Axsys (AXYS) 10-Q 2007 Q3 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                             to

Commission File Number 0-16182

AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	11-1962029 (I.R.S. Employer Identification Number)
175 Capital Boulevard, Suite 103 Rocky Hill, Connecticut (Address of principal executive offices)	06067 (Zip Code)
(860) 257-0200 (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer o                Accelerated filer ý                Non-accelerated filer o

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

        The number of shares outstanding of the registrant's common stock as of October 19, 2007 was 10,739,308.

AXSYS TECHNOLOGIES, INC.
INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets— As of September 29, 2007 and December 31, 2006	3
Consolidated Statements of Operations— Three and Nine Months Ended September 29, 2007 and September 30, 2006	4
Consolidated Statements of Cash Flows— Nine Months Ended September 29, 2007 and September 30, 2006	5
Consolidated Statements of Shareholders' Equity— Nine Months Ended September 29, 2007 and September 30, 2006	6
Notes to Consolidated Financial Statements	7
Item 2.  Management's Discussion and Analysis of
Financial Condition and Results of Operations	14
Item 3.  Quantitative and Qualitative Disclosures about Market Risk	20
Item 4.  Controls and Procedures	21
PART II. OTHER INFORMATION
Item 6.  Exhibits	22
Signatures	23

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PART I—FINANCIAL INFORMATION

ITEM 1.—FINANCIAL STATEMENTS

AXSYS TECHNOLOGIES, INC.

Consolidated Balance Sheets

(Dollars in thousands, except share and per share data)

			September 29, 2007		December 31, 2006
			(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	5,176	$	6,044
	Accounts receivable—net			20,270		17,298
	Inventories—net			48,718		35,853
	Assets held-for-sale			14,416		15,764
	Income taxes—deferred			3,556		2,405
	Prepaid expenses			941		829
	Other current assets			379		368
		TOTAL CURRENT ASSETS		93,456		78,561
PROPERTY, PLANT AND EQUIPMENT—net				16,230		22,393
INTANGIBLE ASSETS—net				12,588		9,507
GOODWILL				82,649		60,791
OTHER ASSETS				1,574		1,093
		TOTAL ASSETS	$	206,497	$	172,345
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Line of credit		$	10,000	$	—
	Accrued expenses and other current liabilities			20,978		18,218
	Accounts payable			11,307		7,550
	Deferred income			10,064		6,088
	Liabilities held-for-sale			2,648		3,430
		TOTAL CURRENT LIABILITIES		54,997		35,286
OTHER LONG-TERM LIABILITIES				8,243		5,871
SHAREHOLDERS' EQUITY:
	Common stock, $.01 par value per share: authorized 30,000,000 shares, issued 10,739,308 shares at September 29, 2007 and 10,643,934 shares at December 31, 2006			107		106
	Capital in excess of par			101,143		99,111
	Retained earnings			42,007		31,977
	Treasury stock, at cost, 572 shares at December 31, 2006			—		(6	)
		TOTAL SHAREHOLDERS' EQUITY		143,257		131,188
		TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	206,497	$	172,345

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Operations

(Dollars in thousands, except share and per share data—Unaudited)

		For the Three Months Ended						For the Nine Months Ended
		September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006
Sales		$	45,218		$	33,640		$	123,712		$	96,170
Cost of sales			30,560			23,054			83,910			65,534
Gross profit			14,658			10,586			39,802			30,636
Selling, general and administrative expenses			7,131			5,399			18,720			16,266
Research, development and engineering expenses			1,436			1,261			4,383			3,380
Operating income			6,091			3,926			16,699			10,990
Interest expense			(191	)		(10	)		(463	)		(72	)
Interest income			55			70			174			221
Other income (expense), net			17			(7	)		(235	)		25
Income from continuing operations before income taxes			5,972			3,979			16,175			11,164
Provision for income taxes			2,216			1,510			6,135			4,235
Income from continuing operations			3,756			2,469			10,040			6,929
Income from discontinued operations, net of income taxes			383			225			929			768
Net income		$	4,139		$	2,694		$	10,969		$	7,697
BASIC EARNINGS PER SHARE:
	Continuing operations	$	0.35		$	0.23		$	0.94		$	0.65
	Discontinued operations		0.04			0.02			0.09			0.07
	Total	$	0.39		$	0.25		$	1.03		$	0.72
Weighted average basic common shares outstanding			10,722,393			10,630,136			10,688,869			10,625,153
DILUTED EARNINGS PER SHARE:
	Continuing operations	$	0.34		$	0.23		$	0.91		$	0.64
	Discontinued operations		0.03			0.02			0.08			0.07
	Total	$	0.37		$	0.25		$	0.99		$	0.71
Weighted average diluted common shares outstanding			11,140,374			10,883,385			11,031,234			10,877,734

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Cash Flow

(Dollars in thousands—Unaudited)

