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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 26, 2001
Commission File Number 0-27414
REMEC, INC.
(Exact name of registrant as specified in its charter)
| CALIFORNIA (State of other jurisdiction of incorporation or organization) | 95-3814301 I.R.S. Employer Identification Number | |
9404 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA (Address of principal executive offices) | 92123 (Zip Code) |
(858) 560-1301
(Registrant's telephone number, including area code)
Indicate by check 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 month (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
Indicate number of shares outstanding of each of the issuer's classes of common stock, at the latest practicable date:
| Class | Outstanding as of: October 26, 2001 | |
|---|---|---|
| Common shares, $.01 par value | 44,998,691 |
REMEC, Inc.
Form 10-Q
For The Quarterly Period Ended October 26, 2001
| Index | | Page No. | ||
|---|---|---|---|---|
| PART I | FINANCIAL INFORMATION | |||
| Item 1. | Condensed Consolidated (unaudited) Financial Statements: | |||
| Condensed Consolidated Balance Sheets | 3 | |||
| Condensed Consolidated Statements of Operations | 4 | |||
| Condensed Consolidated Statements of Cash Flows | 5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||
PART II | OTHER INFORMATION | |||
| Item 1. | Legal Proceedings | 15 | ||
| Item 3. | Qualitative and Quantitative Disclosures About Market Risk | 15 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||
SIGNATURES | 17 | |||
2
REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | October 26, 2001 | January 31, 2001 | ||||
|---|---|---|---|---|---|---|
| | (unaudited) | | ||||
| ASSETS | ||||||
| Cash and cash equivalents | $ | 105,683,000 | $ | 138,526,000 | ||
| Accounts receivable, net | 31,939,000 | 49,679,000 | ||||
| Inventories, net | 47,960,000 | 58,866,000 | ||||
| Deferred income taxes | 15,715,000 | 15,617,000 | ||||
| Other current assets | 4,885,000 | 3,535,000 | ||||
| Total current assets | 206,182,000 | 266,223,000 | ||||
Property, plant and equipment, net | 92,235,000 | 82,841,000 | ||||
| Restricted cash | 17,049,000 | 17,049,000 | ||||
| Intangible and other assets, net | 35,827,000 | 24,112,000 | ||||
| $ | 351,293,000 | $ | 390,225,000 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| Accounts payable | $ | 9,688,000 | $ | 19,948,000 | ||
| Accrued expenses and other current liabilities | 8,196,000 | 20,870,000 | ||||
| Total current liabilities | 17,884,000 | 40,818,000 | ||||
| Deferred income taxes and other long-term liabilities | 6,901,000 | 7,920,000 | ||||
Shareholders' equity | 326,508,000 | 341,487,000 | ||||
| $ | 351,293,000 | $ | 390,225,000 | |||
See accompanying notes.
3
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | Three months ended | Nine months ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | October 26, 2001 | October 27, 2000 | ||||||||
| Net sales | $ | 52,472,000 | $ | 78,838,000 | $ | 171,786,000 | $ | 198,442,000 | ||||
| Cost of sales | 45,111,000 | 56,281,000 | 153,381,000 | 143,658,000 | ||||||||
| Gross profit | 7,361,000 | 22,557,000 | 18,405,000 | 54,784,000 | ||||||||
Operating expenses: | ||||||||||||
| Selling, general and administrative | 12,919,000 | 12,548,000 | 37,413,000 | 32,784,000 | ||||||||
| Research and development | 6,493,000 | 4,785,000 | 19,241,000 | 13,309,000 | ||||||||
| Total operating expenses | 19,412,000 | 17,333,000 | 56,654,000 | 46,093,000 | ||||||||
| Income (loss) from operations | (12,051,000 | ) | 5,224,000 | (38,249,000 | ) | 8,691,000 | ||||||
Write down of investment | — | — | (9,400,000 | ) | — | |||||||
| Gain on sale of subsidiary | — | — | 7,614,000 | — | ||||||||
| Interest income and other, net | 1,010,000 | 2,638,000 | 4,467,000 | 6,909,000 | ||||||||
| Income (loss) before provision (credit) for income taxes | (11,041,000 | ) | 7,862,000 | (35,568,000 | ) | 15,600,000 | ||||||
Provision (credit) for income taxes | (4,796,000 | ) | 2,863,000 | (13,900,000 | ) | 6,033,000 | ||||||
| Net income (loss) | $ | (6,245,000 | ) | $ | 4,999,000 | $ | (21,668,000 | ) | $ | 9,567,000 | ||
Earnings (loss) per share: | ||||||||||||
| Basic | $ | (0.14 | ) | $ | 0.11 | $ | (0.48 | ) | $ | 0.22 | ||
| Diluted | $ | (0.14 | ) | $ | 0.11 | $ | (0.48 | ) | $ | 0.21 | ||
Shares used in computing earnings (loss) per share: | ||||||||||||
| Basic | 44,980,000 | 44,322,000 | 44,834,000 | 43,043,000 | ||||||||
| Diluted | 44,980,000 | 46,636,000 | 44,834,000 | 45,379,000 | ||||||||
See accompanying notes.
