AEROFLEX INC (ARX)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Nine Months Ended March 31, 1997 Compared to Nine Months Ended March 31, 1996 Net sales increased to $64,912,000 for the nine months ended March 31, 1997 from $44,300,000 for the nine months ended March 31, 1996. Operating profits increased 63% from last year, exclusive of a one-time write-off of $23,200,000 in 1996 for in-process research and development related to the purchase of MIC Technology Corporation ("MIC"). Net income for the nine months ended March 31, 1997 was $2,461,000. The net loss for the comparable period of the prior year was $(20,479,000) including the special write-off of $23,200,000.
Net sales in the electronics segment increased to $52,591,000 for the nine months ended March 31, 1997 from $33,186,000 for the nine months ended March 31, 1996 primarily as a result of the acquisition of MIC in March 1996 and an increase in volume of existing microelectronic product sales. Operating profits, exclusive of the special write-off of $23,200,000 in 1996, increased by $2,190,000 as a result of both the increased sales volume and higher profit margins in the existing
product lines offset, in part, by the addition of MIC's selling, general and administrative costs.
Net sales in the isolator products segment increased to $12,321,000 for the nine months ended March 31, 1997 from $11,114,000 for the nine months ended March 31, 1996. The increase reflects increased sales volume in the commercial and industrial divisions offset, in part, by decreased sales volume in the military isolator division. Operating profits increased by $344,000 primarily due to the higher sales volume and higher profit margins, offset, in part, by increased selling, general and administrative expenses.
Cost of sales as a percentage of sales decreased to 67.2% from 69.2% between the two periods primarily as a result of increased margins in microelectronics and isolator products divisions during the nine months ended March 31, 1997. Selling, general and administrative costs (exclusive of the special charge in the prior year) as a percentage of sales increased to 23.4% from 22.4% primarily as a result of the addition of MIC which has a higher S,G&A cost structure than the balance of the Company.
Interest expense for the period increased to $2,263,000 from $936,000 for the prior period due to increased levels of borrowings related to the MIC acquisition in March 1996. Interest and other income decreased to $71,000 from $595,000 as a result of lower interest income on reduced cash amounts due to the acquisition of MIC.
The income tax provisions for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to state income taxes for the nine months ended March 31, 1997 and primarily as a result of the tax benefits of loss carryforwards (both unrealized and realized) for the nine months ended March 31, 1996. The income tax rates were 37% and 20% for 1997 and 1996, respectively, exclusive of the special charge in 1996.
Management believes that potential reductions in military spending will not materially affect its operations. In certain product areas, the Company has suffered reductions in sales volume due to cutbacks in the military budget. In other product areas, the Company has experienced increased sales volume due to a realignment of government spending towards upgrading existing systems instead of purchasing completely new systems. The overall effect of the cutbacks and realignment has not been material to the Company.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996 Net sales increased to $22,937,000 for the three months ended March 31, 1997 from $15,956,000 for the three months ended March 31, 1996. Operating profits increased 47% from last year, exclusive
of a one-time write-off of $23,200,000 in 1996 for in-process research and development related to the purchase of MIC Technology Corporation ("MIC"). Net income was $917,000 for the three months ended March 31, 1997. The net loss for the comparable period in the prior year was
$(22,084,000) including the special charge of $23,200,000.
Net sales in the electronics segment increased to $18,549,000 for the three months ended March 31, 1997 from $11,790,000 for the three months ended March 31, 1996 primarily as a result of the acquisition of MIC in March 1996 and an increase in volume of existing microelectronics product sales. Operating profits, exclusive of the special write-off of $23,200,000 in 1996, increased by $786,000 as a result of both the increased sales volume and higher profit margins in existing product lines (specifically microelectronics) partially offset by the addition of MIC's selling, general and administrative costs.
Net sales in the isolator products segment increased to $4,388,000 for the three months ended March 31, 1997 from $4,166,000 for the three months ended March 31, 1996. The increase is attributable to higher sales volume in both the commercial and industrial isolator divisions offset, in part, by decreased sales volume in the military isolators division. Operating profits increased by $121,000 primarily due to the higher sales volume and higher profit margins, offset, in part, by
increased selling, general and administrative expenses.
Cost of sales as a percentage of sales decreased to 66.2% from 68.6% between the two periods primarily as a result of improved margins in the microelectronics and isolator products divisions. Selling, general and administrative costs (exclusive of the special charge in 1996) as a percentage of sales increased to 24.5% from 22.3% primarily as a result of the addition of MIC which has a higher S,G&A cost structure than the balance of the Company.
