UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
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Commission File Number 000-02324
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AEROFLEX INCORPORATED
(Exact name of Registrant as specified in its Charter)
DELAWARE 11-1974412
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
35 South Service Road
Plainview, N.Y. 11803
(Address of principal executive offices) (Zip Code)
(516) 694-6700
(Registrant's telephone number, including area code)
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*Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
November 9, 2000 28,863,607 shares (excluding 2,194 shares held in treasury)
- --------------------------------------------------------------------------------
(Date) (Number of Shares)
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I: FINANCIAL INFORMATION
- ------ ---------------------
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and June 30, 2000 3-4
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended September 30, 2000 and 1999 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2000 and 1999 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999 13-17
PART II: OTHER INFORMATION
- ------- -----------------
ITEM 4 Submission of Matters to a Vote of Security Holders 18
ITEM 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
-2-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2000 2000
------------- --------
(Unaudited)
(In thousands)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 41,807 $ 54,710
Marketable securities 30,656 11,512
Accounts receivable, less allowance for
doubtful accounts of $514,000 and $509,000 41,784 51,086
Inventories 40,189 37,367
Deferred income taxes 5,386 5,317
Prepaid expenses and other current assets 3,808 2,814
-------- --------
Total current assets 163,630 162,806
Property, plant and equipment, net 54,439 52,222
Intangible assets acquired in connection with
the purchase of businesses, net 12,652 12,839
Cost in excess of fair value of net assets
of businesses acquired, net 13,468 13,380
Deferred income taxes 5,560 3,093
Other assets 4,613 4,367
-------- --------
Total assets $254,362 $248,707
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
-3-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, June 30,
2000 2000
------------- --------
(Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,643 $ 1,566
Accounts payable 8,941 9,489
Accrued expenses and other current liabilities 16,623 17,847
-------- --------
Total current liabilities 27,207 28,902
Long-term debt 12,915 12,983
Other long-term liabilities 5,014 4,890
-------- --------
Total liabilities 45,136 46,775
-------- --------
Stockholders' equity:
Preferred Stock, par value $.10 per share;
authorized 1,000,000 shares:
Series A Junior Participating Preferred
Stock, par value $.10 per share,
authorized 40,000; none issued - -
Common Stock, par value $.10 per share;
authorized 40,000,000 shares; issued
28,166,000 and 27,835,000 shares 2,817 2,783
Additional paid-in capital 192,291 190,168
Accumulated other comprehensive income 50 82
Retained earnings 14,082 8,979
-------- --------
209,240 202,012
Less: Treasury stock, at cost (2,000 and
13,000 shares) 14 80
-------- --------
Total stockholders' equity 209,226 201,932
-------- --------
Total liabilities and stockholders' equity $254,362 $248,707
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
-4-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
September 30,
------------------
2000 1999
------------ ---------------
(Unaudited)
(In thousands, except per share data)
Net sales $ 50,228 $ 42,072
Cost of sales 31,141 26,933
-------- --------
Gross profit 19,087 15,139
-------- --------
Selling, general and administrative costs 9,368 7,330
Research and development costs 2,965 2,430
-------- --------
12,333 9,760
-------- --------
Operating income 6,754 5,379
-------- --------
Other expense (income)
Interest expense 340 612
Other expense (income) (1,107) 262
-------- --------
Total other expense (income) (767) 874
-------- --------
Income before income taxes 7,521 4,505
Provision for income taxes 2,550 1,575
-------- --------
Income before cumulative effect
of a change in accounting 4,971 2,930
Cumulative effect of a change
in accounting, net of tax (Note 4) 132 -
-------- --------
Net income $ 5,103 $ 2,930
======== ========
Net income per common share (1):
Basic
Income before cumulative effect $.09 $.06
Cumulative effect of a change
in accounting - -
-------- --------
Net income $.09 $.06
======== ========
Diluted
Income before cumulative effect $.09 $.06
Cumulative effect of a change
in accounting - -
-------- --------
Net income $.09 $.06
======== ========
Weighted average number of
common shares outstanding:
Basic 56,064 46,464
======== ========
Diluted 59,466 49,704
======== ========
<FN>
(1) All share and per share data have been restated to reflect a 2-for-1 stock
split declared and payable in November 2000.
