-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Htmxo713L7OFUR9ZmHLpnE29HjZQs1OMl4RcInnrpCNnkDpTb78TtGEAAaZtlBBC 3pzaiuZ49MJngnjuHftfFQ== 0000932214-00-000093.txt : 20000511 0000932214-00-000093.hdr.sgml : 20000511 ACCESSION NUMBER: 0000932214-00-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROFLEX INC CENTRAL INDEX KEY: 0000002601 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 111974412 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08037 FILM NUMBER: 623965 BUSINESS ADDRESS: STREET 1: 35 S SERVICE RD CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 5166946700 MAIL ADDRESS: STREET 1: 35 S SERVICE ROAD CITY: PLAINVIEW STATE: NY ZIP: 11803 FORMER COMPANY: FORMER CONFORMED NAME: ARX INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AEROFLEX LABORATORIES INC DATE OF NAME CHANGE: 19851119 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 2000 Commission File Number 000-02324 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) *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 9, 2000 18,906,755 shares (excluding 34,005 shares held in treasury) - -------------------------------------------------------------------------------- (Date) (Number of Shares) NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 20 PAGES. AEROFLEX INCORPORATED AND SUBSIDIARIES INDEX PAGE ---- PART I: FINANCIAL INFORMATION CONSOLIDATED BALANCE SHEETS March 31, 2000 and June 30, 1999 3-4 CONSOLIDATED STATEMENTS OF EARNINGS Nine Months Ended March 31, 2000 and 1999 5 CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended March 31, 2000 and 1999 6 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended March 31, 2000 and 1999 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine and Three Months Ended March 31, 2000 and 1999 13-18 PART II: OTHER INFORMATION ITEM 5 Other Information 19 ITEM 6 Exhibits and Reports on Form 8-K 19 SIGNATURES 20 -2- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, June 30, 2000 1999 --------- -------- (In thousands) ASSETS - ------ Current assets: Cash and cash equivalents $ 6,285 $ 2,714 Accounts receivable, less allowance for doubtful accounts of $413,000 and $381,000 39,705 39,967 Inventories, net 37,982 32,637 Deferred income taxes 4,890 5,291 Prepaid expenses and other current assets 3,431 2,314 -------- -------- Total current assets 92,293 82,923 Property, plant and equipment, at cost, net 49,474 50,802 Intangible assets acquired in connection with the purchase of businesses, net 12,640 13,777 Cost in excess of fair value of net assets of businesses acquired, net 13,540 14,019 Other assets 4,018 3,695 -------- -------- Total assets $171,965 $165,216 ======== ========
See notes to consolidated financial statements. -3- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
March 31, June 30, 2000 1999 --------- --------- (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt $ 6,450 $6,509 Accounts payable 9,045 8,070 Accrued expenses and other current liabilities 15,216 16,923 Income taxes payable 147 1,055 -------- -------- Total current liabilities 30,858 32,557 Long-term debt 18,989 24,608 Deferred income taxes 3,059 3,582 Other long-term liabilities 2,455 2,376 -------- -------- Total liabilities 55,361 63,123 -------- -------- Stockholders' equity: Preferred Stock, par value $.10 per share; authorized 1,000,000 shares: Series A Junior Participating Preferred Stock, par value $.10 per share, authorized 40,000; none issued - - Common Stock, par value $.10 per share; authorized 40,000,000 shares; issued 18,895,000 and 18,429,000 shares 1,890 1,843 Additional paid-in capital 113,158 105,720 Retained earnings (accumulated deficit) 1,882 (5,421) -------- -------- 116,930 102,142 Less: Treasury stock, at cost (41,000 and 6,000 shares) 326 49 -------- -------- Total stockholders' equity 116,604 102,093 -------- -------- Total liabilities and stockholders' equity $171,965 $165,216 ======== ========
See notes to consolidated financial statements. -4- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Nine Months Ended March 31, ------------------- 2000 1999 ---- ---- (In thousands, except per share data) Net sales $129,878 $108,430 Cost of sales 84,459 69,504 --------- -------- Gross profit 45,419 38,926 --------- -------- Selling, general and administrative costs 24,456 18,306 Research and development costs 7,930 6,874 Acquired in-process research and development (Note 2) - 3,500 --------- -------- 32,386 28,680 --------- -------- Operating income 13,033 10,246 --------- -------- Other expense (income) Interest expense 1,846 1,024 Other expense (income) (16) (734) -------- -------- Total other expense (income) 1,830 290 -------- -------- Income before income taxes 11,203 9,956 Provision for income taxes 3,900 4,700 -------- -------- Net income $ 7,303 $ 5,256 ======== ======== Net income per common share: - Basic $ .39 $ .30 ===== ===== - Diluted $ .37 $ .28 ===== ===== Weighted average number of common shares outstanding: - Basic 18,546 17,628 ======= ======= - Diluted 19,788 18,973 ======= ======= See notes to consolidated financial statements.