				Nine Months Ended
				September 30, 2007			September 29, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	10,969		$	7,697
Adjustments to reconcile net income to net cash provided by operating activities:
	Income from discontinued operations, net of tax				(929	)		(768	)
	Depreciation				2,610			2,442
	Amortization of intangibles				764			749
	Amortization of debt issuance cost				6			—
	Deferred income taxes				(255	)		1,027
	Share-based compensation expense				888			737
	Stock contribution to 401(k) plan				70			51
	Loss (gain) on disposal of equipment				144			(22	)
	Impairment of intangible assets				131			—
	Changes in operating assets and liabilities:
		Accounts receivable			(2,972	)		185
		Inventories			(9,972	)		(4,937	)
		Other current assets and other assets			(45	)		(77	)
		Accounts payable			2,580			(280	)
		Accrued expenses and other liabilities			2,907			3,026
		Deferred income			3,433			357
		Long-term liabilities			(231	)		(242	)
Net cash provided by continuing operations					10,098			9,945
Net cash provided by (used in) discontinued operations					1,446			(228	)
			NET CASH PROVIDED BY OPERATING ACTIVITIES		11,544			9,717
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net					(4,705	)		(8,516	)
Acquisitions, net of cash acquired					(27,037	)		—
Purchase of Telic—earn-out payment					(1,183	)		(2,817	)
Proceeds from disposal of property, plant and equipment					9,589			132
			NET CASH USED IN INVESTING ACTIVITIES		(23,336	)		(11,201	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings					(15,000	)		(8,000	)
Proceeds from borrowings, net					25,000			8,000
Proceeds from the exercise of options					812			105
Tax benefit from exercises of stock options					182			47
Payment of debt issuance costs					(69	)		—
Payments under stock buyback program					(1	)		—
			NET CASH PROVIDED BY FINANCING ACTIVITIES		10,924			152
NET CHANGE IN CASH AND CASH EQUIVALENTS					(868	)		(1,332	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					6,044			7,079
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	5,176		$	5,747
Supplemental cash flow information
	Interest paid			$	(414	)	$	(46	)
	Interest received				179			213
	Income tax payments				(6,543	)		(3,805	)
	Non-cash consideration from sale of capital equipment				—			15

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Consolidated Statements of Shareholders' Equity

For the Nine Months Ended September 29, 2007 and September 30, 2006

(Dollars in thousands—Unaudited)

	Common Stock Amount		Capital in Excess of Par		Accumulated Other Comprehensive Gain/ (Loss)			Retained Earnings			Treasury Stock Amount			Total			Comprehensive Income
Balance at December 31, 2006	$	106	$	99,111	$	—		$	31,977		$	(6	)	$	131,188
Cumulative effect adjustment due to adoption of FIN 48		—		—		—			(939	)		—			(939	)
Balance at January 1, 2007		106		99,111		—			31,038			(6	)		130,249
Net income		—		—		—			10,969			—			10,969
Share-based compensation expense		—		976		—			—			—			976
Restricted stock withheld for employee taxes		—		—		—			—			(39	)		(39	)
Exercise of stock options		1		824		—			—			26			851
Tax benefit on exercise of options		—		182		—			—			—			182
Contribution to 401(k) plan		—		50		—			—			20			70
Stock repurchases		—		—		—			—			(1	)		(1	)
Balance at September 29, 2007	$	107	$	101,143	$	—		$	42,007		$	—		$	143,257
Balance at December 31, 2005	$	106	$	97,875	$	3		$	21,712		$	(155	)	$	119,541
Net income		—		—		—			7,697			—			7,697		$	7,697
Foreign exchange contract		—		—		(3	)		—			—			(3	)		(3	)
Total comprehensive income																	$	7,694
Share-based compensation expense		—		808		—			—			—			808
Reduction of public stock offering costs		—		23		—			—			—			23
Exercise of stock options		—		44		—			—			61			105
Tax benefit on exercise of options		—		47		—			—			—			47
Contribution to 401(k) plan		—		18		—			—			33			51
Balance at September 30, 2006	$	106	$	98,815	$	—		$	29,409		$	(61	)	$	128,269

See accompanying notes to consolidated financial statements.

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AXSYS TECHNOLOGIES, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands, except share and per share data—Unaudited)

Note 1—Basis of Presentation

        The accompanying unaudited consolidated financial statements of Axsys Technologies, Inc. ("Axsys" or "we") have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP. In the opinion of management, all significant adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the three and nine months ended September 29, 2007 and September 30, 2006 have been included. Operating results for the three and nine months ended September 29, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The financial information included in this quarterly report on Form 10-Q should be read in conjunction with the consolidated financial statements and notes in Axsys' Annual Report on Form 10-K for the fiscal year ended December 31, 2006. The consolidated balance sheet dated December 31, 2006, included in this Form 10-Q, has been derived from the audited consolidated financial statements at that date.

        Basic earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding. The dilutive effect of stock options on the weighted average number of common shares was 417,981 shares for the three months ended September 29, 2007 and 342,365 shares for the nine months ended September 29, 2007 compared to 253,249 shares for the three months ended September 30, 2006 and 252,581 shares for the nine months ended September 30, 2006. For the three months ended September 29, 2007, there were no anti-dilutive common shares. For the nine months ended September 29, 2007, diluted earnings per share exclude 31,250 potential common shares related to our stock compensation plans because they were anti-dilutive.

        Certain amounts in 2006 have been reclassified to conform to the 2007 presentation.

Note 2—Acquisitions

        On April 13, 2007, Axsys acquired substantially all of the assets of Cineflex, LLC ("Cineflex"), a privately held manufacturer of high-precision gyro-stabilized aerial camera systems.

        In addition to obtaining an established and skilled workforce, this acquisition leverages our existing technologies and provides a new base of customers. Cineflex is a technology leader in the design and manufacture of highly stable, multi-sensor, multi-axis surveillance platforms serving customers in federal and local government, and in the motion picture and electronic news gathering industries. A pioneer in high-definition aerial surveillance technology, Cineflex develops ultra-stable camera systems for applications such as long range license plate identification and the observation of suspected criminals.

