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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-16182
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AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-1962029
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
910 SYLVAN AVENUE
ENGLEWOOD CLIFFS, NEW JERSEY 07632
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 871-1500
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS:
YES X NO
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4,003,267 SHARES OF COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING AS OF
NOVEMBER 3, 1998.
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AXSYS TECHNOLOGIES, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Operations -
Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
NET SALES $ 26,250 $ 30,168
Cost of sales 19,927 21,575
Selling, general and administrative expenses 4,079 5,224
Amortization of intangible assets 107 107
----------- -----------
OPERATING INCOME 2,137 3,262
Interest expense 215 823
Other expense (income) 24 (2)
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 1,898 2,441
Provision for income taxes - 993
----------- -----------
INCOME FROM CONTINUING OPERATIONS 1,898 1,448
DISCONTINUED OPERATIONS:
(Loss) income from operations, net of taxes (2) 2
Loss on disposal, net of taxes (2,508) (244)
----------- -----------
NET (LOSS) INCOME $ (612) $ 1,206
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.45 $ 0.46
Discontinued operations (0.60) (0.08)
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TOTAL $ (0.15) $ 0.38
=========== ===========
Weighted average common shares outstanding 4,187,794 3,148,381
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 0.45 $ 0.42
Discontinued operations (0.60) (0.07)
----------- -----------
TOTAL $ (0.15) $ 0.35
=========== ===========
Weighted average common shares outstanding 4,202,439 3,460,610
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollars in thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
NET SALES $ 89,922 $ 85,578
Cost of sales 65,658 61,738
Selling, general and administrative expenses 15,637 14,962
Amortization of intangible assets 323 212
----------- -----------
OPERATING INCOME 8,304 8,666
Interest expense 761 2,166
Other expense 54 24
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 7,489 6,476
Provision for income taxes 1,063 2,608
----------- -----------
INCOME FROM CONTINUING OPERATIONS 6,426 3,868
DISCONTINUED OPERATIONS:
Income (loss) from operations, net of taxes 63 (52)
Loss on disposal, net of taxes (2,508) (244)
----------- -----------
NET INCOME 3,981 3,572
Preferred stock dividends - 102
----------- -----------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS $ 3,981 $ 3,470
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 1.53 $ 1.23
Discontinued operations (0.58) (0.09)
----------- -----------
TOTAL $ 0.95 $ 1.14
=========== ===========
Weighted average common shares outstanding 4,208,787 3,057,239
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE:
Income from continuing operations $ 1.52 $ 1.13
Discontinued operations (0.58) (0.09)
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TOTAL $ 0.94 $ 1.04
=========== ===========
Weighted average common shares outstanding 4,243,279 3,333,962
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash $ 176 $ 573
Accounts receivable - net 15,861 17,603
Inventories - net 27,107 26,003
Other current assets 2,900 977
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TOTAL CURRENT ASSETS 46,044 45,156
PROPERTY, PLANT AND EQUIPMENT - net 14,902 13,377
EXCESS OF COST OVER NET ASSETS ACQUIRED - net 12,325 12,729
NET ASSETS OF DISCONTINUED OPERATIONS 750 7,002
OTHER ASSETS 1,737 430
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TOTAL ASSETS $ 75,758 $ 78,694
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,809 $ 9,437
Accrued expenses and other liabilities 9,307 9,868
Current portion of long-term debt and capital
lease obligations 1,151 904
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TOTAL CURRENT LIABILITIES 17,267 20,209
LONG-TERM DEBT & CAPITAL LEASES, less
current portion 6,067 8,629
OTHER LONG-TERM LIABILITIES 2,277 2,284
DEFERRED INCOME 156 255
SHAREHOLDERS' EQUITY:
Preferred Stock, none issued and outstanding at
September 30, 1998 and December 31, 1997 - -
Common Stock, issued and outstanding 4,122,767
shares at September 30, 1998 and 4,113,190
shares at December 31, 1997 41 41
Capital in Excess of Par 40,766 40,409
Retained Earnings 10,848 6,867
