UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
December 31, 2013
 
Commission File Number 001-34974
 
 
 

 
AEROFLEX HOLDING CORP.
 
(Exact name of Registrant as specified in its Charter)
 
DELAWARE
01-0899019
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
35 South Service Road
 
P.O. Box 6022
 
Plainview, N.Y.
11803-0622
(Address of principal executive offices)
 (Zip Code)
 
(516) 694-6700
(Registrant’s telephone number, including area code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x          No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x    No ¨
   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
 
Large accelerated filer ¨
Accelerated filer x
 
Non-accelerated filer ¨
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes ¨   No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
   
February 7, 2014
 
85,208,482 
(Date)
 
(Number of Shares)
 
 
 
AEROFLEX HOLDING CORP.
AND SUBSIDIARIES
INDEX
 
 
PART I:        FINANCIAL INFORMATION
PAGE
 
 
 
Item 1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
December 31, 2013 and June 30, 2013 
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended December 31, 2013 and 2012
3
 
Six Months Ended December 31, 2013 and 2012
4
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended December 31, 2013 and 2012
5
 
Six Months Ended December 31, 2013 and 2012
5
 
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Six Months Ended December 31, 2013 and 2012
6
 
 
 
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7 – 16
 
 
 
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Three and Six Months Ended December 31, 2013 and 2012
17 – 28
 
 
 
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
29
 
 
 
Item 4
CONTROLS AND PROCEDURES
29
 
 
 
 
PART II:          OTHER INFORMATION
 
 
 
 
Item 1
LEGAL PROCEEDINGS
30
 
 
 
Item 1A
RISK FACTORS
30
 
 
 
Item 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
30
 
 
 
Item 3
DEFAULTS UPON SENIOR SECURITIES
30
 
 
 
Item 4
MINE SAFETY DISCLOSURES
30
 
 
 
Item 5
OTHER INFORMATION
30
 
 
 
Item 6
EXHIBITS
30
 
 
 
SIGNATURE
31
 
 
EXHIBIT INDEX
32
 
 
CERTIFICATIONS
 
 
1

 
Aeroflex Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)
 
 
 
December 31,
 
June 30,
 
 
 
2013
 
2013
 
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
60,949
 
$
39,424
 
Accounts receivable, less allowance for doubtful accounts of $3,453 and $3,422
 
 
125,417
 
 
151,163
 
Inventories
 
 
170,146
 
 
156,516
 
Deferred income taxes
 
 
34,496
 
 
35,491
 
Prepaid expenses and other current assets
 
 
14,107
 
 
9,374
 
Total current assets
 
 
405,115
 
 
391,968
 
 
 
 
 
 
 
 
 
Property, plant and equipment, net of accumulated depreciation of $121,091 and $122,479
 
 
100,982
 
 
101,546
 
Deferred financing costs, net
 
 
10,722
 
 
11,580
 
Other assets
 
 
31,188
 
 
31,886
 
Intangible assets with definite lives, net
 
 
48,676
 
 
65,552
 
Intangible assets with indefinite lives
 
 
113,006
 
 
110,779
 
Goodwill
 
 
316,990
 
 
315,643
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,026,679
 
$
1,028,954
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
 
$
29,174
 
$
34,768
 
Advance payments by customers and deferred revenue
 
 
23,280
 
 
23,490
 
Income taxes payable
 
 
3,086
 
 
12,003
 
Accrued payroll expenses
 
 
17,655
 
 
21,694
 
Accrued expenses and other current liabilities
 
 
34,642
 
 
37,184
 
Total current liabilities
 
 
107,837
 
 
129,139
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
587,000
 
 
587,000
 
Deferred income taxes
 
 
62,459
 
 
67,296
 
Other long-term liabilities
 
 
20,262
 
 
23,061
 
Total liabilities
 
 
777,558
 
 
806,496
 
 
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
 
Preferred stock, par value $.01 per share; 50,000,000 shares authorized, no shares
    issued and outstanding
 
 
-
 
 
-
 
Common stock, par value $.01 per share; 300,000,000 shares authorized, 85,208,482
    and 84,936,582 shares issued and outstanding
 
 
852
 
 
849
 
Additional paid-in capital
 
 
652,175
 
 
651,950
 
Accumulated other comprehensive income (loss)
 
 
(28,605)
 
 
(43,406)
 
Accumulated deficit
 
 
(375,301)
 
 
(386,935)
 
Total stockholders' equity
 
 
249,121
 
 
222,458
 
 
 
 
 
 
 
 
 
Total liabilities and stockholders' equity
 
$
1,026,679
 
$
1,028,954
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
2

 
Aeroflex Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)
 
 
 
Three Months Ended December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net sales
 
