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EX-32.1 - AEROFLEX HOLDING CORP.v210367_ex32-1.htm
EX-31.1 - AEROFLEX HOLDING CORP.v210367_ex31-1.htm
EX-31.6 - AEROFLEX HOLDING CORP.v210367_ex31-6.htm
EX-31.5 - AEROFLEX HOLDING CORP.v210367_ex31-5.htm
EX-32.3 - AEROFLEX HOLDING CORP.v210367_ex32-3.htm
EX-31.2 - AEROFLEX HOLDING CORP.v210367_ex31-2.htm
EX-32.4 - AEROFLEX HOLDING CORP.v210367_ex32-4.htm
EX-32.2 - AEROFLEX HOLDING CORP.v210367_ex32-2.htm
EX-31.4 - AEROFLEX HOLDING CORP.v210367_ex31-4.htm
EX-10.1 - AEROFLEX HOLDING CORP.v210367_ex10-1.htm
EX-31.3 - AEROFLEX HOLDING CORP.v210367_ex31-3.htm



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 December 31, 2010

Commission File
 
Registrant; State of Incorporation;
 
IRS Employer
Number
 
Address and Telephone Number
 
Identification No.
         
001-34974
 
Aeroflex Holding Corp.
 
01-0899019
   
Delaware
   
   
35 South Service Road
   
   
P.O. Box 6022
   
   
Plainview, NY 11803-0622
   
   
(516) 694-6700
   
         
033-88878
 
Aeroflex Incorporated
 
11-1974412
   
Delaware
   
   
35 South Service Road
   
   
P.O. Box 6022
   
   
Plainview, NY 11803-0622
   
   
(516) 694-6700
   

Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
 
Aeroflex Holding Corp.
Yes ¨
No x
Aeroflex Incorporated
Yes x
No ¨
 
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Aeroflex Holding Corp.
Yes ¨
No ¨
Aeroflex Incorporated
Yes ¨
No ¨

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
Large accelerated
 
Accelerated
 
Non-accelerated
 
Smaller reporting
 
filer
 
filer
 
filer
 
company
Aeroflex Holding Corp.
¨
 
¨
 
x
 
¨
Aeroflex Incorporated
¨
 
¨
 
x
 
¨

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).

Aeroflex Holding Corp.
Yes ¨
No x
Aeroflex Incorporated
Yes ¨
No x

Number of shares of common stock outstanding as of February 9, 2011:

Aeroflex Holding Corp. - 
84,789,180 shares
Aeroflex Incorporated -
1,000 shares

Aeroflex Incorporated meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
 



 
OVERVIEW

This quarterly report on Form 10-Q for the period ended December 31, 2010 is a combined quarterly report being separately filed by two registrants: Aeroflex Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a direct wholly-owned subsidiary of Aeroflex Holding. Unless the context provides otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s consolidated subsidiaries.

Filing a combined report which contains full financial information of both Aeroflex Holding and its wholly owned subsidiary Aeroflex is both economical and efficient, as Aeroflex Holding is a holding company which does not conduct business operations on its own - all business operations are conducted by Aeroflex and its consolidated subsidiaries. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of Aeroflex and its subsidiaries, except for activity related to Aeroflex Holding’s equity and earnings per share. Aeroflex Holding’s only asset is its investment in Aeroflex. As such, other than any discussions of liquidity and capital resources (including indebtedness and cash flows), equity and earnings per share, controls and procedures, unregistered sales of equity securities, use of proceeds and any material differences between Aeroflex Holding and Aeroflex which would require separate disclosures, all information presented in this quarterly report will be combined and pertain to both Aeroflex Holding and Aeroflex.

In this Form 10-Q, unless the context requires otherwise, references to (i) the term “Sponsors” refers collectively to affiliates of or funds managed by The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc., and GS Direct, LLC, which indirectly control Aeroflex Holding, and (ii) “fiscal year” refers to the twelve months ended June 30 of the applicable year. For example, “fiscal 2010” refers to the twelve months ended June 30, 2010.

Aeroflex Holding’s board of directors authorized an increase of Aeroflex Holding’s authorized shares of common stock to 300,000,000 and a 65,000,000 for 1 common stock split, both of which became effective on November 18, 2010. Aeroflex Holding’s stockholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the split from additional paid-in capital to common stock. In addition, all share numbers and per share amounts in Aeroflex Holding’s consolidated financial statements have been retroactively adjusted to give effect to the stock split.

On November 19, 2010, Aeroflex Holding consummated an initial public offering (“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding received net proceeds of $244.1 million from the IPO, after deducting underwriting discounts and offering expenses, including a $2.5 million transaction fee which was paid to affiliates of the Sponsors under the advisory agreement with them for services directly attributable to the equity offering (“Transaction Fee”). Aeroflex Holding used the net proceeds of the IPO to make a capital contribution to Aeroflex. In connection with the IPO, Aeroflex:

 
·
Repurchased an aggregate of $186.6 million of its senior unsecured notes and senior subordinated unsecured term loans and paid the related expenses;

 
·
Paid a $16.9 million termination fee to affiliates of the Sponsors to terminate the advisory agreement with them, which, including the related write-off of prepaid advisory fees, resulted in an $18.1 million expense (“Termination Fee”); and
 
·
Entered into an amendment of the credit agreement with the lenders of its senior secured credit facility, for which a $3.3 million fee was paid to the lenders.

