-----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, VKK6Er9ag4plInpscU0MR8so/Bgq0v4GojRbe4bWmVEvDfTzcJ/Z5f/kRpiEKHHe BkBClF1Y5M34oHKTxBpzAQ== 0000932214-02-000048.txt : 20020515 0000932214-02-000048.hdr.sgml : 20020515 20020515144436 ACCESSION NUMBER: 0000932214-02-000048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 1934 Act SEC FILE NUMBER: 001-08037 FILM NUMBER: 02651159 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 arx10qmarch2002-live.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 March 31, 2002 ------------------------------ 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 15, 2002 59,998,842 shares (excluding 4,388 shares held in treasury) - -------------------------------------------------------------------------------- (Date) (Number of Shares) NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 30 PAGES. ------------ AEROFLEX INCORPORATED AND SUBSIDIARIES INDEX ----- PAGE ---- PART I: FINANCIAL INFORMATION - ------ --------------------- CONSOLIDATED BALANCE SHEETS March 31, 2002 and June 30, 2001 3-4 CONSOLIDATED STATEMENTS OF OPERATIONS Nine and Three Months Ended March 31, 2002 and 2001 5-6 CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended March 31, 2002 and 2001 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine and Three Months Ended March 31, 2002 and 2001 20-28 PART II: OTHER INFORMATION 29 - ------- ----------------- SIGNATURES 30 -2- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, June 30, 2002 2001 --------- -------- (Unaudited) (In thousands) ASSETS - ------ Current assets: Cash and cash equivalents $ 74,751 $ 69,896 Marketable securities 5,943 12,012 Accounts receivable, less allowance for doubtful accounts of $593,000 and $459,000 50,474 49,409 Inventories, net 48,522 48,423 Deferred income taxes 7,320 7,148 Prepaid expenses and other current assets 2,592 2,583 -------- -------- Total current assets 189,602 189,471 Property, plant and equipment, net 55,534 62,137 Intangible assets with definite lives, net 15,196 20,286 Goodwill 23,212 21,006 Deferred income taxes 11,239 8,538 Other assets 9,014 8,814 -------- -------- Total assets $303,797 $310,252 ======== ======== See notes to consolidated financial statements.
-3- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
March 31, June 30, 2002 2001 --------- -------- (Unaudited) (In thousands) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt $ 1,714 $ 1,905 Accounts payable 10,154 16,794 Advance payments by customers 1,693 425 Accrued expenses and other current liabilities 16,292 17,973 -------- -------- Total current liabilities 29,853 37,097 Long-term debt 10,192 11,428 Other long-term liabilities 6,671 6,606 -------- -------- Total liabilities 46,716 55,131 -------- -------- 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 110,000; none issued - - Common Stock, par value $.10 per share; authorized 110,000,000 shares; issued 59,988,000 and 59,674,000 shares 5,999 5,967 Additional paid-in capital 222,201 219,278 Accumulated other comprehensive income (loss) (138) (154) Retained earnings 29,033 30,044 -------- -------- 257,095 255,135 Less: Treasury stock, at cost (4,000 and 4,000 shares) 14 14 -------- -------- Total stockholders' equity 257,081 255,121 -------- -------- Total liabilities and stockholders' equity $303,797 $310,252 ======== ======== See notes to consolidated financial statements.
-4- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended March 31, ---------------------- 2002 2001 ---- ---- (Unaudited) (In thousands, except per share data) Net sales $136,307 $173,602 Cost of sales (including a $750,000 restructuring charge in 2002, Note 3) 88,247 101,181 -------- -------- Gross profit 48,060 72,421 -------- -------- Selling, general and administrative costs (including a $4,300,000 restructuring charge in 2002, Note 3) 34,706 32,143 Research and development costs 15,370 13,101 Acquired in-process research and development (Note 4) - 2,500 -------- -------- 50,076 47,744 -------- -------- Operating income (loss) (2,016) 24,677 -------- -------- Other income (expense): Interest expense (1,138) (1,078) Other income (expense), net 1,668 2,749 -------- -------- Total other income (expense) 530 1,671 -------- -------- Income (loss) before income taxes (1,486) 26,348 Provision (benefit) for income taxes (475) 9,300 -------- -------- Income (loss) before cumulative effect of a change in accounting (1,011) 17,048 Cumulative effect of a change in accounting, net of tax (Note 2) - 132 -------- -------- Net income (loss) $ (1,011) $ 17,180 ======== ======== Net income (loss) per common share: Basic Income (loss) before cumulative effect $(.02) $.30 Cumulative effect of a change in accounting - - ----- ----- Net income (loss) $(.02) $.30 ===== ==== Diluted(1) Income (loss) before cumulative effect $(.02) $.28 Cumulative effect of a change in accounting - - ----- ----- Net income (loss) $(.02) $.28 ===== ==== Weighted average number of common shares outstanding: Basic 59,926 57,584 ======== ======== Diluted(1) 59,926 60,920 ======== ======== (1) As a result of the loss for the nine months ended March 31, 2002, all options are anti-dilutive. See notes to consolidated financial statements.
