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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2002
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Commission File Number 000-02324
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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)
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*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.
November 13, 2002 60,053,475 shares (excluding 4,388 shares held in treasury)
- --------------------------------------------------------------------------------------------------------
(Date) (Number of Shares)
NOTE: THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 26 PAGES.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
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Item 1 - CONSOLIDATED BALANCE SHEETS
September 30, 2002 and June 30, 2002 3-4
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2002 and 2001 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2002 and 2001 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-13
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 2002 and 2001 14-20
Item 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 20
Item 4 - CONTROLS AND PROCEDURES 20
PART II: OTHER INFORMATION 21
------- -----------------
SIGNATURES 22
CERTIFICATIONS 23-26
-2-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2002 2002
------------- ------------
(Unaudited)
(In thousands)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 41,990 $ 38,559
Accounts receivable, less allowance for
doubtful accounts of $762,000 and $766,000 54,436 63,487
Income taxes receivable 3,227 4,432
Inventories 73,846 72,104
Deferred income taxes 12,105 12,259
Prepaid expenses and other current assets 6,172 3,360
-------- --------
Total current assets 191,776 194,201
Property, plant and equipment, net 73,147 74,252
Intangible assets with definite lives, net 17,056 17,815
Goodwill 20,769 20,179
Deferred income taxes 1,872 2,477
Other assets 9,291 9,541
-------- --------
Total assets $313,911 $318,465
======== ========
See notes to consolidated financial statements.
-3-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, June 30,
2002 2002
------------- ------------
(Unaudited)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,014 $ 2,171
Accounts payable 16,968 18,357
Advance payments by customers 947 861
Accrued expenses and other current liabilities 23,105 27,916
-------- --------
Total current liabilities 43,034 49,305
Long-term debt 12,218 12,638
Other long-term liabilities 8,046 7,040
-------- --------
Total liabilities 63,298 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
60,036,000 and 60,006,000 shares 6,004 6,001
Additional paid-in capital 222,491 222,351
Accumulated other comprehensive income 2,237 1,881
Retained earnings 19,895 19,263
-------- --------
250,627 249,496
Less: Treasury stock, at cost (4,000 shares) 14 14
-------- --------
Total stockholders' equity 250,613 249,482
-------- --------
Total liabilities and stockholders' equity $313,911 $318,465
======== ========
See notes to consolidated financial statements.
-4-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
-------------------------
2002 2001
------- -------
(Unaudited)
(In thousands, except per share data)
Net sales $66,484 $39,490
Cost of sales 41,672 26,418
------- -------
Gross profit 24,812 13,072
------- -------
Selling, general and administrative costs 15,689 9,787
Research and development costs 7,719 4,546
------- -------
23,408 14,333
------- -------
Operating income (loss) 1,404 (1,261)
------- -------
Other expense (income)
Interest expense 351 337
Other expense (income) 111 (576)
------- -------
Total other expense (income) 462 (239)
------- -------
Income (loss) before income taxes 942 (1,022)
Provision (benefit) for income taxes 310 (350)
------- -------
Net income (loss) $ 632 $ (672)
======= =======
Net income (loss) per common share:
Basic $.01 $(.01)
==== =====
Diluted (1) $.01 $(.01)
==== =====
Weighted average number of common shares outstanding:
Basic 60,125 59,789
======== ========
Diluted (1) 60,622 59,789
======== ========
(1) As a result of the loss for the three months ended September 30, 2001, all
options are anti-dilutive.
See notes to consolidated financial statements.
-5-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
---------------------------
2002 2001
-------- --------
(Unaudited)
(In thousands)
Cash Flows From Operating Activities:
Net income (loss) $ 632 $ (672)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,908 3,051
Amortization of deferred gain (101) (127)
Deferred income taxes 796 (350)
Other, net 11 227
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 9,078 8,685
Decrease (increase) in inventories (1,386) (1,003)
Decrease (increase) in prepaid expenses
and other assets (1,398) (2,876)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (5,834) (11,575)
-------- --------
Net Cash Provided By (Used In) Operating Activities 5,706 (4,640)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (1,862) (1,073)
Proceeds from sale of marketable securities -- 2,882
-------- --------
Net Cash Provided By (Used In) Investing Activities (1,862) 1,809
-------- --------
Cash Flows From Financing Activities:
Debt repayments (577) (463)
Proceeds from the exercise of stock options 131 48
-------- --------
Net Cash Provided By (Used In) Financing Activities (446) (415)
-------- --------
Effect of exchange rate changes on cash
and cash equivalents 33 --
-------- --------
Net Increase (Decrease) In Cash
And Cash Equivalents 3,431 (3,246)
Cash And Cash Equivalents At Beginning Of Period 38,559 69,896
-------- --------
Cash And Cash Equivalents At End Of Period $ 41,990 $ 66,650
======== ========
See notes to consolidated financial statements.
