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, 2003
---------------------------------------------
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 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 by check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
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, 2003 60,113,092 shares (excluding 4,388 shares held in treasury)
- --------------------------------------------------------------------------------
(Date) (Number of Shares)
NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 33 PAGES.
----
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I: FINANCIAL INFORMATION
------ ---------------------
Item 1 - CONSOLIDATED BALANCE SHEETS 3-4
March 31, 2003 and June 30, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS 5-6
Nine and Three Months Ended March 31, 2003 and 2002
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
Nine Months Ended March 31, 2003 and 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-18
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19-26
Nine and Three Months Ended March 31, 2003 and 2002
Item 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 26
Item 4 - CONTROLS AND PROCEDURES 27
PART II: OTHER INFORMATION
------- -----------------
Item 1 - LEGAL PROCEEDINGS 28
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
CERTIFICATIONS 30-33
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2003 2002
------------- ------------
(Unaudited) (Note 3)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 42,705 $ 38,559
Accounts receivable, less allowance for
doubtful accounts of $500,000 and $636,000 64,053 63,384
Income taxes receivable 870 4,432
Inventories 74,456 72,040
Deferred income taxes 12,956 12,259
Assets of discontinued operations - 1,367
Prepaid expenses and other current assets 6,796 3,360
--------- ---------
Total current assets 201,836 195,401
Property, plant and equipment, net 68,817 73,473
Intangible assets with definite lives, net 15,778 17,815
Goodwill 22,476 20,179
Deferred income taxes 867 2,477
Other assets 11,636 9,120
--------- ---------
Total assets $321,410 $318,465
========= =========
See notes to consolidated financial statements.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 31, June 30,
2003 2002
---------- ----------
(Unaudited) (Note 3)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,844 $ 2,171
Accounts payable 16,490 18,356
Advance payments by customers 2,816 1,775
Liabilities of discontinued operations 1,074 366
Accrued expenses and other current liabilities 24,130 26,637
--------- --------
Total current liabilities 46,354 49,305
Long-term debt 11,603 12,638
Other long-term liabilities 8,348 7,040
--------- ---------
Total liabilities 66,305 68,983
--------- ---------
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
60,117,000 and 60,006,000 shares 6,012 6,001
Additional paid-in capital 222,921 222,351
Accumulated other comprehensive income 3,578 1,881
Retained earnings 22,608 19,263
--------- ---------
255,119 249,496
Less: Treasury stock, at cost (4,000 shares) 14 14
--------- ---------
Total stockholders' equity 255,105 249,482
--------- ---------
Total liabilities and stockholders' equity $321,410 $318,465
========= =========
See notes to consolidated financial statements.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Nine Months Ended
March 31,
2003 2002
------- ---------
(Note 3)
(Unaudited)
Net sales $213,139 $135,875
Cost of sales 131,343 87,453
--------- ---------
Gross profit 81,796 48,422
--------- ---------
Selling, general and administrative costs 50,003 33,229
Research and development costs 22,751 14,965
--------- ---------
72,754 48,194
--------- ---------
Operating income 9,042 228
--------- ---------
Other expense (income)
Interest expense 1,023 1,138
Other expense (income) (284) (1,666)
--------- ---------
Total other expense (income) 739 (528)
--------- ---------
Income before income taxes 8,303 756
Provision for income taxes 2,820 282
--------- ---------
Income from continuing operations 5,483 474
--------- ---------
Discontinued operations (Note 3)
Loss from discontinued operations,
net of tax benefit of $208 and $757 404 1,485
Loss on abandonment of operations,
net of tax benefit of $892 1,734 -
--------- ---------
Loss from discontinued operations,
net of tax 2,138 1,485
--------- ---------
Net income (loss) $ 3,345 $ (1,011)
========= =========
Income (loss) per common share:
Basic
Continuing operations $ .09 $ .01
Discontinued operations (.03) (.03)
----- -----
Net income (loss) $ .06 $(.02)
===== =====
Diluted
Continuing operations $ .09 $ .01
Discontinued operations (.03) (.03)
----- -----
Net income (loss) $ .06 $(.02)
===== =====
Weighted average number of
common shares outstanding:
Basic 60,180 59,926
========= =========
Diluted 60,739 61,992
========= =========
See notes to consolidated financial statements.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
March 31,
------------------
2003 2002
--------- ---------
(Note 3)
(Unaudited)
Net sales $ 74,942 $ 50,571
Cost of sales 45,208 32,314
--------- ---------
Gross profit 29,734 18,257
--------- ---------
Selling, general and administrative costs 17,540 13,951
Research and development costs 7,757 5,901
--------- ---------
25,297 19,852
--------- ---------
Operating income (loss) 4,437 (1,595)
--------- ---------
Other expense (income)
Interest expense 310 479
Other expense (income) (293) (578)
--------- ---------
Total other expense (income) 17 (99)
--------- ---------
Income (loss) before income taxes 4,420 (1,496)
Provision (benefit) for income taxes 1,495 (483)
--------- ---------
Income (loss) from continuing operations 2,925 (1,013)
--------- ---------
Discontinued operations (Note 3)
Loss from discontinued operations,
net of tax benefit of $5 and $316 8 616
Loss on abandonment of operations - -
--------- ---------
Loss from discontinued operations,