See notes to consolidated financial statements.
</FN>
-5-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
------------------
2000 1999
---- ----
(Unaudited)
(In thousands)
Cash Flows From Operating Activities:
Net income $ 5,103 $ 2,930
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,514 2,265
Amortization of deferred gain (242) (147)
Deferred income taxes (236) 8
Other, net 77 118
Change in operating assets and liabilities,
net of effects from purchase of
businesses:
Decrease (increase) in accounts receivable 9,456 (466)
Decrease (increase) in inventories (2,821) (690)
Decrease (increase) in prepaid expenses
and other assets (1,148) (963)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (1,733) (3,900)
Increase (decrease) in income taxes payable 2,745 1,487
------- --------
Net Cash Provided By Operating Activities 13,715 642
------- --------
Cash Flows From Investing Activities:
Payment for purchase of businesses, net of
cash acquired (271) -
Capital expenditures (3,896) (1,687)
Purchase of marketable securities (19,171) -
Other, net - 12
------- --------
Net Cash Used In Investing Activities (23,338) (1,675)
------- --------
Cash Flows From Financing Activities:
Borrowings under debt agreements 292 -
Debt repayments (283) (1,578)
Proceeds from the exercise of stock options
and warrants 921 805
Amounts paid for withholding taxes on stock
option exercises (4,979) (41)
Withholding taxes collected for stock option
exercises 769 40
------- --------
Net Cash Used In Financing Activities (3,280) (774)
------- --------
Net Increase (Decrease) In Cash
And Cash Equivalents (12,903) (1,807)
Cash And Cash Equivalents At Beginning Of Period 54,710 2,714
------- --------
Cash And Cash Equivalents At End Of Period $41,807 $ 907
======= ========
<FN>
See notes to consolidated financial statements.
</FN>
-6-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The consolidated balance sheet of Aeroflex Incorporated and Subsidiaries
("the Company") as of September 30, 2000 and the related consolidated
statements of earnings for the three months ended September 30, 2000 and
1999 and the consolidated statements of cash flows for the three months
ended September 30, 2000 and 1999 have been prepared by the Company and are
unaudited. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 2000 and
for all periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's June 30, 2000 annual report to shareholders. There have been no
changes of significant accounting policies since June 30, 2000. Certain
reclassifications have been made to previously reported financial
statements to conform to current classifications.
Results of operations for the three month periods are not necessarily
indicative of results of operations for the corresponding years.
2. Acquisition of Businesses
-------------------------
Amplicomm
---------
Effective September 7, 2000, Aeroflex Amplicomm, Inc. ("Amplicomm") was
formed as a wholly-owned subsidiary of the Company. On September 20, 2000,
Amplicomm acquired certain equipment and intellectual property from a third
party for approximately $300,000, entered into employment agreements with
this third party's former owners and issued 25% of the stock of Amplicomm
to them. Amplicomm designs and develops fiber optic amplifiers and
modulator drivers used by manufacturers of advanced fiber optic systems. On
a pro forma basis, had the Amplicomm acquisition taken place as of the
beginning of the periods presented, results of operations for those periods
would not have been materially affected.
Europtest
---------
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. The purchase
agreement also requires that the Company purchase the remaining 10% of
Europtest pro rata over a three-year period at prices determined based upon
net sales of Europtest products. In October 1999, the Company purchased an
additional 3.4% of Europtest's stock for approximately $54,000. Europtest
develops and sells specialized software-driven test equipment used
primarily in cellular, satellite and other communications applications. The
acquired company's net sales were approximately $1.9 million for the year
ended March 31, 1998. On a pro forma basis, had the Europtest acquisition
taken place as of the beginning of the periods presented, results of
operations for those periods would not have been materially affected. The
purchase price has been allocated to the assets acquired and liabilities
assumed based on their fair values.
-7-
3. Earnings Per Share
------------------
In accordance with Statement of Financial Accounting Standards No. 128
"Earnings Per Share", net income per common share ("Basic EPS") is computed
by dividing net income by the weighted average common shares outstanding.
Net income per common share, assuming dilution ("Diluted EPS") is computed
by dividing net income by the weighted average common shares outstanding
plus potential dilution from the exercise of stock options and warrants.
