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 March 31, 2001
-------------------------------
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.
May 10, 2001 59,605,544 shares (excluding 4,388 shares held in treasury)
- ----------------------------------------------------------------------------------------------------------------
(Date) (Number of Shares)
NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 25 PAGES.
--
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
March 31, 2001 and June 30, 2000 3-4
CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended March 31, 2001 and 2000 5
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 2001 and 2000 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2001 and 2000 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Nine and Three Months Ended March 31, 2001 and 2000 17-23
PART II: OTHER INFORMATION 24
SIGNATURES 25
-2-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2001 2000
------------- ------------
(Unaudited) (Restated, Note 2)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 58,945 $ 54,732
Marketable securities 10,302 11,512
Accounts receivable, less allowance for
doubtful accounts of $531,000 and $509,000 53,422 51,777
Inventories, net 47,790 37,367
Deferred income taxes 5,759 5,317
Prepaid expenses and other current assets 3,902 2,859
-------- --------
Total current assets 180,120 163,564
Property, plant and equipment, net 61,462 52,251
Intangible assets acquired in connection with
the purchase of businesses, net 21,110 12,839
Cost in excess of fair value of net assets
of businesses acquired, net 21,089 13,380
Deferred income taxes 12,073 3,094
Other assets 5,507 4,367
-------- --------
Total assets $301,361 $249,495
======== ========
See notes to consolidated financial statements.
-3-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 31, June 30,
2001 2000
------------- ------------
(Unaudited) (Restated, Note 2)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,743 $ 2,102
Accounts payable 12,832 12,629
Accrued expenses and other current liabilities 18,358 15,247
--------- ---------
Total current liabilities 32,933 29,978
Long-term debt 11,990 12,983
Other long-term liabilities 5,061 4,890
--------- ---------
Total liabilities 49,984 47,851
--------- ---------
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 80,000; none issued -- --
Common Stock, par value $.10 per share;
authorized 80,000,000 shares; issued
59,589,000 and 28,110,000 shares 5,959 2,811
Additional paid-in capital 219,754 190,141
Accumulated other comprehensive income (loss) (192) 82
Retained earnings 25,870 8,690
--------- ---------
251,391 201,724
Less: Treasury stock, at cost (4,000 and
25,000 shares) 14 80
--------- ---------
Total stockholders' equity 251,377 201,644
--------- ---------
Total liabilities and stockholders' equity $ 301,361 $ 249,495
========= =========
See notes to consolidated financial statements.
-4-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended
March 31,
----------------------------
2001 2000
------------ -----------
(Restated, Note 2)
(Unaudited)
(In thousands, except per share data)
Net sales $ 173,602 $ 131,601
Cost of sales 101,181 85,606
--------- ---------
Gross profit 72,421 45,995
--------- ---------
Selling, general and administrative costs 32,143 24,810
Research and development costs 13,101 8,475
Acquired in-process research and
development (Note 2) 2,500 --
--------- ---------
47,744 33,285
--------- ---------
Operating income 24,677 12,710
--------- ---------
Other expense (income)
Interest expense 1,078 1,917
Other expense (income) (2,749) (16)
--------- ---------
Total other expense (income) (1,671) 1,901
--------- ---------
Income before income taxes 26,348 10,809
Provision for income taxes 9,300 3,900
--------- ---------
Income before cumulative effect
of a change in accounting 17,048 6,909
Cumulative effect of a change
in accounting, net of tax (Note 4) 132 --
--------- ---------
Net income $ 17,180 $ 6,909
========= =========
Net income per common share:
Basic
Income before cumulative effect $ .30 $ .15
Cumulative effect of a change
in accounting -- --
--------- ---------
Net income $ .30 $ .15
========= =========
Diluted
Income before cumulative effect $ .28 $ .14
Cumulative effect of a change
in accounting -- --
--------- ---------
Net income $ .28 $ .14
========= =========
Weighted average number of common shares outstanding:
Basic 57,584 46,914
========= =========
Diluted 60,920 50,019
========= =========
See notes to consolidated financial statements.