 
 

 
 
AEROFLEX HOLDING CORP.
AND SUBSIDIARIES

INDEX

   
PAGE
 
PART I:    FINANCIAL INFORMATION
 
     
Item 1
FINANCIAL STATEMENTS OF AEROFLEX HOLDING CORP. AND SUBSIDIARIES
 
 
Unaudited Condensed Consolidated Balance Sheets
 
 
December 31, 2010 and June 30, 2010
2
     
 
Unaudited Condensed Consolidated Statements Of Operations
 
 
Three Months Ended December 31, 2010 and 2009
3
 
Six Months Ended December 31, 2010 and 2009
4
     
 
Unaudited Condensed Consolidated Statements Of Stockholders’ Equity and Comprehensive
 
 
Income (Loss)
 
 
Six Months Ended December 31, 2010
5
     
 
Unaudited Condensed Consolidated Statements Of Cash Flows
 
 
Six Months Ended December 31, 2010 and 2009
6
     
 
FINANCIAL STATEMENTS OF AEROFLEX INCORPORATED AND SUBSIDIARIES
 
 
Unaudited Condensed Consolidated Balance Sheets
 
 
December 31, 2010 and June 30, 2010
7
     
 
Unaudited Condensed Consolidated Statements Of Operations
 
 
Three Months Ended December 31, 2010 and 2009
8
 
Six Months Ended December 31, 2010 and 2009
9
     
 
Unaudited Condensed Consolidated Statements Of Stockholder’s Equity and Comprehensive
 
 
Income (Loss)
 
 
Six Months Ended December 31, 2010
10
     
 
Unaudited Condensed Consolidated Statements Of Cash Flows
 
 
Six Months Ended December 31, 2010 and 2009
11
     
 
COMBINED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12 – 34
     
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 
 
RESULTS OF OPERATIONS
 
 
Three and Six Months Ended December 31, 2010 and 2009
35 – 50
     
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
50
     
Item 4
CONTROLS AND PROCEDURES
50
     
 
PART II:     OTHER INFORMATION
 
     
Item 1
LEGAL PROCEEDINGS
51
     
Item 1A
RISK FACTORS
51
 

 
Item 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
51
     
Item 3
DEFAULTS UPON SENIOR SECURITIES
51
     
Item 4
[REMOVED AND RESERVED]
51
     
Item 5
OTHER INFORMATION
51
     
Item 6
EXHIBITS
52
     
SIGNATURE
53
   
EXHIBIT INDEX
54
   
CERTIFICATIONS
   
 
 
- 1 -

 

Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data )

   
December 31,
   
June 30,
 
   
2010
   
2010
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 70,643     $ 100,663  
Marketable securities
    8,357       -  
Accounts receivable, less allowance for doubtful
               
accounts of $2,101 and $1,821
    131,222       141,595  
Inventories
    153,880       126,568  
Deferred income taxes
    26,030       28,018  
Prepaid expenses and other current assets
    11,252       10,983  
Total current assets
    401,384       407,827  
                 
Property, plant and equipment, net
    99,889       101,662  
Non-current marketable securities, net
    -       9,769  
Deferred financing costs, net
    17,435       20,983  
Other assets
    23,204       21,818  
Intangible assets with definite lives, net
    214,085       238,313  
Intangible assets with indefinite lives
    113,844       109,894  
Goodwill
    458,034       445,874  
                 
Total assets
  $ 1,327,875     $ 1,356,140  
                 
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Current portion of long-term debt
  $ 360     $ 21,817  
Accounts payable
    36,967       28,803  
Advance payments by customers and deferred revenue
    23,185       30,741  
Income taxes payable
    1,654       4,615  
Accrued payroll expenses
    19,098       23,082  
Accrued expenses and other current liabilities
    52,944       58,817  
Total current liabilities
    134,208       167,875  
                 
Long-term debt
    695,908       880,030  
Deferred income taxes
    88,066       138,849  
Defined benefit plan obligations
    5,605       5,763  
Other long-term liabilities
    12,983       12,639  
Total liabilities
    936,770       1,205,156  
                 
Stockholders' equity:
               
Preferred stock $.01 par value; 50,000,000 shares authorized,
               
no shares issued and outstanding
    -       -  
Common stock, par value $.01 per share; 300,000,000 shares
               
authorized; 84,789,180 and 65,000,000 shares issued and outstanding
    848       650  
Additional paid-in capital
    642,961       398,291  
Accumulated other comprehensive income (loss)
    (41,102 )     (53,575 )
Accumulated deficit
    (211,602 )     (194,382 )
Total stockholders' equity
    391,105       150,984  
                 
Total liabilities and stockholders' equity
  $ 1,327,875     $ 1,356,140  

See combined notes to unaudited condensed consolidated financial statements.

