<PAGE>
- --------------------------------------------------------------------------------
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 QUARTER ENDED JUNE 30, 1998
Commission file number 0-16182
AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-1962029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
910 Sylvan Avenue
Englewood Cliffs, New Jersey 07632
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 871-1500
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
4,122,767 shares of Common Stock, $.01 par value, were outstanding as of August
3, 1998.
- --------------------------------------------------------------------------------
<PAGE>
AXSYS TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1998 and 1997 .......................... 3
Condensed Consolidated Statements of Operations -
Six Months Ended June 30, 1998 and 1997 ........................... 4
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 ................................ 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 ............................ 6
Notes to Condensed Consolidated Financial Statements ................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................... 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ............................................ 15
Item 4. Submission of Matters to a Vote of Security Holders ......... 15
Item 5. Other Information ........................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 16
SIGNATURES ........................................................... 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AXSYS TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited, dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------
1998 1997
------------------ -----------------
<S> <C> <C>
NET SALES........................................................... $ 33,666 $ 31,247
Cost of sales....................................................... 24,359 22,709
Selling, general and administrative expenses........................ 5,821 5,385
Amortization of intangible assets................................... 117 73
-------- ---------
OPERATING INCOME.................................................... 3,369 3,080
Interest expense.................................................... 288 688
Other expense....................................................... 25 15
-------- ---------
INCOME BEFORE TAXES................................................. 3,056 2,377
Provision for income taxes.......................................... - 956
-------- ---------
NET INCOME.......................................................... 3,056 1,421
Preferred stock dividends........................................... - 42
-------- ---------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS........................ $ 3,056 $ 1,379
-------- ---------
-------- ---------
BASIC EARNINGS PER SHARE............................................ $ 0.72 $ 0.45
-------- ---------
-------- ---------
Weighted average common shares outstanding.......................... 4,222,591 3,040,684
-------- ---------
-------- ---------
DILUTED EARNINGS PER SHARE.......................................... $ 0.72 $ 0.42
-------- ---------
-------- ---------
Weighted average common shares outstanding.......................... 4,264,699 3,301,056
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AXSYS TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited, dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------
1998 1997
--------------- -----------------
<S> <C> <C>
NET SALES....................................................... $ 67,261 $ 58,849
Cost of sales................................................... 48,679 43,111
Selling, general and administrative expenses.................... 12,114 10,284
Amortization of intangible assets............................... 236 125
-------- ---------
OPERATING INCOME................................................ 6,232 5,329
Interest expense................................................ 546 1,343
Other expense................................................... 30 26
-------- ---------
INCOME BEFORE TAXES............................................. 5,656 3,960
Provision for income taxes...................................... 1,063 1,594
-------- ---------
NET INCOME...................................................... 4,593 2,366
Preferred stock dividends....................................... - 102
-------- ---------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS.................... $ 4,593 $ 2,264
-------- ---------
-------- ---------
BASIC EARNINGS PER SHARE........................................ $ 1.09 $ 0.75
-------- ---------
-------- ---------
Weighted average common shares outstanding...................... 4,219,284 3,011,668
-------- ---------
-------- ---------
DILUTED EARNINGS PER SHARE...................................... $ 1.08 $ 0.69
-------- ---------
-------- ---------
Weighted average common shares outstanding...................... 4,263,698 3,270,639
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AXSYS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash. ................................................................................ $ 556 $ 575
Accounts receivable - net............................................................. 19,071 18,643
Inventories - net..................................................................... 30,698 29,324
Other current assets.................................................................. 2,589 1,011
-------- -------
TOTAL CURRENT ASSETS................................................................ 52,914 49,553
PROPERTY, PLANT AND EQUIPMENT - net..................................................... 16,418 15,074
EXCESS OF COST OVER NET ASSETS ACQUIRED - net........................................... 13,625 13,942
OTHER ASSETS............................................................................ 414 430
-------- -------
TOTAL ASSETS........................................................................ $ 83,371 $ 78,999
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 8,508 $ 9,631
