SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

 

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes ý  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o.

 

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

 

Aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the close of business June 30, 2003, $30,218,048.

 

Common Stock outstanding at March 1, 2004:  4,660,983 shares.

 

Documents Incorporated by Reference

 

Document		Form 10-K Reference
Portion of Axsys Technologies, Inc. Notice of Annual Meeting of Stockholders and Proxy Statement.		Part III, Items 10-14

 

 

PART I

 

Item 1.  BUSINESS

 

Axsys Technologies, Inc. (together with our subsidiaries, unless the context suggests otherwise, “Axsys” or “we”) is a leading designer and manufacturer of precision opto-mechanical and electromechanical components and subassemblies used to reflect and direct laser, infrared and multi-spectral energy for use in aerospace, defense and commercial applications.  In addition, we distribute precision ball bearings used in a variety of industrial and commercial applications.  Axsys’ highly engineered components and subassemblies serve as core technologies in numerous, vital military platforms and programs.  Within the National Missile Defense systems of the United States, Axsys’ products are on several current missile defense programs including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.  Additionally, Axsys’ products are on several next generation thermal imaging and targeting systems for platforms such as F-16, F-18, Comanche, IBAS, M1A2 and Stryker.  Axsys also supplies critical guidance and seeker components for the Minuteman intercontinental ballistic missile and the AIM-9X Sidewinder missile.  Axsys was incorporated in the State of New York in 1959 and reincorporated in the State of Delaware in 1968.  Axsys’ common stock trades on the Nasdaq Stock Market under the symbol “AXYS”.

 

We sell our components, subassemblies and bearings to a variety of original equipment manufacturers (“OEMs”).  Our focus markets are aerospace and defense, high-performance graphic arts, medical imaging, semiconductor capital equipment, industrial automation and maintenance repair operations (“MROs”).

 

Axsys offers a wide range of precision opto-mechanical and electromechanical components and subassemblies, which allow our customers to meet the needs of rigorous operating environments such as the battlefield or space.  For the fiscal year ending December 31, 2003, approximately 58% of Axsys’ revenues were generated in the Aerospace and Defense sector.  However, the core technologies and manufacturing techniques used in the Aerospace and Defense industry are transferable to the semiconductor, high-performance graphic arts and medical imaging markets.

 

Within our defense business, Axsys is extremely well positioned on high-profile military platforms, with the majority of our sales in a sole source position.  Axsys’ defense businesses, precision machining, precision optics and motion control products, are key components required for stabilized optical platforms (“SOP”).  The SOP is essential to military and space targeting and imaging systems.

 

Axsys is organized into three groups: Aerospace and Defense Group, Commercial Products Group and Distributed Products Group.

 

The Aerospace and Defense Group designs, manufactures and sells high-end components such as precision position sensors, high-performance motors, precision metal optics, precision machined light-weight structures and opto-mechanical and electromechanical subassemblies.  Our products are principally oriented toward SOPs that enable our customers to improve imaging, positional performance (accuracy, resolution, speed and power) and weight requirements in their systems.  Principal markets for our products include OEMs serving the aerospace and defense markets.  The Aerospace and Defense Group is comprised of Motion Control Products in San Diego, California, Precision Machined Products in Cullman, Alabama, and Precision Optical Products in Rochester Hills, Michigan.

 

The Commercial Products Group designs, manufactures and sells airbearing scanners, micro-positioning stages, laser auto-focus and laser-based distance measuring interferometers.  Our products are sold to OEMs who typically produce equipment that utilizes lasers for imaging or inspection, enabling them to increase the accuracy and throughput of their systems.  Principal markets for our products include graphic arts and semiconductor capital equipment manufacturers and, recently, the medical imaging market. The Commercial Products Group is located in Rochester Hills, Michigan.

