Attached files
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 March 31, 2011
|_| 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 0-6620
ANAREN, INC.
(Exact name of registrant as specified in its Charter)
New York 16-0928561
-------- ----------
(State of incorporation) (I.R.S Employer Identification No.)
6635 Kirkville Road 13057
East Syracuse, New York -----
----------------------- (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: 315-432-8909
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by Check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by checkmark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of regulation S-T (Section
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. Yes |_|
No |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company (as
defined in Rule 12b-2 of the Exchange Act).
Check One: Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of Registrant's Common Stock outstanding on April 25,
2011 was 15,116,657.
ANAREN, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page No.
------------------------------ --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 3
March 31, 2011 and June 30, 2010 (unaudited)
Condensed Consolidated Statements of Income 4
for the Three Months Ended March 31,
2011 and 2010 (unaudited)
Condensed Consolidated Statements of Income 5
for the Nine Months Ended March 31,
2011 and 2010 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
for the Nine Months Ended March 31,
2011 and 2010 (unaudited)
Notes to Condensed Consolidated Financial 7 - 13
Statements (unaudited)
Item 2. Management's Discussion and Analysis 14 - 20
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20 -21
Item 4. Controls & Procedures 21
PART II - OTHER INFORMATION
---------------------------
Item 1A. Risk Factors 21
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 22
Item 6. Exhibits 22
Officer Certifications 23 - 27
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC.
Condensed Consolidated Balance Sheets
March 31, 2011 and June 30, 2010
(in thousands, except per share amounts)
(unaudited)
March 31, June 30,
2011 2010
--------- --------
ASSETS
------
Assets:
Cash and cash equivalents $ 57,155 $ 50,521
Securities held to maturity 7,961 2,334
Receivables, less an allowance of $358 and $375
at March 31, 2011 and June 30, 2010, respectively 28,547 29,124
Inventories 36,262 31,361
Prepaid expenses and other current assets 3,915 2,916
Deferred income taxes 1,140 1,955
--------- ---------
Total current assets 134,980 118,211
Securities available-for-sale -- 1,051
Securities held to maturity 12,563 19,756
Property, plant, and equipment, net 48,178 48,711
Other assets 1,634 1,031
Goodwill 42,435 42,435
Other intangible assets, net of accumulated amortization 9,259 10,153
--------- ---------
Total assets $ 249,049 $ 241,348
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities and Stockholders' Equity:
Current installments of long-term obligation $ 10,000 $ 10,000
Accounts payable 9,516 9,271
Accrued expenses 5,848 5,661
Customer advance payments 45 888
Other current liabilities 2,302 2,920
--------- ---------
Total current liabilities 27,711 28,740
Deferred income taxes 331 726
Pension and postretirement benefit obligation 7,461 7,083
Long-term obligation 20,000 30,000
Other liabilities 1,619 1,873
--------- ---------
Total liabilities 57,122 68,422
--------- ---------
Stockholders' Equity:
Common stock, $0.01 par value. Authorized 200,000
shares; issued 28,981 and 28,506 at March 31, 2011 and
June 30, 2010, respectively 290 285
Additional paid-in capital 213,129 206,193
Retained earnings 130,268 118,111
Accumulated other comprehensive loss (2,017) (2,813)
--------- ---------
341,670 321,776
Less 13,864 and 13,811 treasury shares at March 31, 2011 149,743 148,850
and June 30, 2010, respectively, at cost
--------- ---------
Total stockholders' equity 191,927 172,926
--------- ---------
Total liabilities and stockholders' equity $ 249,049 $ 241,348
========= =========
See accompanying notes to condensed consolidated financial statements
3
ANAREN, INC.
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2011 and 2010
(in thousands, except per share amounts)
(unaudited)
2011 2010
------- -------
Net Sales $44,015 $42,181
Cost of Sales 27,928 25,356
------- -------
Gross profit 16,087 16,825
Operating Expenses:
Marketing 2,622 2,407
Research and development 4,656 3,999
General and administrative 4,521 5,096
------- -------
Total operating expenses 11,799 11,502
------- -------
Operating income 4,288 5,323
Other income (expense):
Interest expense (104) (129)
Other, primarily interest income 139 75
------- -------
Total other income (expense), net 35 (54)
------- -------
Income before income tax expense 4,323 5,269
Income tax expense 925 708
------- -------
Net income $ 3,398 $ 4,561
======= =======
Earnings per share:
Basic $ 0.24 $ 0.33
======= =======
Diluted $ 0.23 $ 0.32
======= =======
Weighted average common shares outstanding:
Basic 14,123 13,919
======= =======
Diluted 14,994 14,328
======= =======
See accompanying notes to condensed consolidated financial statements
4
ANAREN, INC.
Condensed Consolidated Statements of Income
Nine Months Ended March 31, 2011 and 2010
(in thousands, except per share amounts)
(unaudited)
2011 2010
-------- --------
Net Sales $131,997 $123,537
Cost of Sales 81,983 77,743
-------- --------
Gross profit 50,014 45,794
Operating Expenses:
Marketing 7,617 7,006
Research and development 12,024 11,140
General and administrative 14,384 14,218
-------- --------
Total operating expenses 34,025 32,364
-------- --------
Operating income 15,989 13,430
Other income (expense):
Interest expense (393) (451)
Other, primarily interest income 436 288
-------- --------
Total other income (expense), net 43 (163)
-------- --------
Income before income tax expense 16,032 13,267
Income tax expense 3,875 3,328
-------- --------
Net income $ 12,157 $ 9,939
======== ========
Earnings per share:
Basic $ 0.87 $ 0.71
======== ========
Diluted $ 0.83 $ 0.68
======== ========
Weighted average common shares outstanding:
Basic 13,973 14,083
======== ========
Diluted 14,712 14,595
======== ========
See accompanying notes to condensed consolidated financial statements
5
ANAREN, INC.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 2011 and 2010
(in thousands)
(unaudited)
2011 2010
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,157 $ 9,939
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 6,146 6,700
Loss on disposal of fixed assets -- 214
Amortization 1,446 996
Deferred income taxes (352) (245)
Equity-based compensation 3,215 2,703
Changes in operating assets and liabilities:
Receivables 577 (3,638)
Inventories (4,913) 1,874
Prepaid expenses and other current assets (1,601) (722)
Accounts payable 246 1,126
Accrued expenses 187 (389)
Customer advance payments (844) 953
Other liabilities (100) (702)
Pension and postretirement benefit obligation 378 (156)
-------- --------
Net cash provided by operating activities 16,542 18,653
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,612) (3,862)
Escrow claim received for the Unicircuit acquisition -- 154
Proceeds from sale of property, plant, and equipment -- 50
Maturities of held to maturity and sale of available-for-sale
securities 3,511 11,760
Purchases of held to maturity securities (1,057) (17,918)
-------- --------
Net cash used in investing activities (3,158) (9,816)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on long-term obligation (10,000) (9,800)
Stock options exercised 3,555 3,149
Excess tax benefit from exercise of stock options 183 214
Purchase of treasury stock (894) (7,865)
-------- --------
Net cash used in financing activities (7,156) (14,302)
-------- --------
Effect of exchange rates on cash 406 17
-------- --------
Net increase (decrease) in cash and cash equivalents 6,634 (5,448)
Cash and cash equivalents, beginning of year 50,521 49,893
======== ========
Cash and cash equivalents, end of period $ 57,155 $ 44,445
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 359 $ 586
======== ========
Income taxes, net of refunds $ 5,552 $ 4,424
======== ========
See accompanying notes to condensed consolidated financial statements.