$
151,105
 
$
151,872
 
Cost of sales
 
 
76,125
 
 
73,814
 
Gross profit
 
 
74,980
 
 
78,058
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative costs
 
 
34,012
 
 
36,427
 
Research and development costs
 
 
22,694
 
 
21,088
 
Amortization of acquired intangibles
 
 
7,212
 
 
14,063
 
Restructuring charges
 
 
1,539
 
 
66
 
Impairment of asset held for sale
 
 
-
 
 
1,340
 
Total operating expenses
 
 
65,457
 
 
72,984
 
Operating income
 
 
9,523
 
 
5,074
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
 
 
(7,240)
 
 
(9,768)
 
Write-off of deferred financing costs
 
 
-
 
 
(227)
 
Other income (expense), net
 
 
(296)
 
 
(212)
 
Total other income (expense), net
 
 
(7,536)
 
 
(10,207)
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
 
1,987
 
 
(5,133)
 
Provision (benefit) for income taxes
 
 
860
 
 
(5,306)
 
Income from continuing operations
 
 
1,127
 
 
173
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net of tax provision of $178
 
 
-
 
 
572
 
 
 
 
 
 
 
 
 
Net income
 
$
1,127
 
$
745
 
 
 
 
 
 
 
 
 
Income per common share - basic:
 
 
 
 
 
 
 
Continuing operations
 
$
0.01
 
$
-
 
Discontinued operations
 
 
-
 
 
0.01
 
Net income
 
$
0.01
 
$
0.01
 
Income per common share - diluted:
 
 
 
 
 
 
 
Continuing operations
 
$
0.01
 
$
-
 
Discontinued operations
 
 
-
 
 
0.01
 
Net income
 
$
0.01
 
$
0.01
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
 
 
85,014
 
 
84,870
 
Diluted
 
 
85,223
 
 
84,880
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
3

 
Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)
 
 
 
Six Months Ended December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net sales
 
$
283,837
 
$
289,507
 
Cost of sales
 
 
143,039
 
 
143,227
 
Gross profit
 
 
140,798
 
 
146,280
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative costs
 
 
67,180
 
 
71,947
 
Research and development costs
 
 
44,179
 
 
41,966
 
Amortization of acquired intangibles
 
 
17,730
 
 
28,643
 
Restructuring charges
 
 
2,223
 
 
3,333
 
Impairment of asset held for sale
 
 
-
 
 
1,340
 
Total operating expenses
 
 
131,312
 
 
147,229
 
Operating income (loss)
 
 
9,486
 
 
(949)
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
 
 
(14,492)
 
 
(19,846)
 
Write-off of deferred financing costs
 
 
-
 
 
(824)
 
Other income (expense), net
 
 
(347)
 
 
(501)
 
Total other income (expense), net
 
 
(14,839)
 
 
(21,171)
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
 
(5,353)
 
 
(22,120)
 
Provision (benefit) for income taxes
 
 
(2,525)
 
 
(7,777)
 
Income (loss) from continuing operations
 
 
(2,828)
 
 
(14,343)
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Income from discontinued operations, net of tax provision of $105 and $295
 
 
360
 
 
949
 
Gain on disposal of operations, net of tax of $0
 
 
14,102
 
 
-
 
Income from discontinued operations
 
 
14,462
 
 
949
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
11,634
 
$
(13,394)
 
 
 
 
 
 
 
 
 
Income (loss) per common share - basic and diluted:
 
 
 
 
 
 
 
Continuing operations
 
$
(0.03)
 
$
(0.17)
 
Discontinued operations
 
 
0.17
 
 
0.01
 
Net income (loss)
 
$
0.14
 
$
(0.16)
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
 
 
84,965
 
 
84,853
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
4

 
Aeroflex Holding Corp. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
 (In thousands)
 
 
 
Three Months Ended December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
1,127
 
$
745
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax provision (benefit) of $21
 
 
25
 
 
-
 
Foreign currency translation adjustment, net of tax provision (benefit) of $162 and $37
 
 
4,201
 
 
793
 
 
 
 
4,226
 
 
793
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
$
5,353
 
$
1,538
 
 
 
 
Six Months Ended December 31,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
11,634
 
$
(13,394)
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Minimum pension liability adjustment, net of tax provision (benefit) of $42
 
 
50
 
 
-
 
Foreign currency translation adjustment, net of tax provision (benefit) of $572 and $229
 
 
14,751
 
 
6,270
 
 
 
 
14,801
 
 
6,270
 
 
 
 
 
 
 
 
 
Total comprehensive income (loss)
 
$
26,435
 
$
(7,124)
 
 
See notes to unaudited condensed consolidated financial statements.
 
