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| EMKR > SEC Filings for EMKR > Form 10-Q on 17-Aug-2009 | All Recent SEC Filings |
17-Aug-2009
Quarterly Report
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934. These forward-looking statements are based largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These forward-looking statements may be identified by the use of terms and phrases such as "expects", "anticipates", "projects", "forecasts", "intends", "plans", believes", "estimates", "targets", "can", "may", "could", "will", and variations of these terms and similar phrases. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Quarterly Report. This discussion should also be read in conjunction with the condensed consolidated financial statements, including the related notes.
These forward-looking statements include, without limitation, any and all statements or implications regarding:
The ability of EMCORE Corporation (the "Company", "we", "our", or "EMCORE") to obtain financing or sell assets and achieve levels of revenue and cost reductions that are adequate to support our capital and operating requirements in order to continue as a going concern.
Our ability to remain competitive within our industry and the future growth of the Company, and our industry, and the recovery of financial markets, the markets for our products, and economic conditions in general;
Our ability to achieve structural and material cost reductions without impacting product development or manufacturing execution;
Expected improvements in our product and technology development programs;
Our ability to successfully develop, introduce, market and qualify new products, including our concentrating photovoltaic (CPV) terrestrial solar products;
Our ability to identify and acquire suitable acquisition targets and difficulties in integrating recent or future acquisitions into our operations; and,
Other risks and uncertainties described in our filings with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, 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.
Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008. Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other Exchange Act reports filed with the SEC. We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.
Business Overview
EMCORE Corporation (the "Company", "we", "our", or "EMCORE") is a provider of compound semiconductor-based components and subsystems for the fiber optic and solar power markets. We were established in 1984 as a New Jersey corporation and have two reporting segments: Fiber Optics and Photovoltaics. Our Fiber Optics segment offers optical components, subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed data and telecommunications, cable television ("CATV") and fiber-to-the-premises ("FTTP") networks. Our Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based multi-junction solar cells, covered interconnect cells ("CICs") and fully integrated solar panels. For terrestrial applications, we offer concentrating photovoltaic ("CPV") power systems for commercial and utility scale solar applications as well as high-efficiency multi-junction solar cells and integrated CPV components for use in other solar power concentrator systems. Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000. For specific information about our Company, our products or the markets we serve, please visit our website at http://www.emcore.com. The information on our website is not incorporated into this Quarterly Report on Form 10-Q.
Strategy
The Company's management has believed for some time that, due to much dissimilarity between the businesses of the Company's Fiber Optics and Photovoltaics businesses, they would provide the greatest value to shareholders if they were operated as two separate business entities. Over the past two years, the Company entered into several acquisitions to strengthen one or both of these businesses with a view toward their eventual separation. On April 4, 2008, the Company announced that its Board of Directors had formally authorized management to prepare a comprehensive operational and strategic plan for the separation of these businesses into separate corporations. Management began assessing alternative methods for achieving this goal; however, the subsequent onset of the world-wide economic and financial crisis has had a significant adverse impact on these plans. A dramatic reduction in customer demand for many of the Company's Fiber Optics products has significantly lowered revenue and cash flow in that business unit, while a shortage of debt and equity capital, a decline in the price of conventional energy sources, and a generally cautious and conservative attitude in all segments of the government and business sectors has delayed the opportunities for expanded deployment of the Company's terrestrial photovoltaic products and systems.
As a result, the Company has instituted a series of initiatives aimed at conserving and generating cash over the next twelve months, as described above under "Liquidity Matters - Management Actions and Plans". The Company's strategy over the short term will be focused on the successful implementation of these initiatives. The Company also continues to investigate a wide variety of strategic options for the purpose of maximizing shareholder value. No determination has yet been made regarding which options will be pursued.