-5- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, ------------------- 2000 1999 ---- ---- (In thousands, except per share data) Net sales $ 46,275 $ 40,604 Cost of sales 29,554 25,205 -------- -------- Gross profit 16,721 15,399 -------- -------- Selling, general and administrative costs 8,751 6,914 Research and development costs 2,992 2,580 Acquired in-process research and development (Note 2) - 3,500 -------- -------- 11,743 12,994 -------- -------- Operating income 4,978 2,405 -------- -------- Other expense (income) Interest expense 597 457 Other expense (income) (251) (190) -------- -------- Total other expense (income) 346 267 -------- -------- Income before income taxes 4,632 2,138 Provision for income taxes 1,600 1,950 -------- -------- Net income $ 3,032 $ 188 ======== ======== Net income per common share: - Basic $ .16 $ .01 ======== ======== - Diluted $ .15 $ .01 ======== ======== Weighted average number of common shares outstanding: - Basic 18,580 17,839 ======== ======== - Diluted 20,481 19,416 ======== ======== See notes to consolidated financial statements.
-6- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, ------------------- 2000 1999 ---- ---- (In thousands) Cash Flows From Operating Activities: Net income $ 7,303 $ 5,256 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Acquired in-process research and development - 3,500 Depreciation and amortization 6,828 4,853 Amortization of deferred gain (441) (441) Deferred income taxes (122) (531) Other, net 288 55 Change in operating assets and liabilities, net of effects from purchase of business: Decrease (increase) in accounts receivable 209 (8,946) Decrease (increase) in inventories (5,345) 2,386 Decrease (increase) in prepaid expenses and other assets (1,463) (2,225) Increase (decrease) in accounts payable, accrued expenses and other long-term liabilities (271) 1,693 Increase (decrease) in income taxes payable 3,212 3,129 -------- -------- Net Cash Provided By Operating Activities 10,198 8,729 -------- -------- Cash Flows From Investing Activities: Payment for purchase of businesses, net of cash acquired - (43,475) Capital expenditures (5,424) (6,902) Proceeds from sale of equipment 1,690 967 Other, net (39) (10) -------- -------- Net Cash Used In Investing Activities (3,773) (49,420) -------- -------- Cash Flows From Financing Activities: Debt repayments (5,678) (3,910) Borrowings under debt agreements - 24,188 Bank debt financing costs - (438) Proceeds from the exercise of stock options and warrants 4,816 1,341 Amounts paid for withholding taxes on stock option exercises (2,434) (2,381) Withholding taxes collected for stock option exercises 2,432 1,341 Purchase of treasury stock (1,990) (343) -------- -------- Net Cash Provided By (Used In) Financing Activities (2,854) 19,798 -------- -------- Net Increase (Decrease) In Cash And Cash Equivalents 3,571 (20,893) Cash And Cash Equivalents At Beginning Of Period 2,714 24,408 -------- -------- Cash And Cash Equivalents At End Of Period $ 6,285 $ 3,515 ======== ======== 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, 2000 and the related consolidated statements of earnings for the nine and three months ended March 31, 2000 and 1999 and the consolidated statements of cash flows for the nine months ended March 31, 2000 and 1999 have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2000 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 1999 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 1999. 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. 2. Acquisition of Businesses ------------------------- UTMC ---- Effective February 25, 1999, the Company acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of cash. The purchase price was paid with available cash of $22.5 million and borrowings under the Company's bank loan agreement of $20.0 million. UTMC designs, develops and manufactures radiation-tolerant integrated circuits primarily for satellite communications. The acquired company's net sales were approximately $33.4 million for the year ended December 31, 1998. The Company had commissioned an independent asset valuation study of acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. Based on this study, the Company allocated the purchase price, including acquisition costs of approximately $500,000, as follows:
(In thousands) Net tangible assets $28,771 Identifiable intangible assets 6,300 Excess costs over fair value of net assets 4,429 In-process research and development 3,500 ------- $43,000 =======