 
- 2 -

 

Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)

   
Three Months Ended December 31,
 
   
2010
   
2009
 
             
Net sales
  $ 181,579     $ 166,739  
Cost of sales
    86,739       80,081  
Gross profit
    94,840       86,658  
                 
Selling, general and administrative costs
    38,266       31,573  
Research and development costs
    21,656       17,261  
Amortization of acquired intangibles
    15,843       15,514  
Termination of Sponsor Advisory Agreement
    18,133       -  
Restructuring charges
    6,293       64  
      100,191       64,412  
Operating income (loss)
    (5,351 )     22,246  
                 
Other income (expense):
               
Interest expense
    (20,713 )     (21,418 )
Loss on extinguishment of debt
    (25,178 )     -  
Gain from a bargain purchase of a business
    173       -  
Other income (expense), net
    (378 )     422  
Total other income (expense)
    (46,096 )     (20,996 )
                 
Income (loss) before income taxes
    (51,447 )     1,250  
Provision (benefit) for income taxes
    (40,044 )     11,864  
                 
Net income (loss)
  $ (11,403 )   $ (10,614 )
                 
Net income (loss) per common share - Basic
  $ (0.15 )   $ (0.16 )
                 
Weighted average number of common shares outstanding - Basic
    74,034       65,000  

See combined notes to unaudited condensed consolidated financial statements.

 
- 3 -

 

Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)

   
Six Months Ended December 31,
 
   
2010
   
2009
 
             
Net sales
  $ 337,510     $ 296,855  
Cost of sales
    162,844       145,124  
Gross profit
    174,666       151,731  
                 
Selling, general and administrative costs
    74,969       61,703  
Research and development costs
    43,814       34,442  
Amortization of acquired intangibles
    31,806       31,119  
Termination of Sponsor Advisory Agreement
    18,133       -  
Restructuring charges
    8,092       251  
Loss on liquidation of foreign subsidiary
    -       7,696  
      176,814       135,211  
Operating income (loss)
    (2,148 )     16,520  
                 
Other income (expense):
               
Interest expense
    (41,951 )     (42,457 )
Loss on extinguishment of debt
    (25,178 )     -  
Gain from a bargain purchase of a business
    173       -  
Other income (expense), net
    (407 )     479  
Total other income (expense)
    (67,363 )     (41,978 )
                 
Income (loss) before income taxes
    (69,511 )     (25,458 )
Provision (benefit) for income taxes
    (52,291 )     5,699  
                 
Net income (loss)
  $ (17,220 )   $ (31,157 )
                 
Net income (loss) per common share - Basic
  $ (0.25 )   $ (0.48 )
                 
Weighted average number of common shares outstanding - Basic
    69,517       65,000  

See combined notes to unaudited condensed consolidated financial statements.

 
- 4 -

 

Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Statement of Stockholders' Equity
and Comprehensive Income (Loss)
(In thousands)

                     
Additional
   
Other
             
         
Common Stock
   
Paid-in
   
Comprehensive
   
Accumulated
   
Comprehensive
 
   
Total
   
Shares
   
Par Value
   
Capital
   
Income(Loss)
   
Deficit
   
Income (Loss)
 
                                           
Balance, June 30, 2010
  $ 150,984       65,000     $ 650     $ 398,291     $ (53,575 )   $ (194,382 )      
Proceeds from issuance of common stock
    244,097       19,789       198       243,899       -       -        
Share-based compensation
    1,026       -       -       1,026       -       -        
Other changes
    (255 )     -       -       (255 )     -       -        
Other comprehensive income (loss)
    12,473       -       -       -       12,473       -     $ 12,473  
Net income (loss)
    (17,220 )     -       -       -       -       (17,220 )     (17,220 )
Balance, December 31, 2010
  $ 391,105       84,789     $ 848     $ 642,961     $ (41,102 )   $ (211,602 )   $ (4,747 )

See combined notes to unaudited condensed consolidated financial statements.

 
- 5 -

 

Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

   
Six Months Ended December 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net income (loss)
  $ (17,220 )   $ (31,157 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    41,534       41,774  
Gain from a bargain purchase of a business
    (173 )     -  
Acquisition related adjustment to cost of sales
    998       246  
Loss on liquidation of foreign subsidiary
    -       7,696  
Loss on extinguishment of debt
    25,178       -  
Deferred income taxes
    (55,926 )     2,437  
Share-based compensation
    1,026       1,045  
Non - cash restructuring charges
    4,860       -  
Amortization of deferred financing costs
    2,839       2,386  
Paid in kind interest
    2,434       8,857  
Other, net
    1,194       400  
Change in operating assets and liabilities, net of effects from purchases of businesses:
               
Decrease (increase) in accounts receivable
    13,629       12,136  
Decrease (increase) in inventories
    (24,214 )     (358 )
Decrease (increase) in prepaid expenses and other assets
    (1,088 )     (4,319 )
Increase (decrease) in accounts payable, accrued expenses and other liabilities
    (6,128 )     (19,030 )
                 
Net cash provided by (used in) operating activities
    (11,057 )     22,113  
                 
Cash flows from investing activities:
               
