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EX-31.2 - AEROFLEX INC | v184526_ex31-2.htm |
EX-32.2 - AEROFLEX INC | v184526_ex32-2.htm |
EX-31.3 - AEROFLEX INC | v184526_ex31-3.htm |
EX-31.1 - AEROFLEX INC | v184526_ex31-1.htm |
EX-32.1 - AEROFLEX INC | v184526_ex32-1.htm |
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 quarterly period ended
|
March
31, 2010
|
Commission
File Number 033-88878
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
|
|
P.O.
Box 6022
|
|
Plainview,
N.Y.
|
11803-0622
|
(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 (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 x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
Smaller
reporting company ¨
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date.
May
12, 2010
|
1,000
|
|
(Date)
|
(Number
of Shares)
|
AEROFLEX
INCORPORATED
AND
SUBSIDIARIES
INDEX
|
|
PAGE
|
|
PART
1: FINANCIAL
INFORMATION
|
|||
Item
1
|
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
March
31, 2010 and June 30, 2009
|
2
|
|
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three
Months Ended March 31, 2010 and 2009
Nine
Months Ended March 31, 2010 and 2009
|
3 –
4
|
||
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine
Months Ended March 31, 2010 and 2009
|
5
|
||
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
6
– 30
|
||
Item
2
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
Three
and Nine Months Ended March 31, 2010 and 2009
|
30 – 45
|
|
Item
3
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
45
|
|
Item
4T
|
CONTROLS
AND PROCEDURES
|
45
|
|
PART
II: OTHER
INFORMATION
|
|||
Item
1
|
LEGAL
PROCEEDINGS
|
46
|
|
Item
1A
|
RISK
FACTORS
|
46
|
|
Item
2
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
46
|
|
Item
3
|
DEFAULTS
UPON SENIOR SECURITIES
|
46
|
|
Item
4
|
[REMOVED
AND RESERVED]
|
46
|
|
Item
5
|
OTHER
INFORMATION
|
46
|
|
Item
6
|
EXHIBITS
|
47
|
|
SIGNATURE
|
48
|
||
EXHIBIT
INDEX
|
49
|
||
CERTIFICATIONS
|
50-54
|
- 1
-
Aeroflex
Incorporated and Subsidiaries
Unaudited
Condensed Consolidated Balance Sheets
(In
thousands, except share and per share data )
March 31,
|
June 30,
|
|||||||
|
2010
|
2009
|
||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 96,348 | $ | 57,748 | ||||
Accounts
receivable, less allowance for doubtful accounts of $2,189 and
$2,250
|
116,708 | 130,429 | ||||||
Inventories
|
128,441 | 135,603 | ||||||
Deferred
income taxes
|
38,769 | 35,164 | ||||||
Prepaid
expenses and other current assets
|
9,818 | 9,938 | ||||||
Total
current assets
|
390,084 | 368,882 | ||||||
Property,
plant and equipment, net
|
96,908 | 100,907 | ||||||
Non-current
marketable securities, net
|
9,779 | 17,677 | ||||||
Deferred
financing costs, net
|
22,176 | 25,754 | ||||||
Other
assets
|
17,880 | 15,425 | ||||||
Intangible
assets with definite lives, net
|
244,679 | 292,553 | ||||||
Intangible
assets with indefinite lives
|
110,291 | 112,266 | ||||||
Goodwill
|
426,884 | 428,133 | ||||||
Total
assets
|
$ | 1,318,681 | $ | 1,361,597 | ||||
Liabilities and Stockholder's
Equity
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of long-term debt
|
$ | 5,516 | $ | 5,590 | ||||
Accounts
payable
|
26,703 | 36,574 | ||||||
Advance
payments by customers and deferred revenue
|
29,004 | 33,418 | ||||||
Income
taxes payable
|
6,610 | 5,080 | ||||||
Accrued
payroll expenses
|
19,490 | 18,876 | ||||||
Accrued
expenses and other current liabilities
|
45,968 | 47,938 | ||||||
Total
current liabilities
|
133,291 | 147,476 | ||||||
Long-term
debt
|
893,197 | 883,758 | ||||||
Deferred
income taxes
|
146,671 | 143,048 | ||||||
Defined
benefit plan obligations
|
5,942 | 6,079 | ||||||
Other
long-term liabilities
|
3,933 | 21,476 | ||||||
Total
liabilities
|
1,183,034 | 1,201,837 | ||||||
Stockholder's
equity:
|
||||||||
Common
stock, par value $.10 per share; authorized 1,000 shares; issued and
outstanding 1,000 shares
|
- | - | ||||||
Additional
paid-in capital
|
398,351 | 396,573 | ||||||
Accumulated
other comprehensive income (loss)
|
(52,290 | ) | (54,700 | ) | ||||
Accumulated
deficit
|
(210,414 | ) | (182,113 | ) | ||||
Total
stockholder's equity
|
135,647 | 159,760 | ||||||
Total
liabilities and stockholder's equity
|
$ | 1,318,681 | $ | 1,361,597 |
See notes
to unaudited condensed consolidated financial statements.