Interest expense for the period increased to $712,000 from $320,000 for the prior period due to increased levels of borrowings related to the MIC acquisition in March 1996. Interest and other income decreased to $10,000 from $262,000 as a result of lower interest income on reduced cash amounts due to the acquisition of MIC.
The income tax provisions for the two quarters differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to state income taxes for the three months ended March 31, 1997 and primarily as a result of the tax benefits of loss carryforwards (both unrealized and realized) for the three months ended March 31, 1996. The income tax rates were 36% and 20% for 1997 and 1996, respectively, exclusive of the special
charge in 1996.
Financial Condition -
The Company's working capital at March 31, 1997 was $24,772,000 as compared to $24,736,000 at June 30, 1996. The current ratio was 2.3 to 1 at both dates.
Cash provided by operating activities of $5,119,000 for the nine months ended March 31, 1997 was primarily due to the continued profitability of the Company and the collection of receivables
partially offset by an increase of inventory. Cash used by investing activities of $2,181,000 was comprised primarily of capital expenditures.
The cash provided by operating activities net of the cash used by investing activities for the nine month period was used to reduce debt by $3,228,000. Management believes that the revolving credit and term loan facility, coupled with cash to be provided by future operations, will be sufficient for its presently anticipated working capital requirements, capital expenditure needs and the servicing
of its debt.
Effective March 19, 1996, the Company acquired all of the outstanding stock of MIC Technology Corporation ("MIC") for approximately $36,000,000 of cash, 300,000 shares of common stock and warrants to purchase 400,000 shares of common stock (at exercise prices ranging from $7.05 to $7.50 per share). The purchase price was paid with available cash of $9,000,000 and borrowings under the Company's bank loan agreement of $27,000,000. The purchase agreement also provides for a contingent payment of $4,000,000 based upon certain operating results. MIC manufactures high frequency thin film circuits and interconnects for miniaturized, high frequency, high performance electronic products for growing commercial markets such as wireless communications, satellite based communications hardware and high technology military electronics. The acquired company's net sales were approximately $25,000,000 for its fiscal year ended October 31, 1995.
As of March 15, 1996 the Company replaced a previous agreement with a revised revolving credit and term loan agreement with two banks which is secured by substantially all of the Company's assets not otherwise encumbered. The agreement provides for a revolving credit line of
$22,000,000 and a term loan of $16,000,000. The revolving credit line expires in March 1999. The term loan is payable in quarterly installments of $900,000 with final payment on September 30, 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 the prime rate (8.5% at March 31, 1997) on the revolving credit borrowings and prime plus 1/4% on the term loan borrowings. The terms of the agreement require compliance with certain covenants including minimum consolidated tangible net worth and pre-tax earnings, maintenance of certain financial ratios, limitations on capital expenditures and indebtedness and prohibition of the payment of cash dividends.
During June 1994, the Company completed a sale of $10,000,000 principal amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons. The debentures are due June 15, 2004 subject to prior sinking fund payments of 10%, 10%, 15% and 15% of the principal amount on September 15, 2000, 2001, 2002 and 2003, respectively. The debentures are convertible into the Company's common stock at a price of $5-5/8 per share. As of March 31, 1997, $19,000 principal amount of debentures was converted.
A subsidiary of the Company whose operations were discontinued in 1991, is one of several defendants named in a personal injury action initiated in August, 1994, by a group of plaintiffs. The plaintiffs are seeking damages which cumulatively may exceed $500 million. The complaint alleges, among other things, that the plaintiffs suffered injuries from exposure to substances contained in products sold by the subsidiary to one of its customers. This action is in the early stages of discovery. Based upon available information and considering its various defenses, together with its product liability insurance, in the opinion of management of the Company, the outcome of the action
against its subsidiary is not expected to have a materially adverse effect on the Company's consolidated financial statements.
The Company's backlog of orders at March 31, 1997 and 1996 was $49,000,000 and $44,000,000, respectively.
At June 30, 1996 the Company had net operating loss carryforwards of approximately $8,000,000 for Federal income tax purposes. The Company is undergoing routine audits by various taxing authorities of several of its Federal, state and local income tax returns covering different periods from 1993 to 1996. Management believes that the probable outcome of these various audits should not materially affect the consolidated financial statements of the Company.
AEROFLEX INCORPORATED
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