The identifiable intangible assets include existing technology, customer relationships and assembled work force. The identifiable intangibles and costs in excess of fair value of net assets are being amortized on a straight-line basis over 6 to 15 years based on the study described above. The acquired in- process research and development was not considered to have reached technological feasibility and, in accordance with generally accepted accounting principles, the value of such was expensed in the third quarter of fiscal 1999. -8- Summarized below are the unaudited pro forma results of operations of the Company as if UTMC had been acquired at the beginning of the fiscal periods presented.
Pro Forma Pro Forma Pro Forma Year Ended Nine Months Ended Three Months Ended June 30, 1999 March 31, 1999 March 31, 1999 ------------- ------------------ ------------------ (In thousands, except per share data) Net Sales $ 177,149 $ 128,475 $ 44,348 Net Income (Loss) 9,469 4,968 (36) Net Income (Loss) Per Share Basic $ .53 $ .28 $ .00 Diluted .50 .26 .00
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. Europtest Effective September 1, 1998, the Company acquired 90% of the stock of Europtest, S.A. (France) for approximately $1.1 million. The purchase agreement also requires that the Company purchase the remaining 10% of Europtest pro rata over a three-year period at prices determined based upon net sales of Europtest products. In October 1999, the Company purchased an additional 3.4% of Europtest's stock for approximately $54,000. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications. The acquired company's net sales were approximately $1.9 million for the year ended March 31, 1998. On a pro forma basis, had the Europtest acquisition taken place as of the beginning of the periods presented, results of operations for those periods would not have been materially affected. The purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values. 3. Earnings Per Share ------------------ In accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share", net income per common share ("Basic EPS") is computed by dividing net income by the weighted average common shares outstanding. Net income per common share, assuming dilution ("Diluted EPS") is computed by dividing net income by the weighted average common shares outstanding plus potential dilution from the exercise of stock options and warrants. -9- A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:
Nine Months Ended March 31, ------------------- 2000 1999 ---- ---- (In thousands, except per share data) Net income for basic and diluted earnings per common share $ 7,303 $ 5,256 ======== ======== Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 18,546 17,628 Add: Effect of dilutive options and warrants outstanding 1,242 1,345 ------- -------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 19,788 18,973 ======= ======== Net Income Per Common Share: Basic $ .39 $ .30 ===== ===== Diluted $ .37 $ .28 ===== =====
Three Months Ended March 31, 2000 1999 ---- ---- (In thousands, except per share data) Net income for basic and diluted earnings per common share $ 3,032 $ 188 ======== ======== Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 18,580 17,839 Add: Effect of dilutive options and warrants outstanding 1,901 1,577 -------- -------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 20,481 19,416 ======== ======== Net Income Per Common Share: Basic $ .16 $ .01 ===== ===== Diluted $ .15 $ .01 ===== =====
4. 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 provides for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on the Company's Plainview property for $4.5 million. The revolving credit and term loans expire in December 2002. The term loan is payable in quarterly installments of $1.25 million with final payment on December 31, 2002. As of March 31, 2000, the outstanding term loan was $13.0 million. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to 30-day LIBOR (approximately 6.1% at March 31, 2000) plus 1.50% on the revolving credit borrowings and LIBOR plus 1.75% on the term loan 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 -10- mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. The Company has entered into an interest rate swap agreement for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit facility of $2.0 million. At December 31, 1999, the Company's available unused line of credit was approximately $21.0 million after consideration of the letter of credit. On December 29, 1998, the Company financed the acquisition and renovation of the land and building of its Pearl River, NY facility and received proceeds amounting to $4.2 million. The Company currently intends to pay these borrowings in annual installments of approximately $200,000 through 2019. 5. Inventories ----------- Inventories consist of the following:
