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 December 31, 2010
-----------------
__ 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
January 20, 2011 was 15,110,718.
ANAREN, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page No.
------------------------------ --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of 3
December 31, 2010 and June 30, 2010 (unaudited)
Condensed Consolidated Statements of Income 4
for the Three Months Ended December 31,
2010 and 2009 (unaudited)
Condensed Consolidated Statements of Income 5
for the Six Months Ended December 31,
2010 and 2009 (unaudited)
Condensed Consolidated Statements of Cash Flows 6
for the Six Months Ended December 31,
2010 and 2009 (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 20 - 21
Market Risk
Item 4. Controls & Procedures 21
PART II - OTHER INFORMATION
---------------------------
Item 1A. Risk Factors 21
Item 6. Exhibits 22
Officer Certifications 23 - 27
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ANAREN, INC.
Condensed Consolidated Balance Sheets
December 31, 2010 and June 30, 2010
(in thousands, except per share amounts)
(unaudited)
December 31, June 30,
2010 2010
------------ --------
ASSETS
------
Assets:
Cash and cash equivalents $ 50,031 $ 50,521
Securities held to maturity 4,369 2,334
Receivables, less an allowance of $358
and $375 at December 31, 2010 and
June 30, 2010, respectively 26,715 29,124
Inventories 35,218 31,361
Prepaid expenses and other current assets 5,489 2,916
Deferred income taxes 1,178 1,955
-------- --------
Total current assets 123,000 118,211
Securities available-for-sale -- 1,051
Securities held to maturity 16,831 19,756
Property, plant, and equipment, net 48,311 48,711
Other assets 1,623 1,031
Goodwill 42,435 42,435
Other intangible assets, net of
accumulated amortization 9,557 10,153
-------- --------
Total assets $241,757 $241,348
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities and Shareholders' Equity:
Current installments of long-term obligation $ 10,000 $ 10,000
Accounts payable 7,331 9,271
Accrued expenses 4,937 5,661
Customer advance payments 268 888
Other current liabilities 2,403 2,920
-------- --------
Total current liabilities 24,939 28,740
Deferred income taxes 682 726
Pension and postretirement benefit obligation 7,326 7,083
Long-term obligation 20,000 30,000
Other liabilities 2,029 1,873
-------- --------
Total liabilities 54,976 68,422
-------- --------
Stockholders' Equity:
Common stock, $0.01 par value. Authorized
200,000 shares; issued 28,942 and 28,506
at December 31, 2010 and June 30, 2010,
respectively 289 285
Additional paid-in capital 211,447 206,193
Retained earnings 126,871 118,111
Accumulated other comprehensive loss (2,091) (2,813)
-------- --------
336,516 321,776
Less 13,864 and 13,811 treasury shares
at December 31, 2010 and June 30, 2010,
respectively, at cost 149,735 148,850
-------- --------
Total stockholders' equity 186,781 172,926
-------- --------
Total liabilities and stockholders' equity $241,757 $241,348
======== ========
See accompanying notes to condensed consolidated financial statements
3
ANAREN, INC.
Condensed Consolidated Statements of Income
Three Months Ended December 31, 2010 and 2009
(in thousands, except per share amounts)
(unaudited)
2010 2009
--------- ---------
Net Sales $ 43,443 $ 41,019
Cost of Sales 27,149 26,713
--------- ---------
Gross profit 16,294 14,306
Operating Expenses:
Marketing 2,596 2,237
Research and development 3,538 3,534
General and administrative 4,628 4,641
--------- ---------
Total operating expenses 10,762 10,412
--------- ---------
Operating income 5,532 3,894
Other income (expense):
Interest expense (105) (138)
Other, primarily interest income 177 86
--------- ---------
Total other income (expense), net 72 (52)
--------- ---------
Income before income tax expense 5,604 3,842
Income tax expense 950 1,320
--------- ---------
Net income $ 4,654 $ 2,522
========= =========
Earnings per share:
Basic $ 0.33 $ 0.18
========= =========
Diluted $ 0.32 $ 0.17
========= =========
Weighted average common shares
outstanding:
Basic 13,961 14,210
========= =========
Diluted 14,720 14,706
========= =========
See accompanying notes to condensed consolidated financial statements
4
ANAREN, INC.
