<PAGE> 1
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, 1999
-----------------------------------------
COMMISSION FILE NUMBER 1-8037
------------------
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.
<TABLE>
<S> <C>
February 1, 2000 18,335,060 shares (excluding 317,212 shares held in treasury)
- -----------------------------------------------------------------------------------------------------
(Date) (Number of Shares)
</TABLE>
NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 19 PAGES.
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<PAGE> 2
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I: FINANCIAL INFORMATION
- ------- ---------------------
<S> <C>
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and June 30, 1999 3-4
CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended December 31, 1999 and 1998 5
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended December 31, 1999 and 1998 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 1999 and 1998 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Six and Three Months Ended December 31, 1999 and 1998 13-17
PART II: OTHER INFORMATION
- -------- -----------------
ITEM 4 Submission of Matters to a Vote of Security Holders 18
ITEM 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
-2-
<PAGE> 3
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------- --------------
(In thousands)
ASSETS
- ------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,493 $ 2,714
Accounts receivable, less allowance for
doubtful accounts of $407,000 and $381,000 36,946 39,967
Inventories 35,718 32,637
Deferred income taxes 5,103 5,291
Prepaid expenses and other current assets 2,092 2,314
--------- --------
Total current assets 82,352 82,923
Property, plant and equipment, at cost, net 48,824 50,802
Intangible assets acquired in connection with
the purchase of businesses, net 13,053 13,777
Cost in excess of fair value of net assets
of businesses acquired, net 13,700 14,019
Other assets 4,025 3,695
--------- --------
Total assets $161,954 $165,216
========= ========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------- --------------
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
<S> <C> <C>
Current portion of long-term debt $ 6,456 $ 6,509
Accounts payable 7,490 8,070
Accrued expenses and other current liabilities 13,871 16,923
Income taxes payable 1,507 1,055
--------- --------
Total current liabilities 29,324 32,557
Long-term debt 21,504 24,608
Deferred income taxes 3,230 3,582
Other long-term liabilities 2,364 2,376
--------- --------
Total liabilities 56,422 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
18,652,000 and 18,429,000 shares 1,865 1,843
Additional paid-in capital 107,570 105,720
Accumulated deficit (1,150) (5,421)
--------- ---------
108,285 102,142
Less: Treasury stock, at cost (339,000 and
6,000 shares) 2,753 49
--------- --------
Total stockholders' equity 105,532 102,093
--------- --------
Total liabilities and stockholders' equity $161,954 $165,216
========= ========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 5
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------
1999 1998
------------ -----------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 83,603 $ 67,826
Cost of sales 54,905 44,299
--------- --------
Gross profit 28,698 23,527
--------- --------
Selling, general and administrative costs 15,705 11,392
Research and development costs 4,938 4,294
--------- --------
20,643 15,686
--------- --------
Operating income 8,055 7,841
--------- --------
Other expense (income)
Interest expense 1,249 567
Other expense (income) 235 (544)
--------- ---------
Total other expense (income) 1,484 23
--------- --------
Income before income taxes 6,571 7,818
Provision for income taxes 2,300 2,750
--------- --------
Net income $ 4,271 $ 5,068
========= ========
Net income per common share and common
share equivalent:
- Basic $ .23 $ .29
====== =====
- Diluted $ .22 $ .27
====== =====
Weighted average number of common
shares and common share equivalents
outstanding:
- Basic 18,528 17,523
========= ========
- Diluted 19,441 18,751
========= ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
1999 1998
---------- ----------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 41,531 $ 36,197
Cost of sales 27,972 23,795
--------- --------
Gross profit 13,559 12,402
--------- --------
Selling, general and administrative costs 8,375 5,762
Research and development costs 2,508 2,303
--------- --------
10,883 8,065
--------- --------
Operating income 2,676 4,337
--------- --------
Other expense (income)
Interest expense 637 268
Other expense (income) (27) (241)
--------- ---------
Total other expense (income) 610 27
--------- --------
Income before income taxes 2,066 4,310
Provision for income taxes 725 1,500
--------- --------
Net income $ 1,341 $ 2,810
========= ========
Net income per common share and common
