-----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, Le0vZnpK2V+LyEMKeS1PoBpue1fh5f5ZE6y1ZqhHP4PHgEultVMjAntrzFuCoE7U 43G+tFmJUVjLTAU3qhd5NQ== 0000932214-01-000018.txt : 20010223 0000932214-01-000018.hdr.sgml : 20010223 ACCESSION NUMBER: 0000932214-01-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: 1543278 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 0001.txt 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 December 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. February 12, 2001 58,401,579 shares (excluding 4,388 shares held in treasury) - -------------------------------------------------------------------------------- (Date) (Number of Shares) NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 23 PAGES. ------ AEROFLEX INCORPORATED AND SUBSIDIARIES INDEX ----- PAGE ---- PART I: FINANCIAL INFORMATION - ------ --------------------- CONSOLIDATED BALANCE SHEETS December 31, 2000 and June 30, 2000 3-4 CONSOLIDATED STATEMENTS OF EARNINGS Six Months Ended December 31, 2000 and 1999 5 CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended December 31, 2000 and 1999 6 CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 2000 and 1999 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six and Three Months Ended December 31, 2000 and 1999 15-21 PART II: OTHER INFORMATION 22 - ------- ----------------- SIGNATURES 23 -2- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, June 30, 2000 2000 ------------ --------------- (Unaudited) (Restated, Note 2) (In thousands) ASSETS Current assets: Cash and cash equivalents $ 36,746 $ 54,732 Marketable securities 25,735 11,512 Accounts receivable, less allowance for doubtful accounts of $523,000 and $509,000 44,765 51,777 Inventories 45,178 37,367 Deferred income taxes 5,774 5,317 Prepaid expenses and other current assets 3,760 2,859 -------- -------- Total current assets 161,958 163,564 Property, plant and equipment, net 59,662 52,251 Intangible assets acquired in connection with the purchase of businesses, net 15,152 12,839 Cost in excess of fair value of net assets of businesses acquired, net 15,975 13,380 Deferred income taxes 15,014 3,094 Other assets 5,431 4,367 -------- -------- Total assets $273,192 $249,495 ======== ======== See notes to consolidated financial statements.
-3- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
December 31, June 30, 2000 2000 ------------ ---------------- (Unaudited) (Restated, Note 2) (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,711 $ 2,102 Accounts payable 9,037 9,711 Accrued expenses and other current liabilities 16,648 18,165 -------- -------- Total current liabilities 27,396 29,978 Long-term debt 12,278 12,983 Other long-term liabilities 4,961 4,890 -------- -------- Total liabilities 44,635 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 58,018,000 and 28,110,000 shares 5,802 2,811 Additional paid-in capital 203,290 190,141 Accumulated other comprehensive income (loss) (57) 82 Retained earnings 19,536 8,690 -------- -------- 228,571 201,724 Less: Treasury stock, at cost (4,000 and 25,000 shares) 14 80 -------- -------- Total stockholders' equity 228,557 201,644 -------- -------- Total liabilities and stockholders' equity $273,192 $249,495 ======== ======== See notes to consolidated financial statements.
-4- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended December 31, ---------------- 2000 1999 ------------- ---------------- (Restated, Note 2) (Unaudited) (In thousands, except per share data) Net sales $109,576 $ 84,547 Cost of sales 65,284 55,765 -------- -------- Gross profit 44,292 28,782 -------- -------- Selling, general and administrative costs 20,293 15,945 Research and development costs 7,478 5,200 Acquired in-process research and development (Note 2) 1,500 - -------- -------- 29,271 21,145 -------- -------- Operating income 15,021 7,637 -------- -------- Other expense (income) Interest expense 758 1,297 Other expense (income) (1,951) 236 -------- -------- Total other expense (income) (1,193) 1,533 -------- -------- Income before income taxes 16,214 6,104 Provision for income taxes 5,500 2,300 -------- -------- Income before cumulative effect of a change in accounting 10,714 3,804 Cumulative effect of a change in accounting, net of tax (Note 4) 132 - -------- -------- Net income $ 10,846 $ 3,804 ======== ======== Net income per common share: Basic Income before cumulative effect $.19 $.08 Cumulative effect of a change in accounting - - ---- ---- Net income $.19 $.08 ==== ==== Diluted Income before cumulative effect $.18 $.08 Cumulative effect of a change in accounting - - ---- ---- Net income $.18 $.08 ==== ==== Weighted average number of common shares outstanding: Basic 57,136 46,871 ======== ======== Diluted 60,808 49,153 ======== ======== See notes to consolidated financial statements.