4
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Nine months ended | |||||||
|---|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | ||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (21,668,000 | ) | $ | 9,567,000 | |||
| Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: | ||||||||
| Depreciation and amortization | 14,912,000 | 11,362,000 | ||||||
| Write down of investment | 9,400,000 | — | ||||||
| Gain on sale of subsidiary | (7,614,000 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 17,263,000 | (12,459,000 | ) | |||||
| Inventories | 9,075,000 | (14,878,000 | ) | |||||
| Prepaid expenses and other current assets | (1,392,000 | ) | (1,853,000 | ) | ||||
| Accounts payable | (10,805,000 | ) | 8,470,000 | |||||
| Accrued expenses, deferred income taxes and other long-term liabilities | (15,628,000 | ) | 12,029,000 | |||||
| Net cash (used) provided by operating activities | (6,457,000 | ) | 12,238,000 | |||||
INVESTING ACTIVITIES | ||||||||
| Additions to property, plant and equipment | (16,037,000 | ) | (24,027,000 | ) | ||||
| Payment for acquisitions, net of cash acquired | (27,944,000 | ) | — | |||||
| Proceeds from sale of subsidiary | 13,782,000 | — | ||||||
| Other assets | 3,467,000 | (15,982,000 | ) | |||||
| Net cash used by investing activities | (26,732,000 | ) | (40,009,000 | ) | ||||
FINANCING ACTIVITIES | ||||||||
| Repayments on credit facilities and long-term debt | (2,204,000 | ) | (5,277,000 | ) | ||||
| Proceeds from sale of common stock | 2,550,000 | 135,243,000 | ||||||
| Net cash (used) provided by financing activities | 346,000 | 129,966,000 | ||||||
Effect of exchange rate changes on cash | — | (247,000 | ) | |||||
| Increase (decrease) in cash and cash equivalents | (32,843,000 | ) | 101,948,000 | |||||
| Cash and cash equivalents at beginning of period | 138,526,000 | 34,836,000 | ||||||
| Cash and cash equivalents at end of period | $ | 105,683,000 | $ | 136,784,000 | ||||
See accompanying notes
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Quarterly Financial Statements
The interim condensed consolidated financial statements included herein have been prepared by REMEC, Inc. (the "Company" or "REMEC") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, the management of REMEC believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 31, 2001, included in REMEC's Annual Report on Form 10-K. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of REMEC as of October 26, 2001, and the results of its operations for the three and nine month periods ended October 26, 2001, and October 27, 2000. The results of operations for the interim period ended October 26, 2001, are not necessarily indicative of the results which may be reported for any other interim period or for the entire fiscal year.
The statements in this report on Form 10-Q that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially due to a variety of factors, including REMEC's success in penetrating the commercial wireless market, risks associated with the cancellation or reduction of orders by significant commercial or defense customers, trends in the commercial wireless and defense markets, risks of cost overruns and product nonperformance and other factors and considerations described in REMEC's Annual Report on Form 10-K, and the other documents REMEC files from time to time with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. REMEC undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, other than as required by applicable law, that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
2. Earnings Per Share
REMEC calculates earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed using the weighted average shares outstanding for each period presented. Diluted earnings per share is computed using the weighted average shares outstanding plus potentially dilutive common shares using the treasury stock method at the average market price during the reporting period. The calculation of net income per share reflects the historical information for REMEC and its acquired subsidiaries and the conversion of the common shares of those companies acquired in pooling of interests transactions into REMEC shares as stipulated in the respective
6
acquisition agreements. The following table reconciles the shares used in computing basic and diluted earnings per share for the periods indicated:
| | Three months ended | Nine months ended | ||||||
|---|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | October 26, 2001 | October 27, 2000 | ||||
| Weighted average common shares Outstanding used in basic earnings per share calculation | 44,980,000 | 44,322,000 | 44,834,000 | 43,043,000 | ||||
| Effect of dilutive stock options | — | 2,314,000 | — | 2,336,000 | ||||
| Shares used in diluted Earnings per share calculation | 44,980,000 | 46,636,000 | 44,834,000 | 45,379,000 | ||||
Dilutive securities may include options, warrants, and preferred stock, as if converted, and restricted stock subject to vesting. Potentially dilutive securities (consisting of stock options) totaling 591,000 and 608,000 shares for the three and nine months ended October 26, 2001, respectively, were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.