Accrued expenses and other liabilities................................................ 11,195 9,979
Current portion of long-term debt and capital
lease obligations..................................................................... 980 904
-------- -------
TOTAL CURRENT LIABILITIES........................................................... 20,683 20,514
LONG-TERM DEBT & CAPITAL LEASES, less current portion................................... 7,882 8,629
OTHER LONG-TERM LIABILITIES............................................................. 2,350 2,284
DEFERRED INCOME......................................................................... 189 255
SHAREHOLDERS' EQUITY:
Preferred Stock, none issued and outstanding at June 30, 1998
and December 31, 1997............................................................... - -
Common Stock, issued and outstanding 4,122,767 shares at
June 30, 1998 and 4,113,190 shares at
December 31, 1997.................................................................... 41 41
Capital in Excess of Par.............................................................. 40,766 40,409
Retained Earnings..................................................................... 11,460 6,867
-------- -------
TOTAL SHAREHOLDERS' EQUITY.......................................................... 52,267 47,317
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 83,371 $ 78,999
-------- -------
-------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AXSYS TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income............................................................... $ 4,593 $ 2,366
Adjustments to reconcile net income to cash provided by
operating activities:
Deferred income taxes.................................................... (991) -
Realization of net operating loss carryforward........................... 58 1,355
Depreciation and amortization............................................ 1,981 1,563
Increase in current assets, other than cash.............................. (2,161) (3,320)
Increase in current liabilities.......................................... 93 3,875
Other-net................................................................ 147 (121)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 3,720 5,718
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (3,029) (851)
Acquisition of business, net of cash acquired............................ - (7,335)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES.................................. (3,029) (8,186)
--------- --------
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings............................................. - 7,000
Net repayment of borrowings.............................................. (754) (5,226)
Other ................................................................... 44 (1,582)
--------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................... (710) 192
--------- --------
NET DECREASE IN CASH................................................... (19) (2,276)
CASH AT BEGINNING OF PERIOD................................................ 575 2,691
--------- --------
CASH AT END OF PERIOD...................................................... $ 556 $ 415
--------- --------
--------- --------
Supplemental Cash Flow Information:
Cash paid for:
Interest............................................................... $ 468 $ 1,162
Income Tax............................................................. 339 37
Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases................................ $ 75 $ 1,158
Capital stock issued for acquisition.................................... - 2,166
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
AXSYS TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring accruals) have
been included. Operating results for the three month and six month periods ended
June 30, 1998 are not indicative of the results that may be expected for the
year ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
Certain reclassifications have been made to previously reported financial
statements to conform to current classifications.
Note 2 - Earnings per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share" which requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
has been computed by dividing Net Income Applicable to Common Shareholders by
the weighted average number of common shares outstanding. Diluted earnings per
share has been computed by dividing Net Income Applicable to Common Shareholders
by the weighted average number of common shares outstanding including the
dilutive effects of warrants and stock options.
Note 3 - Acquisitions and Divestiture
On May 30, 1997, the Company acquired Teletrac, Inc. ("Teletrac") for $9,926,
including the issuance of 153,000 shares of Axsys Common Stock, 53,000 of which
shares were issued at closing and 100,000 of which shares will be issued
pursuant to a Stockholder Agreement entered into as of May 30, 1997 with certain
selling shareholders and employees of Teletrac. Teletrac designs and
manufactures laser-based precision measurement systems and state-of-the-art
precision linear and rotary positioning servo systems for use in the electronics
capital equipment market.
The acquisition of Teletrac was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Teletrac have been
included in the accompanying consolidated financial statements since the date of
its acquisition. The cost of the acquisition was allocated on the basis of the
fair market value of the assets acquired and liabilities assumed.
Summarized below are the unaudited pro forma results of operations of the
Company as if Teletrac had been acquired on January 1, 1997:
<TABLE>
<CAPTION>
Pro Forma
Six Months Ended June 30, 1997
---------------------------------------
<S> <C>
Net sales............................................ $ 63,160
Net income........................................... 2,455
Basic earnings per share............................. 0.75
Diluted earnings per share........................... 0.69
</TABLE>
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had the
acquisition of Teletrac taken place at the beginning of 1997 or the future
operating results of the combined companies.