-5- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended December 31, ------------------ 2000 1999 ---------- ---------------- (Restated, Note 2) (Unaudited) (In thousands, except per share data) Net sales $ 58,448 $ 41,912 Cost of sales 33,621 28,377 -------- -------- Gross profit 24,827 13,535 -------- -------- Selling, general and administrative costs 10,828 8,501 Research and development costs 4,454 2,646 Acquired in-process research and development (Note 2) 1,500 - -------- -------- 16,782 11,147 -------- -------- Operating income 8,045 2,388 -------- -------- Other expense (income) Interest expense 388 666 Other expense (income) (843) (28) -------- -------- Total other expense (income) (455) 638 -------- -------- Income before income taxes 8,500 1,750 Provision for income taxes 2,875 725 -------- -------- Net income $ 5,625 $ 1,025 ======== ======== Net income per common share: Basic $.10 $.02 ==== ==== Diluted $.09 $.02 ==== ==== Weighted average number of common shares outstanding: Basic 57,658 46,728 ======== ======== Diluted 61,601 48,051 ======== ======== See notes to consolidated financial statements.
-6- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31, ------------------------- 2000 1999 -------- -------- (Restated, Note 2) (Unaudited) (In thousands) Cash Flows From Operating Activities: Net income $ 10,846 $ 3,804 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Acquired in-process research and development 1,500 - Depreciation and amortization 5,381 4,513 Amortization of deferred gain (547) (294) Tax benefit of stock option exercises (Note 8) 6,042 134 Deferred income taxes (474) (164) Other, net 153 209 Change in operating assets and liabilities, net of effects from purchase of businesses: Decrease (increase) in accounts receivable 8,916 2,642 Decrease (increase) in inventories (2,926) (3,081) Decrease (increase) in prepaid expenses and other assets (1,128) (127) Increase (decrease) in accounts payable, accrued expenses and other liabilities (5,231) (2,933) Increase (decrease) in income taxes payable (120) 452 -------- -------- Net Cash Provided By Operating Activities 22,412 5,155 -------- -------- Cash Flows From Investing Activities: Payment for purchase of businesses, net of cash acquired (14,724) - Capital expenditures (6,921) (3,009) Purchase of marketable securities (19,644) - Proceeds from sale of marketable securities 5,356 - Proceeds from sale of property, plant and equipment - 1,687 Other, net 1 (34) -------- -------- Net Cash Used In Investing Activities (35,932) (1,356) -------- -------- Cash Flows From Financing Activities: Borrowings under debt agreements 542 294 Debt repayments (3,222) (3,158) Proceeds from the exercise of stock options and warrants 2,424 827 Amounts paid for withholding taxes on stock option exercises (17,442) (47) Withholding taxes collected for stock option exercises 13,232 45 Purchase of treasury stock - (1,990) -------- -------- Net Cash Used In Financing Activities (4,466) (4,029) -------- -------- Net Increase (Decrease) In Cash And Cash Equivalents (17,986) (230) Cash And Cash Equivalents At Beginning Of Period 54,732 2,747 -------- -------- Cash And Cash Equivalents At End Of Period $ 36,746 $ 2,517 ======== ======== 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 December 31, 2000 and the related consolidated statements of earnings for the six and three months ended December 31, 2000 and 1999 and the consolidated statements of cash flows for the six months ended December 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 December 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, 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 six and three month periods are not necessarily indicative of results of operations for the corresponding years. 2. Acquisition of Businesses ------------------------- 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 =======
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 generally accepted accounting principles, the value of such has been expensed in the quarter ended December 31, 2000. -8- 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 December 31, 2000 pro forma income but not the December 31, 1999 pro forma income in order to provide comparability to the respective historical periods.