Treasury Stock, at cost, 119,500 shares
at September 30, 1998 and none at
December 31, 1997 (1,664) -
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TOTAL SHAREHOLDERS' EQUITY 49,991 47,317
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 75,758 $ 78,694
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
AXSYS TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,981 $ 3,572
Adjustments to reconcile net income to
cash provided by operating activities:
Loss on disposal of discontinued operations 2,508 244
Deferred income taxes (230) -
Realization of net operating loss carryforward 58 2,205
Depreciation and amortization 2,733 2,242
Change in net assets of discontinued operations 154 (919)
Decrease (increase) in current assets,
other than cash 298 (3,504)
(Decrease) increase in current liabilities (3,189) 3,142
Other-net 41 138
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NET CASH PROVIDED BY OPERATING ACTIVITIES 6,354 7,120
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,929) (1,949)
Net proceeds from sale of discontinued operation 1,797 -
Advances to third parties (651) -
Acquisition of business, net of cash acquired - (7,335)
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NET CASH USED IN INVESTING ACTIVITIES (1,783) (9,284)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings - 7,000
Net repayment of borrowings (3,348) (5,244)
Purchases of Treasury Stock (1,664) -
Other 44 (1,646)
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NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (4,968) 110
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NET DECREASE IN CASH (397) (2,054)
CASH AT BEGINNING OF PERIOD 573 2,580
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CASH AT END OF PERIOD $ 176 $ 526
=========== ===========
Supplemental Cash Flow Information:
Cash paid for:
Interest $ 629 $ 1,631
Income tax 1,002 190
Non-Cash Investing and Financing Activities:
Equipment acquired under capital leases $ 1,021 $ 1,612
Capital stock issued for acquisition - 2,166
See accompanying notes to condensed consolidated financial statements.
6
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Axsys
Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included.
Operating results for the three month and nine month periods ended September 30,
1998 are not indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Certain reclassifications have been made to previously reported financial
statements to conform to current classifications.
NOTE 2 - EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share" which requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
has been computed by dividing Net Income Applicable to Common Shareholders by
the weighted average number of common shares outstanding. Diluted earnings per
share has been computed by dividing Net Income Applicable to Common Shareholders
by the weighted average number of common shares outstanding including the
dilutive effects of warrants and stock options.
NOTE 3 - ACQUISITIONS
On May 30, 1997, the Company acquired Teletrac, Inc. ("Teletrac") for $9,926,
including the issuance of 153,000 shares of Axsys Common Stock, 53,000 of which
shares were issued at closing and 100,000 of which shares will be issued
pursuant to a Stockholder Agreement entered into as of May 30, 1997 with certain
selling shareholders and employees of Teletrac. Teletrac designs and
manufactures laser-based precision measurement systems and state-of-the-art
precision linear and rotary positioning servo systems for use in the electronics
capital equipment market.
The acquisition of Teletrac was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Teletrac have been
included in the accompanying consolidated financial statements since the date of
its acquisition. The cost of the acquisition was allocated on the basis of the
fair market value of the assets acquired and liabilities assumed.
Summarized below are the unaudited pro forma results of operations of the
Company as if Teletrac had been acquired on January 1, 1997:
PRO FORMA
NINE MONTHS ENDED SEPTEMBER 30, 1997
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Net sales $ 89,889
Income from continuing operations 3,957
Net income 3,661
Basic earnings per share from
continuing operations 1.23
Diluted earnings per share from
continuing operations 1.13
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had the
acquisition of Teletrac taken place at the beginning of 1997 or the future
operating results of the combined companies.
