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ANEN > SEC Filings for ANEN > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for ANAREN INC

Form 10-Q for ANAREN INC


26-Oct-2012

Quarterly Report


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 condensed 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, 2012.

Overview
The condensed consolidated financial statements present the financial condition of the Company as of September 30, 2012 and June 30, 2012, and the consolidated results of operations and cash flows of the Company for the three months ended September 30, 2012 and 2011.

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, 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 2012/ 2013 defense budget on these programs and, to date have seen only minimal negative impact on our anticipated Space & Defense Group order rate. The economic downturn has negatively impacted the worldwide Wireless infrastructure market as the market has delayed or downsized system expansions and upgrades. Wireless Group sales have declined in the first three months of fiscal 2013, compared to the first quarter of fiscal 2012 due to the softening of demand for standard components beginning in the fourth quarter of calendar 2011. Demand for consumer and infrastructure standard components has rebounded from the lowest levels of fiscal 2012 and the Company is cautiously optimistic about fiscal 2013 component shipment levels.

Second Quarter of Fiscal 2013 Outlook
For the second quarter of fiscal 2013, we anticipate comparable sales for both the Wireless and Space & Defense Groups compared to the first quarter levels. As a result, we expect net sales to be in the range of $37 to $41 million. We expect earnings per diluted share, absent the effect of any one-time events, to be in the range of $0.17 - $0.25, using an anticipated tax rate of approximately 32% and inclusive of approximately $0.05 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 September 30, 2012 were $39.1 million, up 0.9% from sales of $38.7 million for the first quarter of fiscal 2012. Net income for the first quarter of fiscal 2013 was $2.9 million, or 7.3% of net sales, up $0.4 million from net income of $2.5 million in the first quarter of fiscal 2012.

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
                                    September 30,         September 30,
                                        2012                  2011
Net sales                                    100.0 %               100.0 %
Cost of sales                                 63.1 %                62.5 %
Gross profit                                  36.9 %                37.5 %
Operating expenses:
Marketing                                      6.5 %                 6.7 %
Research and development                       8.5 %                10.1 %
General and administrative                    11.7 %                11.4 %
Total operating expenses                      26.7 %                28.2 %
Operating income                              10.2 %                 9.3 %
Other income (expense):
Other income                                   0.6 %                 0.4 %
Interest expense                              (0.1 %)               (0.3 %)
Total other income, net                        0.5 %                 0.1 %
Income before income tax expense              10.7 %                 9.4 %
Income tax expense                             3.4 %                 2.9 %
Net income                                     7.3 %                 6.5 %

The following table summarizes the Company's net sales by operating segments for the periods indicated.

                             Three Months Ended
                         Sept. 30,       Sept. 30,
                            2012           2011
(amounts in thousands)
Wireless Group           $   13,202     $    18,213
Space & Defense Group        25,860          20,507
Total                    $   39,062     $    38,720

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Net sales. Net sales were $39.1 million for the first quarter of fiscal 2013, up 0.9% compared to $38.7 million for the first quarter of fiscal 2012. Sales of Wireless Group products fell $5.0 million, or 27.5%, and sales of Space & Defense Group products rose $5.4 million, or 26.1%, in the current first quarter compared to the first quarter of fiscal 2012.

The decline in sales of Wireless Group products, which consist of standard components for use in building wireless base station and consumer equipment, was the result of a substantial decrease in demand from Wireless infrastructure customers beginning in the latter half of the first quarter of fiscal 2012 and continuing through the current first quarter of fiscal 2013. Sales of these products dropped $5.0 million in the current first quarter over the first quarter of fiscal 2012 due to declining orders from both European OEMs and Asian contract manufacturers. Sales of Wireless Group products rebounded approximately 30% in the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013 compared to the Wireless Group sales low point of $10.2 million in the third quarter last year. Wireless Group sales are expected to remain at or above first quarter levels throughout fiscal 2013 based on the increased customer demand the Company is presently experiencing. Current customer forecasts for the remainder of calendar 2012 indicate stronger demand as the year progresses and the Company remains optimistic about fiscal 2013 component shipment 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 $5.4 million, or 26.1% in the first quarter of fiscal 2013 compared to the first quarter of the previous fiscal year. First quarter 2013 Space & Defense Group sales were comparable to sales in this group for the preceding last three quarters of fiscal 2012. The improvement over fiscal 2012 first quarter sales reflects both the Space & Defense backlog level of approximately $95 - $100 million during the past twelve months and the resolution of production and customer specification issues which had delayed approximately $2.0 million of Space & Defense Group product shipments from the first to the second quarter of fiscal 2012. Quarterly Space & Defense Group sales are expected to remain at or above first quarter levels for the remainder of fiscal 2013.

