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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 March 31, 2004

Commission File Number 000-02324

AEROFLEX INCORPORATED
(Exact name of Registrant as specified in its Charter)

*  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 ý                                  No o

*  Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý                                  No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

AEROFLEX INCORPORATED
AND SUBSIDIARIES

INDEX

2

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

3

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(continued)

See notes to consolidated financial statements.

4

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See notes to consolidated financial statements.

5

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

See notes to consolidated financial statements.

6

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

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 March 31, 2004, the related consolidated statements of operations for the nine and three months ended March 31, 2004 and 2003, and the consolidated statements of cash flows for the nine months ended March 31, 2004 and 2003 have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2004 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, 2003 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 2003. Certain reclassifications have been made to previously reported financial statements to conform to current classifications and properly reflect discontinued operations (see Note 3).

        Results of operations for the nine and three month periods are not necessarily indicative of results of operations for the corresponding years.

2.    Acquisition of Businesses and Intangible Assets

Acquisition of Racal Instruments Wireless Solutions Group

        On July 31, 2003, the Company acquired the Racal Instruments Wireless Solutions Group ("RIWS") for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at the Company's option, depending on RIWS achieving certain performance goals for the year ending July 31, 2004. The Company has not included this contingent consideration in its initial purchase price allocation as the payment of this consideration is not considered to be certain beyond a reasonable doubt. As a result, the Company will adjust goodwill for any contingent consideration in the future if and when it is earned. RIWS develops, manufactures and integrates digital wireless testing and measurement solutions. The addition of RIWS testing solutions products and technologies is expected to enable the Company to provide a full spectrum of wireless testing solutions from development to production and services primarily for infrastructure testing and mobile handset testing.

        The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company preliminarily allocated the purchase price, including

8

acquisition costs of approximately $2.5 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

        As of March 31, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during the fourth quarter.

        The developed technology, tradenames and customer related intangibles are being amortized on a straight-line basis over a range of 1 to 8 years. Approximately $5.7 million of the goodwill is 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 has been expensed in the quarter ended September 30, 2003 in operating costs. At the acquisition date, RIWS was conducting design, development, engineering and testing activities associated with the completion of new 2.5G and 3G protocol and conformance testers.

Acquisition of MCE Technologies, Inc.

        On September 3, 2003, the Company acquired all of the outstanding stock of MCE Technologies, Inc. ("MCE") for approximately 5.8 million shares of Aeroflex common stock with a fair value of approximately $43.5 million. In addition, the Company discharged $22.8 million of MCE outstanding bank debt, other indebtedness and preferred stock. Further, the Company issued stock options for 315,000 shares of Aeroflex common stock with exercise prices ranging from $2.88 to $9.59 in exchange for outstanding options of MCE. The fair value of these options was approximately $2.4 million utilizing the Black-Scholes option pricing model. MCE designs, manufactures and markets a broad range of microelectronic devices, components and multi-function modules servicing wireless, broadband infrastructure, satellite communications and defense markets. These product offerings complement the existing product lines of the Company.

        The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company preliminarily allocated the purchase price, including

9

acquisition costs of approximately $2.0 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

        As of March 31, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during the fourth quarter.

        The developed technology, customer related intangibles, and tradenames are being amortized on a straight-line basis over a range of 1 to 15 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 has been expensed in the quarter ended September 30, 2003 in operating costs. At the acquisition date, MCE was conducting development activities associated with the completion of certain high frequency component technology.

Acquisition of the Business of Celerity Systems Inc. (CA)

        On October 31, 2003, the Company acquired the business of Celerity Systems Inc. (CA) ("Celerity") for $4.0 million of cash, 428,000 shares of Aeroflex common stock with a fair market value of approximately $4.2 million and a release of certain liabilities totaling $1.8 million. Celerity designs, develops and manufactures modular digital test and measurement solutions for the communications, satellite, wireless and broadband test markets, including broadband signal generators. Celerity's technology enhances the Company's automatic systems capability.

        The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company preliminarily allocated the purchase price, including

10

acquisition costs of approximately $101,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

        As of March 31, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during the fourth quarter.

        The developed technology is being amortized on a straight-line basis over 7 years. The goodwill is fully 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 has been expensed in the quarter ended December 31, 2003 in operating costs. At the acquisition date, Celerity was conducting development activities associated with the completion of its next generation modular technology.

Pro Forma Results of Operations—RIWS, MCE and Celerity

        Summarized below are the unaudited pro forma results of operations of the Company as if RIWS, MCE and Celerity had been acquired at the beginning of the fiscal periods presented. The $4.2 million write-off of in-process research and development has been included in the March 31, 2004 pro forma loss, but not the March 31, 2003 pro forma income in order to provide comparability to the respective historical periods.