net of tax 8 616
--------- ---------
Net income (loss) $ 2,917 $ (1,629)
========= =========
Income (loss) per common share:
Basic
Continuing operations $ .05 $(.02)
Discontinued operations - (.01)
----- -----
Net income (loss) $ .05 $(.03)
===== =====
Diluted
Continuing operations $ .05 $(.02)
Discontinued operations - (.01)
----- -----
Net income (loss) $ .05 $(.03)
===== =====
Weighted average number of
common shares outstanding:
Basic 60,229 60,088
========= =========
Diluted 60,831 60,088
========= =========
See notes to consolidated financial statements.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
March 31,
2003 2002
---------- ----------
(Note 3)
(Unaudited)
Cash Flows From Operating Activities:
Net income (loss) $ 3,345 $ (1,011)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss from discontinued operations 3,238 2,242
Depreciation and amortization 11,410 8,289
Restructuring charge - 5,050
Deferred income taxes 1,191 (466)
Other, net (132) 274
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (460) (1,529)
Decrease (increase) in inventories (2,011) (830)
Decrease (increase) in prepaid expenses
and other assets (1,489) (262)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (4,546) (8,108)
--------- ---------
Net Cash Provided By (Used In) Operating Activities 10,546 3,649
--------- ---------
Cash Flows From Investing Activities:
Payment for purchase of business (1,039) (283)
Capital expenditures (4,100) (3,169)
Cash flow provided by (used in) discontinued
operations (1,163) (1,611)
Purchase of marketable securities - (5,938)
Proceeds from sale of marketable securities - 11,994
Other, net 40 -
--------- ---------
Net Cash Provided By (Used In) Investing Activities (6,262) 993
--------- ---------
Cash Flows From Financing Activities:
Borrowings under debt agreements - 89
Debt repayments (1,362) (1,516)
Proceeds from the exercise of stock options 485 1,640
Amounts paid for withholding taxes on stock option
exercises (84) (1,485)
Withholding taxes collected for stock option
exercises 84 1,485
--------- ---------
Net Cash Provided By (Used In) Financing Activities (877) 213
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 739 -
--------- ---------
Net Increase (Decrease) In Cash
And Cash Equivalents 4,146 4,855
Cash And Cash Equivalents At Beginning Of Period 38,559 69,896
--------- ---------
Cash And Cash Equivalents At End Of Period $ 42,705 $ 74,751
========= =========
See notes to consolidated financial statements.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated balance sheet of Aeroflex Incorporated and
Subsidiaries ("the Company") as of March 31, 2003, the related
consolidated statements of operations for the nine and three months
ended March 31, 2003 and 2002, and the consolidated statements of cash
flows for the nine months ended March 31, 2003 and 2002 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, 2003 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, 2002 annual report to shareholders. There have been no changes of
significant accounting policies since June 30, 2002, 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
--------------------------------
In October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 adopted SFAS No. 144 effective July 1,
2002. The adoption did not have any impact on the consolidated
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which will be effective
for exit and disposal activities initiated after December 31, 2002.
SFAS No. 146 provides that an exit cost liability should not always be
recorded at the date of an entity's commitment to an exit plan, but
instead should be recorded when the obligation is incurred and measured
at fair value. An entity's commitment to a plan, by itself, does not
create an obligation that meets the definition of a liability.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45
requires certain guarantees to be recorded at fair value regardless of
the probability of the loss. FIN 45 has been adopted prospectively by
the Company as of January 1, 2003. The adoption did not have any impact
on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148
provides alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee
compensation as originally provided by SFAS No. 123 "Accounting for
Stock-Based Compensation." Additionally, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. The Company has adopted the disclosure portion of
this statement for the fiscal quarter ended March 31, 2003. The
adoption did not have any impact on the Company's consolidated
financial position or results of operations.
In November 2002, the Emerging Issues Task Force ("EITF") finalized
EITF Issue 00- 21, "Revenue Arrangements with Multiple Deliverables",
which provides guidance on the timing and method of revenue recognition
for sales arrangements that include the delivery of more than one
product or service. EITF Issue 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after June 15,
2003. The Company is currently analyzing the impact of its adoption on
its consolidated financial statements.
3. Discontinued Operation
----------------------
In December 2002, the Board of Directors of the Company approved a
formal plan to discontinue the Company's fiber optic lithium niobate
modulator operation. The plan called for an immediate cessation of
operations and disposal of existing assets. The abandonment of the
operation resulted in a charge of $2.6 million ($1.7 million, net of
tax) in the quarter ended December 31, 2002. The charge included a cash
requirement of $1.4 million, primarily for equipment leases and payroll
costs, and a non-cash charge of $1.2 million primarily for the
write-off of owned equipment.
In accordance with SFAS No. 144, the abandonment has been reported as a
discontinued operation and, accordingly, losses from operations and the
loss on abandonment have been reported separately from continuing
operations.
