Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act).
Aeroflex Holding Corp. - 84,789,180 shares
Aeroflex Incorporated meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
This quarterly report on Form 10-Q for the period ended March 31, 2011 is a combined quarterly report being separately filed by two registrants: Aeroflex Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a direct wholly-owned subsidiary of Aeroflex Holding. Unless the context provides otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s consolidated subsidiaries.
Filing a combined report which contains full financial information of both Aeroflex Holding and its wholly owned subsidiary Aeroflex is both economical and efficient, as Aeroflex Holding is a holding company which does not conduct business operations on its own – i.e., all business operations are conducted by Aeroflex and its consolidated subsidiaries. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of Aeroflex and its subsidiaries, except for activity related to Aeroflex Holding’s equity and earnings per share. Aeroflex Holding’s only asset is its investment in Aeroflex. As such, other than any discussions of liquidity and capital resources (including indebtedness and cash flows), equity and earnings per share, controls and procedures, unregistered sales of equity securities, use of proceeds and any material differences between Aeroflex Holding and Aeroflex which would require separate disclosures, all information presented in this quarterly report will be combined and pertain to both Aeroflex Holding and Aeroflex.
In this Form 10-Q, unless the context requires otherwise, references to (i) the term “Sponsors” refers collectively to affiliates of or funds managed by The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc., and GS Direct, LLC, which indirectly control Aeroflex Holding, and (ii) “fiscal year” refers to the twelve months ended June 30 of the applicable year. For example, “fiscal 2010” refers to the twelve months ended June 30, 2010.
Aeroflex Holding’s board of directors authorized an increase of Aeroflex Holding’s authorized shares of common stock to 300,000,000 and a 65,000,000 for 1 common stock split, both of which became effective on November 18, 2010. Aeroflex Holding’s stockholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the split from additional paid-in capital to common stock. In addition, all share numbers and per share amounts in Aeroflex Holding’s consolidated financial statements have been retroactively adjusted to give effect to the stock split.
On November 19, 2010, Aeroflex Holding consummated an initial public offering (“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding received net proceeds of $244.0 million from the IPO, after deducting underwriting discounts and offering expenses, including a $2.5 million transaction fee which was paid to affiliates of the Sponsors under the advisory agreement with them for services directly attributable to the equity offering (“Transaction Fee”). Aeroflex Holding used the net proceeds of the IPO to make a capital contribution to Aeroflex. In connection with the IPO, Aeroflex:
AEROFLEX HOLDING CORP.
COMBINED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Stock Split, Initial Public Offering and Use of Proceeds
This quarterly report for the period ended March 31, 2011 is a combined quarterly report being separately filed by two registrants: Aeroflex Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a direct wholly-owned subsidiary of Aeroflex Holding. Unless the context provides otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s consolidated subsidiaries.
Filing a combined report which contains full financial information of both Aeroflex Holding and its wholly owned subsidiary Aeroflex is both economical and efficient, as Aeroflex Holding is a holding company which does not conduct business operations on its own – i.e., all business operations are conducted by Aeroflex and its consolidated subsidiaries. All assets, liabilities, income, expenses and cash flows presented for all periods represent those of Aeroflex and its subsidiaries, except for activity related to Aeroflex Holding’s equity and earnings per share. Aeroflex Holding’s only asset is its investment in Aeroflex. As such, other than any discussions of liquidity and capital resources (including indebtedness and cash flows), equity and earnings per share, use of proceeds and any material differences between Aeroflex Holding and Aeroflex which would require separate disclosures, all information presented in these notes to the unaudited condensed consolidated financial statements pertains to both Aeroflex Holding and Aeroflex.
Unless the context requires otherwise, references to (i) the term “Sponsors” refers collectively to affiliates of or funds managed by The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc., and GS Direct, LLC, which indirectly control Aeroflex Holding, and (ii) “fiscal year” refers to the twelve months ended June 30 of the applicable year. For example, “fiscal 2010” refers to the twelve months ended June 30, 2010.
Aeroflex Holding’s board of directors authorized an increase of Aeroflex Holding’s authorized shares of common stock to 300,000,000 and a 65,000,000 for 1 common stock split, both of which became effective on November 18, 2010. Aeroflex Holding’s stockholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the split from additional paid-in capital to common stock. In addition, all share numbers and per share amounts in Aeroflex Holding’s consolidated financial statements have been retroactively adjusted to give effect to the stock split.
On November 19, 2010, Aeroflex Holding consummated an initial public offering (“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding received net proceeds of $244.0 million from the IPO, after deducting underwriting discounts and offering expenses, including a $2.5 million transaction fee which was paid to affiliates of the Sponsors under the advisory agreement with them for services directly attributable to the equity offering (“Transaction Fee”). Aeroflex Holding used the net proceeds of the IPO to make a capital contribution to Aeroflex. In connection with the IPO, Aeroflex:
| | · | Repurchased an aggregate of $186.6 million of its senior unsecured notes and senior subordinated unsecured term loans and paid the tender premiums and expenses related thereto; |
| | · | Paid a $16.9 million termination fee to affiliates of the Sponsors to terminate the advisory agreement with them, which, including the related write-off of prepaid advisory fees, resulted in an $18.1 million expense (“Termination Fee”); and |
| | · | Amended its senior secured credit facility, for which a $3.3 million fee was paid to the lenders. |
Basis of Accounting
The accompanying unaudited condensed consolidated financial information of Aeroflex Holding and Aeroflex has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and reflects all adjustments, consisting only of normal recurring adjustments, which in management’s opinion are necessary to state fairly the Company’s financial position as of March 31, 2011, the results of operations for the three and nine month periods ended March 31, 2011 and 2010 and the cash flows for the nine month periods ended March 31, 2011 and 2010. The June 30, 2010 balance sheet information has been derived from audited financial statements, but does not include all information or disclosures required by U.S. GAAP.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of sales and expenses during the reporting period. Actual results may differ from those estimates, and such differences may be material to the financial statements.
These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Aeroflex Holding’s amended registration statement on Form S-1 filed with the SEC on November 9, 2010 (“Aeroflex Holding’s Registration Statement”) and in Aeroflex’s annual report on Form 10-K for the fiscal year ended June 30, 2010 (“Aeroflex’s Fiscal 2010 Form 10-K”).
The accompanying condensed consolidated financial statements of Aeroflex Holding are essentially identical to the accompanying condensed consolidated financial statements of Aeroflex, with the following significant exceptions: Aeroflex Holding has 84,789,180 shares of common stock outstanding at a par value of $.01 per share, of which 65,000,000 shares (as a result of the 65,000,000 for 1 stock split on November 18, 2010) are held by one shareholder and 19,789,180 shares are held by public shareholders by virtue of the IPO on November 19, 2010, which resulted in net proceeds of $244.0 million after deducting underwriting discounts and offering expenses, whereas Aeroflex has 1,000 shares of common stock outstanding at a par value of $.10 per share, all of which are held by Aeroflex Holding, and Aeroflex received a capital contribution of $244.0 million from Aeroflex Holding from the net proceeds of the IPO. The combined notes to the condensed consolidated financial statements are essentially identical for Aeroflex Holding and Aeroflex, except as noted.
Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal year or any future periods.
Reclassifications
Certain reclassifications have been made to the fiscal 2010 consolidated financial statements to conform to the fiscal 2011 presentation.
2. Accounting Pronouncements
Recently Adopted Accounting Pronouncements
On July 1, 2010, we adopted the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on the consolidation of variable interest entities. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. The adoption of this new guidance did not have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires a roll forward of activities on purchases, sales, issuance, and settlements on a gross basis of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We believe the adoption on July 1, 2011 of the gross presentation of the Level 3 roll forward will not have an impact on our consolidated financial statements.
3. Acquisitions of Businesses and Intangible Assets
Test Evolution Corporation
On October 1, 2007, we purchased 40% of the outstanding stock of Test Evolution Corporation, or TEC, for $4.0 million. TEC, located in Massachusetts, develops and manufactures digital, analog and RF semiconductor automated test equipment. We determined that we have control of this company and have consolidated TEC’s assets and liabilities and results of operations, all of which were insignificant, into our financial statements commencing October 1, 2007. On August 5, 2010, we invested another $2.0 million in TEC and, as a result of this and other capital transactions, our ownership interest is approximately 51%. The amounts attributable to the non-controlling interest in TEC’s equity and results of operations are not material to our consolidated financial statements and have been included in other long-term liabilities and other income (expense), respectively. TEC is included in our Test Solutions segment.
Radiation Assured Devices
On June 30, 2010, we acquired 100% of the stock of Radiation Assured Devices, Inc., or RAD, for $14.0 million in cash, plus contingent payments equal to 50% of the acquired company’s EBITDA (as defined in the agreement) for the five year period of fiscal 2011 to fiscal 2015, provided certain EBITDA thresholds are met. The fair value of the contingent consideration as of June 30, 2010 was $7.1 million and was reflected in other long-term liabilities and considered in the allocation of the purchase price. The fair value of the contingent consideration as of March 31, 2011 was $8.3 million, of which $1.4 million was reflected in accrued expenses and other current liabilities and $6.9 million was reflected in other long-term liabilities. The increase in the fair value of the contingent consideration was $409,000 and $1.2 million for the three and nine months ended March 31, 2011, respectively, and was recorded in selling, general and administrative costs. RAD, located in Colorado Springs, Colorado, uses commercial and specialty technologies to provide state of the art radiation engineering and qualification services, as well as to produce radiation hardened products for commercial and military spaceborne electronics. RAD is included in our Microelectronic Solutions segment.
Advanced Control Components
On August 31, 2010, we acquired 100% of the stock of Advanced Control Components, Inc., or ACC, for $19.2 million in cash, which was net of a preliminary working capital adjustment made at closing. The purchase price is subject to a further working capital adjustment, based on the amount by which the final adjusted net working capital at the date of closing is lower than the target set forth in the purchase agreement. We currently estimate an additional $764,000 deficiency in adjusted net working capital, reducing the purchase price to $18.4 million. ACC, located in Eatontown, New Jersey, designs, manufacturers and markets a wide range of radio frequency, or RF, and microwave products for the military, civilian radar, scientific and communications markets. ACC is included in our Microelectronic Solutions segment.