Payments for purchase of businesses, net of cash acquired
    (23,591 )     -  
Capital expenditures
    (11,213 )     (8,401 )
Proceeds from sale of marketable securities
    2,000       1,000  
Proceeds from the sale of property, plant and equipment
    741       845  
Other, net
    -       (11 )
                 
Net cash provided by (used in) investing activities
    (32,063 )     (6,567 )
                 
Cash flows from financing activities:
               
Net proceeds from issuance of common stock
    244,097       -  
Repurchase of senior unsecured notes and senior subordinated unsecured term loans, including premiums and fees
    (207,690 )     -  
Debt repayments
    (21,458 )     (4,012 )
Debt financing costs
    (3,332 )     -  
                 
Net cash provided by (used in) financing activities
    11,617       (4,012 )
Effect of exchange rate changes on cash and cash equivalents
    1,483       (483 )
                 
Net increase (decrease) in cash and cash equivalents
    (30,020 )     11,051  
Cash and cash equivalents at beginning of period
    100,663       57,748  
Cash and cash equivalents at end of period
  $ 70,643     $ 68,799  

See combined notes to unaudited condensed consolidated financial statements.

 
- 6 -

 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data )

   
December 31,
   
June 30,
 
   
2010
   
2010
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 70,643     $ 100,663  
Marketable securities
    8,357       -  
Accounts receivable, less allowance for doubtful accounts of $2,101 and $1,821
    131,222       141,595  
Inventories
    153,880       126,568  
Deferred income taxes
    26,030       28,018  
Prepaid expenses and other current assets
    11,252       10,983  
Total current assets
    401,384       407,827  
                 
Property, plant and equipment, net
    99,889       101,662  
Non-current marketable securities, net
    -       9,769  
Deferred financing costs, net
    17,435       20,983  
Other assets
    23,204       21,818  
Intangible assets with definite lives, net
    214,085       238,313  
Intangible assets with indefinite lives
    113,844       109,894  
Goodwill
    458,034       445,874  
                 
Total assets
  $ 1,327,875     $ 1,356,140  
                 
Liabilities and Stockholder's Equity
               
Current liabilities:
               
Current portion of long-term debt
  $ 360     $ 21,817  
Accounts payable
    36,967       28,803  
Advance payments by customers and deferred revenue
    23,185       30,741  
Income taxes payable
    1,654       4,615  
Accrued payroll expenses
    19,098       23,082  
Accrued expenses and other current liabilities
    52,944       58,817  
Total current liabilities
    134,208       167,875  
                 
Long-term debt
    695,908       880,030  
Deferred income taxes
    88,066       138,849  
Defined benefit plan obligations
    5,605       5,763  
Other long-term liabilities
    12,983       12,639  
Total liabilities
    936,770       1,205,156  
                 
Stockholder's equity:
               
Common stock, par value $.10 per share; 1,000 shares authorized, issued and outstanding
    -       -  
Additional paid-in capital
    643,809       398,941  
Accumulated other comprehensive income (loss)
    (41,102 )     (53,575 )
Accumulated deficit
    (211,602 )     (194,382 )
Total stockholder's equity
    391,105       150,984  
                 
Total liabilities and stockholder's equity
  $ 1,327,875     $ 1,356,140  

See combined notes to unaudited condensed consolidated financial statements.

 
- 7 -

 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands)

   
Three Months Ended December 31,
 
   
2010
   
2009
 
             
Net sales
  $ 181,579     $ 166,739  
Cost of sales
    86,739       80,081  
Gross profit
    94,840       86,658  
                 
Selling, general and administrative costs
    38,266       31,573  
Research and development costs
    21,656       17,261  
Amortization of acquired intangibles
    15,843       15,514  
Termination of Sponsor Advisory Agreement
    18,133       -  
Restructuring charges
    6,293       64  
      100,191       64,412  
Operating income (loss)
    (5,351 )     22,246  
                 
Other income (expense):
               
Interest expense
    (20,713 )     (21,418 )
Loss on extinguishment of debt
    (25,178 )     -  
Gain from a bargain purchase of a business
    173       -  
Other income (expense), net
    (378 )     422  
Total other income (expense)
    (46,096 )     (20,996 )
                 
Income (loss) before income taxes
    (51,447 )     1,250  
Provision (benefit) for income taxes
    (40,044 )     11,864  
                 
Net income (loss)
  $ (11,403 )   $ (10,614 )

See combined notes to unaudited condensed consolidated financial statements.

 
- 8 -

 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands)

   
Six Months Ended December 31,
 
   
2010
   
2009
 
             
Net sales
  $ 337,510     $ 296,855  
Cost of sales
    162,844       145,124  
Gross profit
    174,666       151,731  
                 
Selling, general and administrative costs
    74,969       61,703  
Research and development costs
    43,814       34,442  
Amortization of acquired intangibles
    31,806       31,119  
Termination of Sponsor Advisory Agreement
    18,133       -  
Restructuring charges
    8,092       251  
Loss on liquidation of foreign subsidiary
    -       7,696  
      176,814       135,211  
Operating income (loss)
    (2,148 )     16,520  
                 
Other income (expense):
               
Interest expense
    (41,951 )     (42,457 )
Loss on extinguishment of debt
    (25,178 )     -  
Gain from a bargain purchase of a business
    173       -  
Other income (expense), net
    (407 )     479  
Total other income (expense)
    (67,363 )     (41,978 )
                 
Income (loss) before income taxes
    (69,511 )     (25,458 )
Provision (benefit) for income taxes
    (52,291 )     5,699  
                 
Net income (loss)
  $ (17,220 )   $ (31,157 )

See notes to unaudited condensed consolidated financial statements.