6
The condensed consolidated financial statements are unaudited and reflect all
adjustments (consisting of normal recurring adjustments) and accruals, which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2010. The results of operations for the three and nine months ended
March 31, 2011 are not necessarily indicative of the results for the entire
fiscal year ending June 30, 2011, or any future interim period.
The income tax rate utilized for interim financial statement purposes for the
three months and nine months ended March 31, 2011 is based on estimates of
income and utilization of tax credits for the entire fiscal year ending June 30,
2011.
(1) Securities
The amortized cost and fair value of securities are as follows:
March 31, 2011
---------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(amounts in thousands) Cost gains losses value
--------- ---------- ---------- -------
Securities held to maturity:
Municipal bonds $18,371 $ 250 $ -- $18,621
Corporate bonds 2,153 41 -- 2,194
------- ------- ------- -------
Total securities held to maturity $20,524 $ 291 $ -- $20,815
======= ======= ======= =======
June 30, 2010
---------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
(amounts in thousands) Cost gains losses value
--------- ---------- ---------- -------
Securities available-for-sale:
Auction rate securities $ 1,440 $ -- $ (389) $ 1,051
Securities held to maturity:
Municipal bonds $21,088 $ 353 $ -- $21,441
Corporate bonds 503 4 -- 507
Federal agency bonds 499 7 -- 506
------- ------- ------- -------
Total securities held to maturity $22,090 $ 364 $ -- $22,454
======= ======= ======= =======
7
Contractual maturities of marketable debt securities held to maturity are
summarized as follows:
March 31, 2011 June 30, 2010
---------------------------- ----------------------------
Fair Fair
Amortized market Amortized market
Cost value Cost value
--------- ------- --------- -------
(amounts in thousands)
Within one year $ 7,961 $ 8,053 $ 2,334 $ 2,379
One year to three years 12,563 12,762 19,756 20,075
------- ------- ------- -------
Total $20,524 $20,815 $22,090 $22,454
======= ======= ======= =======
Contractual maturities of auction rate securities available for sale are
summarized as follows:
March 31, 2011 June 30, 2010
----------------------------- ----------------------------
Fair Fair
market market
Cost value Cost value
--------- ------- --------- -------
(amounts in thousands)
Within one year $ -- $ -- $ 1,440 $ 1,051
(2) Fair Value Measurements
The carrying amount of financial instruments, including cash, trade receivables
and accounts payable, approximated their fair value as of March 31, 2011 and
June 30, 2010 because of the short maturity of these instruments. Also, the
Company's carrying cost for its revolving credit note approximates fair value.
The carrying value of cash equivalents are carried at cost, which approximates
fair market value.
The available-for-sale security was sold during the second quarter ended
December 31, 2010. The amount received, based on the escrow agreement that was
in place between the Company and M. S. Kennedy Corporation, was the security's
par value of $1.5 million.
The following table provides the assets and liabilities carried at fair value as
measured on a recurring basis as of March 31, 2011 and June 30, 2010:
(amounts in thousands)
Significant other Significant
Total Carrying Quoted prices in observable unobservable
Value at active markets inputs inputs
March 31, 2011 (Level 1) (Level 2) (Level 3)
-------------- ---------------- ----------------- ------------
Asset Category
Cash equivalents $ 7,567 $ 7,567 $ -- $ --
(amounts in thousands)
Significant other Significant
Total Carrying Quoted prices in observable unobservable
Value at active markets inputs inputs
June 30, 2010 (Level 1) (Level 2) (Level 3)
-------------- ---------------- ----------------- ------------
Asset Category
Cash equivalents $ 5,807 $ 5,807 $ -- $ --
Available-for-sale securities 1,051 1,051
8
(3) Intangible Assets
The major components of intangible assets are as follows:
March 31, 2011 June 30, 2010
(amounts in thousands) Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
------- ------- ------- -------
Amortizable intangible assets:
Customer relationships $ 7,530 $ 5,534 $ 7,530 $ 6,099
Developed technology 780 364 780 481
Non-competition agreements 1,130 381 1,130 593
------- ------- ------- -------
Total $ 9,440 $ 6,279 $ 9,440 $ 7,173
======= ======= ======= =======
Non-amortizable intangible assets:
Trade names 2,980 2,980
------- -------
Total intangible assets $ 9,259 $10,153
======= =======
Intangible asset amortization expense for the three months ended March 31, 2011
and 2010 aggregated $0.3 million in each period and for the nine months ended
March 31, 2011 and 2010 aggregated $0.9 million in each period. Amortization
expense related to developed technology is recorded in cost of sales, and
amortization expense for non-compete agreements and customer relationships is
recorded in general and administrative expense.
There have been no changes to the goodwill balance in the three and nine months
ended March 31, 2011.