- 2
-
Aeroflex
Incorporated and Subsidiaries
Unaudited
Condensed Consolidated Statements of Operations
(In
thousands)
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 168,435 | $ | 139,439 | ||||
Cost
of sales
|
78,138 | 72,834 | ||||||
Gross
profit
|
90,297 | 66,605 | ||||||
Selling,
general and administrative costs
|
31,377 | 30,954 | ||||||
Research
and development costs
|
20,854 | 17,941 | ||||||
Amortization
of acquired intangibles
|
15,408 | 14,956 | ||||||
Acquired
in-process research and development costs
|
- | 2,291 | ||||||
67,639 | 66,142 | |||||||
Operating
income
|
22,658 | 463 | ||||||
Other
income (expense):
|
||||||||
Interest
expense
|
(20,815 | ) | (20,566 | ) | ||||
Other
income (expense), net
|
222 | (47 | ) | |||||
Total
other income (expense)
|
(20,593 | ) | (20,613 | ) | ||||
Income
(loss) before income taxes
|
2,065 | (20,150 | ) | |||||
Provision
(benefit) for income taxes
|
(791 | ) | (6,416 | ) | ||||
Net
income (loss)
|
$ | 2,856 | $ | (13,734 | ) |
See notes
to unaudited condensed consolidated financial statements.
- 3
-
Aeroflex
Incorporated and Subsidiaries
Unaudited
Condensed Consolidated Statements of Operations
(In
thousands)
Nine Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 465,290 | $ | 437,099 | ||||
Cost
of sales
|
223,405 | 229,976 | ||||||
Gross
profit
|
241,885 | 207,123 | ||||||
Selling,
general and administrative costs
|
93,188 | 96,612 | ||||||
Research
and development costs
|
55,296 | 52,045 | ||||||
Amortization
of acquired intangibles
|
46,527 | 47,546 | ||||||
Acquired
in-process research and development costs
|
- | 2,291 | ||||||
Loss
on liquidation of foreign subsidiary (Note 10)
|
7,696 | - | ||||||
202,707 | 198,494 | |||||||
Operating
income
|
39,178 | 8,629 | ||||||
Other
income (expense):
|
||||||||
Interest
expense
|
(63,272 | ) | (63,031 | ) | ||||
Other
income (expense), net
|
701 | 12,366 | ||||||
Total
other income (expense)
|
(62,571 | ) | (50,665 | ) | ||||
Loss
before income taxes
|
(23,393 | ) | (42,036 | ) | ||||
Provision
(benefit) for income taxes
|
4,908 | (17,298 | ) | |||||
Net
Loss
|
$ | (28,301 | ) | $ | (24,738 | ) |
See notes
to unaudited condensed consolidated financial statements.