7
<PAGE>
AXSYS TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)
Note 4 - Inventories
Inventories have been determined generally by lower of cost (first-in, first-out
or average) or market. Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- ------------------
<S> <C> <C>
Raw materials........................... $ 9,954 $ 10,799
Work-in-process......................... 13,540 12,455
Finished goods.......................... 12,630 11,425
--------- ---------
36,124 34,679
Less reserves........................... 5,426 5,355
--------- ---------
$ 30,698 $ 29,324
--------- ---------
--------- ---------
</TABLE>
Note 5 - Shareholders' Equity
Common Stock -
On October 21, 1997, the Company completed an underwritten public offering of
1,064,809 shares of its Common Stock at a public offering price of $27.00 per
share (the "offering"). Of the approximately $26,400 of net proceeds from the
offering, approximately $6,900 was used to repurchase outstanding warrants to
purchase the Company's Common Stock and the remaining net proceeds to prepay a
portion of the Company's outstanding bank debt.
Preferred Stock -
The Company paid quarterly dividends on its $1.20 Cumulative Redeemable
Preferred Stock in additional shares at an annual rate of 15% based on the
shares outstanding from August 1991 through February 22, 1996. On February 22,
1996, the Company's right to pay dividends in additional shares of Preferred
Stock expired. From February 22, 1996 to June 4, 1997, the Company did not
declare or pay any dividends on the Preferred Stock, although they continued to
accumulate.
On February 14, 1997, the Company commenced an offer to exchange 0.75 shares of
its Common Stock for each outstanding share of its Preferred Stock. On March 17,
1997, the Exchange Offer terminated and the Company accepted for exchange all
shares of Preferred Stock validly tendered as of that time. Approximately
538,000 shares of Preferred Stock were exchanged for approximately 403,500
shares of Common Stock. Holders of shares of Preferred Stock accepted for
exchange did not receive any separate payment in respect of dividends not paid
subsequent to February 22, 1996, the last date on which dividends were paid on
the Preferred Stock.
On June 4, 1997, the Company called for redemption all of the remaining
approximately 200,900 outstanding shares of its Preferred Stock. The redemption
price was $7.70 per share, including accrued and unpaid dividends of $1.54 per
share through the redemption date.
8
<PAGE>
AXSYS TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)
Note 6 - Income Taxes
The Company has determined, based upon the level of its current taxable income,
it is more likely than not that it will realize the benefit of a portion of its
deferred tax assets which previously had been fully reserved with a valuation
allowance. As such, in the second quarter of 1998, the Company has reversed a
portion of its tax valuation allowance equal to the amount it would have
recorded as a tax provision on income before taxes during the period. As a
result, the Company reduced its tax provision for the second quarter of 1998 and
increased its net deferred tax asset by $1,241. Excluding the effect of the tax
valuation allowance reversal, net income applicable to common shareholders would
have been $1,815 or $0.43 per diluted share for the three month period ended
June 30, 1998, and $3,352 or $0.79 per diluted share for the six month period
ended June 30, 1998.
In addition, during the second quarter, the Company has reduced its tax
valuation allowance and credited Capital in Excess of Par by $255, to recognize
the remaining portion of deferred tax assets originating prior to the Company's
1991 quasi-reorganization. Including $58 which was recorded as part of the
Company's first quarter tax provision, a total of $313 has been credited to
Capital in Excess of Par during 1998.
As of June 30, 1998, the remaining tax valuation allowance is approximately $3.0
million.
Note 7 - Segment Data
Effective January 1, 1998, the Company adopted SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information" which requires disclosure of
information on the segments of a business based on the way management organizes
the segments of its business for making operating decisions and assessing
performance. The Company classifies its businesses under two major groups each
of which has two segments. The Precision Systems Group ("PSG") is comprised of
the Precision Systems and Sensor Systems segments, and the Industrial Components
Group ("ICG") is comprised of the Precision Ball Bearings and Electronic
Interconnect Products segments. Within the PSG, the Precision Systems segment
designs and manufactures micro-positioning and precision optical components and
systems primarily for defense, space, electronics capital equipment and digital
imaging applications. The Sensor Systems segment designs and manufactures
position sensor devices such as potentiometers, pressure transducers and
encoders primarily for defense and industrial automation applications. Within
the ICG, the Precision Ball Bearings segment distributes and services precision
miniature ball bearings. The Electronic Interconnect Products segment designs
and manufactures interconnect devices, barrier terminal blocks, and connectors.
