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 March 31, 2000
Commission File Number 000-02324
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.
May 9, 2000 18,906,755 shares (excluding 34,005 shares held in treasury)
- --------------------------------------------------------------------------------
(Date) (Number of Shares)
NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 20 PAGES.
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and June 30, 1999 3-4
CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended March 31, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 2000 and 1999 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2000 and 1999 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Nine and Three Months Ended March 31, 2000 and 1999 13-18
PART II: OTHER INFORMATION
ITEM 5 Other Information 19
ITEM 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------- --------
(In thousands)
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 6,285 $ 2,714
Accounts receivable, less allowance for
doubtful accounts of $413,000 and $381,000 39,705 39,967
Inventories, net 37,982 32,637
Deferred income taxes 4,890 5,291
Prepaid expenses and other current assets 3,431 2,314
-------- --------
Total current assets 92,293 82,923
Property, plant and equipment, at cost, net 49,474 50,802
Intangible assets acquired in connection with
the purchase of businesses, net 12,640 13,777
Cost in excess of fair value of net assets
of businesses acquired, net 13,540 14,019
Other assets 4,018 3,695
-------- --------
Total assets $171,965 $165,216
======== ========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
--------- ---------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt $ 6,450 $6,509
Accounts payable 9,045 8,070
Accrued expenses and other current liabilities 15,216 16,923
Income taxes payable 147 1,055
-------- --------
Total current liabilities 30,858 32,557
Long-term debt 18,989 24,608
Deferred income taxes 3,059 3,582
Other long-term liabilities 2,455 2,376
-------- --------
Total liabilities 55,361 63,123
-------- --------
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 40,000; none issued - -
Common Stock, par value $.10 per share;
authorized 40,000,000 shares; issued
18,895,000 and 18,429,000 shares 1,890 1,843
Additional paid-in capital 113,158 105,720
Retained earnings (accumulated deficit) 1,882 (5,421)
-------- --------
116,930 102,142
Less: Treasury stock, at cost (41,000 and
6,000 shares) 326 49
-------- --------
Total stockholders' equity 116,604 102,093
-------- --------
Total liabilities and stockholders' equity $171,965 $165,216
======== ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------
2000 1999
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net sales $129,878 $108,430
Cost of sales 84,459 69,504
--------- --------
Gross profit 45,419 38,926
--------- --------
Selling, general and administrative costs 24,456 18,306
Research and development costs 7,930 6,874
Acquired in-process research and development
(Note 2) - 3,500
--------- --------
32,386 28,680
--------- --------
Operating income 13,033 10,246
--------- --------
Other expense (income)
Interest expense 1,846 1,024
Other expense (income) (16) (734)
-------- --------
Total other expense (income) 1,830 290
-------- --------
Income before income taxes 11,203 9,956
Provision for income taxes 3,900 4,700
-------- --------
Net income $ 7,303 $ 5,256
======== ========
Net income per common share:
- Basic $ .39 $ .30
===== =====
- Diluted $ .37 $ .28
===== =====
Weighted average number of common
shares outstanding:
- Basic 18,546 17,628
======= =======
- Diluted 19,788 18,973
======= =======
See notes to consolidated financial statements.
</TABLE>
-5-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
2000 1999
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 46,275 $ 40,604
Cost of sales 29,554 25,205
-------- --------
Gross profit 16,721 15,399
-------- --------
Selling, general and administrative costs 8,751 6,914
Research and development costs 2,992 2,580
Acquired in-process research and development
(Note 2) - 3,500
-------- --------
11,743 12,994
-------- --------
Operating income 4,978 2,405
-------- --------
Other expense (income)
Interest expense 597 457
Other expense (income) (251) (190)
-------- --------
Total other expense (income) 346 267
-------- --------
Income before income taxes 4,632 2,138
Provision for income taxes 1,600 1,950
-------- --------
Net income $ 3,032 $ 188
======== ========
Net income per common share:
- Basic $ .16 $ .01
======== ========
- Diluted $ .15 $ .01
======== ========
Weighted average number of common shares
outstanding:
- Basic 18,580 17,839
======== ========
- Diluted 20,481 19,416
======== ========
See notes to consolidated financial statements.