- 4
-
Unaudited
Condensed Consolidated Statements of Cash Flows
(In
thousands)
Nine Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | (28,301 | ) | $ | (24,738 | ) | ||
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
62,178 | 63,659 | ||||||
Acquired
in-process research and development costs
|
- | 2,291 | ||||||
Acquisition
related adjustment to sales
|
96 | 240 | ||||||
Loss
on liquidation of foreign subsidiary
|
7,696 | - | ||||||
Deferred
income taxes
|
(1,286 | ) | (27,851 | ) | ||||
Share-based
compensation
|
1,563 | 1,466 | ||||||
Amortization
of deferred financing costs
|
3,579 | 3,579 | ||||||
Paid
in kind interest
|
13,377 | 11,913 | ||||||
Other,
net
|
908 | 729 | ||||||
Change
in operating assets and liabilities, net of effects from purchases of
businesses:
|
||||||||
Decrease
(increase) in accounts receivable
|
10,754 | 21,185 | ||||||
Decrease
(increase) in inventories
|
4,450 | (14,451 | ) | |||||
Decrease
(increase) in prepaid expenses and other assets
|
(2,711 | ) | 2,253 | |||||
Increase
(decrease) in accounts payable, accrued expenses and other
liabilities
|
(20,053 | ) | (5,282 | ) | ||||
Net
cash provided by (used in) operating activities
|
52,250 | 34,993 | ||||||
Cash
flows from investing activities:
|
||||||||
Payments
for purchase of businesses, net of cash acquired
|
(4,000 | ) | (7,832 | ) | ||||
Capital
expenditures
|
(13,176 | ) | (12,958 | ) | ||||
Proceeds
from sale of marketable securities
|
8,580 | - | ||||||
Proceeds
from the sale of property, plant and equipment
|
1,021 | 1,359 | ||||||
Other,
net
|
(12 | ) | (4 | ) | ||||
Net
cash provided by (used in) investing activities
|
(7,587 | ) | (19,435 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Debt
repayments
|
(4,012 | ) | (4,129 | ) | ||||
Debt
financing costs
|
- | (340 | ) | |||||
Net
cash provided by (used in) financing activities
|
(4,012 | ) | (4,469 | ) | ||||
Effect
of exchange rate changes on cash and cash equivalents
|
(2,051 | ) | (11,307 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
38,600 | (218 | ) | |||||
Cash
and cash equivalents at beginning of period
|
57,748 | 54,149 | ||||||
Cash
and cash equivalents at end of period
|
$ | 96,348 | $ | 53,931 |
See notes
to unaudited condensed consolidated financial statements.
- 5
-
AEROFLEX
INCORPORATED AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Basis
of Presentation
|
We
design, engineer and manufacture microelectronic products and test and
measurement equipment that are sold primarily to the space, avionics, defense,
commercial wireless communications, medical and other
markets. Our fiscal year ends on June 30.
The
accompanying unaudited condensed consolidated financial information of Aeroflex
Incorporated and subsidiaries (the “Company”, “we”, or “our”) has been prepared
in accordance with accounting principles generally accepted in the United States
(“U.S. GAAP”) and the rules and regulations of the United States Securities and
Exchange Commission (“SEC”), and reflects all adjustments, consisting only of
normal recurring adjustments, which in management’s opinion are necessary to
state fairly the Company’s financial position as of March 31, 2010,
results of operations for the three and nine month periods ended
March 31, 2010 and 2009 and cash flows for the nine month periods ended March
31, 2010 and 2009. The June 30, 2009 balance sheet information has been derived
from audited financial statements, but does not include all information or
disclosures required by U.S. GAAP.
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of
sales and expenses during the reporting period. Actual results may differ
from those estimates, and such differences may be material to the financial
statements.
These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2009 (the “Fiscal
2009 Form 10-K”).
Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full fiscal year or any future periods.
Revenue
Recognition
We
recognize revenue, net of trade discounts and allowances, when (1) persuasive
evidence of an arrangement exists, (2) delivery of the product has occurred or
the services have been performed, (3) the selling price is fixed or
determinable, and (4) collectability of the resulting receivable is reasonably
assured.
Our
product revenue is generated predominantly from the sales of various types of
microelectronic products and test and measurement equipment. For
arrangements other than certain long-term contracts, revenue (including shipping
and handling fees) is recognized when products are shipped and title has passed
to the customer. If title does not pass until the product reaches the customer’s
delivery site, recognition of the revenue is deferred until that time. Certain
of our sales are to distributors, which have a right to return some portion of
product within specified periods from delivery. We recognize revenue on these
sales at the time of shipment to the distributor, as the returns under these
arrangements have historically been insignificant and can be reasonably
estimated. A provision for such estimated returns is recorded at the time
revenues are recognized. For transactions that include customer-specified
acceptance criteria, including those where acceptance is required upon
achievement of performance milestones, revenue is recognized after the
acceptance criteria have been met.
