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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 2002
Commission File Number 000-02324
AEROFLEX INCORPORATED
(Exact name of Registrant as specified in its Charter)
DELAWARE 11-1974412
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
35 South Service Road
Plainview, N.Y. 11803
(Address of principal executive offices) (Zip Code)
(516) 694-6700
(Registrant's telephone number, including area code)
*Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
*Indicate 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.
February 14, 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 154 PAGES.
AEROFLEX INCORPORATED
AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1 - CONSOLIDATED BALANCE SHEETS 3-4
December 31, 2002 and June 30, 2002
CONSOLIDATED STATEMENTS OF OPERATIONS 5-6
Six and Three Months Ended December 31, 2002 and 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS 7
Six Months Ended December 31, 2002 and 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8-16
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17-25
Six and Three Months Ended December 31, 2002 and 2001
Item 3 - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
Item 4 - CONTROLS AND PROCEDURES 25
PART II: OTHER INFORMATION
Item 1 - LEGAL PROCEEDINGS 26
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 28
CERTIFICATIONS 29-32
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2002
------------ --------
(Unaudited) (Note 3)
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 38,038 $ 38,559
Accounts receivable, less allowance for
doubtful accounts of $480,000 and $636,000 59,060 63,384
Income taxes receivable 3,226 4,432
Inventories 74,398 72,040
Deferred income taxes 12,399 12,259
Assets of discontinued operations 98 1,367
Prepaid expenses and other current assets 5,051 3,360
-------- --------
Total current assets 192,270 195,401
Property, plant and equipment, net 70,945 73,473
Intangible assets with definite lives, net 16,528 17,815
Goodwill 22,426 20,179
Deferred income taxes 1,871 2,477
Other assets 11,740 9,120
-------- --------
Total assets $315,780 $318,465
======== ========
See notes to consolidated financial statements.
-3-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
December 31, June 30,
2002 2002
------------ --------
(Unaudited) (Note 3)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,962 $ 2,171
Accounts payable 14,618 18,356
Advance payments by customers 2,455 1,687
Liabilities of discontinued operations 1,421 366
Accrued expenses and other current liabilities 23,210 26,725
-------- --------
Total current liabilities 43,666 49,305
Long-term debt 12,005 12,638
Other long-term liabilities 8,154 7,040
-------- --------
Total liabilities 63,825 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
60,097,000 and 60,006,000 shares 6,010 6,001
Additional paid-in capital 222,806 222,351
Accumulated other comprehensive income 3,462 1,881
Retained earnings 19,691 19,263
-------- --------
251,969 249,496
Less: Treasury stock, at cost (4,000 shares) 14 14
-------- --------
Total stockholders' equity 251,955 249,482
-------- --------
Total liabilities and stockholders' equity $315,780 $318,465
======== ========
See notes to consolidated financial statements.
-4-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six Months Ended
December 31,
-------------------
2002 2001
-------- -------
(Note 3)
(Unaudited)
Net sales $138,197 $85,303
Cost of sales 86,135 55,138
-------- -------
Gross profit 52,062 30,165
-------- -------
Selling, general and administrative costs 32,463 19,278
Research and development costs 14,994 9,064
-------- -------
47,457 28,342
-------- -------
Operating income 4,605 1,823
-------- -------
Other expense (income)
Interest expense 713 659
Other expense (income) 9 (1,088)
-------- -------
Total other expense (income) 722 (429)
-------- -------
Income before income taxes 3,883 2,252
Provision for income taxes 1,325 765
-------- -------
Income from continuing operations 2,558 1,487
-------- -------
Discontinued operations (Note 3)
Loss from discontinued operations,
net of tax benefit of $203 and $440 396 870
Loss on abandonment of operations,
net of tax benefit of $892 1,734 --
-------- -------
Loss from discontinued operations,
net of tax 2,130 870
-------- -------
Net income $ 428 $ 617
======== =======
Income (loss) per common share:
Basic
Continuing operations $ .04 $ .02
Discontinued operations (.03) (.01)
-------- -------
Net income $ .01 $ .01
======== =======
Diluted
Continuing operations $ .04 $ .02
Discontinued operations (.03) (.01)
-------- -------
Net income $ .01 $ .01
======== =======
Weighted average number of common shares outstanding:
Basic 60,155 59,844
======== =======
Diluted 60,693 61,771
======== =======
See notes to consolidated financial statements.