        The acquisition has been accounted for by the purchase method of accounting and accordingly, the consolidated statements of income include the results of Cineflex through the nine months ended September 29, 2007 from the date of acquisition. The assets acquired and the liabilities assumed were recorded at estimated fair values as determined by Axsys management and a valuation firm based on information currently available and on current assumptions as to future operations. Goodwill acquired through the purchase of Cineflex is deductible for income tax purposes.

        The initial purchase price of this acquisition, after a working capital adjustment, was $26,681 with possible additional cash consideration to be paid over the 36 months following the closing date based on certain revenue and order placement goals. In addition, $356 of legal, audit and other acquisition-

7

related costs were incurred in connection with the acquisition. Axsys funded the purchase price and associated transaction costs through a combination of existing cash balances and borrowings under its revolving credit facility.

Fair value:
	Assets acquired	$	3,062
	Liabilities assumed		(1,860	)
	Amortizable intangible assets		3,977
	Goodwill		21,858
Purchase price		$	27,037
	Accrued acquisition costs		—
Net cash paid through the third quarter of 2007		$	27,037

Note 3—Acquisition Earn-Out Adjustment

        On April 8, 2004, we acquired all of the capital stock of Telic Optics, Inc. ("Telic"), a manufacturer of infrared optics and optical assemblies. The initial purchase price of this acquisition, after a working capital adjustment of $15, was $14,423 with an additional earn-out payment of up to $4,000 over 36 months following the closing date based on the achievement of certain revenue goals. The entire earn-out was earned during 2005 and 2006, with the final cash payment of $1,183 paid during the first quarter of 2007. This resulted in a final purchase price of $18,423.

Note 4—Inventories—net

        Inventories, determined by lower of cost (first-in, first-out or average) or market, consist of:

		September 29, 2007			December 31, 2006
	Raw materials	$	24,933		$	18,825
	Work-in-process		27,174			20,258
	Finished goods		2,234			1,490
Gross inventories			54,341			40,573
	Less reserve		(5,623	)		(4,720	)
Net inventories		$	48,718		$	35,853

Note 5—Income Taxes

        The consolidated effective tax rate was 37.1% for the three months and 37.9% for the nine months ended September 29, 2007 compared to 37.9% for the three and nine months ended September 30, 2006.

        Axsys adopted Financial Accounting Standards Board ("FASB") Interpretation 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), at the beginning of fiscal year 2007. As a result of the implementation of FIN 48, we recognized a $939 increase to reserves for uncertain tax positions. This

8

increase was accounted for as an adjustment to the beginning balance of retained earnings on our balance sheet. Including the cumulative effect of this increase at the beginning of 2007, we had approximately $5,035 of unrecognized tax benefits, of which $2,033 would favorably affect our effective tax rate if recognized. At September 29, 2007, we had approximately $5,110 of unrecognized tax benefits.

        We recognize interest and penalties related to uncertain tax positions in income tax expense. As of September 29, 2007, we had approximately $1,266 of accrued interest and penalties related to uncertain tax positions included in the unrecognized tax benefits mentioned above. During the first nine months of 2007, we recognized interest and penalties related to uncertain tax positions of $150.

        The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which we are subject. As of September 29, 2007, we do not expect any material changes to unrecognized tax positions within the next twelve months.

Note 6—Warranty Accruals

        We provide warranties for certain of our products. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency and average cost of warranty claims.

        The following table summarizes product warranty activity:

Balance at December 31, 2006	$	898
Provision		786
Payments		(340	)
Balance at September 29, 2007	$	1,344

Note 7—Impairment of Asset

        During the first quarter of 2007, management determined that there was an impairment of an intangible asset related to a service contract. This contract was initially recorded as an intangible asset in connection with Axsys' acquisition of Diversified Optical Products, Inc. in May 2005. The total value of the contract at the time of acquisition was determined to be $200 and was given an estimated useful life of five years. It became evident during the first quarter of 2007 that the contract was not going to be renewed by our customer and management therefore made the decision to impair the asset and write-off its remaining value. A charge of $131 was recorded in "other expense-net" on Axsys' consolidated income statement in the first quarter of 2007. In addition, during the first quarter of 2007, we wrote off $79 of obsolete software.

Note 8—Line of Credit

        Revolving Credit Facility:    On April 10, 2007, in connection with the acquisition of Cineflex, we amended our credit agreement to extend the maturity date of our revolving credit facility to May 2, 2012 and increase the commitment amount from $15,000 to $40,000. In addition, on April 13, 2007, in connection with the acquisition of Cineflex, we borrowed $25,000 under our revolving credit facility to

9

fund a portion of the purchase price. We have repaid $15,000 of the advance, leaving $10,000 outstanding at September 29, 2007. The weighted-average interest rate was 6.45% on these borrowings. Our revolving credit facility remains available through May 2012, subject to optional prepayment in accordance with its terms. We may elect to have any borrowing under the revolving credit facility bear interest either at the bank's prime rate or the LIBOR rate plus a margin of 100 to 200 basis points, depending on our consolidated funded debt-to-consolidated EBITDA ratio. We have the option of selecting the 1-month, 2-month, 3-month or 6-month LIBOR rate. Up to $3,000 of the revolving credit facility may be utilized to issue letters of credit. As of September 29, 2007, $900 of the revolving credit facility was also utilized for outstanding letters of credit. We expect to repay the entire outstanding balance within the next twelve months and as such have classified the amount due as a current liability.

Note 9—Shareholders' Equity

Stock Repurchase

        Axsys' Board of Directors has authorized the repurchase, from time to time, on the open market or otherwise, of up to 200,000 shares of Axsys common stock at prevailing market prices or at negotiated prices.