We allocated the purchase price based on the estimated fair value of the assets acquired and liabilities assumed as follows:
| (In thousands) | | | |
| Current assets (excluding cash of $15) | | $ | 4,899 | |
| Property, plant and equipment | | | 1,156 | |
| Other assets | | | 60 | |
| Customer related intangibles | | | 5,680 | |
| Non-compete arrangements | | | 30 | |
| Tradenames | | | 3,010 | |
| Goodwill | | | 10,057 | |
| Total assets acquired | | | 24,892 | |
| Current liabilities | | | (2,895 | ) |
| Deferred taxes | | | (3,576 | ) |
| Total liabilities assumed | | | (6,471 | ) |
| Net assets acquired | | $ | 18,421 | |
The customer related intangibles and non-compete arrangements are being amortized on a straight-line basis over a range of 1 to 9 years. The tradenames have an indefinite life. The goodwill is not deductible for tax purposes.
On a pro forma basis, had the ACC acquisition taken place as of the beginning of the periods presented, our results of operations for those periods would not have been materially affected.
Cash Paid for the Purchase of Businesses
For the nine months ended March 31, 2011, we had net cash outlays of $23.6 million for the purchase of businesses, net of cash acquired. This was primarily comprised of $18.4 million for the purchase of ACC and $5.6 million of contingent consideration payments ($4.6 million for Gaisler Research AB, acquired on June 30, 2008 and $1.0 million for Airflyte Electronics Company, acquired on June 26, 2009), partially offset by working capital adjustment refunds for prior year acquisitions.
Intangible Assets with Definite Lives
The components of amortizable intangible assets were as follows:
| | | March 31, 2011 | | | June 30, 2010 | |
| | | (In thousands) | |
| | | Gross | | | | | | Gross | | | | |
| | | Carrying | | | Accumulated | | | Carrying | | | Accumulated | |
| | | Amount | | | Amortization | | | Amount | | | Amortization | |
| | | | | | | | | | | | | |
| Developed technology | | $ | 200,791 | | | $ | 121,997 | | | $ | 197,422 | | | $ | 94,672 | |
| Customer related intangibles | | | 229,297 | | | | 115,342 | | | | 222,026 | | | | 94,656 | |
| Non-compete arrangements | | | 10,443 | | | | 5,942 | | | | 10,087 | | | | 4,420 | |
| Tradenames | | | 3,396 | | | | 1,197 | | | | 3,184 | | | | 658 | |
| Total | | $ | 443,927 | | | $ | 244,478 | | | $ | 432,719 | | | $ | 194,406 | |
4. Restructuring Charges
The following table sets forth the charges and payments related to the restructuring liability for the period indicated:
| | | Balance June 30, 2010 | | | Nine Months Ended March 31, 2011 | | | Balance March 31, 2011 | |
| | | Restructuring Liability | | | Net Additions | | | Cash Payments | | | Effect of foreign currency | | | Restructuring Liability | |
| | | (In thousands) | |
| Work force reduction | | $ | 172 | | | $ | 4,936 | | | $ | (3,140 | ) | | $ | 64 | | | $ | 2,032 | |
| Closure of facilities | | | 632 | | | | 994 | | | | (1,181 | ) | | | 50 | | | | 495 | |
| Total | | $ | 804 | | | $ | 5,930 | | | $ | (4,321 | ) | | $ | 114 | | | $ | 2,527 | |
Restructuring charges for the nine months ended March 31, 2011 amounted to $10.8 million, consisting of (a) $5.9 million of severance and facility closure costs in connection with continued consolidation activities related to certain manufacturing operations located in Europe and one of our domestic components facilities located in Whippany, New Jersey, and (b) a $4.9 million impairment charge based on the fair value of the Whippany, New Jersey facility we intend to sell.
5. Net Income (Loss) Per Common Share
The consolidated statements of operations for Aeroflex Holding present only basic net income (loss) per common share, as it does not have any potentially dilutive securities. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.
Earnings per share information is not presented for Aeroflex because, as a wholly-owned subsidiary of Aeroflex Holding, such information is not relevant.
6. Inventories
Inventories consisted of the following:
| | | March 31, | | | June 30, | |
| | | 2011 | | | 2010 | |
| | | (In thousands) | |
| Raw materials | | $ | 93,272 | | | $ | 61,278 | |
| Work in process | | | 55,858 | | | | 44,022 | |
| Finished goods | | | 22,082 | | | | 21,268 | |
| | | $ | 171,212 | | | $ | 126,568 | |
7. Derivative Financial Instruments
We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. When deemed appropriate to do so, we enter into interest rate swap derivatives to manage the effects of interest rate movements on portions of Aeroflex’s debt. We routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates.
The fair values of our derivative financial instruments included in the consolidated balance sheets as of March 31, 2011 and June 30, 2010 are as follows:
| | | Asset (Liability) Derivatives |
| | | March 31, 2011 | | June 30, 2010 |
| | | Balance Sheet | | Fair | | Balance Sheet | | Fair |
| (In thousands) | | Location | | Value(1) | | Location | | Value(1) |
| Derivatives designated as hedging | | | | | | | | | | |
| instruments: | | | | | | | | | | |
| Interest rate swap contracts | | Accrued expenses and | | | | | Accrued expenses and | | | |
| | | other current liabilities | | $ | - | | other current liabilities | | $ | (6,613) |
| | | | | | | | | | | |
| Derivatives not designated as | | | | | | | | | | |
| hedging instruments: | | | | | | | | | | |
| Foreign currency forward contracts | | Prepaid expenses and | | | | | Accrued expenses and | | | |
| | | other current assets | | | 3 | | other current liabilities | | | (293) |
| | | | | | | | | | | |
| Total derivatives, net | | | | $ | 3 | | | | $ | (6,906) |
(1) See Note 8 for further information about how the fair values of derivative assets and liabilities are determined. |
The gains and losses related to our derivative financial instruments designated as hedging instruments for the three and nine months ended March 31, 2011 and 2010 were as follows:
Derivatives in Cash Flow Hedging Relationships | | Amount of Gain or (Loss) Recognized on Derivatives in Other Comprehensive Income (Effective Portion) (1) | |
| | | Three Months Ended March 31, | | | Nine Months Ended March 31, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | (In thousands) | |
| Interest rate swap contracts | | $ | - | | | $ | (1,279 | ) | | $ | (612 | ) | | $ | (5,550 | ) |
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) (1) | |
| | | Three Months Ended March 31, | | | Nine Months Ended March 31, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | (In thousands) | |
| Interest expense | | $ | (1,033 | ) | | $ | (3,666 | ) | | $ | (7,225 | ) | | $ | (10,848 | ) |
(1) See Note 11 for additional information on changes to accumulated other comprehensive income (loss). |
The amounts of the gains and losses related to our derivative financial instruments not designated as hedging instruments for the three and nine months ended March 31, 2011 and 2010 were as follows:
Derivatives Not Designated as Hedging Instruments | | Location of Gain or (Loss) Recognized in Earnings on Derivative | | Amount of Gain or (Loss) Recognized in Earnings on Derivative | |
| | | | | Three Months Ended March 31, | | | Nine Months Ended March 31, | |
| | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | | | (In thousands) | |
| Foreign currency forward contracts | | Other income (expense) | | $ | (15 | ) | | $ | 410 | | | $ | 296 | | | $ | 641 | |
Interest Rate Swap Cash-Flow Hedges
We enter into interest rate swap contracts with counterparties that are rated investment grade to manage the effects of interest rate movements on portions of our debt. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising rates. We do not enter into interest rate swap contracts for speculative purposes. Our interest rate swap contracts that were outstanding as of June 30, 2010, all of which were entered into in fiscal 2008 for an aggregate notional amount of $425.0 million, matured during the nine months ended March 31, 2011. As of March 31, 2011 we have not entered into new interest rate swap contracts.
Foreign Currency Contract Derivatives
Foreign currency contracts are used to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. The change in fair value is included in other income (expense) as it occurs. As of March 31, 2011, we had $50.3 million of notional value foreign currency forward contracts maturing through April 29, 2011. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts.
8. Fair Value Measurements
We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring the fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
| | Level 1: | Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date. |
| | Level 2: | Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| | Level 3: | Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments’ valuation. |
The following table presents for each hierarchy level, financial assets and liabilities measured at fair value on a recurring basis:
| As of March 31, 2011 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| | | (In thousands) | |
| Assets: | | | | | | | | | | | | |
| Foreign currency forward contracts | | $ | - | | | $ | 3 | | | $ | - | | | $ | 3 | |
| As of June 30, 2010 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| | | (In thousands) | |
| Assets: | | | | | | | | | | | | |
| Non-current marketable securities | | $ | - | | | $ | - | | | $ | 9,769 | | | $ | 9,769 | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Foreign currency forward contracts | | $ | - | | | $ | 293 | | | $ | - | | | $ | 293 | |
| Interest rate swap contracts | | | - | | | | 6,613 | | | | - | | | | 6,613 | |
| Total Liabilities | | $ | - | | | $ | 6,906 | | | $ | - | | | $ | 6,906 | |
The following table presents the changes in the carrying value of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended March 31, 2011:
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| | | Auction Rate Securities | |
| | | (In thousands) | |
| Balance at June 30, 2010 | | $ | 9,769 | |
| Sold at par | | | (2,000 | ) |
| Transfer to Level 2 | | | (9,045 | ) |
| Transfer of unrealized loss from accumulated other comprehensive income (loss) to realized loss recorded in other expense | | | 688 | |
| Unrealized gain (loss) in accumulated other comprehensive income (loss) | | | 588 | |
| Balance at March 31, 2011 | | $ | - | |
Marketable Securities – In December 2010, $2.0 million of our auction rate securities were sold at par. In January 2011, the remaining $9.0 million of our auction rate securities were sold at an average of 92.4% of par. The resulting $688,000 realized loss was recorded in the statement of operations for the nine months ended March 31, 2011.
Foreign Currency Forward Contracts – The fair values of our foreign currency forward contracts were determined using a pricing model with all significant inputs based on observable market data such as measurement date spot and forward rates.
Interest Rate Swap Contracts – The fair values of our interest rate swap contracts were based on valuations received from the counterparties and corroborated by measurement date equivalent swap rates.
9. Long Term Debt and Credit Agreements
All indebtedness has been incurred by Aeroflex; such indebtedness is reflected on the balance sheets of Aeroflex Holding by virtue of the principles of consolidation.