-6-
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 September 30, 2002, the related consolidated
statements of operations for the three months ended September 30, 2002 and
2001, and the consolidated statements of cash flows for the three months
ended September 30, 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 September 30, 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, 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 three month periods are not necessarily
indicative of results of operations for the corresponding years.
2. 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. The Company
adopted SFAS No. 144 effective July 1, 2002. The adoption did not have a
material 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. Management
does not expect such adoption to have a material impact on its
consolidated financial statements.
3. Acquisition of Business and Intangible Assets
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.
-7-
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).... $ 44,046
Property, plant and equipment...................... 20,242
Developed technology............................... 8,230
Goodwill........................................... 3,471
In-process research and development................ 1,100
Other.............................................. 62
---------
Total assets acquired............................ 77,151
---------
Current liabilities................................ (20,458)
Long-term debt..................................... (2,814)
---------
Total liabilities assumed........................ (23,272)
---------
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
September 30, 2001 pro forma results of operations in order to provide
comparability to the respective historical period.
Pro Forma
Three Months Ended
September 30,
2001
--------------------
(In thousands, except per share data)
Net sales......................... $69,596
Net loss.......................... (1,723)
Net loss per share:
Basic......................... $(.03)
Diluted....................... $(.03)
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.
-8-
Intangibles with Definite Lives
The components of amortizable intangible assets are as follows:
As of September 30, 2002
--------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------ ------------ -----
(In thousands)
Existing technology...... $23,489 $7,075 $16,414
Tradenames............... 1,000 358 642
-------- ------- --------
Total................ $24,489 $7,433 $17,056
======== ======= ========
The aggregate amortization expense for the amortized intangible assets was
$759,000 for the three months ended September 30, 2002.
The estimated aggregate amortization expense for each of the twelve month
periods ending September 30, is as follows:
(In thousands)
2003.................... $3,006
2004.................... 3,006
2005.................... 2,983
2006.................... 2,953
2007.................... 2,953
Goodwill
The carrying amount of goodwill is as follows:
Balance Balance
as of as of
July 1, Adjustment September 30,
2002 (Note a) 2002
---------- ------------ -------------
(In thousands)
Microelectronic
solutions
segment............... $ 5,367 $ -- $ 5,367
Test solutions
segment............... 14,023 590 14,613
Isolator products
segment............... 789 -- 789
------- ---- -------
Total............... $20,179 $590 $20,769
======= ==== =======
Note a - Additional goodwill recorded during the period is a result of
adjustments to liabilities assumed in the acquisition of IFR.
4. Restructuring Charges
In fiscal 2002, the Company initiated strategic plans to consolidate four
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 the impairments to goodwill and
other intangibles related to its microelectronic fiber optic acquisitions.
The last of these consolidations is expected to be completed by March 2003.
In connection with this restructuring, the Company recorded a charge of
$20.1 million during the quarters ended March 31, 2002 and June 30, 2002
or $14.9 million, net of tax.
-9-
The following table sets forth the charges and payments related to the
restructuring reserve for the three months ended September 30, 2002:
Balance Three Months Ended Balance
July 1, September 30, 2002 September 30,
2002 ---------------------------- 2002
------------ Adjustments to -------------
Restructuring Restructuring Cash Restructuring
Reserve Reserve Payments Reserve
------- ------- -------- -------
Workforce reduction $1,559 $100 $(663) $996
Lease payments 980 (223) (73) 684
Plant shutdown 161 134 (54) 241
------ ------ ------ ------
Total operative costs $2,700 $11 $(790) $1,921
====== ====== ====== ======
The restructuring charges, including post-production operating costs of
approximately $165,000 that will be expensed during the remainder of
fiscal 2003, is estimated to be $20.3 million in total.
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.
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
Three Months
Ended September 30,
---------------------
2002 2001
---- ----
(In thousands, except per share data)
Net income (loss) $ 632 $ (672)
======= =======
Computation of adjusted weighted
average shares outstanding:
Weighted average shares outstanding 60,125 59,789
Add: Effect of dilutive options
outstanding 497 --
------- -------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 60,622 59,789
======= =======
Net income (loss) per share - Basic $.01 $(.01)
==== =====
- Diluted(1) $.01 $(.01)
==== =====
(1) As a result of the loss for the three months ended September 30, 2001, all
options are anti-dilutive.