 

The Distributed Products Group distributes precision ball bearings, spherical plain bearings and bushings, acquired from various domestic and international sources, to OEMs and MROs.  The bearings and bushings are used in a variety of industrial automation and commercial markets. Additionally, the Distributed Products Group designs, manufactures and sells mechanical-bearing subassemblies for a variety of customers.  The Distributed Products group is comprised of the AST Bearings Division located in Montville, New Jersey and our distribution center in Irvine, California.

 

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Market Overview

 

Axsys’ products are sold to OEMs in a variety of markets that demand the precision and performance of our products and capabilities.

 

Aerospace and Defense

 

Defense Electronics:  Defense electronics represents one of the largest growth sectors in the Department of Defense (“DoD”) budget.  The additional demand will focus on defense electronics products and services including sensors and thermal imaging.  Axsys is involved in the continuing development of the next generation forward looking infrared (“FLIR”) systems for fighter aircraft, helicopters and armored vehicles including the F-16, F-18, Apache, Comanche, MIA2, Bradley and Stryker.

 

The DoD’s 2004 budget also includes significant allocations of funds for programs that are consistent with the DoD’s emphasis on network-centric warfare.  The government is focused on the development of unmanned aerial vehicles (“UAVs”) to increase endurance and capacity for longer uninterrupted surveillance.  Axsys’ technology is expected to be used to increase the use of sensors (electro-optical and synthetic aperture radar) on UAVs.  In addition, Axsys expects to participate in providing heat sinks, structures, optics and opto-mechanical subassemblies on the next generation of defense communications and surveillance satellites that will support the ground and air-based network-centric warfare platforms.

 

National Missile Defense (“NMD”):  Restructuring the country’s defense and deterrence capabilities to correspond to emerging threats remains a high priority for the United States.  The deployment of missile defenses is an essential component of this effort. Axsys is an integral member of the contractor teams involved in the rollout of key NMD programs from development to production, including EKV, THAAD, PAC-3, SBIRS-High and Airborne Laser.

 

Homeland Security:  Since September 11, 2001, government officials have worked to put together a plan that prevents terrorist attacks within the United States, reduces America’s vulnerability to terrorism, minimizes damage, and helps citizens to recover from attacks.  At the forefront of the homeland security initiative is the detection of biological and chemical agents.  The federal government is taking steps to improve the nation’s ability to protect against the threat of bio-terrorism.  The 2003 budget proposes to spend $5.9 billion to defend against biological terrorism, an increase of $4.5 billion, or 319%, over the 2002 level. Axsys is strategically positioned on several contracts to develop telescope systems for measuring biological agents in the air.  In addition, Axsys provides components used on infrared countermeasures flown by U.S. military aircraft to defeat heat-seeking missiles.  Axsys expects to benefit from any legislation that would require over 6,000 commercial aircraft flown by U.S. carriers to be equipped with similar countermeasures.

 

Other Aerospace and Defense Growth Opportunities:  In connection with the U.S. government’s efforts to continually enhance aging weaponry, Axsys has the opportunity to be involved in retrofitting the nuclear missile arsenal with advanced gas bearings.  Axsys was chosen as the U.S. Air Force’s Center of Excellence for gas bearing production.

 

Technology Integration: Axsys has the opportunity to provide value-added solutions by integrating our technologies into subassemblies and sub-systems.  The integration capabilities would create value for the prime contractors by reducing the number of suppliers and collapsing the supply chain.  Management believes Axsys is strategically positioned to design, develop and manufacture these subassemblies and sub-systems for stabilized optical platforms.

 

Commercial Products

 

Health Imaging:  Axsys has positioned itself as a key supplier to the medical imaging sector with an industry leading airbearing scanner for use in an advanced medical imaging system.  The airbearing scanner Axsys developed has enabled our customer to reach the highest level of design and performance of any medical imaging systems available on the market.  Axsys has the opportunity to continue expanding our position in the sector as the market moves to develop new systems that require the most advanced imaging technology.