-5- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, ------------------ 2002 2001 ------- -------- (Unaudited) (In thousands, except per share data) Net sales $ 50,617 $ 64,026 Cost of sales (including a $750,000 restructuring charge in 2002, Note 3) 32,570 35,897 -------- -------- Gross profit 18,047 28,129 -------- -------- Selling, general and administrative costs (including a $4,300,000 restructuring charge in 2002, Note 3) 14,533 11,850 Research and development costs 6,043 5,623 Acquired in-process research and development (Note 4) - 1,000 -------- -------- 20,576 18,473 -------- -------- Operating income (loss) (2,529) 9,656 -------- -------- Other income (expense): Interest expense (479) (320) Other income (expense), net 579 798 -------- -------- Total other income (expense) 100 478 -------- -------- Income (loss) before income taxes (2,429) 10,134 Provision (benefit) for income taxes (800) 3,800 -------- -------- Net income (loss) $ (1,629) $ 6,334 ======== ======== Net income (loss) per common share: Basic $(.03) $.11 ===== ==== Diluted(1) $(.03) $.10 ===== ==== Weighted average number of common shares outstanding: Basic 60,088 58,480 ======== ======== Diluted(1) 60,088 61,145 ======== ======== (1) As a result of the loss for the three months ended March 31, 2002, all options are anti-dilutive. See notes to consolidated financial statements.
-6- AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, ----------------- 2002 2001 ---- ---- (Unaudited) (In thousands) Cash Flows From Operating Activities: Net income (loss) $ (1,011) $ 17,180 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Acquired in-process research and development - 2,500 Depreciation and amortization 9,127 8,284 Tax benefit of stock option exercises (Note 9) - 10,015 Deferred income taxes (466) 431 Restructuring charge 5,050 - Other, net 364 (448) Change in operating assets and liabilities, net of effects from purchase of businesses: Decrease (increase) in accounts receivable (1,632) 349 Decrease (increase) in inventories (849) (5,430) Decrease (increase) in prepaid expenses and other assets (212) (1,299) Increase (decrease) in accounts payable, accrued expenses and other liabilities (8,178) 239 -------- -------- Net Cash Provided By (Used In) Operating Activities 2,193 31,821 -------- -------- Cash Flows From Investing Activities: Payment for purchase of businesses, net of cash acquired (283) (14,532) Capital expenditures (3,324) (10,332) Purchase of marketable securities (5,938) (21,747) Proceeds from sale of marketable securities 11,994 22,833 Other, net - (52) -------- -------- Net Cash Provided By (Used In) Investing Activities 2,449 (23,830) -------- -------- Cash Flows From Financing Activities: Borrowings under debt agreements 89 613 Debt repayments (1,516) (3,550) Proceeds from the exercise of stock options and warrants 1,640 3,369 Amounts paid for withholding taxes on stock option exercises (1,485) (21,910) Withholding taxes collected for stock option exercises 1,485 17,700 -------- -------- Net Cash Provided By (Used In) Financing Activities 213 (3,778) -------- -------- Net Increase (Decrease) In Cash And Cash Equivalents 4,855 4,213 Cash And Cash Equivalents At Beginning Of Period 69,896 54,732 -------- -------- Cash And Cash Equivalents At End Of Period $ 74,751 $ 58,945 ======== ======== 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, 2002, the related consolidated statements of operations for the nine and three months ended March 31, 2002 and 2001, and the consolidated statements of cash flows for the nine months ended March 31, 2002 and 2001 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, 2002 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 2001 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 2001, except as disclosed in Note 2. 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. Recent Accounting Pronouncements -------------------------------- Accounting for Derivative Instruments and Hedging Activities ------------------------------------------------------------ Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("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. Accounting for Business Combinations, Goodwill and Other Intangible Assets -------------------------------------------------------------------------- In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. This pronouncement also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 121. The Company has adopted the provisions of SFAS Nos. 141 and 142 as of July 1, 2001. The Company has evaluated its existing intangible assets and goodwill that were acquired in prior purchase business combinations and has reclassified $3.0 million net carrying value of intangible assets to goodwill in order to conform to the new criteria in SFAS No. 141 for recognition apart from goodwill. In connection with this reclassification, the Company has reduced goodwill for the amount of deferred taxes -8- previously recorded on the reclassified intangible assets that is no longer required. The Company has also reassessed the useful lives and residual values of all intangible assets acquired, and has determined that no adjustment to these estimates was necessary. The Company has tested goodwill for impairment in accordance with the provisions of SFAS No. 142 as of July 1, 2001. Based on its evaluation, the Company is not required to recognize any impairment losses. The components of amortized intangible assets are as follows:
As of March 31, 2002 ------------------------------ Gross Carrying Accumulated Amount Amortization -------------- ------------ (In thousands) Existing technology $ 21,413 $ 6,909 Tradenames 1,000 308 -------- -------- Total $ 22,413 $ 7,217 ======== ========
The aggregate amortization expense for the amortized intangible assets was $2.1 million for the nine months ended March 31, 2002. The carrying amount of goodwill is as follows:
Balance Balance as of as of July 1, Adjustment Adjustment Acquired March 31, 2001 (Note a) (Note b) (Note c) 2002 -------- ---------- ---------- -------- --------- (In thousands) Microelectronic Solutions Segment $ 9,268 $ 2,913 $(1,116) $ - $ 11,065 Test Solutions Segment 10,949 126 - 283 11,358 Isolator Products Segment 789 - - - 789 -------- -------- ------- ------ -------- Total $ 21,006 $ 3,039 $(1,116) $ 283 $ 23,212 ======== ======== ======= ====== ======== Note a - Reclassification from intangible assets in accordance with SFAS No. 141. Note b - Reversal of deferred taxes payable, previously recorded, for reclassified intangible assets. Note c - Goodwill acquired during the period as a result of contingent payments made pursuant to purchase agreements.
