UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
---------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1998
-------------------------------------
Commission File Number 1-8037
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AEROFLEX INCORPORATED
(Exact name of Registrant as specified in its Charter)
DELAWARE 11-1974412
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
35 South Service Road
Plainview, N.Y. 11803
(Address of principal executive offices) (Zip Code)
(516) 694-6700
(Registrant's telephone number, including area code)
---------
*Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
February 9, 1999 17,785,419 shares (excluding 32,027 shares held in treasury)
- --------------------------------------------------------------------------------
(Date) (Number of Shares)
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I: FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and June 30, 1998 3-4
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended December 31, 1998 and 1997 5
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, 1998 and 1997 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1998 and 1997 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six and Three Months Ended December 31, 1998 and 1997 11-15
PART II: OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 16
ITEM 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(In thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 21,402 $ 24,408
Accounts receivable, less allowance for
doubtful accounts of $434,000 and $317,000 24,467 19,853
Inventories 29,359 29,851
Deferred income taxes 2,283 1,861
Prepaid expenses and other current assets 2,222 1,197
-------- --------
Total current assets 79,733 77,170
Property, plant and equipment, at cost, net 29,111 26,994
Intangible assets acquired in connection with
the purchase of businesses, net 8,118 7,578
Cost in excess of fair value of net assets
of businesses acquired, net 9,862 9,827
Other assets 3,267 2,532
-------- --------
Total assets $130,091 $124,101
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ --------
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,777 $ 1,755
Accounts payable 5,145 6,668
Accrued expenses and other current liabilities 10,627 12,932
Income taxes payable 2,108 1,850
-------- --------
Total current liabilities 19,657 23,205
Long-term debt 13,287 9,726
Deferred income taxes 982 1,156
Other long-term liabilities 2,513 2,978
-------- --------
Total liabilities 36,439 37,065
-------- --------
Stockholders' equity:
Preferred Stock, par value $.10 per share;
authorized 1,000,000 shares:
Series A Junior Participating Preferred
Stock, par value $.10 per share,
authorized 25,000 and 150,000 shares,
none issued - -
Common Stock, par value $.10 per share;
authorized 25,000,000 shares; issued
17,706,000 and 17,378,000 shares 1,771 1,738
Additional paid-in capital 102,335 100,481
Accumulated deficit (10,110) (15,178)
-------- --------
93,996 87,041
Less: Treasury stock, at cost (39,000 and
1,000 shares) 344 5
-------- --------
Total stockholders' equity 93,652 87,036
-------- --------
Total liabilities and stockholders' equity $130,091 $124,101
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------
1998 1997
------- -------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 67,826 $ 53,210
Cost of sales 44,299 35,079
-------- --------
Gross profit 23,527 18,131
-------- --------
Selling, general and administrative costs 11,392 10,365
Research and development costs 4,294 2,029
-------- --------
15,686 12,394
-------- --------
Operating income 7,841 5,737
-------- --------
Other expense (income)
Interest expense 567 1,250
Other expense (income) (544) 74
-------- --------
Total other expense (income) 23 1,324
-------- --------
Income before income taxes 7,818 4,413
Provision for income taxes 2,750 1,575
-------- --------
Net income $ 5,068 $ 2,838
======== ========
Net income per common share:
- Basic $ .29 $ .21
===== =====
- Diluted $ .27 $ .19
===== =====
Weighted average number of common
shares and common share equivalents
outstanding:
- Basic 17,523 13,547
======== ========
- Diluted 18,751 15,557
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------
1998 1997
------- -------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 36,197 $ 29,325
Cost of sales 23,795 19,406
-------- --------
Gross profit 12,402 9,919
-------- --------
Selling, general and administrative costs 5,762 5,759
Research and development costs 2,303 1,031
-------- --------