Condensed Consolidated Statements of Income
Six Months Ended December 31, 2010 and 2009
(in thousands, except per share amounts)
(unaudited)
2010 2009
--------- ---------
Net Sales $ 87,982 $ 81,356
Cost of Sales 54,055 52,386
--------- ---------
Gross profit 33,927 28,970
Operating Expenses:
Marketing 4,995 4,599
Research and development 7,369 7,142
General and administrative 9,862 9,122
--------- ---------
Total operating expenses 22,226 20,863
--------- ---------
Operating income 11,701 8,107
Other income (expense):
Interest expense (289) (321)
Other, primarily interest income 298 213
--------- ---------
Total other income (expense), net 9 (108)
--------- ---------
Income before income tax expense 11,710 7,999
Income tax expense 2,950 2,620
--------- ---------
Net income $ 8,760 $ 5,379
========= =========
Earnings per share:
Basic $ 0.63 $ 0.38
========= =========
Diluted $ 0.60 $ 0.37
========= =========
Weighted average common shares
outstanding:
Basic 13,900 14,163
========= =========
Diluted 14,573 14,727
========= =========
See accompanying notes to condensed consolidated financial statements
5
ANAREN, INC.
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 2010 and 2009
(in thousands)
(unaudited)
2010 2009
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,760 $ 5,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,193 4,207
Amortization 972 671
Deferred income taxes (34) (158)
Equity based compensation 2,164 1,622
Changes in operating assets and liabilities:
Receivables 2,408 (1,376)
Inventories (3,836) 2,122
Prepaid expenses and other current assets (3,163) (675)
Accounts payable (2,019) (1,092)
Accrued expenses (724) (1,640)
Customer advance payments (620) 45
Other liabilities 405 811
Pension and postretirement benefit obligation 243 376
--------- ---------
Net cash provided by operating activities 8,749 10,292
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,713) (2,160)
Maturities of held to maturity and sale of
available-for-sale securities 3,011 10,750
Purchases of held to maturity securities (1,057) --
--------- ---------
Net cash (used in) provided by
investing activities (1,759) 8,590
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on long-term obligation (10,000) (9,800)
Stock options exercised 2,895 3,149
Excess tax benefit from exercise of stock options 179 214
Purchase of treasury stock (885) (4,657)
--------- ---------
Net cash used in financing activities (7,811) (11,094)
--------- ---------
Effect of exchange rates on cash 331 16
--------- ---------
Net (decrease) increase in cash and
cash equivalents (490) 7,804
Cash and cash equivalents, beginning of year 50,521 49,893
--------- ---------
Cash and cash equivalents, end of period $ 50,031 $ 57,697
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 261 $ 454
========= =========
Income taxes, net of refunds $ 5,280 $ 2,810
========= =========
See accompanying notes to condensed consolidated financial statements.
6
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 six months ended
December 31, 2010 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 six months ended December 31, 2010 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:
December 31, 2010
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
(amounts in thousands) Cost gains losses Fair value
--------- ---------- ---------- ----------
Securities held to maturity:
Municipal bonds $18,531 $298 $-- $18,829
Corporate bonds 2,170 54 -- 2,224
Federal agency bonds 499 5 -- 504
------- ---- --- -------
Total securities held to maturity $21,200 $357 $-- $21,557
======= ==== === =======
June 30, 2010
----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized
(amounts in thousands) Cost gains losses Fair 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
======= ==== ===== =======
Contractual maturities of marketable debt securities held to maturity are
summarized as follows:
December 31, 2010 June 30, 2010
----------------------------------------------------------------
Fair Fair
Amortized market Amortized market
Cost value Cost value
--------- ------ --------- -------
(amounts in thousands)
Within one year $ 4,369 $ 4,447 $ 2,334 $ 2,379
One year to three years 16,831 17,110 19,756 20,075
------- ------- ------- -------
Total $21,200 $21,557 $22,090 $22,454
======= ======= ======= =======
7
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Contractual maturities of auction rate securities available for sale are
summarized as follows:
December 31, 2010 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 December 31, 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 based on fair market value.