Pending implementation of any such strategic option, the Company will continue to pursue its existing strategy of leveraging our expertise in advanced compound semiconductor technologies to be a leading provider of high-performance, cost-effective product solutions in each of the markets that we serve. Key elements of our strategy include:
Drive Business Growth, Reduce Cost, and Deliver Profitability.
We believe that as compound semiconductor production costs continue to be reduced, existing and new customers will be compelled to increase their use of these products because of their attractive performance characteristics and superior value. With our enhanced product portfolio, expanded customer base, and established vertically-integrated, low-cost manufacturing infrastructure in our fiber optics business, we are better positioned to leverage our resources and infrastructure to grow our revenue through new product introductions and gain market share. We expect several initiatives for cost reduction to come to fruition during the remainder of 2009, which we believe will eventually improve our gross profit and margins. We are committed to achieving profitability by increasing revenue through the introduction of new products, reducing our cost structure and lowering the breakeven points of our product lines. We have significantly streamlined our manufacturing operations by focusing on core competencies to identify cost efficiencies. Where appropriate, we transferred the manufacturing of certain product lines to low-cost contract manufacturers when we can lower costs while maintaining quality and reliability. Our restructuring programs are designed to further reduce the number of headcount, manufacturing facilities, in addition to the divesture or exit from selected businesses and product lines that are not strategic and/or are not capable of achieving desired revenue or profitability goals. Our results of operations and financial condition have and will likely continue to be significantly affected by severance, restructuring charges, impairment of long-lived assets and idle facility expenses incurred. We have also significantly reduced capital expenditures and have placed a greater emphasis on improving our working capital management.
Focus Our R&D Effort on Cost Reduction and Market Share Gain.
We have invested substantially in research and development and product engineering over the past years. We have developed a clear path towards business growth and are recognized as a technology leader in both our Fiber Optics and Photovoltaics segments. Throughout the rest of 2009, we will continue to be focusing our R&D and product engineering efforts on product cost reduction and market share gain through more complete product solutions for our customers. In this challenging economic environment, we have to be very selective in allocating our R&D resources to develop competitive technologies and products as a means to leapfrog our competitors.
Grow Our Terrestrial Solar Power Business by a Focus on Our Core Competencies.
For our CPV component business, we intend to continue to secure and expand our leadership position by providing high-performance, reliable, and cost-effective products and excellent customer service. We expect our Gen-III CPV terrestrial solar power system to provide a competitive levelized cost of energy for commercial and utility scale projects in certain regions. In August 2009, we announced to our employees a restructuring of our solar business, combining the satellite and terrestrial solar businesses within a single business unit. We also implemented a new marketing strategy which will focus on EMCORE's traditional competencies in technological innovation, systems design and engineering while retaining our unique competitive advantage as the only vertically integrated competitor in the CPV market. We will continue to develop and expand partnerships and other ventures with major companies, both domestically and internationally, to drive the deployment of terrestrial CPV components and systems.
Quarter Highlights
Long Term Supply Agreement with Space Systems Loral On May 20, 2009, the Company announced that Space Systems Loral, a subsidiary of Loral Space & Communications, has awarded a long term supply agreement contract to the Company's Photovoltaics segment to manufacture and deliver high-efficiency, multi-junction solar cells for Space Systems Loral's spacecraft programs. The period of performance for the contract is 2009 through 2014 and the solar cells will be produced at the Company's state-of-the-art manufacturing facilities located in Albuquerque, New Mexico, USA.
Christopher M. Larocca Named Chief Operating Officer On June 4, 2009, the Company announced that Christopher M. Larocca has been named Chief Operating Officer of the Company. Mr. Larocca reports to the Company's President and Chief Executive Officer, Dr. Hong Q. Hou.