- 6
-
Long-term
contracts are accounted for by determining estimated contract profit rates and
use of the percentage-of-completion method to recognize revenues and associated
costs as work progresses. We measure the extent of progress toward completion
generally based upon one of the following methods (based upon an assessment of
which method most closely aligns to the underlying earnings process): (i) the
units-of-delivery method, (ii) the cost-to-cost method (using the ratio of
contract costs incurred as a percentage of total estimated costs at contract
completion based upon engineering and production estimates), or (iii) the
achievement of contractual milestones. Provisions for anticipated losses or
revisions in estimated profits on contracts-in-process are recorded in the
period in which such anticipated losses or revisions become
evident.
Where an
arrangement includes only a software license, revenue is recognized when the
software is delivered and title has been transferred to the customer or, in
the case of electronic delivery of software, when the customer is given access
to the licensed software programs. We also evaluate whether persuasive evidence
of an arrangement exists, collection of the receivable is probable, the fee
is fixed or determinable and whether any other undelivered elements of the
arrangement exist for which a portion of the total fee would be allocated based
on vendor-specific objective evidence of the fair value of the undelivered
element. When a customer purchases software together with post contract support,
we allocate a portion of the fee to the post contract support for its fair value
based on the contractual renewal rate. Post contract support fees are deferred
in Advance Payments by Customers and Deferred Revenue in the consolidated
balance sheets, and recognized as revenue ratably over the term of the related
contract.
Service
revenue is derived from extended warranty, customer support and training.
Service revenue is deferred and recognized over the contractual term or as
services are rendered and accepted by the customer. For example, customer
support contracts are recognized ratably over the contractual term, while
training revenue is recognized as the training is provided to the customer. In
addition, the four revenue recognition criteria described above must be met
before service revenue is recognized.
We use
vendor-specific objective evidence of selling price, verifiable objective
evidence of selling price, such as third party selling prices, or estimated
selling price, in that order, to allocate revenue to elements in
multiple element arrangements. Revenue is recognized on only those elements that
meet the four criteria described above.
Effective
July 1, 2009, we no longer use the residual method to determine the portion of
the arrangement consideration to allocate to undelivered elements of a multiple
element arrangement.
At March
31, 2010, we have $29.0 million in Advance Payments by Customers and Deferred
Revenue, which is comprised of $14.2 million of customer advance payments
primarily for the purchase of materials, $8.1 million of deferred service and
software support revenue, $4.0 million of deferred warranty revenue and $2.7
million of revenue deferred due to software arrangements for which there is no
vendor specific objective evidence of fair value of the undelivered elements of
the arrangements, contingent revenue, billings for which the related product has
not been delivered or product delivered to a customer that has not been accepted
or is incomplete. We generally sell non-software service and extended warranty
contracts on a standalone basis. The amount of deferred revenue at March 31,
2010 and revenue for the three and nine months ended March 31, 2010 derived from
non-software multiple element arrangements was insignificant.
The
adoption on July 1, 2009 of the guidance issued by the Financial Accounting
Standards Board (“FASB”) in Accounting Standard Updates 2009-13 and 2009-14 did
not have a material impact on our pattern or timing of revenue recognition and
is not expected to have a material impact on revenues in future periods. We have
one test equipment product line, which includes software that is more than
incidental to the hardware component that, prior to July 1, 2009, was accounted
for as a software product for revenue recognition purposes. Effective July 1,
2009, the new revenue recognition guidance provides that products such as these
that contain software which is essential to overall product functionality are
outside the scope of software revenue recognition guidance and are now accounted
for under new rules pertaining to revenue arrangements with multiple
deliverables. Although this change had no impact on revenue
recognized for the three and nine months ended March 31, 2010, if this product
were delivered in a multiple element arrangement in the future, certain revenue
recognition could be accelerated. We do not believe that this will result in a
material impact on our revenues.
- 7
-
2.
|
Accounting
Pronouncements
|
Recently
Adopted Accounting Pronouncements
On
July 1, 2009, we adopted the authoritative implementation guidance issued
by the FASB for fair value measurement for non-financial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The adoption
of this new guidance did not have a material impact on our consolidated
financial statements.
On
July 1, 2009, we adopted the authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the fair value of contingent consideration to be recorded at the acquisition
date, the capitalization of in-process research and development at fair value
and the expensing of acquisition-related costs as incurred. The adoption of
this new guidance, which is effective for acquisitions consummated by us after
June 30, 2009, did not have an impact on our consolidated financial
statements.
On
July 1, 2009, we adopted the authoritative guidance issued by the FASB for
the determination of the useful life of intangible assets. This guidance amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset.