The following table provides the assets and liabilities carried at fair value as
measured on a recurring basis as of December 31, 2010:
(amounts in thousands)
Total Carrying Significant other Significant
Value at Quoted prices in observable unobservable
December 31, active markets inputs inputs
2010 (Level 1) (Level 2) (Level 3)
-------------- ---------------- ----------------- ------------
Asset Category
Cash equivalents $6,760 $6,760 $ -- $ --
(3) Intangible Assets
The major components of intangible assets are as follows:
December 31, 2010 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 $ 5,723 $7,530 $ 6,099
Developed technology 780 403 780 481
Non-competition agreements 1,130 451 1,130 593
------ ------- ------ -------
Total $9,440 $ 6,577 $9,440 $ 7,173
====== ======= ====== =======
Non-amortizable intangible assets:
Trade names 2,980 2,980
------- -------
Total intangible assets $ 9,557 $10,153
======= =======
Intangible asset amortization expense for the three months ended December 31,
2010 and 2009 aggregated $0.3 million in each period and for the six months
ended December 31, 2010 and 2009 aggregated $0.6 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 six months
ended December 31, 2010.
8
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(4) Inventories
Inventories are summarized as follows:
December 31, June 30,
(amounts in thousands) 2010 2010
------------ --------
Raw Materials $18,761 $17,319
Work in process 12,605 9,396
Finished goods 3,852 4,646
------- -------
$35,218 $31,361
======= =======
(5) Property, Plant, and Equipment
Components of property, plant, and equipment consists of the following:
December 31, June 30,
(amounts in thousands) 2010 2010
------------ --------
Land and land improvements $ 5,167 $ 5,167
Construction in process 3,386 1,451
Buildings, furniture, and fixtures 34,298 34,052
Machinery and equipment 63,492 62,267
--------- --------
106,343 102,937
Less accumulated depreciation (58,032) (54,226)
--------- --------
$ 48,311 $ 48,711
========= ========
(6) Accrued Expenses
Accrued expenses consists of the following:
December 31, June 30,
(amounts in thousands) 2010 2010
------------ --------
Compensation $3,732 $4,483
Health insurance 498 423
Commissions and other 707 755
------ ------
$4,937 $5,661
====== ======
(7) Other Liabilities
Other liabilities consist of the following:
December 31, June 30,
(amounts in thousands) 2010 2010
------------ --------
Deferred compensation $ 405 $ 425
Supplemental retirement plan 714 670
Accrued lease 1,411 1,107
Warranty accrual 332 320
Income tax liability 791 1,610
Deferred grant income 375 375
Other 404 286
------- -------
4,432 4,793
Less current portion (2,403) (2,920)
------- -------
$ 2,029 $ 1,873
======= =======
9
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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
six months ended December 31, 2010, is as follows:
(amounts in thousands)
Balance as of July 1, 2010 $320
Additions 251
Costs incurred (221)
Adjustments (18)
----
Balance as of December 31, 2010 $332
====
(8) Income Taxes
Income taxes for the second quarter of fiscal 2011 were $1.0 million
representing an effective tax rate of 17.0%. This compares to income tax expense
of $1.3 million for the second quarter of fiscal 2010, representing an effective
tax rate of 34.4%. This decrease primarily resulted from the reinstatement of
the Federal Research and Experimentation credit retroactive to January 1, 2010.
The effective tax rate for fiscal 2011 is now expected to be approximately
30.0%.
The Company is subject to income tax examinations for its U.S. federal taxes for
the fiscal years 2009 and 2010, and for foreign, state and local taxes for the
fiscal years 2007 through 2010. One of the Company's recent acquisition is
currently undergoing an IRS examination for a year before the Company's
ownership. It is reasonably possible that the liability associated with the
Company's unrecognized tax benefits will increase or decrease within the next
twelve months as a result of this examination and with the expiration of the
statutes of limitations. At this time an estimate of the range of reasonably
possible outcomes cannot be made.
(9) Long-term Obligation
Borrowings under a revolving credit note (Note), with Key Bank National
Association, bears interest at the 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 six months ended December 31,
2010, the weighted average interest rate on the outstanding borrowings was
approximately 1.45%. In the six months ended December 31, 2010, 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.