</TABLE>
-6-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 7,303 $ 5,256
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Acquired in-process research and development - 3,500
Depreciation and amortization 6,828 4,853
Amortization of deferred gain (441) (441)
Deferred income taxes (122) (531)
Other, net 288 55
Change in operating assets and liabilities,
net of effects from purchase of
business:
Decrease (increase) in accounts receivable 209 (8,946)
Decrease (increase) in inventories (5,345) 2,386
Decrease (increase) in prepaid expenses
and other assets (1,463) (2,225)
Increase (decrease) in accounts payable, accrued
expenses and other long-term liabilities (271) 1,693
Increase (decrease) in income taxes payable 3,212 3,129
-------- --------
Net Cash Provided By
Operating Activities 10,198 8,729
-------- --------
Cash Flows From Investing Activities:
Payment for purchase of businesses, net
of cash acquired - (43,475)
Capital expenditures (5,424) (6,902)
Proceeds from sale of equipment 1,690 967
Other, net (39) (10)
-------- --------
Net Cash Used In
Investing Activities (3,773) (49,420)
-------- --------
Cash Flows From Financing Activities:
Debt repayments (5,678) (3,910)
Borrowings under debt agreements - 24,188
Bank debt financing costs - (438)
Proceeds from the exercise of stock options
and warrants 4,816 1,341
Amounts paid for withholding taxes on stock
option exercises (2,434) (2,381)
Withholding taxes collected for stock option
exercises 2,432 1,341
Purchase of treasury stock (1,990) (343)
-------- --------
Net Cash Provided By (Used In)
Financing Activities (2,854) 19,798
-------- --------
Net Increase (Decrease) In Cash
And Cash Equivalents 3,571 (20,893)
Cash And Cash Equivalents At Beginning Of Period 2,714 24,408
-------- --------
Cash And Cash Equivalents At End Of Period $ 6,285 $ 3,515
======== ========
See notes to consolidated financial statements.
</TABLE>
-7-
<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 March 31, 2000 and the related consolidated
statements of earnings for the nine and three months ended March 31, 2000
and 1999 and the consolidated statements of cash flows for the nine months
ended March 31, 2000 and 1999 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 March 31, 2000 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, 1999 annual report to shareholders. There have been no
changes of significant accounting policies since June 30, 1999. Certain
reclassifications have been made to previously reported financial
statements to conform to current classifications.
Results of operations for the nine and three month periods are not
necessarily indicative of results of operations for the corresponding
years.
2. Acquisition of Businesses
-------------------------
UTMC
----
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of
cash. The purchase price was paid with available cash of $22.5 million and
borrowings under the Company's bank loan agreement of $20.0 million. UTMC
designs, develops and manufactures radiation-tolerant integrated circuits
primarily for satellite communications. The acquired company's net sales
were approximately $33.4 million for the year ended December 31, 1998.
The Company had commissioned an independent asset valuation study of
acquired tangible and identifiable intangible assets to serve as a basis
for allocation of the purchase price. Based on this study, the Company
allocated the purchase price, including acquisition costs of approximately
$500,000, as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net tangible assets $28,771
Identifiable intangible assets 6,300
Excess costs over fair value of net assets 4,429
In-process research and development 3,500
-------
$43,000
=======
</TABLE>
The identifiable intangible assets include existing technology, customer
relationships and assembled work force. The identifiable intangibles and
costs in excess of fair value of net assets are being amortized on a
straight-line basis over 6 to 15 years based on the study described above.
The acquired in- process research and development was not considered to
have reached technological feasibility and, in accordance with generally
accepted accounting principles, the value of such was expensed in the third
quarter of fiscal 1999.
-8-
<PAGE>
Summarized below are the unaudited pro forma results of operations of the
Company as if UTMC had been acquired at the beginning of the fiscal periods
presented.