(4) Inventories
Inventories are summarized as follows:
(amounts in thousands) March 31, 2011 June 30, 2010
-------------- -------------
Raw materials $19,144 $17,319
Work in process 13,315 9,396
Finished goods 3,803 4,646
------- -------
$36,262 $31,361
======= =======
(5) Property, Plant, and Equipment
Components of property, plant, and equipment consists of the following:
(amounts in thousands) March 31, 2011 June 30, 2010
-------------- -------------
Land and land improvements $ 5,167 $ 5,167
Construction in process 2,727 1,451
Buildings, furniture, and fixtures 34,441 34,052
Machinery and equipment 65,945 62,267
------- -------
108,280 102,937
Less accumulated depreciation (60,102) (54,226)
------- -------
$48,178 $48,711
======= =======
(6) Accrued Expenses
Accrued expenses consists of the following:
9
(amounts in thousands) March 31, 2011 June 30, 2010
-------------- -------------
Compensation $ 4,868 $ 4,483
Health insurance 548 423
Commissions and other 432 755
------- -------
$ 5,848 $ 5,661
======= =======
(7) Other Liabilities
Other liabilities consist of the following:
(amounts in thousands) March 31, 2011 June 30, 2010
-------------- -------------
Deferred compensation $ 395 $ 425
Supplemental retirement plan 737 670
Accrued lease 1,275 1,107
Warranty accrual 332 320
Income tax liability 293 1,610
Deferred grant income 375 375
Other 514 286
------- -------
3,921 4,793
Less current portion (2,302) (2,920)
------- -------
$ 1,619 $ 1,873
======= =======
The Company provides warranty policies on its products. In addition, the Company
incurs costs to service our products in connection with specific product
performance issues. Liabilities for product warranties are based upon expected
future product performance and durability, and is estimated largely based upon
historical experience. Adjustments are made to accruals as claim data and
historical experience warrant. The changes in product warranty reserves for the
nine months ended March 31, 2011, is as follows:
(amounts in thousands)
Balance as of July 1, 2010 $ 320
Additions 382
Costs incurred (304)
Adjustments (66)
-------
Balance as of March 31, 2011 $ 332
=======
(8) Long-term Obligation
Borrowings under a revolving credit note (Note), with Key Bank National
Association, bears interest at the 90-day London inter-bank offer rate (LIBOR),
plus 100 to 425 basis points, or at the Lender's prime rate, minus (100) to plus
225 basis points, depending upon the Company's earnings before interest and
taxes and depreciation and amortization (EBITDA) performance at the end of each
quarter as measured by the formula: EBITDA divided by the Current Portion of
Long-term Debt plus interest expense. For the nine months ended March 31, 2011,
the weighted average interest rate on the outstanding borrowings was
approximately 1.60%. In the nine months ended March 31, 2011, the Company paid
$10.0 million on the Note. The Company's indebtedness and obligations are
guaranteed by three of the Company's domestic subsidiaries, as well as an
assignment of the Company's interest in its foreign subsidiary.
(9) Earning Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share is based on the weighted average
number of common shares outstanding, as well as dilutive potential common shares
which, in the Company's case, comprise shares issuable under the Company's
Comprehensive Long-Term Incentive Plan. The weighted average number of common
shares utilized in the calculation of the diluted earnings per share does not
include anti-dilutive shares aggregating 13,000 and 1,393,000 for the nine
months ended March 31, 2011 and 2010, respectively. The treasury stock method is
used to calculate dilutive shares, which reduces the gross number of dilutive
shares by the number of shares purchasable from the proceeds of the options
assumed to be exercised.
10
The following table sets forth the computation of basic and fully diluted
earnings per share:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
-------- --------
(amounts in thousands) 2011 2010 2011 2010
------- ------- ------- -------
Numerator:
Net income $ 3,398 $ 4,561 $12,157 $ 9,939
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share
outstanding 14,123 13,919 13,973 14,083
======= ======= ======= =======
Denominator for diluted earnings per share:
Weighted average shares outstanding 14,123 13,919 13,973 14,083
Common stock options and restricted stock 871 409 739 512
------- ------- ------- -------
Weighted average shares 14,994 14,328 14,712 14,595
======= ======= ======= =======
(10) Employee Benefit Plans
Defined Benefit Plan
Components of net periodic pension cost for the three and nine months ended
March 31, are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
-------- --------
2011 2010 2011 2010
------- ------- ------- -------
(amounts in thousands)
Service cost $ 93 $ 53 $ 279 $ 209
Interest cost 210 194 630 594
Expected return on plan assets (215) (198) (645) (572)
Amortization of the unrecognized loss 120 63 360 229
------- ------- ------- -------
Net periodic benefit cost $ 208 $ 112 $ 624 $ 460
======= ======= ======= =======
Required contributions for fiscal 2011 are approximately $0.3 million, $0.2
million has been paid in the nine months ended March 31, 2011.
Postretirement Health Benefit Plan
Components of net periodic postretirement benefit cost for the three and nine
months ended March 31, are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
-------- --------
2011 2010 2011 2010
------- ------- ------- -------
(amounts in thousands)
Service cost $ 9 $ 20 $ 27 $ 60
Interest cost 17 40 51 120
Amortization of the unrecognized loss (18) 1 (54) 3
Amortization of the prior service cost (5) (5) (15) (15)
------- ------- ------- -------
Net periodic benefit cost $ 3 $ 56 $ 9 $ 168
======= ======= ======= =======
11
Expected contributions for fiscal 2011 are estimated to be approximately $0.1
million.
(11) Other Comprehensive Income
Other Comprehensive Income
Comprehensive income consists of the following:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31 March 31
-------- --------
2011 2010 2011 2010
------- ------- ------- -------
(amounts in thousands)
Net income $ 3,398 $ 4,561 $12,157 $ 9,939
Other comprehensive income:
Foreign currency translation gain 74 2 407 17
Mark to market adjustment -- -- 389 --
------- ------- ------- -------
Comprehensive income $ 3,472 $ 4,563 $12,953 $ 9,956
======= ======= ======= =======
Accumulated Other Comprehensive Income (Loss)
The cumulative balance of each component of accumulated other comprehensive
income (loss) is as follows:
Foreign Minimum Mark to Accumulated
currency pension market other
translation liability available-for-sale comprehensive
adjustment adjustment securities income (loss)
----------- ---------- ------------------ -------------
(amounts in thousands)
Balances at June 30, 2009 $ 1,404 $(3,412) $ (389) $(2,397)
Current period change 62 (478) -- (416)
------- ------- ------- -------
Balances at June 30, 2010 $ 1,466 $(3,890) $ (389) $(2,813)
Current period change 407 -- 389 796
------- ------- ------- -------
Balances at March 31, 2011 $ 1,873 $(3,890) $ -- $(2,017)
======= ======= ======= =======
(12) Segment and Related Information
The Company's two reportable segments are the Wireless Group and the Space &
Defense Group. These segments have been determined based upon the nature of the
products and services offered, customer base, technology, availability of
discrete internal financial information, homogeneity of products, and delivery
channel, and are consistent with the way the Company organizes and evaluates
financial information internally for purposes of making operating decisions and
assessing performance.