(10) 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 439,000 and 611,000 for the six months
ended December 31, 2010 and 2009, 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
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table sets forth the computation of basic and fully diluted
earnings per share:
Three Months Ended Six Months Ended
December 31 December 31
---------------------- ----------------------
(amounts in thousands) 2010 2009 2010 2009
------- ------- ------- -------
Numerator:
Net income $ 4,654 $ 2,522 $ 8,760 $ 5,379
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
share outstanding 13,961 14,210 13,900 14,163
======= ======= ======= =======
Denominator for diluted earnings per share:
Weighted average shares outstanding 13,961 14,210 13,900 14,163
Common stock options and restricted stock 759 496 673 564
------- ------- ------- -------
Weighted average shares 14,720 14,706 14,573 14,727
======= ======= ======= =======
(11) Employee Benefit Plans
Defined Benefit Plan
Components of net periodic pension cost for the three and six months ended
December 31, are as follows:
Three Months Ended Six Months Ended
December 31 December 31
---------------------- ----------------------
2010 2009 2010 2009
------- ------- ------- -------
(amounts in thousands)
Service cost $ 93 $ 78 $ 186 $ 156
Interest cost 210 200 420 400
Expected return on plan assets (215) (187) (430) (374)
Amortization of the unrecognized loss 120 83 240 166
------- ------- ------- -------
Net periodic benefit cost $ 208 174 $ 416 348
======= ======= ======= =======
Required contributions for fiscal 2011 are approximately $0.3 million, $0.1
million has been paid in the six months ended December 31, 2010.
Postretirement Health Benefit Plan
Components of net periodic postretirement benefit cost for the three and six
months ended December 31, are as follows:
Three Months Ended Six Months Ended
December 31 December 31
---------------------- ----------------------
2010 2009 2010 2009
------- ------- ------- -------
(amounts in thousands)
Service cost $ 9 $ 20 $ 18 $ 40
Interest cost 17 40 34 80
Amortization of the unrecognized loss (18) 1 (36) 2
Amortization of the prior service cost (5) (5) (10) (10)
------- ------- ------- -------
Net periodic benefit cost $ 3 $ 56 $ 6 112
======= ======= ======= =======
11
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Expected contributions for fiscal 2011 are estimated to be approximately $0.1
million.
(12) Other Comprehensive Income
Other Comprehensive Income
Comprehensive income consists of the following:
Three Months Ended Six Months Ended
December 30 December 31
---------------------- ----------------------
2010 2009 2010 2009
------- ------- ------- -------
(amounts in thousands)
Net income $ 4,654 $ 2,522 $ 8,760 $ 5,379
Other comprehensive income:
Foreign currency translation gain 147 2 333 16
Mark to market adjustment 389 -- 389 --
------- ------- ------- -------
Comprehensive income $ 5,190 $ 2,524 $ 9,482 $ 5,395
======= ======= ======= =======
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 333 -- 389 722
------- ------- ------- -------
Balances at December 31, 2010 $ 1,799 $(3,890) $ -- $(2,091)
======= ======= ======= =======
(13) 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 operating segments have
similar products, customers, and margins on products.
12
ANAREN, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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):
December 31, 2010 $15,599 $27,844 $ -- $43,443
December 31, 2009 12,383 28,636 -- 41,019
Net sales (Six Months Ended):
December 31, 2010 31,124 56,858 -- 87,982
December 31, 2009 26,794 54,562 -- 81,356
Operating income (Three Months Ended)
December 31, 2010 2,297 3,285 (50) 5,532
December 31, 2009 537 3,683 (326) 3,894
Operating income (Six Months Ended)
December 31, 2010 5,277 6,994 (570) 11,701
December 31, 2009 1,768 6,733 (394) 8,107
Goodwill and intangible assets:
December 31, 2010 30,716 21,276 -- 51,992
June 30, 2010 30,716 21,872 -- 52,588
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 December 31, 2010 and June 30, 2010, and the consolidated results
of operations and cash flows of the Company for the three and six months ended
December 31, 2010 and 2009.
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, 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. Although Wireless Group sales have improved in
the first half of fiscal 2011 due to strong demand for standard components,
custom product sales continue to decline and are expected to have an ongoing
negative impact on Wireless Group sales levels in the current fiscal year. While
the Company has limited short-term visibility for customer demand, we believe
that demand has stabilized at current levels and should improve in calendar 2011
as the economy continues to recover.
Third Quarter of Fiscal 2011 Outlook
------------------------------------
For the third quarter of fiscal 2011, we anticipate comparable sales for the
Wireless Group and an increase in sales for the Space & Defense Group compared
to second quarter levels. As a result, we expect net sales to be in the range of
$42 to $46 million. We expect GAAP net earnings per diluted share to be in the
range of $0.24 to $0.30, using an
14
anticipated tax rate of approximately 30.0% and inclusive of approximately $0.06
per share related to expected non-cash equity based compensation expense and
intangible amortization.