8,065 6,790
-------- --------
Operating income 4,337 3,129
-------- --------
Other expense (income)
Interest expense 268 527
Other expense (income) (241) (9)
-------- --------
Total other expense (income) 27 518
-------- --------
Income before income taxes 4,310 2,611
Provision for income taxes 1,500 925
-------- --------
Net income $ 2,810 $ 1,686
======== ========
Net income per common share:
- Basic $ .16 $ .12
===== =====
- Diluted $ .15 $ .11
===== =====
Weighted average number of common
shares and common share equivalents
outstanding:
- Basic 17,599 14,347
======== ========
- Diluted 18,939 15,750
======== ========
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 5,068 $ 2,838
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,046 2,511
Amortization of deferred gain (294) (338)
Deferred income taxes (525) (285)
Other, net 139 124
Change in operating assets and liabilities,
net of effects from purchase of
business:
Decrease (increase) in accounts receivable (4,556) 3,624
Decrease (increase) in inventories 698 (7,265)
Decrease (increase) in prepaid expenses
and other assets (1,777) (1,420)
Increase (decrease) in accounts payable,
accrued expenses and other long-term
liabilities (4,594) 1,880
Increase (decrease) in income taxes payable 1,559 1,091
------- -------
Net Cash Provided By (Used In)
Operating Activities (1,236) 2,760
------- -------
Cash Flows From Investing Activities:
Payment for purchase of business, net of cash
acquired (968) -
Purchase of equipment, inventory and
technology rights from Lucent Technologies - (4,435)
Capital expenditures (5,472) (1,348)
Proceeds from sale of equipment 967 47
Other, net (20) (142)
------- -------
Net Cash Provided By (Used In)
Investing Activities (5,493) (5,878)
------- -------
Cash Flows From Financing Activities:
Borrowings under debt agreements 4,187 6,232
Debt repayments (796) (3,439)
Proceeds from the exercise of stock options
and warrants 675 400
Purchase of treasury stock (343) -
------- -------
Net Cash Provided By (Used In)
Financing Activities 3,723 3,193
------- -------
Net Increase (Decrease) In Cash
And Cash Equivalents (3,006) 75
Cash And Cash Equivalents At Beginning Of Period 24,408 600
------- -------
Cash And Cash Equivalents At End Of Period $21,402 $ 675
======= =======
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The consolidated balance sheet of Aeroflex Incorporated and Subsidiaries
("the Company") as of December 31, 1998 and the related consolidated
statements of operations for the six and three months ended December 31,
1998 and 1997 and the consolidated statements of cash flows for the six
months ended December 31, 1998 and 1997 have been prepared by the Company
and are unaudited. In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at December 31,
1998 and for all periods presented have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 1998 annual report to shareholders. There have been no
changes of significant accounting policies since June 30, 1998. Certain
reclassifications have been made to previously reported financial
statements to conform to current classifications.
Results of operations for the six and three month periods are not
necessarily indicative of results of operations for the corresponding
years.
2. Common Stock Offering
---------------------
In March 1998, the Company sold 2,597,000 shares of its Common Stock in a
public offering for $31,285,000, net of an underwriting discount of
$1,973,000 and issuance costs of $496,000. Of these net proceeds,
$9,639,000 was used to repay bank indebtedness. The balance of the net
proceeds, which is included in cash and cash equivalents, has been and will
be used for general corporate purposes, including working capital, capital
expenditures, facilities expansion and potential acquisitions.
3. Earnings Per Share
------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 "Earnings Per Share" during the quarter ended December 31, 1997. In
accordance with SFAS No. 128, earnings per common share ("Basic EPS") is
computed by dividing net income by the weighted average common shares
outstanding. Earnings per common share, assuming dilution ("Diluted EPS")
is computed by dividing net income plus a pro forma addback of debenture
interest by the weighted average common shares outstanding plus potential
dilution from the conversion of debentures and the exercise of stock
options and warrants. Earnings per share amounts for prior periods have
been restated to conform to SFAS No. 128.