 

Semiconductor Capital Equipment:  The global semiconductor wafer fabrication capital equipment market grew from $19 billion in revenues in 1995 to a peak of $33 billion in 2000 before declining in 2002 to $16 billion.  We expect this market to grow to over $25 billion in 2007, representing a five-year compound annual growth rate of 9.7%.  Axsys has the opportunity to take advantage of the recovery in the semiconductor industry with our existing products and customer design-ins, as well as the introduction of our new products into the market.

 

Graphic Arts: Axsys pioneered the development of airbearing laser scanners used for digital imaging of film within the graphic arts market in the early 1990’s.  Since that time, Axsys has maintained our market and technical dominance.  While declining advertising revenues have negatively impacted the graphic arts market, Axsys has expanded our product offering to

 

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include marker engines, which increases our average selling price to a customer over six-fold.  While Axsys expects a moderate decline in the overall graphic arts market, it expects to mitigate this decline with the introduction of marker engines to our customer base.

 

Distributed Products Group

 

Ball Bearings:  The market for Axsys’ ball bearings distribution follows the overall economic trends and should benefit from the forecasted global recovery.  We project that the anticipated recovery could return sales in the Distributed Products Group to 2000 levels by 2007.  In addition, Axsys is introducing new products, lower cost products and value-added services.

 

Business Strategy

 

Leverage the vertical integration of our operations.  We are a vertically integrated supplier of precision components and subassemblies for high-technology applications. We design and manufacture components and subassemblies for OEMs of aerospace guidance, thermal imaging, graphic arts, medical imaging and semiconductor and related electronic capital equipment.  Our products are designed to increase the accuracy and throughput of equipment produced by OEMs.  A focus of our business strategy is to utilize our vertically integrated component manufacturing experience and resources and our electro-mechanical and opto-mechanical integration capabilities in the design of higher-level subassemblies that employ our micro-positioning and precision optical technologies.

 

Enhance our market position through acquisitions and strategic alliances and divestures of non-core businesses.  We have historically expanded our market presence and capabilities through acquisitions.  We review and consider possible acquisitions on an ongoing basis.

 

Focus on improving operating efficiencies.  Our focus has been toward eliminating waste in all aspects of the organization, measured in reduced cycle time, material costs, scrap and rework. By implementing this process, we have reduced, and expect to continue to reduce, our design and manufacturing lead times as well as manufacturing costs in order to become more competitive in the marketplace.

 

Evaluate new market and application opportunities to leverage our core capabilities. In order to grow our sales at a rate in excess of the markets we serve, we continually evaluate new markets and applications that can benefit from our core capabilities.  Examples include our success in developing an airbearing laser scanner for use in a medical imaging application as well as the development of fast steering mirrors to serve space and defense applications.

 

Technologies, Products, and Capabilities

 

We utilize several key manufacturing technologies and have developed software and systems integration capabilities that enable us to design and manufacture a wide variety of high-performance precision optical and micro-positioning component systems.  These core competencies include:

 

Magnetics. Axsys designs a complete line of brushless and brush type torque motors and servomotors that can be customized to meet customers’ unique specifications.  The direct drive motor replaces conventional servomotor-gearhead configurations improving the response characteristics of the unit.  Motors incorporate rare earth magnets with outer diameters ranging from 0.5” to 48” and provide peak torques up to 1,650 ft-lbs.

 

The gearless DC motor drive is ideally suited for high acceleration applications requiring improved response for rapid start/stop actions such as missile seekers, optical stabilization and turret control. The absence of gearing also eliminates errors caused by friction and backlash creating high threshold sensitivity, which is accurate to one arc-second in a high performance positioning system.  Axsys’ DC torque motors are designed using premium materials that offer unique space and weight savings while generating maximum power output.  Limited angle torque motors do not require commutation electronics and have near zero cogging.

 

Axsys also manufactures exceptionally reliable, multi-speed and segmented positioning sensors, such as resolvers and induction potentiometers, which provide a high degree of angular accuracy and extremely high resolution.  These devices typically accompany Axsys’ motors to provide position feedback within a high performance system.