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 first quarter of fiscal 2013 was $14.4 million, (36.9% of net sales), relatively unchanged from $14.5 million (37.5% of net sales) for the same quarter of the prior year. Gross profit as a percent of sales decreased slightly in the first quarter of fiscal 2013 from the first quarter of fiscal 2012 due to a slightly less favorable product mix in both the Wireless and Space & Defense Groups, which resulted in a higher material content in the current quarter compared to the first quarter last year.

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 $2.5 million (6.5% of net sales) for the first quarter of fiscal 2013, down from $2.6 million (6.7% of net sales) for the first quarter of fiscal 2012. Marketing expenses in the current first quarter declined due to reductions in consulting and advertising costs in the current first quarter compared to the first quarter of fiscal 2012.

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 $3.3 million (8.5% of net sales) in the first quarter of fiscal 2013, down 15.0% from $3.9 million (10.1% of net sales) for the first quarter of fiscal 2012. The decline resulted from a reduction in engineering personnel in the second quarter of fiscal 2012 due to a decline in design work and the reassignment of some engineering personnel to funded engineering development work in the Space & Defense Group. 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 maintain its current research and development efforts and spending levels in fiscal 2013.

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 increased 3.1% to $4.5 million (11.7% of net sales) for the first quarter of fiscal 2013, from $4.4 million (11.4% of net sales) for the first quarter of fiscal 2012. The increase in general and administrative expense in the current first quarter was due to increased compensation costs related to deferred compensation accruals and additional consultant expense. Quarterly general and administrative costs are expected to remain at current levels for the remainder of fiscal 2013.

Operating Income. Operating income increased $0.4 million in the first quarter of fiscal 2013 to $4.0 million, (10.2% of net sales), compared to $3.6 million (9.3% of net sales) for the first quarter of fiscal 2012. This increase in operating income was a result of the $0.5 million decline in operating expenses, which offset the small negative impact on gross margins from the less favorable product mix during the current quarter.


On an operating segment basis, Wireless Group operating income was $1.9 million (14.1% of Group sales) for the first quarter of fiscal 2013, down $1.8 million from the Group's operating income of $3.7 million (20.2% of Group sales) in the first quarter of fiscal 2012. The decline in Wireless Group operating income in the first quarter of fiscal 2013, compared to the first quarter of fiscal 2012, was due to the $5.0 million, or 27.5%, decline in Wireless Group sales. This significant decline in demand, year-over-year, has resulted in a large drop in production volumes and under absorption of Group manufacturing overhead and operating expenses in the current first quarter.

Space & Defense Group operating income was $2.1 million, or 8.3% of Group sales, in the first quarter of fiscal 2013, compared to a loss of $(0.1) million
((0.5)% of net group sales) for the first quarter of fiscal 2012. Operating margins for this Group increased in the current first quarter due mainly to the $5.4 million increase in sales volume and the resulting efficiencies in production and operating expenses at those sales levels compared to the first quarter fiscal 2012 sales levels.