The Wireless Group designs, manufactures, and markets commercial products used
mainly by the wireless communications market. The Space & Defense Group designs,
manufactures, and markets specialized products for the space and defense
electronics markets. The Company's Space & Defense Group aggregates certain
operating segments into one reportable segment, as the Company has assessed the
aggregation criteria and have met all requirements for aggregation.
12
The following table reflects the operating results of the segments consistent
with the Company's internal financial reporting process. The following results
are used in part, by management, both in evaluating the performance of, and in
allocating resources to, each of the segments:
Space &
(amounts in thousands) Wireless Defense Unallocated Consolidated
-------- -------- ----------- ------------
Net sales (Three Months Ended):
March 31, 2011 $15,170 $28,845 $ -- $44,015
March 31, 2010 14,212 27,969 -- 42,181
Net sales (Nine Months Ended):
March 31, 2011 46,294 85,703 -- 131,997
March 31, 2010 41,006 82,531 -- 123,537
Operating income (Three Months Ended)
March 31, 2011 1,864 2,424 -- 4,288
March 31, 2010 (1) 1,867 3,686 (230) 5,323
Operating income (Nine Months Ended)
March 31, 2011 (1) 7,141 9,418 (570) 15,989
March 31, 2010 (1) 3,635 10,419 (624) 13,430
Goodwill and intangible assets:
March 31, 2011 30,716 20,978 -- 51,694
June 30, 2010 30,716 21,872 -- 52,588
(1) Unallocated amounts relate to the lease expense incurred on the Company's
operating lease located in England.
(13) Subsequent Event
On April 13, 2011, the Company entered into a Termination Agreement with AML
Communications, Inc. (AML) to terminate the Agreement and Plan of Merger dated
February 13, 2011 (the Merger Agreement). The termination of the Merger
Agreement was due to AML's delivery of a Recommendation Change Notice indicating
that AML's Board of Directors intended to withdraw its recommendation of the
Company's acquisition. The Company, pursuant to the Termination Agreement, was
paid a termination fee in the amount of $0.6 million and reimbursed $0.2 million
for expenses related to the terminated transaction in the fourth quarter of
fiscal 2011.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere in this Form
10-Q. The following condensed discussion, other than historical facts, contains
forward-looking statements that involve a number of risks and uncertainties. The
Company's results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including factors
described elsewhere in this Quarterly Report on Form 10-Q and factors described
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2010.
Overview
The consolidated financial statements present the financial condition of the
Company as of March 31, 2011 and June 30, 2010, and the consolidated results of
operations and cash flows of the Company for the three and nine months ended
March 31, 2011 and 2010.
The Company designs, develops and markets microwave components and assemblies
for the wireless communications, satellite communications and defense
electronics markets. The Company's distinctive manufacturing and packaging
techniques enable it to cost-effectively produce compact, lightweight microwave
products for use in base stations and subscriber equipment for wireless
communications as well as, in satellites and in defense electronics systems. The
Company sells its products to leading wireless communications equipment
manufacturers such as Ericsson, Motorola Solutions, Nokia Siemens Networks, and
Huawei, and to satellite communications and defense electronics companies such
as Boeing Satellite, ITT, Lockheed Martin, Northrop Grumman and Raytheon.
Net sales generally are recognized when units are shipped. Net sales under
certain long-term contracts of the Space & Defense Group, many of which provide
for periodic payments, are recognized under the percentage-of-completion method
based on units of delivery. Estimated manufacturing cost-at-completion for these
contracts are reviewed on a routine periodic basis, and adjustments are made
periodically to the estimated cost-at-completion based on actual costs incurred,
progress made, and estimates of the costs required to complete the contractual
requirements. When the estimated manufacturing cost-at-completion exceeds the
contract value, the contract is written down to its net realizable value, and
the loss resulting from cost overruns is immediately recognized. To properly
match net sales with costs, certain contracts may have revenue recognized in
excess of billings (unbilled revenues), and other contracts may have billings in
excess of net sales recognized (billings in excess of contract costs). Under
long-term contracts, the prerequisites for billing the customer for periodic
payments generally involve the Company's achievement of contractually specific,
objective milestones (e.g., completion of design, testing, or other engineering
phase, delivery of test data or other documentation, or delivery of an
engineering model or flight hardware).
The Company operates in the wireless communications, satellite communications
and defense electronics markets all of which have been affected by the current
economic climate and recession. The United States defense budget has a direct
impact on the level of funding available for programs that the Company currently
participates in or has targeted for future participation. We continue to assess
the effect of the 2011 defense budget on these programs and, to date have seen
little negative impact on our anticipated Space & Defense Group order rate in
fiscal 2011. The current economic down turn has negatively impacted the
worldwide Wireless infrastructure market as the market has delayed or downsized
system expansions and upgrades. Wireless Group sales have improved in the first
nine months of fiscal 2011 due to strong demand for standard components. While
the Company has limited short-term visibility for customer demand, we believe
that demand should stabilize at current levels for the remainder of calendar
2011.
Fourth Quarter of Fiscal 2011 Outlook
For the fourth quarter of fiscal 2011, we anticipate comparable sales for the
Space & Defense Group and an increase in sales for the Wireless Group compared
to third quarter levels. As a result, we expect net sales to be in the range of
$42 to $46 million. We expect GAAP earnings per diluted share, absent the effect
of any one-time events, to be in the range of $0.23 - $0.28, using an
anticipated tax rate of approximately 29.5% and inclusive of approximately
14
$0.05 to $0.06 per share related to expected non-cash equity based compensation
expense and amortization of intangibles.
Results of Operations
Net sales for the three months ended March 31, 2011 were $44.0 million, up 4.3%
from sales of $42.2 million for the third quarter of fiscal 2010. Net income for
the third quarter of fiscal 2011 was $3.4 million, or 7.7% of net sales, down
$1.2 million from net income of $4.6 million in the third quarter of fiscal
2010.
The following table sets forth the percentage relationships of certain items
from the Company's condensed consolidated statements of income as a percentage
of net sales.