To conform with this presentation, all periods have been restated. As a
result, the assets and liabilities of the discontinued operation have
been reclassified on the balance sheet from the historical
classifications and presented under the captions "assets of
discontinued operations" and "liabilities of discontinued operations,"
respectively.
4. Acquisition of Business and Intangible Assets
---------------------------------------------
Acquisition of IFR Systems
On May 20, 2002, the Company acquired 75.1% of the outstanding stock of
IFR Systems, Inc. ("IFR"). Effective June 19, 2002, IFR was merged into
a wholly- owned subsidiary of the Company, with IFR as the surviving
wholly-owned subsidiary. The Company paid $61.9 million from its
available cash and marketable securities, including $48.8 million which
was advanced to IFR to satisfy IFR's bank indebtedness. IFR designs and
manufactures advanced test solutions for communications, avionics and
general test and measurement applications. As a result of the
acquisition, the Company has broadened its Test Solutions Segment
product portfolio and its international sales network.
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 $1.9 million, based on the estimated fair value of the
assets acquired and liabilities assumed, as follows:
(In thousands)
------------
Current assets (excluding cash of $8.0 million).... $ 44,209
Property, plant and equipment...................... 20,242
Developed technology............................... 8,230
Goodwill........................................... 5,058
In-process research and development................ 1,100
Other.............................................. 62
---------
Total assets acquired............................ 78,901
---------
Current liabilities................................ (22,208)
Long-term debt..................................... (2,814)
---------
Total liabilities assumed........................ (25,022)
---------
Net assets acquired.............................. $ 53,879
=========
The developed technology is being amortized on a straight-line basis
over 6 years. The goodwill is not deductible for tax purposes. At the
acquisition date, the acquired in-process research and development was
not considered to have reached technological feasibility and had no
alternative future uses. Therefore, in accordance with accounting
principles generally accepted in the United States of America, the
value of such was expensed in the quarter ended June 30, 2002 in
operating costs. At the acquisition date, IFR was conducting design,
development, engineering and testing activities associated with the
completion of new technologies for its radio test set product line.
Summarized below are the unaudited pro forma results of operations of
the Company as if IFR had been acquired at the beginning of the fiscal
period presented. The $1.1 million write-off has not been included in
the March 31, 2002 pro forma results of operations in order to provide
comparability to the respective historical period.
Pro Forma
Nine Months Ended
March 31,
2002
-----------------
(In thousands, except per share data)
Net sales......................... $221,771
Income (loss) from continuing
operations...................... (6,777)
Income (loss) from continuing
operations per share:
Basic......................... $ (.11)
Diluted....................... $ (.11)
The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred
had the acquisition taken place at the beginning of the period
presented or of future operating results of the combined companies.
Intangibles with Definite Lives The components of amortizable
intangible assets are as follows:
As of March 31, 2003
--------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ --------
(In thousands)
Existing technology...... $ 23,769 $ 8,583 $ 15,186
Tradenames............... 1,000 408 592
--------- --------- ---------
Total................ $ 24,769 $ 8,991 $ 15,778
========= ========= =========
The aggregate amortization expense for the amortized intangible assets
was $2.3 million for the nine months ended March 31, 2003.
The estimated aggregate amortization expense for each of the twelve
month periods ending March 31, is as follows:
(In thousands)
2004.................... $ 3,003
2005.................... 3,000
2006.................... 3,000
2007.................... 3,000
2008.................... 2,886
Goodwill
The carrying amount of goodwill is as follows:
Balance Balance
as of as of
July 1, Adjustment March 31,
2002 (Note a) 2003
---------- ------------ ------------
(In thousands)
Microelectronic
solutions
segment............... $ 5,367 $ - $ 5,367
Test solutions
segment............... 14,023 2,297 16,320
Isolator products
segment............... 789 - 789
-------- --------- --------
Total............... $20,179 $ 2,297 $22,476
======== ========= ========
Note a - The additional goodwill recorded during the period is a result of
adjustments to the fair value of assets and liabilities assumed
in the acquisition of IFR and contingent payments pursuant to a
purchase agreement.
5. Restructuring Charges
---------------------
In fiscal 2002, the Company initiated strategic plans to consolidate
three of its manufacturing operations to take advantage of excess
manufacturing capacity in certain of its facilities and reduce
operating costs. The Company recorded charges to eliminate excess
equipment capacity, primarily in its microelectronics segment, and for
personnel related costs. These consolidations are substantially
complete. In connection with these restructurings, the Company recorded
charges of $5.0 million and $4.1 million during the quarters ended
March 31, 2002 and June 30, 2002, respectively, or $3.4 million and
$2.9 million, net of tax, respectively.
The following table sets forth the charges and payments related to the
restructuring reserve for the nine months ended March 31, 2003:
Balance Balance
July 1, Nine Months Ended March 31,
2002 March 31, 2003 2003
------------- ----------------------- ------------
Adjustments to
Restructuring Restructuring Cash Restructuring
Reserve Reserve Payments Reserve
----------- -------------- ---------- -------------
(In thousands)
Workforce reduction..... $ 1,406 $ 58 $ (1,271) $ 193
Lease payments.......... 864 (35) (670) 159
Plant shutdown.......... 106 99 (84) 121
---------- --------- --------- ---------
Total operating costs. $ 2,376 $ 122 $ (2,025) $ 473
========== ========= ========= =========
The amounts above exclude $11.0 million of restructuring charges
recorded during the quarter ended June 30, 2002 for the Company's fiber
optic lithium niobate modulator operation which, as of December 2002,
has been reclassified as a discontinued operation. The charges related
to such discontinuance were primarily due to the impairment of goodwill
and other intangibles.