This guidance also adds certain disclosures to those already
prescribed. The guidance for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date. The
disclosure requirements must also be applied prospectively to all intangible
assets recognized as of the effective date. The adoption of this new
guidance did not have a material impact on our consolidated financial
statements.
In
September 2009, we adopted the authoritative guidance issued by the FASB which
establishes the FASB Accounting Standards Codification as the source of
authoritative accounting principles recognized by the FASB to be applied in the
preparation of financial statements in conformity with U.S.
GAAP. This guidance explicitly recognizes the rules and interpretive
releases of the SEC under federal securities laws as authoritative GAAP for SEC
registrants. We have updated references to U.S. GAAP in our financial
statements issued for the period ended March 31, 2010. The adoption of this new
guidance did not have an impact on our consolidated financial
statements.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
becomes effective for us commencing July 1, 2010. However, earlier
adoption was permitted. Under the new guidance on sales arrangements that
include software elements, tangible products that have software components that
are essential to the functionality of the tangible product will no longer be
within the scope of the software revenue recognition guidance, and
software-enabled products will now be subject to other relevant revenue
recognition guidance. Additionally, the FASB issued authoritative guidance on
revenue arrangements with multiple deliverables that are outside the scope of
the software revenue recognition guidance. Under the new guidance, when vendor
specific objective evidence or third party evidence for deliverables in an
arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration and the
use of the relative selling price method is required. The new guidance
eliminated the residual method of allocating arrangement consideration to
deliverables and includes new disclosure requirements on how the application of
the relative selling price method affects the timing and amount of revenue
recognition. We chose to early adopt such authoritative guidance on a
prospective basis effective July 1, 2009 and, therefore, it has been applied to
multiple deliverable revenue arrangements and arrangements for the sale of
tangible products with software components entered into or materially modified
on or after July 1, 2009. The adoption of this new guidance did not
have a material impact on our consolidated financial
statements.
- 8
-
In
December 2007, the FASB issued guidance which requires that the non-controlling
interests in consolidated subsidiaries be presented as a separate component of
stockholders’ equity in the balance sheet, that the amount of consolidated net
earnings attributable to the parent and the non-controlling interest be
separately presented in the statement of earnings, and that the amount of
consolidated other comprehensive income attributable to the non-controlling
interest be separately disclosed. The standard also requires gains or losses
from the sale of stock of subsidiaries where control is maintained to be
recognized as an equity transaction. The guidance was effective beginning with
the first quarter of the fiscal year 2010 financial reporting. In
connection with the adoption of this guidance, we did not apply the presentation
or disclosure provisions to our one non-controlling interest as the
effect on our consolidated financial statements was insignificant.
In
January 2010, the FASB issued authoritative guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value measurements. The
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons and the timing of the transfers.
Additionally, the guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements on a gross basis of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). We adopted the fair value disclosures guidance on
January 1, 2010, except for the gross presentation of the Level 3 roll forward,
which is not required to be adopted until July 1, 2011. The adoption
of this new guidance did not have a material impact on our consolidated
financial statements. We believe the adoption on July 1, 2011 of the
gross presentation of the Level 3 roll forward will not have a material impact
on our consolidated financial statements.
In
February 2010, the FASB amended its authoritative guidance related to subsequent
events to alleviate potential conflicts with current SEC
guidance. Effective immediately, these amendments remove the
requirement that an SEC filer disclose the date through which it has evaluated
subsequent events. The adoption of this new guidance did not have a
material impact on our consolidated financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In June
2009, the FASB issued authoritative guidance on the consolidation of variable
interest entities, which is effective for us beginning July 1, 2010. The
new guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of control over such entities, and
additional disclosures for variable interests. We believe adoption of this new
guidance will not have a material impact on our consolidated financial
statements.
- 9
-
3.
|
Intangible
Assets
|
Intangible
Assets with Definite Lives
The
components of amortizable intangible assets were as follows:
March 31, 2010
|
June 30, 2009
|
|||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Carrying
|
Accumulated
|
Carrying
|
Accumulated
|
|||||||||||||
Amount
|
Amortization
|
Amount
|
Amortization
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Developed
technology
|
$ | 196,083 | $ | 86,570 | $ | 197,684 | $ | 62,021 | ||||||||
Customer
related intangibles
|
215,733 | 88,326 | 216,956 | 69,339 | ||||||||||||
Non-compete
arrangements
|
10,198 | 4,046 | 10,090 | 2,692 | ||||||||||||
Tradenames
|
2,176 | 569 | 2,105 | 230 | ||||||||||||
Total
|
$ | 424,190 | $ | 179,511 | $ | 426,835 | $ | 134,282 |
The
aggregate amortization expense for amortizable intangible assets was $15.4
million and $15.0 million for the three months ended March 31, 2010 and 2009,
respectively, and $46.5 million and $47.5 million for the nine months ended
March 31, 2010 and 2009, respectively.