Pro Forma Six Months Ended December 31, ------------------- 2000 1999 ---- ---- (In thousands, except per share data) Net Sales $114,458 $ 92,210 Income before cumulative effect of a change in accounting 10,270 3,497 Income before cumulative effect of a change in accounting per share: Basic $ .18 $ .07 Diluted .17 .07
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 (after adjustment for the 2-for-1 stock split effective in November 2000) shares of its common stock for all the outstanding common stock of Altair Aerospace Corporation ("Altair"). Altair designs and develops advanced object-oriented control systems software based upon a proprietary software engine. This business combination 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 consolidating results of operations and there were no adjustments necessary to conform the accounting practices of the two companies. 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. -9- 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. A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:
Six Months Ended December 31, ----------------------- 2000 1999 ---- ---- (In thousands, except per share data) Income before cumulative effect of a change in accounting $10,714 $ 3,804 Cumulative effect of a change in accounting, net of tax 132 - ------- ------- Net income $10,846 $ 3,804 ======= ======= Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 57,136 46,871 Add: Effect of dilutive options and warrants outstanding 3,672 2,282 ------- ------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 60,808 49,153 ======= ======= Income per share - Basic: Income before cumulative effect $.19 $.08 Cumulative effect of a change in accounting - - ---- ---- Net income $.19 $.08 ==== ==== Income per share - Diluted: Income before cumulative effect $.18 $.08 Cumulative effect of a change in accounting - - ---- ---- Net income $.18 $.08 ==== ====
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Three Months Ended December 31, ------------------ 2000 1999 ---- ---- (In thousands, except per share data) Net income $ 5,625 $ 1,025 ======= ======= Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 57,658 46,728 Add: Effect of dilutive options and warrants outstanding 3,943 1,323 ------- -------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 61,601 48,051 ======= ======== Income per share: Basic $.10 $.02 ==== ==== Diluted $.09 $.02 ==== ====
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 net of tax components of comprehensive income for the six and three months ended December 31, 2000 and 1999 are as follows:
Six Months Three Months Ended December 31, Ended December 31, ------------------ ------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net income $10,846 $ 3,804 $ 5,625 $ 1,025 Unrealized gain (loss) on interest rate swap agreement (26) - (86) - Unrealized investment gain (loss) (71) - (25) - Foreign currency translation adjustment (42) - 4 - ------- ------- ------- ------- Total comprehensive income $10,707 $ 3,804 $ 5,518 $ 1,025 ======= ======= ======= =======
-11- 6. Bank Loan Agreements -------------------- As of February 25, 1999, the Company replaced a previous agreement with a revised revolving credit, term loan and mortgage agreement with two banks which is secured by substantially all of the Company's assets not otherwise encumbered. The agreement provided for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on its Plainview property for $4.5 million. The revolving credit loan facility expires in December 2002. The term loan was fully paid with the proceeds from the Company's sale of its Common Stock in May 2000. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to 30-day LIBOR (approximately 6.4% at December 31, 2000) plus 1% on the revolving credit borrowings. The Company paid a facility fee of $100,000 and is required to pay a commitment fee of .25% per annum of the average unused portion of the credit line. The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. The Company has entered into an interest rate swap agreement for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit of $2.0 million. At December 31, 2000, the Company's available unused line of credit was approximately $21.0 million after consideration of the letter of credit. 7. Inventories ----------- Inventories consist of the following:
December 31, June 30, 2000 2000 ------------ -------- (In thousands) Raw Materials $ 25,049 $ 20,392 Work in Process 16,062 12,783 Finished Goods 4,067 4,192 -------- -------- $ 45,178 $ 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 $17.5 million and $134,000 to additional paid-in capital during the six months ended December 31, 2000 and 1999, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options, including $6.0 million and $134,000, respectively, which reduced the current tax payable. The balance was recorded as a net operating loss deferred tax asset. -12- 9. Contingencies ------------- A subsidiary of the Company whose operations were discontinued in 1991, is one of several defendants named in a personal injury action initiated in August 1994, by a group of plaintiffs. The plaintiffs are seeking damages which cumulatively exceed $500 million. The complaint alleges, among other things, that the plaintiffs suffered injuries from exposure to substances contained in products sold by the subsidiary to one of its customers. This action is in the discovery stage. Based upon available information and considering its various defenses, together with its product liability insurance, in the opinion of management of the Company, the outcome of the action against its subsidiary will not have a materially adverse effect on the Company's consolidated financial statements. 10. Business Segments ----------------- The Company's business segments and major products included in each segment, are as follows: Microelectronics: Test, Measurement and a)Microelectronic Modules Other Electronics: b)Thin Film Interconnects a)Instrument Products c)Integrated Circuits b)Motion Control Systems Isolator Products