All of the net proceeds of Aeroflex Holding’s IPO were used to make a capital contribution to Aeroflex to enable it to, among other things, tender for a portion of its senior unsecured notes and offer to repurchase a portion of its senior subordinated unsecured term loans. In December 2010, Aeroflex repurchased approximately $32.2 million of its senior unsecured notes and $154.4 million of its senior subordinated unsecured term loans. This resulted in a $25.2 million loss on extinguishment of debt, which is comprised of the following:
| | · | an 11% premium paid on the debt repurchased, which amounted to $20.5 million; |
| | · | the write-off of the related deferred financing costs of $4.0 million; and |
| | · | professional fees of $614,000. |
On November 4, 2010, Aeroflex amended its senior secured credit facility, for which it paid a $3.3 million fee to the lenders which was recorded as deferred financing costs and $579,000 of other costs that were expensed as incurred, which allowed Aeroflex to, among other things:
| | · | increase the amount of cash it can spend for acquisitions of businesses from $20 million per year and a $100 million aggregate amount, to $200 million in the aggregate (with no annual limit), from the effective date of the amendment to the credit facility maturity date, August 15, 2014; |
| | · | pay certain fees to affiliates of our Sponsors upon the completion of the Aeroflex Holding IPO. These fees were paid on November 24, 2010, and consisted of the $2.5 million Transaction Fee for services directly attributable to the equity offering, which was recorded as a reduction of additional paid-in capital, and the $16.9 million Termination Fee. The Termination Fee, when combined with the related write-off of prepaid advisory fees, amounted to an $18.1 million expense which is reported in the statement of operations as Termination of Sponsor Advisory Agreement; and |
| | · | base its interest rate margin above LIBOR on a grid, with reference to its current credit rating. This increased the interest rate margin by 75 basis points for all tranches of debt within the secured credit facility. |
The fair values of Aeroflex’s debt instruments are summarized as follows:
| | | March 31, 2011 | | | | |
| | | Carrying | | | Estimated | |
| | | Amount | | | Fair Value | |
| | | (In thousands) | |
| Senior secured credit facility B-1 term loan | | $ | 372,651 | | | $ | 374,515 | |
| Senior secured B-2 term loan | | | 116,454 | | | | 116,454 | |
| Senior unsecured notes | | | 192,845 | | | | 209,237 | |
| Senior subordinated unsecured term loan | | | 13,573 | | | | 14,913 | |
| Other | | | 745 | | | | 745 | |
| Total debt | | $ | 696,268 | | | $ | 715,864 | |
As of June 30, 2010, Aeroflex’s total debt had a carrying value of $901.8 million and a fair value of $877.7 million.
The estimated fair values of each of Aeroflex’s debt instruments are based on quoted market prices for the same or similar issues. Fair value estimates related to Aeroflex’s debt instruments are made at a specific point in time based on relevant market information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
As of March 31, 2011, Aeroflex is in compliance with all of the covenants contained in the loan agreements.
Interest paid was $56.7 million and $52.8 million for the nine months ended March 31, 2011 and 2010, respectively. Accrued interest of $5.7 million and $13.9 million was included in accrued expenses and other current liabilities at March 31, 2011 and June 30, 2010, respectively.
On May 9, 2011, Aeroflex entered into a new senior secured credit facility with various lenders, consisting of a senior secured term loan facility of $725.0 million and a senior secured revolving credit facility of $75.0 million, to refinance $695.5 million of its outstanding debt. See Note 16 for additional information on the debt refinancing.
10. Loss on Liquidation of Foreign Subsidiary
In connection with the 2003 acquisition of one of our wireless businesses in the U.K., we set up a foreign partnership to finance the acquisition. We invested $19.5 million in the partnership and the partnership advanced those funds to our foreign holding company in the form of a loan, the proceeds of which were used for the acquisition.
During the nine months ended March 31, 2010, the loan was fully repaid to the partnership, with interest, and we received a return of capital and dividends. The partnership has been substantially liquidated.
As a result of changes in foreign currency rates, there was a cumulative translation adjustment of $7.7 million remaining after substantially all of the assets were returned to us and substantially all of the liabilities were satisfied. In accordance with U.S. GAAP, this remaining cumulative translation adjustment has been expensed in the period during which the substantial liquidation of the partnership occurred and presented as a non-cash loss on liquidation of foreign subsidiary in our Condensed Consolidated Statement of Operations for the nine months ended March 31, 2010. This loss was not deductible for income tax purposes.
11. Comprehensive Income
The components of comprehensive income (loss) were as follows:
| | | Three Months Ended | | | Nine Months Ended | |
| | | March 31, | | | | | | March 31, | | | | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| (In thousands) | | | | | | | | | | | | |
| Net income (loss) | | $ | 4,127 | | | $ | 2,856 | | | $ | (13,093 | ) | | $ | (28,301 | ) |
| Increase (decrease) in fair value of | | | | | | | | | | | | | | | | |
| interest rate swap contracts, net of tax | | | | | | | | | | | | | | | | |
| provision (benefit) of $401, $927, | | | | | | | | | | | | | | | | |
| $2,567 and $2,013 | | | 632 | | | | 1,460 | | | | 4,046 | | | | 3,285 | |
| Valuation allowance against | | | | | | | | | | | | | | | | |
| non-current marketable securities | | | - | | | | 780 | | | | 1,276 | | | | 1,002 | |
| Foreign currency translation adjustment, | | | | | | | | | | | | | | | | |
| net of tax provision (benefit) of $0, $(1,033), | | | | | | | | | | | | | | | | |
| $625 and $(416) | | | 7,200 | | | | (7,890 | ) | | | 14,983 | | | | (1,877 | ) |
| Total comprehensive income (loss) | | $ | 11,959 | | | $ | (2,794 | ) | | $ | 7,212 | | | $ | (25,891 | ) |
Accumulated other comprehensive income (loss) was as follows:
| | | Unrealized | | | Valuation | | | | | | | | | | |
| | | Gain (Loss) | | | Allowance | | | Minimum | | | Foreign | | | | |
| | | on Interest | | | Against | | | Pension | | | Currency | | | | |
| | | Rate Swap | | | Non-Current | | | Liability | | | Translation | | | | |
| | | Contracts | | | Marketable | | | Adjustment | | | Adjustment | | | Total | |
| | | (net of tax) | | | Securities | | | (net of tax) | | | (net of tax) | | | (net of tax) | |
| | | (In thousands) | |
| | | | | | | | | | | | | | | | |
| Balance, June 30, 2010 | | $ | (4,046 | ) | | $ | (1,276 | ) | | $ | (773 | ) | | $ | (47,480 | ) | | $ | (53,575 | ) |
| Nine months' activity | | | 4,046 | | | | 1,276 | | | | - | | | | 14,983 | | | | 20,305 | |
| Balance, March 31, 2011 | | $ | - | | | $ | - | | | $ | (773 | ) | | $ | (32,497 | ) | | $ | (33,270 | ) |
The valuation allowance for non-current marketable securities was not adjusted for income taxes as it would have created a capital loss carryforward upon realization for which we would have recorded a valuation allowance against the related deferred tax asset.
Although, as of March 31, 2011, deferred U.S. income taxes have been provided on certain undistributed foreign earnings of a U.K. limited partnership subsidiary, we have not recorded a deferred U.S. income tax on the foreign currency translation adjustment since only an insignificant amount relates to that subsidiary.
12. Legal Matters
In March 2005, we sold the net assets of our shock and vibration control device manufacturing business, which we refer to as VMC. Under the terms of the sale agreements, we retained certain liabilities relating to adverse environmental conditions that existed at the premises occupied by VMC as of the date of sale. We recorded a liability for the estimated remediation costs related to adverse environmental conditions that existed at the VMC premises when it was sold. The accrued environmental liability at March 31, 2011 was $1.4 million, of which $322,000 was expected to be paid within one year.
We have identified instances of noncompliance with the International Traffic in Arms Regulations (“ITAR”) in certain of our past business activities as well as in the pre-acquisition business activities of certain recently acquired companies. These include the inadvertent misclassification and/or export of products without the required license and the disclosure of controlled technology to certain foreign national employees. These matters were formally disclosed to the U.S. Department of State from time to time during the period from 2007 through 2010.
For example, in fiscal 2007, when we became aware that certain RadHard bidirectional multipurpose transceivers sold by us since 1999 may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with ITAR, we filed a Voluntary Disclosure with the Department of State describing the details of the possible inadvertent misclassification and identifying certain unauthorized exports from the United States to end-users in a number of countries, including China and Russia. Once our request for reclassification was denied and a determination was made that the product was subject to the licensing jurisdiction of the Department of State in accordance with ITAR, on September 18, 2008, we filed an addendum to our Voluntary Disclosure identifying other products that may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with ITAR but were inadvertently misclassified and exported without a license.
At this time it is not possible to determine whether any fines or other penalties will be asserted against us or the materiality of the outcome of any of these ITAR matters.
We are also involved in various other claims and legal actions that arise in the ordinary course of business. We do not believe that the ultimate resolution of any of these actions will have a material adverse effect on our business, results of operations, financial position, liquidity or capital resources.
13. Business Segments
We are a global provider of radio frequency, or RF, and microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high-performance wireless communication systems. Our solutions include highly specialized microelectronic components and test and measurement equipment used by companies in the space, avionics, defense, commercial wireless communications, medical and other markets. Approximately 26% and 32% of our sales for the three months ended March 31, 2011 and 2010, respectively, and 29% and 33% for the nine months ended March 31, 2011 and 2010 were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No customer constituted more than 10% of sales during any of the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.
The majority of our operations are located in the United States. We also have operations in Europe and Asia, with our most significant foreign operations in the U.K. Net sales from facilities located in the U.K. were approximately $47.5 million and $48.9 million for the three months ended March 31, 2011 and 2010 and $128.0 million and $120.0 million for the nine months ended March 31, 2011 and 2010, respectively. Total assets of the U.K. operations were $188.3 million as of March 31, 2011 and $159.9 million as of June 30, 2010.
Net sales, based on the customers’ locations, attributed to the United States and other regions were as follows:
| | | Three Months Ended | | | Nine Months Ended | |
| | | March 31, | | | | | | March 31, | | | | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | (In thousands) | |
| United States of America | | $ | 101,533 | | | $ | 94,700 | | | $ | 291,364 | | | $ | 267,089 | |
| Europe and Middle East | | | 40,623 | | | | 40,975 | | | | 105,281 | | | | 103,684 | |
| Asia and Australia | | | 44,726 | | | | 29,550 | | | | 117,841 | | | | 85,655 | |
| Other regions | | | 6,337 | | | | 3,210 | | | | 16,243 | | | | 8,862 | |
| | | $ | 193,219 | | | $ | 168,435 | | | $ | 530,729 | | | $ | 465,290 | |
We organize our operations into two segments: Aeroflex Microelectronics Solutions, or AMS and Aeroflex Test Solutions, ATS. We engineer, manufacture and market a diverse range of products in each of our segments.