The
estimated aggregate amortization expense for each of the twelve month periods
ending March 31, is as follows:
(In thousands)
|
||||
2011
|
$ | 60,548 | ||
2012
|
60,200 | |||
2013
|
56,072 | |||
2014
|
35,749 | |||
2015
|
18,362 |
Goodwill
The
carrying amount of goodwill, by segment, was as follows:
Microelectronic
|
Test
|
|||||||||||
Solutions
|
Solutions
|
Total
|
||||||||||
(In
thousands)
|
||||||||||||
Balance
at June 30, 2009
|
$ | 266,813 | $ | 161,320 | $ | 428,133 | ||||||
Adjustment
to goodwill for acquisitions
|
314 | 455 | 769 | |||||||||
Impact
of foreign currency translation
|
387 | (2,405 | ) | (2,018 | ) | |||||||
Balance
at March 31, 2010
|
$ | 267,514 | $ | 159,370 | $ | 426,884 |
- 10
-
4.
|
Restructuring
Charges
|
The
following table sets forth the charges and payments related to the restructuring
liability for the periods indicated:
Balance
|
Balance
|
|||||||||||||||||||
June 30,
|
March 31,
|
|||||||||||||||||||
2009
|
Nine Months Ended March 31, 2010
|
2010
|
||||||||||||||||||
Effect of
|
||||||||||||||||||||
Restructuring
|
foreign
|
Restructuring
|
||||||||||||||||||
Liability
|
Net Additions
|
Cash Payments
|
currency
|
Liability
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Work
force reduction
|
$ | 756 | $ | 330 | $ | (1,076 | ) | $ | 2 | $ | 12 | |||||||||
Closure
of facilities
|
1,722 | 26 | (463 | ) | (217 | ) | 1,068 | |||||||||||||
Total
|
$ | 2,478 | $ | 356 | $ | (1,539 | ) | $ | (215 | ) | $ | 1,080 |
5.
|
Inventories
|
Inventories
consisted of the following:
March 31,
|
June 30,
|
|||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Raw
materials
|
$ | 62,205 | $ | 67,388 | ||||
Work
in process
|
47,533 | 47,185 | ||||||
Finished
goods
|
18,703 | 21,030 | ||||||
$ | 128,441 | $ | 135,603 |
6.
|
Product
Warranty
|
We
warrant our 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 in cost of sales when the
related revenue is recognized. Quarterly we analyze our warranty liability for
reasonableness based on a 15-month history of warranty costs incurred, the
nature of the products shipped subject to warranty and anticipated warranty
trends.
- 11
-
Activity
related to our product warranty liability, which is reflected in Accrued
Expenses and Other Current Liabilities in the accompanying consolidated balance
sheets, was as follows:
Nine months
|
Nine months
|
|||||||
Ended
|
Ended
|
|||||||
March 31,
|
March 31,
|
|||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Balance
at beginning of period
|
$ | 2,645 | $ | 2,944 | ||||
Provision
for warranty obligations
|
1,696 | 2,028 | ||||||
Cost
of warranty obligations
|
(1,622 | ) | (2,147 | ) | ||||
Foreign
currency impact
|
(64 | ) | (285 | ) | ||||
Balance
at end of period
|
$ | 2,655 | $ | 2,540 |
7.
|
Derivative
Financial Instruments
|
We
address certain financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We enter
into interest rate swap derivatives to manage the effects of interest rate
movements on portions of our debt. We also enter into foreign currency forward
contracts, not designated as hedging instruments, to protect us from
fluctuations in exchange rates.