 
- 9 -

 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statement of Stockholder's Equity
and Comprehensive Income (Loss)
(In thousands)

                     
Additional
   
Other
             
         
Common Stock
   
Paid-in
   
Comprehensive
   
Accumulated
   
Comprehensive
 
   
Total
   
Shares
   
Par Value
   
Capital
   
Income(Loss)
   
Deficit
   
Income (Loss)
 
                                           
Balance, June 30, 2010
  $ 150,984       1     $ -     $ 398,941     $ (53,575 )   $ (194,382 )      
Proceeds from capital contribution from Aeroflex Holding
    244,097       -       -       244,097       -       -        
Share-based compensation
    1,026       -       -       1,026       -       -        
Other changes
    (255 )     -       -       (255 )     -       -        
Other comprehensive income (loss)
    12,473       -       -       -       12,473       -     $ 12,473  
Net income (loss)
    (17,220 )     -       -       -       -       (17,220 )     (17,220 )
Balance, December 31, 2010
  $ 391,105       1     $ -     $ 643,809     $ (41,102 )   $ (211,602 )   $ (4,747 )

See combined notes to unaudited condensed consolidated financial statements.

 
- 10 -

 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

   
Six Months Ended December 31,
 
   
2010
   
2009
 
             
Cash flows from operating activities:
           
Net income (loss)
  $ (17,220 )   $ (31,157 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    41,534       41,774  
Gain from a bargain purchase of a business
    (173 )     -  
Acquisition related adjustment to cost of sales
    998       246  
Loss on liquidation of foreign subsidiary
    -       7,696  
Loss on extinguishment of debt
    25,178       -  
Deferred income taxes
    (55,926 )     2,437  
Share-based compensation
    1,026       1,045  
Non - cash restructuring charges
    4,860       -  
Amortization of deferred financing costs
    2,839       2,386  
Paid in kind interest
    2,434       8,857  
Other, net
    1,194       400  
Change in operating assets and liabilities, net of effects from purchases of businesses:
               
Decrease (increase) in accounts receivable
    13,629       12,136  
Decrease (increase) in inventories
    (24,214 )     (358 )
Decrease (increase) in prepaid expenses and other assets
    (1,088 )     (4,319 )
Increase (decrease) in accounts payable, accrued expenses and other liabilities
    (6,128 )     (19,030 )
                 
Net cash provided by (used in) operating activities
    (11,057 )     22,113  
                 
Cash flows from investing activities:
               
Payments for purchase of businesses, net of cash acquired
    (23,591 )     -  
Capital expenditures
    (11,213 )     (8,401 )
Proceeds from sale of marketable securities
    2,000       1,000  
Proceeds from the sale of property, plant and equipment
    741       845  
Other, net
    -       (11 )
                 
Net cash provided by (used in) investing activities
    (32,063 )     (6,567 )
                 
Cash flows from financing activities:
               
Capital contribution from Aeroflex Holding
    244,097       -  
Repurchase of senior unsecured notes and senior subordinated unsecured term loans, including premiums and fees
    (207,690 )     -  
Debt repayments
    (21,458 )     (4,012 )
Debt financing costs
    (3,332 )     -  
                 
Net cash provided by (used in) financing activities
    11,617       (4,012 )
Effect of exchange rate changes on cash and cash equivalents
    1,483       (483 )
                 
Net increase (decrease) in cash and cash equivalents
    (30,020 )     11,051  
Cash and cash equivalents at beginning of period
    100,663       57,748  
Cash and cash equivalents at end of period
  $ 70,643     $ 68,799  

See combined notes to unaudited condensed consolidated financial statements.

 
- 11 -

 
 
COMBINED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of Presentation

Stock Split, Initial Public Offering and Use of Proceeds

This quarterly report for the period ended December 31, 2010 is a combined quarterly report being separately filed by two registrants: Aeroflex Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a direct wholly-owned subsidiary of Aeroflex Holding.  Unless the context provides otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s consolidated subsidiaries.

Filing a combined report which contains full financial information of both Aeroflex Holding and its wholly owned subsidiary Aeroflex is both economical and efficient, as Aeroflex Holding is a holding company which does not conduct business operations on its own - all business operations are conducted by Aeroflex and its consolidated subsidiaries. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of Aeroflex and its subsidiaries, except for activity related to Aeroflex Holding’s equity and earnings per share. Aeroflex Holding’s only asset is its investment in Aeroflex.  As such, other than any discussions of liquidity and capital resources (including indebtedness and cash flows), equity and earnings per share, controls and procedures, unregistered sales of equity securities, use of proceeds and any material differences between Aeroflex Holding and Aeroflex which would require separate disclosures, all information presented in this quarterly report will be combined and pertain to both Aeroflex Holding and Aeroflex.