AMS offers a broad range of microelectronics products and is a leading provider of high-performance, high reliability specialty microelectronics components. Its products include high reliability, or HiRel, microelectronics/semiconductors, RF and microwave components, mixed-signal/digital ASICs and motion control products. ATS is a leading provider of a broad line of specialized test and measurement hardware and software products. Its products include wireless test equipment, military radio and private mobile radio test equipment, avionics test equipment, synthetic test equipment and other general purpose test equipment.
Debt Refinancing
On May 9, 2011, Aeroflex entered into a new senior secured credit facility with various lenders, consisting of a senior secured term loan facility of $725.0 million and a senior secured revolving credit facility of $75.0 million, to refinance $695.5 million of its outstanding debt. The new term loan facility provides for $1.8 million quarterly principal repayments commencing September 30, 2011, with the remaining balance due at maturity on May 9, 2018. Unless terminated earlier, the new revolving credit facility will expire on May 9, 2016. No amounts have been drawn under the revolving credit agreement. The new senior secured credit facility is subject to mandatory prepayments based on certain events, including a percentage of our excess cash flows, which ranges from 0% to 50%, depending on the level of our senior secured leverage ratio. The outstanding borrowings under the new senior secured credit facility bear interest, payable quarterly, at a rate per annum equal to either: (i) the base rate (as defined in the new senior secured credit facility), plus an applicable margin of 2.0%, or (ii) the adjusted LIBOR rate (as defined in the new senior secured credit facility), plus an applicable margin of 3.0%. The adjusted LIBOR rate has a floor of 1.25% on the term loan. Certain customary fees are payable to the lenders and the agents under the new senior secured credit facility, including, without limitation, commitment fees, letter of credit fees, issuer fronting fees and an annual facility servicing fee. The new senior secured credit facility contains various customary affirmative and negative covenants and customary events of default. Aeroflex’s new senior secured credit facility contains a maximum leverage ratio of total debt (less up to $15.0 million of unrestricted cash) to Adjusted EBITDA financial covenant, as defined in the new senior secured credit facility. The maximum leverage ratio permitted as of June 30, 2011 is 5.20, which periodically decreases to 4.75 on June 30, 2012. Additional covenants include restrictions on indebtedness, liens, investments, dividends, disposition of assets, acquisitions and transactions with shareholders and affiliates.
The $725.0 million proceeds were, or will be, used:
| | 1) | to refinance $695.5 million of Aeroflex’s outstanding debt, as follows: |
| | · | to repay the entire outstanding balance of $489.1 million under Aeroflex’s existing senior secured credit facilities; |
| | · | to repurchase, pursuant to a tender offer initiated on April 25, 2011, all of Aeroflex’s senior notes of $192.8 million (Aeroflex expects to call any notes not tendered); and |
| | · | to repurchase all of Aeroflex’s senior subordinated unsecured term loans of $13.6 million. |
| | 2) | to pay fees and expenses totaling $33.8 million in connection with the refinancing, including: |
| | · | fees to the lenders of $14.2 million; |
| | · | a premium of approximately 9% on the repurchased senior notes and senior subordinated unsecured term loans, which amounted to $18.3 million; and |
| | · | professional fees and other expenses of approximately $1.3 million. |
The total cash outlay related to the debt refinancing, including premiums, fees and expenses listed above and $10.7 million of interest accrued through May 9, 2011, exceeds the $725.0 million proceeds by $15.0 million, which was paid from our available cash.
We will record approximately $15.5 million of these fees related to the new facility as deferred financing costs and record approximately $34.2 million related to the repayment of the existing debt as a loss on extinguishment of debt, including the write-off of the existing deferred financing costs of $15.9 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q for the period ended March 31, 2011 is a combined quarterly report being separately filed by two registrants: Aeroflex Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a direct wholly-owned subsidiary of Aeroflex Holding. Unless the context provides otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s consolidated subsidiaries.
Forward-Looking Statements
This report contains forward-looking statements. All statements other than statements of historical fact are forward-looking statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. A listing of some of the key factors that could cause actual results to differ from our expectations is included under the caption “Risk Factors” disclosed in Aeroflex Holding’s Registration Statement and Aeroflex’s Fiscal 2010 Form 10-K.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments, or for any other reason, except as required by law.
Overview
Company Background
We are a leading global provider of RF and microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high-performance wireless communication systems. Our solutions include highly specialized microelectronic components and test and measurement equipment used by companies in the space, avionics, defense, commercial wireless communications, medical and other markets. We have targeted customers in these end markets because we believe our solutions address their technically demanding requirements. We were founded in 1937 and have proprietary technology that is based on extensive know-how and a long history of research and development focused on specialized technologies, often in collaboration with our customers.
Business Segments
Our business segments and major products included in each segment are as follows:
Microelectronic Solutions (“AMS”)
| | · | HiRel microelectronics/semiconductors |
| | · | RF and microwave components |
| | · | Mixed-signal/digital ASICs |
Test Solutions (“ATS”)
| | · | Military radio and Private Mobile Radio, or PMR, test equipment |
| | · | Synthetic test equipment |
| | · | General purpose test equipment and other |
Stock Split
Aeroflex Holding’s board of directors authorized an increase in Aeroflex Holding’s authorized shares of common stock to 300,000,000 and a 65,000,000 for 1 common stock split, both of which became effective on November 18, 2010. Aeroflex Holding’s stockholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the par value of the additional shares issued in connection with the split from additional paid-in capital to common stock. In addition, all share numbers and per share amounts in Aeroflex Holding’s consolidated financial statements have been retroactively adjusted to give effect to the stock split.
Initial Public Offering
On November 19, 2010, Aeroflex Holding consummated an initial public offering (“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding received net proceeds of $244.0 million from the IPO, after deducting underwriting discounts and offering expenses, including a $2.5 million transaction fee which was paid to affiliates of the Sponsors under the advisory agreement with them for services directly attributable to the equity offering (“Transaction Fee”). Aeroflex Holding used the net proceeds of the IPO to make a capital contribution to Aeroflex. In connection with the IPO, Aeroflex:
| | · | Repurchased $186.6 million of its senior unsecured notes and senior subordinated unsecured term loans and paid tender premiums and expenses related thereto; |
| | · | Paid a $16.9 million termination fee to affiliates of the Sponsors to terminate the advisory agreement with them, which, including the related write-off of prepaid advisory fees, resulted in an $18.1 million expense (“Termination Fee”); and |
| | · | Amended its senior secured credit facility, for which a $3.3 million fee was paid to the lenders. |
Debt Repurchase
In December 2010, Aeroflex repurchased approximately $32.2 million of its senior unsecured notes and $154.4 million of its senior subordinated unsecured term loans. This resulted in a $25.2 million loss on extinguishment of debt, which is comprised of the following:
| | · | an 11% premium paid on the debt repurchased, which amounted to $20.5 million; |
| | · | the write-off of the related deferred financing costs of $4.0 million; and |
| | · | professional fees of $614,000. |
Amendment to Senior Secured Debt Agreement
On November 4, 2010, Aeroflex amended its senior secured credit facility, for which it paid a $3.3 million fee to the lenders which was recorded as deferred financing costs and $579,000 of other costs that were expensed as incurred, which allowed Aeroflex to, among other things:
| | · | increase the amount of cash it can spend for acquisitions of businesses from $20 million per year and a $100 million aggregate amount, to $200 million in the aggregate (with no annual limit), from the effective date of the amendment to the credit facility maturity date, August 15, 2014; |
| | · | pay certain fees to affiliates of the Sponsors upon the completion of the Aeroflex Holding IPO. These fees were paid on November 24, 2010, and consisted of the $2.5 million Transaction Fee for services directly attributable to the equity offering, which was recorded as a reduction of additional paid-in capital, and the $16.9 million Termination Fee. The Termination Fee, when combined with the related write-off of prepaid advisory fees, amounted to an $18.1 million expense which is reported in the statement of operations as Termination of Sponsor Advisory Agreement; and |
| | · | base its interest rate margin above LIBOR on a grid, with reference to its current credit rating. This increased the interest rate margin by 75 basis points for all tranches of debt within the secured credit facility. |
Results of Operations
The following table sets forth our historical results of operations as a percentage of net sales for the periods indicated below:
| | | Three Months Ended | | | Nine Months Ended | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Costs of sales | | | 45.0 | | | | 46.4 | | | | 47.0 | | | | 48.0 | |
| Gross profit | | | 55.0 | | | | 53.6 | | | | 53.0 | | | | 52.0 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Selling, general and administrative costs | | | 19.7 | | | | 18.5 | | | | 21.4 | | | | 19.9 | |
| Research and development costs | | | 12.8 | | | | 12.4 | | | | 12.9 | | | | 11.9 | |
| Amortization of acquired intangibles | | | 8.2 | | | | 9.1 | | | | 9.0 | | | | 10.0 | |
Termination of Sponsor Advisory Agreement | | | - | | | | - | | | | 3.4 | | | | - | |
| Restructuring charges | | | 1.4 | | | | 0.1 | | | | 2.0 | | | | 0.1 | |
| Loss on liquidation of foreign subsidiary | | | - | | | | - | | | | - | | | | 1.7 | |
| Total operating expenses | | | 42.1 | | | | 40.1 | | | | 48.7 | | | | 43.6 | |
| | | | | | | | | | | | | | | | | |
| Operating income | | | 12.9 | | | | 13.5 | | | | 4.3 | | | | 8.4 | |
| | | | | | | | | | | | | | | | | |
| Other income (expense): | | | | | | | | | | | | | | | | |
| Interest expense | | | (7.2 | ) | | | (12.4 | ) | | | (10.5 | ) | | | (13.6 | ) |
| Loss on extinguishment of debt | | | - | | | | - | | | | (4.7 | ) | | | - | |
| Gain from a bargain purchase of a | | | | | | | | | | | | | | | | |
| business | | | - | | | | - | | | | - | | | | - | |
| Other income (expense), net | | | (0.1 | ) | | | 0.1 | | | | (0.1 | ) | | | 0.2 | |
| | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | | 5.6 | | | | 1.2 | | | | (11.0 | ) | | | (5.0 | ) |
| Provision (benefit) for income taxes | | | 3.5 | | | | (0.5 | ) | | | (8.6 | ) | | | 1.1 | |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 2.1 | % | | | 1.7 | % | | | (2.4 | )% | | | (6.1 | )% |
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Net Sales. Net sales increased $24.8 million, or 15%, to $193.2 million for the three months ended March 31, 2011 from $168.4 million for the three months ended March 31, 2010. Businesses acquired since March 31, 2010 contributed $8.9 million to sales, or 5%, in the current quarter.
| | | Net Sales | |
| Three Months | | | | | % of | | | | | | % of | | | | |
| Ended | | | | | Consolidated | | | | | | Consolidated | | | | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Total | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 83,418 | | | | 49.5 | % | | $ | 85,017 | | | | 50.5 | % | | $ | 168,435 | |
| 2011 | | $ | 97,856 | | | | 50.6 | % | | $ | 95,363 | | | | 49.4 | % | | $ | 193,219 | |
Net sales in the AMS segment increased $14.4 million, or 17%, to $97.9 million for the three months ended March 31, 2011 from $83.4 million for the three months ended March 31, 2010. Specific variances include a volume driven $7.5 million increase in sales of HiRel RadHard integrated circuits; a volume driven $7.4 million increase in sales of components, including $3.3 million from Advanced Control Components, Inc., or ACC, acquired in August 2010; and additional sales of $1.6 million from Radiation Assured Devices, Inc., or RAD, acquired in June 2010. The increases in sales were partially offset by volume driven reductions of $1.1 million in sales of motion control products and $1.0 million in sales of microelectronics modules.