-5-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended
March 31,
-------------------
2001 2000
------------ -----------
(Restated, Note 2)
(Unaudited)
(In thousands, except per share data)
Net sales $ 64,026 $ 47,054
Cost of sales 35,897 29,841
--------- ---------
Gross profit 28,129 17,213
--------- ---------
Selling, general and administrative costs 11,850 8,865
Research and development costs 5,623 3,275
Acquired in-process research and
development (Note 2) 1,000 --
--------- ---------
18,473 12,140
--------- ---------
Operating income 9,656 5,073
--------- ---------
Other expense (income)
Interest expense 320 620
Other expense (income) (798) (252)
--------- ---------
Total other expense (income) (478) 368
--------- ---------
Income before income taxes 10,134 4,705
Provision for income taxes 3,800 1,600
--------- ---------
Net income $ 6,334 $ 3,105
========= =========
Net income per common share:
Basic $.11 $.07
===== =====
Diluted $.10 $.06
===== =====
Weighted average number of common shares outstanding:
Basic 58,480 47,000
========= =========
Diluted 61,145 51,752
========= =========
See notes to consolidated financial statements.
-6-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31,
---------------------------
2001 2000
---------- ----------
(Restated, Note 2)
(Unaudited)
(In thousands)
Cash Flows From Operating Activities:
Net income $ 17,180 $ 6,909
Adjustments to reconcile net income to net cash
provided by operating activities:
Acquired in-process research and development 2,500 --
Depreciation and amortization 8,284 6,846
Amortization of deferred gain (696) (441)
Tax benefit from stock option
exercises (Note 8) 10,015 4,119
Deferred income taxes 431 (122)
Other, net 248 288
Change in operating assets and liabilities, net of effects from purchase of
businesses:
Decrease (increase) in accounts receivable 349 (22)
Decrease (increase) in inventories (5,430) (5,345)
Decrease (increase) in prepaid expenses
and other assets (1,299) (1,465)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 239 (131)
Increase (decrease) in income taxes payable -- (908)
-------- --------
Net Cash Provided By Operating Activities 31,821 9,728
-------- --------
Cash Flows From Investing Activities:
Payment for purchase of businesses, net of
cash acquired (14,532) --
Capital expenditures (10,332) (5,437)
Purchase of marketable securities (21,747) --
Proceeds from sale of marketable securities 22,833 --
Proceeds from sale of property, plant and equipment -- 1,690
Other, net (52) (39)
-------- --------
Net Cash Used In Investing Activities (23,830) (3,786)
-------- --------
Cash Flows From Financing Activities:
Borrowings under debt agreements 613 508
Debt repayments (3,550) (5,678)
Proceeds from the exercise of stock options
and warrants 3,369 4,816
Amounts paid for withholding taxes on stock
option exercises (21,910) (2,434)
Withholding taxes collected for stock option
exercises 17,700 2,432
Purchase of treasury stock -- (1,990)
-------- --------
Net Cash Used In Financing Activities (3,778) (2,346)
-------- --------
Net Increase (Decrease) In Cash
And Cash Equivalents 4,213 3,596
Cash And Cash Equivalents At Beginning Of Period 54,732 2,747
-------- --------
Cash And Cash Equivalents At End Of Period $ 58,945 $ 6,343
======== ========
See notes to consolidated financial statements.
-7-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated balance sheet of Aeroflex Incorporated and Subsidiaries
("the Company") as of March 31, 2001 and the related consolidated
statements of earnings for the nine and three months ended March 31, 2001
and 2000 and the consolidated statements of cash flows for the nine months
ended March 31, 2001 and 2000 have been prepared by the Company and are
unaudited. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at March 31, 2001 and for
all periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America 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, except as disclosed in Note 4.
Certain reclassifications have been made to previously reported financial
statements to conform to current classifications.
Results of operations for the nine and three month periods are not
necessarily indicative of results of operations for the corresponding
years.
Foreign Currency Translations
The financial statements of the Company's subsidiary in France are measured
in the local currency and then translated into U.S. dollars using the
current rate method. Under the current rate method, assets and liabilities
are translated using the exchange rate at the balance sheet date. Revenues
and expenses are translated at average rates prevailing throughout the
year. Gains and losses resulting from the translation of financial
statements of the foreign subsidiary are accumulated in other comprehensive
income (loss) and presented as part of stockholders' equity. Exchange gains
or losses from the settlement of foreign currency transactions are
reflected in the consolidated statement of earnings.