3. Inventories
Inventories consist of the following:
| | October 26, 2001 | January 31, 2001 | ||||
|---|---|---|---|---|---|---|
| Raw materials | $ | 34,550,000 | $ | 35,227,000 | ||
| Work in progress | 13,410,000 | 23,639,000 | ||||
| $ | 47,960,000 | $ | 58,866,000 | |||
Inventories related to contracts with prime contractors to the U.S. Government included capitalized general and administrative expenses of $1,175,000 and $1,897,000 at October 26, 2001, and January 31, 2001, respectively. REMEC had a reserve for obsolete and unusable inventory of $17,285,000 and $9,963,000 as of October 26, 2001, and January 31, 2001, respectively.
4. Comprehensive Income (Loss)
Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income (loss) and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income (loss).
The components of comprehensive income (loss), net of tax, are as follows:
| | Three months ended | Nine months ended | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | October 26, 2001 | October 27, 2000 | |||||||||
| Net income (loss) | $ | (6,245,000 | ) | $ | 4,999,000 | $ | (21,668,000 | ) | $ | 9,567,000 | |||
| Change in net unrealized loss on investment | — | — | 3,665,000 | ||||||||||
| Foreign currency translation adjustment | 95,000 | (272,000 | ) | 475,000 | (980,000 | ) | |||||||
| Comprehensive income (loss) | $ | (6,150,000 | ) | $ | 4,727,000 | $ | (17,528,000 | ) | $ | 8,587,000 | |||
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5. Transactions
In February 2001, REMEC sold substantially all of the operating assets and operations of its wholly owned subsidiary Humphrey, Inc. in exchange for cash consideration of $13.8 million.
In March 2001, REMEC acquired substantially all of the assets and assumed all of the obligations of Pacific Microwave Corporation ("PMC"), a privately held microwave electronics manufacturing company located in the Philippines, in exchange for cash consideration of approximately $23.1 million. The acquisition has been accounted for as a purchase, and accordingly, the total purchase price has been allocated to the acquired assets and liabilities assumed at their estimated fair values in accordance with the provisions of Accounting Principles Board opinion ("APB") No. 16. The estimated excess of the purchase price over the net assets acquired of approximately $17.6 million is being carried as an intangible asset, and will be amortized over 10 years. REMEC's consolidated financial statements include the results of PMC from March 2001 forward.
The following unaudited pro forma summary presents the consolidated results of operations of the Company as if the acquisition of PMC and the disposition of Humphrey, Inc. had occurred on February 1, 2000. The pro forma condensed consolidated results of operations would be as follows:
| | Nine months ended | ||||||
|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | |||||
| Total revenue | $ | 171,437,000 | $ | 195,204,000 | |||
| Net income (loss) | $ | (21,856,000 | ) | $ | 7,670,000 | ||
| Income (loss) per share: | |||||||
| Basic | $ | (.49 | ) | $ | .18 | ||
| Diluted | $ | (.49 | ) | $ | .17 | ||
In June 2001, REMEC acquired substantially all of the assets and assumed all of the obligations of Multipoint Radio, Inc. ("MRI"), a privately held millimeter wave radio technology company located in Sacramento, California, in exchange for cash consideration of approximately $3.5 million. The acquisition has been accounted for as a purchase, and accordingly, the total purchase price has been allocated to the acquired assets and liabilities assumed at their estimated fair values in accordance with the provisions of Accounting Principles Board opinion ("APB") No. 16. The estimated excess of the purchase price over the net assets acquired of approximately $2.5 million is being carried as an intangible asset, and will be amortized over 10 years. The pro forma results of operations of REMEC and MRI assuming that MRI was acquired on February 1, 2000 would not be materially different than reported results. REMEC's consolidated financial statements include the results of MRI from July 2001 forward.