        We plan to use the repurchased shares for general corporate purposes, including the satisfaction of commitments under our employee benefit plans and the exercise of stock option grants. As of September 29, 2007, Axsys has repurchased 83 shares in total under this repurchase program. During the nine months ended September 29, 2007,    6 shares were repurchased under this program.

Stock

        We use treasury stock shares for general corporate purposes, including the satisfaction of commitments under employee benefit plans and stock options.

        Changes in stock were as follows:

	Common Stock			Treasury Stock
Number of shares
	Shares	Amount		Shares		Amount
Balance at December 31, 2006	10,643,934	$	106	572		$	6
Restricted stock withheld for employee taxes	—		—	2,296			39
Repurchase of stock	12,472		—	6			1
Exercise of stock options, net	81,396		1	(1,676	)		(26	)
Contribution to the 401(k) plan	1,506		—	(1,198	)		(20	)
Balance at September 29, 2007	10,739,308	$	106	—		$	—
Balance at December 31, 2005	10,636,734	$	106	18,907		$	155
Exercise of stock options, net	7,200		—	(10,356	)		(61	)
Contribution to the 401(k) plan	—		—	(3,221	)		(33	)
Repurchase of common stock	—		—	32			—
Balance at September 30, 2006	10,643,934	$	107	5,362		$	61

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Note 10—Sale-Leaseback of Facilities

        During the second quarter of 2007, we sold our buildings located in Nashua, New Hampshire for $6,405 and Cullman, Alabama for $3,695. Concurrent with the sale, we entered into 15-year operating leases with the buyer with monthly rental payments of $39 for the Nashua, New Hampshire building and $25 for the Cullman, Alabama building. Each lease is renewable at our option for an additional five years. As part of the sale and leaseback, we have no continuing involvement aside from the lease agreement. The $1,414 difference between the sales proceeds received (net of $511 closing costs) and the book value of assets sold was deferred and is being amortized over the life of the initial lease terms.

        The future minimum lease payments under the terms of the related lease agreements are as follows:

2007	$	194
2008		783
2009		794
2010		806
2011		818
Thereafter		9,130
	$	12,525

Note 11—Discontinued Operations

        On July 9, 2007, we announced our intent to sell our Distributed Products business. We believe that the sale of this non-strategic business will allow us to focus on our increasingly prominent and faster growing optics business. In addition, we plan to use the proceeds to pay down our outstanding debt, which will give us more flexibility in pursuing strategic acquisitions in our core business. We are currently holding discussions in connection with the sale and expect to complete the transaction within the next twelve months.

        The Distributed Products business was previously reported in the Distributed Products Group for segment reporting. Because we intend to sell the Distributed Products business, the assets and liabilities of the Distributed Products business are now reported separately as held-for-sale on the consolidated balance sheet. The sales and income before taxes for the Distributed Products business included in discontinued operations are as follows:

	For the Three Months Ended				For the Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Sales	$	6,800	$	6,135	$	19,055	$	19,568
Income before income taxes		609		362		1,496		1,205

        As a result of the expected sale of the Distributed Products business, the result of continuing operations only includes one segment.

        During 2002, Axsys disposed of the Automation Group, which included facilities in Wilmington, Massachusetts and Pittsburgh, Pennsylvania. At the time of the sale, Axsys continued to be responsible

11

for fulfilling the remaining terms of the leases. As of the second quarter of 2006, we fulfilled all of our contractual obligations related to these sites and we recognized an after-tax gain of $85 on the reversal of expenses associated with these buildings.

        The gain (loss) from discontinued operations, net of tax, recognized in the consolidated statements of operations includes the following:

	For the Three Months Ended				For the Nine Months Ended
	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006
Net income from Distributed Products business	$	383	$	225	$	929	$	748
Automation Group-operating leases		—		—		—		85
Environmental charges for previously divested business		—		—		—		(65	)
Income from discontinued operations, net of tax	$	383	$	225	$	929	$	768

Note 12—Recent Accounting Pronouncements

        In February 2007, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115", ("SFAS 159"). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective as of the beginning of fiscal 2008. We have not yet assessed the effect, if any, that adoption of SFAS 159 will have on its results of operations and financial position.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",("SFAS 157"). This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. SFAS157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data. We are currently assessing the impact that SFAS 157 will have on its results of operations and financial position.

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

        The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in Item 1 of this quarterly report.

Disposition of Business Segment

        On July 9, 2007, we announced our intent to sell our Distributed Products business. We believe that the sale of this non-strategic business will allow us to focus on our increasingly prominent and faster growing optics business. In addition, we plan to use the proceeds to pay down our outstanding debt which will give us more flexibility in pursuing strategic acquisitions in our core optics business. We are currently holding discussions in connection with the sale and expect to complete the transaction within the next twelve months.

Acquisition of Cineflex, LLC.

        On April 13, 2007, Axsys acquired Cineflex, LLC ("Cineflex"), a privately held manufacturer of high-precision gyro-stabilized aerial camera systems, for $26.7 million in cash with possible additional cash consideration to be paid over the 36 months following the closing date based on certain revenue goals. In addition, $356 thousand of legal, audit and other acquisition-related costs were incurred in connection with the acquisition. Cineflex is a technology leader in the design and manufacture of highly stable, multi-sensor, multi-axis surveillance platforms serving customers in federal and local government, and in the motion picture and electronic news gathering industries. At the time of acquisition, Cineflex employed approximately 25 people at its Grass Valley, California facility.