 
5

 
Aeroflex Holding Corp. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)
 
 
 
Six Months Ended December 31,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income (loss)
 
$
11,634
 
$
(13,394)
 
Adjustments to reconcile net income (loss) to net cash provided by (used in)
 
 
 
 
 
 
 
operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
29,762
 
 
39,803
 
Gain on disposal of operations
 
 
(14,102)
 
 
-
 
Impairment of asset held for sale
 
 
-
 
 
1,340
 
Write-off of deferred financing costs
 
 
-
 
 
824
 
Deferred income taxes
 
 
(6,208)
 
 
(7,766)
 
Share-based compensation
 
 
2,012
 
 
1,367
 
Amortization of deferred financing costs
 
 
858
 
 
1,101
 
Other, net
 
 
208
 
 
774
 
Change in operating assets and liabilities, net of effects from sale of business:
 
 
 
 
 
 
 
Decrease (increase) in accounts receivable
 
 
23,864
 
 
20,404
 
Decrease (increase) in inventories
 
 
(11,728)
 
 
(1,342)
 
Decrease (increase) in prepaid expenses and other assets
 
 
(2,964)
 
 
3,676
 
Increase (decrease) in accounts payable, accrued expenses and other liabilities
 
 
(23,292)
 
 
(2,678)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
 
 
10,044
 
 
44,109
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Net proceeds from the sale of business
 
 
18,389
 
 
-
 
Capital expenditures
 
 
(9,665)
 
 
(9,262)
 
Other, net
 
 
126
 
 
335
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
 
 
8,850
 
 
(8,927)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Debt repayments
 
 
-
 
 
(35,000)
 
Other, net
 
 
(1,757)
 
 
(641)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) financing activities
 
 
(1,757)
 
 
(35,641)
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
 
4,388
 
 
811
 
 
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
 
21,525
 
 
352
 
Cash and cash equivalents at beginning of period
 
 
39,424
 
 
41,324
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
 
$
60,949
 
$
41,676
 
 
See notes to unaudited condensed consolidated financial statements. 
 
 
6

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
1.     Basis of Presentation
 
The accompanying unaudited condensed consolidated financial information of Aeroflex Holding Corp. and subsidiaries (“we”, “our”, “us”, or the “Company”) 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 of normal recurring adjustments, which in management’s opinion are necessary for a fair presentation. The June 30, 2013 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 our annual report on Form 10-K for the fiscal year ended June 30, 2013 (“the fiscal 2013 Form 10-K”).
 
Unless the context requires otherwise, “fiscal” refers to the twelve months ended June 30 of the applicable year.  For example, “fiscal 2013” refers to the twelve months ended June 30, 2013.
 
Results of operations for interim periods are not necessarily indicative of results to be expected for the full fiscal year or any future periods.

2.
Recent Accounting Pronouncements
 
In February 2013, the FASB issued guidance which improves the reporting of reclassifications out of accumulated other comprehensive income. The new guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This new guidance became effective for us in our first quarter of fiscal 2014. The adoption of this presentation and disclosure only guidance is reflected in our consolidated financial statements.
 
In March 2013, the FASB issued authoritative guidance to resolve the diversity in practice concerning the release of the cumulative translation adjustment (“CTA”) into net income (i) when a parent sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets within a foreign entity, and (ii) in connection with a step acquisition of a foreign entity. This amended guidance requires that CTA be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, and that a pro rata portion of the CTA be released into net income upon a partial sale of an equity method investment in a foreign entity only. In addition, the amended guidance clarifies the definition of a sale of an investment in a foreign entity to include both events that result in the loss of a controlling financial interest in a foreign entity and events that result in an acquirer obtaining control of an acquiree in which it held an equity interest immediately prior to the date of acquisition. The CTA should be released into net income upon the occurrence of such events. This new guidance becomes effective prospectively for us in our first quarter of fiscal 2015. The adoption of this new guidance is not expected to have a significant impact on our consolidated financial statements. 
 
 
7

 
In July 2013, the FASB issued guidance that clarifies when an entity should present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. If either (i) a net operating loss carryforward, a similar tax loss, or tax credit carryforward is not available as of the reporting date under the governing tax law to settle taxes that would result from the disallowance of the tax position or (ii) the entity does not intend to use the deferred tax asset for this purpose (provided that the tax law permits a choice), an entity should present an unrecognized tax benefit in the financial statements as a liability and should not net the unrecognized tax benefit with a deferred tax asset. This new guidance becomes effective prospectively for us in our first quarter of fiscal 2015, with retrospective application and early adoption permitted. The adoption of this new guidance is not expected to have a significant impact on our consolidated financial statements.