7
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - DISCONTINUED OPERATIONS
On September 16, 1998, the Company sold its Sensor Systems business unit
("Sensor Systems") which manufactured position sensor devices such as
potentiometers, pressure transducers and encoders primarily for defense and
industrial automation applications, for $3,030, of which $1,030 was in the form
of a five year, 10% subordinated note. Sensor Systems' land and building were
not sold as part of this transaction, but are being marketed for sale by the
Company and are recorded as Net Assets of Discontinued Operations on the
September 30, 1998 Consolidated Balance Sheet at their estimated net realizable
value.
The disposal of Sensor Systems has been accounted for as a discontinued
operation and, accordingly, the related net assets and operating results have
been reported separately from continuing operations in all years presented. In
addition, the Company has reported separately a $2,508 loss on the sale of
Sensor Systems, which is net of a $1,794 tax benefit. Revenues applicable to the
discontinued operation for the nine months ended September 30, 1998 and 1997
were $4,774 and $4,945, respectively.
In September 1997, the Company was advised by its environmental consultants that
the costs associated with the remediation of a previously discontinued operation
site were estimated to be higher than originally anticipated. The estimates to
remediate this site ranged from approximately $600 to $1,500. Actual costs may
be different than these estimates. Based on this information, the Company
increased its reserve relating to this site in fiscal 1997 to approximately $600
by recording a discontinued operation charge of $400, before a tax benefit of
$156.
NOTE 5 - ADVANCES TO THIRD PARTIES
On August 12, 1998, the Company entered into an agreement with Westlake
Technology Corporation ("WTC") whereby the Company has the exclusive right to
market and sell WTC's electronic and electromechanical test equipment. In return
for these exclusive rights, the Company has agreed to provide loans of up to a
maximum of $1,400 to WTC. Outstanding loans bear interest at 10.5% and mature on
August 12, 2001. As of September 30, 1998, the outstanding loan balance, which
is recorded under "Other Assets" in the Condensed Consolidated Balance Sheet,
was $654.
NOTE 6 - INVENTORIES
Inventories have been determined generally by lower of cost (first-in,
first-out or average) or market. Inventories consist of:
SEPTEMBER 30, DECEMBER 31,
1998 1997
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Raw materials $ 6,450 $ 6,692
Work-in-process 12,145 11,581
Finished goods 12,445 11,136
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31,040 29,409
Less reserves 3,933 3,406
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$ 27,107 $ 26,003
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8
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 - SHAREHOLDERS' EQUITY
COMMON STOCK -
On October 21, 1997, the Company completed an underwritten public offering of
1,064,809 shares of its Common Stock at a public offering price of $27.00 per
share (the "offering"). Of the approximately $26,400 of net proceeds from the
offering, approximately $6,900 was used to repurchase outstanding warrants to
purchase the Company's Common Stock and the remaining net proceeds to prepay a
portion of the Company's outstanding bank debt.
PREFERRED STOCK -
The Company paid quarterly dividends on its $1.20 Cumulative Redeemable
Preferred Stock in additional shares at an annual rate of 15% based on the
shares outstanding from August 1991 through February 22, 1996. On February 22,
1996, the Company's right to pay dividends in additional shares of Preferred
Stock expired. From February 22, 1996 to June 4, 1997, the Company did not
declare or pay any dividends on the Preferred Stock, although they continued to
accumulate.
On February 14, 1997, the Company commenced an offer to exchange 0.75 shares of
its Common Stock for each outstanding share of its Preferred Stock. On March 17,
1997, the Exchange Offer terminated and the Company accepted for exchange all
shares of Preferred Stock validly tendered as of that time. Approximately
538,000 shares of Preferred Stock were exchanged for approximately 403,500
shares of Common Stock. Holders of shares of Preferred Stock accepted for
exchange did not receive any separate payment in respect of dividends not paid
subsequent to February 22, 1996, the last date on which dividends were paid on
the Preferred Stock.
On June 4, 1997, the Company called for redemption all of the remaining
approximately 200,900 outstanding shares of its Preferred Stock. The redemption
price was $7.70 per share, including accrued and unpaid dividends of $1.54 per
share through the redemption date.