For The Six Months Ended December 31, --------------------------- Business Segment Data: 2000 1999 ---- ---- (In thousands) Net sales: Microelectronics $ 66,716 $ 49,872 Test, Measurement and Other Electronics 33,761 25,641 Isolator Products 9,099 9,034 --------- --------- Net sales $ 109,576 $ 84,547 ========= ========= Operating income: Microelectronics $ 16,827 $ 8,368 Test, Measurement and Other Electronics 2,859 264 Isolator Products 897 992 General corporate expenses (4,062) (1,987) --------- --------- 16,521 7,637 Acquired in-process research and development (1) (1,500) - Interest expense (758) (1,297) Other income(expense), net 1,951 (236) --------- --------- Income before income taxes $ 16,214 $ 6,104 ========= =========
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For The Three Months Ended December 31, ---------------------------- Business Segment Data: (continued) 2000 1999 ---- ---- (In thousands) Net sales: Microelectronics $ 34,443 $ 24,836 Test, Measurement and Other Electronics 19,617 12,535 Isolator Products 4,388 4,541 --------- --------- Net sales $ 58,448 $ 41,912 ========= ========= Operating income: Microelectronics $ 8,727 $ 3,433 Test, Measurement and Other Electronics 2,627 (449) Isolator Products 402 464 General corporate expenses (2,211) (1,060) --------- --------- 9,545 2,388 Acquired in-process research and development (1) (1,500) - Interest expense (388) (666) Other income (expense), net 843 28 --------- --------- Income before income taxes $ 8,500 $ 1,750 ========= ========= (1) The charge for the write-off of in-process research and development acquired in the purchase of RDL is allocable fully to the Test, Measurement and Other Electronics 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 must adopt SAB 101 by April 1, 2001. Management does not expect the adoption to have a material effect on its consolidated financial statements. -14- AEROFLEX INCORPORATED AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We use our advanced design, engineering and manufacturing abilities to produce microelectronic, integrated circuit, interconnect and testing solutions. Our products are used in fiber optic, broadband cable, wireless and satellite communications markets. We also design and manufacture motion control systems and shock and vibration isolation systems which are used for commercial, industrial and defense applications. Our operations are grouped into three segments: -- microelectronics -- test, measurement and other electronics -- isolator products Our consolidated financial statements include the accounts of Aeroflex Incorporated and all of our subsidiaries. All of our subsidiaries are wholly-owned, except for Europtest, S.A. which is 93.4% owned by us and Aeroflex Amplicomm, Inc., which is 75% owned by us. Our microelectronics segment has been designing, manufacturing and selling state-of-the-art microelectronics for the electronics industry since 1974. In January 1994, we acquired substantially all of the net operating assets of the microelectronics division of Marconi Circuit Technology Corporation, which manufactures a wide variety of microelectronic assemblies. In March 1996, we acquired MIC Technology Corporation which designs, develops, manufactures and markets microelectronics products in the form of passive thin film circuits and interconnects. Effective July 1, 1997, MIC Technology acquired certain equipment, inventory, licenses for technology and patents of two of Lucent Technologies' telecommunications component units - multi-chip modules and film integrated circuits. These units manufacture microelectronic modules and interconnect products. In February 1999, we acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. consisting of UTMC's integrated circuit business. In September 2000, we acquired all of the net operating assets of AmpliComm, Inc., which designs and develops fiber optic amplifiers and modulator drivers used by manufacturers of advanced fiber optic systems. Our test, measurement and other electronics segment consists of two divisions: (1) instruments and (2) motion control products, including the following product lines: -- Comstron, a leader in radio frequency and microwave technology used in the manufacture of fast switching frequency signal generators and components, which we acquired in November 1989. Comstron is currently an operating division of Aeroflex Laboratories, Incorporated, one of our wholly-owned subsidiaries; -- Lintek, a leader in high speed instrumentation antenna measurement systems, radar systems and satellite test systems which we acquired in January 1995; -15- -- Europtest, S.A. (France), of which we acquired 90% effective September 1, 1998, under a purchase agreement which requires us to purchase the remaining 10% of Europtest pro rata over a three-year period at prices determined based upon net sales of Europtest products. In October 1999, we purchased an additional 3.4%. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications. -- Altair, which we acquired on October 16, 2000 in a pooling-of-interests business combination. Altair designs and develops advanced object-oriented control systems software based upon a proprietary software engine. -- RDL, which we acquired on October 23, 2000. RDL designs, develops and manufactures advanced commercial communications test and measurement products and defense subsystems. -- Our motion control products division has been engaged in the development and manufacture of electro-optical scanning devices used in infra-red night vision since 1975. Additionally, it is engaged in the design, development and production of stabilization tracking devices and systems and magnetic motors used in satellites and other high reliability applications. Our isolator products segment has been designing, developing, manufacturing and selling severe service shock and vibration isolation systems since 1961. These devices are primarily used in defense applications. In October 1983, we acquired Vibration Mountings & Controls, Inc., which manufactures a line of off-the-shelf rubber and spring shock, vibration and structure borne noise control devices used in commercial and industrial applications. In December 1986, we acquired the operating assets of Korfund Dynamics Corporation, a manufacturer of an industrial line of heavy duty spring and rubber shock mounts. Our revenue is recognized based upon shipments or billings. We record costs on our long-term contracts using percentage-of-completion accounting. Under percentage of completion accounting, costs are recognized on revenues in the same relation that total estimated manufacturing costs bear to total contract value. Estimated costs at completion are based upon engineering and production estimates. Provisions for estimated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such losses or revisions are first determined. Approximately 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. 