UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)                         

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

__  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________ to ________________________

Commission file number 0-6620

ANAREN, INC.

(Exact name of registrant as specified in its Charter)

New York	16-0928561
(State of incorporation)	(I.R.S Employer Identification No.)
6635 Kirkville Road	13057
East Syracuse, New York	(Zip Code)
(Address of principal
executive offices)

 

Registrant's telephone number, including area code: 315-432-8909

(Former name, former address and former fiscal year, if changed since last report)

Indicate by Check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No __

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes X No __

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Check One: Large accelerated filer __     Accelerated filer X     

               Non-accelerated filer __ Smaller reporting company __

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X

The number of shares of Registrant’s Common Stock outstanding on October 23, 2013was 13,332,622.

1

ANAREN, INC.

FORM 10-Q

INDEX

 

PART I – FINANCIAL INFORMATION		Page No.
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2013and June 30, 2013 (unaudited)	3
	Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2013 and 2012 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30 , 2013 and 2012 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30 ,2013 and 2012 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19-20
Item 4.	Controls & Procedures	20
PART II – OTHER INFORMATION
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 6.	Exhibits	21
Officer Certifications		22-26

2

PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements

ANAREN, INC.

Condensed Consolidated Balance Sheets

September 30, 2013 and June 30, 2013

(in thousands, except per share amounts)

(unaudited)

	September 30, 2013			June 30, 2013
ASSETS
Assets:
Cash and cash equivalents	$	46,237		$	44,308
Securities held to maturity		4,705			6,688
Receivables, less allowances of $489 and $414 at September 30, 2013 and June 30, 2013		31,721			32,059
Inventories		36,260			34,928
Prepaid expenses and other assets		3,287			3,288
Deferred income taxes		936			1,820
Total current assets		123,146			123,091
Securities held to maturity		2,577			2,582
Property, plant, and equipment, net		41,548			40,842
Goodwill		42,408			42,297
Other intangible assets, net		7,021			6,833
Total assets	$	216,700		$	215,645
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities and Stockholders’ Equity:
Accounts payable	$	6,791		$	7,319
Accrued expenses		3,248			4,806
Income taxes payable		2,916			3,780
Customer advance payments		1,615			1,603
Other current liabilities		1,608			1,555
Total current liabilities		16,178			19,063
Deferred income taxes		3,315			2,671
Pension and postretirement benefit obligation		6,727			6,598
Other liabilities		977			1,010
Total liabilities		27,197			29,342
Stockholders' Equity:
Common stock, $0.01 par value. Authorized 200,000 shares; issued 29,892 and 29,752 at September 30, 2013 and June 30, 2013, respectively		299			298
Additional paid-in capital		232,016			230,355
Retained earnings		157,730			154,747
Accumulated other comprehensive loss		(773	)		(858	)
Total stockholders’ equity before treasury stock		389,272			384,542
Less 16,566 and 16,503 treasury shares at September 30, 2013 and June 30, 2013, respectively, at cost		199,769			198,239
Total stockholders' equity		189,503			186,303
Total liabilities and stockholders' equity	$	216,700		$	215,645

See accompanying notes to condensed consolidated financial statements.

3

ANAREN, INC. 

Condensed Consolidated Statements of Income

Three Months Ended September 30, 2013 and 2012

(in thousands, except per share amounts)

(unaudited)

	2013			2012
Net sales	$	38,543		$	39,062
Cost of sales		24,656			24,647
Gross profit		13,887			14,415
Operating Expenses:
Marketing		2,131			2,539
Research and development		3,223			3,334
General and administrative		4,174			4,550
Total operating expenses		9,528			10,423
Operating income		4,359			3,992
Other income (expense):
Interest expense		(19	)		(18	)
Other income		93			223
Total other income, net		74			205
Income before income tax expense		4,433			4,197
Income tax expense		1,450			1,343
Net income	$	2,983		$	2,854
Earnings per share:
Basic	$	0.24		$	0.22
Diluted	$	0.23		$	0.21
Weighted average common shares outstanding:
Basic		12,649			12,999
Diluted		13,193			13,676

See accompanying notes to condensed consolidated financial statements.

4

ANAREN, INC.

Condensed Consolidated Statements of Comprehensive Income

Three Months Ended September 30, 2013 and 2012

(in thousands)

(unaudited)

	2013		2012
Net income	$	2,983	$	2,854
Other comprehensive income:
Net foreign currency translation adjustments		85		(30	)
Other comprehensive income (loss)		85		(30	)
Total comprehensive income	$	3,068	$	2,824

See accompanying notes to condensed consolidated financial statements.

5

ANAREN, INC.