TREASURY STOCK -
In August 1998, the Company's Board of Directors authorized the repurchase, from
time to time, on the open market or otherwise, of up to 200,000 shares of the
Company's Common Stock at prevailing market prices or at negotiated prices. The
Company plans to use the repurchased shares for general corporate purposes,
including the satisfaction of commitments under its employee benefit plans. As
of September 30, 1998 the Company has repurchased 119,500 shares for an
aggregate purchase price of $1,664.
NOTE 8 - INCOME TAXES
The Company has determined, based upon the level of its current taxable income,
it is more likely than not that it will realize the benefit of a portion of its
deferred tax assets which previously had been fully reserved with a valuation
allowance. As such, beginning in the second quarter of 1998, the Company has
reversed a portion of its tax valuation allowance equal to the amount it would
have recorded as a tax provision on income from continuing operations before
taxes during the period. As a result, the Company reduced its tax provision from
continuing operations and increased its net deferred tax asset by $784 and
$1,991 for the three month and nine month periods ended September 30, 1998,
respectively. Excluding the effect of the tax valuation allowance reversal,
income from continuing operations for the three month and nine month periods
ended September 30, 1998 would have been $1,114 or $0.27 per diluted share and
$4,435 or $1.05 per diluted share, respectively.
In addition, during the second quarter, the Company has reduced its tax
valuation allowance and credited Capital in Excess of Par by $255, to recognize
the remaining portion of deferred tax assets originating prior to the Company's
1991 quasi-reorganization. Including $58 which was recorded as part of the
Company's first quarter tax provision, a total of $313 has been credited to
Capital in Excess of Par during 1998.
As of September 30, 1998, the remaining tax valuation allowance is approximately
$1.6 million.
9
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - SEGMENT DATA
Effective January 1, 1998, the Company adopted SFAS No. 131 "Disclosure about
Segments of an Enterprise and Related Information" which requires disclosure of
information on the segments of a business based on the way management organizes
the segments of its business for making operating decisions and assessing
performance. The Company classifies its businesses under two major groups, the
Precision Systems Group ("PSG") and the Industrial Components Group ("ICG"). The
PSG designs and manufactures micro-positioning and precision optical components
and systems primarily for defense, space, electronics capital equipment and
digital imaging applications. The ICG is comprised of the Precision Ball
Bearings segment, which distributes and services precision miniature ball
bearings, and the Electronic Interconnect Products segment, which designs and
manufactures interconnect devices, barrier terminal blocks, and connectors.
The products of both the ICG segments are used in a variety of commercial and
industrial applications.
As discussed in Note 4, the company sold its Sensor Systems segment during
the third quarter of 1998. The disposal of Sensor Systems, which previously was
part of the PSG, has been accounted for as a discontinued operation and,
accordingly, their related operating results have been reported separately from
continuing operations and the segment data below has been restated to exclude
the Sensor Systems segment.
The following tables present financial data for each of the Company's segments.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales:
PSG $ 16,051 $ 19,170 $ 55,909 $ 52,150
----------- ----------- ----------- -----------
Precision Ball Bearings 6,010 6,806 19,849 20,265
Electronic Interconnect Products 4,189 4,192 14,164 13,163
----------- ----------- ----------- -----------
Total ICG 10,199 10,998 34,013 33,428
----------- ----------- ----------- -----------
Total Sales $ 26,250 $ 30,168 $ 89,922 $ 85,578
=========== =========== =========== ===========
Earnings before amortization, interest and taxes:
PSG $ 1,549 $ 2,436 $ 6,228 $ 6,428
----------- ----------- ----------- -----------
Precision Ball Bearings 678 915 2,563 2,798
Electronic Interconnect Products 652 666 2,291 2,252
----------- ----------- ----------- -----------
Total ICG 1,330 1,581 4,854 5,050
Non-allocated expenses (981) (1,576) (3,593) (5,002)
----------- ----------- ----------- -----------
Income from continuing operations
before taxes $ 1,898 $ 2,441 $ 7,489 $ 6,476
=========== =========== =========== ===========
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
Identifiable assets:
PSG $ 37,631 $ 37,135
----------- -----------
Precision Ball Bearings 13,654 12,475
Electronic Interconnect Products 8,852 8,679
----------- -----------
Total ICG 22,506 21,154
Non-allocated assets 14,871 13,403
Net assets of discontinued operations 750 7,002
----------- -----------
Total assets 75,758 78,694
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10
AXSYS TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Included in non-allocated expenses are the following: general corporate expense,
interest expense, amortization of goodwill and other income and expense.