2. Acquisition of Businesses
TriLink
Effective March 23, 2001, the Company acquired all of the outstanding stock
of TriLink Communications Corp. ("TriLink") for 1.1 million shares of
Aeroflex common stock. TriLink designs, develops, manufacturers and
markets fiber optic components for the communications industry, including
Lithium Niobate modulators.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $300,000, as follows:
(In thousands)
Net tangible assets $ 1,134
Identifiable intangible assets 6,430
Deferred income taxes on identifiable
intangible assets (2,250)
Excess costs over fair value of net assets
acquired 5,367
In-process research and development 1,000
-------
$11,681
=======
-8-
The existing technology and costs in excess of fair value of net assets are
being amortized on a straight-line basis over 6 years. The acquired
in-process research and development was not considered to have reached
technological feasibility and, in accordance with accounting principles
generally accepted in the United States of America, the value of such has
been expensed in the quarter ended March 31, 2001. At the acquisition date,
TriLink was conducting design, development, engineering and testing
activities associated with the completion of its 10 GB modulator. TriLink
expects to spend approximately $200,000 to complete all phases of the
research and development. The anticipated completion date is between 6 and
9 months from the acquisition date, at which time the Company expects to
begin benefiting from the developed technology.
Summarized below are the unaudited pro forma results of operations of the
Company as if TriLink had been acquired at the beginning of the fiscal
periods presented. The $1.0 million write-off has been included in the
March 31, 2001 pro forma income but not the March 31, 2000 pro forma income
in order to provide comparability to the respective historical periods.
Pro Forma
Nine Months Ended
March 31,
--------------------
2001 2000
---- ----
(In thousands, except per share data)
Net Sales $173,962 $131,638
Income before
cumulative effect
of a change in
accounting 15,666 5,714
Income before
cumulative effect
of a change in
accounting per share:
Basic $.27 $.12
Diluted .25 .11
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.
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.
The Company evaluated the acquired tangible and identifiable intangible
assets to serve as a basis for allocation of the purchase price. The
Company allocated the purchase price, including acquisition costs of
approximately $100,000, as follows:
(In thousands)
Net tangible assets $ 6,879
Existing technology 2,970
Excess costs over fair value of net assets
acquired 2,751
In-process research and development 1,500
-------
$14,100
=======
-9-
The existing technology and costs in excess of fair value of net assets are
being amortized on a straight-line basis over 7 years. The acquired
in-process research and development was not considered to have reached
technological feasibility and, in accordance with accounting principles
generally accepted in the United States of America, the value of such has
been expensed in the quarter ended December 31, 2000. At the acquisition
date, RDL was conducting design, development, engineering and testing
activities associated with the completion of its defense and commercial
product lines representing next-generation technologies. RDL expects to
spend approximately $1.3 million to complete all phases of the research and
development. Anticipated completion dates ranged from 13 to 17 months from
the acquisition date, at which times the Company expects to begin
benefiting from the developed technologies.
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 been included in the March 31,
2001 pro forma income but not the March 31, 2000 pro forma income in order
to provide comparability to the respective historical periods.
Pro Forma
Nine Months Ended
March 31,
--------------------
2001 2000
---- ----
(In thousands, except per share data)
Net sales $178,484 $143,219
Income before
cumulative effect
of a change in
accounting 16,604 5,801
Income before
cumulative effect
of a change in accounting per share:
Basic $.29 $.12
Diluted .27 .12
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.
Altair
On October 16, 2000, the Company issued 550,000 shares(after adjustment for
the 2-for-1 stock split effective in November 2000) 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 has been accounted for as a pooling-of-interests and,
accordingly, for all periods prior to the business combination, the
Company's historical consolidated financial statements have been restated
to include the accounts and results of operations of Altair. The acquired
company's net sales were approximately $3.0 million for the year ended
December 31, 2000.
For periods preceding the combination, there were no intercompany
transactions which required elimination from the combined consolidated
results of operations and there were no adjustments necessary to conform
the accounting practices of the two companies.
-10-
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 each of March 2001 and October 1999,
the Company purchased an additional 3.4% of Europtest's stock for
approximately $47,000 and $54,000, respectively. Europtest develops and
sells specialized software-driven test equipment used primarily in
cellular, satellite and other communications applications.
3. Earnings Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS") 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.