-5-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
December 31,
------------------
2002 2001
------- -------
(Note 3)
(Unaudited)
Net sales $71,764 $45,996
Cost of sales 44,645 28,976
------- -------
Gross profit 27,119 17,020
------- -------
Selling, general and administrative costs 16,937 9,893
Research and development costs 7,351 4,639
------- -------
24,288 14,532
------- -------
Operating income 2,831 2,488
------- -------
Other expense (income)
Interest expense 362 321
Other expense (income) (103) (511)
------- -------
Total other expense (income) 259 (190)
------- -------
Income before income taxes 2,572 2,678
Provision for income taxes 888 909
------- -------
Income from continuing operations 1,684 1,769
------- -------
Discontinued operations (Note 3)
Loss from discontinued operations,
net of tax benefit of $74 and $270 154 480
Loss on abandonment of operations,
net of tax benefit of $892 1,734 --
------- -------
Loss from discontinued operations,
net of tax 1,888 480
------- -------
Net Income (loss) $ (204) $ 1,289
======= =======
Income (loss) per common share:
Basic
Continuing operations $ .03 $ .03
Discontinued operations (.03) (.01)
------- -------
Net income (loss) $ -- $ .02
======= =======
Diluted
Continuing operations $ .03 $ .03
Discontinued operations (.03) (.01)
------- -------
Net income (loss) $ -- $ .02
======= =======
Weighted average number of common shares outstanding:
Basic 60,185 59,900
======= =======
Diluted 60,764 62,442
======= =======
See notes to consolidated financial statements.
-6-
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
December 31,
------------------
2002 2001
------- --------
(Note 3)
Unaudited)
Cash Flows From Operating Activities:
Net income $ 428 $ 617
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss from discontinued operations 3,225 1,310
Depreciation and amortization 7,536 5,548
Amortization of deferred gain (99) (253)
Deferred income taxes (25) 325
Other, net 38 454
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 4,890 2,635
Decrease (increase) in inventories (1,274) (1,360)
Decrease (increase) in prepaid expenses
and other assets (3,069) (462)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities (7,051) (10,552)
------- --------
Net Cash Provided By (Used In) Operating Activities 4,599 (1,738)
------- --------
Cash Flows From Investing Activities:
Payment for purchase of business (1,039) (284)
Capital expenditures (3,013) (2,320)
Cash flow provided by (used in) discontinued
operations (901) (610)
Proceeds from sale of marketable securities -- 5,963
Other, net 81 1
------- --------
Net Cash Provided By (Used In) Investing Activities (4,872) 2,750
------- --------
Cash Flows From Financing Activities:
Borrowings under debt agreements -- 89
Debt repayments (842) (858)
Proceeds from the exercise of stock options 392 1,394
Amounts paid for withholding taxes on stock
option exercises (60) (1,256)
Withholding taxes collected for stock option
exercises 60 1,256
------- --------
Net Cash Provided By (Used In) Financing Activities (450) 625
------- --------
Effect of exchange rate changes on cash
and cash equivalents 202 --
------- --------
Net Increase (Decrease) In Cash
And Cash Equivalents (521) 1,637
Cash And Cash Equivalents At Beginning Of Period 38,559 69,896
------- --------
Cash And Cash Equivalents At End Of Period $38,038 $ 71,533
======= ========
See notes to consolidated financial statements.