Condensed Consolidated Statements of Cash Flows

Three Months Ended September 30, 2013 and 2012

(in thousands)

(unaudited)

	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,983		$	2,854
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,780			1,909
Amortization		250			363
Deferred income taxes		598			105
Equity-based compensation		902			1,050
Changes in operating assets and liabilities:
Receivables		338			(3,906	)
Inventories		(1,332	)		(411	)
Prepaid expenses and other assets		(2	)		400
Accounts payable		(678	)		(989	)
Accrued expenses		(1,557	)		659
Customer advance payments		12			(101	)
Other liabilities		87			63
Pension and postretirement benefit obligation		129			67
Net cash provided by operating activities		3,510			2,063
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,485	)		(1,309	)
Proceeds from sale of property, plant, and equipment		-			200
Purchase of Cellular Machines, LLC		(350	)		-
Maturities of held to maturity securities		1,940			5,415
Net cash (used in) provided by investing activities		(895	)		4,306
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt obligation		-			8,000
Stock options exercised		354			1,352
Excess tax benefit from equity-based compensation		406			453
Purchase of treasury stock		(1,531	)		(8,897	)
Net cash (used in) provided by financing activities		(771	)		908
Effect of exchange rates on cash		85			(31	)
Net increase in cash and cash equivalents		1,929			7,246
Cash and cash equivalents, beginning of period		44,308			21,012
Cash and cash equivalents, end of period	$	46,237		$	28,258
Supplementaldisclosures of cash flow information:
Cash paid during the period for:
Interest	$	26		$	13
Income tax payments	$	400		$	-

See accompanying notes to condensed consolidated financial statements.

6

 ANAREN, INC.

Notes to Condensed Financial Statements

(Unaudited)

The condensed consolidated financial statements are unaudited and reflect all adjustments (consisting of normal recurring adjustments) and accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The results of operations for the three months ended September 30, 2013 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2014, or any future interim period.

The income tax rates utilized for interim financial statement purposes for the three months ended September 30, 2013 are based on estimates of income and utilization of tax credits for the entire fiscal year ending June 30,2014.

During the quarter ended September 30, 2013, the Company identified an error in its liability for income taxes. The error arose during the Company’s fiscal year ended June 30, 2009 upon the execution and subsequent borrowing under a debt agreement with a bank. The debt agreement included a pledge by the Company of all the assets of its foreign subsidiary in China. Under Section 956(a) of the Internal Revenue Code, a pledge of assets of a foreign subsidiary requires that the value of the subsidiary’s earnings and profits be included in gross taxable income of the Company. Based on this, the Company should have included income in its gross taxable income in fiscal 2009 in an amount equal to the cumulative earnings and profits from the China subsidiary from its inception through the date of the borrowing in fiscal 2009. The resulting error in fiscal 2009 was an understatement of its income tax liability and an overstatement of its net income totaling $2.7 million. The total effect of the error as of June 30, 2011 totaled $3.4 million, which includes interest expense from fiscal years 2010 and 2011 and an income tax penalty. The interest expense incurred and not recorded in fiscal years 2012 and fiscal 2013 was not material to the consolidated financial statements in those years.

In accordance with accounting guidance found in Accounting Standards Codification (“ASC”) 250-10, Accounting Changes and Error Corrections and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 99, Materiality, the Company assessed the materiality of the error and concluded that the error was not material to any of its previously issued consolidated financial statements included in the Form 10-K for the year ended June 30, 2013. As permitted by the accounting guidance found in ASC 250-10 and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company has revised the accompanying condensed consolidated balance sheet as of the earliest period presented (June 30, 2013), to decrease retained earnings by $3.4 million and to increase income taxes payable by the same amount. The following table presents the effect of this revision on the Company’s condensed consolidated balance sheet as of June 30, 2013 (in thousands):

 

	Retained earnings			Income taxes payable		Other current liabilites
Beginning balance, as previously reported	$	158,182		$	-	$	1,900
Prior-period adjustment		(3,435	)		3,435
Reclassification					345		(345	)
Beginning balance, as restated	$	154,747		$	3,780	$	1,555

As indicated above, the Company previously included income taxes payable in other current liabilities on the condensed consolidated balance sheet as of June 30, 2013. As a result of this revision, the Company has reclassified income taxes payable from other current liabilities as of June 30, 2013. No adjustments were required to be made to the accompanying condensed consolidated statements of income, comprehensive income, or cash flows for the three month period ended September 30, 2012.

7

ANARAN, INC.

Notes to Condensed Financial Statements

(Unaudited)

(1) Securities

The amortized cost and fair value of securities are as follows:

	September 30, 2013
(amounts in thousands)	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Securities held to maturity:
Municipal bonds	$	1,985	$	6	$	-	$	1,991
Corporate bonds		5,297		19		-		5,316
Total securities held to maturity	$	7,282	$	25	$	-	$	7,307

	June 30,2013
(amounts in thousands)	Amortized Cost		Gross unrealized gains		Gross unrealized losses		Fair value
Securities held to maturity:
Municipal bonds	$	3,005	$	8	$	-	$	3,013
Corporate bonds		6,265		16		-		6,281
Total securities held to maturity	$	9,270	$	24	$	-	$	9,294

Contractual maturities of marketable debt securities held to maturity are summarized as follows:

	September 30, 2013				June 30,2013
	Amortized Cost		Fair value		Amortized Cost		Fair value
(amounts in thousands)
Within one year	$	4,705	$	4,723	$	6,688	$	6,709
One year to two years		2,577		2,584		2,582		2,585
Total	$	7,282	$	7,307	$	9,270	$	9,294

(2) Fair Value Measurements

The carrying amount of financial instruments, including cash, trade receivables and accounts payable, approximated their fair value as of September 30, 2013and June 30, 2013 because of the short maturity of these instruments. Also, the Company’s carrying value for its revolving credit facility approximates fair value. Cash equivalents are carried at cost, which approximates fair value.

Valuations on certain instruments are categorized into three levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification is determined based on the lowest level input that is significant to the fair value measurement.