<PAGE>
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>
Six Months
Ended December 31,
------------------
1998 1997
---- ----
(In thousands, except per share data)
<S> <C> <C>
Computation of Adjusted Net Income:
Net income for basic earnings per common share $ 5,068 $ 2,838
Add: Debenture interest and amortization
expense, net of income taxes - 103
-------- --------
Adjusted net income for diluted
earnings per common share $ 5,068 $ 2,941
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 17,523 13,547
Add: Shares assumed to be issued upon
conversion of debentures - 783
Add: Effect of dilutive options and warrants
outstanding 1,228 1,227
-------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 18,751 15,557
======== ========
Net Income Per Common Share:
Basic $ .29 $ .21
===== =====
Diluted $ .27 $ .19
===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended December 31,
------------------
1998 1997
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net income for basic and diluted earnings per
common share $ 2,810 $ 1,686
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 17,599 14,347
Add: Shares assumed to be issued upon
conversion of debentures - 15
Add: Effect of dilutive options and warrants
outstanding 1,340 1,388
-------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 18,939 15,750
======== ========
Net Income Per Common Share:
Basic $ .16 $ .12
===== =====
Diluted $ .15 $ .11
===== =====
</TABLE>
<PAGE>
4. Acquisition of Business
-----------------------
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1,100,000. The purchase
agreement also requires that the Company purchase the remaining 10% of
Europtest pro rata over a three-year period at prices determined based upon
net sales of Europtest products. Europtest develops and sells specialized
software-driven test equipment used primarily in cellular, satellite and
other communications applications. The acquired company's net sales were
approximately $1,900,000 for the year ended March 31, 1998. On a pro forma
basis, had the Europtest acquisition taken place as of the beginning of the
periods presented, results of operations for those periods would not have
been materially affected. The purchase price has been allocated to the
assets acquired and liabilities assumed based on their fair values.
5. Bank Loan Agreements
--------------------
As of March 31, 1998, the Company replaced a previous agreement with a
revised revolving credit agreement with two banks which is secured by
substantially all of the Company's assets. The agreement provides for a
revolving credit line of $27,000,000, which expires on March 31, 2001. The
interest rate on borrowings under this agreement is at various rates
depending upon certain financial ratios, with the present rate
substantially equivalent to the prime rate (7.75% at December 31, 1998).
The Company entered into an interest rate swap agreement for the initial
$4,720,000 outstanding under the revolving credit line at 7.6% in order to
reduce the interest rate risk associated with these outstanding borrowings.
The Company paid a facility fee of $20,000 and is required to pay a
commitment fee of 1/4% per annum of the average unused portion of the
credit line.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash
dividends. In connection with the purchase of certain materials for use in
manufacturing, the Company has a letter of credit facility of $2,000,000.
At December 31, 1998, the Company's available unused line of credit was
approximately $20,000,000 after consideration of the letter of credit.
On December 29, 1998, the Company financed the acquisition and renovation
of the land and building of its Pearl River, NY facility and received
proceeds amounting to $4,165,000. These borrowings are payable in quarterly
installments of approximately $50,000 through 2019.
<PAGE>
6. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
------------ ---------
(In thousands)
<S> <C> <C>
Raw Materials $ 14,850 $ 12,012
Work in Process 10,815 12,737
Finished Goods 3,694 5,102
-------- --------
$ 29,359 $ 29,851
======== ========
</TABLE>
7. Income Taxes
------------
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering periods from
1994 to 1996. Management believes that the probable outcome of these
various audits should not materially affect the consolidated financial
statements of the Company.
8. Contingencies
-------------
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the discovery stage. Based upon available information and
considering its various defenses, together with its product liability
insurance, in the opinion of management of the Company, the outcome of the
action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
9. Conversion of 7-1/2% Debentures
-------------------------------
On September 8, 1997, the Company called for the redemption of all of its
outstanding 7-1/2% Senior Subordinated Convertible Debentures ($9,981,000)
at 104-1/2% of the principal amount. As of October 1997, all of the
principal amount outstanding was converted into Common Stock at $5-5/8 per
share. In connection with the conversions, $599,000 of deferred bond
issuance costs were charged to additional paid-in capital.
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Aeroflex, founded in 1937, utilizes its advanced design, engineering and
manufacturing capabilities to provide state-of-the-art microelectronic module,
interconnect and testing solutions used in communication applications for
commercial and defense markets. Its products are used in satellite, personal
wireless, cable television ("CATV") and defense communications markets. It also
designs and manufactures motion control systems and shock and vibration
isolation systems used for commercial, industrial and defense applications. The
Company's operations are grouped into three segments: Microelectronics; Test,
Measurement and Other Electronics; and Isolator Products. The Company's
consolidated financial statements include the accounts of Aeroflex and its
subsidiaries, all of which are wholly-owned, except for Europtest, as discussed
below.