 

Resolvers are available with transmitter, differential or receiver functions. These resolvers are specifically designed to withstand high-impact (shock) and environments containing dirt, grease, oil or other contaminants, and are available housed or

 

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un-housed in a variety of configurations.  Resolvers are either single or multi-speed (up to 64-speed), with outer diameters ranging from 0.7” to 15”, and provide accuracies to 5 arc seconds.

 

Induction potentiometers, also defined as linear transmitters, provide high linearity output over a wide angular range. Induction potentiometers are available in frameless and housed configurations and brush and brushless designs.

 

Precision Machining. Axsys is a leading fabricator of precision machined and processed exotic and conventional materials.  These include beryllium, AlBeMet, titanium, halfnium, quartz and glass used in the defense, space and high-performance commercial markets.  Operating within a 100,000 square foot environmentally controlled manufacturing facility, Axsys provides complete fabrication services including manual and CNC milling, turning, EDM, lapping and grinding, chemical and special processing and mechanical assembly.  Using these technologies, Axsys is able to achieve tolerances virtually unmatched in the world. Applications include precision optics, airbearings, heat sinks, structural housings and gimbals.  Our airbearings provide high-speed precision positioning and are used in high-speed scanners for digital imaging and weapons guidance systems.  Our heat sinks are used to dissipate heat in high-performance avionics and satellite electronics, and our gimbals are used in various applications, including positioning optical sensors in FLIR night vision systems.  We also manufacture optical substrates used internally and by our customers in a variety of precision metal optical applications such as weapon fire control systems and space-borne instruments.

 

Precision Optics. Axsys is a leading designer and manufacturer of custom precision metal optical components and optical assembles.  Axsys provides complete design, fabrication and testing of beryllium and aluminum optics ranging from single and multi-faceted scan mirrors, plano and aspheric mirrors to complex telescope assemblies.  Axsys has designed and/or manufactured numerous optical products for a variety of military and astronomical applications over the past forty years.

 

Axsys specializes in the manufacture of diamond machined aspheric metal optics that are significantly enhanced for optical figure and optical finish by post polishing, typically while using custom engineered interferometric null tests.  “Bolt together” assemblies with post polished metal aspheres are routine. Axsys produces a variety of aspheric surfaces including conic aspheres, general case aspheres, cylindrical aspheres and toric aspheres up to 0.80-meter aperture. Our precision optic products are used in applications where performance requirements cannot be met with glass optics.  The advantages of our optics include lighter weight, thermal stability and ease of mechanical interface with housing and actuation devices.  We sell our precision metal optical components for use in high speed electro-mechanical scanners, weapons fire control systems, FLIR night vision weapons systems and high-performance space-borne instruments used on weather, mapping and scientific satellites.

 

Electronics.  Axsys designs and manufactures several key electronic components for the semiconductor capital equipment and high-end digital imaging markets including laser interferometers and electronic controllers and drives. Our electronics components control the speed and position of electro-mechanical systems, such as precision motors, actuators, X-Y positioning stages and laser scanners.  Laser interferometers, which are designed to permit precise linear position sensing, are sold to customers principally in the semiconductor capital equipment market. Electronic controllers coordinate the positioning and speed of electro-mechanical systems by interfacing with other motion control components.  Drives provide power to a motor based on input from the controller in order to achieve a designated position or to achieve a specific speed.

 

Utilizing these core technologies, Axsys has developed an array of opto-mechanical, electro-mechanical and electro-optical subassemblies, which are incorporated into aerospace, defense and high performance commercial equipment.

 

Opto-Mechanical Subassemblies:

 

Ball Bearing Scanner: Axsys’ high precision scanners are designed and manufactured in both open and closed loop configurations. These sophisticated scanners are proven to perform with precision and reliability under the harshest environmental conditions. They are used in guidance and tracking, thermal imaging systems and targeting sights.