The products of both the ICG segments are used in a variety of commercial and
industrial applications.
9
<PAGE>
AXSYS TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)
The following tables present financial data for each of the Company's segments.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales:..........................................
Precision Systems............................... $ 20,451 $ 17,958 $ 39,858 $ 32,982
Sensor Systems.................................. 2,024 1,966 3,886 3,659
Intersegment eliminations....................... (132) (124) (297) (223)
--------- --------- --------- ---------
Total PSG................................... 22,343 19,800 43,447 36,418
--------- --------- --------- ---------
Precision Ball Bearings......................... 6,576 6,827 13,839 13,459
Electronic Interconnect Products................ 4,747 4,620 9,975 8,972
--------- --------- --------- ---------
Total ICG................................... 11,323 11,447 23,814 22,431
--------- --------- --------- ---------
Total Sales............................. $ 33,666 $ 31,247 $ 67,261 $ 58,849
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings before amortization, interest and taxes:...
Precision Systems............................... $ 2,605 $ 2,238 $ 4,679 $ 3,969
Sensor Systems.................................. 101 106 85 (33)
--------- --------- --------- ---------
Total PSG................................... 2,706 2,344 4,764 3,936
--------- --------- --------- ---------
Precision Ball Bearings......................... 906 925 1,885 1,883
Electronic Interconnect Products................ 701 786 1,639 1,587
--------- --------- --------- ---------
Total ICG................................... 1,607 1,711 3,524 3,470
Non-allocated expenses.......................... (1,257) (1,678) (2,632) (3,446)
--------- --------- --------- ---------
Income before taxes..................... $ 3,056 $ 2,377 $ 5,656 $ 3,960
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Identifiable assets:
Precision Systems............................ $ 39,716 $ 37,135
Sensor Systems............................... 6,314 6,092
--------- ---------
Total PSG................................ 46,030 43,227
--------- ---------
Precision Ball Bearings...................... 13,348 12,475
Electronic Interconnect Products............. 9,094 8,679
--------- ---------
Total ICG................................ 22,442 21,154
Non-allocated assets......................... 14,899 14,618
--------- ---------
Total assets........................... $ 83,371 $ 78,999
--------- ---------
--------- ---------
</TABLE>
Included in non-allocated expenses are the following: general corporate expense,
interest expense, amortization of goodwill and other income and expense.
Identifiable assets by segment consist of those assets that are used in the
segments' operations. Non-allocated assets are comprised primarily of goodwill.
10
<PAGE>
AXSYS TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in thousands, except per share data)
Note 8 - Other Information
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Allowance for doubtful accounts......................... $ 393 $ 345
---------- ---------
---------- ---------
Accumulated depreciation and amortization
of property, plant and equipment....................... $ 11,862 $ 10,406
---------- ---------
---------- ---------
Accumulated amortization of excess of cost
over net assets acquired............................... $ 1,644 $ 1,408
---------- ---------
---------- ---------
</TABLE>
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth certain financial data as a percentage of net
sales for the three month and six month periods ended June 30, 1998 and 1997.
The Company acquired the stock of Teletrac Inc. ("Teletrac") on May 30, 1997.