A reconciliation of the numerators and denominators of the Basic EPS and Diluted
EPS calculations is as follows:
Three Months
Ended September 30,
------------------
2000 1999
---- ----
(In thousands, except per share data)
Income before cumulative effect
of a change in accounting $ 4,971 $ 2,930
Cumulative effect of a change in
accounting, net of tax 132 -
------- -------
Net income $ 5,103 $ 2,930
======= =======
Computation of Adjusted Weighted
Average Shares Outstanding (1):
Weighted average shares outstanding 56,064 46,464
Add: Effect of dilutive options and
warrants outstanding 3,402 3,240
------- -------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 59,466 49,704
======= =======
Income per share - Basic (1):
Income before cumulative effect $.09 $.06
Cumulative effect of a change in
accounting - -
------- -------
Net income $.09 $.06
======= =======
Income per share - Diluted (1):
Income before cumulative effect $.09 $.06
Cumulative effect of a change in
accounting - -
------- -------
Net income $.09 $.06
======= =======
<FN>
(1) All share and per share data have been restated to reflect a 2-for-1 stock
split declared and payable in November 2000.
</FN>
4. Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities at their fair value. In certain circumstances changes in the
value of such derivatives may be required to be recorded as gains or
losses. The impact of this statement did not have a material effect on the
Company's consolidated financial statements. The cumulative effect of the
adoption of this accounting policy was a $132,000, net of tax, credit in
the quarter ended September 30, 2000 which represents the net of tax fair
value of certain interest rate swap agreements at July 1, 2000.
-8-
5. Comprehensive Income
--------------------
The net of tax components of comprehensive income for the three months
ended September 30, 2000 and 1999 are as follows:
Three Months
Ended September 30,
------------------
2000 1999
---- ----
Net income $ 5,103 $ 2,930
Unrealized gain on interest rate swap
agreement 60 -
Unrealized investment gain (46) -
Foreign currency translation adjustment (46) -
------- -------
Total comprehensive income $ 5,071 $ 2,930
======= =======
6. Bank Loan Agreements
--------------------
As of February 25, 1999, the Company replaced a previous agreement with a
revised revolving credit, term loan and mortgage agreement with two banks
which is secured by substantially all of the Company's assets not otherwise
encumbered. The agreement provided for a revolving credit line of $23.0
million, a term loan of $20.0 million and a mortgage on its Plainview
property for $4.5 million. The revolving credit loan facility expires in
December 2002. The term loan was fully paid with the proceeds from the
Company's sale of its Common Stock in May 2000. The interest rate on
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to 30-day
LIBOR (approximately 6.6% at September 30, 2000) plus 1.50% on the
revolving credit borrowings. The Company paid a facility fee of $100,000
and is required to pay a commitment fee of .25% per annum of the average
unused portion of the credit line. The mortgage is payable in monthly
installments of approximately $26,000 through March 2008 and a balloon
payment of $1.6 million in April 2008. The Company has entered into an
interest rate swap agreement for the outstanding amount under the mortgage
agreement at approximately 7.6% in order to reduce the interest rate risk
associated with these borrowings.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash
dividends. In connection with the purchase of certain materials for use in
manufacturing, the Company has a letter of credit of $2.0 million. At
September 30, 2000, the Company's available unused line of credit was
approximately $21.0 million after consideration of the letter of credit.
7. Inventories
-----------
Inventories consist of the following:
September 30, June 30,
2000 2000
------------ -------
(In thousands)
Raw Materials $ 21,271 $ 20,392
Work in Process 14,711 12,783
Finished Goods 4,207 4,192
-------- --------
$ 40,189 $ 37,367
======== ========
-9-
8. Income Taxes
------------
The Company is undergoing routine audits by various taxing authorities of
several of its state and local income tax returns covering periods from
1994 to 1996. Management believes that the probable outcome of these
various audits should not materially affect the consolidated financial
statements of the Company.
The Company recorded credits of $5.1 million and $129,000 to additional
paid-in capital during the three months ended September 30, 2000 and 1999,
respectively, in connection with the tax benefit related to compensation
deductions on the exercise of stock options and warrants.
9. Contingencies
-------------
A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the discovery stage. Based upon available information and
considering its various defenses, together with its product liability
insurance, in the opinion of management of the Company, the outcome of the
action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.