Results of Operations
---------------------
Net sales for the three months ended December 31, 2010 were $43.4 million, up
5.9% from sales of $41.0 million for the second quarter of fiscal 2010. Net
income for the second quarter of fiscal 2011 was $4.7 million, or 10.7% of net
sales, up $2.2 million from net income of $2.5 million in the second 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 Six Months Ended
Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009
------------- ------------- ------------- -------------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 62.5% 65.1% 61.4% 64.4%
----- ----- ----- -----
Gross profit 37.5% 34.9% 38.6% 35.6%
----- ----- ----- -----
Operating Expenses:
Marketing 6.0% 5.5% 5.7% 5.6%
Research and development 8.1% 8.6% 8.4% 8.8%
General and administrative 10.7% 11.3% 11.2% 11.2%
----- ----- ----- -----
Total operating expenses 24.8% 25.4% 25.3% 25.6%
----- ----- ----- -----
Operating income 12.7% 9.5% 13.3% 10.0%
----- ----- ----- -----
Other income (expense):
Interest expense (0.2)% (0.3)% (0.3)% (0.4)%
Other, primarily interest income 0.4 % 0.2 % 0.3 % 0.2 %
----- ----- ----- -----
Total other income (expense), net 0.2 % (0.1)% 0.0 % (0.2)%
----- ----- ----- -----
Income before income tax expense 12.9% 9.4% 13.3% 9.8%
Income tax expense 2.2% 3.3% 3.3% 3.2%
----- ----- ----- -----
Net income 10.7% 6.1% 10.0% 6.6%
===== ===== ===== =====
The following table summarizes the Company's net sales by operating segments for
the periods indicated. Amounts are in thousands.
Three Months Ended Six months Ended
Dec. 31, 2010 Dec. 31, 2009 Dec. 31, 2010 Dec. 31, 2009
------------- ------------- ------------- -------------
Wireless $15,599 $12,383 $31,124 $26,794
Space and Defense 27,844 28,636 56,858 54,562
------- ------- ------- -------
Total $43,443 $41,019 $87,982 $81,356
======= ======= ======= =======
Three Months Ended December 31, 2010 Compared to Three Months Ended December 31,
--------------------------------------------------------------------------------
2009
----
Net sales. Net sales were $43.4 million for the second quarter ended December
31, 2010, up 5.9% compared to $41.0 million for the second quarter of fiscal
2010. Sales of Wireless Group products rose $3.2 million, or 26.0%, and sales of
Space & Defense Group products declined $0.8 million, or 2.8%, in the current
second quarter compared to the second quarter of fiscal 2010.
15
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
second quarter compared to the second quarter of fiscal 2010. Sales of these
products rose $5.1 million in the current second quarter over second quarter
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 $1.9 million decline in custom and ferrite basestation
products in the current quarter compared to the second quarter last fiscal year,
led by a $1.3 million decline in sales to a major OEM 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 third
quarter of fiscal 2011 is expected to be comparable to first and second 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 declined $0.8 million, or 2.8% in the second quarter of fiscal 2011
compared to the second quarter of the previous fiscal year. This decrease
resulted from a decline in sales of military printed wire board products, which
fell to $3.6 million in the current second quarter compared to $5.2 million in
the second quarter of fiscal 2010 due to production delays and inefficiencies
caused by ongoing capacity expansion and facility renovations at the Company's
Unicircuit printed wire board operation. 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 $74.3
million at December 31, 2010.
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 second quarter of fiscal 2011 was
$16.3 million, (37.5% of net sales), up from $14.3 million (34.9% of net sales)
for the same quarter of the prior year. Gross profit as a percent of sales
increased in the second quarter of fiscal 2011 from the second quarter of fiscal
2010 due to favorable product mix in both the Wireless and Space & Defense
Groups. In the Wireless Group, gross margins were enhanced by a $1.9 million
reduction in sales of lower margin, high material content custom products which
were replaced by $5.1 million of sales of higher margin standard component
products in the current second quarter compared to the same period last year. In
the Space & Defense Group, margins declined slightly due to both the lower group
sales level, a less favorable product mix, and some production issues due to
ongoing expansion at the Company's Unicircuit subsidiary. The Group is focused
on resolving these issues over the third and fourth quarter of fiscal 2011.
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 second quarter of fiscal 2011, up $0.4 million from $2.2
million (5.5% of net sales) for the second quarter of fiscal 2010. Marketing
expenses in the current second 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.