Identifiable assets by segment consist of those assets that are used in the
segments' operations. Non-allocated assets are comprised primarily of goodwill
and net deferred tax assets.
NOTE 10 - OTHER INFORMATION
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
Allowance for doubtful accounts $ 487 $ 265
=========== ===========
Accumulated depreciation and amortization
of property, plant and equipment $ 10,623 $ 8,502
=========== ===========
Accumulated amortization of excess of cost
Over net assets acquired $ 1,485 $ 1,162
=========== ===========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for the three month and nine month periods ended September 30, 1998 and
1997. The Company acquired the stock of Teletrac Inc. ("Teletrac") on May 30,
1997. This acquisition, which is part of the PSG, has been accounted for under
the purchase method of accounting. Accordingly, the results of the continuing
operations of Teletrac have been included in the Company's Condensed
Consolidated Statements of Operations since the date of acquisition.
On September 16, 1998 the Company sold certain assets related to its Sensor
Systems segment. The divestiture, which was previously part of the PSG,
has been accounted for as a discontinued operation. Accordingly, the results of
the operations of this division through the date of the sale and the loss from
the disposal are reflected in discontinued operations.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net sales:
PSG 61.1% 63.5% 62.2% 60.9%
----------- ----------- ----------- -----------
Precision Ball Bearings 22.9 22.6 22.0 23.7
Electronic Interconnect Products 16.0 13.9 15.8 15.4
----------- ----------- ----------- -----------
Total ICG 38.9 36.5 37.8 39.1
----------- ----------- ----------- -----------
Total Company 100.0 100.0 100.0 100.0
----------- ----------- ----------- -----------
Cost of sales 75.9 71.5 73.0 72.1
----------- ----------- ----------- -----------
Gross profit 24.1 28.5 27.0 27.9
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 15.6 17.3 17.4 17.5
Amortization of intangible assets 0.4 0.4 0.4 0.3
----------- ----------- ----------- -----------
16.0 17.7 17.8 17.8
----------- ----------- ----------- -----------
Operating income 8.1 10.8 9.2 10.1
Interest expense 0.8 2.7 0.8 2.5
Other expense 0.1 - 0.1 -
----------- ----------- ----------- -----------
Income from continuing operations before taxes 7.2 8.1 8.3 7.6
Provision for income taxes - 3.3 1.2 3.1
----------- ----------- ----------- -----------
Income from continuing operations 7.2 4.8 7.1 4.5
Discontinued operations:
Income (loss) from operations, net of taxes - - 0.1 -
Loss on disposal, net of taxes (9.5) (0.8) (2.8) (0.3)
----------- ----------- ----------- -----------
Net Income (2.3)% 4.0% 4.4% 4.2%
=========== =========== =========== ===========
Gross profit (as a percentage of related net sales):
PSG 21.1% 27.7% 25.2% 26.1%
ICG 28.8 29.8 29.9 30.6
12
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
NET SALES. Net sales decreased by 13.0%, or $3.9 million, from $30.2 million in
the three month period ended September 30, 1997 to $26.3 million in the same
period of 1998. The PSG's sales decreased by 16.3%, or $3.1 million, from $19.2
million in 1997 to $16.1 million in 1998. This decrease was primarily the result
of a decline in revenue in the space and electronics capital equipment markets.