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. -16- Six Months Ended December 31, 2000 Compared to Six Months Ended December 31, 1999 Net Sales. Net sales increased 29.6% to $109.6 million for the six months ended December 31, 2000 from $84.5 million for the six months ended December 31, 1999. Net sales in the microelectronics segment increased 33.8% to $66.7 million for the six months ended December 31, 2000 from $49.9 million for the six months ended December 31, 1999 due primarily to increased sales volume in microelectronic modules and thin film interconnects. Net sales in the test, measurement and other electronics segment increased 31.7% to $33.8 million for the six months ended December 31, 2000 from $25.6 million for the six months ended December 31, 1999 primarily due to increased sales volume in frequency synthesizers (primarily shipments of the FS-1000 for use in commercial communications test systems) and the acquisition of RDL, Inc. in October, 2000 offset, in part, by reductions in sales in high speed automatic test systems (primarily due to the completion of satellite payload test equipment for Hughes Space and Communications). Net sales in the isolator products segment were $9.1 million for the six months ended December 31, 2000 and $9.0 million for the six months ended December 31, 1999. Gross Profit. Cost of sales includes materials, direct labor and overhead expenses such as engineering labor, fringe benefits, allocable occupancy costs, depreciation and manufacturing supplies. Gross profit increased 53.9% to $44.3 million for the six months ended December 31, 2000 from $28.8 million for the six months ended December 31, 1999. Gross margin increased to 40.4% for the six months ended December 31, 2000 from 34.0% for the six months ended December 31, 1999. The increases were primarily a result of the increased sales volume in both the microelectronics segment and in frequency synthesizers offset, in part, by reduced margins in high speed automatic test systems. Selling, General and Administrative Costs. Selling, general and administrative costs include office and management salaries, fringe benefits and commissions. Selling, general and administrative costs increased 27.3% to $20.3 million (18.5% of net sales) for the six months ended December 31, 2000 from $15.9 million (18.9% of net sales) for the six months ended December 31, 1999. 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 43.8% to $7.5 million (6.8% of net sales) for the six months ended December 31, 2000 from $5.2 million (6.2% of net sales) for the six months ended December 31, 1999. The increase was primarily due to 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. 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 research and development in progress had no alternative future uses. Accordingly, we expensed these costs as of the acquisition date. The value assigned to this asset was determined by identifying significant research projects for which technological feasibility had not been established. -17- The research and development projects are associated with the introduction of several new products as well as specific significant enhancements to existing products. Valuation of development efforts in the future has been excluded from the research and development appraisal. The nature of the efforts to develop the acquired in-process technology into a commercially viable product relate to the completion of all planning, designing, prototyping and testing activities that are necessary to establish that the proposed technologies meet their design specifications including functional, technical and economic performance requirements. The value assigned to purchased in-process technology was determined 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 RDL were estimated based on a detailed forecast, as well as discussions with the finance, marketing and engineering personnel of RDL. Allocation of total RDL projected revenues to in-process research and development was based on discussions with RDL's management. A significant portion of RDL's future revenues was expected to originate from the sale of products that were not yet completed at acquisition. However, RDL's existing products and technologies are expected to generate sales through 2007. 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 RDL 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, a discount rate of 25 percent was used to discount cash flows from the in-process products. This discount rate was commensurate with RDL's 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 even RDL's 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 RDL's research and development include various phases of design, development and testing. Funding for such projects is expected to come from internally generated sources. -18- As evidenced by the continued support of the development of RDL's 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 RDL's research and development projects, and there is no assurance that technological or commercial success will be achieved. If the development of RDL's in-process research and development project 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 $758,000 for the six months ended December 31, 2000 from $1.3 million for the six months ended December 31, 1999, primarily due to reduced levels of borrowings. Other