10. Business Segments
-----------------
The Company's business segments and major products included in each
segment, are as follows:
Microelectronics: Test, Measurement and
a)Microelectronic Modules Other Electronics:
b)Thin Film Interconnects a)Instrument Products
c)Integrated Circuits b)Motion Control Systems
Isolator Products
For The Three Months Ended
September 30,
--------------------------
Business Segment Data: 2000 1999
---- ----
(In thousands)
Net sales:
Microelectronics $ 32,049 $ 25,036
Test, Measurement and
Other Electronics 13,469 12,543
Isolator Products 4,710 4,493
-------- --------
Net sales $ 50,228 $ 42,072
======== ========
Operating income:
Microelectronics $ 7,927 $ 4,935
Test, Measurement and
Other Electronics 182 843
Isolator Products 495 528
General corporate expenses (1,850) (927)
-------- --------
6,754 5,379
Interest expense (340) (612)
Other income (expense), net 1,107 (262)
-------- --------
Income before income taxes $ 7,521 $ 4,505
======== ========
-10-
11. Subsequent Events
-----------------
Stock Split
-----------
On November 2, 2000, the Company's Board of Directors authorized a 2-for-1
stock split of the Common Stock, effective November 16, 2000. The share and
per share amounts in these consolidated financial statements give effect to
the stock split.
Acquisition of Businesses
-------------------------
Altair
------
On October 16, 2000, the Company issued 275,000 (before the 2-for-1 stock
split declared in November 2000) shares of its common stock for all the
outstanding common stock of Altair Aerospace Corporation ("Altair"). Altair
designs and develops advanced object-oriented control systems software
based upon a proprietary software engine. This business combination will be
accounted for as a pooling-of-interests and, accordingly, the Company's
historical consolidated financial statements presented in future reports
will be restated to include the accounts and results of operations of
Altair.
The following unaudited pro forma data summarizes the combined results of
operations of the Company and Altair as if the pooling-of-interests method
of accounting had been applied for the periods presented. There were no
adjustments to conform the accounting methods of Altair with those of the
Company.
Pro Forma
Three Months Ended
September 30,
------------------
2000 1999
---- ----
(In thousands, except per share data)
Net Sales $ 51,127 $ 42,634
Income before cumulative effect
of a change in accounting 5,099 2,832
Income before cumulative effect
of a change in accounting
per share (1):
Basic $.09 $.06
Diluted .08 .06
<FN>
(1) Per share amounts have been restated to reflect the 2-for-1 stock split.
</FN>
RDL
---
On October 23, 2000, the Company acquired all of the outstanding stock of
RDL, Inc. ("RDL") for $14.0 million of available cash. RDL designs,
develops and manufactures advanced commercial communications test and
measurement products and defense subsystems. The acquired company's net
sales were approximately $15.0 million for the year ended March 31, 2000.
-11-
The Company had commissioned an independent asset valuation study of
acquired tangible and identifiable intangible assets to serve as a basis
for allocation of the purchase price. Based on this study, the Company
allocated the purchase price, including acquisition costs of approximately
$100,000, as follows:
(In thousands)
Net tangible assets $ 7,959
Existing technology 2,500
Excess costs over fair value of net assets
acquired 2,141
In-process research and development 1,500
-------
$14,100
=======
The existing technology and costs in excess of fair value of net assets
will be amortized on a straight-line basis over 7 years based on the study
described above. The acquired in-process research and development was not
considered to have reached technological feasibility and, in accordance
with generally accepted accounting principles, the value of such will be
expensed in the second quarter of fiscal 2001.
Summarized below are the unaudited pro forma results of operations of the
Company as if RDL had been acquired at the beginning of the fiscal periods
presented. The $1.5 million write-off has not been included in the pro
forma amounts in order to provide comparability to the respective actual
results.
Pro Forma
Three Months Ended
September 30,
------------------
2000 1999
---- ----
(In thousands, except per share data)
Net Sales $54,768 $45,475
Income before cumulative effect
of a change in accounting 4,806 2,654
Income before cumulative effect
Of a change in accounting per
share (1):
Basic $.09 $.06
Diluted .08 .05
<FN>
(1) Per share amounts have been restated to reflect the 2-for-1 stock split.