6. 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. A reconciliation of the
numerators and denominators of the Basic EPS and Diluted EPS
calculations is as follows:
Nine Months
Ended March 31,
------------------------
2003 2002
---- ----
(In thousands, except per share data)
Income from continuing operations $ 5,483 $ 474
======== ========
Computation of adjusted weighted
average shares outstanding:
Weighted average shares outstanding 60,180 59,926
Add: Effect of dilutive options
outstanding 559 2,066
-------- --------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 60,739 61,992
======== ========
Income from continuing operations
per share - Basic $ .09 $ .01
====== ======
- Diluted $ .09 $ .01
====== ======
Three Months
Ended March 31,
------------------------
2003 2002
---- ----
(In thousands, except per share data)
Income (loss) from continuing operations $ 2,925 $(1,013)
======== ========
Computation of adjusted weighted
average shares outstanding:
Weighted average shares outstanding 60,229 60,088
Add: Effect of dilutive options
outstanding 602 -
-------- --------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 60,831 60,088
======== ========
Income (loss) from continuing operations
per share - Basic $ .05 $(.02)
====== ======
- Diluted $ .05 $(.02)
====== ======
Options to purchase 11.3 million shares at exercise prices ranging between $6.85
and $34.41 per share were outstanding as of March 31, 2003 but were not included
in the computation of diluted EPS because the exercise prices of these options
were greater than the average market price of the common shares
7. Accounting for Stock-Based Compensation
---------------------------------------
The Company records compensation expense for employee and director
stock options only if the current market price of the underlying stock
exceeds the exercise price on the date of the grant. The Company has
chosen not to implement the fair value based accounting method for
employee and director stock options, but has elected to disclose the
pro forma income and income per share as if such method had been used
to account for stock-based compensation costs as described in SFAS No.
123.
The per share weighted average fair value of stock options granted
during the nine months ended March 31, 2003 and 2002 was $5.36 and
$7.12, respectively, on the date of grant. These fair values were
determined using the Black Scholes option-pricing model with the
following weighted average assumptions: 2003 - expected dividend yield
of 0%, risk free interest rate of 3.9%, expected volatility of 112%,
and an expected option life of 5.4 years; 2002 - expected dividend
yield of 0%, risk free interest rate of 4.9%, expected volatility of
122%, and an expected option life of 5.3 years.
The per share weighted average fair value of stock options granted
during the quarter ended March 31, 2003 and 2002 was $5.40 and $9.11,
respectively, on the date of grant. These fair values were determined
using the Black Scholes option-pricing model with the following
weighted average assumptions: 2003 - expected dividend yield of 0%,
risk free interest rate of 3.7%, expected volatility of 112%, and an
expected life of 7.4 years; 2002 - expected dividend yield of 0%, risk
free interest rate of 5.0%, expected volatility of 122%, and an
expected life of 7.5 years. The Company's income (loss) from continuing
operations and income (loss) from continuing operations per share using
the pro forma compensation cost would have been:
Nine Months Ended Three Months Ended
March 31, March 31,
------------------ ---------------------
2003 2002 2003 2002
------ ------ ------ ------
(In thousands)
Income (loss) from
continuing operations $ 5,483 $ 474 $ 2,925 $ (1,013)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all grants, net of tax (23,588) (32,484) (5,850) (11,010)
--------- --------- --------- ---------
Pro forma income (loss) from
continuing operations $(18,105) $(32,010) $ (2,925) $(12,023)
========= ========= ========= =========
Earnings per share:
Basic - as reported $ 0.09 $ 0.01 $ 0.05 $(0.02)
======= ======= ======= =======
Basic - pro forma $(0.30) $(0.53) $(0.05) $(0.20)
======= ======= ======= =======
Diluted - as reported $ 0.09 $ 0.01 $ 0.05 *
======= ======= ======= =======
Diluted - pro forma * * * *
======= ======= ======= =======
* As a result of the loss, all options are anti-dilutive.