This acquisition, which is part of the Precision Systems segment, has been
accounted for under the purchase method of accounting. Accordingly, the results
of the continuing operations of Teletrac have been included in the Company's
Condensed Consolidated Statements of Operations since the date of acquisition.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales:
Precision Systems................................. 60.8% 57.5% 59.2% 56.1%
Sensor Systems.................................... 6.0 6.3 5.8 6.2
Intersegment eliminations......................... (0.4) (0.4) (0.4) (0.4)
------ ------ ------ -----
Total PSG..................................... 66.4 63.4 64.6 61.9
------ ------ ------ -----
Precision Ball Bearings........................... 19.5 21.8 20.6 22.9
Electronic Interconnect Products.................. 14.1 14.8 14.8 15.2
------ ------ ------ -----
Total ICG..................................... 33.6 36.6 35.4 38.1
------ ------ ------ -----
Total Company............................. 100.0 100.0 100.0 100.0
------ ------ ------ -----
Cost of sales......................................... 72.4 72.7 72.4 73.3
------ ------ ------ -----
Gross profit.......................................... 27.6 27.3 27.6 26.7
------ ------ ------ -----
Operating expenses:
Selling, general and administrative expenses...... 17.3 17.2 18.0 17.5
Amortization of intangible assets................. 0.3 0.2 0.4 0.2
------ ------ ------ -----
17.6 17.4 18.4 17.7
------ ------ ------ -----
Operating income...................................... 10.0 9.9 9.2 9.0
Interest expense.................................. 0.8 2.2 0.8 2.3
Other expense..................................... 0.1 0.1 - -
------ ------ ------ -----
Income before taxes................................... 9.1 7.6 8.4 6.7
Provision for income taxes........................ - 3.1 1.6 2.7
------ ------ ------ -----
Net income............................................ 9.1% 4.5% 6.8% 4.0%
------ ------ ------ -----
Gross profit (as a percentage of related net sales):
PSG .............................................. 26.6% 25.5% 26.1% 24.2%
ICG .............................................. 29.8 30.4 30.4 30.9
</TABLE>
12
<PAGE>
Comparison of the Three Months Ended June 30, 1998 and June 30, 1997
Net sales. Net sales increased by 7.7%, or $2.5 million, from $31.2 million in
the three month period ended June 30, 1997 to $33.7 million in the same period
of 1998. The PSG's sales increased by 12.8%, or $2.5 million, from $19.8 million
in 1997 to $22.3 million in 1998. Of this $2.5 million increase, approximately
$2.0 million was attributable to the acquisition of Teletrac. The remaining $0.5
million increase was the result of internal growth primarily in the space,
digital imaging and industrial automation markets partially offset by lower
shipments to the defense and electronics capital equipment markets. The lower
shipments to the defense market are due primarily to the timing of government
programs, rather than lower demand. The PSG sales to the electronics capital
equipment market have decreased as a result of the difficulties in the Asian
economy and specific weakness in the data storage and semiconductor segments of
that market. The ICG's sales decreased by 1.1%, or $0.1 million, from $11.4
million in 1997 to $11.3 million in 1998. Sales of electronic interconnect
products grew 2.7% over the prior year as a result of the introduction and
continuing acceptance of new product offerings. This increase was partially
offset by a general weakening of market demand due in part to the effect of the
difficulties in Asia. Sales of precision ball bearings were down 3.7% over the
prior year, representing a decrease to both distributors and original equipment
manufacturers, particularly those serving the weak electronics capital equipment
market.
Gross profit. The Company's gross profit increased by 9.0%, or $0.8 million,
from $8.5 million in 1997 to $9.3 million in 1998. Gross profit margin
increased from 27.3% of net sales in 1997 to 27.6% in 1998. The gross margin
for the PSG increased from 25.5% of net sales in 1997 to 26.6% in 1998
primarily due to the addition of higher margin revenue from the acquisition of
Teletrac and a favorable sales mix. The gross margin for the ICG, decreased
from 30.4% of net sales in 1997 to 29.8% in 1998 primarily due to higher direct
labor and overhead spending.
Selling, general and administrative expenses. SG&A expenses increased by 8.1%,
or $0.4 million, from $5.4 million in 1997 to $5.8 million in 1998. As a
percentage of net sales, SG&A increased from 17.2% in 1997 to 17.3% in 1998. The
increase in SG&A expenses in absolute dollars was primarily due to the
acquisition of Teletrac.
Interest expense. Interest expense decreased by 58.1%, or $400,000, from
$688,000 in 1997 to $288,000 in 1998. The decrease in interest expense was
primarily due to lower average borrowings during 1998 resulting from the
Company's use of the net proceeds (approximately $19.5 million) from its common
stock offering in late October of 1997 to repay indebtedness under the Company's
senior credit facility.