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Year Ended Nine Months Ended Three Months Ended
June 30, 1999 March 31, 1999 March 31, 1999
------------- ------------------ ------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net Sales $ 177,149 $ 128,475 $ 44,348
Net Income (Loss) 9,469 4,968 (36)
Net Income (Loss)
Per Share
Basic $ .53 $ .28 $ .00
Diluted .50 .26 .00
</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 taken place at the beginning of the periods presented or of
future operating results of the combined companies.
Europtest
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. 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. In October 1999, the Company purchased an
additional 3.4% of Europtest's stock for approximately $54,000. 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 $1.9 million 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.
3. Earnings Per Share
------------------
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", net income per common share ("Basic EPS") is computed
by dividing net income by the weighted average common shares outstanding.
Net income per common share, assuming dilution ("Diluted EPS") is computed
by dividing net income by the weighted average common shares outstanding
plus potential dilution from the exercise of stock options and warrants.
-9-
<PAGE>
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
-------------------
2000 1999
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net income for basic and diluted earnings
per common share $ 7,303 $ 5,256
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 18,546 17,628
Add: Effect of dilutive options and warrants
outstanding 1,242 1,345
------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 19,788 18,973
======= ========
Net Income Per Common Share:
Basic $ .39 $ .30
===== =====
Diluted $ .37 $ .28
===== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net income for basic and diluted earnings
per common share $ 3,032 $ 188
======== ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 18,580 17,839
Add: Effect of dilutive options and warrants
outstanding 1,901 1,577
-------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 20,481 19,416
======== ========
Net Income Per Common Share:
Basic $ .16 $ .01
===== =====
Diluted $ .15 $ .01
===== =====
</TABLE>
4. Bank Loan Agreements
--------------------
As of February 25, 1999, the Company replaced a previous agreement with a
revised revolving credit, term loan and mortgage agreement with two banks
which is secured by substantially all of the Company's assets not otherwise
encumbered. The agreement provides for a revolving credit line of $23.0
million, a term loan of $20.0 million and a mortgage on the Company's
Plainview property for $4.5 million. The revolving credit and term loans
expire in December 2002. The term loan is payable in quarterly installments
of $1.25 million with final payment on December 31, 2002. As of March 31,
2000, the outstanding term loan was $13.0 million. The interest rate on
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to 30-day
LIBOR (approximately 6.1% at March 31, 2000) plus 1.50% on the revolving
credit borrowings and LIBOR plus 1.75% on the term loan borrowings. The
Company paid a facility fee of $100,000 and is required to pay a commitment
fee of .25% per annum of the average unused portion of the credit line. The
-10-
<PAGE>
mortgage is payable in monthly installments of approximately $26,000
through March 2008 and a balloon payment of $1.6 million in April 2008. The
Company has entered into an interest rate swap agreement for the
outstanding amount under the mortgage agreement at approximately 7.6% in
order to reduce the interest rate risk associated with these borrowings.
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 $2.0 million.
At December 31, 1999, the Company's available unused line of credit was
approximately $21.0 million 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 $4.2 million. The Company currently intends to pay
these borrowings in annual installments of approximately $200,000 through
2019.
5. Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999
---------- --------
(In thousands)
<S> <C> <C>
Raw Materials $ 20,472 $ 18,441
Work in Process 13,304 11,148
Finished Goods 4,206 3,048
-------- --------
$ 37,982 $ 32,637
======== ========
</TABLE>
6. 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.
