured on September 30, 2006 and one maturing on each succeeding September 30th through 2010. In connection with, and as an inducement to Handelsbanken to make the loans, the Company entered into a Guaranty and Agreement with Handelsbanken whereby the Company has agreed to guarantee the payment of all its Swedish subsidiary's obligations under the loans. At December 31, 2006, the Company had $1,403 outstanding under these loans. The Company leases an administrative office, manufacturing and research and development complex located in Jacksonville, Florida (the "Jacksonville Facility") from a partnership controlled by the Company's President, Chief Executive Officer and principal stockholder under a capital lease. At December 31, 2006, the Jacksonville Facility has an aggregate cost of $5,104 and a net book value of $1,396. The lease is for a period of 30 years, was capitalized using an interest rate of 10.5% and expires on September 30, 2010. The lease currently provides for base rent of approximately $812 per annum. The lease further provides for annual increases in base rent for years beginning after May 1, 1999, based on the increase in the Consumer Price Index since May 1, 1998 applied to base rent. The lease also provides for increases to the base rent in connection with any new construction at the Jacksonville Facility. Under the lease, upon any new construction being placed into use, the base rent is subject to increase to the fair market rental of the Jacksonville Facility, including the new construction. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) The following discussion and analysis should be read in conjunction with the consolidated financial statements, related notes and other information included in this Quarterly Report on Form 10-Q. Statements in this Quarterly Report on Form 10-Q that are not historical fact may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties, including, but not limited to, market and economic conditions, the impact of competitive products, product demand and market acceptance risks, changes in product mix, costs and availability of raw materials, fluctuations in operating results, delays in development of highly complex products, risks associated with international sales and sales to the U.S. military, risk of customer contract or sales order cancellations and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including, without limitation, those contained under the caption "Item 1. BUSINESS - CAUTIONARY STATEMENTS REGARDING FORWARD - LOOKING STATEMENTS" in the Company's Annual Report on Form 10-K. These risks could cause the Company's actual results for future periods to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Any forward-looking statement represents the Company's expectations or forecasts only as of the date it was made and should not be relied upon as representing its expectations or forecasts as of any subsequent date. The Company undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, even if its expectations or forecasts change. Overview During the three-month period ended December 31, 2006, revenues continued to increase year over year, although at a slower rate than the rate of growth the Company has experienced in recent quarters. The Company believes this is due to the typical seasonality the Company experiences in the first half of its fiscal year which this year extended through December. Orders from certain customers were delayed but were received in January 2007 which was a very strong month in terms of bookings. The Company expects that sales for the remainder of the fiscal year will be strong. Net sales for the three and six month periods ended December 31, 2006 increased 5% and 18%, respectively, from the comparable periods of the prior fiscal year. The increase in net sales for the three and six month periods was primarily due to strong demand across most of the Company's major product lines, particularly to customers in the semiconductor equipment, military and fiber optic markets. Net income increased for the six months ended December 31, 2006 compared to the comparable period in the prior fiscal year, primarily due to the increased revenues and, in part, to increased material reclamation. The prior year's results were negatively impacted by the attempted conversion of part of the Company's sales and manufacturing functions to its Enterprise Resource Planning System. The Company experienced a lower gross margin for the three months ended December 31, 2006 than in the comparable period of the prior fiscal year. The gross margin was impacted by a less favorable product sales mix. Net income decreased for the three months ended December 31, 2006 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) compared to the comparable period in the prior fiscal year primarily due to the lower gross margin. The Company's operations are staffed and equipped to run at higher production levels which the Company believes will be needed through the second half of the fiscal year. The Company has transferred certain of its manufacturing operations to a contract manufacturer in Costa Rica in order to reduce costs, increase capacity and add cost flexibility during fluctuating production. As such, the Company reduced headcount at its operations in New York and, to a lesser extent, in Florida and incurred severance expense related to the layoff. Going forward, the Company expects to realize cost savings from this outsourcing arrangement. However, during the current quarter, the Company experienced additional costs during the startup of the operation. Bookings for the three months ended December 31, 2006 were approximately $22.6 million, an increase of 3% from the comparable period in