3.
Discontinued Operations
 
On September 5, 2013, we sold the net assets of Aeroflex Test Equipment Services (“ATES”), a division of our U.K. subsidiary, Aeroflex Limited, for $18.4 million in cash. The consideration is subject to a working capital adjustment, based on the amount by which the final working capital at the date of closing differed from the target set forth in the purchase agreement. ATES provided calibration and repair services of non-Aeroflex test and measurement equipment in the United Kingdom and was previously included in our Aeroflex Test Solutions (“ATS”) segment. As a result of this sale, we recorded a gain on disposal of $14.1 million. The gain is not subject to U.K. taxes.
 
We have reported the results of operations of ATES as income from discontinued operations. The prior period statement of operations has been restated to conform to the current presentation. Net sales from the ATES operations were $2.4 million from July 1, 2013 to the date of sale and $4.4 million and $7.9 million for the three and six months ended December 31, 2012, respectively.

4.
Inventories
 
Inventories consisted of the following:
 
 
 
December 31,
 
June 30,
 
 
 
2013
 
2013
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
Raw materials
 
$
83,835
 
$
76,762
 
Work in process
 
 
52,317
 
 
52,221
 
Finished goods
 
 
33,994
 
 
27,533
 
 
 
$
170,146
 
$
156,516
 
 
 
8

 
5.     Intangible Assets and Other Long Lived Assets
 
Intangible Assets with Definite Lives
 
The components of amortizable intangible assets were as follows:
 
 
 
December 31, 2013
 
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross
 
 
 
 
 
 
 
Gross
 
 
 
 
 
 
 
 
 
Carrying
 
Accumulated
 
Total Net
 
Carrying
 
Accumulated
 
Total Net
 
 
 
Amount
 
Amortization
 
Book Value
 
Amount
 
Amortization
 
Book Value
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
 
$
204,368
 
$
199,409
 
$
4,959
 
$
201,447
 
$
192,574
 
$
8,873
 
Customer related intangibles
 
 
227,970
 
 
185,338
 
 
42,632
 
 
226,406
 
 
171,514
 
 
54,892
 
Non-compete arrangements
 
 
10,420
 
 
10,023
 
 
397
 
 
10,344
 
 
9,401
 
 
943
 
Trade names
 
 
3,382
 
 
2,694
 
 
688
 
 
3,332
 
 
2,488
 
 
844
 
Total
 
$
446,140
 
$
397,464
 
$
48,676
 
$
441,529
 
$
375,977
 
$
65,552
 
 
Goodwill
 
We assess goodwill and other intangible assets with indefinite lives at least annually for impairment, in the fourth quarter of our fiscal year, or more frequently if certain events or circumstances indicate an impairment may have occurred. We test goodwill for impairment at the reporting unit level, which is one level below our operating segments.
 
The carrying amount of goodwill, by segment, was as follows:
 
 
 
Microelectronic
 
Test
 
 
 
 
 
 
Solutions
 
Solutions
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Balance at June 30, 2013
 
 
 
 
 
 
 
 
 
 
Goodwill
 
$
339,859
 
$
159,284
 
$
499,143
 
Accumulated impairments
 
 
(90,100)
 
 
(93,400)
 
 
(183,500)
 
 
 
 
249,759
 
 
65,884
 
 
315,643
 
 
 
 
 
 
 
 
 
 
 
 
Changes for the six months ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
Translation and other adjustments
 
 
759
 
 
588
 
 
1,347
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
340,618
 
 
159,872
 
 
500,490
 
Accumulated impairments
 
 
(90,100)
 
 
(93,400)
 
 
(183,500)
 
 
 
$
250,518
 
$
66,472
 
$
316,990
 
 
Based on a reduced forecast in one of our ATS reporting units, Avionics-Communications (“AVComm”), resulting from continued uncertainty in government spending, we have tested this reporting unit for impairment. As of December 31, 2013, the AVComm group had goodwill of $24.1 million and an enterprise carrying value of $91.2 million. We evaluated if there was impairment by comparing the fair value of the reporting unit with its enterprise carrying value. Based on our current analysis of the discounted estimated cash flows of this group, we have estimated that the fair value of this group was approximately $98.6 million at December 31, 2013 and that the goodwill has not been impaired. However, should actual results differ from our forecasts of cash flows and our estimated enterprise fair value decreases below the carrying value, then an impairment would likely occur and we would need to calculate the amount of the write-down of goodwill by comparing the implied fair value of the reporting unit’s goodwill (the excess of the fair value of the reporting unit over the fair value of its net identifiable assets) with the carrying amount of that goodwill.
 
 
9

 
Other Long Lived Assets
 
In December 2012, we entered into a contract for the sale of our RF and microwave components (“RFMW”) Whippany, New Jersey building. The net proceeds received in January 2013 were less than the carrying value of the building. Therefore, in December 2012, we recorded a $1.3 million impairment to the asset held for sale. Our RFMW reporting unit is included within our Aeroflex Microelectronic Solutions (“AMS”) segment.