Goodwill (including intangible assets reclassified to goodwill in accordance with SFAS No. 141) amortization for the nine and three months ended March 31, 2001 was $957,000 and $365,000, respectively, and generated a tax benefit of $169,000 and $72,000, respectively. The following table shows the results of operations as if SFAS No. 141 was applied to prior periods: -9-
For the nine months ended March 31, ------------------- 2002 2001 ---- ---- (In thousands, except per share amounts) Net income (loss), as reported $(1,011) $17,180 Add Back: Goodwill amortization, net of tax - 788 ------- ------- Adjusted net income (loss) $(1,011) $17,968 ======= ======= Income (loss) per share - Basic Net income (loss), as reported $ (.02) $ .30 Goodwill amortization, net of tax - .01 ------- ------- Adjusted net income (loss) $ (.02) $ .31 ======= ======= Income (loss) per share - Diluted Net income, as reported $ (.02) $ .28 Goodwill amortization, net of tax - .01 ------- ------- Adjusted net income (loss) $ (.02) $ .29 ======= =======
For the three months ended March 31, -------------------- 2002 2001 ---- ---- (In thousands, except per share amounts) Net income (loss), as reported $(1,629) $ 6,334 Add Back: Goodwill amortization, net of tax - 293 ------- ------- Adjusted net income (loss) $(1,629) $ 6,627 ======= ======= Income (loss) per share - Basic Net income (loss), as reported $ (.03) $ .11 Goodwill amortization, net of tax - - ------- ------- Adjusted net income (loss) $ (.03) $ .11 ======= ======= Income (loss) per share - Diluted Net income (loss), as reported $ (.03) $ .10 Goodwill amortization, net of tax - .01 ------- ------- Adjusted net income (loss) $ (.03) $ .11 ======= =======
Accounting for the Impairment of Long-Lived Assets -------------------------------------------------- In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 effective July 1, 2002 and does not expect such adoption to have a material impact on its consolidated financial statements. -10- 3. Restructuring Charge -------------------- In February 2002, the Company, pursuant to a Board of Directors resolution, decided to consolidate its leased Texas thin-film manufacturing operations into its existing owned facilities in Pearl River, New York. The Company has ceased manufacturing operations in Texas as of April 2002 and expects the consolidation to be complete by June 2002. In connection with this restructuring, the Company has recorded a restructuring charge of $5.1 million in the third quarter of fiscal 2002 or $3.4 million, net of tax ($.06 per diluted share). The restructuring charge is allocated $750,000 to cost of sales and $4.3 million to selling, general and administrative expenses. In addition, there are anticipated charges of approximately $550,000 directly related to the restructuring plan which could not be accrued in the third quarter of fiscal 2002, but will be expensed as incurred. Inventory --------- The $750,000 charge to write-off inventory was recognized for inventory at the Texas facility that is not compatible with the manufacturing platform at the New York facility. This charge was classified as a component of cost of sales in accordance with EITF No. 96-9, "Classification of Inventory Markdowns and Other Costs Associated with a Restructuring." Workforce Reduction -------------------- During the third quarter of fiscal 2002, workforce reductions resulted in a charge of $560,000. This charge includes severance pay, retention bonuses and fringe benefits for the remaining workforce at the Texas facility. Approximately $220,000 of post-production payroll costs, related solely to closing the facility, have not been accrued, but will be expensed as incurred, as such costs did not meet the criteria for accrual of EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." Plant Shutdown -------------- During the third quarter of fiscal 2002, the Company recognized a charge of $3.7 million for plant shutdown charges. This charge includes $2.5 million for write- off of excess equipment and leasehold improvements, $1.0 million for buyouts of certain equipment and facility leases and $240,000 relating to facility closing and clean-up. Approximately $330,000 of additional costs are expected to be incurred and expensed in the fourth quarter of fiscal 2002 related to post- production operating costs such as rent and utilities. The $2.5 million of asset impairment charges was recognized for property, plant and equipment associated with the consolidation of manufacturing facilities. This non-cash charge was recognized in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of." -11- The following table sets forth the charges and payments related to the restructuring reserve for the nine months ended March 31, 2002:
Balance Nine Months Ended March 31, March 31, 2002 2002 ------------------------------------- ------------- Restructuring Non-Cash Cash Restructuring Charge Items Payments Reserve ------------- -------- -------- ------------- (In thousands) Inventory write-off $ 750 $ (750) $ - $ - ------ ------- ------ ------ Cost of sales 750 (750) - - ------ ------- ------ ------ Workforce reduction 560 - (5) 555 Plant Shutdown 3,740 (2,506) (19) 1,215 ------ ------- ------ ------ Operating costs 4,300 (2,506) (24) 1,770 ------ ------- ------ ------ Total $5,050 $(3,256) $ (24) $1,770 ====== ======= ====== ======
This restructuring charge, along with the additional post-production operating costs of approximately $550,000 that will be expensed subsequent to March 31, 2002, is estimated to be $5.6 million in total. 4. Acquisition of Businesses ------------------------- TriLink ------- Effective March 23, 2001, the Company acquired all of the outstanding stock of TriLink Communications Corp. ("TriLink") for 1.1 million shares of Aeroflex Common Stock. TriLink designs, develops, manufactures and markets fiber optic components for the communications industry, including Lithium Niobate modulators and optical switches. The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. In accordance with SFAS No. 141, the Company allocated the purchase price, including acquisition costs of approximately $300,000, as follows:
(In thousands) Net tangible assets $ 1,171 Existing technology 6,000 Deferred income taxes on identifiable intangible assets (2,400) Goodwill 5,926 In-process research and development 1,000 ------- $11,697 =======
The existing technology is being amortized on a straight-line basis over 6 years. The acquired in-process research and development was not considered to have reached technological feasibility and, in accordance with accounting principles generally accepted in the United States of America, the value of such was expensed in the quarter ended March 31, 2001. At the acquisition date, TriLink was conducting design, development, engineering and testing activities associated with the completion of its 10 GB modulator. -12- Summarized below are the unaudited pro forma results of operations of the Company as if TriLink had been acquired at the beginning of the fiscal period presented. The $1.0 million write-off has not been included in the March 31, 2001 pro forma income in order to provide comparability to the respective historical period.