March 31, June 30, 2000 1999 ---------- -------- (In thousands) Raw Materials $ 20,472 $ 18,441 Work in Process 13,304 11,148 Finished Goods 4,206 3,048 -------- -------- $ 37,982 $ 32,637 ======== ========
6. 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. 7. Business Segments ----------------- The Company's business segments and major products included in each segment, are as follows: Microelectronics: Isolator Products: a)Microelectronic Modules a)Commercial spring and rubber isolators b)Thin Film Interconnects b)Industrial spring and rubber isolators c)Integrated Circuits c)Military wire-rope isolators Test, Measurement and Other Electronics: a)Instrument Products b)Motion Control Systems - Scanning devices - Stabilization and tracking devices - Magnetic devices -11- Business Segment Data:
For The Nine Months Ended March 31, ------------------------- 2000 1999 ---- ---- (In thousands) Net sales: Microelectronics $ 75,986 $ 68,094 Test, Measurement and Other Electronics 39,743 26,938 Isolator Products 14,149 13,398 -------- -------- Net sales $129,878 $108,430 ======== ======== Operating income: Microelectronics $ 12,710 $ 13,647 Test, Measurement and Other Electronics 1,651 1,528 Isolator Products 1,776 1,544 General corporate expenses (3,104) (2,973) -------- -------- 13,033 13,746 Acquired in-process research and development - (3,500) Interest expense (1,846) (1,024) Other income (expense), net 16 734 -------- -------- Income before income taxes $ 11,203 $ 9,956 ======== ========
For The Three Months Ended March 31, ------------------------- 2000 1999 ---- ---- (In thousands) Net sales: Microelectronics $ 26,114 $ 25,777 Test, Measurement and Other Electronics 15,046 10,111 Isolator Products 5,115 4,716 -------- -------- Net sales $ 46,275 $ 40,604 ======== ======== Operating income: Microelectronics $ 4,342 $ 5,989 Test, Measurement and Other Electronics 969 557 Isolator Products 784 531 General corporate expenses (1,117) (1,172) -------- -------- 4,978 5,905 Acquired in-process research and development - (3,500) Interest expense (597) (457) Other income (expense), net 251 190 -------- -------- Income before income taxes $ 4,632 $ 2,138 ======== ========
-12- AEROFLEX INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We use our advanced design, engineering and manufacturing abilities to produce microelectronic, integrated circuit, interconnect and testing solutions. Our products are used in fiber optic, broadband cable, wireless and satellite communications markets. We also design and manufacture motion control systems and shock and vibration isolation systems which are used for commercial, industrial and defense applications. Our operations are grouped into three segments: -- microelectronics -- test, measurement and other electronics -- isolator products Our consolidated financial statements include the accounts of Aeroflex Incorporated and all of our subsidiaries. All of our subsidiaries are wholly-owned, except for Europtest, S.A., which is 93.4% owned by us. Our microelectronics segment has been designing, manufacturing and selling 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. Our test, measurement and other electronics segment consists of two divisions: (1) instruments and (2) motion control products. Our instruments division consists of: -- Comstron, a leader in radio frequency and microwave technology used in the manufacture of fast switching frequency signal generators and components, which we acquired in November 1989. Comstron is currently an operating division of Aeroflex Laboratories, Incorporated, one of our wholly-owned subsidiaries; -- Lintek, a leader in high speed instrumentation measurement systems which we acquired in January 1995; and -- Europtest, S.A. (France), of which we acquired 90% effective September 1, 1998, under a purchase agreement which requires us to purchase the remaining 10% of Europtest pro rata over a three-year period at prices determined based upon net sales of Europtest products. In October 1999, we purchased an additional 3.4%. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications. 