Net sales in the ATS segment increased $10.3 million, or 12%, to $95.4 million for the three months ended March 31, 2011 from $85.0 million for the three months ended March 31, 2010. Specific variances include a volume driven $16.6 million increase in sales of radio test products; a volume driven $3.2 million increase in sales of avionic products; and a volume driven increase in wireless test products sales of $2.2 million, which includes, $3.9 million of sales from Willtek Communications, or Willtek, acquired in May 2010. The increases in net sales were partially offset by a volume driven reduction of $11.6 million in sales of general purpose test products.
Gross Profit. Gross profit equals net sales less cost of sales. Cost of sales includes materials, direct labor, amortization of capitalized software development costs and overhead expenses such as engineering labor, fringe benefits, depreciation, allocable occupancy costs and manufacturing supplies.
On a consolidated basis, gross profit was $106.4 million, or 55.0% of net sales, for the three months ended March 31, 2011 and $90.3 million, or 53.6% of net sales, for the three months ended March 31, 2010.
| | | Gross Profit | |
| Three Months | | | | | | | | | | | | | | | | | | |
| Ended | | | | | % of | | | | | | % of | | | | | | % of | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Total | | | Net Sales | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 42,286 | | | | 50.7 | % | | $ | 48,014 | | | | 56.5 | % | | $ | 90,300 | | | | 53.6 | % |
| 2011 | | $ | 51,971 | | | | 53.1 | % | | $ | 54,387 | | | | 57.0 | % | | $ | 106,358 | | | | 55.0 | % |
Gross margins in the AMS segment were 53.1% for the three months ended March 31, 2011 and 50.7% for the three months ended March 31, 2010. The increase in gross margins is principally attributable to increased sales of HiRel RadHard integrated circuits, combined with the additional sales of services by RAD, acquired in June 2010, (which has margins higher than the segment average). Gross profit increased $9.7 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 due to both increased sales and the aforementioned increase in gross margins.
Gross margins in the ATS segment were 57.0% for the three months ended March 31, 2011 and 56.5% for the three months ended March 31, 2010. Gross profit increased $6.4 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 due to increased sales.
Selling, General and Administrative Costs. Selling, general and administrative (“SG&A”) costs include sales, office and management salaries, fringe benefits, commissions, insurance and professional fees.
On a consolidated basis, SG&A costs increased $7.0 million, or 22%, to $38.3 million for the three months ended March 31, 2011. This increase was primarily attributable to the additional SG&A costs of the acquired businesses, the expansion of our sales and marketing team in the Asia-Pacific region and the increase in the fair value of contingent consideration of an acquired business. SG&A related to the acquired businesses increased SG&A by $1.9 million, or 6% of 2010 total SG&A. As a percentage of sales, SG&A costs increased from 18.5% to 19.7% from the three months ended March 31, 2010 to the three months ended March 31, 2011.
| | | Selling, General and Administrative Costs | |
| Three Months | | | | | | | | | | | | | | | | | | | | | |
| Ended | | | | | % of | | | | | | % of | | | | | | | | | % of | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Corporate | | | Total | | | Net Sales | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 10,799 | | | | 12.9 | % | | $ | 17,077 | | | | 20.1 | % | | $ | 3,409 | | | $ | 31,285 | | | | 18.5 | % |
| 2011 | | $ | 13,483 | | | | 13.8 | % | | $ | 20,456 | | | | 21.5 | % | | $ | 4,326 | | | $ | 38,265 | | | | 19.7 | % |
In the AMS segment, SG&A costs increased $2.7 million, or 25%, to $13.5 million for the three months ended March 31, 2011. This increase is primarily due to additional SG&A costs of $1.0 million related to RAD, acquired in June 2010, and ACC, acquired in August 2010, and general increases in our existing businesses, primarily due to increased employee related expenses of $1.2 million. SG&A costs in the AMS segment increased from 12.9% to 13.8%, as a percentage of sales, from the three months ended March 31, 2010 to the three months ended March 31, 2011.
In the ATS segment, SG&A costs increased $3.4 million, or 20%, to $20.5 million for the three months ended March 31, 2011, primarily due to increased employee related expenses of $1.8 million, primarily related to the expansion of our sales and marketing team in the Asia-Pacific region, and additional costs of $919,000 related to Willtek, acquired in May 2010. As a percentage of sales, SG&A costs in the ATS segment increased from 20.1% to 21.5% from the three months ended March 31, 2010 to the three months ended March 31, 2011.
Corporate general and administrative costs increased $917,000 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily due to increased employee related expenses of $1.1 million and a $409,000 increase in the fair value of contingent consideration of an acquired business, partially offset by a reduction in merger related expenses and sponsor fees of $647,000.
Research and Development Costs. Research and development costs include materials, engineering labor and allocated overhead.
On a consolidated basis, research and development costs increased by $3.8 million, or 18%, to $24.7 million for the three months ended March 31, 2011. This increase was primarily attributable to the additional costs of the acquired businesses and the acceleration of research and development projects in our ATS segment to meet customer requirements for new products. Research and development costs of acquired businesses increased research and development costs by $1.8 million, or 9% of 2010 total research and development costs. As a percentage of sales, research and development costs increased from 12.4% to 12.8% from the three months ended March 31, 2010 to the three months ended March 31, 2011.
| | | Research and Development Costs | |
| Three Months | | | | | | | | | | | | | | | | | | |
| Ended | | | | | % of | | | | | | % of | | | | | | % of | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Total | | | Net Sales | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 8,709 | | | | 10.4 | % | | $ | 12,135 | | | | 14.3 | % | | $ | 20,844 | | | | 12.4 | % |
| 2011 | | $ | 9,729 | | | | 9.9 | % | | $ | 14,934 | | | | 15.7 | % | | $ | 24,663 | | | | 12.8 | % |
AMS segment self-funded research and development costs increased $1.0 million, or 12%, to $9.7 million for the three months ended March 31, 2011 primarily due to additional costs of $828,000 related to RAD, acquired in June 2010, and ACC, acquired in August 2010, and additional spending on HiRel RadHard integrated circuits projects. As a percentage of sales, AMS segment research and development costs decreased from 10.4% for the three months ended March 31, 2010 to 9.9% for the three months ended March 31, 2011.
ATS segment self-funded research and development costs increased $2.8 million, or 23%, to $14.9 million for the three months ended March 31, 2011 primarily due to increases in our radio test and avionics divisions, for the development of a common platform technology, and additional costs of $954,000 related to Willtek, acquired in May 2010. As a percentage of sales, ATS segment research and development costs increased from 14.3% for the three months ended March 31, 2010 to 15.7% for the three months ended March 31, 2011.
Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $492,000 for the three months ended March 31, 2011 to $15.9 million primarily due to additional amortization related to intangible assets recorded in connection with the acquisitions of Willtek, in May 2010; RAD, in June 2010; and ACC, in August 2010. The increases in amortization were partially offset by certain intangibles becoming fully amortized during fiscal 2010. By segment, the amortization increased $487,000 in the AMS segment and increased $5,000 in the ATS segment.
Restructuring Charges. The AMS segment incurred total restructuring costs of $797,000 for the three months ended March 31, 2011 which primarily relate to consolidation of our components operations by relocating our Whippany, New Jersey facility’s production to our Ann Arbor, Michigan facility and to our Eatontown, New Jersey facility. There were no comparable charges for the three months ended March 31, 2010.
The ATS segment incurred restructuring costs of $1.9 million for the three months ended March 31, 2011, primarily related to the integration of Willtek with our U.K. operations. In comparison, for the three months ended March 31, 2010, the ATS segment incurred restructuring costs of $105,000 for continued reorganization efforts in our European operations.
Other Income (Expense). Interest expense was $13.9 million for the three months ended March 31, 2011 and $20.8 million for the three months ended March 31, 2010. The decrease resulted from the repurchase, in December 2010, of $186.6 million of Aeroflex’s senior unsecured notes and senior subordinated unsecured term loans with the proceeds from the IPO. Other income (expense) of $(119,000) for the three months ended March 31, 2011 consisted primarily of $(406,000) of foreign currency transaction losses, offset by $287,000 of interest and miscellaneous income. Other income (expense) of $222,000 for the three months ended March 31, 2010 consisted primarily of $329,000 of interest and miscellaneous income, offset by $(107,000) of foreign currency transaction losses.
Income Taxes. The income tax provision was $6.7 million for the three months ended March 31, 2011 on pre-tax income of $10.9 million. We recorded an income tax benefit for the three months ended March 31, 2010 of $791,000 on pre-tax income of $2.1 million. The effective income tax rate for both periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes, including U.S. income tax on certain foreign net income that we anticipate will be repatriated to the U.S. The provisions are a combination of projected annual U.S. tax benefits on domestic losses and foreign tax expense on foreign earnings. The resulting projected net consolidated income tax benefit was then applied to the projected consolidated pre-tax amount for the year to calculate the annual effective tax rate, which contributed to the high income tax provision as a percentage of pre-tax income.
In the three months ended March 31, 2011 and 2010, we paid income taxes of $4.1 million and $622,000, respectively.
Net Income. Net income was $4.1 million for the three months ended March 31, 2011 and $2.9 million for the three months ended March 31, 2010.