6. Information by Segment
During fiscal 2001, the Company realigned its operating structure into four distinct reportable segments, Broadband Wireless, Mobile Wireless, Defense Products and Manufacturing. The Company's new reportable segments have been determined based on the nature of the products offered to customers or the nature of their function within the organization. The Company evaluates performance and allocates resources based on profit or loss from operations before interest, other income and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies included in REMEC's Annual Report on Form 10-K. Although the Company had previously operated in one reportable segment, prior period operating results have been presented on a similar segmented basis for comparison purposes. Additionally, commencing with February 1, 2001, the operating results of the filter products business line of our REMEC Wireless subsidiary have been incorporated in the Mobile Wireless Group.
8
Information by Segment Data—Continued
The components of segment data are as follows:
| | Three months ended | Nine months ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | October 26, 2001 | October 27, 2000 | ||||||||||
| Net sales: | ||||||||||||||
| Broadband Wireless | $ | 10,894,000 | $ | 28,168,000 | $ | 46,351,000 | $ | 78,045,000 | ||||||
| Mobile Wireless | 18,073,000 | 20,223,000 | 55,702,000 | 50,494,000 | ||||||||||
| Defense Products | 15,940,000 | 17,400,000 | 46,621,000 | 50,331,000 | ||||||||||
| Manufacturing | 14,436,000 | 14,573,000 | 49,217,000 | 38,711,000 | ||||||||||
| All other | 2,749,000 | 13,172,000 | 10,102,000 | 22,049,000 | ||||||||||
| Intersegment revenues | (9,620,000 | ) | (14,698,000 | ) | (36,207,000 | ) | (41,188,000 | ) | ||||||
| Consolidated net sales | $ | 52,472,000 | $ | 78,838,000 | $ | 171,786,000 | $ | 198,442,000 | ||||||
| Income (loss) from operations: | ||||||||||||||
| Broadband Wireless | $ | (4,541,000 | ) | $ | (1,160,000 | ) | $ | (12,133,000 | ) | $ | (1,953,000 | ) | ||
| Mobile Wireless | (3,779,000 | ) | 960,000 | (17,350,000 | ) | (1,184,000 | ) | |||||||
| Defense Products | 1,105,000 | 1,482,000 | 2,992,000 | 5,120,000 | ||||||||||
| Manufacturing | (731,000 | ) | 769,000 | (921,000 | ) | 3,568,000 | ||||||||
| All other | (4,105,000 | ) | 3,173,000 | (10,837,000 | ) | 3,140,000 | ||||||||
| Consolidated income (loss) from operations | $ | (12,051,000 | ) | $ | 5,224,000 | $ | (38,249,000 | ) | $ | 8,691,000 | ||||
| Depreciation and amortization: | ||||||||||||||
| Broadband Wireless | $ | 1,243,000 | $ | 1,452,000 | $ | 3,670,000 | $ | 4,088,000 | ||||||
| Mobile Wireless | 750,000 | 491,000 | 2,099,000 | 1,543,000 | ||||||||||
| Defense Products | 675,000 | 728,000 | 2,111,000 | 2,164,000 | ||||||||||
| Manufacturing | 1,175,000 | 460,000 | 3,299,000 | 1,337,000 | ||||||||||
| All other | 1,257,000 | 869,000 | 3,733,000 | 2,230,000 | ||||||||||
| Consolidated depreciation and amortization | $ | 5,100,000 | $ | 4,000,000 | $ | 14,912,000 | $ | 11,362,000 | ||||||
| | October 26, 2001 | January 31, 2001 | |||||
|---|---|---|---|---|---|---|---|
| Identifiable assets: | |||||||
| Broadband Wireless | $ | 41,373,000 | $ | 61,390,000 | |||
| Mobile Wireless | 49,824,000 | 51,874,000 | |||||
| Defense Products | 30,421,000 | 35,492,000 | |||||
| Manufacturing | 59,003,000 | 37,238,000 | |||||
| All other assets | 170,672,000 | 204,231,000 | |||||
| Consolidated identifiable assets | $ | 351,293,000 | $ | 390,225,000 | |||
7. Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 137. "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133". The statement defers for one year the effective date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". The FASB issued SFAS No. 133 in June 1998, which established accounting and reporting standards for derivative instruments
9
on the Company's balance sheet at fair value. As of October 26, 2001, the Company did not hold any derivative instruments or conduct any hedging activities. The adoption of SFAS No.'s 137 and 133 did not have any significant impact on the financial position or results of operations of REMEC.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141. Business Combinations ("FAS 141") and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 require all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt FAS 142 effective February 1, 2002. The Company is currently evaluating the effect that adoption of the provisions of FAS 142 that are effective February 1, 2002 will have on its results of operations and financial position.