share equivalent:
- Basic $ .07 $ .16
====== =====
- Diluted $ .07 $ .15
====== =====
Weighted average number of common
shares and common share equivalents
outstanding:
- Basic 18,471 17,599
========= ========
- Diluted 19,000 18,939
========= ========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE> 7
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------------
1999 1998
---------- --------
(In thousands)
Cash Flows From Operating Activities:
<S> <C> <C>
Net income $ 4,271 $ 5,068
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,499 3,046
Amortization of deferred gain (294) (294)
Deferred income taxes (164) (525)
Other, net 210 139
Change in operating assets and liabilities,
net of effects from purchase of business:
Decrease (increase) in accounts receivable 2,976 (4,556)
Decrease (increase) in inventories (3,081) 698
Decrease (increase) in prepaid expenses
and other assets (124) (1,777)
Increase (decrease) in accounts payable, accrued
expenses and other long-term liabilities (3,421) (4,103)
Increase (decrease) in income taxes payable 586 1,559
--------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 5,458 (745)
--------- ---------
Cash Flows From Investing Activities:
Payment for purchase of business, net of cash acquired - (968)
Capital expenditures (3,009) (5,472)
Proceeds from sale of equipment 1,687 967
Other, net (34) (20)
--------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (1,356) (5,493)
--------- ---------
Cash Flows From Financing Activities:
Debt repayments (3,158) (796)
Borrowings under debt agreements - 4,187
Proceeds from the exercise of stock options
and warrants 827 675
Amounts paid for withholding taxes on stock
option exercises (47) (1,260)
Withholding taxes collected for stock option
exercises 45 769
Purchase of treasury stock (1,990) (343)
--------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (4,323) 3,232
--------- --------
Net Increase (Decrease) In Cash
And Cash Equivalents (221) (3,006)
Cash And Cash Equivalents At Beginning Of Period 2,714 24,408
--------- --------
Cash And Cash Equivalents At End Of Period $ 2,493 $ 21,402
========= ========
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE> 8
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, 1999 and the related
consolidated statements of earnings for the six and three months
ended December 31, 1999 and 1998 and the consolidated statements of
cash flows for the six months ended December 31, 1999 and 1998 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, 1999 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 six 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 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> 9
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. The $3.5 million write-off has been
included in the June 30, 1999 pro forma income but not the December
31, 1998 pro forma income in order to provide comparability to the
respective actual results.
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Year Ended Six Months Ended Three Months Ended
June 30, 1999 December 31, 1998 December 31, 1998
----------------- ----------------- -------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net Sales $ 177,149 $ 84,127 $ 44,144
Net Income 9,469 5,010 2,266
Net Income Per Share
Basic $ .53 $ .29 $ .13
Diluted .50 .27 .12
</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> 10
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,
-----------------------------------
1999 1998
---- ----
(In thousands, except per share ata)
<S> <C> <C>
Net income for basic and diluted earnings
per common share $ 4,271 $ 5,068
========= ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 18,528 17,523
Add: Effect of dilutive options and warrants
outstanding 913 1,228
--------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 19,441 18,751
========= ========
Net Income Per Common Share and Common Share
Equivalent:
Basic $ .23 $ .29
====== =====
Diluted $ .22 $ .27
====== =====
</TABLE>
<TABLE>
<CAPTION>
Three Months
Ended December 31,
----------------------------
1999 1998
---- ----
(In thousands, except per share data)
<S> <C> <C>
Net income for basic and diluted earnings
per common share $ 1,341 $ 2,810
========= ========
Computation of Adjusted Weighted Average
Shares Outstanding:
Weighted average shares outstanding 18,471 17,599
Add: Effect of dilutive options and warrants
outstanding 529 1,340
--------- --------
Weighted average shares and common share
equivalents used for computation of
diluted earnings per common share 19,000 18,939
========= ========
Net Income Per Common Share and Common Share
Equivalent:
Basic $ .07 $ .16
====== =====
Diluted $ .07 $ .15
====== =====
</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 December 31, 1999, the
outstanding term loan was $15.0 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 6.5% at December 31, 1999)