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1,100,000. The purchase agreement
also requires that the Company purchase the remaining 10% of Europtest pro rata
over a three-year period at prices determined based upon net sales of Europtest
products. Europtest develops and sells specialized software-driven test
equipment used primarily in cellular, satellite and other communications
applications. The acquired company's net sales were approximately $1,900,000 for
the year ended March 31, 1998.
Approximately 42% and 50% of the Company's sales for fiscal years 1998 and
1997, respectively, were to agencies of the United States Government or to prime
defense contractors or subcontractors of the United States Government. The
Company's overall dependence on the defense market has been declining following
its 1996 acquisition of MIC Technology and the resulting expansion of its
microelectronics business which is more commercially oriented, and a focusing of
resources towards developing standard products for the commercial market.
Management believes that potential reductions in defense spending will not
materially affect its operations. In certain product areas, the Company has
suffered reductions in sales volume due to cutbacks in the military budget. In
other product areas, the Company has experienced increased sales volume due to a
realignment of government spending towards upgrading existing systems instead of
purchasing completely new systems. The overall effect of the cutbacks and
realignment has not been material to the Company.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments and related
disclosures about products and services, geographic areas and major customers.
The Company adopted this standard effective July 1, 1998, as required, and does
not believe the adoption will result in a material change to its segment
disclosures in its fiscal 1999 annual financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair value.
In certain circumstances changes in the value of such derivatives may be
required to be recorded as gains or losses. Management believes that the impact
of this statement will not have a material effect on the Company's consolidated
financial statements.
<PAGE>
Market Risk
The Company is exposed to market risk related to changes in interest rates
and, to an immaterial extent, to foreign currency exchange rates. Some of the
Company's debt is at fixed rates of interest or at a variable rate with an
interest rate swap agreement to effectively make it a fixed rate of interest.
That debt which is subject to a floating rate of interest and is not hedged by
an interest rate swap amounts to approximately $9.4 million at December 31,
1998. The Company intends to enter into an interest rate swap agreement with
respect to $4.2 million of this amount before the end of fiscal year 1999. If
market interest rates increase by 10 percent from levels at December 31, 1998,
the effect on the Company's results of operations would not be material.
Year 2000 Compliance
Management has initiated a company-wide program and has developed a formal
plan of implementation to prepare the Company for the Year 2000. This includes
taking actions designed to ensure that the Company's information technology
("IT") systems, products and infrastructure are Year 2000 compliant and that its
customers, suppliers and service providers have taken similar action. The
Company is in the process of evaluating its internal issues - all of its IT
systems, products, equipment and other facilities systems and modifying items
that are not compliant. With respect to its external issues - customers,
suppliers and service providers - the Company is surveying them primarily
through written correspondence.
The Company expects to incur internal staff costs, as well as consulting
and other expenses, and believes the total costs to be incurred for all internal
Year 2000 compliance related projects will not have a material impact on the
Company's business, results of operations or financial condition. Management
expects to complete its investigation, remediation and contingency planning
activities for all mission critical systems and areas by the middle of calendar
1999, although there can be no assurance that it will. At this time, Management
believes that the Company does not have any internal mission critical Year 2000
issues that it cannot remedy. With respect to mission critical third parties, in
some instances the Company has protection under contracts and the Company has
begun to create contingency plans to attempt to mitigate its exposure in the
event such third parties are not Year 2000 compliant. Despite its efforts to
survey its customers, suppliers and service providers, Management cannot be
certain as to the actual Year 2000 readiness of these third parties or the
impact that any non-compliance on their part may have on the Company's business,
results of operations or financial condition, which impact may be material.