-10-
6. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Three Months
Ended September 30,
-------------------
2002 2001
---- -----
(In thousands)
Net income (loss) $ 632 $(672)
Unrealized gain (loss) on
interest rate swap
agreements, net of tax (105) (125)
Unrealized investment
gain (loss), net of tax -- 6
Foreign currency
translation adjustment 461 133
---- -----
Total comprehensive
income (loss) $ 988 $(658)
===== =====
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 September 30, 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 $388,000 as
of September 30, 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
September 30, 2002, the Company's available unused line of credit was
approximately $20.6 million after consideration of this and other letters
of credit.
-11-
8. Inventories
Inventories consist of the following:
September 30, June 30,
2002 2002
------- -------
(In thousands)
Raw materials $34,890 $34,765
Work in process 24,322 21,939
Finished goods 14,634 15,400
------- -------
$73,846 $72,104
======= =======
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 $8,000 and $14,000 to additional paid-in
capital during the three months ended September 30, 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, was
one of several defendants named in a personal injury action initiated in
August 1994 by a group of plaintiffs. The plaintiffs were seeking damages
which cumulatively exceeded $500 million. The complaint alleged, among
other things, that the plaintiffs suffered injuries from exposure to
substances contained in products sold by the subsidiary to one of its
customers. In July 2002, the claims were resolved in mediation within the
Company's product liability insurance limits.
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.
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
-12-
For The Three Months Ended
September 30,
--------------------------
Business Segment Data: 2002 2001
------- -------
(In thousands)
Net sales:
Microelectronic solutions $23,812 $22,213
Test solutions 38,969 12,935
Isolator products 3,703 4,342
------- -------
Net sales $66,484 $39,490
======= =======
Operating income (loss):
Microelectronic solutions $ 1,870 $ 1,105
Test solutions 361 (1,886)
Isolator products 260 536
General corporate expenses (1,087) (1,016)
------- -------
1,404 (1,261)
Interest expense (351) (337)
Other income (expense), net (111) 576
------- -------
Income (loss) before income taxes $ 942 $(1,022)
======= =======
The Company's export sales accounted for 33.5% and 16.2% of sales during
the three months ended September 30, 2002 and 2001, respectively.
-13-
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, fiber optic, 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:
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 satellite communications. 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:
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, S.A. (France), which we acquired in September 1998.
Europtest develops and sells specialized software-driven test
equipment used primarily in cellular, satellite and other
communications applications.
-14-
o 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.
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.
Approximately 30% of our sales for the three months ended September 30,
2002, 42% 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.
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Net Sales. Net sales increased 68.4% to $66.5 million for the three
months ended September 30, 2002 from $39.5 million for the three months ended
September 30, 2001. Net sales in the microelectronic solutions segment increased
7.2% to $23.8 million for the three months ended September 30, 2002 from $22.2
million for the three months ended September 30, 2001 due primarily to increased
sales volume of integrated circuits, primarily in the satellite and defense
markets, offset, in part, by decreased sales volume in thin film interconnects
due to the continuing slowdown of the fiber optic market. Net sales in the test
solutions segment increased 201.3% to $39.0 million for the three months ended
September 30, 2002 from $12.9 million for the three months ended September 30,
2001 primarily due to the acquisition of IFR Systems in May 2002. Net sales in
the isolator products segment decreased 14.7% to $3.7 million for the three
months ended September 30, 2002 from $4.3 million for the three months ended
September 30, 2001 due to lower sales volume of military and industrial
isolators.
Gross Profit. Gross profit increased 89.8% to $24.8 million (37.3% of
net sales) for the three months ended September 30, 2002 from $13.1 million
(33.1% of net sales) for the three months ended September 30, 2001. The
increases were primarily a result of the effect of the acquisition of IFR, which
has higher gross margins than our historical average.
-15-
Selling, General and Administrative Costs. Selling, general and
administrative costs increased 60.3% to $15.7 million (23.6% of net sales) for
the three months ended September 30, 2002 from $9.8 million (24.8% of net sales)
for the three months ended September 30, 2001. The increase in such expenses was
due primarily to the addition of the expenses of IFR, slightly offset by reduced
expenses in our microelectronics division as a result of last year's
restructuring efforts.
Research and Development Costs. Our self-funded research and development
costs increased 69.8% to $7.7 million (11.6% of net sales) for the three months
ended September 30, 2002 from $4.5 million (11.5% of net sales) for the three
months ended September 30, 2001. The increase was primarily due to the addition
of the expenses of IFR.