8. Comprehensive Income
--------------------
The components of comprehensive income are as follows:
Nine Months Three Months
Ended March 31, Ended March 31,
---------------------- ---------------------
2003 2002 2003 2002
------ ------ ------ ------
(In thousands)
Net income (loss) $ 3,345 $(1,011) $ 2,917 $(1,629)
Unrealized gain (loss) on
interest rate swap
agreements, net of tax (97) (37) 7 36
Unrealized investment
gain (loss), net of tax - (8) - (3)
Foreign currency
translation adjustment 1,794 61 109 (28)
-------- -------- -------- --------
Total comprehensive
income (loss) $ 5,042 $ (995) $ 3,033 $(1,624)
======== ======== ======== ========
9. Bank Loan Agreements
--------------------
On February 14, 2003, the Company executed an amended and restated
revolving credit and security agreement with two banks which replaced a
previous loan agreement. The amended and restated loan agreement
increased the line of credit to $50 million through February 2007,
continues the mortgage on the Company's Plainview property for $3.3
million and is secured by the pledge of the stock of certain of the
Company's subsidiaries. The interest rate on revolving credit
borrowings under this agreement is at various rates depending upon
certain financial ratios, with the current rate substantially
equivalent to prime (4.25% at March 31, 2003). The Company paid a
facility fee of $125,000 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 interest rate swap agreements 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 agreements
was $376,000 as of March 31, 2003 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
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, 2003, the Company's available unused line of credit was
approximately $46.2 million after consideration of this and other
letters of credit.
10. Inventories
-----------
Inventories consist of the following:
March 31, June 30,
2003 2002
------------- -------------
(In thousands)
Raw materials $ 33,994 $ 34,702
Work in process 26,413 21,939
Finished goods 14,049 15,399
--------- ---------
$ 74,456 $ 72,040
========= =========
11. Product Warranty
----------------
The Company warrants its products against defects in design, materials
and workmanship, generally for one year from their date of shipment. A
provision for estimated future costs relating to these warranties is
recorded when revenue is recorded and is included in cost of goods
sold.
Changes in the Company's product warranty liability during the nine
months ended March 31, 2003 were as follows:
Nine Months Ended
March 31,
2003 2002
---------- ----------
(In thousands)
Balance at beginning of period $ 1,500 $ 270
Provision for warranty obligations 1,369 547
Charges incurred (1,552) (527)
-------- --------
Balance at end of period $ 1,317 $ 290
======== ========
12. 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 $84,000 and $1.3 million to additional
paid-in capital during the nine months ended March 31, 2003 and 2002,
respectively, in connection with the tax benefit related to
compensation deductions on the exercise of stock options.
13. Contingencies
-------------
The Company was served recently with an action commenced by Ricoh
Company, Ltd. ("Ricoh"). The action, which is pending in the United
States District Court for the District of Delaware, alleges that the
Company and several other unrelated defendants are infringing a certain
patent owned by Ricoh which purportedly describes a method for
designing an application specific integrated circuit. The supplier of
software used by the Company in the design of the application specific
integrated circuits has agreed to assume the defense of this action
pursuant to the supplier's contractual obligation to indemnify the
Company against such claims. Accordingly, the Company does not believe
that the outcome of the lawsuit will have a materially adverse effect
upon its consolidated financial statements.
The Company is involved in various other routine legal matters.
Management believes the outcome of these matters will not have a
materially adverse effect on the Company's consolidated financial
statements.
14. 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
For The Nine Months Ended
March 31,
Business Segment Data: 2003 2002
----------- -----------
(In thousands)
Net sales:
Microelectronic solutions $ 76,668 $ 75,235
Test solutions 124,616 48,983
Isolator products 11,855 11,657
----------- -----------
Net sales $ 213,139 $ 135,875
=========== ===========
Operating income:
Microelectronic solutions $ 10,463 $ 8,083
Test solutions 2,928 (106)
Isolator products 424 620
General corporate expenses (4,773) (3,319)
----------- -----------
9,042 5,278
Restructuring charge (1) - (5,050)
Interest expense (1,023) (1,138)
Other income (expense), net 284 1,666
----------- -----------
Income before income taxes $ 8,303 $ 756
=========== ===========
For The Three Months Ended
March 31,
2003 2002
----------- -----------
(In thousands)
Net sales:
Microelectronic solutions $ 26,810 $ 27,259
Test solutions 43,934 19,580
Isolator products 4,198 3,732
----------- -----------
Net sales $ 74,942 $ 50,571
=========== ===========
Operating income (loss):
Microelectronic solutions $ 4,209 $ 3,144
Test solutions 1,909 1,335
Isolator products 204 78
General corporate expenses (1,885) (1,102)
----------- -----------
4,437 3,455
Restructuring charge (1) - (5,050)
Interest expense (310) (479)
Other income (expense), net 293 578
----------- -----------
Income (loss) before income taxes $ 4,420 $ (1,496)
=========== ===========
(1) The Microelectronic Solutions segment operating income has been adjusted
to exclude the restructuring charge of $5.1 million from the periods
ended March 31, 2002 for the closing of the Company's Richardson, Texas
facility.
Revenues, based on the customers' locations, attributed to the United States and
other regions are as follows:
For the Nine Months Ended
March 31,
2003 2002
-------- --------
(In thousands)
United States of America $137,759 $117,115
Europe and Middle East 57,153 12,247
Asia and Australia 14,341 5,249
Rest of World 3,886 1,264
--------- ---------
$213,139 $135,875
========= =========
ITEM 2 - 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 and testing solutions. Our products are used in the
aerospace, defense and broadband communications markets. We also design and
manufacture motion control systems and shock and vibration isolation systems
which are used for commercial, industrial and defense applications. Our
operations are grouped into three segments:
o microelectronic solutions
o test solutions
o isolator products
Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. All of our subsidiaries are
wholly-owned.