6.     Restructuring Charges
 
The following table sets forth the charges and payments related to the restructuring liability, which is reflected in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheets and primarily relates to our ATS segment for both our Wireless and AVComm groups, for the period indicated:
 
 
 
Balance
 
 
 
 
 
 
 
 
 
 
Balance
 
 
 
June 30,
 
 
 
 
 
 
 
 
 
 
December 31,
 
 
 
2013
 
Six Months Ended December 31, 2013
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Effect of
 
 
 
 
 
 
Restructuring
 
 
 
 
Cash
 
Foreign
 
Restructuring
 
 
 
Liability
 
Net Additions
 
Payments
 
Currency
 
Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance costs
 
$
904
 
$
1,171
 
$
(1,540)
 
$
22
 
$
557
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Facilities closure costs
 
 
88
 
 
1,052
 
 
(1,006)
 
 
-
 
 
134
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
992
 
$
2,223
 
$
(2,546)
 
$
22
 
$
691
 
 

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 our debt. We routinely enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates.
 
Foreign Currency Forward Contract Derivatives
 
Foreign currency forward contracts are used to protect us from fluctuations in exchange rates. Our foreign currency forward contracts are not designated as hedges and therefore the change in fair value is included in other income (expense) as it occurs.  As of December 31, 2013, we had $47.8 million of notional value foreign currency forward contracts maturing through January 31, 2014. 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.
 
 
10

 
The fair values of our derivative financial instruments included in the condensed consolidated balance sheets as of December 31, 2013 and June 30, 2013 were as follows:
 
 
 
Asset (Liability) Derivatives
 
 
 
December 31, 2013
 
June 30, 2013
 
 
 
Balance Sheet
 
 
 
 
Balance Sheet
 
 
 
 
(In thousands)
 
Location
 
Fair Value (1)
 
Location
 
Fair Value (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging
    instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
Prepaid expenses and other current assets
 
$
224
 
Accrued expenses and other current liabilities
 
$
(359)
 
 
(1)
The fair values of derivative assets and liabilities are determined based on observable market data and are considered level 2 in the fair value hierarchy. 
 
The amounts of the gains and losses related to our derivative financial instruments not designated as hedging instruments for the three and six months ended December 31, 2013 and 2012 were as follows:
 
Derivatives Not
 
Location of Gain or (Loss)
 
Amount of Gain or (Loss)
 
Designated as
 
Recognized in Earnings on
 
Recognized in Earnings on
 
Hedging Instruments
 
Derivative
 
Derivative
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
 
December 31,
 
December 31,
 
 
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Foreign currency
    forward contracts
 
Other income (expense)
 
$
(172)
 
$
(3)
 
$
583
 
$
(28)
 

8.
Long Term Debt and Credit Agreements
 
As of December 31, 2013, we were in compliance with all of the financial covenants contained in our senior secured credit facility.
 
Interest paid was $13.8 million and $18.9 million for the six months ended December 31, 2013 and 2012, respectively. Accrued interest of $2.3 million and $2.5 million was included in accrued expenses and other current liabilities at December 31, 2013 and June 30, 2013, respectively.
 
The fair value of our debt instruments was as follows:
 
 
 
As of December 31, 2013
 
 
 
(In thousands)
 
 
 
Carrying
Amount
 
Estimated Fair
Value
 
 
 
 
 
 
 
 
 
Senior secured term loan facility
 
$
587,000
 
$
591,755
 
 
As of June 30, 2013, our total debt had a carrying value of $587.0 million and an estimated fair value of $585.5 million.
 
 
11

 
The estimated fair value of our senior secured term loan facility was based on quoted prices and is considered a Level 1 measurement.

9.     Accumulated Other Comprehensive Income (Loss)
 
The changes in accumulated other comprehensive income (loss), net of tax, for the six months ended December 31, 2013 were as follows:
 
 
 
Net Minimum
Pension
Liability
 
Net
Cumulative
Translation
Adjustment
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss) at June 30, 2013
 
$
(1,403)
 
$
(42,003)
 
$
(43,406)
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 
 
32
 
 
14,751
 
 
14,783
 
Amounts reclassified from accumulated other comprehensive income
 
 
18
 
 
-
 
 
18
 
Total other comprehensive income (loss)
 
 
50
 
 
14,751
 
 
14,801
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss) at December 31, 2013
 
$
(1,353)
 
$
(27,252)
 
$
(28,605)
 

10.     Share-Based Payment Arrangements
 
Restricted Stock Units
 
During the six months ended December 31, 2013, the compensation committee awarded restricted stock units, or RSUs, covering a total of 88,556 shares. The average grant date fair value per share of these RSUs was $7.01 and they vest in equal tranches over service periods between one and four years.