8. Subsequent Event
Subsequent to October 26, 2001, REMEC acquired ADC Mersun OY ("Solitra") in Oulu, Finland in exchange for cash consideration of $50.1 million.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our business is divided into four groups: Broadband Wireless, Mobile Wireless, Defense Products and Manufacturing.
The Broadband Wireless Group develops and manufactures microwave products for fixed access wireless communications equipment integrated into wireless networks for high speed voice, video, data and internet services and includes our subsidiaries, REMEC Magnum, REMEC Wireless, Multipoint Radio, Inc ("MRI") (acquired in June 2001) and REMEC CSH. The Mobile Wireless Group develops and manufactures integrated RF products that improve the performance and cost effectiveness of mobile wireless communications equipment. The subsidiaries within this group include REMEC Airtech, REMEC WACOM and REMEC Q-bit. The Defense Products Group provides a broad spectrum of RF, microwave and guidance products for systems integrated by prime contractors in military and space applications. This group currently consists only of REMEC Microwave. The Manufacturing Group provides high volume production of microwave products, including test and critical hybrid circuits, primarily to the other product groups. Subsidiaries or divisions within this group include REMEC Veritek, REMEC Costa Rica, Pacific Microwave Corporation and the REMEC Metal Fabrication Center. Not included in the above groups are certain non-operating subsidiaries of REMEC and Nanowave, Inc., a majority owned subsidiary which designs and produces custom monolithic integrated circuits, critical modules and integrated subassemblies for fiber optic and broadband wireless communication systems. Additionally, commencing with February 1, 2001, the operating results of the filter products business line of our REMEC Wireless subsidiary have been incorporated in the Mobile Wireless Group.
Results of Operations as a Percentage of Net Sales
The following table sets forth, as a percentage of total net sales, certain consolidated statement of income data for the periods indicated.
| | Three months ended | Nine months ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | October 26, 2001 | October 27, 2000 | October 26, 2001 | October 27, 2000 | |||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
| Cost of sales | 86.0 | 71.4 | 89.3 | 72.4 | |||||||
| Gross profit | 14.0 | 28.6 | 10.7 | 27.6 | |||||||
| Operating expenses: | |||||||||||
| Selling, general & administrative | 24.6 | 15.9 | 21.8 | 16.5 | |||||||
| Research and development | 12.4 | 6.1 | 11.2 | 6.7 | |||||||
| Total operating expenses | 37.0 | 22.0 | 33.0 | 23.2 | |||||||
| Income (loss) from operations | (23.0 | ) | 6.6 | (22.3 | ) | 4.4 | |||||
| Write down of investment | — | — | (5.5 | ) | — | ||||||
| Gain on sale of subsidiary | — | — | 4.4 | — | |||||||
| Interest income and other, net | 2.0 | 3.3 | 2.7 | 3.4 | |||||||
| Income (loss) before income taxes | (21.0 | ) | 9.9 | (20.7 | ) | 7.8 | |||||
| Provision (credit) for income taxes | (9.1 | ) | 3.6 | (8.1 | ) | 3.0 | |||||
| Net income (loss) | (11.9 | )% | 6.3 | % | (12.6 | )% | 4.8 | % | |||
11
Results of Operations
Net Sales and Gross Profit. Net sales were $52.5 million and $171.8 million for the three and nine months ended October 26, 2001, respectively. Sales for the third quarter of fiscal 2002 declined $26.4 million, or 33.4%, from their level during the comparable prior year period primarily as a result of decreased demand from the telecommunications equipment sector. Additionally, the sale of our Humphrey subsidiary in February 2001 resulted in a reduction of defense products sales (Humphrey contributed sales of $3.4 million during the third quarter of the prior fiscal year). The above were also primarily responsible for the $26.7 million, or 13.4%, decline in sales for the nine months ended October 26, 2001, from their year ago levels.