the prior fiscal year and 17% over the levels achieved in the immediate preceding quarter of the current fiscal year. These increases are primarily due to the strong demand from customers in the semiconductor equipment, fiber optic, military and wireless electronics markets. RESULTS OF OPERATIONS KEY COMPARATIVE PERFORMANCE INDICATORS Three Months Ended Six Months Ended ----------------------------- ----------------------------- Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2006 Dec. 31, 2005 ------------- ------------- ------------- ------------- Sales $ 20,634 $ 19,678 $ 43,691 $ 37,180 Bookings $ 22,599 $ 21,975 $ 41,885 $ 39,601 Gross Margin $ 7,085 $ 7,965 $ 16,980 $ 11,840 Gross Margin (% of sales) 34.3% 40.5% 38.9% 31.8% Operating Expenses $ 5,214 $ 4,972 $ 10,248 $ 9,734 Operating Expenses (% of sales) 25.3% 25.3% 23.5% 26.2% SIGNIFICANT HIGHLIGHTS Sales for the three and six months ended December 31, 2006 increased 5% and 18%, respectively, over the comparable periods in the prior fiscal year. Bookings for the three and six months ended December 31, 2006 increased 3% and 6%, respectively, over the comparable periods in the prior fiscal year. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) Three Months Ended December 31, 2006 Compared with Three Months Ended December 31, 2005 Bookings for the three months ended December 31, 2006 were $22,599, compared to $21,975 for the three months ended December 31, 2005. The improvement in bookings was due primarily to increased orders from customers in the semiconductor and fiber optic markets. The backlog of unfilled orders at December 31, 2006 was $17,122, compared to $16,331 at December 31, 2005 and $18,941 at June 30, 2006. Net sales for the three months ended December 31, 2006 increased 5% from the comparable period in the prior fiscal year. The increase was due to higher volume of product shipped. The volume improvement was mainly from sales to customers in the semiconductor equipment and fiber optic markets. Gross margins for the three months ended December 31, 2006 were 34% of net sales, compared to 41% of net sales for the comparable period in the prior fiscal year. Gross margins decreased due to a less favorable product sales mix and higher manufacturing overhead. During the quarter, sales of lower margin larger case size capacitors increased as a percentage of total sales. The Company has outsourced certain labor intensive steps in its manufacturing process to a third party contract manufacturer in Costa Rica in order to reduce costs, add capacity and increase cost flexibility in fluctuating production. As such, during the fiscal quarter ended December 31, 2006, the Company reduced costs in its New York and Florida facilities via a reduction in headcount of approximately 8%. The full benefit of these reductions will be realized beginning in the third quarter of fiscal year 2007. Selling, general and administrative expenses for the three months ended December 31, 2006 increased 3% from the comparable period in the prior fiscal year. The increase was primarily the result of increased severance expense as a result of the reduction of headcount mentioned above and increased professional fees, partially offset by decreased bonuses as a result of decreased profitability and decreased depreciation expense. The effective income tax rate for the three months ended December 31, 2006 and 2005 was approximately 31% and 33%, respectively. The decrease in the effective tax rate was primarily due to settlements of state tax audits during the quarter. As a result of the foregoing, net income for the three months ended December 31, 2006 was $1,192, or $0.14 per common share and $0.13 per common share assuming dilution, compared to net income of $1,929, or $0.23 per common share and $0.22 per common share assuming dilution, for the comparable period in the prior fiscal year. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) Six Months Ended December 31, 2006 Compared with Six Months Ended December 31, 2005 Bookings for the six months ended December 31, 2006 were $41,885, compared to $39,601 for the six months ended December 31, 2005. The improvement in bookings was due primarily to increased orders from customers in the semiconductor equipment, military and fiber optic markets. Net sales for the six months ended December 31, 2006 increased 18% from the comparable period in the prior fiscal year. The increase was due to higher volume of product shipped as a result of improving economic conditions in the electronic components industry, greater market share and improving sales of newer products as these new products gain acceptance in the markets the Company serves. The volume improvement was mainly from sales to customers in the wireless electronics, semiconductor equipment, military and fiber optic markets. Gross margins for the six months ended December 31, 2006 were 39% of net sales, compared to 32% of net sales for the comparable period in the prior fiscal year. Gross margins increased primarily due to the increased revenues and in part to increased levels of precious metal recovery during the six months ended December 31, 2006. Gross margin improvement was partially offset by unfavorable product sales mix in the second quarter of fiscal year 2006. In addition, the prior year's results were negatively impacted by the attempted conversion of part of the Company's sales and manufacturing functions to its Enterprise Resource Planning System. Selling, general and administrative expenses for the six months ended December 31, 2006 increased 6% from the comparable period in the prior fiscal year. The increase in selling, general and administrative expenses compared to the prior fiscal year is