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 microelectronic 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. UTMC designs and supplies radiation tolerant integrated
circuits for defense and aerospace communications.
Our test solutions segment consists of two divisions: (1) instruments
and (2) motion control products, including the following product lines:
o Comstron, which we acquired in November 1989. Comstron is a leader in
radio frequency and microwave technology used in the manufacture of
fast switching frequency signal generators and components. Comstron is
currently an operating division of Aeroflex Laboratories Incorporated,
one of our wholly-owned subsidiaries.
o Lintek, which we acquired in January 1995. Lintek is a leader in high
speed instrumentation antenna measurement systems, radar systems and
satellite test systems.
o Europtest, which we acquired in September 1998. Europtest develops and
sells specialized software-driven test equipment used primarily in
cellular, satellite and other communications applications.
o Altair, which we acquired in October 2000. Altair designs and develops
advanced object-oriented control systems software based upon a
proprietary software engine.
o RDL, which we acquired in October 2000. RDL designs, develops and
manufactures advanced commercial communications test and measurement
products and defense subsystems.
o IFR, which we acquired in May 2002. IFR designs and manufactures
advanced test solutions for communications, avionics and general test
and measurement applications.
o Our motion control products division has been engaged in the
development and manufacture of electro-optical scanning devices used
in infra-red night vision systems 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.
In December 2002, our Board of Directors approved a formal plan to
discontinue our fiber optic lithium niobate modulator operation. The plan called
for an immediate cessation of operations and disposal of existing assets. The
abandonment of the operation resulted in a charge of $2.6 million ($1.7 million,
net of tax) in the quarter ended December 31, 2002. The charge included a cash
requirement of $1.4 million, primarily for equipment leases and payroll costs,
and a non-cash charge of $1.2 million, primarily for the write-off of owned
equipment. In accordance with SFAS No. 144, the abandonment has been reported as
a discontinued operation and, accordingly, losses from operations and the loss
on abandonment have been reported separately from continuing operations.
Approximately 35% of our sales for the nine months ended March 31,
2003, 43% of our sales for fiscal 2002 and 29% of our sales for fiscal 2001 were
to agencies of the United States government or to prime defense contractors or
subcontractors of the United States government. The decrease from fiscal 2002 is
primarily due to the acquisition in May 2002 of IFR, which has predominantly
commercial customers.
As used in this report, "we," "us" and "our" mean Aeroflex
Incorporated and its subsidiaries (unless the content indicates otherwise).
Nine Months Ended March 31, 2003 Compared to Nine Months Ended March 31, 2002
Net Sales. Net sales increased 56.9% to $213.1 million for the nine
months ended March 31, 2003 from $135.9 million for the nine months ended March
31, 2002. Net sales in the microelectronic solutions segment increased 1.9% to
$76.7 million for the nine months ended March 31, 2003 from $75.2 million for
the nine months ended March 31, 2002 due primarily to increased sales volume of
integrated circuits, primarily in the aerospace and defense markets, offset, in
part, by decreased sales volume in microelectronic modules and thin film
interconnects due to the continuing slowdown of the fiber optic market. Net
sales in the test solutions segment increased 154.4% to $124.6 million for the
nine months ended March 31, 2003 from $49.0 million for the nine months ended
March 31, 2002 due to the acquisition of IFR in May 2002 partially offset by
decreased sales volume of communications test and measurement products and
satellite test equipment. Net sales in the isolator products segment increased
1.7% to $11.9 million for the nine months ended March 31, 2003 from $11.7
million for the nine months ended March 31, 2002.
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
66.3% to $81.8 million (38.4% of net sales) for the nine months ended March 31,
2003 from $49.2 million (36.2% of net sales)
for the nine months ended March 31, 2002 (excluding a $750,000 restructuring
charge. See Note 5 of the Consolidated Financial Statements). The increases were
primarily a result of the effect of the acquisition of IFR, which has higher
gross margins than our historical average.
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 72.8% to $50.0
million (23.5% of net sales) for the nine months ended March 31, 2003 from $28.9
million (21.3% of net sales) for the nine months ended March 31, 2002 (excluding
a $4.3 million restructuring charge. See Note 5 to the Consolidated Financial
Statements). The increase in such expenses was due primarily to the addition of
the expenses of IFR.
Other Expense (Income). Interest expense was $1.0 million for the nine
months ended March 31, 2003 and $1.1 million for the nine months ended March 31,
2002. Other income of $284,000 for the nine months ended March 31, 2003 consists
primarily of interest income of $801,000 and other miscellaneous income,
partially offset by foreign currency transaction losses of $570,000 and a
$180,000 decrease in the fair value of our interest rate swap agreements. Other
income of $1.7 million for the nine months ended March 31, 2002 consisted
primarily of interest income. Interest income decreased primarily due to lower
levels of cash and marketable securities, which were used to acquire IFR, and
lower market interest rates.
Provision for Income Taxes. The income tax provision was $2.8 million (an
effective income tax rate of 34.0%) for the nine months ended March 31, 2003 and
$282,000 (an effective income tax rate of 37.3%) for the nine months ended March
31, 2002. 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 foreign, state and local income taxes and research and
development credits.