Gross profit was $7.4 million and $18.4 million for the three and nine months ended October 26, 2001, respectively, representing decreases of $15.2 million (67.4%) and $36.4 million (66.4%), from the comparable prior year periods. Consolidated gross margin as a percentage of sales decreased to 14.0% and 10.7% for the three and nine months ended October 26, 2001, respectively, from 28.6% and 27.6% for the comparable prior year periods. The decline in both overall gross profits and gross margins as a percentage of sales during the third quarter reflects the negative impact on overhead absorption resulting from declining production volume. Declining production volume and a $7.8 million increase in our reserves for potential inventory obsolescence were primarily responsible for the decline in gross margins on a year to date basis.
Results within each of our business segments were as follows (unless indicated otherwise, segment sales figures include intersegment revenues):
Broadband Wireless Group. Sales were $10.9 million and $46.4 million for the three and nine months ended October 26, 2001, representing decreases of $17.3 million (61.3%) and $31.7 million (40.6%), respectively, from the comparable prior year periods. Effective February 1, 2001, the operating results of the filter products business of REMEC Wireless have been incorporated into the results of the Mobile Wireless segment. Filter product sales amounted to approximately $12.3 million in the current fiscal year and the removal of filter product sales from the group and the overall decline in industry demand for radio products account for the majority of the sales decrease for this segment. Gross margin as a percentage of sales decreased to (8.8%) and 7.3% for the three and nine months ended October 26, 2001, respectively, from 20.7% and 22.4% during the comparable prior year periods. As discussed above, the decline in gross margins reflects the negative impact on overhead absorption associated with reduced production volumes. Year to date margins have been adversely affected by both the negative impact of declining production volume and charges of approximately $2.5 million related to increasing our reserves for potential inventory obsolescence.
Mobile Wireless Group. Sales were $18.1 million and $55.7 million for the three and nine months ended October 26, 2001, respectively, as compared to sales of $20.2 and $50.5 for the comparable prior year periods. As discussed above, results for the current quarter and current fiscal year include filter products sales of $3.4 million and $12.3 million, respectively. The sales decline recorded during the third quarter reflects diminished orders for amplifier products for the mobile wireless communications market which, more than offset the additional filter products sales included in the current year results. On a year to date basis, the increased sales revenue attributable to filter product sales more than offset sales declines elsewhere. Gross margin as a percentage of sales increased to 24.6% from 20.7% for the three months ended October 26, 2001, reflecting improvements in the mix of products sold. On a year to date basis, gross margins were 2.7% as compared to 17.0% for the comparable prior year period. Year to date results reflect the impact of charges totaling approximately $5.3 million related to increasing our reserves for potential inventory obsolescence.
Defense Products Group. Sales were $15.9 million and $46.6 million for the three and nine months ended October 26, 2001, representing decreases of $1.5 million (8.4%) and $3.7 million (7.4%),
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respectively, from the comparable prior year periods. Gross margin as a percentage of sales declined to 22.8% and 22.2% for the three and nine months ended October 26, 2001, respectively, from 26.3% and 26.7% during the comparable prior year periods. The decrease in sales revenues and the decline in our gross margins as a percentage of sales reflect the absence of our Humphrey subsidiary, which as discussed above, was sold during February 2001.
Manufacturing Group. Sales to external customers were $8.1 million and $24.9 million for the three and nine months ended October 26, 2001, representing increases of $3.0 million (57.6%) and $11.0 million (79.1%), respectively, over the prior year periods. The increase in sales is primarily due to approximately $3.0 million of current fiscal year sales from Pacific Microwave Corporation and an increase in demand for consignment and turnkey-manufacturing services from the remainder of the Manufacturing Group. Pacific Microwave Corporation was acquired during the first quarter of fiscal 2002 and, as such, the prior year results do not include any sales from this unit. Gross margin as a percentage of sales decreased to 3.6% and 7.7% for the three and nine months ended October 26, 2001, respectively, from 11.1% and 11.4% during the comparable prior year periods. The decline in gross margin is a result of the change in the mix of products sold by the Group. The company has reduced its manufacturing labor costs at its foreign facilities to address the continuing decline in intersegment sales which has resulted from falling demand from our commercial products groups. We anticipate that such measures will result in more cost efficient operations in the future.