attributable to increased commission expense due to higher sales levels and increased bonus expense due to increased profitability, partially offset by decreased training costs related to the implementation of the ERP system. The Company incurred approximately $150 of selling, general and administrative expenses related to the ERP system implementation in the six months ended December 31, 2005. Interest expense for the six months ended December 31, 2006 increased 23% from the comparable period in the prior fiscal year due to increased borrowings outstanding under the Company's line of credit with GECC and borrowings by the Company's wholly-owned subsidiary in Sweden. The effective tax rate for the six months ended December 31, 2006 and 2005 was approximately 33% and 34%, respectively. The decrease in the effective tax rate was primarily due to favorable settlements of state tax audits. As a result of the foregoing, net income for the six months ended December 31, 2006 was $4,332 or $0.50 per common share and $0.48 per common share assuming dilution, compared to net income of $1,238, or $0.15 per common share and $0.14 per common share assuming dilution, for the comparable period in the prior fiscal year. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) LIQUIDITY AND CAPITAL RESOURCES Dec. 31, 2006 June 30, 2006 ------------- ------------- Cash and Investments $ 8,911 $ 8,324 Working Capital $ 51,696 $ 46,649 Quarter Ended: Operating Cash Flow $ 421 $ (1,809) Capital Expenditures $ 951 $ 1,200 Depreciation and Amortization $ 1,466 $ 1,680 Current Ratio 5.7:1 4.8:1 Quick Ratio 1.7:1 1.7:1 The Company's financial position at December 31, 2006 remains strong as evidenced by working capital of $51,696. The Company's current and quick ratios at December 31, 2006 also remain strong. Cash, cash equivalents and investments increased by $587 from June 30, 2006 as a result of positive operating cash flows, partially offset by capital expenditures and repayments of long-term debt. Accounts receivable decreased $3,152 from June 30, 2006 due to a decrease in sales volume in the three months ended December 31, 2006 compared with the three months ended June 30, 2006, partially offset by a decrease in the allowance for sales returns and doubtful accounts of $117. Inventories increased $5,074 from June 30, 2006, primarily to support forecasted increases in demand. Other current assets increased by $1,310 from June 30, 2006, primarily due to estimated tax payments offsetting the provision for current year taxable income. Accounts payable decreased by $98 from June 30, 2006 due to the regularly scheduled shutdown of the Company's manufacturing operations for the holidays. Accrued expenses decreased by $213 from June 30, 2006 due to the payments of various accrued expenses at June 30, 2006 during the six months ended December 31, 2006. In April 2004, the Company entered into a $4,000 credit facility with GECC for the purchase of equipment. In March 2005, the credit facility was increased to $6,000. Borrowings under the line bear interest, at the Company's option, at either a fixed rate of 3.47% above the five year Treasury Bond yield or a floating rate of 3.65% above LIBOR. Borrowings under the line are secured by the equipment purchased thereunder. Each separate borrowing under the line will be a fully amortizing term loan with a maturity of five years from the date the funds are drawn down. The line has been extended several times and currently will expire on March 24, 2007. GECC has the option to securitize these loans with a third party. Loans securitized with a third party increase the available line of credit to the Company. As of December 31, 2006, the Company had $4,500 of borrowings outstanding under this facility at fixed interest rates ranging from 7.15% to 7.93%. At December 31, 2006, the Company had $6,000 available to borrow under this credit facility. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) In December 2004, the Company entered into a credit facility with Commerce Bank, N.A. Under the terms of this facility, the Company may request advances from time to time up to an aggregate of $5,000. Any advance made bears interest at the Prime Rate as reported in the Wall Street Journal. Borrowings under the facility are secured by a lien on the Company's accounts receivable. The line has been extended several times and currently expires on November 30, 2007. The facility is subject to certain financial covenants, including minimum tangible net worth and liability percentage ratios. As of December 31, 2006, the Company had no outstanding borrowings under this credit facility. In September 2005, the Company's wholly-owned subsidiary in Sweden obtained a series of five term loans aggregating 12,000 Swedish Krona ("SEK") (approximately $1,500) from Svenska Handelsbanken, AB ("Handelsbanken"). The loans are unsecured and bear interest at fixed rates ranging from 3.56% to 4.59%. The five loans are each for a principal amount of 2,400 SEK and are fully amortizing. The loans mature in one to five years with the first having matured on September 30, 2006 and one other maturing on each succeeding September 30th through 2010. In connection with, and as an inducement to Handelsbanken to make the loans, the Company entered into a Guaranty and Agreement with Handelsbanken whereby the Company has agreed to guarantee the payment of all its Swedish subsidiary's obligations under the loans. The Company leases an administrative office, manufacturing and research and development complex located in Jacksonville, Florida (the "Jacksonville Facility") from a partnership controlled by the Company's President, Chief Executive Officer and principal stockholder under a capital