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
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<PAGE> 11
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>
December 31, June 30,
1999 1999
------------- ------------
(In thousands)
<S> <C> <C>
Raw Materials $ 20,425 $ 18,441
Work in Process 11,814 11,148
Finished Goods 3,479 3,048
--------- --------
$ 35,718 $ 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> 12
BUSINESS SEGMENT DATA:
<TABLE>
<CAPTION>
For The Six Months Ended
December 31,
---------------------------
1999 1998
----------- --------
(In thousands)
<S> <C> <C>
Net sales:
Microelectronics $ 49,872 $ 42,317
Test, Measurement and
Other Electronics 24,697 16,827
Isolator Products 9,034 8,682
----------- --------
Net sales $ 83,603 $ 67,826
=========== ========
Operating income:
Microelectronics $ 8,368 $ 7,658
Test, Measurement and
Other Electronics 682 971
Isolator Products 992 1,013
General corporate expenses (1,987) (1,801)
----------- ---------
8,055 7,841
Interest expense (1,249) (567)
Other income (expense), net (235) 544
----------- --------
Income before income taxes $ 6,571 $ 7,818
=========== ========
</TABLE>
<TABLE>
<CAPTION>
For The Three Months Ended
December 31,
----------------------------
1999 1998
----------- --------
(In thousands)
<S> <C> <C>
Net sales:
Microelectronics $ 24,836 $ 20,818
Test, Measurement and
Other Electronics 12,154 11,124
Isolator Products 4,541 4,255
----------- --------
Net sales $ 41,531 $ 36,197
=========== ========
Operating income:
Microelectronics $ 3,433 $ 4,104
Test, Measurement and
Other Electronics (161) 845
Isolator Products 464 289
General corporate expenses (1,060) (901)
----------- ---------
2,676 4,337
Interest expense (637) (268)
Other income (expense), net 27 241
----------- --------
Income before income taxes $ 2,066 $ 4,310
=========== ========
</TABLE>
-12-
<PAGE> 13
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 state-of-the-art microelectronic module, integrated circuit,
interconnect and testing solutions. Our products are used in satellite,
wireless, wireline (including fiber optic), broadband cable and defense
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., of which we own 93.4%.
Effective February 25, 1999, we acquired all of the outstanding stock
of UTMC Microelectronic Systems, Inc. for $42.5 million of cash. Prior to the
acquisition, UTMC distributed by dividend to its then-parent, United
Technologies Corporation, the assets and United Technologies assumed the
liabilities of the circuit card assembly portion of UTMC's business. The
purchase price was paid with available cash of $22.5 million and borrowings
under our bank loan agreement of $20.0 million. UTMC is a leader in supplying
radiation-tolerant integrated circuits for satellite communications. The
acquired company's net sales, excluding the circuit card assembly business, were
approximately $33.4 million for the year ended December 31, 1998.
Effective September 1, 1998, we acquired 90% of the stock of Europtest,
S.A. (France) for approximately $1.1 million. The purchase agreement also
requires that we 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% 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.
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 a 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.
-13-
<PAGE> 14
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.
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 $19.5 million at
December 31, 1999. If market interest rates increase by 10 percent from levels
at December 31, 1999, the effect on our net income would be a reduction of
approximately $100,000 per year.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1998
Net Sales. Net sales increased 23.3% to $83.6 million for the six
months ended December 31, 1999 from $67.8 million for the six months ended
December 31, 1998. Net sales in the microelectronics segment increased 17.9% to
$49.9 million for the six months ended December 31, 1999 from $42.3 million for
the six months ended December 31, 1998 due to the acquisition of UTMC in
February 1999 partially offset by reductions in sales in both thin film
interconnects and microelectronic modules. Net sales in the test, measurement
and other electronics segment increased 46.8% to $24.7 million for the six
months ended December 31, 1999 from $16.8 million for the six months ended
December 31, 1998 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 4.1% to $9.0 million for the six
months ended December 31, 1999 from $8.7 million for the six months ended
December 31, 1998. We are seeing strengthening in several of our microelectronic
product areas which leads us to believe that the softness in bookings and
shipments we had experienced in the second quarter is behind us and that both
our third and fourth quarters should show sequential improvements in both sales
and operating income.