The PSG sales to the electronics capital equipment market have decreased as a
result of the continuing difficulties in the Asian economy and specific weakness
in the data storage and semiconductor segments of that market. The decline in
the PSG sales to the space market is primarily due to the timing of satellite
programs. Smaller PSG sales declines in the digital imaging and industrial
automation markets were offset by higher revenues in the defense market. The
ICG's sales decreased by 7.3%, or $0.8 million, from $11.0 million in 1997 to
$10.2 million in 1998. Sales of electronic interconnect products remained flat
over the prior year. Sales of precision ball bearings were down 11.7% over the
prior year primarily due to the weak electronics capital equipment market.
GROSS PROFIT. The Company's gross profit decreased by 26.4%, or $2.3 million,
from $8.6 million in 1997 to $6.3 million in 1998. Gross profit margin decreased
from 28.5% of net sales in 1997 to 24.1% in 1998. The gross margin for the PSG
decreased from 27.7% of net sales in 1997 to 21.1% in 1998 and for the ICG,
decreased from 29.8% of net sales in 1997 to 28.8% in 1998. The decline in the
PSG gross profit margin was due primarily to the lost variable contribution
margin on the decline in sales and higher fixed overhead spending. The decline
in the ICG's sales was primarily in precision ball bearings which has a higher
variable cost of sales content than the Company's other businesses. As such, the
effect of the lower sales volume on the ICG's gross margin was not as
significant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased by 21.9%,
or $1.1 million, from $5.2 million in 1997 to $4.1 million in 1998. As a
percentage of net sales, SG&A decreased from 17.3% in 1997 to 15.5% in 1998. The
decrease in SG&A expenses is primarily due to a decrease in incentive
compensation expense.
INTEREST EXPENSE. Interest expense decreased by 73.9%, or $608,000, from
$823,000 in 1997 to $215,000 in 1998. The decrease in interest expense was
primarily due to lower average borrowings during 1998 resulting from the
Company's use of the net proceeds (approximately $19.5 million) from its stock
offering in late October of 1997 to repay indebtedness under the Company's
senior credit facility.
TAXES. The Company's effective tax rate, decreased from 40.7% in 1997 to none in
1998. As discussed in Note 8 to the Condensed Consolidated Financial Statements,
the Company offset its normal third quarter continuing operations tax provision
by the reversal of a portion of its tax valuation allowance. As of September 30,
1998, the remaining tax valuation allowance is approximately $1.6 million. The
Company will continue to assess the realizability of its deferred tax assets in
future periods.
DISCONTINUED OPERATIONS. In September 1998, the Company sold its Sensor Systems
business unit and recorded a loss on the disposal of $2.5 million, net of a tax
benefit of $1.8 million. Results of operations from the discontinued business
have been reported separately from continuing operations in all periods
presented. In the third quarter of 1997, the Company recorded a discontinued
operation charge of $244,000, net of a tax benefit of $156,000, to increase its
environmental reserve for the remediation of a previously discontinued operation
site.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
NET SALES. Net sales increased by 5.1%, or $4.3 million, from $85.6 million in
the nine month period ended September 30, 1997 to $89.9 million in the same
period of 1998. The PSG's sales increased by 7.2%, or $3.8 million, from $52.2
million in 1997 to $55.9 million in 1998. The increase in PSG's sales is
primarily due to the acquisition of Teletrac. Lower sales to the space market,
primarily due to the timing of satellite programs, were offset by increased
sales to the defense and digital imaging markets. The ICG's sales increased by
1.8%, or $0.6 million, from $33.4 million in 1997 to $34.0 million in 1998.
Sales of electronic interconnect products grew 7.6%, or $1.0 million over the
prior year as a result of the introduction and continuing acceptance of new
product offerings and market share gains. Sales of precision ball bearings were
down 2.1% over the prior year primarily as a result of a decline in sales to the
weak electronics capital equipment market.