lease. At September 30, 2006, the Jacksonville Facility had an aggregate cost of $5,104 and a net book value of $1,396. The lease is for a period of 30 years, was capitalized using an interest rate of 10.5% and expires on September 30, 2010. The lease currently provides for base rent of approximately $812 per annum. The lease further provides for annual increases in base rent for years beginning after May 1, 1999, based on the increase in the Consumer Price Index since May 1, 1998 applied to base rent. The lease also provides for increases to the base rent in connection with any new construction at the Jacksonville Facility. Under the lease, upon any new construction being placed into use, the base rent is subject to increase to the fair market rental of the Jacksonville Facility, including the new construction. Capital expenditures for the six months ended December 31, 2006 totaled $2,893, including expenditures for machinery and equipment and leasehold improvements. The Company intends to use cash on hand, cash generated through operations and the line of credit with GECC to finance budgeted capital expenditures of approximately $4,000 for the remainder of fiscal year 2007, primarily for equipment acquisitions and building renovations. Aggregate contractual obligations as of December 31, 2006 mature as follows: Payments Due by Period ------------------------------------------------------ Less than 1 1- 3 3- 5 After 5 Contractual Obligations Total year years Years years -------------------------------- -------- ----------- -------- -------- ------- Bank Debt (including interest) $ 6,721 $ 1,892 $ 3,674 $ 1,155 $ -- Capital Lease Obligations 3,046 812 1,625 609 -- Operating Leases 427 387 40 -- -- Purchase Obligations 5,509 5,509 -- -- -- -------- ----------- -------- -------- ------- Total Contractual Obligations $ 15,703 $ 8,600 $ 5,339 $ 1,764 $ -- ======== =========== ======== ======== ======= 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) The Company routinely enters into binding and non-binding purchase obligations in the ordinary course of business, primarily covering anticipated purchases of inventory and equipment. The terms of these commitments generally do not extend beyond one year. CRITICAL ACCOUNTING POLICIES The Securities and Exchange Commission (the "SEC") issued disclosure guidance for "critical accounting policies." The SEC defines "critical accounting policies" as those that require the application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 1 to its consolidated financial statements contained in its Annual Report on Form 10-K for the fiscal year ended June 30, 2006. The Company believes that the following accounting policies require the application of management's most difficult, subjective or complex judgments: Allowances for Doubtful Accounts Receivable The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and a customer's current creditworthiness, as determined by its review of the customer's current credit information. The Company continuously monitors collections and payments from its customers and maintains an allowance for estimated credit losses based upon its historical experience and any specific customer collection issues that the Company has identified. While such credit losses have historically been within the Company's expectations and the allowances established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. Should the financial position of its customers deteriorate resulting in an impairment of their ability to pay amounts due, the Company's revised estimate of such losses and any actual losses in excess of previous estimates may negatively impact its operating results. Sales Returns and Allowances In the ordinary course of business, the Company accepts returns of products sold for various reasons and grants sales allowances to customers. While the Company engages in extensive product quality control programs and processes, its level of sales returns is affected by, among other things, the quality of its manufacturing processes. The Company maintains an allowance for sales returns and allowances based upon historical returns and allowances granted. While such returns and allowances have historically been within the Company's expectations, actual return and allowance rates in the future may differ from current estimates, which could negatively impact the Company's operating results. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) Inventory Valuation The Company values inventory at the lower of aggregate cost (first-in, first-out) or market. When the cost of inventory is determined by management to be in excess of its market value, such inventory is written down to its estimated net realizable value. This requires the Company to make estimates and assumptions about several factors (e.g., future sales quantities and selling prices and percentage complete and failure rates for work in process) based upon historical experience and its projections for future periods. Changes in factors such as the level of order bookings, the product mix of order bookings and the Company's manufacturing processes could have a material impact on the Company's assessment of the net realizable value of inventory in the future. Valuation of Deferred Tax Assets The Company regularly evaluates its ability to recover the reported amount of its deferred income taxes considering several factors, including its estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. Presently, the Company believes that it is more likely than not that it will realize the benefits of its deferred tax assets based primarily on its history of and projections for taxable income in the future. In the event that actual results differ from its estimates or the Company adjusts these estimates in future periods, the Company may need to establish a valuation allowance against a portion or all of its deferred tax assets, which could materially impact its financial position or results of operations in future periods. Valuation of Long-lived Assets The Company assesses the recoverability of long-lived assets whenever the Company determines that events or changes in circumstances indicate that the carrying amount may not be recoverable. Its assessment is primarily based upon its estimate of future cash flows associated with these assets. The Company believes that the carrying amount of its long-lived assets is recoverable. However, should its operating results deteriorate, or anticipated new product launches not occur or not attain the commercial acceptance that the Company anticipates, the Company may determine that some portion of its long-lived assets are impaired. Such determination could result in non-cash charges to income that could materially affect the Company's financial position or results of operations for that period. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except per share and percentage data) Accounting Standards Issued Not Yet Adopted In July 2006, the Financial Accounting Standard Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48") to address the noncomparability in reporting tax assets and liabilities resulting from a lack of specific guidance in FASB Statement of Financial Accounting Standards ("SFAS") No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," on the uncertainty in income taxes recognized in an enterprise's financial statements. Specifically, FIN No. 48 prescribes (a) a consistent recognition threshold, and (b) a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 will apply to fiscal years beginning after December 15, 2006. The Company is currently assessing the impact of the adoption of FIN No. 48 on its financial position and consolidated results of operations. In September 2006, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB No. 108"), which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 will require registrants to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, SAB No. 108 allows registrants to record that effect as a cumulative effect adjustment to beginning-of-year retained earnings. The requirements are effective for annual financial statements covering the first fiscal year ending after November 15, 2006. The Company is in the process of assessing the effect of SAB No. 108 on its consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk exposure at December 31, 2006 is consistent with the types of market risk and amount of exposures presented in its Annual Report on Form 10-K for the fiscal year ended June 30, 2006, including foreign currency exchange rate, commodity price, security price and interest rate risks. 19 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures In response to the requirements of the Sarbanes-Oxley Act of 2002, as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"), the Company's President and Chief Executive Officer and Vice President - Finance carried out an evaluation of the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, these officers concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and the Company's consolidated subsidiaries was made known to them by others within those entities, particularly during the period in which this report was being prepared. Changes in Internal Controls There were no changes in the Company's internal controls over financial reporting identified in connection with the evaluation of such internal controls that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 20 PART II - OTHER INFORMATION ITEMS 1. THROUGH 3. Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Stockholders held on November 14, 2006 (the "Annual Meeting"), the stockholders elected the individuals named below as directors for one-year terms. Votes were cast as follows: For ----------- Victor Insetta 8,573,129 Dov S. Bacharach 8,665,895 Chester E. Spence 8,631,115 O. Julian Garrard III 8,665,295 Stuart P. Litt 8,535,015 Thomas J. Volpe 8,662,895 The stockholders also ratified the appointment of KPMG LLP as the independent registered public accounting firm to audit the Company's consolidated financial statements for the fiscal year ending June 30, 2007. The holders of 8,654,485 shares of Common Stock voted to ratify the appointment, 19,062 voted against ratification and the holders of 1,040 shares of Common Stock abstained from voting on the issue. ITEM 5. Other Events ITEM 6. Exhibits EXHIBIT NO. DESCRIPTION 10.21(i) - Letter Agreement, dated December 21, 2006, between the Company and David Ott. 10.25(i) - Amendment No. 1, dated January 25, 2007 effective November 30, 2006, to Loan and Security Agreements between the Company and Commerce Bank, N.A. 10.26(i) - Amendment No. 1, dated January 25, 2007 effective November 30, 2006, to Security Agreement between American Technical Ceramics (Florida) Inc. and Commerce Bank, N.A. 31.1 - Section 302 Certification of Principal Executive Officer. 31.2 - Section 302 Certification of Principal Accounting Officer. 32.1 - Section 906 Certification of Principal Executive Officer. 32.2 - Section 906 Certification of Principal Accounting Officer. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated. AMERICAN TECHNICAL CERAMICS CORP. (Company) DATE: February 9, 2007 BY: /S/ Victor Insetta ------------------------------ Victor Insetta President and Director (Principal Executive Officer) DATE: February 9, 2007 BY: /S/Andrew R. Perz ------------------------------ Andrew R. Perz Vice President, Finance (Principal Accounting Officer) 22