Three Months Ended Nine Months Ended
Mar. 31, 2011 Mar. 31, 2010 Mar. 31, 2011 Mar. 31, 2010
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.5% 60.1% 62.1% 62.9%
----- ----- ----- -----
Gross profit 36.5% 39.9% 37.9% 37.1%
----- ----- ----- -----
Operating expenses:
Marketing 6.0% 5.7% 5.8% 5.7%
Research and development 10.6% 9.5% 9.1% 9.0%
General and administrative 10.2% 12.1% 10.9% 11.5%
----- ----- ----- -----
Total operating expenses 26.8% 27.3% 25.8% 26.2%
----- ----- ----- -----
Operating income 9.7% 12.6% 12.1% 10.9%
----- ----- ----- -----
Other income (expense):
Interest expense (0.2)% (0.3)% (0.3)% (0.4)%
Other, primarily interest income 0.3% 0.2% 0.3% 0.2%
----- ----- ----- -----
Total other income (expense), net 0.1% (0.1)% 0.0% (0.2)%
----- ----- ----- -----
Income before income taxes 9.8% 12.5% 12.2% 10.7%
Income taxes 2.1% 1.7% 3.0% 2.7%
----- ----- ----- -----
Net income 7.7% 10.8% 9.2% 8.0%
===== ===== ===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Nine Months Ended
Mar. 31, 2011 Mar. 31, 2010 Mar. 31, 2011 Mar. 31, 2010
------------- ------------- ------------- -------------
Wireless $15,170 $14,212 $ 46,294 $ 41,006
Space and Defense 28,845 27,969 85,703 82,531
------- ------- -------- --------
Total $44,015 $42,181 $131,997 $123,537
======= ======= ======== ========
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Net sales. Net sales were $44.0 million for the third quarter ended March 31,
2011, up 4.3% compared to $42.2 million for the third quarter of fiscal 2010.
Sales of Wireless Group products rose $1.0 million, or 6.7%, and sales of Space
& Defense Group products increased $0.9 million, or 3.1%, in the current third
quarter compared to the third quarter of fiscal 2010.
The increase in sales of Wireless Group products, which consist of standard
components, ferrite components and custom subassemblies for use in building
wireless basestation and consumer equipment, was the result of a substantial
increase in demand for standard Wireless component products in the current third
quarter compared to
15
the third quarter of fiscal 2010. Sales of these products rose $2.6 million in
the current third quarter over third quarter fiscal 2010 levels on the strength
of continuing orders from both European Original Equipment Manufacturers (OEM)
and Asian contract manufacturers. This increase in standard component sales was
partially offset by a $1.6 million decline in custom and ferrite basestation
products in the current quarter compared to the third quarter last fiscal year,
resulting from loss of sales to low cost Asian vendor sources and decreased
demand for second generation GSM equipment. Demand for Wireless Group products
in the fourth quarter of fiscal 2011 is expected to increase compared to third
quarter levels.
Space & Defense Group products consist of custom components and assemblies for
commercial and military satellites, as well as radar, receiver, and
countermeasure subsystems for the military. Sales of Space & Defense Group
products rose $0.9 million, or 3.1% in the third quarter of fiscal 2011 compared
to the third quarter of the previous fiscal year. This increase in sales was
attributable to a general rise in Space & Defense Group business due to a higher
rate of bookings by the Group and not any specific program sales. Space &
Defense Group product sales continue to benefit from the higher level of
business won by the Company over the past few fiscal years which has resulted in
the Group's backlog of $88.0 million and $89.6 million at March 31, 2011 and
June 30, 2010, respectively.
Gross Profit. Cost of sales consists primarily of engineering design costs,
materials, material fabrication costs, assembly costs, direct and indirect
overhead, and test costs. Gross profit for the third quarter of fiscal 2011 was
$16.1 million, (36.5% of net sales), down from $16.8 million (39.9% of net
sales) for the same quarter of the prior year. Gross profit decreased in the
third quarter of fiscal 2011 from the third quarter of fiscal 2010 due to a
decline in margins for the Space & Defense Group. Margins in this group,
declined 5.3 percentage points due to a less favorable product mix with
increased material content, losses recognized on some initial engineering to
production contracts and production yield issues due to ongoing expansion at the
Company's Unicircuit subsidiary. The Group is focused on resolving these issues
over the next quarter of fiscal 2011. In the Wireless Group, gross margins were
enhanced by a $2.6 million increase in sales of higher margin, standard
component products in the current third quarter compared to the same period last
year, which partially offset the decline in Space & Defense Group margins.
Marketing. Marketing expenses consist mainly of employee related expenses,
commissions paid to sales representatives, trade show expenses, advertising
expenses and related travel expenses. Marketing expenses were $2.6 million (6.0%
of net sales) for the third quarter of fiscal 2011, up $0.2 million from $2.4
million (5.7% of net sales) for the third quarter of fiscal 2010. Marketing
expenses in the current third quarter rose due to higher personnel levels,
commission costs and travel expenses related to the increase in business levels
and additional advertising expenditures related to the Anaren Integrated Radio
(AIR) product introduction in the current fiscal year. Marketing expenses are
expected to remain at this level through the fourth quarter.
Research and Development. Research and development (R&D) expenses consist of
material, salaries and related overhead costs of employees engaged in ongoing
research, design and development activities associated with new products and
technology development. Research and development expenses were $4.7 million
(10.6% of net sales) in the third quarter of fiscal 2011, up 16.4% from $4.0
million (9.5% of net sales) for the third quarter of fiscal 2010. Research and
development expenditures are supporting further development of Wireless Group
infrastructure and consumer component opportunities, as well as new technology
development in the Space & Defense Group. During the second and third quarters
of fiscal 2011, the Company hired additional engineering and technical personnel
to work on funded customer development programs, as well as, further development
of AIR products. Due to delays in finalization of some contracts during the
quarter, these new hires and other engineering personnel were redirected to
unfunded development work. The Company expects to return to previous research
and development spending levels in fiscal 2012, and is presently working on a
number of new Wireless and Space & Defense Group opportunities.
General and Administrative. General and administrative expenses consist of
employee related expenses, incentive compensation, professional services,
intangible amortization, travel related expenses and corporate acquisition
costs. General and administrative expenses were $4.5 million (10.2% of net
sales) for the third quarter of fiscal 2011, down 11.3% from $5.1 million (12.1%
of net sales) for the third quarter of fiscal 2010. The decrease in the current
quarter resulted from lower personnel costs due to reductions in administrative
personnel, declines in the Company bonus accruals and lower expenses related to
the Company's vacant leased facility in the United Kingdom. These
16
reductions, coupled with the reallocation of some subsidiary administrative
expenses, more than off-set $0.2 million in acquisition expenses incurred for
the aborted AML Communications, Inc. transaction in the current third quarter.
Operating Income. Operating income declined 19.4% in the third quarter of fiscal
2011 to $4.3 million (9.7% of net sales), compared to $5.3 million (12.6% of net
sales) for the third quarter of fiscal 2010. This decrease in operating income
was a result of the Space & Defense Group's unfavorable product mix, losses
recognized on some initial engineering to production contracts, production yield
issues at the Company's Unicircuit subsidiary and the large increase in R&D
expenditures in both business segments during the current quarter compared to
the third quarter last year.
The Wireless Group operating income was $1.9 million (12.3% of Group sales) for
the third quarter of fiscal 2011, unchanged from $1.9 million, (13.1% of Group
sales) in the third quarter of fiscal 2010. The $0.5 million improvement in
Wireless Group gross margin in the third quarter of fiscal 2011 compared to the
third quarter of fiscal 2010, due to the higher component sales levels, was
off-set by a $0.4 million increase in Wireless Group R&D spending and a $0.1
million increase in the Group's administrative expense year over year.
Space & Defense Group operating income was $2.4 million (8.4% of Group sales) in
the third quarter of fiscal 2011, down $1.3 million from $3.7 million (13.2% of
net group sales) for the third quarter of fiscal 2010. Operating margins for
this Group decreased in the current third quarter due to a less favorable
product mix, losses recognized on some initial engineering production contracts,
production yield issues at the Company's Unicircuit subsidiary and increased R&D
spending due to a delay in the finalization of some contracts, which resulted in
additional engineering personnel being redirected to unfunded development work
in the quarter compared to the third quarter last fiscal year.
Other Income. Other income primarily consists of interest income received on
invested cash balances and rental income. Other income was $0.1 million in the
third quarter of fiscal 2011 compared to $0.1 million for the third quarter of
last year. Earnings on invested cash balances were relatively flat as both
investable cash and interest rate have remained relatively unchanged year over
year. Other income will fluctuate based on short term market interest rates and
the level of investable cash balances.
Interest Expense. Interest expense consists mainly of interest on Company
borrowings and deferred items. Interest expense in the third quarter of fiscal
2011 was $0.1 million, unchanged compared to $0.1 million for the third quarter
of fiscal 2010. Interest expense has remained flat due to the continuing
consistent and low level of the 90 day London Inter-Bank Offer Rate (LIBOR)
interest rate for the third quarter of fiscal 2011 compared to the third quarter
of fiscal 2010. The Company's long-term obligation declines by $10 million in
the first quarter of each fiscal year. These borrowings bear interest at the 90
day LIBOR rate, plus 100 to 425 basis points, depending upon the Company's
rolling twelve month earnings before interest and taxes and depreciation and
amortization (EBITDA) performance. The rate is reset quarterly and for the
fourth quarter of fiscal 2011 is expected to be approximately 1.30%.
Income Taxes. Income taxes for the third quarter of fiscal 2011 were $0.9
million (2.1% of net sales), representing an effective tax rate of 21.4%. This
compares to income tax expense of $0.7 million (1.7% of net sales) for the third
quarter of fiscal 2010, representing an effective tax rate of 13.4%. The current
year quarter's uncertain tax positions (UTP) was approximately $0.2 million and
favorably affected the rate for the quarter. The effective tax rate for the
third quarter of fiscal 2010 was a result of the inclusion of the effects of the
settlement of the IRS examination of the Company's fiscal 2007 and 2008 returns,
as well as, adjustments to the balances for UTPs related to the results of the
examination amounting to a reduction in tax expense of approximately $1.0
million. The projected effective tax rate for fiscal 2011 is now expected to be
approximately 29.5%. The Company's effective tax rate is a direct result of the
proportion of federally exempt state municipal bond income and federal tax
credits and benefits in relation to the levels of United States and foreign
taxable income or loss.
Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010
Net sales. Net sales were $132.0 million for the nine months ended March 31,
2011, up 6.8% compared to $123.5 million for the first nine of fiscal 2010.
Sales for the Wireless Group rose $5.3 million, or 12.9%, and sales in the Space
& Defense Group increased $3.2 million, or 3.8%, in the current first nine
months compared to the first nine months of fiscal 2010.
17
The increase in the Wireless Group sales was the result of a substantial
increase in demand for standard component products in the current first nine
months compared to the first nine months of fiscal 2010. Sales of these products
rose $11.6 million in the current first nine months of fiscal 2011 over the
first nine months of fiscal 2010 levels on the strength of continuing orders
from both European OEMs and Asian contract manufacturers. This increase in
standard component sales was partially offset by a $6.3 million decline in
custom and ferrite basestation products in the current first nine months
compared to the first nine months of last fiscal year due to the loss of sales
to low cost Asian vendor sources and decreased demand for second generation GSM
equipment. Demand for Wireless Group products in the fourth quarter of fiscal
2011 is expected to be higher compared to the first nine month levels.
Sales for the Space & Defense Group rose $3.2 million, or 3.8% in the first nine
months of fiscal 2011 compared to the first nine months of the previous fiscal
year. This increase resulted from sales of counter-improvised explosive devices
(IED) related products totaling $10.4 million in the current first nine months
compared to $4.1 million in the first nine months of fiscal 2010 and a $1.7
million increase in hybrid module sales in fiscal 2011 compared to last year.
This increase was partially off-set by a decline in sales of military printed
wire board products, which fell $4.0 million in the current first nine months
compared to the first nine months of fiscal 2010 due to production delays and
inefficiencies caused by ongoing capacity expansion and renovations at the
Company's Unicircuit facility.
Gross Profit. Gross profit for the first nine months of fiscal 2011 was $50.0
million, (37.9% of net sales), up from $45.8 million (37.1% of net sales) for
the same period of the prior year. Gross profit as a percent of sales increased
in the first nine months of fiscal 2011 from the first nine months of last year
due to the higher Wireless Group sales and a more favorable product mix in the
Wireless Group. Wireless Group gross margins were enhanced by a $6.3 million
reduction in sales of lower margin, high material content custom products which
were replaced by $11.6 million of sales of higher margin standard component
products in the current nine months compared to the same period last year. In
the Space & Defense Group, margins declined slightly due to a less favorable
product mix and production inefficiencies and yield issues at the Unicircuit
operation.