        In connection with the acquisition of Cineflex, we amended our credit agreement to extend the maturity date of our revolving credit facility to May 2, 2012 and increase the commitment amount from $15.0 million to $40.0 million. In addition, on April 13, 2007, in connection with the acquisition of Cineflex, we borrowed $25.0 million under our revolving credit facility to fund a portion of the purchase price. As of September 29, 2007, we have repaid $15.0 million of the advance.

Facilities

        During the second quarter of 2007, we sold our buildings and land located in Nashua, New Hampshire and Cullman, Alabama and concurrently entered into 15-year operating leases with the buyer. We received $9.6 million in proceeds for the sale of the two buildings. The $1.4 million difference between the sales proceeds received (net of $511 thousand of closing costs) and the book value of assets sold was deferred and is being amortized over the life of the leases.

Financial Results

        The following tables set forth certain financial data for the three months and nine months ended September 29, 2007 and September 30, 2006.

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(in thousands and as a percentage of sales)

	Three Months Ended
	September 29, 2007					September 30, 2006
Sales	$	45,218		100.0	%	$	33,640		100.0	%
Cost of sales		30,560		67.6			23,054		68.5
Gross profit		14,658		32.4			10,586		31.5
Selling, general and administrative expenses		7,131		15.8			5,399		16.0
Research, development and engineering expenses		1,436		3.2			1,261		3.7
Operating income		6,091		13.5			3,926		11.7
Interest expense		(191	)	(0.4	)		(10	)	0.0
Interest income		55		0.1			70		0.2
Other income (expense), net		17		0.0			(7	)	0.0
Income from continuing operations before income taxes		5,972		13.2			3,979		11.8
Provision for income taxes		2,216		4.9			1,510		4.5
Income from continuing operations		3,756		8.3			2,469		7.3
Income from discontinued operations, net of tax		383		0.8			225		0.7
Net income	$	4,139		9.1	%	$	2,694		8.0	%

	Nine Months Ended
	September 29, 2007					September 30, 2006
Sales	$	123,712		100.0	%	$	96,170		100.0	%
Cost of sales		83,910		67.8			65,534		68.1
Gross profit		39,802		32.2			30,636		31.9
Selling, general and administrative expenses		18,720		15.1			16,266		16.9
Research, development and engineering expenses		4,383		3.5			3,380		3.5
Operating income		16,699		13.6			10,990		11.4
Interest expense		(463	)	(0.4	)		(72	)	(0.1	)
Interest income		174		0.1			221		0.2
Other (expense) income, net		(235	)	(0.2	)		25		0.0
Income from continuing operations before income taxes		16,175		13.1			11,164		11.6
Provision for income taxes		6,135		5.0			4,235		4.4
Income from continuing operations		10,040		8.1			6,929		7.2
Income from discontinued operations, net of tax		929		0.8			768		0.8
Net income	$	10,969		8.9	%	$	7,697		8.0	%

        Sales increased 34.4% for the three months ended September 29, 2007 and 28.6% for the nine months ended September 29, 2007 compared to the same periods in the prior year. Sales growth was primarily driven by our recent acquisition of Cineflex, which contributed approximately $6.5 million of sales during the third quarter of 2007, with a total of $8.6 million of sales since the date of acquisition. In addition, increased sales during 2007, resulted from the continued growth of our infrared business highlighted by increased shipments of our lens assemblies in support of the U.S. Army's thermal weapons sight program. Our infrared cameras sales continue to be strong in support of the mine resistant ambush protected vehicles program. We also continue to benefit from our increased participation on several United States Air Force programs, including the stellar-inertial navigation system.

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        Gross margin increased from 31.5% in the third quarter of 2006 to 32.4% in the third quarter of 2007, and from 31.9% in the nine months of 2006 to 32.2% in the first nine months of 2007. The increase in gross margin, as a percentage of sales, for the quarter was primarily due to product mix. Year to date, the higher margins were mainly due to a favorable benefit received on a long-term percentage of completion contract, which is nearing its life end. This benefit was partially offset by increased costs for germanium and silicon that we were unable to pass along to customers and the impact of recording the acquired inventory for Cineflex at fair market value.

Operating Expenses (in thousands and as a percentage of sales)

	Three Months Ended								Nine Months Ended
	September 29, 2007				September 30, 2006				September 29, 2007				September 30, 2006
Selling, general and administrative	$	7,131	15.8	%	$	5,399	16.0	%	$	18,720	15.1	%	$	16,266	16.9	%
Research, development and engineering		1,436	3.2	%		1,261	3.7	%		4,383	3.5	%		3,380	3.5	%

        SG&A Expenses.    Spending increased, year over year, on a dollar basis, primarily due to the acquisition of Cineflex and increased compensation costs to support the overall growth of our business. Spending as a percentage of sales, however, decreased year over year as we were able to gain significant leverage from the higher sales volume.

        Research, Development and Engineering Expenses.    Research, development and engineering expenses increased for the three months and nine months ended September 29, 2007 compared to the same periods in the prior year. We continue to increase our R&D efforts on our infrared product lines, which require ongoing research and development to ensure product competitiveness in the imaging market place. In addition, the acquisition of Cineflex contributed to the increase in our R&D spending as this product line requires continual development as we begin to work on a gimbal system for military applications.

Other Income and Expenses

        Interest expense.    Interest expense was $191 thousand in the third quarter of 2007 and $463 thousand for the nine months ended September 29, 2007 compared to interest expense of $10 thousand and $72 thousand in the comparable periods of 2006. The higher interest expense was due to higher overall borrowings during 2007 associated with the acquisition of Cineflex during the second quarter. We had $10.0 million in borrowings outstanding as of September 29, 2007 compared to no outstanding borrowings in the comparable period of 2006.