8

 ANARAN, INC.

Notes to Condensed Financial Statements

(Unaudited)

The following table provides the assets and liabilities carried at fair value as measured on a recurring basis as of September 30, 2013:

(amounts in thousands)	Level 1		Level 2		Level 3		Total Carrying Value at September 30, 2013
Cash equivalents	$	7,710	$	-	$	-	$	7,710

The following table provides the assets and liabilities carried at fair value as measured on a recurring basis as of June 30,2013:

(amounts in thousands)	Level 1		Level 2		Level 3		Total Carrying Value at June 30, 2013
Cash equivalents	$	5,693	$	-	$	-	$	5,693

There were no nonfinancial assets or nonfinancial liabilities recognized at fair value on a nonrecurring basis and there were no transfers between levels of the fair value hierarchy during the three months ended September30, 2013 and 2012.

(3) Intangible Assets

The major components of intangible assets are as follows:

	September 30, 2013				June 30,2013
(amounts in thousands)	Gross Carrying Amount		Net Carrying Amount		Gross Carrying Amount		Net Carrying Amount
Amortizable intangible assets:
Customer relationships	$	7,530	$	3,652	$	7,530	$	3,840
Developed technology		970		190		780		13
Non-competition agreements		1,329		199		1,130		-
Total	$	9,829		4,041	$	9,440		3,853
Non-amortizable intangible assets:
Trade names				2,980				2,980
Total intangible assets			$	7,021			$	6,833

Intangible asset amortization expense for the three months ended September 30, 2013 and 2012aggregated $0.2 millionand $0.3 million, respectively. Amortization expense related to developed technology is recorded in cost of sales, and amortization expense for non-competition agreements and customer relationships is recorded in general and administrative expense.

The changes in the carrying amount of goodwill is summarized as follows:

(amounts in thousands)
Balance, June 30,2013	$	42,297
Cellular Machines, LLC acquisition		111
Balance, September 30,2013	$	42,408

9

 ANARAN, INC.

Notes to Condensed Financial Statements

(Unaudited)

Acquisition - In August 2013, the Company acquired the assets of Cellular Machines, LLC (Cell Machines), a Texas-based company. The assets acquired are principally comprised of wireless device and system technology and other intellectual property, which the Company expects to enhance its product line capability in the Wireless Segment. The aggregate purchase price was $0.5 million for the acquired assets, of which $350,000 was paid upon consummation of the acquisition and the remaining $150,000 is due in August 2014 unless such amount is offset in satisfaction of certain indemnification obligations of Cell Machines. In addition, the Company hired two employees from Cell Machines who have accepted employment with Anaren Microwave, Inc., a subsidiary of Anaren, Inc. The acquisition and its impact on the balance sheet and results of operations are not material. The purchase price was allocated to the assets acquired based on their respective fair values as of the acquisition date (other intangible assets of $0.4 million), with the amount exceeding the fair value recorded as goodwill of $0.1 million.

(4) Inventories

Inventories are summarized as follows:

(amounts in thousands)	September 30, 2013		June 30,2013
Raw materials	$	19,998	$	19,434
Work in process		12,411		11,732
Finished goods		3,851		3,762
	$	36,260	$	34,928

(5) Property, Plant, and Equipment

Components of property, plant, and equipment consist of the following:

(amounts in thousands)	September 30, 2013			June 30,2013
Land and land improvements	$	4,559		$	4,559
Construction-in-process		3,214			1,875
Buildings, furniture, and fixtures		31,889			31,647
Machinery and equipment		76,907			76,425
		116,569			114,506
Less accumulated depreciation		(75,021	)		(73,664	)
	$	41,548		$	40,842

(6) Accrued Expenses

Accrued expenses consist of the following:

(amounts in thousands)	September 30, 2013		June 30,2013
Compensation	$	2,020	$	3,552
Health insurance		350		306
Commissions & other		878		948
	$	3,248	$	4,806

(7) Other Liabilities

Other liabilities consist of the following:

(amounts in thousands)	September 30, 2013			June 30,2013
Deferred compensation	$	312		$	322
Supplemental retirement plan		1,026			995
Warranty accrual		192			170
Income tax liability		103			102
Deferred gain		736			760
Other		216			216
		2,585			2,565
Less current portion		(1,608	)		(1,555	)
	$	977		$	1,010

10

 ANARAN, INC.

Notes to Condensed Financial Statements

(Unaudited)

The Company provides warranty policies on its products. In addition, the Company incurs costs to service its products in connection with specific product performance issues. Liabilities for product warranties are based upon expected future product performance and durability, and are estimated largely based upon historical experience. Adjustments are made to accruals as claim data and historical experience warrant. The changes in product warranty reserves are as follows:

(amounts in thousands)				(amounts in thousands)
Balance as of July 1, 2012	$	181		Balance as of July 1, 2013	$	170
Additions		38		Additions		145
Costs incurred		(38	)	Costs incurred		(99	)
Adjustments		-		Adjustments		(24	)
Balance as of September 30, 2012	$	181		Balance as of September 30, 2013	$	192

(8) Long-term Debt Obligation

The Company has a $50 million revolving credit facility (Line) agreement with Key Bank National Association (Lender). The Line bears interest at the 30-day London inter-bank offer rate (LIBOR), plus 100 to 200 basis points, or at the Lender’s prime rate, plus 0 to 75 basis points, based upon the Company's earnings before interest and taxes and depreciation and amortization (EBITDA) performance at the end of each quarter as measured by the leverage ratio, total indebtedness divided by EBITDA. The Company pays a commitment fee (10 to 40 basis points) for any unused portion of the Line, up to $50 million, based upon the same EBITDA formula identified above. The Company has an option to borrow an additional $50 million, $100 million total, subject to the approval of the Lender. The Company’s indebtedness and obligations are guaranteed by five of the Company’s domestic subsidiaries, as well as an assignment of the Company’s interest in its foreign subsidiary. Certain financial and compliance covenants also need to be met on a quarterly basis (leverage ratio, minimum liquidity, and interest coverage). The Line is due on the maturity date, August 2014.