Nine Months Ended March 31, 2011 Compared to Nine Months Ended March 31, 2010
Net Sales. Net sales increased $65.4 million, or 14%, to $530.7 million for the nine months ended March 31, 2011 from $465.3 million for the nine months ended March 31, 2010. Businesses acquired since March 31, 2010 contributed $27.7 million to sales, or 5%, in the current fiscal year.
| | | Net Sales | |
| Nine Months | | | | | % of | | | | | | % of | | | | |
| Ended | | | | | Consolidated | | | | | | Consolidated | | | | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Total | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 229,939 | | | | 49.4 | % | | $ | 235,351 | | | | 50.6 | % | | $ | 465,290 | |
| 2011 | | $ | 264,386 | | | | 49.8 | % | | $ | 266,343 | | | | 50.2 | % | | $ | 530,729 | |
Net sales in the AMS segment increased $34.4 million, or 15%, to $264.4 million for the nine months ended March 31, 2011 from $229.9 million for the nine months ended March 31, 2010. Specific variances include a volume driven $18.8 million increase in sales of components, including $8.9 million from ACC, acquired in August 2010; a volume driven $16.9 million increase in sales of integrated circuits, primarily HiRel RadHard; and additional sales of $4.4 million from RAD, acquired in June 2010. The increases in sales were partially offset by volume driven reductions of $2.9 million in sales of microelectronics modules and $2.7 million in sales of motion control products.
Net sales in the ATS segment increased $31.0 million, or 13%, to $266.3 million for the nine months ended March 31, 2011 from $235.4 million for the nine months ended March 31, 2010. Specific variances include a volume driven $22.3 million increase in sales of wireless test product sales, which includes, sales of $14.4 million from Willtek, acquired in May 2010; a volume driven $19.0 million increase in sales of radio test products; a volume driven $9.1 million increase in sales of avionic products. The increases in net sales were partially offset by a volume driven reduction of $19.3 million in sales of general purpose test products.
Gross Profit. On a consolidated basis, gross profit was $281.0 million, or 53.0% of net sales, for the nine months ended March 31, 2011 and $242.0 million, or 52.0% of net sales, for the nine months ended March 31, 2010.
| | | Gross Profit | |
| Nine Months | | | | | | | | | | | | | | | | | | |
| Ended | | | | | % of | | | | | | % of | | | | | | % of | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Total | | | Net Sales | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 112,487 | | | | 48.9 | % | | $ | 129,544 | | | | 55.0 | % | | $ | 242,031 | | | | 52.0 | % |
| 2011 | | $ | 135,386 | | | | 51.2 | % | | $ | 145,638 | | | | 54.7 | % | | $ | 281,024 | | | | 53.0 | % |
Gross margins in the AMS segment were 51.2% for the nine months ended March 31, 2011 and 48.9% for the nine months ended March 31, 2010. The increase in gross margins is principally attributable to a favorable product mix, combined with the additional sales of services by RAD, acquired in June 2010, (which has margins higher than the segment average). Gross profit increased $22.9 million for the nine months ended March 31, 2011 as compared to the nine months ended March 31, 2010 principally due to both increased sales and the aforementioned increase in gross margins.
Gross margins in the ATS segment were 54.7% for the nine months ended March 31, 2011, and 55.0% for the nine months ended March 31, 2010. Gross profit increased $16.1 million for the nine months ended March 31, 2011 as compared to the nine months ended March 31, 2010 due to increased sales.
Selling, General and Administrative Costs. On a consolidated basis, SG&A costs increased $20.2 million, or 22%, to $113.2 million for the nine months ended March 31, 2011. This increase was primarily attributable to the additional SG&A costs of the acquired businesses, the expansion of our sales and marketing team in the Asia-Pacific region and the increase in the fair value of contingent consideration of an acquired business. The SG&A of the acquired businesses increased SG&A by $6.4 million, or 7% of total 2010 SG&A. As a percentage of sales, SG&A costs increased from 19.9% to 21.4% from the nine months ended March 31, 2010 to the nine months ended March 31, 2011.
| | | Selling, General and Administrative Costs | |
| Nine Months | | | | | | | | | | | | | | | | | | | | | |
| Ended | | | | | % of | | | | | | % of | | | | | | | | | % of | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Corporate | | | Total | | | Net Sales | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 31,382 | | | | 13.6 | % | | $ | 50,389 | | | | 21.4 | % | | $ | 11,217 | | | $ | 92,988 | | | | 19.9 | % |
| 2011 | | $ | 39,463 | | | | 14.9 | % | | $ | 60,758 | | | | 22.8 | % | | $ | 13,013 | | | $ | 113,234 | | | | 21.4 | % |
In the AMS segment, SG&A costs increased $8.1 million, or 26%, to $39.5 million for the nine months ended March 31, 2011. This increase is primarily due to additional costs of $3.3 million related to RAD, acquired in June 2010, and ACC, acquired in August 2010 and general increases in our existing businesses, primarily due to increased employee related expenses of $2.7 million and external commissions of $531,000. SG&A costs in the AMS segment increased from 13.6% to 14.9%, as a percentage of sales, from the nine months ended March 31, 2010 to the nine months ended March 31, 2011.
In the ATS segment, SG&A costs increased $10.4 million, or 21%, to $60.8 million for the nine months ended March 31, 2011, primarily due to increased employee related expenses of $4.5 million, primarily related to the expansion of our sales and marketing team in the Asia-Pacific region; increased commissions of $3.8 million, due to the increase in sales volume; and additional costs of $3.1 million related to Willtek, acquired in May 2010. As a percentage of sales, SG&A costs in the ATS segment increased from 21.4% to 22.8% from the nine months ended March 31, 2010 to the nine months ended March 31, 2011.
Corporate general and administrative costs increased $1.8 million for the nine months ended March 31, 2011 compared to the nine months ended March 31, 2010 primarily related to (i) business acquisition costs of $1.5 million, which includes a $1.2 million increase in the fair value of contingent consideration of an acquired business; and (ii) increased employee related expenses of $1.1 million; partially offset by (iii) a reduction in merger related expenses and sponsor fees of $889,000.
Research and Development Costs. On a consolidated basis, research and development costs increased by $13.2 million, or 24%, to $68.5 million for the nine months ended March 31, 2011. This increase was primarily attributable to the additional costs of the acquired businesses and the acceleration of research and development projects in our ATS segment to meet customer requirements for new products. Research and development costs of acquired businesses increased research and development by $4.2 million, or 8% of 2010 total research and development costs. As a percentage of sales, research and development costs increased from 11.9% to 12.9% from the nine months ended March 31, 2010 to the nine months ended March 31, 2011.
| | | Research and Development Costs | |
| Nine Months | | | | | | | | | | | | | | | | | | |
| Ended | | | | | % of | | | | | | % of | | | | | | % of | |
| March 31, | | AMS | | | Net Sales | | | ATS | | | Net Sales | | | Total | | | Net Sales | |
| | | (In thousands, except percentages) | |
| 2010 | | $ | 22,202 | | | | 9.7 | % | | $ | 33,084 | | | | 14.1 | % | | $ | 55,286 | | | | 11.9 | % |
| 2011 | | $ | 26,028 | | | | 9.8 | % | | $ | 42,449 | | | | 15.9 | % | | $ | 68,477 | | | | 12.9 | % |
AMS segment self-funded research and development costs increased $3.8 million, or 17%, to $26.0 million for the nine months ended March 31, 2011 primarily due to the increased efforts in the development of next generation component products and additional spending on HiRel RadHard integrated circuits projects. As a percentage of sales, AMS segment research and development costs increased from 9.7% for the nine months ended March 31, 2010 to 9.8% for the nine months ended March 31, 2011.
ATS segment self-funded research and development costs increased $9.4 million, or 28%, to $42.4 million for the nine months ended March 31, 2011 primarily due to increases in our radio test and avionics divisions, for the development of a common platform technology, and additional costs of $2.9 million related to Willtek, acquired in May 2010. As a percentage of sales, ATS segment research and development costs increased from 14.1% for the nine months ended March 31, 2010 to 15.9% for the nine months ended March 31, 2011.
Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $1.2 million for the nine months ended March 31, 2011 to $47.7 million primarily due to additional amortization related to intangible assets recorded in connection with the acquisitions of Willtek, in May 2010; RAD, in June 2010; and ACC, in August 2010. The increases in amortization were partially offset by certain intangibles becoming fully amortized during fiscal 2010. By segment, the amortization increased $1.4 million in the AMS segment and decreased $185,000 in the ATS segment.
Termination of Sponsor Advisory Agreement. In connection with the Aeroflex Holding IPO, we paid a $16.9 million Termination Fee to affiliates of the Sponsors on November 24, 2010 to terminate the Sponsor Advisory Agreement with them and eliminate all future payments to the Sponsors under that agreement, which, including the related write-off of prepaid advisory fees, resulted in an $18.1 million expense for the nine months ended March 31, 2011. There was no similar charge recorded for the nine months ended March 31, 2010.
Restructuring Charges. The AMS segment incurred total restructuring costs of $6.9 million for the nine months ended March 31, 2011 which primarily relate to consolidation of our components operations by relocating our Whippany, New Jersey facility’s production to our Ann Arbor, Michigan facility and to our Eatontown, New Jersey facility. In connection with this consolidation, we recorded a $4.9 million impairment charge based on the fair value of the Whippany, New Jersey facility we intend to sell. There were no comparable charges for the nine months ended March 31, 2010.
The ATS segment incurred restructuring costs of $3.9 million for the nine months ended March 31, 2011, primarily related to the integration of Willtek with our U.K. operations. In comparison, for the nine months ended March 31, 2010, the ATS segment incurred restructuring costs of $356,000 for continued reorganization efforts in our European operations.
Loss on Liquidation of Foreign Subsidiary. During the nine months ended March 31, 2010, we recognized a $7.7 million non-cash loss on liquidation of a foreign subsidiary. There was no similar charge recorded for the nine months ended March 31, 2011.
Other Income (Expense). Interest expense was $55.8 million for the nine months ended March 31, 2011 and $63.3 million for the nine months ended March 31, 2010. The interest expense decreased as a result of the repurchase, in December 2010, of $186.6 million of Aeroflex’s senior unsecured notes and senior subordinated unsecured term loans with the proceeds from the IPO. During the nine months ended March 31, 2011 we incurred a $25.2 million loss on extinguishment of debt, which was comprised primarily of $20.5 million in premiums paid on the debt repurchased and $4.0 million for the write-off of the related deferred financing costs. In addition, we recognized a $173,000 gain on a bargain purchase related to the final working capital adjustment to the purchase price of Willtek, acquired in June 2010. There were no comparable charges for the nine months ended March 31, 2010. Other income (expense) of $(526,000) for the nine months ended March 31, 2011 consisted primarily of a $(688,000) realized loss recorded on the sale of our auction rate securities and $(711,000) of foreign currency transaction losses offset by $873,000 of interest and miscellaneous income. Other income (expense) of $701,000 for the nine months ended March 31, 2010 consisted primarily of $1.4 million of interest and miscellaneous income, offset by $(692,000) of foreign currency transaction losses.