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. This division has been engaged in the design, development and production of stabilization tracking devices and systems and magnetic motors since 1961. -13- Our isolator products segment has been designing, developing, manufacturing and selling severe service shock and vibration isolation systems since 1961. 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 applications. In December 1986, we acquired the operating assets of Korfund Dynamics Corporation, a manufacturer of an industrial line of heavy duty spring and rubber shock mounts. Our revenue is recognized based upon shipments or billings. We record costs on our long-term contracts using percentage-of-completion accounting. Under percentage of completion accounting, costs are recognized on revenues in the same relation that total estimated manufacturing costs bear to total contract value. Estimated costs at completion are based upon engineering and production estimates. Provisions for estimated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such losses or revisions are first determined. Approximately 41% of our sales for fiscal 1999 and 42% of our sales for fiscal 1998 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 the acquisition of MIC Technology in fiscal 1996 which is more commercially oriented, and our focusing of resources towards developing standard products for commercial markets. We believe that potential reductions in defense spending will not materially affect our operations. In certain product areas, we have suffered reductions in sales volume due to cutbacks in the military budget. In other product areas, we have experienced increased sales volume due to a realignment of government spending towards upgrading existing systems instead of purchasing completely new systems. The overall effect of the cutbacks and realignment has not been material to our operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which is effective for fiscal years beginning after June 15, 2000. 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. We believe that the impact of this statement will not have a material effect on our consolidated financial statements. Results of Operations Nine Months Ended March 31, 2000 Compared to Nine Months Ended March 31, 1999 Net Sales. Net sales increased 19.8% to $129.9 million for the nine months ended March 31, 2000 from $108.4 million for the nine months ended March 31, 1999. Net sales in the microelectronics segment increased 11.6% to $76.0 million for the nine months ended March 31, 2000 from $68.1 million for the nine months ended March 31, 1999 due to the acquisition of UTMC in February 1999, partially offset by reductions in sales in both microelectronic modules and thin film interconnects. Net sales in the test, measurement and other electronics segment increased 47.5% to $39.7 million for the nine months ended March 31, 2000 from $26.9 million for the nine months ended March 31, 1999 primarily due to increased sales volume in both frequency synthesizers (primarily shipments of the new FS-1000 for use in commercial communications test systems) and high speed automatic test systems (primarily satellite payload test equipment for Hughes Space and Communications). Net sales in the isolator products segment increased 5.6% to $14.1 million for the nine months ended March 31, 2000 from $13.4 million for the nine months ended March 31, 1999. -14- 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 16.7% to $45.4 million for the nine months ended March 31, 2000 from $38.9 million for the nine months ended March 31, 1999. Gross margin decreased to 35.0% for the nine months ended March 31, 2000 from 35.9% for the nine months ended March 31, 1999. The increase in gross profit was primarily a result of the increased sales. The decrease in gross margin was due primarily to low margins on the satellite test system development program. 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 33.6% to $24.5 million (18.8% of net sales) for the nine months ended March 31, 2000 from $18.3 million (16.9% of net sales) for the nine months ended March 31, 1999. The increase was primarily due to the additional costs relating to the operations of UTMC. Research and Development Costs. Research and development costs consist of material, engineering labor and allocated overhead. Our self-funded research and development costs increased 15.4% to $7.9 million (6.1% of net sales) for the nine months ended March 31, 2000 from $6.9 million (6.3% of net sales) for the nine months ended March 31, 1999. The increase was primarily attributable to the additional costs of UTMC, partially offset by reduced costs relative to the comparable period