        Interest income.    Interest income was $55 thousand in the third quarter of 2007 and $174 thousand for the nine months ended September 29, 2007 compared to interest income of $70 thousand and $221 thousand in the comparable periods of 2006. The decrease in interest income was primarily due to overall lower average cash on hand resulting from the repayment of $15.0 million of borrowings under our revolving credit facility during the second and third quarters of 2007. Interest income was primarily composed of income from cash and cash equivalents.

        Other expense and income, net.    Net other income was $17 thousand in the third quarter of 2007 and net other expense was $235 thousand for the nine months ended September 29, 2007 compared to net other expense of $7 thousand and other income of $25 thousand in the comparable periods of 2006. The increase in net other expense, year over year, was primarily due to a $131 thousand impairment charge during the first quarter of 2007 for an intangible asset partially offset by the amortization of the deferred gain on sale-leaseback transactions that began during the second quarter of 2007. Other income and expenses were primarily the result of gains and losses incurred as a result of foreign exchange rates and the disposal of capital equipment.

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        Income Taxes.    The consolidated effective tax rate was 37.1% for the three months and 37.9% for the nine months ended September 29, 2007 compared to 37.9% for the three and nine months ended September 30, 2006. During the first nine months of 2007, we recorded a tax expense of 33.4% for federal taxes and 4.5% for state taxes compared to 34.0% for federal taxes and 3.9% for state taxes during the comparable periods in 2006.

        Discontinued operations.    During the third quarter of 2007, we announced our intent to sell our Distributed Products business. The assets and liabilities for the Distributed Products business are reported separately as held for sale on the consolidated balance sheet. The sales for the Distributed Products business for the three and nine months ended September 29, 2007, included in discontinued operations, were $6.8 million and $19.0 million compared to $6.1 million and $19.6 million for the comparable periods in 2006. Income, net of taxes in the Distributed Products business for the three and nine months ended September 29, 2007, included in discontinued operations, were $383 thousand and $929 thousand compared to $225 thousand and $748 thousand for the comparable periods in 2006.

Liquidity and Capital Resources

        Axsys' strategy to enhance shareholder value is dependent on our ability to take advantage of both internal and external business opportunities as they arise. Maximizing the utilization of our cash resources is crucial to the successful execution of our strategy. During the first nine months of 2007, we took several key steps in support of our strategy. On April 10, 2007, we amended our credit agreement with Bank of America to increase our revolving line of credit from $15.0 million to $40.0 million. During the second quarter of 2007, we also completed the sale-leaseback of our Nashua, New Hampshire and Cullman, Alabama facilities, which generated net proceeds of $9.6 million. In addition, we have also continued to focus on profitability and working capital management to increase cash flow from operations. We have already begun to invest in new growth opportunities, including the acquisition of Cineflex and increased spending on research and development and capital equipment that is critical to increased production capacity. Furthermore in July 2007, we announced our intent to sell our Distributed Products business. This will allow us to further reduce our debt and continue to redeploy our resources to our more profitable Optical Systems business.

        On April 13, 2007, in connection with the acquisition of Cineflex, we borrowed $25.0 million under our revolving credit facility to fund a portion of the purchase price. We have repaid $15.0 million of the advance, leaving $10.0 million outstanding as of September 29, 2007. The weighted-average interest rate was 6.45% on these borrowings. Our revolving credit facility remains available through May 2012, subject to optional prepayment in accordance with its terms. We may elect to have any borrowing under the revolving credit facility bear interest either at the bank's prime rate or the LIBOR rate plus a margin of 100 to 200 basis points, depending on our consolidated funded debt-to-consolidated EBITDA ratio. We have the option of selecting the 1-month, 2-month, 3-month or 6-month LIBOR rate. Up to $3.0 million of the revolving credit facility may be utilized to issue letters of credit. As of September 29, 2007, $900 thousand of the revolving credit facility was also utilized for outstanding letters of credit. We expect to repay the entire outstanding balance within the next twelve months. We are in compliance with all covenants related to our revolving credit facility.

        As of September 29, 2007, cash and cash equivalents totaled $5.2 million. Net cash provided by operating activities for the nine months ended September 29, 2007 was $11.5 million.

        Our net income for the first nine months of 2007 was $11.0 million, which included $3.4 million of depreciation and amortization, a $255 thousand increase in our deferred tax assets, $888 thousand of share-based compensation expense, $131 write-off of intangible assets and $214 thousand of other non-cash items. In addition, income from our Distributed Products business, net of tax, was $929 thousand for the nine months ended September 29, 2007.

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        During the nine months ended September 29, 2007, we utilized $3.0 million of cash to fund changes in our operating assets and liabilities. We utilized $3.0 million of cash to fund an increase in accounts receivable primarily as a result of increased sales volume. We used $10.0 million of cash to fund an increase in our inventories mainly to support growth in our infrared lens and gimbal product lines. In addition, cash was also required to fund increases in inventory levels associated with some of our large aerospace and defense programs, which require long lead times. Accrued liabilities increased $2.9 million during the nine months ended September 29, 2007 primarily due to excess billings over costs on our percentage of completion contracts and increased incentives reserves. In the first nine months of 2007, deferred income increased $3.4 million primarily as a result of increased customer deposits on our larger aerospace and defense programs. Accounts payable increased $2.6 million due to the timing of vendor payments associated with increased inventory levels necessary to support growth within the business. Additional cash outflow of $231 thousand were primarily for costs associated with the utilization of loss contract reserve and former employees' retirement benefits. In addition, cash provided by discontinued operations totaled $1.4 million associated with the result of operations in our Distributed Products business.