Pro Forma Nine Months Ended March 31, 2001 ----------------- (In thousands, except per share data) Net Sales $173,962 Income before cumulative effect of a change in accounting 15,666 Income before cumulative effect of a change in accounting per share: Basic $ .27 Diluted $ .25
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 period presented or of future operating results of the combined companies. RDL --- On October 23, 2000, the Company acquired all of the outstanding stock of RDL, Inc. ("RDL") for $14.0 million of available cash. RDL designs, develops and manufactures advanced commercial communications test and measurement products and defense subsystems. The acquired company's net sales were approximately $15.0 million for the year ended March 31, 2000. The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price, including acquisition costs of approximately $100,000, as follows:
(In thousands) Net tangible assets $ 6,774 Existing technology 2,970 Goodwill 2,856 In-process research and development 1,500 ------- $14,100 =======
The existing technology is being amortized on a straight-line basis over 7 years. The acquired in-process research and development was not considered to have reached technological feasibility and, in accordance with accounting principles generally accepted in the United States of America, the value of such was expensed in the quarter ended December 31, 2000. At the acquisition date, RDL was conducting design, development, engineering and testing activities associated with the completion of its defense and commercial product lines representing next- generation technologies. 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 period presented. The $1.5 million write-off has not been included in the March 31, 2001 pro forma income in order to provide comparability to the respective historical period. -13-
Pro Forma Nine Months Ended March 31, 2001 ----------------- (In thousands, except per share data) Net sales $178,484 Income before cumulative effect of a change in accounting 16,604 Income before cumulative effect of a change in accounting per share: Basic $ .29 Diluted $ .27
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 period presented or of future operating results of the combined companies. Altair ------ On October 16, 2000, the Company issued 550,000 shares(after adjustment for the two-for-one stock split effective in November 2000) of its Common Stock for all the outstanding common stock of Altair Aerospace Corporation ("Altair"). Altair designs and develops advanced object-oriented control systems software based upon a proprietary software engine. This business combination has been accounted for as a pooling-of-interests and, accordingly, for all periods prior to the business combination, the Company's historical consolidated financial statements have been restated to include the accounts and results of operations of Altair. The acquired company's net sales were approximately $3.0 million for the year ended December 31, 2000. For periods preceding the combination, there were no intercompany transactions which required elimination from the combined consolidated results of operations and there were no adjustments necessary to conform the accounting practices of the two companies. 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. 5. Earnings Per Share ------------------ In accordance with SFAS No. 128 "Earnings Per Share," net income per common share ("Basic EPS") is computed by dividing net income by the weighted average common shares outstanding. Net income per common share, assuming dilution ("Diluted EPS") is computed by dividing net income by the weighted average common shares outstanding plus potential dilution from the exercise of stock options and warrants. -14- A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:
Nine Months Ended March 31, ------------------ 2002 2001 ---- ---- (In thousands, except per share data) Income (loss) before cumulative effect of a change in accounting $ (1,011) $ 17,048 Cumulative effect of a change in accounting, net of tax - 132 -------- -------- Net income (loss) $ (1,011) $ 17,180 ======== ======== Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 59,926 57,584 Add: Effect of dilutive options and warrants outstanding - 3,336 -------- -------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 59,926 60,920 ======== ======== Income (loss) per share - Basic: Income (loss) before cumulative effect $(.02) $ .30 Cumulative effect of a change in accounting - - -------- -------- Net income (loss) $(.02) $ .30 ======== ======== Income (loss) per share - Diluted(1): Income (loss) before cumulative effect $(.02) $ .28 Cumulative effect of a change in accounting - - -------- -------- Net income (loss) $(.02) $ .28 ======== ========
Three Months Ended March 31, --------------- 2002 2001 ---- ---- (In thousands, except per share data) Net income (loss) $(1,629) $ 6,334 ======= ======= Computation of Adjusted Weighted Average Shares Outstanding: Weighted average shares outstanding 60,088 58,480 Add: Effect of dilutive options and warrants outstanding - 2,665 ------- ------- Weighted average shares and common share equivalents used for computation of diluted earnings per common share 60,088 61,145 ======= ======= Net Income (loss) Per Share - Basic $(.03) $ .11 ===== ===== - Diluted(1) $(.03) $ .10 ===== ===== (1) As a result of the loss for the nine and three months ended March 31, 2002, all options are anti-dilutive.