        The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods presented or of future operating results of the combined companies. The operating results of RIWS, MCE and Celerity have been included in the consolidated statement of operations from their respective acquisition dates. RIWS and Celerity are included in the Test Solutions segment and MCE is included in the Microelectronic Solutions segment.

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Intangibles with Definite Lives

        The components of amortizable intangible assets are as follows:

        The aggregate amortization expense for the amortized intangible assets was $5.5 million and $2.0 million for the nine months ended March 31, 2004 and 2003, respectively.

        The estimated aggregate amortization expense for each of the twelve-month periods ending March 31, is as follows:

Goodwill

        The carrying amount of goodwill is as follows:

        Note a—The goodwill recorded during the period is a result of the acquisitions of MCE in the Microelectronic Solutions segment and of RIWS and Celerity in the Test Solutions segment.

        Note b—The goodwill increased due to changes in foreign currency exchange rates.

12

3.    Discontinued Operations

        In February 2004, the Board of Directors of the Company approved a formal plan to divest the Company's thin film interconnect manufacturing operation and to seek a strategic buyer. This operation had previously been included in the Microelectronic Solutions segment. As a result of this decision, the Company recorded a $9.1 million ($5.9 million, net of tax) loss on disposal. This charge included a cash requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned equipment.

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company has reported the results of operations of this business as income (loss) from discontinued operations. Net sales from this discontinued operation were $7.2 million and $7.9 million for the nine months ended March 31, 2004 and 2003, respectively.

        All prior periods have been restated to conform to this presentation. 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.    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:

13

        Options to purchase 5.3 million shares at exercise prices ranging between $15.11 and $34.41 per share were outstanding as of March 31, 2004 but were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of the common shares.

5.    Accounting for Stock-Based Compensation

        The Company records compensation expense for employee and director stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has chosen not to implement the fair value based accounting method for employee and director stock options, but has elected to disclose the pro forma income and income per share as if such method had been used to account for stock-based compensation costs as described in SFAS No. 123.

        The per share weighted average fair value of stock options granted during the nine months ended March 31, 2004 was $6.82 on the date of grant. The fair value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 4.4%, expected volatility of 77%, and an expected life of 5.2 years. The per share weighted average fair value of stock options granted during the nine months ended March 31, 2003 was $5.36 on the date of grant. The fair value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 3.9%, expected volatility of 112% and an expected life of 5.4 years. The Company's

14

net income (loss) and net income (loss) per share using the pro forma fair value compensation cost method would have been:

*

As a result of the loss, all options are anti-dilutive.

6.    Comprehensive Income

        The components of comprehensive income are as follows:

15

        Accumulated other comprehensive income (loss) is as follows:

7.    Bank Loan Agreements

        On February 14, 2003, the Company executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on the Company's Plainview property for $3.3 million and is secured by the pledge of the stock of certain of the Company's subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to the LIBOR (1.1% at March 31, 2004) plus 150 basis points. The Company paid a facility fee of $125,000 and is required to pay a commitment fee of ..25% per annum of the average unused portion of the credit line.

        The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. The Company has entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The fair market value of the interest rate swap agreements was $287,000 as of March 31, 2004 in favor of the banks.

        The terms of the loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit of $2.0 million. At March 31, 2004, the Company's available unused line of credit was approximately $44.9 million after consideration of this and other letters of credit.

8.    Inventories

        Inventories consist of the following:

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9.    Product Warranty

        The Company warrants its products against defects in design, materials and workmanship, generally for one year from their date of shipment. A provision for estimated future costs relating to these warranties is recorded when revenue is recorded and is included in cost of goods sold.

        Changes in the Company's product warranty liability during the nine months ended March 31, 2004 were as follows:

10.    Defined Benefit Plan

        Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan (the "SERP") which provides retirement, death and disability benefits to certain of its officers. The SERP expense for the nine months ended March 31, 2004 and 2003 was $900,000 and $887,000, respectively.

11.    Income Taxes

        The Company recorded credits of $2.2 million and $84,000 to additional paid-in capital during the nine months ended March 31, 2004 and 2003, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options.

12.    Contingencies

        The Company is involved in various 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:

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Business Segment Data:

Business Segment Data:

        Management evaluates the operating results of the three segments based upon reported operating income, less costs related to restructurings and in-process research and development charges.

(1)

For the nine months ended March 31, 2004, the charges for the write-off of in- process research and development acquired in the purchase of RIWS ($2.7 million) and Celerity ($1.1 million) are allocable to the Test Solutions segment and the charge for MCE ($420,000) is allocable to the Microelectronic Solutions segment.