Unless the context requires otherwise, references to (i) the term “Sponsors” refers collectively to affiliates of or funds managed by The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc., and GS Direct, LLC, which indirectly control Aeroflex Holding, and (ii) “fiscal year” refers to the twelve months ended June 30 of the applicable year.  For example, “fiscal 2010” refers to the twelve months ended June 30, 2010.

Aeroflex Holding’s board of directors authorized an increase of Aeroflex Holding’s authorized shares of common stock to 300,000,000 and a 65,000,000 for 1 common stock split, both of which became effective on November 18, 2010. Aeroflex Holding’s stockholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the split from additional paid-in capital to common stock. In addition, all share numbers and per share amounts in Aeroflex Holding’s consolidated financial statements have been retroactively adjusted to give effect to the stock split.

On November 19, 2010, Aeroflex Holding consummated an initial public offering (“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding received net proceeds of $244.1 million from the IPO, after deducting underwriting discounts and offering expenses, including a $2.5 million transaction fee which was paid to affiliates of the Sponsors under the advisory agreement with them for services directly attributable to the equity offering (“Transaction Fee”).  Aeroflex Holding used the net proceeds of the IPO to make a capital contribution to Aeroflex.  In connection with the IPO, Aeroflex:

 
·
Repurchased an aggregate of $186.6 million of its senior unsecured notes and senior subordinated unsecured term loans and paid the related expenses;

 
·
Paid a $16.9 million termination fee to affiliates of the Sponsors to terminate the advisory agreement with them, which, including the related write-off of prepaid advisory fees, resulted in an $18.1 million expense (“Termination Fee”); and

 
- 12 -

 
 
 
·
Entered into an amendment of the credit agreement with the lenders of its senior secured credit facility, for which a $3.3 million fee was paid to the lenders.

Basis of Accounting

The accompanying unaudited condensed consolidated financial information of Aeroflex Holding and Aeroflex have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and reflects all adjustments, consisting only of normal recurring adjustments, which in management’s opinion are necessary to state fairly the Company’s financial position as of December 31, 2010, the results of operations for the three and six month periods ended December 31, 2010 and 2009 and the cash flows for the six month periods ended December 31, 2010 and 2009. The June 30, 2010 balance sheet information has been derived from audited financial statements, but does not include all information or disclosures required by U.S. GAAP.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Actual results may differ from those estimates, and such differences may be material to the financial statements.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Aeroflex Holding’s amended registration statement on Form S-1 filed with the SEC on November 9, 2010 (“Aeroflex Holding’s Registration Statement”) and in Aeroflex’s annual report on Form 10-K for the fiscal year ended June 30, 2010 (”Aeroflex’s Fiscal 2010 Form 10-K”).

The accompanying condensed consolidated financial statements of Aeroflex Holding are essentially identical to the accompanying condensed consolidated financial statements of Aeroflex, with the following significant exceptions:  Aeroflex Holding has 84,789,180 shares of common stock outstanding at a par value of $.01 per share, of which 65,000,000 shares are held by one shareholder (as a result of the 65,000,000 for 1 stock split on November 18, 2010) and 19,789,180 shares are held by public shareholders by virtue of the IPO on November 19, 2010, which resulted in net proceeds of $244.1 million after deducting underwriting discounts and offering expenses. Aeroflex has 1,000 shares of common stock outstanding at a par value of $.10 per share, all of which are held by Aeroflex Holding, and Aeroflex received a capital contribution of $244.1 million from Aeroflex Holding from the net proceeds of the IPO. The combined notes to the condensed consolidated financial statements are essentially identical for Aeroflex Holding and Aeroflex, except as noted. 

Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal year or any future periods.
 
 
- 13 -

 
 
Reclassifications

Certain reclassifications have been made to the fiscal 2010 consolidated financial statements to conform to the fiscal 2011 presentation.

2.
Accounting Pronouncements

Recently Adopted Accounting Pronouncements
 
On July 1, 2010, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on the consolidation of variable interest entities. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The adoption of this new guidance did not have an impact on our consolidated financial statements.
 
Recently Issued Accounting Pronouncements Not Yet Adopted

In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires a roll forward of activities on purchases, sales, issuance, and settlements on a gross basis of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We believe the adoption on July 1, 2011 of the gross presentation of the Level 3 roll forward will not have an impact on our consolidated financial statements.

3.
Acquisition of Businesses and Intangible Assets

Test Evolution Corporation
 
On October 1, 2007, we purchased 40% of the outstanding stock of Test Evolution Corporation, or TEC, for $4.0 million. TEC, located in Massachusetts, develops and manufactures digital, analog and RF semiconductor automated test equipment. We determined that we have control of this company and have consolidated TEC’s assets and liabilities and results of operations, all of which were insignificant, into our financial statements commencing October 1, 2007. On August 5, 2010, we invested another $2.0 million in TEC. At December 31, 2010, as a result of this and other capital transactions, our ownership interest is approximately 51%. The amounts attributable to the non-controlling interest in TEC’s equity and results of operations are not material to our consolidated financial statements and have been included in other long-term liabilities and other income (expense), respectively.  TEC is included in our Test Solutions segment.