Research and Development. Research and development 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 $3.5 million (8.1% of net
sales) in the second quarter of fiscal 2011, unchanged from $3.5 million (8.6%
of net sales) for the second 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. The Company expects to continue its current research
and development efforts and spending levels in fiscal 2011, and is presently
working on a number of new Wireless Group 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 other corporate costs.
General and administrative expenses were $4.6 million (10.7% of net sales) for
the second quarter of fiscal 2011, unchanged from $4.6 million (11.3% of net
sales) for the second quarter of fiscal 2010. During the current quarter minor
increases in personnel costs were off-set by lower expenses related to the
Company vacant leased facility in the United Kingdom.
16
Operating Income. Operating income increased 42.1% in the second quarter of
fiscal 2011 to $5.5 million, (12.7% of net sales), compared to $3.9 million
(9.5% of net sales) for the second quarter of fiscal 2010. This increase in
operating income was a result of the $2.4 million increase in sales volume and
the favorable product mix caused by the rise in sales of Wireless standard
components coupled with the decline in sales of Wireless custom assemblies.
On an operating segment basis, Wireless Group operating income was $2.3 million
(14.7% of group sales) for the second quarter of fiscal 2011, up $1.8 million,
from the Group's operating income of $0.5 million (4.3% of group sales) in the
second quarter of fiscal 2010. The improvement in Wireless Group operating
income in the second quarter of fiscal 2011 compared to the second quarter of
fiscal 2010 was due to the $3.2 million overall increase in Wireless Group sales
and the combined impact of the continuing decline in low margin custom assembly
sales which fell $1.9 million in the current quarter and the increased demand
for higher margin standard component products which rose $5.1 million in the
quarter. This favorable product mix coupled with further yield improvements for
standard components served to increase gross and operating margins 10.4
percentage points in the current second quarter compared to the second quarter
of last year.
Space & Defense Group operating income was $3.3 million (11.8% of Group sales)
in the second quarter of fiscal 2011, down $0.4 million from $3.7 million (12.9%
of net group sales) for the second quarter of fiscal 2010. Operating margins for
this Group decreased in the current second quarter due to the lower sales volume
and the production inefficiencies at the Company's Unicircuit facility resulting
from ongoing capacity expansion and equipment renovation which effected both
overall sales volume and production yields in the quarter compared to the second
quarter last fiscal year.
Other Income. Other income primarily consists of interest income received on
invested cash balances and rental income. Other income was $0.2 million in the
second quarter of fiscal 2011 compared to $0.1 million for the second quarter of
last year. This increase was a result of a deliberate lengthening of the
maturities of the Company's investment portfolio resulting in 50% increase in
average return. 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 second quarter of fiscal
2011 was $0.1 million, unchanged compared to $0.1 million for the second 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 second quarter of fiscal 2011 compared to the second
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 third quarter of fiscal 2011 is expected to be approximately 1.32%.
Income Taxes. Income taxes for the second quarter of fiscal 2011 were $1.0
million (2.2% of net sales), representing an effective tax rate of 17.0%. This
compares to income tax expense of $1.3 million (3.3% of net sales) for the
second quarter of fiscal 2010, representing an effective tax rate of 34.4%. This
decrease primarily resulted from the reinstatement of the Federal Research and
Experimentation credit retroactive to January 1, 2010. The projected effective
tax rate for fiscal 2011 is now expected to be approximately 30%. 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.
Six Months Ended December 31, 2010 Compared to Six Months Ended December 31,
----------------------------------------------------------------------------
2009
----
Net sales. Net sales were $88.0 million for the six months ended December 31,
2010, up 8.1% compared to $81.4 million for the first six of fiscal 2010. Sales
of Wireless Group products rose $4.3 million, or 16.0%, while sales of Space &
Defense Group products increased $2.3 million, or 4.2%, in the current first six
months compared to the first six months of fiscal 2010.
The increase in sales of Wireless Group products was the result of a substantial
increase in demand for standard Wireless component products in the current first
six months compared to the first six months of fiscal 2010. Sales of
17
these products rose $9.0 million in the current first six months over the first
six 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 $4.7 million decline in custom and
ferrite basestation products in the current first six months compared to the
first six months of last fiscal year, led by a $3.5 million decline in sales to
a major OEM 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 third quarter of fiscal 2011 is expected to be comparable to
first and second quarter levels.