-7-
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 December 31, 2002, the related
consolidated statements of operations for the six and three months
ended December 31, 2002 and 2001, and the consolidated statements of
cash flows for the six months ended December 31, 2002 and 2001 have
been prepared by the Company and are unaudited. In the opinion of
management, all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at December 31, 2002 and for all
periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's June
30, 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 six and 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 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. Management does not expect such adoption to have a material
impact on the consolidated financial statements.
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 will be adopted prospectively by
the Company as of January 1, 2003. Management does not expect such
adoption to have a material impact on the consolidated financial
statements.
-8-
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 disclosure requirements shall be effective
for financial reports for interim periods beginning after December 31,
2002. The Company will adopt the disclosure portion of this statement
for the fiscal quarter ending March 31, 2003. The adoption will 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
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:
-9-
(In thousands)
--------------
Current assets (excluding cash of $8.0 million) ............... $ 44,046
Property, plant and equipment ................................. 20,242
Developed technology .......................................... 8,230
Goodwill ...................................................... 5,009
In-process research and development ........................... 1,100
Other ......................................................... 62
--------
Total assets acquired ...................................... 78,689
--------
Current liabilities ........................................... (21,996)
Long-term debt ................................................ (2,814)
--------
Total liabilities assumed .................................. (24,810)
--------
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 December 31,
2001 pro forma results of operations in order to provide comparability to the
respective historical period.
Pro Forma
Six Months Ended
December 31,
2001
-------------------------------------
(In thousands, except per share data)
Net sales............................... $141,713
Income (loss) from continuing
operations........................... (2,446)
Income (loss) from continuing
operations per share:
Basic............................. $ (.04)
Diluted........................... $ (.04)
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 December 31, 2002
----------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
-------------- ------------ --------
(In thousands)
Existing technology ................. $23,739 $7,828 $15,911
Tradenames .......................... 1,000 383 617
------- ------ -------
Total ............................ $24,739 $8,211 $16,528
======= ====== =======
-10-
The aggregate amortization expense for the amortized intangible assets was $1.5
million for the six months ended December 31, 2002.
The estimated aggregate amortization expense for each of the twelve month
periods ending December 31, is as follows:
(In thousands)
2003 .......................................................... $3,048
2004 .......................................................... 3,048
2005 .......................................................... 3,011
2006 .......................................................... 2,995
2007 .......................................................... 2,924
Goodwill
The carrying amount of goodwill is as follows:
Balance Balance
as of as of
July 1, Adjustment December 31,
2002 (Note a) 2002
------- ---------- ------------
(In thousands)
Microelectronic
solutions
segment ................................ $ 5,367 $ -- $ 5,367
Test solutions
segment ................................ 14,023 2,247 16,270
Isolator products
segment ................................ 789 -- 789
------- ------ -------
Total ................................ $20,179 $2,247 $22,426
======= ====== =======
Note a - The additional goodwill recorded during the period is a result of
adjustments to 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. The last
of these consolidations is expected to be completed by March 2003. In
connection with this restructuring, the Company recorded a charge of $9.1
million during the quarters ended March 31, 2002 and June 30, 2002, or $5.8
million, net of tax.
-11-
The following table sets forth the charges and payments related to the
restructuring reserve for the six months ended December 31, 2002:
Balance Balance
July 1, Six Months Ended December 31,
2002 December 31, 2002 2002
------------- ------------------------- -------------
Adjustments to
Restructuring Restructuring Cash Restructuring
Reserve Reserve Payments Reserve
------------- -------------- -------- -------------
(In thousands)
Workforce reduction ........ $1,406 $125 $(1,050) $481
Lease payments ............. 864 (56) (587) 221
Plant shutdown ............. 106 134 (65) 175
------ ---- ------- ----
Total operating costs ... $2,376 $203 $(1,702) $877
====== ==== ======= ====
The restructuring charges, including post-production operating costs of
approximately $165,000 that will be expensed during the remainder of fiscal
2003, are estimated to be $9.3 million in total.