Radiation Assured Devices
 
On June 30, 2010, we acquired 100% of the stock of Radiation Assured Devices, Inc., or  RAD, for $14.0 million in cash, plus contingent payments equal to 50% of the acquired company’s EBITDA (as defined in the agreement) for the five year period of fiscal 2011 to fiscal 2015, provided certain thresholds are met.  The fair value of the contingent consideration as of December 31, 2010 was $7.9 million, of which $1.4 million was reflected in accrued expenses and other current liabilities and $6.5 million was reflected in other long-term liabilities. The fair value of the contingent consideration as of June 30, 2010 was $7.1 million and was reflected in other long-term liabilities and considered in the allocation of the purchase price.  The $784,000 increase in the fair value of the contingent consideration was recorded in selling, general and administrative costs for the three and six months ended December 31, 2010. RAD, located in Colorado Springs, Colorado, uses commercial and specialty technologies to provide state of the art radiation engineering and qualification services, as well as to produce radiation hardened products for commercial and military spaceborne electronics.  RAD is included in our Microelectronic Solutions segment.

 
- 14 -

 
 
Advanced Control Components
 
On August 31, 2010, we acquired 100% of the stock of Advanced Control Components, Inc., or ACC, for $19.2 million in cash, which was net of a preliminary working capital adjustment made at closing.  The purchase price is subject to a further working capital adjustment, based on the amount by which the final adjusted net working capital at the date of closing is lower than the target set forth in the purchase agreement.  We currently estimate an additional $764,000 deficiency in adjusted net working capital, reducing the purchase price to $18.4 million. ACC, located in Eatontown, New Jersey, designs, manufacturers and markets a wide range of radio frequency, or RF, and microwave products for the military, civilian radar, scientific and communications markets. ACC is included in our Microelectronic Solutions segment. 

We allocated the purchase price based on the estimated fair value of the assets acquired and liabilities assumed as follows:

(In thousands)
     
       
Current assets (excluding cash of $15)
  $ 4,844  
Property, plant and equipment
    1,156  
Other assets
    60  
Customer related intangibles
    5,680  
Non-compete arrangements
    30  
Tradenames
    3,010  
Goodwill
    10,072  
Total assets acquired
    24,852  
Current liabilities
    (2,855 )
Deferred taxes
    (3,576 )
Total liabilities assumed
    (6,431 )
Net assets acquired
  $ 18,421  

The customer related intangibles and non-compete arrangements are being amortized on a straight-line basis over a range of 1 to 9 years.  The tradenames have an indefinite life.  The goodwill is not deductible for tax purposes.
 
On a pro forma basis, had the ACC acquisition taken place as of the beginning of the periods presented, our results of operations for those periods would not have been materially affected.

Cash Paid for the Purchase of Businesses

For the six months ended December 31, 2010, we had net cash outlays of $23.6 million for the purchase of businesses, net of cash acquired.  This was primarily comprised of $18.4 million for the purchase of ACC and $5.6 million of contingent consideration payments related to fiscal 2010 ($4.6 million for Gaisler Research AB, acquired on June 30, 2008 and $1.0 million for Airflyte Electronics Company, acquired on June 26, 2009), partially offset by refunds for working capital adjustments for prior year acquisitions.
 
 
- 15 -

 
 
Intangible Assets with Definite Lives

The components of amortizable intangible assets were as follows:
 
   
December 31, 2010
   
June 30, 2010
 
   
(In thousands)
 
   
Gross
         
Gross
       
   
Carrying
   
Accumulated
   
Carrying
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
                         
Developed technology
  $ 199,309     $ 112,592     $ 197,422     $ 94,672  
Customer related intangibles
    228,551       108,386       222,026       94,656  
Non-compete arrangements
    10,318       5,421       10,087       4,420  
Tradenames
    3,315       1,009       3,184       658  
Total
  $ 441,493     $ 227,408     $ 432,719     $ 194,406  
 
4.
Restructuring Charges

The following table sets forth the charges and payments related to the restructuring liability for the period indicated:
 
   
Balance
                     
Balance
 
   
June 30,
                     
December 31,
 
   
2010
   
Six Months Ended December 31, 2010
   
2010
 
               
Effect of
       
   
Restructuring
               
foreign
   
Restructuring
 
   
Liability
   
Net Additions
   
Cash Payments
   
currency
   
Liability
 
         
(In thousands)
     
Work force reduction
  $ 172     $ 2,651     $ (1,212 )   $ 16     $ 1,627  
                                         
Closure of  facilities
    632       581       (684 )     28       557  
                                         
Total
  $ 804     $ 3,232     $ (1,896 )   $ 44     $ 2,184  
 
For the six months ended December 31, 2010, we recorded an $8.1 million charge in connection with continued restructuring activities of certain manufacturing operations related to consolidation and reorganization efforts in our United Kingdom (“U.K.”) operations and in connection with one of our domestic components facilities located in Whippany, New Jersey. We are consolidating part of our components operations by relocating a portion of our Whippany, New Jersey facility’s production to our Ann Arbor, Michigan facility and a portion to our Eatontown, New Jersey facility.  In connection with this consolidation, we recorded a $4.9 million impairment charge based on the fair value of the Whippany, New Jersey facility we intend to sell.