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GROSS PROFIT. The Company's gross profit increased by 1.8%, or $0.4 million,
from $23.8 million in 1997 to $24.3 million in 1998. Gross profit margin
decreased from 27.9% of net sales in 1997 to 27.0% in 1998. The gross margin
for the PSG decreased from 26.1% of net sales in 1997 to 25.2% in 1998 and
for the ICG, decreased from 30.6% of net sales in 1997 to 29.9% in 1998. The
decrease in gross profit margin for both the PSG and ICG was primarily due to
higher spending on fixed overhead.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased by 4.5%,
or $0.7 million, from $15.0 million in 1997 to $15.6 million in 1998. As a
percentage of net sales, SG&A decreased from 17.5% in 1997 to 17.4% in 1998. The
increase in SG&A expenses in absolute dollars was primarily due to the
acquisition of Teletrac partially offset by a decrease in incentive compensation
expense.
INTEREST EXPENSE. Interest expense decreased by 64.9%, or $1,405,000, from
$2,166,000 in 1997 to $761,000 in 1998. The decrease in interest expense was
primarily due to lower average borrowings during 1998 resulting from the
Company's use of the net proceeds (approximately $19.5 million) from its stock
offering in late October of 1997 to repay indebtedness under the Company's
senior credit facility.
TAXES. The Company's effective tax rate, decreased from 40.3% in 1997 to 14.2%
in 1998. As discussed in Note 8 to the Condensed Consolidated Financial
Statements, the Company offset its normal second and third quarter continuing
operations tax provision by the reversal of a portion of its tax valuation
allowance.
DISCONTINUED OPERATIONS. See discussion in "Comparison of the Three Months
Ended September 30, 1998 and September 30, 1997".
PREFERRED STOCK DIVIDENDS. Preferred Stock dividends decreased 100%, or
$102,000, to none in 1998. The decrease in Preferred Stock dividends was due to
the Company's exchange of Preferred Stock for Common Stock and subsequent
redemption of remaining Preferred Stock during 1997 (see Note 7 to the Condensed
Consolidated Financial Statements). As a result of such redemption, there is no
Preferred Stock outstanding and there are no accrued and unpaid dividends.
BACKLOG
A substantial portion of the Company's business is of a
build-to-order nature requiring various engineering, manufacturing, testing
and other processes to be performed prior to shipment. As a result, the
Company generally has a significant backlog of orders to be shipped. The
Company's backlog of orders decreased by 9.5% or $4.5 million, from $51.8
million at December 31, 1997 to $47.3 million at September 30, 1998. The
decrease in backlog was primarily due to a decline in orders from the
electronics capital equipment and space markets. The decline in the
electronics capital equipment market is due primarily to the continuing
difficulties in the Asian economy and specific weakness in the data storage
and semiconductor segments of that market. The decline in bookings from the
space market is primarily due to the timing of satellite programs. Orders
from the next significant satellite program are not anticipated in the
current fiscal year. The Company believes that a substantial portion of the
backlog of orders at September 30, 1998 will be shipped over the next twelve
months.
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LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash flow generated by
operations and, to a lesser extent, from borrowings under its credit facility
and through capital lease transactions.
Net cash provided by operations for the nine months ended September 30, 1998 and
1997 was $6.4 million and $7.1 million, respectively. The decrease in cash
provided from operations in 1998 was primarily due to increased working capital
requirements. This use of cash was partially offset by an increase in net income
as adjusted for the realization of tax loss carryforwards, deferred income taxes
and non-cash amortization and depreciation, as well as lower funding of
discontinued operations. At December 31, 1997, the Company had approximately
$1.3 million of net operating losses and $0.5 million of tax credits available
to reduce future taxable income. The net operating losses and a substantial
portion of the tax credits will be used to offset tax payments in 1998.
The Company's working capital was $28.8 million and $24.9 million on
September 30, 1998 and December 31, 1997, respectively.