7. Business Segments
-----------------
The Company's business segments and major products included in each
segment, are as follows:
Microelectronics: Isolator Products:
a)Microelectronic Modules a)Commercial spring and rubber isolators
b)Thin Film Interconnects b)Industrial spring and rubber isolators
c)Integrated Circuits c)Military wire-rope isolators
Test, Measurement and
Other Electronics:
a)Instrument Products
b)Motion Control Systems
- Scanning devices
- Stabilization and tracking
devices
- Magnetic devices
-11-
<PAGE>
Business Segment Data:
<TABLE>
<CAPTION>
For The Nine Months Ended
March 31,
-------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Net sales:
Microelectronics $ 75,986 $ 68,094
Test, Measurement and
Other Electronics 39,743 26,938
Isolator Products 14,149 13,398
-------- --------
Net sales $129,878 $108,430
======== ========
Operating income:
Microelectronics $ 12,710 $ 13,647
Test, Measurement and
Other Electronics 1,651 1,528
Isolator Products 1,776 1,544
General corporate expenses (3,104) (2,973)
-------- --------
13,033 13,746
Acquired in-process research and development - (3,500)
Interest expense (1,846) (1,024)
Other income (expense), net 16 734
-------- --------
Income before income taxes $ 11,203 $ 9,956
======== ========
</TABLE>
<TABLE>
<CAPTION>
For The Three Months Ended
March 31,
-------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Net sales:
Microelectronics $ 26,114 $ 25,777
Test, Measurement and
Other Electronics 15,046 10,111
Isolator Products 5,115 4,716
-------- --------
Net sales $ 46,275 $ 40,604
======== ========
Operating income:
Microelectronics $ 4,342 $ 5,989
Test, Measurement and
Other Electronics 969 557
Isolator Products 784 531
General corporate expenses (1,117) (1,172)
-------- --------
4,978 5,905
Acquired in-process research and development - (3,500)
Interest expense (597) (457)
Other income (expense), net 251 190
-------- --------
Income before income taxes $ 4,632 $ 2,138
======== ========
</TABLE>
-12-
<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We use our advanced design, engineering and manufacturing abilities to
produce microelectronic, integrated circuit, interconnect and testing solutions.
Our products are used in fiber optic, broadband cable, wireless and satellite
communications markets. We also design and manufacture motion control systems
and shock and vibration isolation systems which are used for commercial,
industrial and defense applications. Our operations are grouped into three
segments:
-- microelectronics
-- test, measurement and other electronics
-- isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. All of our subsidiaries are
wholly-owned, except for Europtest, S.A., which is 93.4% owned by us.
Our microelectronics segment has been designing, manufacturing and selling
microelectronics for the electronics industry since 1974. In January 1994, we
acquired substantially all of the net operating assets of the microelectronics
division of Marconi Circuit Technology Corporation, which manufactures a wide
variety of microelectronic assemblies. In March 1996, we acquired MIC Technology
Corporation which designs, develops, manufactures and markets microelectronics
products in the form of passive thin film circuits and interconnects. Effective
July 1, 1997, MIC Technology acquired certain equipment, inventory, licenses for
technology and patents of two of Lucent Technologies' telecommunications
component units - multi-chip modules and film integrated circuits. These units
manufacture microelectronic modules and interconnect products. In February 1999,
we acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc.
consisting of UTMC's integrated circuit business.
Our test, measurement and other electronics segment consists of two
divisions: (1) instruments and (2) motion control products. Our instruments
division consists of:
-- Comstron, a leader in radio frequency and microwave technology used in
the manufacture of fast switching frequency signal generators and
components, which we acquired in November 1989. Comstron is currently
an operating division of Aeroflex Laboratories, Incorporated, one of
our wholly-owned subsidiaries;
-- Lintek, a leader in high speed instrumentation measurement systems
which we acquired in January 1995; and
-- Europtest, S.A. (France), of which we acquired 90% effective September
1, 1998, under a purchase agreement which requires us to purchase the
remaining 10% of Europtest pro rata over a three-year period at prices
determined based upon net sales of Europtest products. In October
1999, we purchased an additional 3.4%. Europtest develops and sells
specialized software-driven test equipment used primarily in cellular,
satellite and other communications applications.
Our motion control products division has been engaged in the development
and manufacture of electro-optical scanning devices used in infra-red night
vision since 1975. This division has been engaged in the design, development and
production of stabilization tracking devices and systems and magnetic motors
since 1961.