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        Revenues, based on the customers' locations, attributed to the United States and other regions are as follows:

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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 that we sell primarily into the broadband communication, aerospace and defense markets. We also design and manufacture motion control systems and shock and vibration isolation systems which are used for commercial, industrial and defense applications. We have built our businesses through acquisitions and internal product development. Our operations are grouped into three segments:

•

Aeroflex Microelectronic Solutions ("AMS")



•

Aeroflex Test Solutions ("ATS")



•

Aeroflex Isolator Products ("AIP")

        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. We built this segment's business primarily through various acquisitions, as follows:

•

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 February 1999, we acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. (now Aeroflex Colorado Springs, Inc.), consisting of UTMC's integrated circuit business. That operation 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. (merged into Aeroflex Plainview, Inc.), which designs and develops amplifiers used by aerospace/defense and communications systems manufacturers.



•

In September 2003, we acquired MCE Technologies, Inc. MCE designs, manufactures and markets a broad range of devices, components and subsystems that are used in defense related applications, as well as throughout mobile and fixed wireless infrastructure equipment and related test equipment applications. MCE's products are also used in wireless broadband access, cable head-end systems, fiber optic networking, and satellite applications.

        Our test solutions segment consists of two divisions: (1) instruments and (2) motion control products. We built this segment's business primarily through various acquisitions, as follows:

•

Comstron, a leader in radio frequency and microwave technology used in the manufacture of fast switching frequency signal generators and components, which we acquired in November 1989. Comstron is currently an operating division of Aeroflex Plainview, Inc., one of our wholly-owned subsidiaries.



•

Lintek (now Aeroflex Powell, Inc.), a leader in high speed synthetic instrumentation antenna measurement systems, radar systems, transmit/receive module test systems and satellite test systems, which we acquired in January 1995.

20

•

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.



•

Altair, which we merged with in October 2000 in a pooling-of-interest business combination. Altair (merged into Aeroflex Powell, Inc.) designs and develops advanced object-oriented control systems software based upon a proprietary software engine.



•

RDL, which we acquired in October 2000. RDL (merged into Aeroflex Plainview, Inc.) designs, develops and manufactures advanced commercial communications test and measurement products and defense subsystems.



•

IFR, which we acquired in May 2002. IFR (now Aeroflex Wichita, Inc. and Aeroflex International Ltd.) designs and manufactures advanced test solutions for communications, avionics and general test and measurement applications.



•

Racal Instrument Wireless Solutions Group, which we acquired in July 2003. RIWS is a leading developer, manufacturer and integrator of digital wireless testing and measurement solutions. Its products address two primary wireless applications—infrastructure testing and mobile handset testing.



•

In October 2003, Aeroflex Powell acquired the business of Celerity Systems Inc. (CA), a company engaged in the development, manufacture and sale of test and measurement systems.

        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 addition, our Aeroflex Pearl River subsidiary designs, develops, manufactures and markets microelectronic products in the form of passive thin film circuits and interconnects. As a result of continued operating losses,in February 2004, our Board of Directors approved a plan to divest our thin film interconnect manufacturing operation and to seek a strategic buyer. As a result of this decision, we recorded a $9.1 million ($5.9 million, net of tax) loss on disposal. This charge included a cash requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned equipment. In accordance with SFAS 144, we have reported the results of operations of this business as income (loss) from discontinued operations and all prior periods have been restated in order to conform to this presentation.

        Approximately 32% of our sales for the nine months ended March 31, 2004, 33% of our sales for fiscal 2003 and 48% of our sales for fiscal 2002 were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government.

        As used in this report, "we," "us" and "our" mean Aeroflex Incorporated and its subsidiaries (unless the content indicates otherwise).

21

Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003

        Net Sales.    Net sales increased 46% to $300.2 million for the nine months ended March 31, 2004 from $205.5 million for the nine months ended March 31, 2003. Net sales in the microelectronic solutions ("AMS") segment increased 65% to $114.1 million for the nine months ended March 31, 2004 from $69.0 million for the nine months ended March 31, 2003 due primarily to the acquisition of MCE in September 2003. Net sales in the test solutions ("ATS") segment increased 40% to $174.7 million for the nine months ended March 31, 2004 from $124.6 million for the nine months ended March 31, 2003 due primarily to the acquisition of RIWS in July 2003 and increased sales in our communication test products business. Net sales in the isolator products ("AIP") segment were $11.4 million for the nine months ended March 31, 2004 and $11.9 million for the nine months ended March 31, 2003.

        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.