Net cash used in investing activities for the nine months ended September 30,
1998 and 1997 was $1.8 million and $9.3 million, respectively. During 1997, the
Company acquired Teletrac for cash consideration of $7.3 million. During 1998,
the Company increased its capital expenditures by $1.0 million over the prior
year, primarily on machinery and equipment to expand or improve on capabilities
and to lower operating costs, and made a $0.7 million advance to a third party
(see Note 5 to the Condensed Consolidated Financial Statements). In addition,
the Company received net proceeds from the sale of Sensor Systems of $1.7
million in 1998.
The Company had no material commitments for capital expenditures as of
September 30, 1998.
The Company has an $11.0 million senior secured revolving credit facility which
expires on April 25, 2000 (the "Credit Facility"), of which $2.7 million was
outstanding as of September 30, 1998. The Credit Facility contains restrictive
covenants which, among other things, impose limitations with respect to the
incurrence of additional liens and indebtedness, mergers, consolidations and
specified sale of assets and requires the Company to meet certain financial
tests including minimum levels of earnings and net worth and various other
financial ratios. In addition, the Credit Facility prohibits the payment of cash
dividends. The Company believes that the remaining availability under the Credit
Facility and cash generated from operations will be sufficient to finance its
future capital expenditures, working capital requirements and the purchase of
additional Company Common Stock for at least the next 12 months.
YEAR 2000
The Company is continuously monitoring Year 2000 compliance issues effecting its
information technology ("IT") and non-IT systems. No significant non-IT system
Year 2000 compliance issues have been identified.
As related to IT systems, the Company is in the process of implementing new
management information systems at three of its business units. While the
implementation of these new systems does address Year 2000 concerns, Year 2000
compliance was not the predominant justification supporting such investments.
These new IT systems are expected to enhance future operations through improved
operating management and efficiencies. It is anticipated that the new systems
will be fully operational by the end of the first quarter of 1999. The cost of
these new systems is projected to be approximately $1.1 million of which $0.9
million will be capitalized and depreciated over future periods. Approximately
$0.9 million has been spent through September 1998, including $0.3 million spent
in 1997. Substantial progress has been made on the implementation of these new
management information systems and no unmanageable problems have been
identified. In addition, the projected completion date for these implementations
allows adequate time to identify and correct potential hardware or software
problems that may arise. As such, no further contingency plans have been
formulated.
15
The Company is in the process of surveying material third parties such as
customers, vendors, banks and others to determine their Year 2000 readiness.
While it is not possible to fully assess the actual readiness of these third
parties, a majority of their responses indicate that they are or will be Year
2000 compliant. For those vendors who have not responded satisfactorily,
alternative sources will be identified.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. Management does
not believe that the implementation of the statement will have a material impact
on the consolidated financial position or consolidated results of operations of
the Company.
This quarterly report on Form 10-Q provides certain forward-looking statements.
The Company's business is subject to a variety of risks and uncertainties. As a
result, actual future results and developments may be materially different from
those expressed or implied in any forward-looking statement. Disclosure
regarding factors affecting the Company's future results and developments is
contained in the Company's public filings with the Securities and Exchange
Commission, including the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of September 30, 1998.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the quarter ended September 30, 1998.
ITEM 5. OTHER INFORMATION
Not applicable during the quarter ended September 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
Exhibit 27: Financial Data Schedule (For SEC use only).
Exhibit 99.1: Company press release regarding stock repurchase program.
Exhibit 99.2: Company press release regarding strategic alliance with
Westlake Technologies Corporation.
Exhibit 99.3: Company press release regarding divestiture of Sensor
Systems division.
b) Reports on Form 8-K
None during the quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated this 11th day of November, 1998.
Date: November 11, 1998 AXSYS TECHNOLOGIES, INC.
By: /s/ Stephen W. Bershad
-------------------------------
Stephen W. Bershad
Chairman of the Board and
Chief Executive Officer
By: /s/ Raymond F. Kunzmann
-------------------------------
Raymond F. Kunzmann
Vice President-Finance
and Chief Financial Officer
17