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. These charges 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:
Six Months
Ended December 31,
-------------------------------------
2002 2001
------- -------
(In thousands, except per share data)
Income from continuing operations $ 2,558 $ 1,487
======= =======
Computation of adjusted weighted
average shares outstanding:
Weighted average shares outstanding 60,155 59,844
Add: Effect of dilutive options
outstanding 538 1,927
------- -------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 60,693 61,771
======= =======
Income from continuing operations
per share - Basic $ .04 $ .02
======= =======
- Diluted $ .04 $ .02
======= =======
-12-
Three Months
Ended December 31,
-------------------------------------
2002 2001
------- -------
(In thousands, except per share data)
Income from continuing operations $ 1,684 $ 1,769
======= =======
Computation of adjusted weighted
average shares outstanding:
Weighted average shares outstanding 60,185 59,900
Add: Effect of dilutive options
outstanding 579 2,542
------- -------
Weighted average shares and common
share equivalents used for computation
of diluted earnings per common share 60,764 62,442
======= =======
Income from continuing operations
per share - Basic $ .03 $ .03
======= =======
- Diluted $ .03 $ .03
======= =======
7. Comprehensive Income
The components of comprehensive income are as follows:
Six Months Three Months
Ended December 31, Ended December 31
------------------ ------------------
2002 2001 2002 2001
------ ----- ------ ------
(In thousands)
Net income (loss) $ 428 $617 $ (204) $1,289
Unrealized gain (loss) on
interest rate swap
agreements, net of tax (104) (73) 1 52
Unrealized investment
gain (loss), net of tax -- (5) -- (11)
Foreign currency
translation adjustment 1,685 89 1,224 (44)
------ ---- ------ ------
Total comprehensive
income (loss) $2,009 $628 $1,021 $1,286
====== ==== ====== ======
8. 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 was scheduled
to expire December 31, 2002, but was extended until March 31, 2003. (See
Note 14 - Subsequent Event). 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 (4.25% at December 31, 2002) on the revolving credit borrowings. The
Company paid a facility fee of $100,000 and is required to pay
-13-
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 $387,000 as of December 31, 2002 in favor of the banks.
The terms of the loan agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash
dividends. In connection with the purchase of certain materials for use in
manufacturing, the Company has a letter of credit of $2.0 million. At
December 31, 2002, the Company's available unused line of credit was
approximately $21.0 million after consideration of this letter of credit.
9. Inventories
Inventories consist of the following:
December 31, June 30,
2002 2002
------------ --------
(In thousands)
Raw materials $33,441 $34,702
Work in process 25,911 21,939
Finished goods 15,046 15,399
------- -------
$74,398 $72,040
======= =======
10. 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 six months
ended December 31, 2002 were as follows:
Six Months Ended
December 31,
----------------
2002 2001
------ -------
(In thousands)
Balance at beginning of period $1,500 $ 270
Provision for warranty obligations 816 326
Charges incurred (891) (306)
------ -----
Balance at end of period $1,425 $ 290
====== =====
11. 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.
-14-
The Company recorded credits of $64,000 and $1.0 million to additional
paid-in capital during the six months ended December 31, 2002 and 2001,
respectively, in connection with the tax benefit related to compensation
deductions on the exercise of stock options.
12. 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 action seeks unspecified damages and injunctive
relief. The Company rejects any allegation that it is infringing this
patent and intends to vigorously defend this lawsuit.
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.