-15- Stock Split ----------- On November 2, 2000, the Company's Board of Directors authorized a two-for-one 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. 6. Comprehensive Income (Loss) --------------------------- The components of comprehensive income (loss) are as follows:
Nine Months Three Months Ended March 31, Ended March 31, --------------- --------------- 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands) Net income (loss) $(1,011) $17,180 $(1,629) $ 6,334 Unrealized gain (loss) on interest rate swap agreements, net of tax (37) (81) 36 (55) Unrealized investment gain (loss), net of tax (8) (109) (3) (38) Foreign currency translation adjustment 61 (84) (28) (42) ------- ------- ------- ------- Total comprehensive income (loss) $ (995) $16,906 $(1,624) $ 6,199 ======= ======= ======= =======
7. Bank Loan Agreements -------------------- As of February 25, 1999, the Company replaced a previous agreement with a revised revolving credit, term loan and mortgage agreement with two banks which is secured by substantially all of the Company's assets not otherwise encumbered. The agreement provided for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on its Plainview property for $4.5 million. The revolving credit loan facility expires in December 2002. The term loan was fully paid with the proceeds from the Company's sale of its Common Stock in May 2000. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to prime (4.75% at March 31, 2002) 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 fair market value of the interest rate swap agreement was $122,000 as of March 31, 2002 in favor of the banks. The terms of the loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit of $2.0 million. At March 31, 2002, the Company's available unused line of credit was approximately $20.0 million after consideration of this and other letters of credit. -16- 8. Inventories ----------- Inventories, net, consist of the following:
March 31, June 30, 2002 2001 --------- -------- (In thousands) Raw Materials $ 26,132 $ 28,999 Work in Process 17,327 13,071 Finished Goods 5,063 6,353 -------- -------- $ 48,522 $ 48,423 ======== ========
9. Income Taxes ------------ The Company is undergoing routine audits by various taxing authorities of several of its Federal and state income tax returns covering periods from 1997 to 2001. 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 $1.3 million and $21.7 million to additional paid- in capital during the nine months ended March 31, 2002 and 2001, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options. 10. 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. 11. Business Segments ----------------- The Company's business segments and major products included in each segment, are as follows: Microelectronic Solutions: Test Solutions: a)Microelectronic Modules a)Instrument Products b)Thin Film Interconnects b)Motion Control Systems c)Integrated Circuits Isolator Products -17-
For The Nine Months Ended March 31, ---------------------------- Business Segment Data: 2002 2001 ---- ---- (In thousands) Net sales: Microelectronic Solutions $ 75,668 $ 107,709 Test Solutions 48,982 51,450 Isolator Products 11,657 14,443 --------- --------- Net sales $ 136,307 $ 173,602 ========= ========= Operating income (loss): Microelectronic Solutions(1) $ 5,840 $ 28,202 Test Solutions (106) 3,655 Isolator Products 620 1,583 General corporate expenses (3,319) (6,263) --------- --------- 3,035 27,177 Restructuring charge (1) (5,050) - Acquired in-process research and development (2) - (2,500) Interest expense (1,138) (1,078) Other income (expense), net 1,667 2,749 --------- --------- Income (loss) before income taxes $ (1,486) $ 26,348 ========= =========
For The Three Months Ended March 31, -------------------------- 2002 2001 ---- ---- (In thousands) Net sales: Microelectronic Solutions $ 27,304 $ 40,993 Test Solutions 19,580 17,689 Isolator Products 3,733 5,344 --------- --------- Net sales $ 50,617 $ 64,026 ========= ========= Operating income (loss): Microelectronic Solutions(1) $ 2,210 $ 11,374 Test Solutions 1,335 796 Isolator Products 78 687 General corporate expenses (1,102) (2,201) --------- --------- 2,521 10,656 Restructuring charge (1) (5,050) - Acquired in-process research and development (2) - (1,000) Interest expense (479) (320) Other income (expense), net 579 798 --------- --------- Income (loss) before income taxes $ (2,429) $ 10,134 ========= ========= (1) The Microelectronic Solutions segment operating income has been adjusted to exclude the restructuring charge of $5.1 million for the closing of the Company's Richardson, Texas facility. (2) The charge for the in-process research and development acquired in the purchase of RDL of $1.5 million for the nine months ended March 31, 2001 is allocable fully to the Test Solutions segment. The charge for the in-process research and development acquired in the purchase of TriLink of $1.0 million for the nine and three months ended March 31, 2001 is allocable fully to the Microelectronics Solutions segment.
-18- 12. Subsequent Event ---------------- On April 15, 2002, the Company announced its agreement to purchase, for cash, all of the outstanding shares of IFR Systems ("IFR") stock for $1.35 per share. IFR designs and manufactures advanced wireless test solutions for communications, avionics and general test and measurement applications. IFR's net sales were approximately $88.3 million for the nine months ended December 31, 2001. Under the terms of the agreement, unanimously approved by the board of directors of both of the companies, the Company commenced a tender offer for a minimum of 50.1% of the outstanding shares of IFR on a fully-diluted basis. The tender offer expires May 20, 2002. Following the successful completion of the tender offer, it is expected there will be a merger in which any remaining shareholders of IFR will receive $1.35 per share in cash. The cash purchase price is approximately $60 million, which includes the payment of $48.8 million in satisfaction of IFR's bank indebtedness of approximately $84 million, including interest. IFR's lenders have agreed to accept this payment in full satisfaction of the amounts owed to them from IFR. -19- 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: -- microelectronic solutions -- test solutions -- 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 Aeroflex Amplicomm, Inc., which is 75% owned by us. Our microelectronic solutions 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 operating assets of AmpliComm, Inc., which designs and develops fiber optic amplifiers and modulator drivers used by manufacturers of advanced fiber optic systems. In March 2001, we acquired TriLink Communications Corp. which designs, develops, manufactures and markets fiber optic components for the communications industry, including Lithium Niobate modulators and optical switches. Our test solutions 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; -- Europtest, S.A. (France), which we acquired effective September 1, 1998. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications. -20- -- Altair, which we merged with in October 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 in October 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. Approximately 40% of our sales for the nine months ended March 31,2002, 29% of our sales for fiscal 2001 and 33% of our sales for fiscal 2000 were to agencies of the United States Government or to prime defense contractors or subcontractors of the United States Government. Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2001 Net Sales. Net sales decreased 21.5% to $136.3 million for the nine months ended March 31, 2002 from $173.6 million for the nine months ended March 31, 2001. Net sales in the microelectronic solutions segment decreased 29.7% to $75.7 million for the nine months ended March 31, 2002 from $107.7 million for the nine months ended March 31, 2001 due primarily to decreased sales volume in thin film interconnects and microelectronic modules due to the continuing slowdown of the fiber optics market offset, in part, by increased sales volume of integrated circuits, primarily in the satellite and defense markets. Net sales in the test solutions segment decreased 4.8% to $49.0 million for the nine months ended March 31, 2002 from $51.5 million for the nine months ended March 31, 2001 primarily due to lower volume in frequency synthesizers partially offset by increased sales volume in satellite test equipment. Net sales in the isolator products segment decreased 19.3% to $11.7 million for the nine months ended March 31, 2002 from $14.4 million for the nine months ended March 31, 2001 due to lower volume of commercial and industrial isolators. 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 decreased 32.6% to $48.8 million (35.8% of net sales) for the nine months ended March 31, 2002 (excluding a $750,000 restructuring charge, see Note 3 to the Consolidated Financial Statements) from $72.4 million (41.7% of net sales) for the nine months ended March 31, 2001. The decreases were primarily a result of the decreased sales volume in all segments. The gross profit margin also decreased in all three segments due to the fixed nature of certain of the labor and overhead costs. -21- Selling, General and Administrative Costs. Selling, general and administrative costs include office and management salaries, fringe benefits and commissions. Selling, general and administrative costs were $30.4 million (22.3% of net sales) for the nine months ended March 31, 2002 (excluding a $4.3 million restructuring charge, see Note 3 to the Consolidated Financial Statements) and $32.1 million (18.5% of net sales) for the nine months ended March 31, 2001. The increase in expenses due to the acquisition of TriLink was more than offset by lower corporate expenses and reduced expenses at our thin film microelectronics division. Research and Development Costs. Research and development costs include material, engineering labor and allocated overhead. Our self-funded research and development costs increased 17.3% to $15.4 million (11.3% of net sales) for the nine months ended March 31, 2002 from $13.1 million (7.5% of net sales) for the nine months ended March 31, 2001. The increase was primarily due to increased efforts to develop proprietary integrated circuits utilized in broadband communications. Acquired In-Process Research and Development. In connection with the acquisition of RDL, Inc., we allocated $1.5 million of the purchase price to incomplete research and development projects. In connection with the acquisition of TriLink Communications Corp., we allocated $1.0 million of the purchase price to incomplete research and development projects. These allocations represent the estimated fair value based on future cash flows that have been adjusted by the projects' completion percentage. At the respective acquisition dates, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, we expensed these costs as of the respective acquisition dates, resulting in a $2.5 million charge for the nine months ended March 31, 2001. Other Income (Expense). Interest expense was $1.1 million for both the nine months ended March 31, 2002 and March 31, 2001. Other income of $1.7 million for the nine months ended March 31, 2002 consists primarily of interest income. Other income of $2.7 million for the nine months ended March 31, 2001 consisted primarily of $3.0 million of interest income partially offset by a $288,000 decrease in the fair value of our interest rate swap agreements. Interest income decreased primarily due to the lower market interest rates, partially offset by increased levels of cash and marketable securities. Provision (Benefit) for Income Taxes. The income tax benefit was $475,000 (an effective income tax rate of 32.0%) for the nine months ended March 31, 2002 and the income tax expense was $9.3 million (an effective income tax rate of 35.3%) for the nine months ended March 31, 2001. The income tax provision 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. Net Income (Loss). On a pro forma basis, net income for the nine months ended March 31, 2002 was $2.3 million, or $.04 per diluted share, versus net income of $19.2 million, or $.31 per diluted share, for the nine months ended March 31, 2001. Pro forma net income excludes a restructuring charge for the closing of our Richardson, Texas facility of $5.1 million ($3.4 million, net of tax), or $.06 per diluted share, in the current period and in-process research and development write- offs of $2.5 million ($2.0 million, net of tax), or $.03 per diluted share, in 2001. On a GAAP basis, our net loss for the current period was $1.0 million, or $.02 per diluted share, versus net income of $17.2 million, or $.28 per diluted share, in 2001. -22- Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 Net Sales. Net sales decreased 20.9% to $50.6 million for the three months ended March 31, 2002 from $64.0 million for the three months ended March 31, 2001. Net sales in the microelectronic solutions segment decreased 33.4% to $27.3 million for the three months ended March 31, 2002 from $41.0 million for the three months ended March 31, 2001 due primarily to decreased sales volume in thin film interconnects and microelectronic modules due to the continuing slowdown of the fiber optic market offset, in part, by increased sales volume of integrated circuits, primarily in the satellite and defense markets. Net sales in the test solutions segment increased 10.7% to $19.6 million for the three months ended March 31, 2002 from $17.7 million for the three months ended March 31, 2001 primarily due to the increased sales volume in motion control products, partially offset by the decrease in sales of communications test and measurement products. Net sales in the isolator products segment decreased 30.1% to $3.7 million for the three months ended March 31, 2002 from $5.3 million for the three months ended March 31, 2001 due to lower volume of commercial and industrial isolators. Gross Profit. Gross profit decreased 33.2% to $18.8 million (37.1% of net sales) for the three months ended March 31, 2002 (excluding a $750,000 restructuring charge, see Note 3 to the Consolidated Financial Statements) from $28.1 million (43.9% of net sales) for the three months ended March 31, 2001. The decreases were primarily a result of the decreased sales volume in the microelectronic solutions segment. The gross profit margin also decreased due primarily to the fixed nature of certain of the labor and overhead