Results of Operations
Six Months Ended December 31, 1998 Compared to Six Months Ended December 31,
1997
Net Sales. Net sales increased 27.5% to $67.8 million for the six months
ended December 31, 1998 from $53.2 million for the six months ended December 31,
1997. Net sales in the Microelectronics segment increased 28.1% to $42.3 million
for the six months ended December 31, 1998 from $33.1 million for the six months
ended December 31, 1997 due to increased sales volume in both thin film
interconnects and microelectronic modules. Net sales in the Test, Measurement
and Other Electronics segment increased 48.7% to $16.8 million for the six
months ended December 31, 1998 from $11.3 million for the six months ended
December 31, 1997 primarily due to increased sales volume in both frequency
synthesizers (including shipments on the new Navy CASS program) and high speed
automatic test systems (primarily satellite payload test equipment for Hughes
Space and Communications) offset in part by decreased sales volume in
stabilization and tracking devices. Net sales in the Isolator Products segment
decreased 1.9% to $8.7 million for the six months ended December 31, 1998 from
$8.8 million for the six months ended December 31, 1997.
Gross Profit. Cost of sales includes materials, direct labor and overhead
expenses such as engineering labor, fringe benefits, allocable occupancy costs,
depreciation and manufacturing supplies. Gross profit increased 29.8% to $23.5
million for the six months ended December 31, 1998 from $18.1 million for the
six months ended December 31, 1997. Gross margin increased to 34.7% for the six
months ended December 31, 1998 from 34.1% for the six months ended December 31,
1997. The increase was primarily a result of increased margins in the
Microelectronics segment reflecting the greater efficiencies of higher volume
and a favorable sales mix in that segment.
<PAGE>
Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits,
commissions and advertising costs. Selling, general and administrative costs
increased 9.9% to $11.4 million (16.8% of net sales) for the six months ended
December 31, 1998 from $10.4 million (19.5% of net sales) for the six months
ended December 31, 1997. The increase was primarily due to labor related
expenses, including salaries for additional hires.
Research and Development Costs. Research and development costs consist of
material, engineering labor and allocated overhead. Company sponsored research
and development costs increased 111.6% to $4.3 million (6.3% of net sales) for
the six months ended December 31, 1998 from $2.0 million (3.8% of net sales) for
the six months ended December 31, 1997. The increase was primarily attributable
to the costs for development of a new low-cost, high speed, high performance
frequency synthesizer intended for commercial communication test systems.
Other Expense (Income). Interest expense decreased to $567,000 for the six
months ended December 31, 1998 from $1.3 million for the six months ended
December 31, 1997, primarily due to reduced levels of borrowings. Other income
of $544,000 for the six months ended December 31, 1998 consisted primarily of
interest income. Other expense was $74,000 for the six months ended December 31,
1997 comprised primarily of $102,000 of debenture redemption costs net of
$26,000 of interest income. Interest income increased due to increased levels of
cash equivalents. The reduced levels of borrowings and the increased levels of
cash equivalents resulted from the net proceeds of $31.3 million from stock
issued in a public offering completed in March 1998.
Provision for Income Taxes. Income taxes recorded by the Company increased
74.6% to $2.8 million (an effective income tax rate of 35.2%) for the six months
ended December 31, 1998 from $1.6 million (an effective income tax rate of
35.7%) for the six months ended December 31, 1997. The income tax provisions for
the two periods differed from the amount computed by applying the U.S. Federal
income tax rate to income before income taxes primarily due to state and local
income taxes and research and development credits.
Three Months Ended December 31, 1998 Compared to Three Months Ended December 31,
1997
Net Sales. Net sales increased 23.4% to $36.2 million for the three months
ended December 31, 1998 from $29.3 million for the three months ended December
31, 1997. Net sales in the Microelectronics segment increased 12.1% to $20.8
million for the three months ended December 31, 1998 from $18.6 million for the
three months ended December 31, 1997 due to increased sales volume in both thin
film interconnects and microelectronic modules. Net sales in the Test,
Measurement and Other Electronics segment increased 73.8% to $11.1 million for
the three months ended December 31, 1998 from $6.4 million for the three months
ended December 31, 1997 primarily as a result of increased sales volume of
frequency synthesizers (including shipments on the new Navy CASS program) and
high speed automatic test systems (primarily satellite payload test equipment
for Hughes Space and Communications). Net sales in the Isolator Products segment
were $4.3 million for the three months ended December 31, 1998 and 1997.