Other Income (Expense). Interest expense was $351,000 for the three
months ended September 30, 2002 and $337,000 for the three months ended
September 30, 2001. Other expense of $111,000 for the three months ended
September 30, 2002 consists of foreign currency transaction losses of $246,000
and a $185,000 decrease in the fair value of our interest rate swap agreements
partially offset by $305,000 of interest income. Other income of $576,000 for
the three months ended September 30, 2001 consisted primarily of $763,000 of
interest income partially offset by a $198,000 decrease in the fair value of our
interest rate swap agreements. Interest income decreased primarily due to lower
levels of cash and marketable securities which were used to acquire IFR.
Provision (Benefit) for Income Taxes. The income tax provision was
$310,000 (an effective income tax rate of 32.9%) for the three months ended
September 30, 2002 and the income tax benefit was $350,000 (an effective income
tax rate of 34.2%) for the three months ended September 30, 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
foreign, state and local income taxes and research and development credits.
Net Income (Loss). Net income for the three months ended September 30,
2002 was $632,000, or $.01 per diluted share, versus a net (loss) of $(672,000),
or $(.01) per share, for the three months ended September 30, 2001.
Liquidity and Capital Resources
As of September 30, 2002, we had $148.7 million in working capital. Our
current ratio was 4.5 to 1 at September 30, 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 September 30, 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.
-16-
We are currently in full compliance with all of the covenants contained
in our loan agreement.
For the three months ended September 30, 2002, our operations provided
cash of $5.7 million primarily due to the reduction in accounts receivable and
profitability of operations, partially offset by reductions in accounts payable
and accrued expenses. For the three months ended September 30, 2002, our
investing activities used cash of $1.9 million for capital expenditures. For the
three months ended September 30, 2002, our financing activities used cash of
$446,000 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 $20.3 million with a cash cost of $4.6 million. These restructurings are
expected to be completed by March 2003 and are expected to reduce annual
operating costs by approximately $8.0 million and result in annual cash savings
of approximately $6.0 million. The restructuring charges included the
elimination of excess equipment capacity (primarily in the microelectronics
segment), impairments to goodwill and other intangibles related to our
microelectronics fiber optic acquisitions, 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 September 30, 2002, our available unused line of credit was $20.6
million after consideration of letters of credit. We expect to enter into a new
credit facility during the second quarter of fiscal 2003, however no assurances
can be given in that regard.
The following table summarizes our obligations and commitments to make
future payments under debt and operating leases as of September 30, 2002:
Payments due by period
-----------------------------------------------
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
(In thousands)
Long-term debt............. $14,232 $2,014 $ 3,923 $2,230 $ 6,065
Operating leases........... 34,809 6,289 9,379 5,615 13,526
------- ------ ------- ------ -------
Total...................... $49,041 $8,303 $13,302 $7,845 $19,591
======= ====== ======= ====== =======
The operating lease commitments shown in the above table have not been
reduced by future minimum sub-lease rentals of $16.5 million.
-17-
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 September 30, 2002 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.
-18-
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 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 estimate of the fair value of each of the
Company's reporting units (as defined in SFAS 142). Such estimates are
inherently subjective, and 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 a material 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. We do not expect such adoption to
have a material impact on our consolidated financial statements.
-19-
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, the integration of the business of IFR, the consolidation of
certain of our manufacturing facilities according to our plan, 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.
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 September 30, 2002,
the effect on our net income would be a reduction of approximately $92,000 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
September 30, 2002, the effect on our net income would be a decrease of
approximately $42,000 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 September 30, 2002, the effect on
our other comprehensive income would be approximately $3.1 million.
ITEM 4 - CONTROLS AND PROCEDURES
On November 6 and 7, 2002, 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. They 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 November 2002, in anticipation of the
filing of this Form 10-Q, they reviewed the most recent evaluation of our
internal controls prepared by our internal auditor. They have advised us that,
based on such review, 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.
-20-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A subsidiary of the Company whose operations were discontinued in 1991,
was one of several defendants named in a personal injury action
initiated in August 1994 by a group of plaintiffs. The plaintiffs were
seeking damages which cumulatively exceeded $500 million. The complaint
alleged, among other things, that the plaintiffs suffered injuries from
exposure to substances contained in products sold by the subsidiary to
one of its customers. In July 2002, the claims were resolved in
mediation within the Company's product liability insurance limits.
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
-21-
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)
November 14, 2002 By: /s/ Michael Gorin
--------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
-22-
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
-23-
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: November 14, 2002
/s/ Harvey R. Blau
------------------------------------
Harvey R. Blau
Chairman of the Board
(Principal Executive Officer)
-24-
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
-25-
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: November 14, 2002
/s/ Michael Gorin
_____________________________
Michael Gorin
President
(Principal Financial Officer)
-26-