costs in the microelectronic solutions segment. Selling, General and Administrative Costs. Selling, general and administrative costs were $10.2 million (20.2% of net sales) for the three months ended March 31, 2002 (excluding a $4.3 million restructuring charge, see Note 3 to the Consolidated Financial Statements) and $11.9 million (18.5% of net sales) for the three months ended March 31, 2001. The addition of the expenses of TriLink was more than offset by lower corporate expenses and reduced expenses at our thin-film microelectronics division. Research and Development Costs. Our self-funded research and development costs increased 7.5% to $6.0 million (11.9% of net sales) for the three months ended March 31, 2002 from $5.6 million (8.8% of net sales) for the three months ended March 31, 2001. The increase was primarily due to increased efforts to develop proprietary integrated circuits utilized in broadband communications. Acquired In-Process Research and Development. In connection with the acquisition of TriLink Communications, Corp., we allocated $1.0 million of the purchase price to incomplete research and development projects. This allocation represents the estimated fair value based 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 during the three months ended March 31, 2001. -23- Other Income (Expense). Interest expense was $479,000 for the three months ended March 31, 2002 and $320,000 for the three months ended March 31, 2001. Other income of $579,000 for the three months ended March 31, 2002 consists primarily of $549,000 of interest income and a $49,000 increase in the fair value of our interest rate swap agreements. Other income of $798,000 for the three months ended March 31, 2001 consisted primarily of $875,000 of interest income offset by a $82,000 decrease in the fair value of our interest rate swap agreements. Interest income decreased primarily due to the lower market interest rates, partially offset by increased levels of cash and marketable securities. Provision (Benefit) for Income Taxes. The income tax benefit was $800,000 (an effective income tax rate of 32.9%) for the three months ended March 31, 2002 and the income tax expense was $3.8 million (an effective income tax rate of 37.5%) for the three months ended March 31, 2001. The income tax provision for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to state and local income taxes and research and development credits, and, for the three months ended March 31, 2001, the non-deductible acquired in-process research and development expense. Net Income (Loss). On a pro forma basis, net income for the three months ended March 31, 2002 was $1.7 million, or $.03 per diluted share, versus net income of $7.3 million, or $.12 per diluted share, in the three months ended March 31, 2001. Pro forma net income excludes a restructuring charge for the closing of our Richardson, Texas facility of $5.1 million ($3.4 million, net of tax), or $.06 per diluted share, in the current quarter and an in-process research and development write-off of $1.0 million ($1.0 million, net of tax), or $.02 per diluted share, in 2001. On a GAAP basis, our net loss for the current quarter was $1.6 million, or $.03 per diluted share, versus net income of $6.3 million, or $.10 per diluted share, in 2001. Liquidity and Capital Resources As of March 31, 2002, we had $159.7 million in working capital. Our current ratio was 6.4 to 1 at March 31, 2002. As of February 25, 1999, we replaced a previous agreement with a revised revolving credit, term loan and mortgage agreement with two banks which is secured by substantially all of our assets not otherwise encumbered. The agreement provided for a revolving credit line of $23.0 million, a term loan of $20.0 million and a mortgage on our Plainview property for $4.5 million. The revolving credit loan facility expires in December 2002. The term loan was fully paid in May 2000 with the proceeds from the sale of our Common Stock. The interest rate on borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to prime (4.75% at March 31, 2002) on the revolving credit borrowings. The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. We have entered into an interest rate swap agreement for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The terms of the loan 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. -24- We are currently in full compliance with all of the covenants contained in our loan agreement. However, we believe that we will not meet our covenant requiring us to have income before taxes of no less than $8.0 million for the fiscal year ending June 30, 2002 and so have contacted our banks to obtain a waiver or amendment of such covenant. The banks have advised us that they are willing to provide a waiver or amendment of this covenant for the fiscal year ending June 30, 2002; however, no assurance can be given that the banks will in fact deliver the waiver or amendment. In the event that we do not obtain such a waiver or amendment, the banks may limit our ability to draw on the line of credit; however, we have sufficient cash on hand to pay all of our currently outstanding indebtedness under the loan agreement. For the nine months ended March 31, 2002, our operations provided cash of $2.2 million primarily due to the profitability of operations, excluding non-cash charges of depreciation and amortization and the restructuring charge (see Note 3 to the Consolidated Financial Statements), partially offset by reductions in accounts payable and accrued expenses. For the nine months ended March 31, 2002, our investing activities provided cash of $2.4 million - $12.0 million from the sale of marketable securities partially offset by $5.9 million of purchases of marketable securities and $3.3 million of capital expenditures. For the nine months ended March 31, 2002, our financing activities provided cash of $213,000 primarily from the exercise of stock options offset, in part, by debt repayments. On April 15, 2002, we announced our agreement to purchase, for cash, all of the outstanding shares of IFR Systems ("IFR") stock for $1.35 per share. IFR designs and manufactures advanced wireless test solutions for communications, avionics and general test and measurement applications. IFR's net sales were approximately $88.3 million for the nine months ended December 31, 2001. Under the terms of the agreement, unanimously approved by the board of directors of both of the companies, we have commenced a tender offer of a minimum of 50.1% of the outstanding shares of IFR on a fully-diluted basis. The tender offer expires May 20, 2002. Following the successful completion of the tender offer, it is expected there will be a merger in which any remaining shareholders of IFR will receive $1.35 per share in cash. The cash purchase price is approximately $60 million, which includes the payment of $48.8 million in satisfaction of IFR's bank indebtedness of approximately $84 million, including interest. IFR's lenders have agreed to accept this payment in full satisfaction of the amounts owed to them from IFR. 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, the purchase of IFR, the restructuring charge recorded in the third quarter of fiscal 2002, capital expenditure needs and the servicing of our debt for the foreseeable future. Our cash, cash equivalents and marketable securities are available to fund other acquisitions and other potential large cash needs that may arise. At March 31, 2002, our available unused line of credit was $20.0 million after consideration of letters of credit. We expect to enter into a new credit facility during the first quarter of fiscal 2003. Aggregate long-term debt matures in each of the twelve month periods ended March 31 as follows:
(In thousands) -------------- 2003 $ 1,714 2004 1,524 2005 1,634 2006 1,458 2007 1,051 Thereafter 4,525 -------- $ 11,906 ========
-25- Future minimum payments under operating leases in each of the twelve month periods ended March 31, are as follows:
(In thousands) -------------- 2003 $ 4,203 2004 3,269 2005 2,232 2006 1,694 2007 1,072 Thereafter 970 -------- $ 13,440 ========
In the normal course of business, we routinely enter into binding and non- binding purchase obligations primarily covering anticipated purchases of inventory and equipment. None of these obligations are individually significant. We do not expect that these commitments as of March 31, 2002 will materially adversely affect our liquidity. Our backlog of orders was $128.2 million at March 31, 2002 and $143.7 million at March 31, 2001. Accounting Policies Involving Significant Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the recognition of revenue and expenses during the period reported. The following accounting policies require us to make estimates and assumptions based on the circumstances, information available and our experience and judgment. These estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. If actual results differ significantly from our estimates, our financial statements could be materially impacted. Revenue and Cost Recognition Under Long-Term Contracts - ------------------------------------------------------ Our revenue is generally recognized based upon shipments. Revenues associated with certain long-term contracts are recognized under the units-of-delivery method that includes shipments and progress billings, in accordance with Statement of Position 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." We record costs on our long-term contracts using percentage-of-completion accounting. Under percentage of completion accounting, costs are recognized on revenues in the same relation that total estimated manufacturing costs bear to the total contract value. Estimated costs at completion are based on engineering and production estimates. Estimates are reviewed on a regular basis throughout the life of these contracts. 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. Revisions to profits recognized to date could be required in future periods and may have a material effect on our results of operations and financial condition. -26- Inventories - ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventory levels are maintained in relation to the expected sales volume. We periodically evaluate the net realizable value of our inventory. Numerous analyses are applied including lower of cost or market analysis, forecasted sales requirements and forecasted warranty requirements. After taking these and other factors into consideration, such as technological changes, age and physical condition, appropriate adjustments are recorded to the inventory balance. If actual conditions differ from our expectations, then inventory balances may be over or under valued, which could have a material effect on our results of operations and financial condition. Recoverability of Long-Lived and Intangible Assets - -------------------------------------------------- Property, plant and equipment are stated at cost less accumulated depreciation computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the lease or the estimated life of the asset, whichever is shorter. Changes in circumstances such as technological advances or changes to the Company's business model can result in the actual useful lives differing from the Company's estimates. To the extent the estimated useful lives are incorrect, the value of these assets may be over or under stated which in turn could have a material effect on our results of operations and financial condition. Long-lived assets other than goodwill, are reviewed for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of any such asset may be impaired. We evaluate the recoverability of such assets by estimating future cash flows. If the sum of the undiscounted cash flows expected to result from the use of the assets and their eventual disposition is less than the carrying amount of the assets, we will recognize an impairment loss to the extent of the shortfall. SFAS 142 requires that we perform an assessment of whether there is an indication that goodwill is impaired on an annual basis unless events or circumstances warrant a more frequent assessment. The impairment assessment involves, among other things, an estimation of the fair value of each of the Company's reporting units (as defined in SFAS 142). Such estimations are inherently subjective, and subject to change in future periods. If the impairment review of goodwill, intangible assets with indefinite useful lives and other long-lived assets differ significantly from actual results, it could have a material effect on our results of operations and financial condition. Restructuring - ------------- When circumstances warrant a restructuring charge, we estimate and record all appropriate expenses. These expenses include severance, retention bonuses, fringe benefits, asset impairment, buyout of leases and inventory write downs. To the extent that our estimates differ from actual expenses, there could be significant additional expenses or reversals of previously recorded charges in the future. -27- Income Taxes - ------------ The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions. If this assumption changes in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense in our consolidated statement of operations. We evaluate the realizability of the deferred tax assets and assess the adequacy of the valuation allowance quarterly. Market Risk We are exposed to market risk related to changes in interest rates and, to an immaterial extent, 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% from levels at March 31, 2002, the effect on our net income would be a reduction of approximately $80,000 per year. Most of our invested cash and marketable securities are at variable rates of interest. If market interest rates decrease by 10% from levels at March 31, 2002, the effect on our net income would be a reduction of approximately $100,000 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. We undertake no obligation to update such forward-looking statements which are made as of the date of this Report. -28- 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 Current report on Form 8-K dated April 13, 2002 covering Item 5 - Other Events and Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits. -29- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AEROFLEX INCORPORATED (REGISTRANT) May 15, 2002 By: s/Michael Gorin ---------------------------------- Michael Gorin President, Chief Financial Officer and Principal Accounting Officer -30- -----END PRIVACY-ENHANCED MESSAGE-----