Gross Profit. Gross profit increased 25.0% to $12.4 million for the three
months ended December 31, 1998 from $9.9 million for the three months ended
December 31, 1997. Gross margin increased to 34.3% for the three months ended
December 31, 1998 from 33.8% for the three months ended December 31, 1997. The
increase was primarily a result of increased margins in the Microelectronics
segment reflecting the greater efficiencies of higher volume.
Selling, General and Administrative Costs. Selling, general and
administrative costs were $5.8 million for the three months ended December 31,
1998 and 1997. Selling, general and administrative expenses represented 15.9% of
net sales for the three months ended December 31, 1998 and 19.6% of net sales
for the three months ended December 31, 1997.
Research and Development Costs. Company sponsored research and development
costs increased 123.4% to $2.3 million (6.4% of net sales) for the three months
ended December 31, 1998 from $1.0 million (3.5% of net sales) for the three
months ended December 31, 1997. The increase was primarily attributable to the
development of a new low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems.
<PAGE>
Other Expense (Income). Interest expense decreased to $268,000 for the three
months ended December 31, 1998 from $527,000 for the three months ended December
31, 1997, primarily due to reduced levels of borrowings. Other income, net was
$241,000 for the three months ended December 31, 1998 including interest income
of $248,000. Other income was $9,000 for the three months ended December 31,
1997. Interest income increased due to increased levels of cash equivalents. The
reduced levels of borrowings and the increased levels of cash equivalents
resulted from the net proceeds of $31.3 million from stock issued in a public
offering completed in March 1998.
Provision for Income Taxes. Income taxes recorded by the Company increased
62.2% to $1.5 million (an effective income tax rate of 34.8%) for the three
months ended December 31, 1998 from $925,000 (an effective income tax rate of
35.4%) for the three months ended December 31, 1997. The income tax provisions
for the two quarters differed from the amount computed by applying the U.S.
Federal income tax rate to income before income taxes primarily due to state and
local income taxes and research and development credits.
Liquidity and Capital Resources
On December 29, 1998, the Company financed the acquisition and renovation
of the land and building of its Pearl River, NY facility and received proceeds
amounting to $4,165,000. These borrowings are payable in quarterly installments
of approximately $50,000 through 2019.
In March 1998, the Company sold 2,597,000 shares of its Common Stock in a
public offering for $31,285,000, net of an underwriting discount of $1,973,000
and issuance costs of $496,000. Of these net proceeds, $9,639,000 was used to
repay bank indebtedness. The balance of the net proceeds, which is included in
cash and cash equivalents, has been and will be used for general corporate
purposes, including working capital, capital expenditures, facilities expansion
and potential acquisitions. As of December 31, 1998, the Company had $60,076,000
in working capital.
As of March 31, 1998, the Company replaced a previous agreement with a
revised revolving credit agreement with two banks which is secured by
substantially all of the Company's assets. The agreement provides for a
revolving credit line of $27,000,000, which expires on March 31, 2001. The
interest rate on borrowings under this agreement is at various rates depending
upon certain financial ratios, with the present rate substantially equivalent to
the prime rate (7.75% at December 31, 1998). The Company entered into an
interest rate swap agreement for the initial $4,720,000 outstanding under the
revolving credit line at 7.6% in order to reduce the interest rate risk
associated with these outstanding borrowings. The Company paid a facility fee of
$20,000 and is required to pay a commitment fee of 1/4% per annum of the average
unused portion of the credit line.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of certain materials for use in manufacturing, the Company has
a letter of credit facility of $2,000,000. At December 31, 1998, the Company's
available unused line of credit was approximately $20,000,000 after
consideration of the letter of credit.
During June 1994, the Company completed a sale of $10.0 million principal
amount of 7-1/2% Senior Subordinated Convertible Debentures ("Debentures"). On
September 8, 1997, the Company called for redemption all of its outstanding
Debentures at 104-1/2% of the principal amount. The Debentures were convertible
into the Company's Common Stock at a price of $5-5/8 per share through October
6, 1997. As of October 1997, all of the principal amount outstanding was
converted into Common Stock.
The Company's order backlog at December 31, 1998 and 1997 was $83.3 million
and $66.1 million, respectively.