As of September 30, 2013 and June 30, 2013, there were no borrowings outstanding under the Company’s revolving credit agreement.

(9) Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding, as well as dilutive potential common shares which, in the Company’s case, comprise shares issuable under the Company’s Comprehensive Long-Term Incentive Plan. The weighted average number of common shares utilized in the calculation of the diluted earnings per share does not include anti-dilutive shares aggregating 0 and 10,000 for the three months ended September 30, 2013 and 2012, respectively. The treasury stock method is used to calculate dilutive shares, which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the options assumed to be exercised.

The following table sets forth the computation of basic and fully diluted earnings per share:

	ThreeMonths Ended September 30
(amounts in thousands)	2013		2012
Numerator:
Net income	$	2,983	$	2,854
Denominator:
Denominator for basic earnings per share outstanding		12,649		12,999
Denominator for diluted earnings per share:
Weighted average shares outstanding		12,649		12,999
Common stock options and restricted stock		544		677
Weighted average shares		13,193		13,676

11

(10) Employee Benefit Plans

Defined Benefit Plan

Components of net periodic pension cost for the three months ended September 30, are as follows:

	Three Months Ended September 30
	2013			2012
(amounts in thousands)
Service cost	$	100		$	118
Interest cost		233			210
Expected return on plan assets		(270	)		(240	)
Amortization of the unrecognized loss		130			203
Net periodic benefit cost	$	193		$	291

Required contributions for fiscal2014 are approximately $0.4 million.

Postretirement Health Benefit Plan

Components of net periodic postretirement benefit cost for the three months ended September 30, are as follows:

	Three Months Ended September 30
	2013			2012
(amounts in thousands)
Service cost	$	-		$	3
Interest cost		2			6
Amortization of the unrecognized loss		(53	)		(52	)
Amortization of the prior service cost		(32	)		(18	)
Net periodic benefit cost (benefit)	$	(83	)	$	(61	)

(11) Accumulated Other Comprehensive Income (Loss)The cumulative balance of each component of accumulated other comprehensive income (loss) is as follows:

	Foreign currency translation adjustment			Defined benefit pension plan liability			Accumulated other comprehensive income (loss)
(amounts in thousands)
Balances at June 30, 2012	$	2,315		$	(5,341	)	$	(3,026	)
Other comprehensive loss-quarter ended September 30, 2012		(30	)		-			(30	)
Balances at September 30, 2012	$	2,285		$	(5,341	)	$	(3,056	)
Balances at June 30, 2013	$	2,599		$	(3,457	)	$	(858	)
Other comprehensive income-quarter ended September 30, 2013		85			-			85
Balances at September 30, 2013	$	2,684		$	(3,457	)	$	(773	)

12

(12) Segment and Related Information

The Company operates predominately in the wireless communications, satellite communications, and space and defense electronics markets. The Company’s two reportable segments are the Wireless Group and the Space & Defense Group. These segments have been determined based upon the nature of the products and services offered, customer base, technology, availability of discrete internal financial information, homogeneity of products, and delivery channel, and are consistent with the way the Company organizes and evaluates financial information internally for purposes of making operating decisions and assessing performance.

The Wireless Group designs, manufactures, and markets commercial products used mainly by the wireless communications market. The Space & Defense Group of the Company designs, manufactures, and markets specialized products for the radar and communications markets.

 

The following table reflects the operating results of the segments consistent with the Company’s internal financial reporting process. The following results are used in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments:

(amounts in thousands)	Wireless		Space & Defense		Unallocated		Consolidated
Net sales (Three Months Ended):
September 30, 2013	$	13,583	$	24,960	$	-	$	38,543
September 30, 2012		13,202		25,860		-		39,062
Operating income (Three Months Ended)
September 30, 2013		2,317		2,042		-		4,359
September 30, 2012		1,858		2,134		-		3,992
Goodwill and intangible assets:
September 30, 2013		31,216		18,213		-		49,429
June 30, 2013		30,716		18,414		-		49,130

13

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. The following condensed discussion, other than historical facts, contains forward-looking statements that involve a number of risks and uncertainties. The Company’s results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including factors described elsewhere in this Quarterly Report on Form 10-Q and factors described in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Overview

The condensed consolidated financial statements present the financial condition of the Company as of September 30, 2013 and June 30, 2013, and the consolidated results of operations and cash flows of the Company for the three months ended September 30, 2013 and 2012.