</FN>
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place at the beginning of the periods presented or of
future operating results of the combined companies.
-12-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We use our advanced design, engineering and manufacturing abilities to
produce microelectronic, integrated circuit, interconnect and testing solutions.
Our products are used in fiber optic, broadband cable, wireless and satellite
communications markets. We also design and manufacture motion control systems
and shock and vibration isolation systems which are used for commercial,
industrial and defense applications. Our operations are grouped into three
segments:
-- microelectronics
-- test, measurement and other electronics
-- isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. All of our subsidiaries are
wholly-owned, except for Europtest, S.A. which is 93.4% owned by us and Aeroflex
Amplicomm, Inc., which is 75% owned by us.
Our microelectronics segment has been designing, manufacturing and selling
state-of-the-art microelectronics for the electronics industry since 1974. In
January 1994, we acquired substantially all of the net operating assets of the
microelectronics division of Marconi Circuit Technology Corporation, which
manufactures a wide variety of microelectronic assemblies. In March 1996, we
acquired MIC Technology Corporation which designs, develops, manufactures and
markets microelectronics products in the form of passive thin film circuits and
interconnects. Effective July 1, 1997, MIC Technology acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' telecommunications component units - multi-chip modules and film
integrated circuits. These units manufacture microelectronic modules and
interconnect products. In February 1999, we acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. consisting of UTMC's integrated
circuit business. In September 2000, we acquired all of the net operating assets
of AmpliComm, Inc., which designs and develops fiber optic amplifiers and
modulator drivers used by manufacturers of advanced fiber optic systems.
Our test, measurement and other electronics segment consists of two
divisions: (1) instruments and (2) motion control products, including the
following product lines:
-- Comstron, a leader in radio frequency and microwave technology used in
the manufacture of fast switching frequency signal generators and
components, which we acquired in November 1989. Comstron is currently
an operating division of Aeroflex Laboratories, Incorporated, one of
our wholly-owned subsidiaries;
-- Lintek, a leader in high speed instrumentation antenna measurement
systems, radar systems and satellite test systems which we acquired in
January 1995;
-13-
-- Europtest, S.A. (France), of which we acquired 90% effective September
1, 1998, under a purchase agreement which requires us to purchase the
remaining 10% of Europtest pro rata over a three-year period at prices
determined based upon net sales of Europtest products. In October
1999, we purchased an additional 3.4%. Europtest develops and sells
specialized software- driven test equipment used primarily in
cellular, satellite and other communications applications.
-- Altair, which we acquired on October 16, 2000 in a
pooling-of-interests business combination. Altair designs and develops
advanced object-oriented control systems software based upon a
proprietary software engine.
-- RDL, which we acquired on October 23, 2000. RDL designs, develops and
manufactures advanced commercial communications test and measurement
products and defense subsystems.
-- Our motion control products division has been engaged in the
development and manufacture of electro-optical scanning devices used
in infra-red night vision since 1975. Additionally, it is engaged in
the design, development and production of stabilization tracking
devices and systems and magnetic motors used in satellites and other
high reliability applications.
Our isolator products segment has been designing, developing, manufacturing
and selling severe service shock and vibration isolation systems since 1961.
These devices are primarily used in defense applications. In October 1983, we
acquired Vibration Mountings & Controls, Inc., which manufactures a line of
off-the-shelf rubber and spring shock, vibration and structure borne noise
control devices used in commercial and industrial applications. In December
1986, we acquired the operating assets of Korfund Dynamics Corporation, a
manufacturer of an industrial line of heavy duty spring and rubber shock mounts.
Our revenue is recognized based upon shipments or billings. We record costs
on our long-term contracts using percentage-of-completion accounting. Under
percentage of completion accounting, costs are recognized on revenues in the
same relation that total estimated manufacturing costs bear to total contract
value. Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.
Approximately 32% of our sales for fiscal 2000 and 41% of our sales for
fiscal 1999 were to agencies of the United States Government or to prime defense
contractors or subcontractors of the United States Government. Our overall
dependence on the military has been declining due to a focusing of resources
towards developing standard products for commercial markets.