-13-
<PAGE>
Our isolator products segment has been designing, developing, manufacturing
and selling severe service shock and vibration isolation systems since 1961. In
October 1983, we acquired Vibration Mountings & Controls, Inc., which
manufactures a line of off-the-shelf rubber and spring shock, vibration and
structure borne noise control devices used in commercial applications. In
December 1986, we acquired the operating assets of Korfund Dynamics Corporation,
a manufacturer of an industrial line of heavy duty spring and rubber shock
mounts.
Our revenue is recognized based upon shipments or billings. We record costs
on our long-term contracts using percentage-of-completion accounting. Under
percentage of completion accounting, costs are recognized on revenues in the
same relation that total estimated manufacturing costs bear to total contract
value. Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Approximately 41% of our sales for fiscal 1999 and 42% of our sales for
fiscal 1998 were to agencies of the United States Government or to prime defense
contractors or subcontractors of the United States Government. Our overall
dependence on the military has been declining due to the acquisition of MIC
Technology in fiscal 1996 which is more commercially oriented, and our focusing
of resources towards developing standard products for commercial markets.
We believe that potential reductions in defense spending will not
materially affect our operations. In certain product areas, we have suffered
reductions in sales volume due to cutbacks in the military budget. In other
product areas, we have 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 our operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, which is effective for fiscal years
beginning after June 15, 2000. 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. We believe that the impact of this
statement will not have a material effect on our consolidated financial
statements.
Results of Operations
Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999
Net Sales. Net sales increased 19.8% to $129.9 million for the nine months
ended March 31, 2000 from $108.4 million for the nine months ended March 31,
1999. Net sales in the microelectronics segment increased 11.6% to $76.0 million
for the nine months ended March 31, 2000 from $68.1 million for the nine months
ended March 31, 1999 due to the acquisition of UTMC in February 1999, partially
offset by reductions in sales in both microelectronic modules and thin film
interconnects. Net sales in the test, measurement and other electronics segment
increased 47.5% to $39.7 million for the nine months ended March 31, 2000 from
$26.9 million for the nine months ended March 31, 1999 primarily due to
increased sales volume in both frequency synthesizers (primarily shipments of
the new FS-1000 for use in commercial communications test systems) and high
speed automatic test systems (primarily satellite payload test equipment for
Hughes Space and Communications). Net sales in the isolator products segment
increased 5.6% to $14.1 million for the nine months ended March 31, 2000 from
$13.4 million for the nine months ended March 31, 1999.
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<PAGE>
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 16.7% to $45.4
million for the nine months ended March 31, 2000 from $38.9 million for the nine
months ended March 31, 1999. Gross margin decreased to 35.0% for the nine months
ended March 31, 2000 from 35.9% for the nine months ended March 31, 1999. The
increase in gross profit was primarily a result of the increased sales. The
decrease in gross margin was due primarily to low margins on the satellite test
system development program.
Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits and
commissions. Selling, general and administrative costs increased 33.6% to $24.5
million (18.8% of net sales) for the nine months ended March 31, 2000 from $18.3
million (16.9% of net sales) for the nine months ended March 31, 1999. The
increase was primarily due to the additional costs relating to the operations of
UTMC.
Research and Development Costs. Research and development costs consist of
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 15.4% to $7.9 million (6.1% of net sales) for the
nine months ended March 31, 2000 from $6.9 million (6.3% of net sales) for the
nine months ended March 31, 1999. The increase was primarily attributable to the
additional costs of UTMC, partially offset by reduced costs relative to the
comparable period in the prior year related to the development of the FS-1000, a
new low-cost, high speed, high performance frequency synthesizer intended for
commercial communication test systems which is complete and the satellite test
system development program.
Acquired In-Process Research and Development. In connection with the
acquisition of UTMC in February 1999, we allocated $3.5 million of the purchase
price to incomplete research and development projects. This allocation
represents the estimated fair value based on future cash flows that have been
adjusted by the projects' completion percentage. At the acquisition date, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the acquisition date.