The Company designs, develops and markets microwave components and assemblies for the wireless communications, satellite communications and defense electronics markets. The Company's distinctive manufacturing and packaging techniques enable it to cost-effectively produce compact, lightweight microwave products for use in base stations and subscriber equipment for wireless communications as well as, in satellites and in defense electronics systems. The Company sells its products to leading wireless communications equipment manufacturers such as Ericsson, Nokia Siemens Networks, and Huawei, and to satellite communications and defense electronics companies such as Boeing Satellite, ITT, Lockheed Martin, Northrop Grumman and Raytheon.

Net sales generally are recognized when units are shipped. Net sales under certain long-term contracts of the Space & Defense Group, many of which provide for periodic payments, are recognized under the percentage-of-completion method based on units of delivery. Estimated manufacturing cost-at-completion for these contracts are reviewed on a routine periodic basis, and adjustments are made periodically to the estimated cost-at-completion based on actual costs incurred, progress made, and estimates of the costs required to complete the contractual requirements. When the estimated manufacturing cost-at-completion exceeds the contract value, the contract is written down to its net realizable value, and the loss resulting from cost overruns is immediately recognized. To properly match net sales with costs, certain contracts may have revenue recognized in excess of billings (unbilled revenues), and other contracts may have billings in excess of net sales recognized (billings in excess of contract costs). Under long-term contracts, the prerequisites for billing the customer for periodic payments generally involve the Company's achievement of contractually specific, objective milestones (e.g., completion of design, testing, or other engineering phase, delivery of test data or other documentation, or delivery of an engineering model or flight hardware).

The Company operates in the wireless communications, satellite communications and defense electronics markets all of which have been affected by the current economic climate and recession. The United States defense budget has a direct impact on the level of funding available for programs that the Company currently participates in or has targeted for future participation. We continue to assess the effect of the 2012/ 2013 defense budget on these programs and, to date have seen only minimal negative impact on our anticipated Space & Defense Group order rate. The economic downturn has negatively impacted the worldwide Wireless infrastructure market as the market has delayed or downsized system expansions and upgrades.

Second Quarter of Fiscal 2014 Outlook

For the second quarter of fiscal 2014, we anticipate comparable sales for the Wireless Group and an increase in sales for the Space & Defense Group compared to the first quarter levels.  As a result, we expect net sales to be in the range of $39 to $43 million.  We expect GAAP net earnings per diluted share to be in the range of $0.26 - $0.32, using an anticipated tax rate of approximately 29.0% and inclusive of approximately $0.05 per diluted share related to expected equity based compensation expense and amortization of intangible assets. 

14

Results of Operations

Net sales for the three months ended September 30, 2013 were $38.5 million, down 1.3% from sales of $39.1 million for the first quarter of fiscal 2013. Net income for the first quarter of fiscal 2014 was $3.0 million, or 7.7% of net sales, up $0.1 million from net income of $2.9 million in the first quarter of fiscal 2013.

The following table sets forth the percentage relationships of certain items from the Company’s condensed consolidated statements of income as a percentage of net sales.

	Three Months Ended
	September 30, 2013			September 30, 2012
Net sales		100.0	%		100.0	%
Cost of sales		64.0	%		63.1	%
Gross profit		36.0	%		36.9	%
Operating expenses:
Marketing		5.5	%		6.5	%
Research and development		8.4	%		8.5	%
General and administrative		10.8	%		11.7	%
Total operating expenses		24.7	%		26.7	%
Operating income		11.3	%		10.2	%
Other income (expense):
Other income		0.2	%		0.6	%
Interest expense		0.0	%		(0.1	%)
Total other income, net		0.2	%		0.5	%
Income before income tax expense		11.5	%		10.7	%
Income tax expense		3.8	%		3.4	%
Net income		7.7	%		7.3	%

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

	Three Months Ended
		Sept. 30, 2013		Sept.30, 2012
(amounts in thousands)
Wireless Group	$	13,583	$	13,202
Space & Defense Group	$	24,960	$	25,860
Total	$	38,543	$	39,062

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Net sales. Net sales were $38.5 million for the first quarter of fiscal 2014, down 1.3% compared to $39.1 million for the first quarter of fiscal 2013. Sales of Wireless Group products increased $0.4 million, or 2.9%, and sales of Space & Defense Group products fell $0.9 million, or 3.5%, in the current first quarter compared to the first quarter of fiscal 2013.

The increase in sales of Wireless Group products, which consist of standard components for use in building wireless base station and consumer equipment, was the result of the continuing current improvement in worldwide demand for Wireless infrastructure components. Sales of Wireless Group products are up 2.9% in the current first quarter compared to the first quarter of fiscal 2013 and down 6.4% sequentially over the fourth quarter of fiscal 2013. Wireless Group sales are expected to remain at or above first quarter levels throughout fiscal 2014 based on the increased customer demand the Company is presently experiencing and current customer forecasts for the remainder of calendar year. The Company remains optimistic about fiscal 2014 Wireless Group component shipment levels.

15

Space & Defense Group products consist of custom components and assemblies for commercial and military satellites, as well as radar, receiver, and countermeasure subsystems for the military. Sales of Space & Defense Group products fell $0.9 million, or 3.5%, to $25.0 million in the first quarter of fiscal 2014 compared to the first quarter of the previous fiscal year. This decrease resulted from customer delays in approving shipments of hybrid electronic modules and a shortfall in shipments of printed wire board products. Quarterly Space & Defense Group sales are expected to remain above first quarter levels for the remainder of fiscal 2014.