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
22.0% to $28.7 million for the six months ended December 31, 1999 from $23.5
million for the six months ended December 31, 1998. Gross margin decreased to
34.3% for the six months ended December 31, 1999 from 34.7% for the six months
ended December 31, 1998. The increase in gross profit was primarily a result of
the increased sales.
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 37.9% to $15.7
million (18.8% of net sales) for the six months ended December 31, 1999 from
$11.4 million (16.8% of net sales) for the six months ended December 31, 1998.
The increase was primarily due to the additional costs relating to the
operations of UTMC.
-14-
<PAGE> 15
Research and Development Costs. Research and development costs consist
of material, engineering labor and allocated overhead. Our self-funded research
and development costs increased 15.0% to $4.9 million (5.9% of net sales) for
the six months ended December 31, 1999 from $4.3 million (6.3% of net sales) for
the six months ended December 31, 1998. 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 for 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.
Other Expense (Income). Interest expense increased to $1.2 million for
the six months ended December 31, 1999 from $567,000 for the six months ended
December 31, 1998, primarily due to increased levels of borrowings. Other
expense of $235,000 for the six months ended December 31, 1999 consists
primarily of a $300,000 expense for the settlement of a lawsuit offset by
$49,000 of interest income. Other income of $544,000 for the six months ended
December 31, 1998 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 16.4% to $2.3
million (an effective income tax rate of 35.0%) for the six months ended
December 31, 1999 from $2.8 million (an effective income tax rate of 35.2%) for
the six months ended December 31, 1998. 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, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998
Net Sales. Net sales increased 14.7% to $41.5 million for the three
months ended December 31, 1999 from $36.2 million for the three months ended
December 31, 1998. Net sales in the microelectronics segment increased 19.3% to
$24.8 million for the three months ended December 31, 1999 from $20.8 million
for the three months ended December 31, 1998 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 9.3% to $12.2 million for the three months ended December 31, 1999
from $11.1 million for the three months ended December 31, 1998 primarily due to
increased sales volume in frequency synthesizers (primarily shipments of the new
FS-1000 for use in commercial communication test systems) offset by reduced
sales volume of radar test systems. Net sales in the isolator products segment
increased 6.7% to $4.5 million for the three months ended December 31, 1999 from
$4.3 million for the three months ended December 31, 1998. We are seeing
strengthening in several of our microelectronic product areas which leads us to
believe that the softness in bookings and shipments we had experienced in the
second quarter is behind us and that both our third and fourth quarters should
show sequential improvements in both sales and operating income.
Gross Profit. Gross profit increased 9.3% to $13.6 million for the
three months ended December 31, 1999 from $12.4 million for the three months
ended December 31, 1998. Gross margin decreased to 32.6% for the three months
ended December 31, 1999 from 34.3% for the three months ended December 31, 1998.
The increase in gross profit was primarily a result of the increased sales
partially offset by low margins on the satellite test system development
program.
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 45.3% to $8.4 million (20.2% of net sales) for
the three months ended December 31, 1999 from $5.8 million (15.9% of net sales)
for the three months ended December 31, 1998. The increase was primarily due to
the additional costs relating to the operations of UTMC.
-15-
<PAGE> 16
Research and Development Costs. Our self-funded research and
development costs increased 8.9% to $2.5 million (6.0% of net sales) for the
three months ended December 31, 1999 from $2.3 million (6.4% of net sales) for
the three months ended December 31, 1998. 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 for the development of the
new FS-1000, a new low-cost, high speed, high performance frequency synthesizer
intended for commercial communication test systems which is complete.