Other Expense (Income). Interest expense increased to $1.8 million for the
nine months ended March 31, 2000 from $1.0 million for the nine months ended
March 31, 1999, primarily due to increased levels of borrowings. Other income of
$16,000 for the nine months ended March 31, 2000 consists primarily of a
$300,000 expense for the settlement of a lawsuit, $100,000 of interest income
and $193,000 gain on the sale of securities. Other income of $734,000 for the
nine months ended March 31, 1999 consists primarily of interest income. Interest
income decreased due to decreased levels of cash equivalents. The increased
levels of borrowings and the decreased levels of cash equivalents were due to
the acquisition of UTMC.
Provision for Income Taxes. Income taxes decreased 17.0% to $3.9 million
(an effective income tax rate of 34.8%) for the nine months ended March 31, 2000
from $4.7 million (an effective income tax rate of 34.9%, exclusive of the non-
deductible write-off of acquired in-process research and development) for the
nine months ended March 31, 1999. 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.
-15-
<PAGE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net Sales. Net sales increased 14.0% to $46.3 million for the three months
ended March 31, 2000 from $40.6 million for the three months ended March 31,
1999. Net sales in the microelectronics segment increased 1.3% to $26.1 million
for the three months ended March 31, 2000 from $25.8 million for the three
months ended March 31, 1999 due to the acquisition of UTMC in February 1999,
partially offset by reductions in sales in microelectronic modules. Net sales in
the test, measurement and other electronics segment increased 48.8% to $15.0
million for the three months ended March 31, 2000 from $10.1 million for the
three months ended March 31, 1999 primarily due to increased sales volume in
frequency synthesizers (primarily shipments of the new FS-1000 for use in
commercial communication test systems). Net sales in the isolator products
segment increased 8.5% to $5.1 million for the three months ended March 31, 2000
from $4.7 million for the three months ended March 31, 1999.
Gross Profit. Gross profit increased 8.6% to $16.7 million for the three
months ended March 31, 2000 from $15.4 million for the three months ended March
31, 1999. Gross margin decreased to 36.1% for the three months ended March 31,
2000 from 37.9% for the three months ended March 31, 1999. The increase in gross
profit was primarily a result of the increased sales. The decrease in gross
margin was due primarily to a change in the product mix.
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 26.6% to $8.8 million (18.9% of net sales) for
the three months ended March 31, 2000 from $6.9 million (17.0% of net sales) for
the three months ended March 31, 1999. The increase was primarily due to the
additional costs relating to the operations of UTMC.
Research and Development Costs. Our self-funded research and development
costs increased 16.0% to $3.0 million (6.5% of net sales) for the three months
ended March 31, 2000 from $2.6 million (6.4% of net sales) for the three months
ended March 31, 1999. The increase was primarily attributable to the additional
costs of UTMC.
Other Expense (Income). Interest expense increased to $597,000 for the
three months ended March 31, 2000 from $457,000 for the three months ended March
31, 1999, primarily due to increased levels of borrowings. Other income of
$251,000 for the three months ended March 31, 2000 consists primarily of a
$193,000 gain on the the sale of securities and $51,000 of interest income.
Other income of $190,000 for the three months ended March 31, 1999 consisted
primarily of interest income. Interest income decreased due to decreased levels
of cash equivalents. The increased levels of borrowings and the decreased levels
of cash equivalents were due to the acquisition of UTMC.
Provision for Income Taxes. Income taxes decreased 17.9% to $1.6 million
(an effective income tax rate of 34.5%) for the three months ended March 31,
2000 from $2.0 million (an effective income tax rate of 34.6%, exclusive of the
non- deductible write-off of acquired in-process research and development) for
the three months ended March 31, 1999. 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.