Income From Continuing Operations. Income from continuing operatons for the
nine months ended March 31, 2003 was $5.5 million or $.09 per diluted share,
versus $474,000, or $.01 per diluted share, for the nine months ended March 31,
2002. The 2002 amounts include a restructuring charge for the closing of our
Richardson, Texas facility of $5.0 million ($3.4 million, net of tax), or $.06
per diluted share.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Sales. Net sales increased 48.2% to $74.9 million for the three months
ended March 31, 2003 from $50.6 million for the three months ended March 31,
2002. Net sales in the microelectronic solutions segment decreased 1.6% to $26.8
million for the three months ended March 31, 2003 from $27.3 million for the
three months ended March 31, 2002 due primarily to decreased sales volume in
microelectronic modules and thin film interconnects due to the continuing
slowdown of the fiber optic market, offset, in part, by increased sales volume
of integrated circuits, primarily in the aerospace and defense markets. Net
sales in the test solutions segment increased 124.4% to $43.9 million for the
three months ended March 31, 2003 from $19.6 million for the three months ended
March 31, 2002 due to the acquisition of IFR in May 2002 partially offset by
decreased sales volume of communications test and measurement products and
frequency synthesizers. Net sales in the isolator products segment increased
12.5% to $4.2 million for the three months ended March 31, 2003 from $3.7
million for the three months ended March 31, 2002 due to higher sales volume of
military isolators.
Gross Profit. Gross profit increased 56.4% to $29.7 million (39.7% of net
sales) for the three months ended March 31, 2003 from $19.0 million (37.6% of
net sales) for the three months ended March 31, 2002 (excluding a $750,000
restructuring charge. See Note 5 to the Consolidated Financial Statements). The
increases were primarily a result of the effect of the acquisition of IFR, which
has higher gross margins than our historical average.
Income From Continuing Operations. Income from continuing operatons for the
three months ended March 31, 2003 was $2.9 million or $.05 per diluted share,
versus a loss from continuing operations of $(1.0) million, or $(.02) per share,
for the three months ended March 31, 2002. The 2002 amounts include a
restructuring charge for the closing of our Richardson, Texas facility of $5.0
million ($3.4 million, net of tax), or $.06 per share.
Liquidity and Capital Resources
As of March 31, 2003, we had $155.5 million in working capital. Our current
ratio was 4.4 to 1 at March 31, 2003. On February 14, 2003, we executed an
amended and restated revolving credit and security agreement with two banks
which replaced a previous loan agreement. The amended and restated loan
agreement increased the line of credit to $50 million through February 2007,
continues the mortgage on our Plainview property for $3.3 million and is secured
by the pledge of the stock of certain of our subsidiaries. The interest rate on
revolving credit borrowings under this agreement is at various rates depending
upon certain financial ratios, with the current rate substantially equivalent to
prime (4.25% at March 31, 2003). 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 interest rate swap agreements 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 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.
We are currently in full compliance with all of the covenants contained in
our loan agreement.
For the nine months ended March 31, 2003, our operations provided cash of
$10.5 million primarily due to the profitability of operations partially offset
by reductions in accounts payable and accrued expenses. For the nine months
ended March 31, 2003, our investing activities used cash of $6.3 million
primarily for capital expenditures. For the nine months ended March 31, 2003,
our financing activities used cash of $877,000 primarily for debt repayments
offset, in part, by the proceeds from the exercise of stock options.
On May 20, 2002, we acquired 75.1% of the outstanding stock of IFR.
Effective June 19, 2002, IFR was merged into a wholly owned subsidiary with IFR
as the surviving wholly owned subsidiary. The purchase price was approximately
$61.9 million of which $48.8 million was used to fully satisfy IFR's bank
indebtedness. The balance was used to purchase IFR's outstanding shares and for
various acquisition related costs. The purchase price was paid from available
cash and marketable securities. The acquired company's net sales were
approximately $117.8 million for the year ended March 31, 2002.
During fiscal year 2002, we announced certain strategic consolidations of
our manufacturing operations. The total restructuring charges are expected to be
$9.3 million with a cash cost of $4.3 million. These restructurings are
substantially complete and are expected to reduce annual operating costs by
approximately $6.3 million and result in annual cash savings of approximately
$5.3 million. The restructuring charges included the elimination of excess
equipment capacity (primarily in the microelectronics segment), severance and
other employee related expenses.
We believe that existing cash and cash equivalents coupled with internally
generated funds will be sufficient for our working capital requirements,
restructuring charges, capital expenditure needs and the servicing of our debt
for the foreseeable future. Our cash and cash equivalents are available to fund
acquisitions and other potential large cash needs that may arise. At March 31,
2003, our available unused line of credit was $46.2 million after consideration
of letters of credit.