-11-
A reconciliation of the numerators and denominators of the Basic EPS and Diluted
EPS calculations is as follows:
Nine Months
Ended March 31,
----------------------
2001 2000
---- ----
(In thousands, except per share data)
Income before cumulative effect
of a change in accounting $ 17,048 $ 6,909
Cumulative effect of a change in
accounting, net of tax 132 --
-------- --------
Net income $ 17,180 $ 6,909
======== ========
Computation of Adjusted Weighted
Average Shares Outstanding:
Weighted average shares outstanding 57,584 46,914
Add: Effect of dilutive options and
warrants outstanding 3,336 3,105
-------- --------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 60,920 50,019
======== ========
Income per share - Basic:
Income before cumulative effect $.30 $.15
Cumulative effect of a change in
accounting -- --
----- -----
Net income $.30 $.15
===== =====
Income per share - Diluted:
Income before cumulative effect $.28 $.14
Cumulative effect of a change in
accounting -- --
----- -----
Net income $.28 $.14
===== =====
Three Months
Ended March 31,
-------------------------
2001 2000
---- ----
(In thousands, except per share data)
Net income $ 6,334 $ 3,105
======== ========
Computation of Adjusted Weighted
Average Shares Outstanding:
Weighted average shares outstanding 58,480 47,000
Add: Effect of dilutive options and
warrants outstanding 2,665 4,752
-------- --------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 61,145 51,752
======== ========
Income per share:
Basic $.11 $.07
===== =====
Diluted $.10 $.06
===== =====
-12-
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.
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.
5. Comprehensive Income
The components of comprehensive income for the nine and three months ended
March 31, 2001 and 2000 are as follows:
Nine Months Three Months
Ended March 31, Ended March 31,
------------------------ ----------------------
2001 2000 2001 2000
------ -------- ------ ------
Net income $ 17,180 $ 6,909 $ 6,334 $ 3,105
Unrealized gain (loss) on
interest rate swap
agreement, net of tax (81) -- (55) --
Unrealized investment
gain (loss), net of tax (109) -- (38) --
Foreign currency
translation adjustment (84) -- (42) --
-------- -------- -------- --------
Total comprehensive income $ 16,906 $ 6,909 $ 6,199 $ 3,105
======== ======== ======== ========
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 prime (8.0% at March 31, 2001) 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.
-13-
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
March 31, 2001, the Company's available unused line of credit was
approximately $21.0 million after consideration of the letter of credit.
7. Inventories
Inventories, net, consist of the following:
March 31, June 30,
2001 2000
------------- ------------
(In thousands)
Raw Materials $ 25,803 $ 20,392
Work in Process 19,021 12,783
Finished Goods 2,966 4,192
--------- ---------
$ 47,790 $ 37,367
========= =========
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 $21.7 million and $4.1 million to
additional paid-in capital during the nine months ended March 31, 2001
and 2000, respectively, in connection with the tax benefit related to
compensation deductions on the exercise of stock options, including $10.0
million and $4.1 million, respectively, which reduced the current tax
payable. The balance was recorded as a net operating loss deferred tax
asset.
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.
-14-
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 Nine Months Ended
March 31,
------------------------------------------
Business Segment Data: 2001 2000
----------- -----------
(In thousands)
Net sales:
Microelectronics $ 107,709 $ 75,986
Test, Measurement and
Other Electronics 51,450 41,466
Isolator Products 14,443 14,149
--------- ---------
Net sales $ 173,602 $ 131,601
========= =========
Operating income:
Microelectronics $ 28,202 $ 12,710
Test, Measurement and
Other Electronics 3,655 1,328
Isolator Products 1,583 1,776
General corporate expenses (6,263) (3,104)
--------- ---------
27,177 12,710
Acquired in-process research
and development (1) (2,500) --
Interest expense (1,078) (1,917)
Other income (expense), net 2,749 16
--------- ---------
Income before income taxes $ 26,348 $ 10,809
========= =========
-15-
For The Three Months Ended
March 31,
-------------------------------------
Business Segment Data: (continued) 2001 2000
----------- -----------
(In thousands)
Net sales:
Microelectronics $ 40,993 $ 26,114
Test, Measurement and
Other Electronics 17,689 15,825
Isolator Products 5,344 5,115
--------- ---------
Net sales $ 64,026 $ 47,054
========= =========
Operating income:
Microelectronics $ 11,374 $ 4,342
Test, Measurement and
Other Electronics 796 1,064
Isolator Products 687 784
General corporate expenses (2,201) (1,117)
--------- ---------
10,656 5,073
Acquired in-process research
and development (1) (1,000) --
Interest expense (320) (620)
Other income (expense), net 798 252
--------- ---------
Income before income taxes $ 10,134 $ 4,705
========= =========
(1) The charge for the in-process research and development acquired in the
purchase of RDL of $1.5 million for the nine months ended March 31, 2001
is allocable fully to the Test, Measurement and Other Electronics
segment. The charge for the in-process research and development acquired
in the purchase of TriLink of $1.0 million for the nine and three months
ended March 31, 2001 is allocable fully to the Microelectronics segment.