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 first quarter of fiscal 2013 compared to $0.1 million for the first quarter of last year. Higher short-term interest rates and cash balances in China, year-over-year, have had a positive impact on interest income. 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 first quarter of fiscal 2013 was minimal, compared to $0.1 million for the first quarter of fiscal 2012. Interest expense has remained relatively low and has declined due to the continuing low level of the 30 day London Inter-Bank Offer Rate (LIBOR) interest rate, and decline in outstanding loan balance for the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. During the first quarter of fiscal 2013, the Company borrowed a total of $8 million, which is currently outstanding under the Line. These borrowings bear interest at the 30 day LIBOR rate, plus 100 to 200 basis points, based upon the Company's rolling twelve month earnings before interest and taxes and depreciation and amortization (EBITDA) performance. The rate is reset monthly and for the second quarter of fiscal 2013 is expected to be approximately 1.3%.

Income Taxes. Income taxes for the first quarter of fiscal 2013 were $1.3 million (3.4% of net sales), representing an effective tax rate of 32.0%. This compares to income tax expense of $1.1 million (2.9% of net sales) for the first quarter of fiscal 2012, representing an effective tax rate of 30.7%. The increase in the effective rate for the quarter is a result of the increase in taxable income, the expiration of the research and experimentation credit and the mix of foreign and domestic taxable income year over year. The projected effective tax rate for fiscal 2013 is expected to be approximately 32.0%.

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 2012 Annual Report on Form 10-K.

Liquidity and Capital Resources
Net cash provided by operations for the first three months of fiscal 2013 was $2.1 million and primarily resulted from the level of net income before depreciation and non-cash equity based compensation expense. The positive cash flow from net income for the first quarter of fiscal 2013 was off-set by a $3.9 million increase in accounts receivable resulting mainly from a lengthening of contractual payment terms for some larger Wireless Group customers and a $0.4 million increase in inventory. Net cash provided by operations for the first three months of fiscal 2012 was $5.3 million and resulted primarily from the level of net income before depreciation, amortization and non-cash equity based compensation expense. The positive cash flow from net income for the first quarter of fiscal 2012 was further enhanced by a $4.7 million decrease in receivables due to higher collections, which was off-set by a $2.6 million increase in inventory, a $1.5 million decrease in accounts payable and a $1.8 million net decline in other assets and liabilities.

Net cash provided by investing activities in the first three months of fiscal 2013 was $4.3 million and consisted of $5.4 million provided by maturities of marketable debt securities and $0.2 million provided by proceeds from a deposit on an asset held for sale, less $1.3 million used for capital additions. Net cash used for investing activities in the first three months of fiscal 2012 was $2.1 million and consisted of $0.1 million use for the net purchase of marketable debt securities and $2.0 million used for capital additions.


Net cash provided by financing activities was $0.9 million in the first three months of fiscal 2013 and consisted of $8.0 million provided by borrowings under the Company's credit facility, $1.8 million of cash and tax benefits provided by the exercise of stock options, less $8.9 million used to purchase approximately 469,000 treasury shares. Net cash used in financing activities was $9.0 million in the first three months of fiscal 2012 and consisted of $3.2 million of cash and tax benefits provided by the exercise of stock options, less $10.0 million used to pay long-term debt and $2.2 million used to purchase approximately 118,000 treasury shares.

During the remainder of fiscal 2013, the Company anticipates that its primary cash requirement will be for capital expenditures and possible repurchase of the Company's common stock. Capital expenditures for the remainder of fiscal 2013 are expected to be in the range of $5.0 - $6.0 million, 4-5% of anticipated sales, and will be funded from existing cash and investments, and expected cash flow generated by operations.

The Company has a $50.0 million revolving credit facility with its principal bank and currently, the Company has $8.0 million outstanding under the Line. These borrowings bear interest at the 30 day LIBOR rate, plus 100 to 200 basis points, based upon the Company's rolling twelve month earnings before interest and taxes and depreciation and amortization (EBITDA) performance. The rate is reset monthly and for the second quarter of fiscal 2013 is expected to be approximately 1.3%.

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 September 30, 2012, there were approximately 0.4 million shares remaining under the current Board repurchase authorization.

At September 30, 2012, the Company had approximately $45.6 million in cash, cash equivalents, and marketable securities. Included in the Company's cash and cash equivalents balance is $16.1 million that is deposited in banks in China. 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.

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