Liquidity and Capital Resources
As of March 31, 2000, we had $61.4 million in working capital. Our current
ratio was 3.0 to 1 at March 31, 2000. As of February 25, 1999, we replaced a
previous agreement with a revised revolving credit, term loan and mortgage
agreement with two banks which is secured by substantially all of our assets not
otherwise encumbered. The agreement provides for a revolving credit line of
$23.0 million, a term loan of $20.0 million and a mortgage on our Plainview
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<PAGE>
property for $4.5 million. The revolving credit and term loans expire in
December 2002. The term loan is payable in quarterly installments of $1.25
million with final payment on December 31, 2002. As of March 31, 2000, the
outstanding term loan was $13.0 million. The interest rate on borrowings under
this agreement is at various rates depending upon certain financial ratios, with
the current rate substantially equivalent to 30-day LIBOR (approximately 6.1% at
March 31, 2000) plus 1.50% on the revolving credit borrowings and LIBOR plus
1.75% on the term loan borrowings. The mortgage is payable in monthly
installments of approximately $26,000 through March 2008 and a balloon payment
of $1.6 million in April 2008. We have entered into an interest rate swap
agreement for the outstanding amount under the mortgage agreement at
approximately 7.6% in order to reduce the interest rate risk associated with
these borrowings.
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, we have a
letter of credit facility of $2.0 million.
In December 1998, we financed the acquisition and renovation of the land
and building of our Pearl River, NY facility and received proceeds amounting to
$4.2 million. We currently intend to pay these borrowings in annual installments
of approximately $200,000 payable through 2019.
Our backlog of orders was $103.8 million at March 31, 2000 and $92.1
million at March 31, 1999.
Net cash provided by operating activities was $10.2 million for the nine
months ended March 31, 2000. Net cash used in investing activities was $3.8
million for the nine months ended March 31, 2000, consisting primarily of
capital expenditures of $5.4 million offset, in part, by the proceeds from the
sale of equipment of $1.7 million under a sale-leaseback arrangement. Net cash
used in financing activities was $2.9 million for the nine months ended March
31, 2000, consisting primarily of debt payments of $5.7 million and the purchase
of treasury stock of $2.0 million, partially offset by proceeds from exercises
of stock options and warrants of $4.8 million.
We believe that internally generated funds and available lines of credit
together with the proceeds from our anticipated offering of common stock will be
sufficient for our working capital requirements, capital expenditure needs and
the servicing of our debt for at least the next twelve months. As of March 31,
2000, our available unused line of credit was $21.0 million after consideration
of the letter of credit.
Market Risk
We are exposed to market risk related to changes in interest rates and, to
an immaterial extent, to foreign currency exchange rates. Some of the our debt
is at fixed rates of interest or at a variable rate with an interest rate swap
agreement which effectively converts the variable rate debt into a fixed rate of
debt. Our debt which is subject to a floating rate of interest and is not hedged
by an interest rate swap amounts to approximately $17.3 million at March 31,
2000. If market interest rates increase by 10 percent from levels at March 31,
2000, the effect on our net income would be a reduction of approximately $70,000
per year.
-17-
<PAGE>
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 our financial position, business strategy and plans and objectives of
our management 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 us or our
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of our management, as well as assumptions made by and
information currently available to our 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 and general economic conditions. Such statements reflect our
current views with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our financial condition,
results of operations, growth strategy and liquidity.
-18-
<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
None
Item 5. Other Information
On March 21, 2000, our common stock commenced trading on the Nasdaq Stock
Market under the symbol ARXX.
On April 6, 2000, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission covering the sale by us of 2,500,000
shares of common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
-19-
<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)
May 9, 2000 By: /s/ Michael Gorin
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements for the nine months ended March 31, 2000 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,285,000
<SECURITIES> 0
<RECEIVABLES> 40,118,000
<ALLOWANCES> 413,000
<INVENTORY> 37,982,000
<CURRENT-ASSETS> 92,293,000
<PP&E> 88,372,000
<DEPRECIATION> 38,898,000
<TOTAL-ASSETS> 171,965,000
<CURRENT-LIABILITIES> 30,858,000
<BONDS> 0
0
0
<COMMON> 1,890,000
<OTHER-SE> 114,714,000
<TOTAL-LIABILITY-AND-EQUITY> 171,965,000
<SALES> 129,878,000
<TOTAL-REVENUES> 129,878,000
<CGS> 84,459,000
<TOTAL-COSTS> 116,845,000
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,846,000
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<NET-INCOME> 7,303,000
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<EPS-DILUTED> .37
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