11.     Income (Loss) Per Common Share
 
Our consolidated statements of operations present basic and diluted income (loss) per common share. Basic income (loss) per common share is computed by dividing income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per common share reflects the dilutive effects of RSUs and performance restricted stock units, or PRSUs, if any. The treasury stock method is used to determine the dilutive effect of these potentially dilutive securities.
 
The following table reconciles basic shares outstanding to diluted shares outstanding:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
December 31,
 
December 31,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
Basic shares outstanding
 
85,014
 
84,870
 
84,965
 
84,853
 
Effect of dilution
 
209
 
10
 
-
 
-
 
 
 
 
 
 
 
 
 
 
 
Diluted shares outstanding
 
85,223
 
84,880
 
84,965
 
84,853
 
 
 
12

 
For the three and six months ended December 31, 2013, 40,000 and 957,000 shares of common stock equivalents, respectively, (which includes PRSUs that have been earned, but are subject to the continued employment of the respective participants with the Company) were excluded from the diluted weighted average shares outstanding calculation because they were anti-dilutive. Also, if all maximum performance metrics are achieved, an additional 727,000 PRSUs could potentially vest. These PRSUs have also been excluded from diluted income (loss) per common share as the performance criteria on these awards were not satisfied during these periods.
 
For the three and six months ended December 31, 2012, 1.1 million and 1.2 million shares of common stock equivalents, respectively, were excluded from the diluted weighted average shares outstanding calculation because they were anti-dilutive. Also, if all maximum performance metrics are achieved, an additional 1.1 million PRSUs could potentially vest. These PRSUs have also been excluded from diluted income (loss) per common share as the performance criteria on these awards were not satisfied during these periods.

12.     Legal Matters
 
To resolve all those outstanding violations of the Arms Export Control Act, or AECA, and the International Traffic in Arms Regulations, or ITAR, during the period from 1999 to 2009 that were disclosed by us voluntarily to the U.S. State Department concerning space related hardware items that were exported to China and, without the requisite State Department licenses, to end users in numerous other foreign countries, without admitting or denying the allegation of the violations, we have entered into a Consent Agreement effectively as of August 6, 2013, with the U.S. Department of State, Office of Defense Trade Controls Compliance. The Consent Agreement involves, among other things, a fine of $8.0 million payable over a two year period, $4.0 million of which is suspended and eligible for credit based on pre and post Consent Agreement compliance expenditures and investments made by the Company and approved by the State Department. During fiscal 2013, we recorded a charge of $8.0 million representing the legal obligation to the State Department under the then proposed terms of the Consent Agreement. In accordance with the terms of the Consent Agreement, in August 2013 we paid $2.0 million of the fine. Going forward, the Consent Agreement will not impact our ability to transact business internationally.
 
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 December 31, 2013 was $1.2 million, of which $300,000 was expected to be paid within one year.
 
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.     Income Taxes
 
The income tax provision was $860,000 and the income tax benefit was $2.5 million for the three and six months ended December 31, 2013 on pre-tax income from continuing operations of $2.0 million and a pre-tax loss from continuing operations of $5.4 million, respectively. We recorded an income tax benefit for the three and six months ended December 31, 2012 of $5.3 million and $7.8 million on a pre-tax loss from continuing operations of $5.1 million and $22.1 million, respectively. The effective income tax rate for both periods differed from the amount computed by applying the U.S. federal income tax rate to income from continuing operations before taxes primarily due to lower foreign tax rates, and state and local income taxes, including U.S. income tax on certain foreign income that we anticipate will be repatriated to the U.S. 
 
The income tax benefit for the six months ended December 31, 2013 reflects a discrete benefit of $1.0 million relating to a reduction in the statutory income tax rate in the U.K. The income tax benefit for the six months ended December 31, 2012 reflects a discrete benefit of $252,000 relating to statutory income tax rate reductions in the U.K. and Sweden largely offset by an adjustment of estimated deferred taxes.
 
 
13

 
Absent the discrete items, the effective tax rates were 43% and 101% for the three months ended December 31, 2013 and 2012 and 29% and 34% for the six months ended December 31, 2013 and 2012, respectively. The current year’s provision was a combination of a U.S. tax benefit on a domestic book loss and a foreign tax expense on foreign book income. The prior year’s provision was a combination of a U.S. tax benefit on a domestic book loss and a foreign tax benefit on a foreign book loss.
 
In the six months ended December 31, 2013 and 2012, we paid income taxes of $12.2 million and $1.6 million and received refunds of $532,000 and $5.5 million, respectively.