13. 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 Six Months Ended
December 31,
------------------------
2002 2001
-------- -------
(In thousands)
Business Segment Data:
Net sales:
Microelectronic solutions $ 49,858 $47,977
Test solutions 80,682 29,402
Isolator products 7,657 7,924
-------- -------
Net sales $138,197 $85,303
======== =======
Operating income:
Microelectronic solutions $ 6,253 $ 4,939
Test solutions 1,020 (1,441)
Isolator products 220 542
General corporate expenses (2,888) (2,217)
-------- -------
4,605 1,823
Interest expense 713 659
Other expense (income), net 9 (1,088)
-------- -------
Income before income taxes $ 3,883 $ 2,252
======== =======
15
For The Three Months Ended
December 31,
--------------------------
2002 2001
------- -------
(In thousands)
Net sales:
Microelectronic solutions $26,096 $25,947
Test solutions 41,713 16,467
Isolator products 3,955 3,582
------- -------
Net sales $71,764 $45,996
======= =======
Operating income:
Microelectronic solutions $ 4,013 $ 3,238
Test solutions 659 445
Isolator products (40) 6
General corporate expenses (1,801) (1,201)
------- -------
2,831 2,488
Interest expense 362 321
Other expense (income), net (103) (511)
------- -------
Income before income taxes $ 2,572 $ 2,678
======= =======
Revenues, based on the customers' locations, attributed to the United States and
other regions are as follows:
For the Six Months Ended
December 31,
------------------------
2002 2001
-------- -------
(In thousands)
United States of America $ 89,493 $72,853
Europe and Middle East 37,390 7,828
Asia and Australia 9,619 3,341
Rest of World 1,695 1,281
-------- -------
$138,197 $85,303
======== =======
14. Subsequent Event
On February 14, 2003, the Company executed and delivered an amended and
restated revolving credit and security agreement with two banks which will
replace the Company's existing loan agreement upon the satisfaction of
certain conditions involving the delivery of various documents. The amended
and restated loan agreement increases 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.
-16-
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, 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.
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.
-17-
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 37% of our sales for the six months ended December 31, 2002,
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).
Six Months Ended December 31, 2002 Compared to Six Months Ended December 31,
2001
Net Sales. Net sales increased 62.0% to $138.2 million for the six months
ended December 31, 2002 from $85.3 million for the six months ended December 31,
2001. Net sales in the microelectronic solutions segment increased 3.9% to $49.9
million for the six months ended December 31, 2002 from $48.0 million for the
six months ended December 31, 2001 due primarily to increased sales volume of
integrated circuits, primarily in the aerospace 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 174.4% to $80.7 million for the six months ended December 31, 2002
from $29.4 million for the six months ended December 31, 2001 primarily due to
the acquisition of IFR Systems in May 2002. Net sales in the isolator products
segment decreased 3.4% to $7.7 million for the six months ended December 31,
2002 from $7.9 million for the six months ended December 31, 3001 due to lower
sales volume of military isolators.
-18-
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 72.6% to $52.1
million (37.7% of net sales) for the six months ended December 31, 2002 from
$30.2 million (35.4% of net sales) for the six months ended December 31, 2001.
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 68.4% to $32.5
million (23.5% of net sales) for the six months ended December 31, 2002 from
$19.3 million (22.6% of net sales) for the six months ended December 31, 2001.
The increase in such expenses was due primarily to the addition of the expenses
of IFR.
Research and Development Costs. Research and development costs include
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 65.4% to $15.0 million (10.8% of net sales) for the
six months ended December 31, 2002 from $9.1 million (10.6% of net sales) for
the six months ended December 31, 2001. The increase was primarily due to the
addition of the expenses of IFR.
Other Expense (Income). Interest expense was $713,000 for the six months
ended December 31, 2002 and $659,000 for the six months ended December 31, 2001.
Other expense of $9,000 for the six months ended December 31, 2002 consists of
foreign currency transaction losses of $464,000 and a $185,000 decrease in
the fair value of our interest rate swap agreements partially offset by
interest income of $428,000 and other miscellaneous income. Other income of
$1.1 million for the six months ended December 31, 2001 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 $1.3 million (an
effective income tax rate of 34.1%) for the six months ended December 31, 2002
and $765,000 (an effective income tax rate of 34.0%) for the six months ended
December 31, 2001. The income tax provision for the two periods differed from
the amount computed by applying the U.S. Federal income tax rate to income
before income taxes primarily due to foreign, state and local income taxes and
research and development credits.
Income From Continuing Operations. Income from continuing operatons for the
six months ended December 31, 2002 was $2.6 million or $.04 per diluted share,
versus $1.5 million, or $.02 per diluted share, for the six months ended
December 31, 2001.