Marketing. Marketing expenses were $7.6 million (5.8% of net sales) for the
first nine months of fiscal 2011, up $0.6 million from $7.0 million (5.7% of net
sales) for the first nine months of fiscal 2010. Marketing expenses in the
current first nine months rose $0.6 million from the first nine months of last
fiscal year due to higher personnel levels, commission costs and travel expenses
related to the increase in business levels and additional advertising
expenditures related to the AIR product introduction in the current fiscal year.
Research and Development. Research and development expenses were $12.0 million
(9.1% of net sales) in the first nine months of fiscal 2011, up 7.9% from $11.1
million (9.0% of net sales) for the first nine months of fiscal 2010. Research
and development expenditures are supporting further development of Wireless
Group consumer component opportunities, as well as new technology development in
the Space & Defense Group. Research and development expenditures have increased
in the first nine months of fiscal 2011 versus the first nine months of last
year due to the higher level of opportunities in the Space & Defense Group and
Wireless Group marketplaces. During the second and third quarters of fiscal 2011
the Company hired additional engineering and technical personnel to work on
funded customer development programs, as well as, further development of AIR
products. Due to delays in finalization of some contracts during the quarter,
these new hires and other engineering personnel were redirected to unfunded
development work. The Company is presently working on a number of new Wireless
Group and Space & Defense Group opportunities.
General and Administrative. General and administrative expenses increased to
$14.4 million (10.9% of net sales) for the first nine months of fiscal 2011,
from $14.2 million (11.5% of net sales) for the first nine months of fiscal
2010. The increase in general and administrative expense in the first three
quarters of fiscal 2011 compared to the first three quarters of last year
resulted from the inclusion of $0.2 million in acquisition expenses incurred for
the aborted AML Communications, Inc. transaction in the current third quarter.
Operating Income. Operating income increased 19.1% in the first nine months of
fiscal 2011 to $16.0 million, (12.1% of net sales), compared to $13.4 million
(10.9% of net sales) for the first nine months of fiscal 2010. This increase in
the first three quarters of fiscal 2011 from the first three quarters of last
year was due to the $8.5 million increase in sales volume and the favorable
product mix caused by the $11.6 million rise in sales of higher margin
18
standard components coupled with the $6.3 million decline in sales of lower
margin custom assemblies in the Wireless Group.
On an operating segment basis, Wireless Group operating income was $7.1 million
(15.4% of group sales) for the first three quarters of fiscal 2011, up $3.5
million, from the Group's operating income of $3.6 million (8.9% of group sales)
in the first three quarters of fiscal 2010. The increase in Wireless Group
operating income in the first nine months of fiscal 2011 compared to the same
period of fiscal 2010 was a result of the $5.3 million overall increase in
Wireless Group sales and the combined impact of the continuing decline in low
margin custom assembly sales, which fell $6.3 million in the current nine
months, and the increased demand for higher margin standard component products
which rose $11.6 million in the current nine months.
Space & Defense Group operating income was $9.4 million (11.0% of Group sales)
in the first nine months of fiscal 2011, down $1.0 million from $10.4 million
(12.6% of net group sales) for the first nine months of fiscal 2010. Operating
margins for this Group decreased in the current first nine months due to a less
favorable product mix, losses recognized on some initial engineering production
contracts, production yield issues due to ongoing expansion at the Company's
Unicircuit facility and increased group R&D spending due to a delay in the
IridiumNext contract finalization, which resulted in additional engineering
personnel being redirected to unfunded development work in the current period.
Other Income. Other income increased to $0.4 million in the first nine months of
fiscal 2011 compared to $0.3 million for the first nine months of last year.
This increase was a result of a lengthening of the maturities of the Company's
investment portfolio resulting in 50% increase in average return as well as
higher interest rates on funds held in China. Other income will fluctuate based
on short term market interest rates and the level of investable cash balances.
Interest Expense. Interest expense in the first nine months of fiscal 2011 was
$0.4 million compared to $0.5 million for the first nine months of fiscal 2010.
The Company currently has $30.0 million outstanding on its long-term obligation.
These borrowings bear interest at the 90 day LIBOR rate, plus 100 to 425 basis
points, depending upon the Company's rolling twelve month EBITDA performance.
The rate is reset quarterly and for the fourth quarter of fiscal 2011 is
expected to be approximately 1.30%.
Income Taxes. Income taxes for the first nine months of fiscal 2011 were $3.9
million (2.9% of net sales), representing an effective tax rate of 24.2%. This
compares to income tax expense of $3.3 million (2.7% of net sales) for the first
nine months of fiscal 2010, representing an effective tax rate of 25.1%. The
projected effective tax rate for fiscal 2011 is approximately 29.5% compared to
an actual effective tax rate of 26.1% for fiscal 2010. The Company's effective
tax rate is a direct result of the proportion of federally exempt state
municipal bond income and federal tax credits and benefits in relation to the
levels of United States and foreign taxable income or loss.
Critical Accounting Policies
There have been no changes to the Company's critical accounting policies,
estimates, or judgments from those discussed in the Company's 2010 Annual Report
on Form 10-K.
Liquidity and Capital Resources
Net cash provided by operations in the first nine months of fiscal 2011 was
$16.5 million and resulted primarily from net income before depreciation,
amortization and non-cash equity based compensation expense, which more than
off-set a $4.9 million increase in inventory. The increase of inventory is due
to the long lead times required for some of the Space & Defense Group programs.
Net cash provided by operations in the first nine months of fiscal 2010 was
$18.7 million and resulted from the net income before depreciation amortization
and non-cash equity based compensation expense, plus a $1.9 million decline in
inventory. The positive cash flow from earnings for the nine months was
partially off-set by a $3.6 million increase in receivables due to heavier
shipments in the last half of the third quarter.
Net cash used in investing activities in the nine months ended March 31, 2011
was $3.2 million and consisted of $5.6 million used to pay for capital
additions, which was partially off-set by $2.4 million provided by the net
maturities of marketable debt and sale of available-for-sale securities. Net
cash used in investing activities in the
19
first nine months of fiscal 2010 was $9.8 million and consisted of $6.2 million
from the net purchases of marketable debt securities, in addition to $3.9
million used to pay for capital additions.
Net cash used in financing activities in the nine months ended March 31, 2011
was $7.2 million and consisted of $10.0 million used to pay long-term debt and
$0.9 million used to purchase approximately 53,000 treasury shares, partially
offset by $3.7 million generated by cash receipts and tax benefits from the
exercise of stock options. Net cash used in financing activities in the first
nine months of fiscal 2010 was $14.3 million and consisted of $9.8 million used
to pay long-term debt and $7.9 million used to purchase approximately 557,000
treasury shares, partially offset by $3.4 million generated by cash receipts and
tax benefits from the exercise of stock options.