The fair
values of our derivative financial instruments included in the consolidated
balance sheets as of March 31, 2010 and June 30, 2009 are presented as
follows:
Asset
(Liability) Derivatives
|
|||||||||||
March
31, 2010
|
June
30, 2009
|
||||||||||
Balance
Sheet
|
Balance
Sheet
|
||||||||||
(In
thousands)
|
Location
|
Fair Value(1)
|
Location
|
Fair Value(1)
|
|||||||
Derivatives
designated as hedging instruments:
|
|||||||||||
Interest
rate swap contracts
|
Accrued
expenses and other current liabilities
|
$ | (10,323 | ) |
Accrued
expenses and other current liabilities
|
$ | (615 | ) | |||
Interest
rate swap contracts
|
Other
long-term liabilities
|
- |
Other
long-term liabilities
|
(15,006 | ) | ||||||
|
|||||||||||
Total
derivatives designated as hedging instruments
|
(10,323 | ) | (15,621 | ) | |||||||
Derivatives
not designated as hedging instruments:
|
|||||||||||
Foreign
currency forward contracts
|
Prepaid
expenses and other current assets
|
446 |
Accrued
expenses and other current liabilities
|
(195 | ) | ||||||
Total
derivatives, net
|
$ | (9,877 | ) | $ | (15,816 | ) |
(1) See
Note 8 for further information about how the fair values of derivative assets
and liabilities are determined.
- 12
-
The
amounts of the gains and losses related to our derivative financial instruments
designated as hedging instruments for the three and nine months ended March 31,
2010 and 2009 were as follows:
Amount
of Gain or (Loss)
|
||||||||||||||||
Recognized
on Derivatives in
|
||||||||||||||||
Derivatives
in Cash Flow
|
Other
Comprehensive Income
|
|||||||||||||||
Hedging Relationships
|
(Effective Portion)
(1)
|
|||||||||||||||
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Interest
rate swap contracts
|
$ | (1,279 | ) | $ | (1,318 | ) | $ | (5,550 | ) | $ | (23,837 | ) |
Location
of Gain or (Loss)
|
Amount
of Gain or (Loss)
|
|||||||||||||||
Reclassified
from Accumulated
|
Reclassified
from
|
|||||||||||||||
Other
Comprehensive Income
|
Accumulated
Other Comprehensive Income
|
|||||||||||||||
into Income (Effective
Portion)
|
into Income (Effective Portion)
(1)
|
|||||||||||||||
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Interest
expense
|
$ | (3,666 | ) | $ | (2,079 | ) | $ | (10,848 | ) | $ | (4,161 | ) |
(1) See
Note 11 for additional information on changes to accumulated other comprehensive
income (loss).
The
amounts of the gains and losses related to our derivative financial instruments
not designated as hedging instruments for the three and nine months ended March
31, 2010 and 2009 were as follows:
Derivatives
Not
|
Location of Gain or (Loss)
|
Amount of Gain or (Loss)
|
||||||||||||||||
Designated as
|
Recognized in Earnings on
|
Recognized in Earnings on
|
||||||||||||||||
Hedging Instruments
|
Derivative
|
Derivative
|
||||||||||||||||
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||||
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||
(In
thousands)
|
||||||||||||||||||
Foreign
currency forward contracts
|
Other
income (expense)
|
$ | 410 | $ | 759 | $ | 641 | $ | (46 | ) |
Interest Rate Swap Cash-Flow
Hedges
We enter
into interest rate swap contracts with counterparties that are rated investment
grade to manage the effects of interest rate movements on portions of our debt.
Such contracts effectively fix the borrowing rates on floating rate debt to
limit the exposure against the risk of rising rates. We do not enter
into interest rate swap contracts for speculative purposes. Our interest rate
swap contracts outstanding as of March 31, 2010, all of which were entered into
in fiscal 2008 for an aggregate notional amount of $425 million, have varying
maturities through February 2011.
- 13
-
Foreign
Currency Contract Derivatives
Foreign
currency contracts are used to protect us from fluctuations in exchange rates.
We enter into foreign currency contracts, which are not designated as hedges.
The change in fair value is included in other income (expense) as it
occurs. As of March 31, 2010, we had $43.4 million of notional value
foreign currency forward contracts maturing through April 30, 2010. Notional
amounts do not quantify risk or represent assets or liabilities of the Company,
but are used in the calculation of cash settlements under the
contracts.