14.     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. Our sales to agencies of the United States government or to prime defense contractors or subcontractors of the United States government were approximately 30% and 26% for the three months ended December 31, 2013 and 2012 and 31% and 29% for the six months ended December 31, 2013 and 2012, respectively. 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 non-U.S. operations in the U.K. Net sales from facilities located in the U.K. were $40.8 million and $33.7 million for the three months ended December 31, 2013 and 2012 and $71.4 million and $65.5 million for the six months ended December 31, 2013 and 2012, respectively. Total assets of the U.K. operations were $211.8 million as of December 31, 2013 and $177.3 million as of June 30, 2013.
 
Net sales, based on the customers’ locations, attributed to the United States and other regions were as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
December 31,
 
December 31,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States of America
 
$
83,229
 
$
83,023
 
$
167,956
 
$
162,413
 
Europe and Middle East
 
 
29,786
 
 
25,850
 
 
49,472
 
 
58,140
 
Asia and Australia
 
 
29,412
 
 
35,699
 
 
52,893
 
 
58,249
 
Other regions
 
 
8,678
 
 
7,300
 
 
13,516
 
 
10,705
 
 
 
$
151,105
 
$
151,872
 
$
283,837
 
$
289,507
 
 
We organize our operations into two segments: Aeroflex Microelectronic Solutions, or AMS, and Aeroflex Test Solutions, or ATS. We engineer, manufacture and market a diverse range of products in each of our segments. The segment data which follows, reflects a reclassification of our frequency synthesizer product line from our ATS segment to our AMS segment for all periods presented to better align it with its end markets.  Our synthesizer reporting unit had sales of $5.4 million and $4.8 million for the three months ended December 31, 2013 and 2012 and $9.2 million and $8.4 million for the six months ended December 31, 2013, respectively.
 
 
14

 
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 Application Specific Integrated Circuits (“ASICs”) and motion control products. ATS is a leading provider of a broad line of specialized test and measurement equipment. 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.
 
Selected financial data by segment was as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
December 31,
 
December 31,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
(In thousands)
 
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
- Microelectronic solutions ("AMS")
 
$
83,757
 
$
83,301
 
$
157,763
 
$
161,373
 
- Test solutions ("ATS")
 
 
67,348
 
 
68,571
 
 
126,074
 
 
128,134
 
Net sales
 
$
151,105
 
$
151,872
 
$
283,837
 
$
289,507
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment adjusted operating income
 
 
 
 
 
 
 
 
 
 
 
 
 
- AMS
 
$
15,126
 
$
19,401
 
$
27,584
 
$
35,606
 
- ATS
 
 
8,017
 
 
5,469
 
 
10,826
 
 
6,389
 
- Corporate expense
 
 
(3,391)
 
 
(3,483)
 
 
(6,609)
 
 
(7,509)
 
Adjusted operating income
 
 
19,752
 
 
21,387
 
 
31,801
 
 
34,486
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of acquired intangibles
 
 
 
 
 
 
 
 
 
 
 
 
 
- AMS
 
 
(4,480)
 
 
(8,970)
 
 
(11,204)
 
 
(17,936)
 
- ATS
 
 
(2,732)
 
 
(5,093)
 
 
(6,526)
 
 
(10,707)
 
Restructuring charges
 
 
 
 
 
 
 
 
 
 
 
 
 
- AMS
 
 
(63)
 
 
185
 
 
(68)
 
 
(19)
 
- ATS
 
 
(1,465)
 
 
(251)
 
 
(2,144)
 
 
(3,314)
 
- Corporate
 
 
(11)
 
 
-
 
 
(11)
 
 
-
 
Inventory write-off related to discontinued product line - ATS
 
 
-
 
 
-
 
 
7
 
 
-
 
Impairment of asset held for sale - AMS
 
 
-
 
 
(1,340)
 
 
-
 
 
(1,340)
 
Share-based compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
- AMS
 
 
(878)
 
 
(291)
 
 
(1,116)
 
 
(402)
 
- ATS
 
 
(121)
 
 
(126)
 
 
(352)
 
 
(193)
 
- Corporate
 
 
(131)
 
 
(314)
 
 
(544)
 
 
(772)
 
Business acquisition and divestiture related costs - Corporate
 
 
(341)
 
 
(100)
 
 
(341)
 
 
(697)
 
Current period impact of acquisition related adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
- AMS
 
 
25
 
 
20
 
 
50
 
 
11
 
- ATS
 
 
23
 
 
22
 
 
44
 
 
44
 
- Corporate
 
 
(55)
 
 
(55)
 
 
(110)
 
 
(110)
 
Operating income (loss) (GAAP)
 
 
9,523
 
 
5,074
 
 
9,486
 
 
(949)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(7,240)
 