Taxes. The Company's effective tax rate, decreased from 40.2% in 1997 to none in
1998. As discussed in Note 6 to the Condensed Consolidated Financial Statements,
the Company offset its normal second quarter tax provision by the reversal of a
portion of its tax valuation allowance. As of June 30, 1998, the remaining tax
valuation allowance is approximately $3.0 million. The Company will continue to
assess the realizability of its deferred tax assets in future periods.
Preferred stock dividends. Preferred Stock dividends decreased 100%, or $42,000,
to none in 1998. The decrease in Preferred Stock dividends was due to the
Company's exchange of Preferred Stock for Common Stock and subsequent redemption
of remaining Preferred Stock during 1997 (see Note 5 to the Condensed
Consolidated Financial Statements). As a result of such redemption, there is no
Preferred Stock outstanding and there are no accrued and unpaid dividends.
Comparison of the Six Months Ended June 30, 1998 and June 30, 1997
Net sales. Net sales increased by 14.3%, or $8.4 million, from $58.8 million in
the six month period ended June 30, 1997 to $67.3 million in the same period of
1998. The PSG's sales increased by 19.3%, or $7.0 million, from $36.4 million in
1997 to $43.4 million in 1998. Of this $7.0 million increase, approximately $4.0
million was attributable to the acquisition of Teletrac. The remaining $3.0
million increase was the result of internal growth in the electronics capital
equipment, digital imaging and industrial automation markets partially offset by
lower sales to the space market primarily due to program timing. The ICG's sales
increased by 6.2%, or $1.4 million, from $22.4 million in 1997 to $23.8 million
in 1998. Sales of electronic interconnect products grew 11.2%, or $1.0 million,
over the prior year as a result of the introduction and continuing acceptance of
new product offerings and market share gains as a result of strong customer
service.
13
<PAGE>
Gross profit. The Company's gross profit increased by 18.1%, or $2.9 million,
from $15.7 million in 1997 to $18.6 million in 1998. Gross profit margin
increased from 26.7% of net sales in 1997 to 27.6% in 1998. The gross margin for
the PSG increased from 24.2% of net sales in 1997 to 26.1% in 1998 and, for the
ICG, decreased from 30.9% of net sales in 1997 to 30.4% in 1998. Overall, the
improvement in gross margin was primarily due to the addition of higher margin
revenue from the acquisition of Teletrac and production efficiencies in the PSG.
Selling, general and administrative expenses. SG&A expenses increased by 17.8%,
or $1.8 million, from $10.3 million in 1997 to $12.1 million in 1998. As a
percentage of net sales, SG&A increased from 17.5% in 1997 to 18.0% in 1998. The
increase in SG&A expenses in absolute dollars was primarily due to the
acquisition of Teletrac. The increase in SG&A expenses as a percentage of net
sales was primarily due to higher incentive expense related to a three year
performance plan established for the former owners, and now employee managers,
of Teletrac.
Interest expense. Interest expense decreased by 59.3%, or $797,000, from
$1,343,000 in 1997 to $546,000 in 1998. The decrease in interest expense was
primarily due to lower average borrowings during 1998 resulting from the
Company's use of the net proceeds (approximately $19.5 million) from its common
stock offering in late October of 1997 to repay indebtedness under the Company's
senior credit facility.
Taxes. The Company's effective tax rate, decreased from 40.3% in 1997 to 18.8%
in 1998. As discussed in Note 6 to the Condensed Consolidated Financial
Statements, the Company offset its normal second quarter tax provision by the
reversal of a portion of its tax valuation allowance. As of June 30, 1998, the
remaining tax valuation allowance is approximately $3.0 million. The Company
will continue to assess the realizability of its deferred tax assets in future
periods.
Preferred stock dividends. Preferred Stock dividends decreased 100%, or
$102,000, to none in 1998. The decrease in Preferred Stock dividends was due to
the Company's exchange of Preferred Stock for Common Stock and subsequent
redemption of remaining Preferred Stock during 1997 (see Note 5 to the Condensed
Consolidated Financial Statements). As a result of such redemption, there is no
Preferred Stock outstanding and there are no accrued and unpaid dividends.