Sales of Space & Defense Group products rose $2.3 million, or 4.2% in the first
half of fiscal 2011 compared to the first half of the previous fiscal year. This
increase resulted from sales of counter-improvised explosive devices (IED)
related products totaling $7.7 million in the current first six months compared
to $2.0 million in the first six months of fiscal 2010. This increase was
partially off-set by a decline in sales of military printed wire board products,
which fell $2.8 million in the current first six months compared to first six
months of fiscal 2010 due to production delays and inefficiencies caused by
ongoing capacity expansion and facility renovations at the Company's Unicircuit
printed wire board operation.
Gross Profit. Gross profit for the first half of fiscal 2011 was $33.9 million,
(38.6% of net sales), up from $29.0 million (35.6% of net sales) for the same
period of the prior year. Gross profit as a percent of sales increased in the
first half of fiscal 2011 from the first half of last year due to favorable
product mix in the Wireless Group. Wireless Group gross margins were enhanced by
a $4.7 million reduction in sales of lower margin, high material content custom
products which were replaced by $9.0 million of sales of higher margin standard
component products in the current six months compared to the same period last
year. In the Space & Defense Group, margins declined slightly due to a less
favorable product mix resulting from the production inefficiencies at the
Unicircuit facility.
Marketing. Marketing expenses were $5.0 million (5.7% of net sales) for the
first half of fiscal 2011, up $0.4 million from $4.6 million (5.6% of net sales)
for the first half of fiscal 2010. Marketing expenses in the current first six
months rose $0.4 million from the first six 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 new AIR product introduction in the current fiscal year.
Research and Development. Research and development expenses were $7.4 million
(8.4% of net sales) in the first half of fiscal 2011, up 3.2% from $7.1 million
(8.8% of net sales) for the first half 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
six months of fiscal 2011 versus the first six months of last year due to the
higher level of opportunities in the Space & Defense Group and Wireless Group
marketplaces, which resulted in the hiring of additional engineering personnel
to support each Group in the current period. The Company expects to continue its
current research and development efforts and spending levels in fiscal 2011, and
is presently working on a number of new standard and custom Wireless Group and
Space & Defense Group opportunities.
General and Administrative. General and administrative expenses increased to
$9.9 million (11.2% of net sales) for the first six months of fiscal 2011, from
$9.1 million (11.2% of net sales) for the first six months of fiscal 2010. The
increase in general and administrative expense in the first half of fiscal 2011
compared to the first half of last year resulted from a lease charge of $0.5
million in the current first half of fiscal 2011 to recognize additional rent
expense related to the Company's vacant facility in Frimley, U.K. Additionally,
G&A expense rose in the current quarter as a result of a $0.3 million increase
in equity based compensation expense related to the Company returning to its
normal pattern of granting restricted stock in August this year compared to
November in fiscal 2010.
Operating Income. Operating income increased 44.4% in the first six months of
fiscal 2011 to $11.7 million, (13.3% of net sales), compared to $8.1 million
(10.0% of net sales) for the first six months of fiscal 2010. This increase in
the first half of fiscal 2011 from the first half of last year was due to the
$6.6 million increase in sales volume and the favorable product mix caused by
the $9.0 million rise in sales of higher margin Wireless standard components
coupled with the $4.7 million decline in sales of lower margin Wireless custom
assemblies.
18
On an operating segment basis, Wireless Group operating income was $5.3 million
(17.0% of group sales) for the first half of fiscal 2011, up $3.5 million, from
the Group's operating income of $1.8 million (6.6% of group sales) in the first
half of fiscal 2010. The increase in Wireless Group operating income in the
first half of fiscal 2011 compared to the first half of fiscal 2010 was a result
of the $4.3 million overall increase in Wireless Group sales and the combined
impact of the continuing decline in low margin custom assembly sales, which fell
$4.7 million in the current six months, and the increased demand for higher
margin standard component products which rose $9.0 million in the current six
months.
Space & Defense Group operating income was $7.0 million (12.3% of Group sales)
in the first half of fiscal 2011, up $0.3 million from $6.7 million (12.3% of
net group sales) for the first half of fiscal 2010. Operating margins for this
Group were unchanged in the first six month of fiscal 2011 compared to the first
half of fiscal 2010, while operating income in dollars increased $0.3 million
due to the increase in sales volume year over year in the first six months.