Solar Panel Manufacturing Contract for NASA's Global Precipitation Measurement
Mission
On June 16, 2009, the Company announced that it was awarded a contract to
manufacture, test, and deliver solar panels for NASA's Global Precipitation
Measurement spacecraft. The contract, valued at approximately $5 million, will
be managed by MEI Technologies, Inc. for the NASA Goddard Space Flight Center
(GSFC). The Global Precipitation Measurement (GPM) mission is one of the
satellite-based science missions studying global precipitation, including rain,
snow, and ice. The launch of the spacecraft is presently scheduled for the
summer of 2013. The GPM spacecraft solar arrays will be powered by the Company's
latest generation, 30% efficiency class ZTJ multi-junction solar cells.
Contract from Air Force Research Laboratory On June 22, 2009, the Company announced it was awarded a $5.7 million cost-plus fixed-fee contract from the Air Force Research Laboratory, located at the Kirtland Air Force Base, for the development of high-efficiency photovoltaic solar cells. The two-year contract calls for the Company to demonstrate high efficiency solar cells for space applications, as well as investigate advanced photovoltaic devices based on inverted metamorphic (IMM) structures. The contract also includes a provision for an additional twelve-month award of $3.4 million for advanced IMM development once the base contract has been completed. Funding for the entire contract has been appropriated.
Reclassification of the Company's Space Solar Cells for Export Control On July 20, 2009, the Company became aware that, as a result of a commodity jurisdiction request submitted by one of its customers, the Directorate of Defense Trade Controls of the United States Department of State had determined that future shipments of the Company's current-generation family of triple junction solar cells would no longer be subject to regulation under the International Traffic in Arms Regulations ("ITAR") regulations administered by that Directorate of Defense Trade Controls (which require an export license for all non-U.S. sales). Rather, the cells would subject to the Export Administration Regulations ("EAR") administered by the Department of Commerce's Bureau of Industry and Security, and would be classified as ECCN 3A001.e.4. Under this classification, the requirement for a license will depend on the end use of the product, the final destination and the identity of the end user. The Company believes that this reclassification will remove what had been a significant barrier to international sales of its space solar cells.
Solar Contract Awarded from Boeing
On July 30, 2009, the Company announced an industry team led by The Boeing
Company has received a contract from the Defense Advanced Research Projects
Agency (DARPA) for work on Phase 2 of the Fast Access Spacecraft Testbed (FAST)
program. The $15.5 million cost-plus-fixed-fee contract is currently funded to
$13.8 million. DARPA's FAST program aims to develop a new, ultra-lightweight
High Power Generation System (HPGS) that can generate up to 175 kilowatts --
more power than is currently available to the International Space Station. When
combined with electric propulsion, FAST will form the foundation for future
self-deployed, high-mobility spacecraft to perform ultra-high-power
communications, space radar, satellite transfer and servicing missions.
Impairment
During the three months ended June 30, 2009, the Company performed an evaluation of its Fiber Optics segment assets for impairment. The impairment test was triggered by a determination that it was more likely than not that certain assets would be sold or otherwise disposed of before the end of their previously estimated useful lives. As a result of the evaluation, it was determined that an impairment existed, and a charge of $27.0 million was recorded to write down the long-lived assets to estimated fair value, which was determined based on a combination of guideline public company comparisons and discounted estimated future cash flows.
The current adverse economic conditions had a significant negative effect on the Company's assessment of the fair value of the Fiber Optics segment assets. The impairment charge primarily resulted from the combined effect of the current slowdown in product orders and lower pricing exacerbated by currently high discount rates used in estimating fair values and the effects of recent declines in market values of debt and equity securities of comparable public companies. This impairment charge in combination with other non-cash charges will not cause the Company to be in default under any of its financial covenants associated with its credit facility nor will it have a material adverse impact on the Company's liquidity position or cash flows.
See Note 9, Goodwill and Intangible Assets, for more information on the impairment charges recorded by the Company in response to unfavorable macroeconomic conditions.
Order Backlog
As of June 30, 2009, the Company had a consolidated order backlog of approximately $49.6 million comprised of $36.2 million in order backlog related to our Photovoltaics segment and $13.4 million in order backlog related to our Fiber Optics segment. Order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product delivery and / or services to be performed within the next twelve months.