During the next twelve months, the Company anticipates that its main cash
requirement will be for capital expenditures, continued repurchase of the
Company's common stock and the $10.0 million principal payment on its line of
credit due in July 2011. Capital expenditures for the remainder of fiscal 2011
and the first half of fiscal 2012 are expected to be in the range of 4 to 5
percent of sales and will be funded from existing cash and investments.
The Company may continue to repurchase shares of its common stock in the open
market and/or through privately negotiated transactions under the current Board
authorization, depending on market conditions and restricted stock vesting. At
March 31, 2011, there were approximately 463,000 shares remaining under the
current Board repurchase authorization.
At March 31, 2011, the Company had approximately $77.7 million in cash, cash
equivalents, and marketable securities. The Company has had positive operating
cash flow for over ten years, and believes that its cash requirements for the
foreseeable future will be satisfied by currently invested cash balances and
expected cash flows from operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses the Company's possible exposure to market risk related
to changes in interest rates. This discussion contains forward-looking
statements that are subject to risks and uncertainties. Results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including factors described elsewhere in this
Quarterly Report.
As of March 31, 2011, the Company had cash, cash equivalents and marketable
securities of $77.7 million, all of which consisted of highly liquid investments
in marketable debt securities. The marketable debt securities at date of
purchase have maturities within 3 years, are exposed to interest rate risk and
will decrease in value if market interest rates increase. A hypothetical
decrease in market interest rate of 10.0% from March 31, 2011 rates, or 0.035%,
would have reduced net income by approximately $7,000, or $.0005 net income per
diluted share for the quarter and would have reduced cash flow by approximately
$7,000 in the quarter. Due to the relatively short maturities of the securities,
continuing current unprecedented low market rates and the Company's ability to
hold those investments to maturity, the Company does not believe that an
immediate decrease in interest rates would have a significant effect on its
financial condition or results of operations. Over time, however, declines in
interest rate will reduce the Company's interest income.
As of March 31, 2011, the Company had $30.0 million in outstanding debt under
its revolving line of credit with Key Bank National Association. The line
consists of a $50,000,000 revolving credit note for which principal amounts are
due on August 1, 2011, and on each anniversary date thereafter through July 31,
2013. Borrowings under this Note bear interest at LIBOR, plus 100 to 425 basis
points or at the Lender's prime rate, minus (100) to plus 225 basis points,
depending upon the Company's EBITDA performance at the end of each quarter as
measured by the formula: EBITDA divided by the current portion of long-term debt
plus interest expense. For the three months ended March 31, 2011, the weighted
average interest rate on the outstanding borrowings was 1.30%. Interest expense
for these borrowings is exposed to interest rate risk and will increase if
market interest rates rise. A hypothetical increase in market interest rate of
10.0% from March 31, 2011 rates, or 0.13%, would have reduced net income by
approximately $10,000, or $.0007 net income per diluted share for the quarter
and would have reduced cash flow by approximately $10,000 in the quarter. Due to
the Company's significant cash reserves and historical
20
positive operating cash flow, the Company does not believe that an immediate
increase in interest rates would have a significant effect on its financial
condition or results of operations. Over time, however, increases in market
interest rates will increase the Company's interest expense.
Forward-Looking Cautionary Statement
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
"forward-looking statements" made by or on behalf of the Company. We may from
time to time make written or oral statements that are "forward-looking,"
including statements contained in this report and other filings with the
Securities and Exchange Commission and in reports to our shareholders. All
forward-looking statements are made on the basis of management's views and
assumptions regarding future events and business performance as of the time the
statements are made and the Company does not undertake any obligation to update
its disclosure relating to forward looking matters. Actual results may differ
materially from those expressed or implied. The uncertainties and risk factors
that could affect our Company, its business and actual results are described
throughout this filing and in our 2010 Annual Report on Form 10-K under the Item
1A, "Risk Factors."
Item 4. Controls and Procedures
A. Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended ("Exchange Act")) was
carried out under the supervision and with the participation of the Company's
management, including the President and Chief Executive Officer and the Chief
Financial Officer ("the Certifying Officers") as of March 31, 2011. Based on
that evaluation, the Certifying Officers concluded that the Company's disclosure
controls and procedures were effective as of March 31, 2011.
B. Changes in Internal Control Over Financial Reporting
There were no changes in the registrant's internal control over financial
reporting during our fiscal quarter to which this Quarterly Report on Form 10-Q
relates that have materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
PART II OTHER INFORMATION
Item 1A. Risk Factors
The Company is exposed to certain risk factors that may affect operations and/or
financial results. The significant factors known to the Company are described in
the Company's most recently filed Annual Report on Form 10-K. There have been no
material changes from the risk factors as previously disclosed in the Company's
Annual Report on Form 10-K.
21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
On November 5, 2007, the Board of Directors increased by an additional 2,000,000
the number of shares that the Company was authorized to repurchase in the open
market or by privately negotiated transactions through its previously announced
stock repurchase program. The program (originally announced on March 5, 2001),
which may be suspended at any time without notice, has no expiration date. The
following table sets forth information regarding shares repurchased and
purchasable under the program during and as of the end of the periods indicated.
On March 31, 2011, approximately 463,000 shares remained authorized for
purchase, depending on market conditions.
--------------------------------------------------------------------------------------------------------------------------------
Period Total Number of Shares Average Price Paid per Total Number of Shares Maximum Number (or
(or Units) Purchased Share (or Unit) (or Units) Purchased as Approximate Dollar
Part of Publicly Value) of Shares (or
Announced Plans or Units) that May Yet Be
Programs Purchased Under the
Plans or Programs
--------------------------------------------------------------------------------------------------------------------------------
January 2011 -- -- -- 463,759
--------------------------------------------------------------------------------------------------------------------------------
February 2011 420 20.03 420 463,339
--------------------------------------------------------------------------------------------------------------------------------
March 2011 -- -- -- 463,339
--------------------------------------------------------------------------------------------------------------------------------
Total 420 20.03 420 463,339
--------------------------------------------------------------------------------------------------------------------------------
Item 6. Exhibits
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Anaren, Inc.
(Registrant)
Date: April 29, 2011 /s/ Lawrence A. Sala
-------------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: April 29, 2011 /s/ George A. Blanton
-------------------------------------------
George A. Blanton
Sr. Vice President, Chief Financial Officer
and Treasurer
2