Other Expense (Income). Interest expense increased to $637,000 for the
three months ended December 31, 1999 from $268,000 for the three months ended
December 31, 1998, primarily due to increased levels of borrowings. Other
income, which consists primarily of interest income, decreased to $27,000 for
the three months ended December 31, 1999 from $241,000 for the three months
ended December 31, 1998 primarily 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 51.7% to $725,000
(an effective income tax rate of 35.1%) for the three months ended December 31,
1999 from $1.5 million (an effective income tax rate of 34.8%) for the three
months ended December 31, 1998. 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 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 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 December 31, 1999, the outstanding term loan was $15.0
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 6.5% at December 31,
1999) 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.
-16-
<PAGE> 17
In March 1998, we sold 2.6 million shares of our common stock in a
public offering for $31.3 million, net of an underwriting discount of $2.0
million and issuance costs of $496,000. Of these net proceeds, $9.6 million was
used to repay bank indebtedness. The balance of the net proceeds was used
primarily for the acquisition of UTMC in February 1999.
Our backlog of orders was $99.5 million at December 31, 1999 and $83.3
million at December 31, 1998.
As of December 31, 1999, we had $53.0 million in working capital. Net
cash provided by operating activities was $5.5 million for the six months ended
December 31, 1999. Net cash used in investing activities was $1.4 million for
the six months ended December 31, 1999, consisting primarily of capital
expenditures of $3.0 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 $4.3 million for the six months ended December 31,
1999, consisting primarily of debt payments of $3.2 million and the purchase of
treasury stock of $2.0 million partially offset by proceeds from exercises of
stock options and warrants of $827,000.
We believe that internally generated funds and available lines of
credit 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 December 31, 1999, our available unused line of credit was $21.0
million after consideration of the letter of credit.
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 operations, results of operations, growth strategy and
liquidity.
-17-
<PAGE> 18
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
A. The Registrant held its Annual Meeting of Stockholders
on November 18, 1999.
B. Three Directors were elected at the Annual Meeting to
serve until the Annual Meeting of Stockholders in 2002.
The name of these Directors and votes cast in favor or
their election and shares withheld are as follows:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Michael Gorin 16,801,957 137,354
Donald S. Jones 16,809,693 136,618
Eugene Novikoff 16,808,951 137,360
</TABLE>
In addition to the election of directors, the
stockholders rejected a proposal to adopt the 1999 Stock
Option Plan, as set forth in Exhibit A to the proxy
statement; 6,190,533 shares were voted in favor of this
proposal, 7,200,923 shares voted against and 43,604
shares abstained from voting.
C. The Registrant held a Special Meeting of Stockholders
on January 6, 2000.
D. The Stockholders approved a proposal to adopt the 1999
Stock Option Plan, as amended and set forth in Exhibit A
to the proxy statement; 15,974,133 shares were voted in
favor of this proposal, 1,994,606 shares voted against
and 69,361 shares abstained from voting.
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
-18-
<PAGE> 19
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 2, 2000 By: s/Michael Gorin
-------------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
-19-
<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, 1999 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 2,493,000
<SECURITIES> 0
<RECEIVABLES> 37,353,000
<ALLOWANCES> 407,000
<INVENTORY> 35,718,000
<CURRENT-ASSETS> 82,352,000
<PP&E> 85,965,000
<DEPRECIATION> 37,141,000
<TOTAL-ASSETS> 161,954,000
<CURRENT-LIABILITIES> 29,324,000
<BONDS> 0
0
0
<COMMON> 1,865,000
<OTHER-SE> 103,667,000
<TOTAL-LIABILITY-AND-EQUITY> 161,954,000
<SALES> 83,603,000
<TOTAL-REVENUES> 83,603,000
<CGS> 54,905,000
<TOTAL-COSTS> 75,548,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,249,000
<INCOME-PRETAX> 6,571,000
<INCOME-TAX> 2,300,000
<INCOME-CONTINUING> 4,271,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,271,000
<EPS-BASIC> .23
<EPS-DILUTED> .22
</TABLE>