Income Taxes. The income tax benefit was $45.6 million for the nine months ended March 31, 2011 on a pre-tax loss of $58.7 million. We recorded an income tax provision for the nine months ended March 31, 2010 of $4.9 million on a pre-tax loss of $23.4 million. The effective income tax rate for both periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes, including U.S. income tax on certain foreign net income that we anticipate will be repatriated to the U.S. The provisions are a combination of projected annual U.S. tax benefits on domestic losses and foreign tax expense on foreign earnings. The resulting projected net consolidated income tax benefit was then applied to the projected consolidated pre-tax amount for the year to calculate the annual effective tax rate, which contributed to the high income tax benefit as a percentage of pre-tax loss. During the three months ended September 30, 2010, we identified an overstatement of deferred income tax liabilities established in the fourth quarter of fiscal 2009 and throughout fiscal 2010 related to U.S. income taxes provided on unremitted foreign earnings. After consideration of both quantitative and qualitative factors, we determined the amounts were not material to any of those prior period financial statements or the fiscal 2011 estimated results and thus corrected the balance in the three months ended September 30, 2010. The adjustment resulted in a reduction of deferred income tax liabilities of $3.7 million, with a corresponding increase in income tax benefit in the statement of operations for the three months ended September 30, 2010. The adjustment did not impact the statement of cash flows. The income tax benefit for the nine months ended March 31, 2011 also reflects various discrete items, including a $1.2 million income tax benefit for the retroactive reinstatement of the U.S. R&D credit and a reduction of $5.8 million of deferred tax liabilities related to U.S. income taxes previously provided on unremitted foreign earnings. As a direct result of Aeroflex Holding’s IPO, and related repurchase of a portion of Aeroflex’s debt in the quarter ended December 31, 2010, interest payments have decreased. Consequently, in the quarter ended December 31, 2010, we changed our intent as to the amount and method of repatriations of foreign earnings, which resulted in the reduction of deferred tax liabilities. The tax provision for the nine months ended March 31, 2010 was affected by the unfavorable impact of a $7.7 million nondeductible loss on the liquidation of a foreign subsidiary, and the favorable impact of a $10.3 million loss for tax purposes on the write-off of our investment in a foreign subsidiary in fiscal 2009. For financial statement purposes, the loss had been recognized in the prior periods, however, for tax purposes the loss was recognized at the time of divestiture, effective September 2009.
In the nine months ended March 31, 2011, we paid income taxes of $14.3 million and received tax refunds of $3.1 million related to federal, state and foreign income taxes. In the nine months ended March 31, 2010, we paid income taxes of $5.2 million and received refunds of $627,000.
Net Income (Loss). The net loss was $13.1 million for the nine months ended March 31, 2011 and $28.3 million for the nine months ended March 31, 2010.
Liquidity and Capital Resources
The liquidity and capital resources of Aeroflex Holding are essentially identical to the liquidity and capital resources of Aeroflex, with the following significant exception: Aeroflex Holding, in connection with its IPO of common stock on November 19, 2010, received net proceeds of $244.0 million after deducting underwriting discounts and offering expenses, whereas Aeroflex received the net proceeds of the IPO of $244.0 million in the form of a capital contribution from Aeroflex Holding. All indebtedness has been incurred by Aeroflex; such indebtedness is reflected on the balance sheets of Aeroflex Holding by virtue of the principles of consolidation. Aeroflex Holding’s principal source of liquidity has been the proceeds of the IPO. Aeroflex’s principal sources of liquidity include cash generated from operations, borrowings and availability under its credit facilities and capital contributions from Aeroflex Holding.
As of March 31, 2011, Aeroflex had $67.2 million of cash and cash equivalents, $289.1 million in working capital and its current ratio was 2.97 to 1.
Aeroflex’s principal liquidity requirements are to service its debt and interest and meet its working capital and capital expenditure needs. As of March 31, 2011, Aeroflex had $696.3 million of debt outstanding (of which $695.9 million was long-term), including approximately $489.1 million under the senior secured credit facility, $192.8 million of senior unsecured notes and $13.6 million under the senior subordinated unsecured credit facility.
On May 9, 2011, Aeroflex entered into a new senior secured credit facility with various lenders, consisting of a senior secured term loan facility of $725.0 million and a senior secured revolving credit facility of $75.0 million. The new term loan facility provides for $1.8 million quarterly principal repayments commencing September 30, 2011, with the remaining balance due at maturity on May 9, 2018. No amounts have been drawn under the revolving credit agreement.
The $725.0 million proceeds were, or will be, used:
1) to refinance $695.5 million of Aeroflex’s outstanding debt, as follows:
| | · | to repay the entire outstanding balance of $489.1 million under Aeroflex’s existing senior secured credit facilities; |
| | · | to repurchase, pursuant to a tender offer initiated on April 25, 2011, all of Aeroflex’s senior notes of $192.8 million (Aeroflex expects to call any notes not tendered); and |
| | · | to repurchase all of Aeroflex’s senior subordinated unsecured term loans of $13.6 million. |
2) to pay fees and expenses totaling $33.8 million in connection with the refinancing, including:
| | · | fees to the lenders of $14.2 million; |
| | · | a premium of approximately 9% on the repurchased senior notes and senior subordinated unsecured term loans, which amounted to $18.3 million; and |
| | · | professional fees and other expenses of approximately $1.3 million. |
The total cash outlay related to the debt refinancing, including premiums, fees and expenses listed above and $10.7 million of interest accrued through May 9, 2011, exceeds the $725.0 million proceeds by $15.0 million, which was paid from our available cash.
We will record approximately $15.5 million of these fees related to the new facility as deferred financing costs and record approximately $34.2 million related to the repayment of the existing debt as a loss on extinguishment of debt, including the write-off of the existing deferred financing costs of $15.9 million.
The following is a summary of required principal repayments of Aeroflex’s new debt for the next five years and thereafter as of March 31, 2011 reflecting the May 9, 2011 refinancing:
| Twelve Months Ended March 31, | | (In thousands) | |
| 2012 | | $ | 5,798 | |
| 2013 | | | 7,635 | |
| 2014 | | | 7,250 | |
| 2015 | | | 7,250 | |
| 2016 | | | 7,250 | |
| Thereafter | | | 690,562 | |
| Total | | $ | 725,745 | |
As of March 31, 2011, Aeroflex and its subsidiaries were in compliance with all of the covenants contained in the then existing loan agreements. Certain loan covenants are based on Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA (net income (loss), before interest expense, income taxes, depreciation and amortization), adjusted to add back certain non-cash, non-recurring and other items, as required by various covenants in the debt agreements. Our use of the term Adjusted EBITDA may vary from others in our industry. EBITDA and Adjusted EBITDA are not measures of operating income (loss), performance or liquidity under U.S. GAAP and are subject to important limitations. A reconciliation of net income (loss), which is a U.S. GAAP measure of our operating results, to Adjusted EBITDA, as defined in the then existing loan agreements, is as follows:
| | | Three Months Ended | | | Nine Months Ended | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | (In thousands) | |
| Net income (loss) | | $ | 4,127 | | | $ | 2,856 | | | $ | (13,093 | ) | | $ | (28,301 | ) |
| Interest expense | | | 13,852 | | | | 20,815 | | | | 55,803 | | | | 63,272 | |
| Provision (benefit) for income taxes | | | 6,734 | | | | (791 | ) | | | (45,557 | ) | | | 4,908 | |
| Depreciation and amortization | | | 20,892 | | | | 20,404 | | | | 62,426 | | | | 62,178 | |
| EBITDA | | | 45,605 | | | | 43,284 | | | | 59,579 | | | | 102,057 | |
| | | | | | | | | | | | | | | | | |
| Non-cash purchase accounting adjustments | | | 21 | | | | 31 | | | | 1,067 | | | | 342 | |
| Merger related expenses | | | - | | | | 647 | | | | 1,222 | | | | 2,111 | |
Restructuring costs and related pro forma savings (a) | | | 3,747 | | | | 105 | | | | 13,821 | | | | 356 | |
| Non-cash share-based compensation | | | 629 | | | | 518 | | | | 1,655 | | | | 1,563 | |
| Termination of Sponsor Advisory Agreement | | | - | | | | - | | | | 18,133 | | | | - | |
| Loss on extinguishment of debt | | | - | | | | - | | | | 25,178 | | | | - | |
| Non-cash loss on liquidation of foreign subsidiary | | | - | | | | - | | | | - | | | | 7,696 | |
Other defined items (b) | | | 659 | | | | (4 | ) | | | 3,172 | | | | (346 | ) |
| Adjusted EBITDA | | $ | 50,661 | | | $ | 44,581 | | | $ | 123,827 | | | $ | 113,779 | |
| (a) | Primarily reflects costs associated with the reorganization of our European operations and consolidation of certain of our U.S. components facilities. Pro forma savings reflect the amount of costs that we estimate would have been eliminated during the fiscal year in which a restructuring occurred had the restructuring occurred as of the first day of that fiscal year. Pro forma savings were estimated to be $3.0 million for the nine months ended March 31, 2011, $1.0 million of which is applicable to the three months ended March 31, 2011, $1.2 million applicable to the three months ended December 31, 2010 and $800,000 applicable to the three months ended September 30, 2010. |
| (b) | Reflects other adjustments required in calculating Aeroflex’s debt covenant compliance. These other defined items include pro forma EBITDA for periods prior to the acquisition dates for companies acquired during the periods presented. |
Financial covenants in Aeroflex’s then existing senior secured credit facility include (i) a maximum leverage ratio of total debt (less up to $15.0 million of unrestricted cash) to Adjusted EBITDA, as defined in the then existing senior secured credit facility, and (ii) maximum consolidated capital expenditures. The maximum leverage ratio permitted for the twelve months ended March 31, 2011 was 5.90, whereas the actual leverage ratio was 3.87.
Aeroflex’s new senior secured credit facility contains a maximum leverage ratio of total debt (less up to $15.0 million of unrestricted cash) to Adjusted EBITDA financial covenant, as defined in the new senior secured credit facility. The maximum leverage ratio permitted as of June 30, 2011 is 5.20, which periodically decreases to 4.75 on June 30, 2012.