11. Recent Accounting Pronouncements
The SEC has issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements," which provides the Staff's
interpretations of the application of generally accepted revenue
recognition accounting principles. The Company adopted SAB No. 101
effective April 1, 2001. The adoption did not have a material effect on
its consolidated financial statements.
-16-
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:
o microelectronics
o test, measurement and other electronics
o 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 96.8% 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. In
March 2001, we acquired TriLink Communications Corp. which designs, develops,
manufactures and markets fiber optic components for the communications industry,
including Lithium Niobate modulators and optical switches.
Our test, measurement and other electronics segment consists of two
divisions: (1) instruments and (2) motion control products, including the
following product lines:
o 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;
o Lintek, a leader in high speed instrumentation antenna
measurement systems, radar systems and satellite test systems,
which we acquired in January 1995;
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o 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 each of March 2001 and 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.
o 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.
o RDL, which we acquired on October 23, 2000. RDL designs,
develops and manufactures advanced commercial communications test
and measurement products and defense subsystems.
o 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 generally recognized based upon shipments. Revenues
associated with certain long term contracts are recognized under the
units-of-delivery method which includes shipments and progress billings, in
accordance with Statement of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts." 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 33% of our sales for fiscal 2000 and 42% 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.
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Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000
Net Sales. Net sales increased 31.9% to $173.6 million for the nine
months ended March 31, 2001 from $131.6 million for the nine months ended March
31, 2000. Net sales in the microelectronics segment increased 41.7% to $107.7
million for the nine months ended March 31, 2001 from $76.0 million for the nine
months ended March 31, 2000 due primarily to increased sales volume in
microelectronic modules and thin film interconnects. Net sales in the test,
measurement and other electronics segment increased 24.1% to $51.5 million for
the nine months ended March 31, 2001 from $41.5 million for the nine months
ended March 31, 2000 primarily due to the acquisition of RDL, Inc. in October
2000 and increased sales volume in frequency synthesizers offset, in part, by
reductions in sales of 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 were $14.4 million
for the nine months ended March 31, 2001 and $14.1 million for the nine months
ended March 31, 2000.
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
57.5% to $72.4 million for the nine months ended March 31, 2001 from $46.0
million for the nine months ended March 31, 2000. Gross margin increased to
41.7% for the nine months ended March 31, 2001 from 35.0% for the nine months
ended March 31, 2000. The increases were primarily a result of the increased
sales volume in both the microelectronics and test, measurement and other
electronics segments 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 29.6% to $32.1
million (18.5% of net sales) for the nine months ended March 31, 2001 from $24.8
million (18.9% of net sales) for the nine months ended March 31, 2000. The
increase was primarily due to both higher corporate expenses and increased
expenses in microelectronics as a result of this segment's 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 54.6% to $13.1 million (7.5% of net sales) for the
nine months ended March 31, 2001 from $8.5 million (6.4% of net sales) for the
nine months ended March 31, 2000. The increase was primarily due to the addition
of the expenses of RDL and increased costs in frequency synthesizers and high
speed automatic test systems.
Acquired In-Process Research and Development. In connection with the
acquisition of RDL, Inc., we allocated $1.5 million of the purchase price to
incomplete research and development projects. In connection with the acquisition
of TriLink Communications Corp., we allocated $1.0 million of the purchase price
to incomplete research and development projects. These allocations represent the
estimated fair value based on future cash flows that have been adjusted by the
projects' completion percentage. At the respective acquisition dates, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, we expensed these costs as of the respective acquisition dates.