Three Months Ended December 31, 2002 Compared to Three Months Ended December 31,
2001
Net Sales. Net sales increased 56.0% to $71.8 million for the three months
ended December 31, 2002 from $46.0 million for the three months ended December
31, 2001. Net sales in the microelectronic solutions segment increased 0.6% to
$26.1 million for the three months ended December 31, 2002 from $25.9 million
for the three months ended December 31, 2001 due primarily to increased sales
volume of integrated circuits, primarily in the aerospace and defense markets,
offset, in part, by decreased sales volume in thin film interconnects and
microelectronic modules due to the continuing slowdown of the fiber optic
market. Net sales in the test solutions segment increased 153.3% to $41.7
million for the three months ended December 31, 2002 from $16.5 million for the
three months ended December 31, 2001 primarily due to the acquisition of IFR
Systems in May 2002. Net sales in the isolator products segment increased 10.4%
to $4.0 million for the three months ended December 31, 2002 from $3.6 million
for the three months ended December 31, 3001 due to higher sales volume of
commercial isolators.
-19-
Gross Profit. Gross profit increased 59.3% to $27.1 million (37.8% of net
sales) for the three months ended December 31, 2002 from $17.0 million (37.0% of
net sales) for the three months ended December 31, 2001. 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 increased 71.2% to $16.9 million (23.6% of net sales) for
the three months ended December 31, 2002 from $9.9 million (21.5% of net sales)
for the three months ended December 31, 2001. The increase in such expenses was
due primarily to the addition of the expenses of IFR.
Research and Development Costs. Our self-funded research and development
costs increased 58.5% to $7.4 million (10.2% of net sales) for the three months
ended December 31, 2002 from $4.6 million (10.1% of net sales) for the three
months ended December 31, 2001. The increase was primarily due to the addition
of the expenses of IFR.
Other Expense (Income). Interest expense was $362,000 for the three months
ended December 31, 2002 and $321,000 for the three months ended December 31,
2001. Other income of $103,000 for the three months ended December 31, 2002
consists of $123,000 of interest income, $88,000 from the sale of a product line
and other miscellaneous income partially offset by foreign currency transaction
losses of $218,000. Other income of $511,000 for the three months ended December
31, 2001 consisted primarily of $406,000 of interest income and an $85,000
increase 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, and lower market interest rates.
Provision for Income Taxes. The income tax provision was $888,000 (an
effective income tax rate of 34.5%) for the three months ended December 31, 2002
and $909,000 (an effective income tax rate of 33.9%) for the three months ended
December 31, 2001. The income tax provision for the two periods differed from
the amount computed by applying the U.S. Federal income tax rate to income
before income taxes primarily due to foreign, state and local income taxes and
research and development credits.
Income From Continuing Operations. Income from continuing operatons for the
three months ended December 31, 2002 was $1.7 million or $.03 per diluted share,
versus $1.8 million, or $.03 per diluted share, for the three months ended
December 31, 2001.
Liquidity and Capital Resources
As of December 31, 2002, we had $148.6 million in working capital. Our
current ratio was 4.4 to 1 at December 31, 2002. As of February 25, 1999, we
replaced a previous agreement with a revised revolving credit, term loan and
mortgage agreement with two banks which is secured by substantially all of our
assets not otherwise encumbered. The agreement provided for a revolving credit
line of $23.0 million, a term loan of $20.0 million and a mortgage on our
Plainview property for $4.5 million. The revolving credit loan facility was
scheduled to expire December 31, 2002, but was extended until March 31, 2003.
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 (4.25% at December 31, 2002) on the revolving
credit borrowings. The mortgage is payable in monthly installments of
approximately $26,000 through March 2008 and a balloon payment of $1.6 million
in April 2008. We have entered into an interest rate swap agreement for the
outstanding amount under the mortgage agreement at approximately 7.6% in order
to reduce the interest rate risk associated with these borrowings.
-20-
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.