5.
Net Income (Loss) Per Common Share

The consolidated statements of operations for Aeroflex Holding present only basic net income (loss) per common share, as it does not have any potentially dilutive securities. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.

Earning per share information is not presented for Aeroflex because, as a wholly-owned subsidiary of Aeroflex Holding, such information is not relevant.
 
 
- 16 -

 
   
6.
Inventories

Inventories consisted of the following:

   
December 31,
   
    June 30,    
 
   
2010
   
2010
 
   
(In thousands)
 
             
Raw materials
  $ 82,212     $ 61,278  
Work in process
    48,782       44,022  
Finished goods
    22,886       21,268  
    $ 153,880     $ 126,568  

7.
Derivative Financial Instruments

We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We enter into interest rate swap derivatives to manage the effects of interest rate movements on portions of our debt. We also enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates.

The fair values of our derivative financial instruments included in the consolidated balance sheets as of December 31, 2010 and June 30, 2010 are presented as follows:

   
Asset (Liability) Derivatives
 
   
December 31, 2010
 
June 30, 2010
 
   
Balance Sheet
     
Balance Sheet
     
(In thousands)
 
Location
 
Fair Value(1)
 
Location
 
Fair Value(1)
 
Derivatives designated as hedging instruments:
                 
Interest rate swap contracts
 
Accrued expenses and other current liabilities
  $ (1,033 )
Accrued expenses and other current liabilities
  $ (6,613 )
                       
Derivatives not designated as hedging instruments:
                     
Foreign currency forward contracts
 
Prepaid expenses and other current assets
    18  
Accrued expenses and other current liabilities
    (293 )
                       
Total derivatives, net
      $ (1,015 )     $ (6,906 )

(1)  See Note 8 for further information about how the fair values of derivative assets and liabilities are determined.
 
 
- 17 -

 
 
The gains and losses related to our derivative financial instruments designated as hedging instruments for the three and six months ended December 31, 2010 and 2009 were as follows:

   
Amount of Gain or (Loss)
 
   
Recognized on Derivatives in
 
Derivatives in Cash Flow
 
Other Comprehensive Income
 
Hedging Relationships
 
(Effective Portion) (1)
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
                                 
Interest rate swap contracts
  $ (37 )   $ (1,191 )   $ (612 )   $ (4,271 )

Location of Gain or (Loss)
 
Amount of Gain or (Loss)
 
Reclassified from Accumulated
 
Reclassified from
 
Other Comprehensive Income
 
Accumulated Other Comprehensive Income
 
into Income (Effective Portion)
 
into Income (Effective Portion) (1)
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
                                 
Interest expense
  $ (2,751 )   $ (3,781 )   $ (6,192 )   $ (7,182 )

(1) See Note 11 for additional information on changes to accumulated other comprehensive income (loss).

The amounts of the gains and losses related to our derivative financial instruments not designated as hedging instruments for the three and six months ended December 31, 2010 and 2009 were as follows:

Derivatives Not
 
Location of Gain or (Loss)
 
Amount of Gain or (Loss)
 
Designated as
 
Recognized in Earnings on
 
Recognized in Earnings on
 
Hedging Instruments
 
Derivative
 
Derivative
 
       
Three Months Ended
   
Six Months Ended
 
       
December 31,
   
December 31,
 
       
2010
   
2009
   
2010
   
2009
 
       
(In thousands)
 
Foreign currency forward contracts
 
Other income (expense)
  $ 351     $ (87 )   $ 311     $ 231  

Interest Rate Swap Cash-Flow Hedges

We enter into interest rate swap contracts with counterparties that are rated investment grade to manage the effects of interest rate movements on portions of our debt. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising rates.  We do not enter into interest rate swap contracts for speculative purposes. Our interest rate swap contracts outstanding as of December 31, 2010, all of which were entered into in fiscal 2008 for an aggregate notional amount of $300.0 million, mature in February 2011.

 
- 18 -

 
 
Foreign Currency Contract Derivatives

Foreign currency contracts are used to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. The change in fair value is included in other income (expense) as it occurs. As of December 31, 2010, we had $31.7 million of notional value foreign currency forward contracts maturing through January 31, 2011. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts.

8.
Fair Value Measurements

We account for certain assets and liabilities at fair value.  The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring the fair value are observable in the market.  We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.  These levels are:

Level 1:
Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
 
Level 2:
Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3:
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instruments’ valuation.
   
The following table presents for each hierarchy level, financial assets and liabilities measured at fair value on a recurring basis:
 
   
Quoted Prices in
                   
   
Active Markets
   
Significant Other
   
Significant
       
   
for Identical
   
Observable
   
Unobservable
       
   
Assets
   
Inputs
   
Inputs
       
As of December 31, 2010
 
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total