in the prior year related to the development of the FS-1000, a new low-cost, high speed, high performance frequency synthesizer intended for commercial communication test systems which is complete and the satellite test system development program. Acquired In-Process Research and Development. In connection with the acquisition of UTMC in February 1999, we allocated $3.5 million of the purchase price to incomplete research and development projects. This allocation represents the estimated fair value based on 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 R&D in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. Other Expense (Income). Interest expense increased to $1.8 million for the nine months ended March 31, 2000 from $1.0 million for the nine months ended March 31, 1999, primarily due to increased levels of borrowings. Other income of $16,000 for the nine months ended March 31, 2000 consists primarily of a $300,000 expense for the settlement of a lawsuit, $100,000 of interest income and $193,000 gain on the sale of securities. Other income of $734,000 for the nine months ended March 31, 1999 consists primarily of interest income. Interest income decreased due to decreased levels of cash equivalents. The increased levels of borrowings and the decreased levels of cash equivalents were due to the acquisition of UTMC. Provision for Income Taxes. Income taxes decreased 17.0% to $3.9 million (an effective income tax rate of 34.8%) for the nine months ended March 31, 2000 from $4.7 million (an effective income tax rate of 34.9%, exclusive of the non- deductible write-off of acquired in-process research and development) for the nine months ended March 31, 1999. 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. -15- Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Net Sales. Net sales increased 14.0% to $46.3 million for the three months ended March 31, 2000 from $40.6 million for the three months ended March 31, 1999. Net sales in the microelectronics segment increased 1.3% to $26.1 million for the three months ended March 31, 2000 from $25.8 million for the three months ended March 31, 1999 due to the acquisition of UTMC in February 1999, partially offset by reductions in sales in microelectronic modules. Net sales in the test, measurement and other electronics segment increased 48.8% to $15.0 million for the three months ended March 31, 2000 from $10.1 million for the three months ended March 31, 1999 primarily due to increased sales volume in frequency synthesizers (primarily shipments of the new FS-1000 for use in commercial communication test systems). Net sales in the isolator products segment increased 8.5% to $5.1 million for the three months ended March 31, 2000 from $4.7 million for the three months ended March 31, 1999. Gross Profit. Gross profit increased 8.6% to $16.7 million for the three months ended March 31, 2000 from $15.4 million for the three months ended March 31, 1999. Gross margin decreased to 36.1% for the three months ended March 31, 2000 from 37.9% for the three months ended March 31, 1999. The increase in gross profit was primarily a result of the increased sales. The decrease in gross margin was due primarily to a change in the product mix. Selling, General and Administrative Costs. Selling, general and administrative costs increased 26.6% to $8.8 million (18.9% of net sales) for the three months ended March 31, 2000 from $6.9 million (17.0% of net sales) for the three months ended March 31, 1999. The increase was primarily due to the additional costs relating to the operations of UTMC. Research and Development Costs. Our self-funded research and development costs increased 16.0% to $3.0 million (6.5% of net sales) for the three months ended March 31, 2000 from $2.6 million (6.4% of net sales) for the three months ended March 31, 1999. The increase was primarily attributable to the additional costs of UTMC. Other Expense (Income). Interest expense increased to $597,000 for the three months ended March 31, 2000 from $457,000 for the three months ended March 31, 1999, primarily due to increased levels of borrowings. Other income of $251,000 for the three months ended March 31, 2000 consists primarily of a $193,000 gain on the the sale of securities and $51,000 of interest income. Other income of $190,000 for the three months ended March 31, 1999 consisted primarily of interest income. Interest income decreased due to decreased levels of cash equivalents. The increased levels of borrowings and the decreased levels of cash equivalents were due to the acquisition of UTMC. Provision for Income Taxes. Income taxes decreased 17.9% to $1.6 million (an effective income tax rate of 34.5%) for the three months ended March 31, 2000 from $2.0 million (an effective income tax rate of 34.6%, exclusive of the non- deductible write-off of acquired in-process research and development) for the three months ended March 31, 1999. 