Backlog
A substantial portion of the Company's business is of a build-to-order nature
requiring various engineering, manufacturing, testing and other processes to be
performed prior to shipment. As a result, the Company generally has a
significant backlog of orders to be shipped. The Company's backlog of orders
decreased by 8.7% or $4.8 million, from $55.4 million at December 31, 1997 to
$50.6 million at June 30, 1998. The decrease in backlog was due primarily to a
decline in orders from the electronics capital equipment, space and defense
markets. The decline in the electronics capital equipment market is due
primarily to the continuing difficulties in the Asian economy and specific
weakness in the data storage and semiconductor segments of that market. It is
anticipated that this market weakness could continue through the next two
quarters. The decline in bookings from the defense and space markets is due
primarily to program timing, rather than lower demand. Some of these programs,
however, may be delayed beyond the current fiscal year. The Company believes
that a substantial portion of the backlog of orders at June 30, 1998 will be
shipped over the next twelve months.
Liquidity and Capital Resources
The Company funds its operations primarily from cash flow generated by
operations and, to a lesser extent, from borrowings under its credit facility
and through capital lease transactions.
Net cash provided by operations for the six months ended June 30, 1998 and 1997
was $3.7 million and $5.7 million, respectively. Cash provided from operations
decreased in 1998 compared to 1997 primarily due to the timing of working
capital requirements. These decreases were partially offset by an increase in
net income as adjusted for the realization of tax loss carryforwards, deferred
income taxes and non-cash amortization and depreciation. At December 31, 1997,
the Company had approximately $1.3 million of net operating losses and $0.5
million of tax credits available to reduce future taxable income.
14
<PAGE>
The Company's working capital was $32.2 million and $29.0 million on June
30, 1998 and December 31, 1997, respectively.
Net cash used in investing activities for the six months ended June 30, 1998 and
1997 was $3.0 million and $8.2 million, respectively. This $5.2 million decrease
was due to the acquisition of Teletrac in 1997. This was partially offset by
higher capital expenditures in 1998 primarily on machinery and equipment to
expand or improve on capabilities and to lower operating costs.
The Company had no material commitments for capital expenditures as of June 30,
1998.
The Company has an $11.0 million senior secured credit facility comprised of a
revolving debt commitment expiring on April 25, 2000 (the "Credit Facility"), of
which $5.0 million was outstanding as of June 30, 1998. The Credit Facility
contains restrictive covenants which, among other things, impose limitations
with respect to the incurrence of additional liens and indebtedness, mergers,
consolidations and specified sale of assets and requires the Company to meet
certain financial tests including minimum levels of earnings and net worth and
various other financial ratios. In addition, the Credit Facility prohibits the
payment of cash dividends. The Company believes that the remaining availability
under the Credit Facility and cash generated from operations will be sufficient
to meet its future capital expenditure and working capital requirements for at
least the next 12 months.
This quarterly report on Form 10-Q provides certain forward-looking statements.
The Company's business is subject to a variety of risks and uncertainties. As a
result, actual future results and developments may be materially different from
those expressed or implied in any forward-looking statement. Disclosure
regarding factors affecting the Company's future results and developments is
contained in the Company's public filings with the Securities and Exchange
Commission, including the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1997.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of June 30, 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the quarter ended June 30, 1998.
Item 5. OTHER INFORMATION
Not applicable during the quarter ended June 30, 1998.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 27.1: Financial Data Schedule (For SEC use only).
Exhibit 27.2: Amended Financial Data Schedule (For SEC use only).
b) Reports on Form 8-K
None during the quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated this 6th day of August, 1998.
Date: August 6, 1998 AXSYS TECHNOLOGIES, INC.
By: /s/Stephen W. Bershad
-----------------------
Stephen W. Bershad
Chairman of the Board and Chief
Executive Officer
By: /s/Raymond F. Kunzmann
------------------------
Raymond F. Kunzmann
Vice President-Finance and Chief
Financial Officer
16
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<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<ALLOWANCES> 393
<INVENTORY> 30,698
<CURRENT-ASSETS> 52,914
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF AXYSYS TECHNOLOGIES, INC. AS OF MARCH 31, 1998 AND
THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
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<PERIOD-END> MAR-31-1998
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