Gross Profit. Cost of sales consists primarily of engineering design costs, materials, material fabrication costs, assembly costs, direct and indirect overhead, and test costs. Gross profit for the first quarter of fiscal 2014 was $13.9 million, (36.0% of net sales), down 3.7% from $14.4 million (36.9% of net sales) for the same quarter of the prior year. Gross profit as a percent of sales decreased in the first quarter of fiscal 2014 from the first quarter of fiscal 2013 due to a less favorable product mix in both the Wireless and Space & Defense Groups and lower sales levels in the Space & Defense Group. Gross margins are expected to improve in the second quarter with additional sales volume.

Marketing. Marketing expenses consist mainly of employee related expenses, commissions paid to sales representatives, trade show expenses, advertising expenses and related travel expenses. Marketing expenses were $2.1 million (5.5% of net sales) for the first quarter of fiscal 2014, down 16.1% from $2.5 million (6.5% of net sales) for the first quarter of fiscal 2013. Marketing expenses in the current first quarter declined due to fourth quarter 2013 reductions in sales personnel resulting from a reorganization of the sales function, as well as lower commissions, consulting and advertising costs in the current first quarter compared to the first quarter of fiscal 2013.

Research and Development. Research and development expenses consist of material, salaries and related overhead costs of employees engaged in ongoing research, design and development activities associated with new products and technology development. Research and development expenses were $3.2 million (8.4% of net sales) in the first quarter of fiscal 2014, down 3.3% from $3.3 million (8.5% of net sales) for the first quarter of fiscal 2013. The slight decline resulted from a small reduction in engineering personnel, mainly through attrition, over the past twelve months due to a lower level of design work requirements in both the Wireless and Space & Defense Groups in the current first quarter compared to the first quarter of fiscal 2013. Research and development expenditures are supporting further development of Wireless Group infrastructure and consumer component opportunities, as well as new technology development in the Space & Defense Group. The Company expects to maintain its current research and development efforts and spending levels in fiscal 2014.

General and Administrative. General and administrative expenses consist of employee related expenses, incentive compensation, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses decreased 8.2% to $4.2 million (10.8% of net sales) for the first quarter of fiscal 2014, from $4.6 million (11.7% of net sales) for the first quarter of fiscal 2013. The decrease in general and administrative expense in the current first quarter was due to a decline in consulting expense, a lower bonus accrual and a reduction in equity based compensation expense compared to the first quarter last fiscal year. Quarterly general and administrative costs are expected to remain at current levels for the remainder of fiscal 2014.

Operating Income. Operating income increased $0.4 million in the first quarter of fiscal 2014 to $4.4 million, (11.3% of net sales), compared to $4.0 million (10.2% of net sales) for the first quarter of fiscal 2013. This increase in operating income was a result of the $0.9 million decline in operating expenses, which offset the negative impact on gross margins from the lower sales volume and the less favorable product mix during the current quarter compared to the first quarter of fiscal 2013.

On an operating segment basis, Wireless Group operating income was $2.3 million (17.1% of Group sales) for the first quarter of fiscal 2014, up $0.4 million from the Group’s operating income of $1.9 million (14.1% of Group sales) in the first quarter of fiscal 2013. The increase in Wireless Group operating income in the first quarter of fiscal 2014, compared to the first quarter of fiscal 2013, was due to the $0.4 million increase in Wireless Group sales coupled with a $0.5 million decrease in operating expenses resulting from lower marketing expenses ($0.2 million from reduced personnel and commissions), research and development expense ($0.1 million) and general and administrative expense ($0.2 million from lower bonus and equity based compensation expense).

16

Space & Defense Group operating income was $2.0 million, or 8.2% of Group sales, in the first quarter of fiscal 2014, compared to operating income of $2.1 million (8.3% of net group sales) for the first quarter of fiscal 2013. Operating margins for this Group decreased slightly in the current first quarter due mainly to the $0.9 million decrease in sales volume and the resulting $0.5 million decrease in gross margins compared to the first quarter fiscal 2013. The drop in current quarter gross margins was partially off-set by a $0.4 million decline in group operating expenses including marketing expenses ($0.2 million from reduced personnel and commissions), and general and administrative expense ($0.2 million from lower consulting, bonus and equity based compensation expense).

Other Income. Other income primarily consists of interest income received on invested cash balances and rental income. Other income was $0.1 million in the first quarter of fiscal 2014 compared to $0.2 million for the first quarter of last year. Other income will fluctuate based on short term market interest rates and the level of investable cash balances.

Interest Expense. Interest expense consists mainly of interest on Company borrowings and deferred items. Interest expense in the first quarters of both fiscal 2014 and 2013 was minimal. Interest expense has remained relatively low and has declined due to the continuing low level of the 30-day London Inter-Bank Offer Rate (LIBOR) interest rate, and the low level of Company borrowings. There was no outstanding loan balance for the first quarter of fiscal 2014 and an $8.0 million balance borrowed in the last half of the first quarter of fiscal 2013. Borrowings under this line bear interest at the 30-day LIBOR rate, plus 100 to 200 basis points, based upon the Company’s rolling twelve month earnings before interest and taxes and depreciation and amortization (EBITDA) performance. The rate is reset monthly.