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. Liquidity and Capital Resources As of March 31, 2000, we had $61.4 million in working capital. Our current ratio was 3.0 to 1 at March 31, 2000. As of February 25, 1999, we replaced a previous agreement with a revised revolving credit, term loan and mortgage agreement with two banks which is secured by substantially all of our assets not otherwise encumbered. The agreement provides for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on our Plainview -16- property for $4.5 million. The revolving credit and term loans expire in December 2002. The term loan is payable in quarterly installments of $1.25 million with final payment on December 31, 2002. As of March 31, 2000, the outstanding term loan was $13.0 million. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to 30-day LIBOR (approximately 6.1% at March 31, 2000) plus 1.50% on the revolving credit borrowings and LIBOR plus 1.75% on the term loan borrowings. The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. We have entered into an interest rate swap agreement for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, we have a letter of credit facility of $2.0 million. In December 1998, we financed the acquisition and renovation of the land and building of our Pearl River, NY facility and received proceeds amounting to $4.2 million. We currently intend to pay these borrowings in annual installments of approximately $200,000 payable through 2019. Our backlog of orders was $103.8 million at March 31, 2000 and $92.1 million at March 31, 1999. Net cash provided by operating activities was $10.2 million for the nine months ended March 31, 2000. Net cash used in investing activities was $3.8 million for the nine months ended March 31, 2000, consisting primarily of capital expenditures of $5.4 million offset, in part, by the proceeds from the sale of equipment of $1.7 million under a sale-leaseback arrangement. Net cash used in financing activities was $2.9 million for the nine months ended March 31, 2000, consisting primarily of debt payments of $5.7 million and the purchase of treasury stock of $2.0 million, partially offset by proceeds from exercises of stock options and warrants of $4.8 million. We believe that internally generated funds and available lines of credit together with the proceeds from our anticipated offering of common stock will be sufficient for our working capital requirements, capital expenditure needs and the servicing of our debt for at least the next twelve months. As of March 31, 2000, 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. Some of the 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 a fixed rate of debt. Our debt which is subject to a floating rate of interest and is not hedged by an interest rate swap amounts to approximately $17.3 million at March 31, 2000. If market interest rates increase by 10 percent from levels at March 31, 2000, the effect on our net income would be a reduction of approximately $70,000 per year. -17- 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. -18- 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 On March 21, 2000, our common stock commenced trading on the Nasdaq Stock Market under the symbol ARXX. On April 6, 2000, we filed a registration statement on Form S-3 with the Securities and Exchange Commission covering the sale by us of 2,500,000 shares of common stock. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None -19- 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 9, 2000 By: /s/ Michael Gorin Michael Gorin President, Chief Financial Officer and Principal Accounting Officer -20- EX-27 2
5 This schedule contains summary financial information extracted from the consolidated financial statements for the nine months ended March 31, 2000 and is qualified in its entirety by reference to such statements. 9-MOS JUN-30-2000 MAR-31-2000 6,285,000 0 40,118,000 413,000 37,982,000 92,293,000 88,372,000 38,898,000 171,965,000 30,858,000 0 0 0 1,890,000 114,714,000 171,965,000 129,878,000 129,878,000 84,459,000 116,845,000 0 0 1,846,000 11,203,000 3,900,000 7,303,000 0 0 0 7,303,000 .39 .37
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