income of $2.0 million for the six months ended December 31, 2000 consists primarily of $2.1 million of interest income offset by a $206,000 decrease in the fair value of our interest rate swap agreements. Other expense of $236,000 for the six months ended December 31, 1999 consisted primarily of a $300,000 expense for the settlement of a lawsuit and $49,000 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 139.1% to $5.5 million (an effective income tax rate of 33.9%) for the six months ended December 31, 2000 from $2.3 million (an effective income tax rate of 37.7%) for the six months ended December 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. Three Months Ended December 31, 2000 Compared to Three Months Ended December 31, 1999 Net Sales. Net sales increased 39.5% to $58.4 million for the three months ended December 31, 2000 from $41.9 million for the three months ended December 31, 1999. Net sales in the microelectronics segment increased 38.7% to $34.4 million for the three months ended December 31, 2000 from $24.8 million for the three months ended December 31, 1999 due primarily to increased sales volume in microelectronic modules and thin film interconnects. Net sales in the test, measurement and other electronics segment increased 56.5% to $19.6 million for the three months ended December 31, 2000 from $12.5 million for the three months ended December 31, 1999 primarily due to the acquisition of RDL, Inc. in October, 2000 and increased sales volume in frequency synthesizers (primarily shipments of the FS-1000 for use in commercial communications test systems) offset, in part, by reductions in sales in high speed automatic test systems (primarily due to the completion of satellite payload test equipment for Hughes Space and Communications). Net sales in the isolator products segment were $4.4 million for the three months ended December 31, 2000 and $4.5 million for the three months ended December 31, 1999. Gross Profit. Gross profit increased 83.4% to $24.8 million for the three months ended December 31, 2000 from $13.5 million for the three months ended December 31, 1999. Gross margin increased to 42.5% for the three months ended December 31, 2000 from 32.3% for the three months ended December 31, 1999. The increases were primarily a result of the increased sales volume in both the microelectronics segment and in frequency synthesizers. -19- Selling, General and Administrative Costs. Selling, general and administrative costs increased 27.4% to $10.8 million (18.5% of net sales) for the three months ended December 31, 2000 from $8.5 million (20.3% of net sales) for the three months ended December 31, 1999. 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 68.3% to $4.5 million (7.6% of net sales) for the three months ended December 31, 2000 from $2.6 million (6.3% of net sales) for the three months ended December 31, 1999. 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 RDL, Inc., we allocated $1.5 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 $388,000 for the three months ended December 31, 2000 from $666,000 for the three months ended December 31, 1999, primarily due to reduced levels of borrowings. Other income of $843,000 for the three months ended December 31, 2000 consists primarily of $960,000 of interest income offset by a $133,000 decrease in the fair value of our interest rate swap agreements. Other income of $28,000 for the three months ended December 31, 1999 consisted primarily 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 296.6% to $2.9 million (an effective income tax rate of 33.8%) for the three months ended December 31, 2000 from $725,000 (an effective income tax rate of 41.4%) for the three months ended December 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 December 31, 2000, we had $134.6 million in working capital. Our current ratio was 5.9 to 1 at December 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 provided for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on our Plainview property for $4.5 million. The revolving credit loan facility expires in December 2002. The term loan was fully paid in May 2000 with the proceeds from the sale of our Common Stock. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to 30-day LIBOR (approximately 6.4% at December 31, 2000) plus 1% 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. -20- 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 $147.0 million at December 31, 2000 and $100.0 million at December 31, 1999. For the six months ended December 31, 2000, our operations provided cash of $22.4 million from our continued profitability, the collection of receivables and the tax benefit of stock option and warrant exercises. For the six months ended December 31, 2000, our investing activities used cash of $35.9 million including $14.7 million for purchases of businesses, $19.6 million for the purchase of available-for-sale securities and $6.9 million for capital expenditures offset, in part, by $5.4 million of proceeds from the sale of available-for-sale marketable securities. For the six months ended December 31, 2000, our financing activities used cash of $4.5 million primarily for the withholding taxes paid on the exercise of stock options 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 at least the next twelve months. At December 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. 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 December 31, 2000, the effect on our net income would not be material. Most of our invested cash and marketable securities are at variable rates of interest. If market interest rates decrease by 10 percent from levels at December 31, 2000, the effect on our net income would be a reduction of approximately $240,000 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. -21- 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 -22- 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) February 14, 2001 By: s/Michael Gorin ------------------------------ Michael Gorin President, Chief Financial Officer and Principal Accounting Officer -23- -----END PRIVACY-ENHANCED MESSAGE-----