 

Nodding Scanners:  Axsys’ closed loop nodding optical scanners represent a significant advancement of the state-of-the-art in electro-opto-mechanical scanning systems.  These devices were developed to provide precise limited angle scanning for thermal imaging camera systems operating in demanding aerospace and military environments.  The scanners produce the “frame scan” portion of the image while a detector array produces the “line scan” in a typical thermal imaging camera application. Similar scanners have been developed for 3-D imaging laser radar, or LADAR systems.

 

Rotary Airbearing Scanners: Axsys designs and manufacturers rotary airbearing scanners for use in high precision graphic arts and medical imaging applications, semiconductor mask production and inspection applications as well as defense applications.

 

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Airbearing scanners provide numerous advantages over mechanical bearings due to their low noise characteristics, repeatability and ability to rotate at high speeds (up to 100,000 RPMs).  When combined with Axsys’ electronic controllers, Axsys’ airbearing scanners provide extremely high cross-scan accuracy and extremely low jitter.

 

Fast Steering Mirrors: Axsys has applied extensive experience designing and building opto-mechanical systems to develop fast steering mirror (“FSM”) technology.  The single-axis and two-axis, flexure mounted, FSM represents a compact, low cost, high performance design solution for a variety of emerging optical scanning and beam stabilization applications.  Such devices may be used to correct for polygon cross scan errors, acquire and lock beams within free space laser systems, modulate tilt and cavity control in interferometers, maintain beam stabilization in the presence of thermal drift and vibration, and provide general two-axis beam scanning.

 

Electro-Mechanical Subassemblies:

 

Actuators:  Axsys produces several configurations of rotary and linear actuators for the military and aerospace sectors.  These are available with either AC or DC power system options.

 

Micro Positioning Stages: Axsys provides precision micro-positioning systems.  These ultra high-performance systems are used in a diverse array of high-end commercial applications such as semiconductor and flat panel process and inspections systems as well as laser imaging systems.

 

Electro-Optical Subassemblies:

 

Marker Engines:  Axsys has leveraged our experience providing high-speed airbearing scanners, with our precision optics and electronics capabilities to produce ultra-high performance flat bed marker engines.  Each engine is self-contained, pre-aligned and ready to integrate into a customer’s system.

 

LaserTrac AutoFocus: Axsys’ LaserTrac AutoFocus provides real-time autofocus of most infinite conjugate microscope systems. These systems include lens objectives manufactured by leading microscope manufacturers.

 

The LaserTrac AutoFocus has been used in high precision manufacturing applications, including inspection systems processing read-write heads, hard disks, semiconductor wafers, and even razor blades.  The LaserTrac provides increased throughput and greatly reduced operator fatigue.

 

Interferometer:

 

Axsys’ laser interferometers are used primarily as feedback elements in state-of-the-art servo motion control systems found in semiconductor test and measurement equipment.

 

The following table summarizes the component products manufactured and services provided by Axsys:

 

Core Manufacturing Technologies
Precision Machining		Precision Optics		Magnetics		Electronics		Subassemblies
Airbearing Components		Polygon Mirrors		AC Motors		AC & DC Motor Speed Controls		Opto-Mechanical  Scanners
Optical Substrates		Monogon Mirrors		Brush & Brushless DC		Custom DSP Motion		Airbearing Ball Bearing
Structural Housings		Flat Optics		Motors:		Controllers		Nodding Scanners
Gimbals and Yokes		Head Mirrors		Torque		Motor Drives		Fast Steering Mirrors
Heat Sinks		Fold Mirrors		Servo				Electro-Mechanical
		Aspherics		Limited Angle				Linear Actuator
		Telescopes		Resolvers				Rotary Actuator
		Collimators		Synchros				Micro-Positioning Stages
								Electro-Optical
								Marker Engines
								Laser Autofocus
								Laser Interferometer

 

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Precision Ball Bearings. We distribute a wide range of precision ball bearings varying in size, precision tolerance, lubrication and price. We also provide certain value-added services, such as bearing subassemblies, bearing relubrication, clean room handling of products and engineering consultation.