Other Sales. Other sales were $2.7 million and $10.1 million for the three and nine months October 26, 2001, representing decreases of $10.4 million (79.1%) and $12.0 million (54.2%), respectively, from the comparable prior year periods. The decline in Other Sales is primarily a result of decreased demand for microwave modules for the fiber optic market. Gross margin as a percentage of sales decreased to a negative 10.1% and 4.0% for the three and nine months ended October 26, 2001, respectively, as a result of the negative impact on overhead absorption as a result of declining sales volume.
Selling, General and Administrative Expenses ("SG&A"). Selling, general and administrative expenses were $12.9 million and $37.4 million for the three and nine months ended October 26, 2001, respectively, as compared to $12.5 million and $32.8 million during the comparable prior year periods. The increase in SG&A is primarily attributable to a combination of factors: An increase in payroll and employment benefits related costs, additional costs arising at Pacific Microwave Corporation, including goodwill amortization costs of approximately $1.2 million, and non-recurring expenditures of approximately $.4 million related to improvements in REMEC's financial reporting and budgeting systems. SG&A expenses as a percentage of sales increased to 24.6% and 21.8% (from 15.9% and 16.5%) for the three and nine months ended October 26, 2001, respectively, primarily as a result of the significant decline in REMEC's sales revenues.
Research and Development Expenses. Research and development expenses were $6.5 million and $19.2 million for the three and nine months ended October 26, 2001, respectively, as compared to $4.8 million and $13.3 million during the comparable prior year periods. As a percentage of net sales, research and development expenses increased to 12.4% and 11.2% (from 6.1% and 6.7%) for the three and nine months ended October 26, 2001, respectively. These expenditures are almost entirely attributable to our Broadband Wireless and Mobile Wireless Groups and reflect increased activity associated with new wireless communications product development. The year to date results also reflects charges totaling approximately $2.0 million recorded in connection with acquisitions.
Write down of Investment. During the first quarter of fiscal 2002, the Company recorded a $9.4 million charge to operations representing the write down of its investment in Allgon AB common stock, which had been acquired in conjunction with the proposed merger with Allgon. The carrying value of these shares was written down to its market value at the end of the first quarter. Subsequent
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increases and decreases are being recorded as unrealized gains and losses in other comprehensive income.
Gain on Sale of Subsidiary. REMEC's results of operations for the first quarter of fiscal 2002 include the gain from the sale of our Humphrey, Inc. subsidiary.
Interest Income and other, net. Interest income and other, net was $1.0 million and $4.5 million for the three and nine months ended October 26, 2001, respectively, as compared to $2.6 million and $6.9 million during the comparable prior year periods. The decrease in interest income was due to the combination of both a decline in the amount of surplus funds available for investment and a reduction of the yields from our investments as short term interest rates declined during the course of the current fiscal year.
Provision (Benefit) for Income Taxes. The Company recorded a benefit for income taxes of $13.9 million for the nine months ended October 26, 2001, as compared to income tax expense of $6.0 million in the comparable prior year period. The credit for income taxes recorded during the current fiscal year reflects the recognition of the tax benefit associated with the Company's domestic net operating losses.
Liquidity and capital resources
At October 26, 2001, REMEC had $188.3 million of working capital, which included cash and cash equivalents totaling $105.7 million. REMEC also has a $12.0 million revolving working capital line of credit with a bank. The borrowing rate under this credit facility is based on a fixed spread over the London Interbank Offered Rate (LIBOR). This credit facility terminates on July 1, 2002. As of October 26, 2001, there were no borrowings outstanding under this credit facility.
During the nine months ended October 26, 2001, operations used cash of approximately $6.5 million. The negative operating cash flow during this period was principally the result of the Company's $5.0 million loss (net of $16.7 million of non-cash adjustments) and cash used to fund working capital requirements.
During the nine months ended October 26, 2001, $26.7 million was used in investing activities consisting of $16.0 million in capital expenditures and a net cash outflow of approximately $14.2 million resulting from separate transactions involving the purchases of PMC (a privately held microwave electronics manufacturing company located in the Philippines) and MRI (a privately held millimeter wave radio technology company located in Sacramento, California), and from the sale of the operating assets and operations of the Company's Humphrey, Inc. subsidiary.