Due to unfavorable credit market conditions and other factors adversely affecting the CPV business in our Photovoltaics segment, a number of agreements and other arrangements previously announced by the Company in press releases have not resulted in the level of sales that were earlier anticipated, nor does the Company believe that they are likely to do so in the near future. These include several memoranda of understanding regarding the supply of solar power systems and several purchase orders for CPV components.
Our Markets
Collectively, our products serve the telecommunications, datacom, cable television, fiber-to-the-premises, high-performance computing, defense and homeland security, and satellite and terrestrial solar power markets.
Fiber Optics
Our fiber optics products enable information that is encoded on light signals to be transmitted, routed (switched) and received in communication systems and networks. Our Fiber Optics segment primarily offers the following product lines:
Telecom Optical Products - We believe we are a leading supplier of 10 gigabit per second (Gb/s) fully C-band and L-band tunable dense wavelength division multiplexed (DWDM) transponders for telecommunications transport systems. We are one of the few suppliers who offer vertically-integrated products, including external-cavity laser modules, integrated tunable laser assemblies (ITLAs) and 300-pin transponders. Our internally developed laser technology is highly suited for applications of 10, 40, and 100 Gb/s due to the superior narrow linewidth and low noise characteristics. All DWDM products are fully Telcordiaฎ qualified and comply with industry multi-source agreements (MSAs). We are currently sampling customers with our tunable XFP (TXFP) product, and MSA which will rapidly replace 300-pin based transponders over the next few years, enabling a higher density transport solution required by carriers. EMCORE's TXFP leverages our unique external cavity laser technology to offer identical performance to currently deployed network specifications, without the need for any specification compromise.
Enterprise Products - We believe we provide leading-edge optical components and transceiver modules for data applications that enable switch-to-switch, router-to-router and server-to-server backbone connections at aggregate speeds of 10 Gb/s and above. We offer the broadest range of products with XENPAK form factor which comply with 10 Gb/s Ethernet (10-GE) IEEE802.3ae standard. Our 10-GE products include short-reach (SR), long-reach (LR), extended-reach (ER), coarse WDM LX4 optical transceivers to connect between the photonic physical layer and the electrical section layer and CX4 transceivers. In addition to the 10-GE products, we offer traditional MSA small form factor (SFF) and small form factor pluggable (SFP) optical transceivers for use in Gigabit Ethernet and Fibre Channel local-area and storage-area networks.. These transceivers provide integrated duplex data links for bi-directional communication over both single-mode and multimode optical fibers at data rates of 1.25Gbps and 4 Gbps, respectively.
Laser/photodetector Component Products - We believe we are a leading provider of optical components including lasers, photodetectors and various forms of packaged subassemblies. Products include bare die (chip), TO, and TOSA forms of high-speed 850nm vertical cavity surface emitting lasers (VCSELs), distributed feedback (DFB) lasers, positive-intrinsic-negative (pin) and avalanche photodiode (APD) components for 2G, 8G and 10G Fibre Channel, 1G and 10G Ethernet, FTTP, and Telecom applications. While we provide component products to the entire industry, we also leverage the benefits of vertically-integrated infrastructure through a low-cost and early availability of new product introduction.
Parallel Optical Transceiver and Cable Products - We have been the technology and product leader of optical transmitter and receiver products utilizing arrays of optical emitting or detection devices, e.g., vertical-cavity surface-emitting lasers (VCSELs) and photodetectors (PDs). These optical transmitter, receiver, and transceiver products are used for back-plane interconnects, switching/routing between telecom racks and high-performance computing clusters. Our products include 12-lane SNAP-12 MSA transmitter and receivers with single and double data rates. Based on the core competency of 4-lane parallel optical transceivers, we offer optical fiber ribbon cables (ECC - EMCORE Connects Cables) with parallel-optical transceivers embedded within the connectors. These products, with aggregated bandwidths of up to 40 Gb/s, are ideally suited for high-performance computing clusters. Our products provide our customers with increased network capacity; increased data transmission distance and speeds; increased bandwidth; lower power consumption; improved cable management over copper interconnects (less weight and bulk); and lower cost optical interconnections for massively parallel multi-processor installations.