 

Competition

 

The markets for our products are competitive.  We compete primarily on the basis of our ability to design and engineer products to meet performance specifications set by our customers.  Most of our customers are OEMs that purchase component parts or subassemblies, which they incorporate into their end products.  Product pricing, quality, customer support, experience, reputation and financial stability are also important competitive factors.

 

There are a limited number of competitors in each of the markets for the various types of precision optical and positioning components and subassemblies that we manufacture and sell.  Our competitors, especially those in the precision optical product lines, typically sell a smaller number of products than we do and are often well entrenched.  Some of these competitors have substantially greater resources than we do.  We believe that the breadth of our technologies and product offerings provides us with a competitive advantage over certain manufacturers that supply only discrete components or are not vertically integrated with enabling technologies.

 

There are numerous competitors in markets to which we distribute our precision ball bearings.  These competitors vary in size and include other bearing manufacturers and distributors.  We believe that our product breadth and availability, combined with the value-added services we supply, provide competitive advantages.

 

We expect our competitors to continue to improve the design and performance of their products.  We cannot assure you that our competitors will not develop enhancements to, or future generations of, competitive products that will offer superior price or performance features or that new technology or processes will not emerge that render our products less competitive or obsolete.  Increased competitive pressure could lead to lower prices for Axsys’ products, thereby adversely affecting our business, financial condition and results of operations. We cannot assure you that we will be able to compete successfully in the future.

 

Customers

 

Our customers include OEMs and end-users that design or utilize high-precision, performance and throughput equipment.  We sell our products primarily to OEM customers in the aerospace and defense, high-end graphic art, medical imaging, semiconductor capital equipment and industrial automation markets.

 

During 2003, sales to Raytheon Company, an aerospace and defense systems supplier, represented 15.5% of our net sales. During 2002 and 2001, we did not have a concentration of sales with any one customer.  While Raytheon, prime contractor with the U.S. Government, does constitute a significant portion of our business, we do not currently believe that this is at-risk business.

 

In 2003, 2002 and 2001, Axsys had aggregate sales, both military and non-military, directly to the U.S. Government, including our agencies and departments, of approximately $3.4 million, $4.6 million and $3.0 million, respectively. These sales accounted for approximately 4.0% of total net sales in 2003, 5.7% in 2002 and 3.4% in 2001.  Approximately 43.0% of net sales in 2003, 40.3% in 2002 and 31.7% in 2001 were derived from subcontracts with U.S. Government contractors.  The majority of these contracts may be subject to termination at the convenience of the U.S. Government, and certain contracts may also be subject to renegotiation.  Currently, we are not aware of any proposed termination or renegotiation of such contracts that would have a material adverse effect on our business.

 

Because a substantial part of our business is derived directly from contracts with the U.S. Government, or our agencies or departments or indirectly through subcontracts with U.S. Government contractors, our results of operations could be materially affected by changes in U.S. Government expenditures for products using component parts that Axsys produces.  However, we believe that the broad number and diversity of our product applications and the strength of our engineering capabilities may lessen our exposure to such risk.

 

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Sales, Marketing and Customer Support

 

As of December 31, 2003, we employed 55 sales, marketing and customer support personnel throughout our organization, compared to 54 employees in similar functions at the end of 2002.  We organize our sales staff by market segments with a view to building on existing customer relationships and improving cross-selling opportunities.  We utilize two OEM component sales organizations, one focused on aerospace and defense customers and the other focused on high-performance commercial customers.  We have a separate distributed products sales force that is focused on selling ball bearings, bushings and assemblies, principally to commercial and industrial oriented OEMs as well as MRO distributors.

 

As of December 31, 2003, our direct sales organization included 21 direct sales field personnel, most of whom have engineering backgrounds, with the remainder involved in inside sales, customer service, program management, contract administration and applications engineering.  We believe that our sales effort is enhanced by having engineering-trained sales personnel available to meet with customers’ engineering personnel.  Our application and design engineers are also involved in the sales process.