The following table summarizes, as of March 31, 2003, our obligations and
commitments to make future payments under debt and operating leases:
Payments due by period
------------------------------------------------------
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
--------- ---------- --------- --------- -------
(In thousands)
Long-term debt...... $13,447 $ 1,844 $ 3,154 $ 1,550 $ 6,899
Operating leases.... 32,788 6,021 8,606 4,943 13,218
-------- -------- -------- -------- --------
Total............... $46,235 $ 7,865 $11,760 $ 6,493 $20,117
======== ======== ======== ======== ========
The operating lease commitments shown in the above table have not been
reduced by future minimum sub-lease rentals of $16.3 million.
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, 2003 will materially
adversely affect our liquidity.
Accounting Policies Involving Significant Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America 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.
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 excess of the carrying amount of the assets
over the discounted cash flow.
SFAS 142 requires that we perform an annual assessment of whether there is
an indication that goodwill is impaired unless events or circumstances warrant a
more frequent assessment. The impairment assessment involves, among other
things, an estimate of the fair value of each of the Company's reporting units
(as defined in SFAS 142). Such estimates involve forward looking assessments,
are inherently subjective, and are subject to change in future periods.
If the impairment review of goodwill, intangible assets 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, fringe benefits,
asset impairment, buyout of leases and inventory write-downs. To the extent that
our estimates differ from actual expenses incurred, there could be significant
additional expenses or reversals of previously recorded charges in the future.
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.
Recent Accounting Pronouncements
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. We adopted SFAS
No. 144 effective July 1, 2002. The adoption did not have any impact on our
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which will be effective for exit
and disposal activities initiated after December 31, 2002. SFAS No. 146 provides
that an exit cost liability should not always be recorded at the date of an
entity's commitment to an exit plan, but instead should be recorded when the
obligation is incurred and measured at fair value. An entity's commitment to a
plan, by itself, does not create an obligation that meets the definition of a
liability.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires certain
guarantees to be recorded at fair value regardless of the probability of the
loss. We have adopted FIN 45 prospectively as of January 1, 2003. The adoption
did not have any impact on the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock- based employee compensation as originally provided by SFAS
No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 in both annual and interim
financial statements. We have adopted the disclosure portion of this statement
for the fiscal quarter ended March 31, 2003. The adoption did not have any
impact on our consolidated financial position or results of operations.
In November 2002, the Emerging Issues Task Force (EITF) finalized EITF
Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF Issue 00-21
is effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. We are currently analyzing the impact of its
adoption on our consolidated financial statements.
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 outlook, 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 current 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, the integration of
the business of IFR, 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 the future 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.
ITEM 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ --------------------------------------------------------
We are exposed to market risk related to changes in interest rates and to
foreign currency exchange rates. Most of our debt is at fixed rates of interest
or at a variable rate with an interest rate swap agreement which effectively
converts the variable rate debt into fixed rate debt. Therefore, if market
interest rates increase by 10 percent from levels at March 31, 2003, the effect
on our net income would be a reduction of approximately $17,000 per year. Most
of our invested cash and cash equivalents are at variable rates of interest. If
market interest rates decrease by 10 percent from levels at March 31, 2003, the
effect on our net income would be a decrease of approximately $36,000 per year.
We operate businesses that are located outside of the United States, which
exposes us to the fluctuation of foreign currency exchange rates (primarily the
British Pound and the Euro). If foreign currency exchange rates change by 10%
from levels at March 31, 2003, the effect on our other comprehensive income
would be approximately $4.1 million.
ITEM 4 - CONTROLS AND PROCEDURES
- ------ -----------------------
On May 5, 2003, there were meetings held under the supervision of our
management, including our Chairman of the Board, who is our Chief Executive
Officer, and our President, who is our Chief Financial Officer, during which
there was an evaluation of the effectiveness of our disclosure controls and
procedures. Our Chairman and President have advised us that based on such
evaluation, they believe such controls and procedures are effective.
Our Chairman of the Board and our President are involved in ongoing
evaluations of internal controls. In May 2003, in anticipation of the filing of
this Form 10-Q, they reviewed the most recent evaluation of our internal
controls prepared by our internal audit department. There have been no
significant changes in our internal controls or in other factors that would
significantly affect our internal controls subsequent to such evaluation.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was served recently with an action commenced by Ricoh
Company, Ltd. ("Ricoh"). The action, which is pending in the United
States District Court for the District of Delaware, alleges that the
Company and several other unrelated defendants are infringing a
certain patent owned by Ricoh which purportedly describes a method for
designing an application specific integrated circuit. The supplier of
software used by the Company in the design of the application specific
integrated circuits has agreed to assume the defense of this action
pursuant to the supplier's contractual obligation to indemnify the
Company against such claims. Accordingly, the Company does not believe
that the outcome of the lawsuit will have a materially adverse effect
upon its consolidated financial statements.
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
99.1 Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
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, 2003 By: /s/Michael Gorin
--------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
CERTIFICATION
I, Harvey R. Blau, Chairman of the Board of Aeroflex Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Aeroflex
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/Harvey R. Blau
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Harvey R. Blau
Chairman of the Board
(Principal Executive Officer)
CERTIFICATION
I, Michael Gorin, President of Aeroflex Incorporated, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aeroflex
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/Michael Gorin
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Michael Gorin
President
(Principal Financial Officer)