        As of September 30, 2006, cash and cash equivalents totaled $5.7 million. Net cash provided by operating activities for the nine months ended September 30, 2007 was $9.7 million.

        Our net income for the first nine months of 2006 was $7.7 million, which included $3.2 million of depreciation and amortization, a $1.0 million decrease in our deferred tax assets, $737 thousand of share-based compensation expense and $29 thousand of other non-cash items. In addition, income from our Distributed Products business, net of tax, was $768 thousand for the nine months ended September 30, 2006.

        During the nine months ended September 30, 2006, we utilized $2.0 million of cash to fund changes in our operating assets and liabilities. We used $4.9 million of cash to fund an increase in our inventories, which resulted from long lead-time orders and increased sales within our infrared and camera product lines, which was partially offset by a $2.7 million net increase in accrued liabilities and accounts payable primarily due to the timing of vendor invoices and increased compensation-related expenses primarily associated with incentives. In the first nine months of 2006, deferred income increased $357 thousand primarily as a result of increased customer deposits partially offset by the recognition of revenue on a large aerospace and defense program booked in the first quarter of 2005. Additional cash outflows of $228 thousand were primarily for costs associated with the utilization of loss contract reserves partially offset by cash provided through operations in our Distributed Products business.

        Net cash used in investing activities was $23.3 million for the nine months ended September 30, 2007. In the second quarter of 2007, we utilized $27.0 million of cash to purchase Cineflex. During the second quarter of 2007, we received $9.6 million in proceeds from the sale of manufacturing facilities in Nashua, New Hampshire and Cullman, Alabama as part of sale-leaseback transactions. We utilized $4.7 million of cash for capital expenditures primarily for the purchase of production and testing equipment. We also utilized $1.2 million of cash for the final Telic Optics, Inc. ("Telic") earn-out payment.

        Net cash used in investing activities was $11.2 million for the nine months ended September 30, 2006. We utilized $4.0 million of cash to purchase a new facility for our IR Systems division and invested an additional $1.6 million in capital improvements for the new facility. During the nine months ended September 30, 2006, other capital expenditures of $2.9 million were primarily for the purchase of production and testing equipment. We also utilized $2.8 million of cash for the Telic earn-out payment. We also received $132 thousand of proceeds from the sale of fully depreciated machinery.

        Net cash provided by financing activities was $10.9 million for the nine months ended September 29, 2007. During the second quarter of 2007, we borrowed $25.0 million under our revolving

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credit facility for the acquisition of Cineflex. We subsequently used $15.0 million to repay a portion of this borrowing. During the first nine months of 2007, we received $812 thousand in proceeds from the exercise of stock options and recorded a tax benefit of $182 thousand related to the exercise of non-qualified stock options. We also used $69 thousand to fund debt issuance costs associated with the amendment of our credit agreement.

        Net cash provided by financing activities was $152 thousand for the nine months ended September 30, 2006. During the first nine months of 2006, we borrowed and subsequently repaid $8.0 million under our revolving credit facility, and we also received $105 thousand in proceeds from the exercise of stock options and recorded a tax benefit of $47 thousand related to the exercise of non-qualified stock options.

        With our existing cash balance, anticipated cash flows from operations and available borrowings under our revolving credit facility, management believes that Axsys has sufficient liquidity to finance its operations, capital expenditures and working capital requirements for the foreseeable future, including at least the next twelve months.

Commitments and Contingencies

        During the second quarter of 2007, as part of the sale-leasebacks discussed in Note 10 of this quarterly report, we entered into lease agreements that will have a material impact on the contractual obligations table presented in our most recent Form 10-K.

Backlog

        A substantial portion of Axsys' business is of a build-to-order nature requiring various engineering, manufacturing, testing and other processes to be performed prior to shipment. As a result, Axsys generally has a significant backlog of orders to be shipped. Axsys ended the first nine months of 2007 with a backlog from continuing operations of $138.5 million, compared to a backlog from continuing operations of $100.2 million at September 30, 2006, an increase of $38.3 million, or 38.2%. We believe that a substantial portion of our backlog of orders at September 29, 2007 will be shipped over the next twelve months. However, approximately 17.5% of our current backlog from continuing operations will be shipped in the fourth quarter of 2008 and beyond.

Recent Accounting Pronouncements

        In February 2007, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value Option for Financial Assets and Liabilities, Including an amendment of FASB Statement No. 115", ("SFAS 159"). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective as of the beginning of fiscal 2008. We have not yet assessed the effect, if any, that adoption of SFAS 159 will have on its results of operations and financial position. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements", ("SFAS 157"). This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS 157 provides a common fair value hierarchy for companies to follow in determining fair value measurements in the preparation of financial statements and expands disclosure requirements relating to how such fair value measurements were developed. SFAS157 clarifies the principle that fair value should be based on the assumptions that the marketplace would use when pricing an asset or liability, rather than company specific data. We are currently assessing the impact that SFAS 157 will have on its results of operations and financial position.