 
(9,768)
 
 
(14,492)
 
 
(19,846)
 
Write-off of deferred financing costs
 
 
-
 
 
(227)
 
 
-
 
 
(824)
 
Other income (expense), net
 
 
(296)
 
 
(212)
 
 
(347)
 
 
(501)
 
Income (loss) from continuing operations before income taxes
 
$
1,987
 
$
(5,133)
 
$
(5,353)
 
$
(22,120)
 
 
Management evaluates the operating results of our two segments based upon Adjusted EBITDA (as defined in our credit agreement) as well as adjusted operating income, which is pre-tax operating income before certain non-cash, non-recurring and other items. We have set out above our adjusted operating income by segment and in the aggregate, and have provided a reconciliation of adjusted operating income to operating income (loss) on a GAAP basis and income (loss) from continuing operations before income taxes for the periods presented. 
 
 
15

 
15.
Subsequent Event
 
Acquisition of Shenick Network Systems
 
On February 5, 2014, we acquired 100% of the stock of Shenick Network Systems (“Shenick”), for cash of $28.5 million. The purchase price is subject to a working capital adjustment if the adjusted net working capital at the date of closing is less than the target set forth in the purchase agreement. Shenick, located in Dublin, Ireland, is a leading edge provider of software-based wireless test solutions. Shenick will be included in our Test Solutions segment. For the calendar year 2013, Shenick had net sales of $9.4 million. On a pro forma basis, had this acquisition taken place as of the beginning of the periods presented, our results of operations for those periods would not have been materially affected.
 
 
16

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Unless the context requires otherwise:  (i) “we,” “our,” “us,” or the “Company” refer to Aeroflex Holding Corp. and subsidiaries; (ii) “fiscal” refers to the twelve months ended June 30 of the applicable year.  For example, “fiscal 2013” refers to the twelve months ended June 30, 2013.
 
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” in our fiscal 2013 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 report 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: (i) commercial wireless communications (ii) space, avionics and defense; and (iii) 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:
 
Aeroflex Microelectronic Solutions (“AMS”) 
 
·
HiRel microelectronics/semiconductors
 
·
RF and microwave components
 
·
Mixed-signal/digital Application Specific Integrated Circuits (“ASICs”)
 
·
Motion control products
 
 
17

 
Aeroflex Test Solutions (“ATS”)
 
 
·
Wireless test equipment
 
·
Military radio and Private Mobile Radio, or PMR, test equipment
 
·
Avionics test equipment
 
·
Synthetic test equipment
 
·
General purpose test equipment
 
Discontinued Operations
 
On September 5, 2013, we sold the net assets of Aeroflex Test Equipment Services (“ATES”), a division of our U.K. subsidiary, Aeroflex Limited, for $18.4 million in cash. The consideration is subject to a working capital adjustment, based on the amount by which the final working capital at the date of closing differed from the target set forth in the purchase agreement. ATES provided calibration and repair services of non-Aeroflex test and measurement equipment in the United Kingdom and was previously included in our ATS segment. As a result of this sale, we recorded a gain on disposal of $14.1 million. The gain is not subject to U.K. taxes.   
 
We have reported the results of operations of ATES as income from discontinued operations. The prior period statement of operations has been restated to conform to the current presentation.
 
 
18

 
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
 
Six Months Ended
 
 
 
December 31,
 
December 31,
 
 
 
2013
 
 
2012
 
2013
 
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales
 
50.4
 
 
48.6
 
 
50.4
 
 
49.5
 
Gross profit
 
49.6
 
 
51.4
 
 
49.6
 
 
50.5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative costs
 
22.5
 
 
24.0
 
 
23.7
 
 
24.8
 
Research and development costs
 
15.0
 
 
13.9
 
 
15.6
 
 
14.5
 
Amortization of acquired intangibles
 
4.8
 
 
9.3
 
 
6.2
 
 
9.9
 
Restructuring charges
 
1.0
 
 
-
 
 
0.8
 
 
1.1
 
Impairment of asset held for sale
 
-
 
 
0.9
 
 
-
 
 
0.5
 
Total operating expenses
 
43.3
 
 
48.1
 
 
46.3
 
 
50.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
 
6.3
 
 
3.3
 
 
3.3
 
 
(0.3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(4.8)
 
 
(6.4)
 
 
(5.1)
 
 
(6.8)
 
Write-off of deferred financing costs
 
-
 
 
(0.1)
 
 
-
 
 
(0.3)
 
Other income (expense), net
 
(0.2)
 
 
(0.1)
 
 
(0.1)
 
 
(0.2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes
 
1.3
 
 
(3.3)
 
 
(1.9)
 
 
(7.6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
 
0.6
 
 
(3.5)