Aeroflex’s new senior secured credit facility contains restrictions on its activities, including but not limited to covenants that restrict Aeroflex and its restricted subsidiaries, as defined in the new senior subordinated unsecured credit facility, from:
| | · | incurring additional indebtedness and issuing disqualified stock or preferred stock; |
| | · | making certain investments or other restricted payments; |
| | · | paying dividends and making other distributions with respect to capital stock, or repurchasing, redeeming or retiring capital stock or subordinated debt; |
| | · | selling or otherwise disposing of assets; |
| | · | under certain circumstances, issuing or selling equity interests; |
| | · | creating liens on assets; |
| | · | consolidating or merging with, or acquiring in excess of specified annual limitations, another business, or selling or disposing of all or substantially all of their assets; and |
| | · | entering into certain transactions with affiliates. |
If for any reason Aeroflex fails to comply with the covenants in the senior secured credit facility, it would be in default under the terms of the agreements governing its outstanding debt. If such a default were to occur, the lenders under the senior secured credit facility could elect to declare all amounts outstanding thereunder immediately due and payable, and the lenders would not be obligated to continue to advance funds to Aeroflex. If the amounts outstanding under these debt agreements are accelerated, Aeroflex’s assets may not be sufficient to repay in full the amounts owed.
We expect that cash generated from operating activities and availability under the revolving portion of Aeroflex’s new senior secured credit facility will be Aeroflex’s principal sources of liquidity. Aeroflex’s ability to make payments on and to refinance its indebtedness and to fund working capital needs and planned capital expenditures will depend on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. In addition, to the extent Aeroflex has consolidated excess cash flows, as defined in the credit agreement governing the new senior secured credit facility, Aeroflex must use specified portions of the excess cash flows to prepay the new senior secured credit facility. Based on its current level of operations, we believe Aeroflex’s cash flow from operations and available borrowings under its new senior secured credit facility will be adequate to meet Aeroflex’s liquidity needs for at least the next twelve months. We cannot assure you, however, that its business will generate sufficient cash flow from operations, or those future borrowings will be available under the new senior secured credit facility in an amount sufficient to enable Aeroflex to repay its indebtedness at maturity or to fund other liquidity needs. Aeroflex may need to refinance all or a portion of its indebtedness on or before the maturity thereof. We cannot assure you that Aeroflex will be able to refinance any of its indebtedness on commercially reasonable terms or at all.
Cash Flows
For the nine months ended March 31, 2011, Aeroflex’s cash flow used by operations was $18.1 million primarily due to increased inventory of $39.9 million in anticipation of higher sales. Its investing activities used cash of $29.5 million, primarily for payments for the purchase of businesses of $23.6 million and for capital expenditures of $17.1 million partially offset by proceeds from the sale of marketable securities of $10.4 million combined with the sale of property, plant and equipment of $819,000. Aeroflex’s financing activities provided cash of $11.5 million - $244.0 million was received by Aeroflex as a capital contribution from Aeroflex Holding and was partially offset by the repurchase of senior unsecured notes and senior subordinated unsecured term loans, including premiums and fees, of $207.7 million plus debt repayments of $21.5 million.
For the nine months ended March 31, 2010, Aeroflex’s cash flow provided by operations was $52.3 million. Its investing activities used cash of $7.6 million, primarily for capital expenditures of $13.2 million and a $4.0 million contingent consideration payment for the purchase of a business, partially offset by proceeds from the sale of marketable securities of $8.6 million combined with the sale of property, plant and equipment of $1.0 million. Aeroflex’s financing activities used cash of $4.0 million to repay indebtedness.
Aeroflex Holding’s cash flows are identical to those of Aeroflex with the following exception: Aeroflex Holding’s cash flows from financing activities for the nine months ended March 31, 2011 reflect the fact that Aeroflex Holding received the $244.0 million proceeds from its IPO of common stock.
Capital Expenditures
Capital expenditures were $17.1 million and $13.2 million for the nine months ended March 31, 2011 and 2010, respectively. Our capital expenditures primarily consist of equipment replacements.
Contractual Obligations
Debt Repurchase
As of June 30, 2010, Aeroflex had $225.0 million due under its senior unsecured notes and $165.5 million due under its senior subordinated unsecured term loans. In connection with Aeroflex Holding’s IPO, the net proceeds were used to make a capital contribution to Aeroflex to enable it to, among other things, tender for a portion of its senior unsecured notes and offer to repurchase a portion of its senior subordinated unsecured term loans. In December 2010 Aeroflex repurchased approximately $32.2 million of senior unsecured notes and $154.4 million of senior subordinated unsecured term loans.
Termination of Sponsor Advisory Agreement
Also in connection with the Aeroflex Holding IPO, we paid a $16.9 million Termination Fee to affiliates of the Sponsors on November 24, 2010 to terminate the Sponsor Advisory Agreement with them and eliminate all future payments to the Sponsors under that agreement, which including the related write-off of prepaid advisory fees, resulted in an $18.1 million expense.
Debt Refinance
On May 9, 2011, Aeroflex entered into a new senior secured credit facility with various lenders, consisting of a senior secured term loan facility of $725.0 million and a senior secured revolving credit facility of $75.0 million, to refinance $695.5 million of its outstanding debt. The new term loan facility provides for $1.8 million quarterly principal repayments commencing September 30, 2011, with the remaining balance due at maturity on May 9, 2018.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have material current or future effect upon our results of operations or financial condition.
Seasonality
Historically our net sales and earnings increase sequentially from quarter to quarter within a fiscal year, but the first quarter is typically less than the previous year’s fourth quarter.
Critical Accounting Policies and Estimates
Information regarding the Company’s critical accounting policies and estimates appears within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Aeroflex Holding’s Registration Statement and in Aeroflex’s Fiscal 2010 Form 10-K. During the nine month period ended March 31, 2011, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying those policies.
Recently Adopted Accounting Pronouncements
See Note 2 of the combined notes to the unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 of the combined notes to the unaudited condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We are subject to interest rate risk in connection with borrowings under Aeroflex’s new senior secured credit facility. We currently do not have interest rate swap agreements hedging this debt. As of May 9, 2011, there is $725.0 million outstanding under the term-loan portion of the new senior secured credit facility, all of which is subject to variable interest rates. The adjusted LIBOR, as defined in the new senior secured credit facility, has a floor of 1.25% on the term loan. An increase of 1% in interest rates would result in a 0.06% increase, due to the 1.25% floor, or a $460,000 increase in our annual interest expense. Any 1% increase in interest rates above the 1.25% floor would result in a $7.4 million increase in our annual interest expense. A 1% change in interest rates would result in a $763,000 change in our annual interest expense on the revolving loan borrowings, assuming the entire $75.0 million was outstanding. Any debt we incur in the future may also bear interest at floating rates.
Foreign Currency Risk. Foreign currency contracts are used to protect us from exchange rate fluctuation from the time customers are invoiced in local currency until such currency is exchanged for U.S. dollars. Aeroflex periodically enters into foreign currency contracts, which are not designated as hedges, and the change in the fair value is included in income currently within other income (expense). As of March 31, 2011, Aeroflex had $50.3 million of notional value foreign currency forward contracts maturing through April 29, 2011. Notional amounts do not quantify risk or represent assets or liabilities of Aeroflex, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at March 31, 2011 was an asset of $3,000. If foreign currency exchange rates (primarily the British pound and the Euro) change by 10% from the levels at March 31, 2011, the effect on our comprehensive income would be approximately $24.3 million.
Inflation Risk. Inflation has not had a material impact on our results of operations or financial condition during the preceding three years.
ITEM 4. CONTROLS AND PROCEDURES – AEROFLEX HOLDING
Aeroflex Holding’s disclosure controls and procedures under the Securities Exchange Act of 1934, as amended, are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Aeroflex Holding’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to its management, including its chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Principal Executive Officer and the Principal Financial Officer, with the assistance from other members of management, have reviewed the effectiveness of its disclosure controls and procedures as of March 31, 2011 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
There have been no changes in Aeroflex Holding’s internal controls over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
ITEM 4. CONTROLS AND PROCEDURES - AEROFLEX
Aeroflex’s disclosure controls and procedures under the Securities Exchange Act of 1934, as amended, are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Aeroflex’s disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to its management, including its chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Principal Executive Officer and the Principal Financial Officer, with the assistance from other members of management, have reviewed the effectiveness of its disclosure controls and procedures as of March 31, 2011 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
There have been no changes in Aeroflex’s internal controls over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in our legal proceedings disclosed in Aeroflex Holding’s Registration Statement and Aeroflex’s Fiscal 2010 Form 10-K.
Item 1A. Risk Factors
There have been no material changes in our risk factors disclosed in Aeroflex Holding’s Registration Statement and Aeroflex’s Fiscal 2010 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. [Removed and Reserved]
Item 5. Other Information
None
Item 6. Exhibits
| Exhibit No. | | Exhibit Description |
| 10.1 | | Credit and Guaranty Agreement, dated as of May 9, 2011, amoung Aeroflex Incorporated, Aeroflex Holding Corp., the Guarantor Subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A. |
| | | |
| 10.2 | | Pledge and Security Agreement, dated as of May 9, 2011, by the Grantors Party thereto in favor of JPMorgan Chase Bank, N.A., as collateral agent. |
| | | |
| 31.1 | | Certification of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 31.2 | | Certification of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 31.3 | | Certification of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
| | | |
| 31.4 | | Certification of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
| | | |
| 31.5 | | Certification of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting Officer) |
| | | |
| 31.6 | | Certification of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting Officer) |
| | | |
| 32.1 | | Certification of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| 32.2 | | Certification of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 32.3 | | Certification of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
| | | |
| 32.4 | | Certification of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Aeroflex Holding Corp. and Aeroflex Incorporated have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
| | | | AEROFLEX HOLDING CORP. | |
| | | | | |
| May 10, 2011 | | | /s/ John Adamovich, Jr. | |
| | | | John Adamovich, Jr. | |
| | | | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
| | | | | |
| | | | | |
| May 10, 2011 | | | /s/ John Adamovich, Jr. | |
| | | | John Adamovich, Jr. | |
| | | | Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
EXHIBIT INDEX
| Exhibit No. | | Exhibit Description |
| 10.1 | | Credit and Guaranty Agreement, dated as of May 9, 2011, amoung Aeroflex Incorporated, Aeroflex Holding Corp., the Guarantor Subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A. |
| | | |
| 10.2 | | Pledge and Security Agreement, dated as of May 9, 2011, by the Grantors Party thereto in favor of JPMorgan Chase Bank, N.A., as collateral agent. |
| | | |
| 31.1 | | Certification of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 31.2 | | Certification of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 31.3 | | Certification of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
| | | |
| 31.4 | | Certification of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
| | | |
| 31.5 | | Certification of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting Officer) |
| | | |
| 31.6 | | Certification of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting Officer) |
| | | |
| 32.1 | | Certification of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 32.2 | | Certification of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer) |
| | | |
| 32.3 | | Certification of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
| | | |
| 32.4 | | Certification of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer) |