We believe that potential reductions in defense spending will not materially
affect our operations. In certain product areas, we have suffered reductions in
sales volume due to cutbacks in the military budget. In other product areas, we
have experienced increased sales volume due to a realignment of government
spending towards upgrading existing systems instead of purchasing completely new
systems. The overall effect of the cutbacks and realignment has not been
material to our operations.
-14-
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net Sales. Net sales increased 19.4% to $50.2 million for the three months
ended September 30, 2000 from $42.1 million for the three months ended September
30, 1999. Net sales in the microelectronics segment increased 28.0% to $32.0
million for the three months ended September 30, 2000 from $25.0 million for the
three months ended September 30, 1999 due to increased sales volume in both thin
film interconnects and microelectronic modules. Net sales in the test,
measurement and other electronics segment increased 7.4% to $13.5 million for
the three months ended September 30, 2000 from $12.5 million for the three
months ended September 30, 1999 primarily due to increased sales volume in
frequency synthesizers (primarily shipments of the new FS-1000 for use in
commercial communications test systems) offset, in part, by reductions in sales
in high speed automatic test systems (primarily due to the completion of
satellite payload test equipment for Hughes Space and Communications). Net sales
in the isolator products segment increased 4.8% to $4.7 million for the three
months ended September 30, 2000 from $4.5 million for the three months ended
September 30, 1999.
Gross Profit. Cost of sales includes materials, direct labor and overhead
expenses such as engineering labor, fringe benefits, allocable occupancy costs,
depreciation and manufacturing supplies. Gross profit increased 26.1% to $19.1
million for the three months ended September 30, 2000 from $15.1 million for the
three months ended September 30, 1999. Gross margin increased to 38.0% for the
three months ended September 30, 2000 from 36.0% for the three months ended
September 30, 1999. The increases were primarily a result of the increased sales
volume in both the microelectronics segment and in frequency synthesizers
offset, in part, by reduced margins in high speed automatic test systems.
Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits and
commissions. Selling, general and administrative costs increased 27.8% to $9.4
million (18.7% of net sales) for the three months ended September 30, 2000 from
$7.3 million (17.4% of net sales) for the three months ended September 30, 1999.
The increase was primarily due to both higher corporate expenses and increased
expenses in MIC Technology as a result of their increased growth.
Research and Development Costs. Research and development costs include
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 22.0% to $3.0 million (5.9% of net sales) for the
three months ended September 30, 2000 from $2.4 million (5.8% of net sales) for
the three months ended September 30, 1999. The increase was primarily due to
increased costs in high speed automatic test systems.
Other Expense (Income). Interest expense decreased to $340,000 for the three
months ended September 30, 2000 from $612,000 for the three months ended
September 30, 1999, primarily due to reduced levels of borrowings. Other income
of $1.1 million for the three months ended September 30, 2000 consists primarily
of $1.2 million of interest income offset by a $72,000 decrease in the fair
value of our interest rate swap agreements. Other expense of $262,000 for the
three months ended September 30, 1999 consisted primarily of a $300,000 expense
for the settlement of a lawsuit and $33,000 of interest income. Interest income
increased due to increased levels of cash equivalents. The decreased levels of
borrowings and the increased levels of cash equivalents resulted from the net
proceeds of $68.5 million from stock issued in a public offering completed in
May 2000.
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Provision for Income Taxes. Income taxes increased 61.9% to $2.6 million (an
effective income tax rate of 33.9%) for the three months ended September 30,
2000 from $1.6 million (an effective income tax rate of 35.0%) for the three
months ended September 30, 1999. The income tax provisions for the two quarters
differed from the amount computed by applying the U.S. Federal income tax rate
to income before income taxes primarily due to state and local income taxes and
research and development credits.