Financing activities during the nine-month period ended October 26, 2001, consisted of the repayment of bank and other debts totaling $2.2 million assumed in the acquisition of PMC and the proceeds of $2.6 million arising from the issuance of common stock by the company under its Employee Stock Purchase Plan and from stock option exercises.
Subsequent to October 26, 2001, REMEC acquired ADC Mersum OY ("Solitra") in Oulu, Finland in exchange for cash consideration of $50.1 million.
Our future capital requirements will depend upon many factors, including the nature and timing of the growth in orders by OEM customers, the expansion of manufacturing to meet sales requirements, the progress of our research and development efforts, expansion of our marketing and sales efforts, and the status of competitive products. REMEC believes that available capital resources will be adequate to fund its operations for at least twelve months.
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Class Action Lawsuit. On April 19, 1999, a class action lawsuit was filed against REMEC, some of its officers and directors and the investment banking firms that served as the representatives of the underwriters of our public offering completed in February 1998. The lawsuit was filed by the law firm Milberg Weiss Bershad Hynes and Lerach and others in the United States District Court for the Southern District of California as counsel for Charles Vezzetti and all others similarly situated. The lawsuit alleges violations of the Securities Exchange Act of 1934 by us and the other defendants between December 1, 1997, and June 12, 1998. Specifically, the complaint alleges that REMEC made falsely positive statements which artificially inflated the price of REMEC stock prior to a secondary offering completed in February 1998, in which REMEC and some of its officers and directors sold stock, and that REMEC's stock price fell on a series of adverse disclosures in late May and early June 1998. The complaint in the lawsuit does not specify an amount of claimed damages. Since the lawsuit was filed, the underwriters have been dismissed without prejudice.
REMEC believes that the lawsuit is without merit and has been defending against it vigorously through a motion to dismiss and otherwise. On October 31, 2001, the Court granted REMEC's motion to dismiss the complaint, but gave the plaintiffs the opportunity to file an amended complaint. On December 7, 2001, at the parties' request, the Court signed an Order dismissing the case in its entirety with prejudice.
Other than the securities class action lawsuit described above, neither REMEC nor any of its subsidiaries is presently subject to any material litigation, nor to REMEC's knowledge, is such litigation threatened against REMEC or its subsidiaries, other than routine actions and administrative proceedings arising in the ordinary course of business, all of which collectively are not anticipated to have a material adverse effect on the business or financial condition of REMEC.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk. REMEC is exposed to changes in interest rates to the extent of its borrowings under its revolving working capital line of credit. At October 26, 2001, REMEC had no borrowings under this credit facility and, therefore, no exposure to interest rate movement on its debt. REMEC will also be affected by changes in interest rates in its investments in certain held-to-maturity securities. Under current REMEC policies, REMEC does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates in REMEC cash equivalent securities would not materially affect the fair value of these securities at October 26, 2001.
Foreign Currency Exchange Rate. REMEC's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. To a certain extent, foreign currency exchange rate movements also affect REMEC's competitive position, as exchange rate changes may affect business practices and/or pricing strategies on non-U.S. based competitors. The primary foreign currency risk exposure is related to U.S. dollar to British pound and U.S. dollar and British pound to Euro conversions. Considering both the anticipated cash flows from firm sales commitments and anticipated sales for the next quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected third quarter fiscal 2002 earnings or cash flows. This analysis is dependent on actual export sales during the next quarter occurring within 90% of budgeted forecasts. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects described above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S.
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dollar. In reality, some currencies may weaken while others may strengthen. REMEC reviews its position each month for expected currency exchange rate movements.
Item 6. Exhibits and Reports on Form 8-K
- (a)
- There were no exhibits attached herewith:
- (b)
- There were no reports on Form 8-K filed by the registrant during the quarter ended October 26, 2001.
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Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| REMEC, Inc. (Registrant) | |||
By: | /s/ Ronald E. Ragland Ronald E. Ragland Chairman and Chief Executive Officer | ||
By: | /s/ David L. Morash David L. Morash Chief Financial and Accounting Officer | ||
Date: | December 11, 2001 | ||
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REMEC, Inc. Form 10-Q For The Quarterly Period Ended October 26, 2001
PART I—FINANCIAL INFORMATION
REMEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
REMEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
REMEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II—OTHER INFORMATION
- Item 1. Legal Proceedings
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Item 6. Exhibits and Reports on Form 8-K