Income Taxes. Income taxes for the first quarter of fiscal 2014 were $1.5 million (3.8% of net sales), representing an effective tax rate of 32.7%. This compares to income tax expense of $1.3 million (3.4% of net sales) for the first quarter of fiscal 2013, representing an effective tax rate of 32.0%. Taxes in the first quarter of fiscal 2014 includes $150,000 of interest due for fiscal 2012, 2013 and the first quarter of fiscal 2014 on the unpaid amount due the Internal Revenue Service for the correction of the unrecorded deemed distribution of earnings and profits of the Company’s Chinese subsidiary, see disclosure of this matter in the notes to the condensed consolidated financial statements. Absent this interest accrual, the effective rate for the quarter is approximately 29% and the projected effective tax rate for the remainder of fiscal 2014 is expected to be approximately 29%.

Critical Accounting Policies

There have been no changes to the Company’s critical accounting policies, estimates, or judgments from those discussed in the Company’s2013Annual Report on Form 10-K.

Liquidity and Capital Resources

Net cash provided by operations for the first three months of fiscal 2014 was $3.5 million and resulted primarily from the level of net income before depreciation, amortization and non-cash equity based compensation expense. The positive cash flow from net income for the first quarter of fiscal 2014 was partially off-set by a $1.3 million increase in inventory due to delayed shipments, a $0.7 million decrease in accounts payable and a $0.4 million net decline in other assets and liabilities. Net cash provided by operations for the first three months of fiscal 2013 was $2.1 million and primarily resulted from the level of net income before depreciation and non-cash equity based compensation expense. The positive cash flow from net income for the first quarter of fiscal 2013 was partially off-set by a $3.9 million increase in accounts receivable resulting mainly from a lengthening of contractual payment terms for some larger Wireless Group customers and a $0.4 million increase in inventory.

Net cash used in investing activities in the first three months of fiscal 2014 was $0.9 million and consisted of $2.5 million used for capital additions and $0.3 million used to acquire Cellular Machines, partially off-set by $1.9 million provided by maturities of marketable debt securities. Net cash provided by investing activities in the first three months of fiscal 2013 was $4.3 million and consisted of $5.4 million provided by maturities of marketable debt securities and $0.2 million provided by proceeds from a deposit on an asset held for sale, partially off-set by $1.3 million used for capital additions.

17

Net cash used in financing activities was $0.8 million in the first three months of fiscal 2014 and consisted of $0.7 million of cash and tax benefits provided by the exercise of stock options, partially off-set by $1.5 million used to purchase approximately 64,000 treasury shares. Net cash provided by financing activities was $0.9 million in the first three months of fiscal 2013 and consisted of $8.0 million provided by borrowings under the Company’s credit facility, $1.8 million of cash and tax benefits provided by the exercise of stock options, partially off-set by $8.9 million used to purchase approximately 469,000 treasury shares.

During the remainder of fiscal 2014, the Company anticipates that its primary cash requirement will be for capital expenditures. Capital expenditures for the remainder of fiscal 2014 are expected to be in the range of $4.0 - $5.0 million, 2-3% of anticipated sales, and will be funded from existing cash and investments, and expected cash flow generated by operations.

The Company has a $50.0 million revolving credit facility with its principal bank and currently has no balance outstanding under the facility. Borrowings on the line of credit bear interest at the 30-day LIBOR rate, plus 100 to 200 basis points, based upon the Company’s rolling twelve month earnings before interest and taxes and depreciation and amortization (EBITDA) performance.

The Company may continue to repurchase shares of its common stock in the open market and/or through privately negotiated transactions under the current Board authorization, depending on market conditions. At September 30, 2013, there were approximately 1.2 million shares remaining under the current Board repurchase authorization.

At September 30, 2013, the Company had approximately $53.5 million in cash, cash equivalents, and marketable securities. Included in the Company’s cash and cash equivalents balance is $15.8 million that is deposited in banks in China. The Company has had positive operating cash flow for over ten years, and believes that its cash requirements for the foreseeable future will be satisfied by currently invested cash balances and expected cash flows from operations.

During the quarter ended September 30, 2013, the Company identified an error in its liability for income taxes. The error arose during the Company’s fiscal year ended June 30, 2009 upon the execution and subsequent borrowing under a debt agreement with a bank. The debt agreement included a pledge by the Company of all the assets of its foreign subsidiary in China. Under Section 956(a) of the Internal Revenue Code, a pledge of assets of a foreign subsidiary requires that the value of the subsidiary’s earnings and profits be included in gross taxable income of the Company. Based on this, the Company should have included income in its gross taxable income in fiscal 2009 in an amount equal to the cumulative earnings and profits from the China subsidiary from its inception through the date of the borrowing in fiscal 2009. The resulting error in fiscal 2009 was an understatement of its income tax liability and an overstatement of its net income totaling $2.7 million. The total effect of the error as of June 30, 2011 totaled $3.4 million, which includes interest expense from fiscal years 2010 and 2011 and an income tax penalty. The interest expense incurred and not recorded in fiscal years 2012 and fiscal 2013 was not material to the consolidated financial statements in those years.

In accordance with accounting guidance found in Accounting Standards Codification (“ASC”) 250-10, Accounting Changes and Error Corrections and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 99, Materiality, the Company assessed the materiality of the error and concluded that the error was not material to any of its previously issued consolidated financial statements included in the Form 10-K for the year ended June 30, 2013. As permitted by the accounting guidance found in ASC 250-10 and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company has revised the accompanying condensed consolidated balance sheet as of the earliest period presented (June 30, 2013), to decrease retained earnings by $3.4 million and to increase income taxes payable by the same amount.