Liquidity and Capital Resources
As of September 30, 2000, we had $136.4 million in working capital. Our
current ratio was 6.0 to 1 at September 30, 2000. As of February 25, 1999, we
replaced a previous agreement with a revised revolving credit, term loan and
mortgage agreement with two banks which is secured by substantially all of our
assets not otherwise encumbered. The agreement provided for a revolving credit
line of $23.0 million, a term loan of $20.0 million and a mortgage on our
Plainview property for $4.5 million. The revolving credit loan facility expires
in December 2002. The term loan was fully paid in May 2000 with the proceeds
from the sale of our Common Stock. The interest rate on borrowings under this
agreement is at various rates depending upon certain financial ratios, with the
current rate substantially equivalent to 30-day LIBOR (approximately 6.6% at
September 30, 2000) plus 1.50% on the revolving credit borrowings. The mortgage
is payable in monthly installments of approximately $26,000 through March 2008
and a balloon payment of $1.6 million in April 2008. We have entered into an
interest rate swap agreement for the outstanding amount under the mortgage
agreement at approximately 7.6% in order to reduce the interest rate risk
associated with these borrowings.
The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of certain materials for use in manufacturing, we have a
letter of credit of $2.0 million.
Our backlog of orders was $132.6 million at September 30, 2000 and $93.6
million at September 30, 1999.
For the three months ended September 30, 2000, our operations provided cash
of $13.7 million from our continued profitability and the collection of
receivables. For the three months ended September 30, 2000, our investing
activities used cash of $23.3 million primarily for the purchase of
available-for-sale securities in the amount of $19.2 million and for capital
expenditures in the amount of $3.9 million. For the three months ended September
30, 2000, our financing activities used cash of $3.3 million primarily for the
withholding taxes paid on the exercise of stock options offset, in part, by the
exercise from and taxes withheld on the exercise of such stock options and
warrants.
We believe that existing cash, cash equivalents and marketable securities
coupled with internally generated funds and available lines of credit will be
sufficient for our working capital requirements, capital expenditure needs and
the servicing of our debt for at least the next twelve months. At September 30,
2000, our available unused line of credit was $21.0 million after consideration
of the letter of credit.
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Market Risk
We are exposed to market risk related to changes in interest rates and, to an
immaterial extent, to foreign currency exchange rates. Most of our debt is at
fixed rates of interest or at a variable rate with an interest rate swap
agreement which effectively converts the variable rate debt into fixed rate
debt. Therefore, if market interest rates increase by 10 percent from levels at
September 30, 2000, the effect on our net income would not be material. Most of
our invested cash and marketable securities are at variable rates of interest.
If market interest rates decrease by 10 percent from levels at September 30,
2000, the effect on our net income would be a reduction of approximately
$290,000.
Forward-Looking Statements
All statements other than statements of historical fact included in this
Report on Form 10-Q, including without limitation statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding our financial position, business strategy and plans and objectives of
our management for future operations, are forward-looking statements. When used
in this Report on Form 10-Q, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to us or our
management, identify forward- looking statements. Such forward-looking
statements are based on the beliefs of our management, as well as assumptions
made by and information currently available to our management. Actual results
could differ materially from those contemplated by the forward-looking
statements, as a result of certain factors, including but not limited to
competitive factors and pricing pressures, changes in legal and regulatory
requirements, technological change or difficulties, product development risks,
commercialization difficulties and general economic conditions. Such statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our financial
condition, results of operations, growth strategy and liquidity.
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AEROFLEX INCORPORATED
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant held its Annual Meeting of Stockholders on November 2, 2000.
A. Three Directors were elected at the Annual Meeting to serve until the
Annual Meeting of Stockholders in 2003. The names of these Directors
and votes cast in favor of their election and shares withheld are as
follows:
Name Votes For Votes Withheld
---- --------- --------------
Harvey R. Blau 23,961,601 529,895
Ernest E. Courchene, Jr. 23,961,601 529,895
John S. Patton 23,961,601 529,895
B. The Stockholders approved to amend the article FOURTH of the
Certificate of Incorporation to increase the number of authorized
shares of the Company from 41,000,000 to 81,000,000; 22,706,691 shares
were voted in favor of this proposal, 1,771,147 shares voted against
the proposal and 13,658 shares abstained from voting.
C. The Stockholders approved a proposal to adopt the 2000 Key Employee
Stock Option Plan as set forth in Exhibit B to the proxy statement;
19,170,712 shares were voted in favor of this proposal, 1,980,136
shares voted against the proposal and 40,765 shares abstained from
voting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 3.1 - Certificate of Incorporation, as amended
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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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 thereunto duly authorized.
AEROFLEX INCORPORATED
(REGISTRANT)
November 10, 2000 By: s/Michael Gorin
-------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
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