Other Income. Other income increased to $0.3 million in the first half of fiscal
2011 compared to $0.2 million for the first half of last year. This increase was
a result of a deliberate lengthening of the maturities of the Company's
investment portfolio resulting in 50% increase in average return. 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 half of fiscal 2011 was $0.3
million compared to $0.3 million for the first half of fiscal 2010. The Company
currently has $30.0 million outstanding on this 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 third quarter of fiscal 2011 is expected to be
approximately 1.30%.
Income Taxes. Income taxes for the first half of fiscal 2011 were $3.0 million
(3.3% of net sales), representing an effective tax rate of 25.2%. This compares
to income tax expense of $2.6 million (3.2% of net sales) for the first half of
fiscal 2010, representing an effective tax rate of 32.8%. During the second
quarter of fiscal 2011, the Federal Research and Experimentation credit was
reinstated retroactive to January 1, 2010. The projected effective tax rate for
fiscal 2011 is approximately 30.0% 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 for the first six months of fiscal 2011 was $8.7
million and resulted primarily from net income before depreciation, amortization
and non-cash equity based compensation expense. The positive cash flow from
earnings for the six months was further enhanced by a $2.4 million decrease in
accounts receivable due to improved collections, which more than off-set a $3.8
million increase in inventory, a $2.4 million increase in refundable income
taxes and a $2.7 million reduction of current liabilities.
Net cash provided by operations for the first six months of fiscal 2010 was
$10.3 million and resulted primarily from the high level of net income before
depreciation amortization and non-cash equity based compensation expense plus a
$2.1 million decline in inventory. The positive cash flow from earnings for the
six months was partially off-set by increases in receivables and the pay down of
liabilities totaling $3.3 million.
Net cash used in investing activities in the first half of fiscal 2011 was $1.8
million and consisted of $3.7 million used to pay for capital additions which,
was partially off-set by $1.9 million provided by the maturity of marketable
debt and available-for-sale securities. Net cash provided by investing
activities in the first half of fiscal 2010 was $8.6 million and consisted of
$10.8 million provided by the maturity of marketable debt securities, partially
offset by of $2.2 million used to pay for capital additions.
19
Net cash used in financing activities in the first six months of fiscal 2011 was
$7.8 million and consisted of $10.0 million used to pay long-term debt and $0.9
million used to purchase approximately 52,000 treasury shares, partially offset
by $3.1 million generated by cash receipts and tax benefits from the exercise of
stock options. Net cash used in financing activities in the first six months of
fiscal 2010 was $11.1 million and consisted of $9.8 million used to pay
long-term debt and $4.7 million used to purchase approximately 284,000 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, possible 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. At December 31, 2010, there were
approximately 0.4 million shares remaining under the current Board repurchase
authorization.
At December 31, 2010, the Company had approximately $71.2 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, equity prices and foreign currency exchange 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 December 31, 2010, the Company had cash, cash equivalents and marketable
securities of $71.2 million, all of which consisted of highly liquid investments
in marketable debt securities. The marketable debt securities at date of
purchase normally 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 December 31, 2010
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 December 31, 2010, 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 December 31, 2010, the
weighted average interest rate on the outstanding borrowings was 1.32%. 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 December 31, 2010 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 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.
20
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 December 31, 2010. Based on
that evaluation, the Certifying Officers concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2010.
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 December 31, 2010, approximately 464,000 shares remained authorized for
purchase, depending on market conditions.
----------------------------------------------------------------------------------------------------------------------
Period Total Number of Average Price Paid Total Number of Maximum Number
Shares (or Units) per Share (or Unit) Shares (or Units) (or Approximate
Purchased Purchased as Part of Dollar Value) of
Publicly Announced Shares (or Units)
Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
----------------------------------------------------------------------------------------------------------------------
October 2010 0 0 476,582
----------------------------------------------------------------------------------------------------------------------
November 2010 12,823 17.91 12,823 476,582
----------------------------------------------------------------------------------------------------------------------
December 2010 0 0 463,759
----------------------------------------------------------------------------------------------------------------------
Total 12,823 17.91 12,823 463,759
----------------------------------------------------------------------------------------------------------------------
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: January 28, 2011 /s/Lawrence A. Sala
---------------------------------------------
Lawrence A.Sala
President & Chief Executive Officer
Date: January 28, 2011 /s/George A. Blanton
---------------------------------------------
George A. Blanton
Sr. Vice President, Chief Financial Officer
and Treasurer
2