<PAGE>
The Company's net cash used in operating activities was $1.2 million for the
six months ended December 31, 1998 which was due to reductions in accounts
payable and accrued liabilities and increases in accounts receivables which was
offset, in part, by the continued profitability of the Company. Net cash used in
investing activities was $5.5 million for the six months ended December 31,
1998, consisting primarily of $5.5 million for capital expenditures (including
$2.5 million for the acquisition of a previously leased operating facility in
Pearl River, NY) and $1.0 million used to purchase Europtest offset, in part, by
the proceeds from the sale of equipment of $1.0 million under a sale-leaseback
arrangement. Net cash provided by financing activities was $3.7 million for the
six months ended December 31, 1998, consisting primarily of the financing of the
Pearl River, NY facility for $4.2 million and proceeds from stock option and
warrant exercises offset, in part, by debt payments and the purchase of treasury
stock.
Management of the Company believes that internally generated funds and
available lines of credit will be sufficient for its working capital
requirements, capital expenditure needs and the servicing of its debt for at
least the next twelve months.
On February 3, 1999, the Company announced that it had agreed with United
Technologies Corporation's Hamilton Standard division to revise and extend its
Letter of Intent of November 17, 1998 under which the parties are negotiating a
definitive agreement for the Company to acquire the integrated circuit
operations of UTMC Microelectronic Systems, Inc. ("UTMC"). The transaction,
which is now expected to close by early March, 1999, remains subject to standard
conditions, including that Aeroflex satisfactorily complete its due diligence
investigation, obtain financing for a portion of the purchase price and obtain
certain required approvals. UTMC is a leader in supplying radiation-hardened
integrated circuits for satellite communications. UTMC's Commercial RadHard
products, services and foundry partners are expected to complement Aeroflex'
line of microelectronic module and interconnect products for the communications
marketplace.
Forward-Looking Statements
All statements other than statements of historical fact included in this
Report on Form 10-Q, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations, are
forward-looking statements. When used in this Report on Form 10-Q, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. Actual results could differ materially
from those contemplated by the forward-looking statements, as a result of
certain factors, including but not limited to competitive factors and pricing
pressures, changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization difficulties, the
ability of the Company to integrate the production facilities of UTMC, whether
the acquisition will be consummated as anticipated and general economic
conditions. Such statements reflect the current views of the Company with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to the operations, results of operations, growth
strategy and liquidity of the Company.
<PAGE>
AEROFLEX INCORPORATED AND SUBSIDIARIES PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
A. The Registrant held its Annual Meeting of Stockholders on November
17, 1998.
B. Four directors were elected at the Annual Meeting to serve until
the Annual Meeting of Stockholders in 2001. The name of these Directors and
votes cast in favor of their election and shares withheld are as follows:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Paul Abecassis 15,655,421 269,656
Leonard Borow 15,655,421 269,656
Milton Brenner 15,655,421 269,656
Eugene Novikoff 15,654,421 270,656
</TABLE>
In addition to the election of directors, the stockholders approved to
amend article FOURTH of the Certificate of Incorporation to increase the
number of authorized shares of the Company from 26,000,000 to 41,000,000.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
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.
AEROFLEX INCORPORATED
(REGISTRANT)
February 9, 1999 By: /s/ Michael Gorin
--------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the six months ended December 31, 1998 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 21,402
<SECURITIES> 0
<RECEIVABLES> 24,901
<ALLOWANCES> 434
<INVENTORY> 29,359
<CURRENT-ASSETS> 79,733
<PP&E> 60,477
<DEPRECIATION> 31,366
<TOTAL-ASSETS> 130,091
<CURRENT-LIABILITIES> 19,657
<BONDS> 0
0
0
<COMMON> 1,771
<OTHER-SE> 91,881
<TOTAL-LIABILITY-AND-EQUITY> 130,091
<SALES> 67,826
<TOTAL-REVENUES> 67,826
<CGS> 44,299
<TOTAL-COSTS> 59,985
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 567
<INCOME-PRETAX> 7,818
<INCOME-TAX> 2,750
<INCOME-CONTINUING> 5,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,068
<EPS-PRIMARY> .29
<EPS-DILUTED> .27
</TABLE>