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Forward-Looking Statements

        This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. One can identify these forward-looking statements by the use of the words such as "expect," "anticipate," "plan," "may," "will," "estimate" or other similar expressions. One should understand that many factors could cause actual results to differ from those expressed or implied in the forward-looking statements. These factors include those discussed below as well as inaccurate assumptions. We caution the reader that this list of factors may not be exhaustive. Because these forward-looking statements involve risks and uncertainties, you should be aware that there are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by these forward-looking statements including, but not limited to:

•

our dependence on sales to the U.S. federal government and Raytheon;

•

changes to U.S. federal government spending priorities;

•

our ability to continue to contract with the federal government or Department of Defense;

•

our ability to comply with complex procurement laws and regulations;

•

our ability to implement effective business plans in the industries in which we operate;

•

our ability to adapt to technological change;

•

our ability to compete in the industries in which we operate;

•

the potential for our backlog to be reduced or cancelled;

•

the risks of doing business internationally;

•

our ability to implement our acquisition strategy and integrate our acquired companies successfully, including the recent acquisition of Cineflex;

•

the timely delivery of materials to us by our suppliers;

•

our ability to manage costs under our fixed-price contracts effectively;

•

our ability to attract and retain qualified personnel;

•

the ability to protect our intellectual property rights;

•

fluctuations in workers' compensation and health care costs for our employees;

•

our ability to comply with environmental, health and safety laws and regulations;

•

our ability to maintain and upgrade our manufacturing capabilities to stay competitive;

•

our ability to comply with restrictive covenants under our revolving credit facility;

•

our ability to maintain security clearances for classified government systems; and

•

our ability to sell our Distributed Products bearings business in a timely manner and on commercially acceptable terms, if at all.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Axsys' market risk sensitive instruments do not subject it to material risk exposures. On April 13, 2007, in connection with the acquisition of Cineflex, we borrowed $25.0 million under our revolving credit facility to fund a portion of the purchase price. We have repaid $15.0 million of the advance, leaving $10.0 million outstanding as of September 29, 2007. The weighted-average interest rate was 6.45% on these borrowings. Our financial results may be affected by changes in short-term interest rates on our borrowings. A hypothetical 100 basis point increase in interest rates, for example, would have resulted in an increase in interest expense of approximately $28 thousand for the three months ended September 29, 2007 and $67 thousand for the nine months ended September 29, 2007. Our revolving credit facility remains available through May 2012, subject to optional prepayment in accordance with its terms. We may elect to have any borrowing under the revolving credit facility bear interest either at the bank's prime rate or the LIBOR rate plus a margin of 100 to 200 basis points, depending on our consolidated funded debt-to-consolidated EBITDA ratio. We have the option of selecting the 1-month, 2-month, 3-month or 6-month LIBOR rate. Up to $3.0 million of the revolving

20

credit facility may be utilized to issue letters of credit. As of September 29, 2007, $900 thousand of the revolving credit facility was also utilized for outstanding letters of credit.

        In September 2007, we signed a multi-year, fixed-price, Euro-denominated sales contract valued at €4.0 million. We will begin reporting revenue on this contract in the fourth quarter of 2007, based on the percentage of completion accounting method. We anticipate receiving Euro cash payments under this contract between April 2008 and April 2010. This contract exposes us to foreign currency fluctuations, which could adversely impact the revenues and cash flows under this contract. We are currently evaluating hedging strategies to mitigate this risk.

Item 4.    CONTROLS AND PROCEDURES

        As of September 29, 2007, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of Axsys' disclosure controls and procedures. Our principal executive officer and principal financial officer concluded, based on their review, that Axsys' disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), were, as of the end of the period covered by this quarterly report, effective to ensure that information required to be disclosed by Axsys in reports it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

        During the third quarter of 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.

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Part II    OTHER INFORMATION

Item 6.    EXHIBITS

10.1	Letter Agreement between Stephen W. Bershad and Axsys Technologies, Inc. extending the term of the initial period of Mr. Bershad's Employment Agreement.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Executive Officer
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Financial Officer
32.1	Certification pursuant to 18 U.S.C. Section 1350—Chief Executive Officer
32.2	Certification pursuant to 18 U.S.C. Section 1350—Chief Financial Officer

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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 thereto duly authorized.

Date: October 24, 2007	AXSYS TECHNOLOGIES, INC.
	By:	/s/  STEPHEN W. BERSHAD      Stephen W. Bershad Chairman of the Board of Directors and Chief Executive Officer
		/s/  DAVID A. ALMEIDA      David A. Almeida Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

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EXHIBITS INDEX

Exhibit Number	Description
10.1	Letter Agreement between Stephen W. Bershad and Axsys Technologies, Inc. extending the term of the initial period of Mr. Bershad's Employment Agreement.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Executive Officer
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Chief Financial Officer
32.1	Certification pursuant to 18 U.S.C. Section 1350—Chief Executive Officer
32.2	Certification pursuant to 18 U.S.C. Section 1350—Chief Financial Officer

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QuickLinks

AXSYS TECHNOLOGIES, INC. INDEX
AXSYS TECHNOLOGIES, INC. Consolidated Balance Sheets (Dollars in thousands, except share and per share data)
AXSYS TECHNOLOGIES, INC. Consolidated Statements of Operations (Dollars in thousands, except share and per share data—Unaudited)
AXSYS TECHNOLOGIES, INC. Consolidated Statements of Cash Flow (Dollars in thousands—Unaudited)
AXSYS TECHNOLOGIES, INC. Consolidated Statements of Shareholders' Equity For the Nine Months Ended September 29, 2007 and September 30, 2006 (Dollars in thousands—Unaudited)
AXSYS TECHNOLOGIES, INC. Notes to Consolidated Financial Statements (Dollars in thousands, except share and per share data—Unaudited)

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES

Item 6. EXHIBITS

SIGNATURES
EXHIBITS INDEX