Fiber Channel Transceiver Products - We offer tri-rate SFF and SFP optical transceivers for storage area networks. The MSA transceiver module is designed for high-speed Fibre Channel data links supporting up to 4.25 Gb/s (4X Fibre Channel rate). The products provide integrated duplex data links for bi-directional communication over Multimode optical fiber.
Cable Television (CATV) Products - We are a market leader in providing radio frequency (RF) over fiber products for the CATV industry. Our products are used in hybrid fiber coaxial (HFC) networks that enable cable service operators to offer multiple advanced services to meet the expanding demand for high-speed Internet, on-demand and interactive video and other advanced services, such as high-definition television (HDTV) and voice over IP (VoIP). Our CATV products include forward and return-path analog and digital lasers, photodetectors and subassembly components, broadcast analog and digital fiber-optic transmitters and quadrature amplitude modulation (QAM) transmitters and receivers. Our products provide our customers with increased capacity to offer more cable services; increased data transmission distance, speed and bandwidth; lower noise video receive; and lower power consumption.
Fiber-To-The-Premises (FTTP) Products - Telecommunications companies are increasingly extending their optical infrastructure to their customers' location in order to deliver higher bandwidth services. We have developed customer qualified FTTP components and subsystem products to support plans by telephone companies to offer voice, video and data services through the deployment of new fiber optics-based access networks. Our FTTP products include passive optical network (PON) transceivers, analog fiber optic transmitters for video overlay and high-power erbium-doped fiber amplifiers (EDFA), analog and digital lasers, photodetectors and subassembly components, analog video receivers and multi-dwelling unit (MDU) video receivers. Our products provide our customers with higher performance for analog and digital characteristics; integrated infrastructure to support competitive costs; and additional support for multiple standards.
Satellite Communications (Satcom) Products - We believe we are a leading provider of optical components and systems for use in equipment that provides high-performance optical data links for the terrestrial portion of satellite communications networks. Our products include transmitters, receivers, subsystems and systems that transport wideband radio frequency and microwave signals between satellite hub equipment and antenna dishes. Our products provide our customers with increased bandwidth and lower power consumption.
Video Transport - Our video transport product line offers solutions for broadcasting, transportation, IP television (IPTV), mobile video and security & surveillance applications over private and public networks. Our video, audio, data and RF transmission systems serve both analog and digital requirements, providing cost-effective, flexible solutions geared for network reconstruction and expansion.
Defense and Homeland Security - Leveraging our expertise in RF module design and high-speed parallel optics, we provide a suite of ruggedized products that meet the reliability and durability requirements of the U.S. government and defense markets. Our specialty defense products include fiber optic gyro components used in precision guided munitions, ruggedized parallel optic transmitters and receivers, high-frequency RF fiber optic link components for towed decoy systems, optical delay lines for radar systems, EDFAs, terahertz spectroscopy systems and other products. Our products provide our customers with high frequency and dynamic range; compact form-factor; and extreme temperature, shock and vibration tolerance.
Major customers for our Fiber Optics segment include: Alcatel-Lucent, Aurora Networks, BUPT-GUOAN Broadband, Arris/C-Cor Electronics, Ciena, Cisco, Fujitsu, Hewlett-Packard, Huawei, IBM, Intel, Jabil, JDSU, Merge Optics, Motorola, Network Appliance, Sycamore Networks, Inc., Tellabs, and ZTE.
Photovoltaics
We believe our high-efficiency compound semiconductor-based multi-junction solar cell products provide our customers with compelling cost and performance . . .
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