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The values assigned to these assets were determined by identifying
significant research projects for which technological feasibility had not been
established. At the acquisition date, RDL was conducting design, development,
engineering and testing activities associated with the completion of its defense
and commercial product lines. The projects under development at the valuation
date represent next-generation technologies which are expected to address
emerging market demands in the equipment testing and measuring industry. At the
acquisition date, TriLink was conducting design, development, engineering and
testing activities associated with its completion of its 10 GB modulator for
fiber optic systems. The Company intends to continue with these development
efforts and, once complete, release the products to market.
At its acquisition date, RDL expected to spend approximately $1.3
million to complete all phases of the research and development, with anticipated
completion dates ranging from 13 to 17 months from that date. At its acquisition
date, TriLink expected to spend approximately $200,000 to complete the research
and development, with an anticipated completion date between 6 and 9 months from
that date.
The Company determined the value assigned to purchased in-process
technology by estimating the contribution of the purchased in-process technology
in developing a commercially viable product, estimating the resulting net cash
flows from the expected sales of such a product, and discounting the net cash
flows to their present value using an appropriate discount rate.
Revenue growth rates for the acquired companies were estimated based on
a detailed forecast, as well as discussions with the finance, marketing and
engineering personnel of the acquired companies. Allocation of total projected
revenues to in-process research and development was based on discussions with
the acquired companies' management. Selling, general and administrative expenses
and profitability estimates were determined based on forecasts as well as an
analysis of comparable companies' margin expectations.
The projections utilized in the transaction pricing and purchase price
allocation exclude the potential synergetic benefits related specifically to our
ownership. Due to the relatively early stage of the development and reliance on
future, unproven products and technologies, the cost of capital (discount rate)
for the acquired companies was estimated using venture capital rates of return.
Due to the nature of the forecast and the risks associated with the projected
growth and profitability of the development projects, discount rates of 25% for
RDL and 45% for TriLink were used to discount cash flows from the in-process
technology. This discount rate was commensurate with the acquired companies'
market position, the uncertainties in the economic estimates described above,
the inherent uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty related to technological advances
that could render development stage technologies obsolete.
We believe that the foregoing assumptions used in the forecasts were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects will transpire as
estimated. For these reasons, actual results may vary from projected results.
Remaining development efforts for the acquired companies' research and
development include various phases of design, development and testing. Funding
for such projects is expected to come from internally generated sources.
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As evidenced by the continued support of the development of the acquired
companies' projects, we believe we have a reasonable chance of successfully
completing the research and development programs. However, as with all of our
technology development, there is risk associated with the completion of the
research and development projects, and there is no assurance that technological
or commercial success will be achieved.
If the development of these in-process research and development projects
is unsuccessful, our sales and profitability may be adversely affected in
future periods. Commercial results are also subject to certain market events and
risks, which are beyond our control, such as trends in technology, changes in
government regulation, market size and growth, and product introduction or other
actions by competitors.
Other Expense (Income). Interest expense decreased to $1.1 million for
the nine months ended March 31, 2001 from $1.9 million for the nine months ended
March 31, 2000, primarily due to reduced levels of borrowings. Other income of
$2.7 million for the nine months ended March 31, 2001 consists primarily of $3.0
million of interest income offset by a $288,000 decrease in the fair value of
our interest rate swap agreements. Other income of $16,000 for the nine months
ended March 31, 2000 consisted primarily of a $300,000 expense for the
settlement of a lawsuit offset by a $193,000 gain on the sale of securities and
$100,000 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.
Provision for Income Taxes. Income taxes increased 138.5% to $9.3
million (an effective income tax rate of 35.3%) for the nine months ended March
31, 2001 from $3.9 million (an effective income tax rate of 36.1%) for the nine
months ended March 31, 2000. The income tax provisions for the two periods
differed from the amount computed by applying the U.S. Federal income tax rate
to income before income taxes primarily due to state and local income taxes and
research and development credits.
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Net Sales. Net sales increased 36.1% to $64.0 million for the three
months ended March 31, 2001 from $47.1 million for the three months ended March
31, 2000. Net sales in the microelectronics segment increased 57.0% to $41.0
million for the three months ended March 31, 2001 from $26.1 million for the
three months ended March 31, 2000 due primarily to increased sales volume in
microelectronic modules and thin film interconnects. Net sales in the test,
measurement and other electronics segment increased 11.8% to $17.7 million for
the three months ended March 31, 2001 from $15.8 million for the three months
ended March 31, 2000 primarily due to the acquisition of RDL, Inc. in October
2000 offset, in part, by reduced sales volume in frequency synthesizers
(primarily shipments of the FS-1000 for use in commercial communications test
systems). Net sales in the isolator products segment were $5.3 million for the
three months ended March 31, 2001 and $5.1 million for the three months ended
March 31, 2000.