18

The following table presents the effect of this revision on the Company’s condensed consolidated balance sheet as of June 30, 2013 (in thousands):

	Retained earnings			Income taxes payable		Other current liabilites
Beginning balance, as previously reported	$	158,182		$	-	$	1,900
Prior-period adjustment		(3,435	)		3,435
Reclassification					345		(345	)
Beginning balance, as restated	$	154,747		$	3,780	$	1,555

As indicated above, the Company previously included income taxes payable in other current liabilities on the condensed consolidated balance sheet as of June 30, 2013. As a result of this revision, the Company has reclassified income taxes payable from other current liabilities as of June 30, 2013. No adjustments were required to be made to the accompanying condensed consolidated statements of income, comprehensive income, or cash flows for the three month period ended September 30, 2012.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

The following discusses the Company’s possible exposure to market risk related to changes in interest rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including factors described elsewhere in this Quarterly Report.

As of September 30, 2013, the Company had cash, cash equivalents and marketable securities of $53.5 million, all of which consisted of highly liquid investments in marketable debt securities. The marketable debt securities at date of purchase have maturities within 3 years, are exposed to interest rate risk and will decrease in value if market interest rates increase. A hypothetical decrease in market interest rate of 10.0% would result in a nominal decrease to the earnings per diluted share. Due to the relatively short maturities of the securities, continuing current unprecedented low market rates and the Company’s ability to hold those investments to maturity, the Company does not believe that an immediate decrease in interest rates would have a significant effect on its financial condition or results of operations. Over time, however, declines in interest rate will reduce the Company’s interest income.

As ofSeptember 30, 2013, the Company had $0 outstanding debt under its Line with Key Bank National Association for which principal amounts are due in August 2014. The Line bears interest at the 30-day London inter-bank offer rate (LIBOR), plus 100 to 200 basis points, or at the Lender’s prime rate, plus 0 to 75 basis points, based upon the Company's earnings before interest and taxes and depreciation and amortization (EBITDA) performance at the end of each quarter as measured by the leverage ratio, total indebtedness divided by EBITDA. The Company pays a commitment fee (10 to 40 basis points) for any unused portion of the Line, up to $50 million, based upon the same EBITDA formula identified above. Interest expense for these borrowings is exposed to interest rate risk and will increase if market interest rates rise. A hypothetical increase in market interest rate of 10.0% would result in a nominal decrease to the earnings per diluted share. Due to the Company’s significant cash reserves and historical positive operating cash flow, the Company does not believe that an immediate increase in interest rates would have a significant effect on its financial condition or results of operations. Over time, however, increases in market interest rates will increase the Company’s interest expense.

Forward-Looking Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for “forward-looking statements” made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our shareholders. All forward-looking statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made and the Company does not undertake any obligation to update its disclosure relating to forward looking matters. Actual results may differ materially from those expressed or implied. The uncertainties and risk factors that could affect our Company, its business and actual results are described throughout this filing and in our 2013Annual Report on Form 10-K under the Item 1A, “Risk Factors.”

19

Item 4.     Controls and Procedures

A. Disclosure Controls and Procedures

An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) was carried out under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer (“the Certifying Officers”) as of September 30, 2013.  Based on that evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2013.  

B. Changes in Internal Control Over Financial Reporting

There were no changes in the registrant’s internal control over financial reporting during our fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Part II          Other Information

Item 1A.     Risk Factors     

The Company is exposed to certain risk factors that may affect operations and/or financial results. The significant factors known to the Company are described in the Company’s most recently filed Annual Report on Form 10-K. There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K.

20

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

 (c) Issuer Purchases of Equity Securities

On November 9, 2012, the Board of Directors increased by an additional 1,500,000 the number of shares that the Company was authorized to repurchase in the open market or by privately negotiated transactions through its previously announced stock repurchase program. The program, which may be suspended at any time without notice, has no expiration date. The following table sets forth information regarding shares repurchased and purchasable under the program during and as of the end of the periods indicated. On September 30, 2013, 1,261,027shares remained authorized for purchase, depending on market conditions.

Period	Total Number of Shares (or Units) Purchased		Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July2013		-		-		-		1,324,589
August 2013		63,562		24.08		63,562		1,261,027
September 2013		-		-		-		1,261,027
Total		63,562		24.08		63,562		1,261,027

Item 6.	Exhibits
	31	Rule 13a-14(a) Certifications
	32	Section 1350 Certifications
	101.INS	XBRL Instance
	101.SCH	XBRL Taxonomy Extension Schema
	101.CAL	XBRL Taxonomy Extension Calculation
	101.DEF	XBRL Taxonomy Extension Definition
	101.LAB	XBRL Taxonomy Extension Labels
	101.PRE	XBRL Taxonomy Extension Presentation

21

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Anaren, Inc.
	(Registrant)
Date: October 31, 2013	/s/ Lawrence A. Sala
	Lawrence A. Sala
	President & Chief Executive Officer

Date: October 31, 2013	/s/ George A. Blanton
	George A. Blanton
	Sr. Vice President, Chief Financial Officer
	and Treasurer

22