We are currently in full compliance with all of the covenants contained in
our loan agreement.
On February 14, 2003, we executed and delivered an amended and restated
revolving credit and security agreement with two banks which will replace our
existing loan agreement upon the satisfaction of certain conditions involving
the delivery of various documents. The amended and restated loan agreement
increases 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.
For the six months ended December 31, 2002, our operations provided cash of
$4.6 million primarily due to the profitability of operations and the reduction
in accounts receivable, partially offset by reductions in accounts payable and
accrued expenses. For the six months ended December 31, 2002, our investing
activities used cash of $4.9 million primarily for capital expenditures. For the
six months ended December 31, 2002, our financing activities used cash of
$450,000 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
$9.1 million with a cash cost of $4.3 million. These restructurings are expected
to be completed by March 2003 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 December
31, 2002, our available unused line of credit was $21.0 million after
consideration of letters of credit.
-21-
The following table summarizes, as of December 31, 2002, 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 ......... $13,967 $1,962 $ 3,336 $1,691 $ 6,978
Operating leases ....... 33,738 6,081 8,914 5,181 13,562
------- ------ ------- ------ -------
Total .................. $47,705 $8,043 $12,250 $6,872 $20,540
======= ====== ======= ====== =======
The operating lease commitments shown in the above table have not been
reduced by future minimum sub-lease rentals of $16.4 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 December 31, 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.
-22-
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 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 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.
-23-
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. We do not expect such adoption to have a material impact on our
consolidated financial statements.
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 will adopt FIN 45 prospectively as of January 1, 2003. We do not expect
such adoption to have a material 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 disclosure requirements shall be effective for
financial reports for interim periods beginning after December 31, 2002. We will
adopt the disclosure portion of this statement for the fiscal quarter ending
March 31, 2003. The adoption will 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. 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 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,
-24-
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 December 31, 2002, the
effect on our net income would be a reduction of approximately $20,000 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
December 31, 2002, the effect on our net income would be a decrease of
approximately $40,000 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 December 31, 2002, the effect on our
other comprehensive income would be approximately $3.7 million.
ITEM 4 - CONTROLS AND PROCEDURES
On February 4, 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. 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 February 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 auditor. 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.
-25-
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 action seeks unspecified damages and injunctive
relief. The Company rejects any allegation that it is infringing this
patent and intends to vigorously defend this lawsuit.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant held its Annual Meeting of Stockholders on November 21,
2002.
(b) Not applicable.
(c) (i) Three directors were elected at the Annual Meeting to serve until
the Annual Meeting of Stockholders in 2005. The names of these
directors and votes cast in favor of their election and shares
withheld are as follows:
Name Votes For Votes Withheld
--------------- ---------- --------------
Michael Gorin 52,310,452 2,395,770
Donald S. Jones 51,945,404 2,760,818
Eugene Novikoff 50,117,231 4,588,991
(ii) The stockholders of the Registrant approved the adoption of the
2002 Outside Directors Stock Option Plan: 27,710,028 shares were
voted in favor of this proposal, 26,876,308 shares were voted
against this proposal and 119,886 abstained.
Item 5. Other Information
None
-26-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Fifth Amended and Restated Loan and Security Agreement among
the Registrant, certain of its subsidiaries, JP Morgan Chase
Bank and Fleet National Bank dated as of February 14, 2003.
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
Form 8-K dated December 23, 2002 - Item 5 - Extension of Loan
Agreement
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AEROFLEX INCORPORATED
(REGISTRANT)
February 14, 2003 By: /s/ Michael Gorin
----------------------------------
Michael Gorin
President, Chief Financial Officer
and Principal Accounting Officer
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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
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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: February 14, 2003
/s/ Harvey R. Blau
-----------------------------------
Harvey R. Blau
Chairman of the Board
(Principal Executive Officer)
-30-
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
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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: February 14, 2003
/s/ Michael Gorin
-----------------------------------
Michael Gorin
President
(Principal Financial Officer)
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STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'