Gross Profit. Gross profit increased 63.4% to $28.1 million for the
three months ended March 31, 2001 from $17.2 million for the three months ended
March 31, 2000. Gross margin increased to 43.9% for the three months ended March
31, 2001 from 36.6% for the three months ended March 31, 2000. The increases
were primarily a result of the increased sales volume in both the
microelectronics and test, measurement and other electronics segments.
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Selling, General and Administrative Costs. Selling, general and
administrative costs increased 33.7% to $11.8 million (18.5% of net sales) for
the three months ended March 31, 2001 from $8.9 million (18.8% of net sales) for
the three months ended March 31, 2000. The increase was primarily due to higher
corporate expenses, increased expenses in microelectronics as a result of this
segment's increased growth and the addition of the expenses of RDL.
Research and Development Costs. Our self-funded research and development
costs increased 71.7% to $5.6 million (8.8% of net sales) for the three months
ended March 31, 2001 from $3.3 million (7.0% of net sales) for the three months
ended March 31, 2000. The increase was primarily due to increased costs in
frequency synthesizers and high speed automatic test systems and the addition of
the expenses of RDL, Inc.
Acquired In-Process Research and Development. In connection with the
acquisition of TriLink Communications, Corp., we allocated $1.0 million of the
purchase price to incomplete research and development projects. This allocation
represents the estimated fair value based of future cash flows that have been
adjusted by the projects' completion percentage. At the acquisition date, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, we expensed these costs as of the acquisition date.
Other Expense (Income). Interest expense decreased to $320,000 for the
three months ended March 31, 2001 from $620,000 for the three months ended March
31, 2000, primarily due to reduced levels of borrowings. Other income of
$798,000 for the three months ended March 31, 2001 consists primarily of
$875,000 of interest income offset by a $82,000 decrease in the fair value of
our interest rate swap agreements. Other income of $252,000 for the three months
ended March 31, 2000 consisted primarily of a $193,000 gain on the sale of
securities and interest income of $52,000. 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.
Provision for Income Taxes. Income taxes increased 137.5% to $3.8
million (an effective income tax rate of 37.5%) for the three months ended March
31, 2001 from $1.6 million (an effective income tax rate of 34.0%) for the three
months ended March 31, 2000. The income tax provisions for the two periods
differed from the amount computed by applying the U.S. Federal income tax rate
to income before income taxes primarily due to state and local income taxes and
research and development credits, and, for the three months ended March 31,
2001, the non- deductible acquired in-process research and development expense.
Liquidity and Capital Resources
As of March 31, 2001, we had $147.2 million in working capital. Our
current ratio was 5.5 to 1 at March 31, 2001. 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 prime (8.0% at March 31, 2001) 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.
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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 $143.7 million at March 31, 2001 and $104.5
million at March 31, 2000.
For the nine months ended March 31, 2001, our operations provided cash
of $31.8 million from our continued profitability and the tax benefit of stock
option exercises. For the nine months ended March 31, 2001, our investing
activities used cash of $23.8 million including $14.5 million for purchases
of businesses, $21.7 million for the purchase of available-for-sale
marketable securities and $10.3 million for capital expenditures offset, in
part, by $22.8 million of proceeds from the sale of available-for-sale
marketable securities. For the nine months ended March 31, 2001, our financing
activities used cash of $3.8 million primarily for the withholding taxes paid on
the exercise of stock options and debt repayments offset, in part, by the
proceeds 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 the foreseeable future. Our cash, cash
equivalents and marketable securities are available for acquisitions and other
potential large cash needs that may arise. At March 31, 2001, our available
unused line of credit was $21.0 million after consideration of the letter of
credit.
Market Risk
We are exposed to market risk related to changes in interest rates and, to an
immaterial extent, to foreign currency exchange rates. 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
March 31, 2001, 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 March 31, 2001, the
effect on our net income would be a reduction of approximately $228,000 per
year.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(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)
May 15, 2001 By: s/Michael Gorin
--------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
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