8.
|
Fair
Value Measurements
|
We
account for certain assets and liabilities at fair value. The
hierarchy below lists three levels of fair value based on the extent to which
inputs used in measuring the fair value are observable in the
market. We categorize each of our fair value measurements in one of
these three levels based on the lowest level input that is significant to the
fair value measurement in its entirety. These levels
are:
Level
1:
|
Inputs
based on quoted market prices for identical assets or liabilities in
active markets at the measurement
date.
|
Level
2:
|
Observable
inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
Level
3:
|
Inputs
reflect management’s best estimate of what market participants would use
in pricing the asset or liability at the measurement date. The
inputs are unobservable in the market and significant to the instruments’
valuation.
|
The
following table presents for each hierarchy level, financial assets and
liabilities measured at fair value on a recurring basis:
Quoted Prices in
|
||||||||||||||||
Active Markets
|
Significant Other
|
Significant
|
||||||||||||||
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
Assets
|
Inputs
|
Inputs
|
||||||||||||||
As of March 31, 2010
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Assets:
|
||||||||||||||||
Non-current
marketable securities
|
$ | - | $ | - | $ | 9,779 | $ | 9,779 | ||||||||
Foreign
currency forward contracts
|
- | 446 | - | 446 | ||||||||||||
Total
Assets
|
$ | - | $ | 446 | $ | 9,779 | $ | 10,225 | ||||||||
Liabilities:
|
||||||||||||||||
Interest
rate swap contracts
|
$ | - | $ | 10,323 | $ | - | $ | 10,323 |
- 14
-
Quoted Prices in
|
||||||||||||||||
Active Markets
|
Significant Other
|
Significant
|
||||||||||||||
for Identical
|
Observable
|
Unobservable
|
||||||||||||||
Assets
|
Inputs
|
Inputs
|
||||||||||||||
As of June 30, 2009
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
Total
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Assets:
|
||||||||||||||||
Non-current
marketable securities
|
$ | - | $ | - | $ | 17,677 | $ | 17,677 | ||||||||
Liabilities:
|
||||||||||||||||
Foreign
currency forward contracts
|
$ | - | $ | 195 | $ | - | $ | 195 | ||||||||
Interest
rate swap contracts
|
- | 15,621 | - | 15,621 | ||||||||||||
Total
Liabilities
|
$ | - | $ | 15,816 | $ | - | $ | 15,816 |
The
following table presents the changes in the carrying value of the Company’s
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the nine months ended March 31,
2010:
Fair Value Measurements
|
||||
Using Significant
|
||||
Unobservable Inputs
|
||||
(Level 3)
|
||||
Auction
|
||||
Rate
|
||||
Securities
|
||||
(In thousands)
|
||||
Balance
at June 30, 2009
|
$ | 17,677 | ||
Redeemed
by the issuer
|
(8,900 | ) | ||
Total
unrealized gain (loss) in accumulated other comprehensive income
(loss)
|
1,002 | |||
Balance
at March 31, 2010
|
$ | 9,779 |
Non-Current Marketable
Securities – Non-current marketable securities consist of auction rate
securities that currently have no active market from which we could obtain
pricing. We have classified auction rate securities as Level 3 as
their valuation requires substantial judgment and estimation of factors that are
not currently observable in the market due to the lack of trading in the
securities. To date, we have collected all interest
payments on all of our auction rate securities when due. Furthermore, we have
the intent and are able to hold these securities until the credit markets
recover, or until their maturities, which range from 2037 through 2041, if
necessary. However, based on a discounted cash flow analysis,
which considered, among other items, the collateral underlying the securities,
the credit worthiness of the issuer, the timing of future cash flows and
liquidity risks, at March 31, 2010 we have a $1.3 million valuation allowance
against the auction rate securities.
As fair
values have continued to be below cost, we have considered various factors in
determining that at March 31, 2010 a credit loss did not exist and there was no
requirement to recognize an other than temporary impairment charge, including
the length of time and the extent to which the fair value has been below the
cost basis, the timely receipt of all interest payments, the rating of the
security, the relatively low volatility of the security’s fair value, the
current financial condition of the issuer and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
During
the nine months ended March 31, 2010 $8.9 million of our auction rate securities
were redeemed by the issuer at an average of 96.4% of par. The resulting
$320,000 realized loss was recorded in the statement of operations for the three
and nine months ended March 31, 2010.
- 15
-
Foreign Currency Forward
Contracts – The fair value of our foreign currency forward contracts were
valued using a pricing model with all significant inputs based on observable
market data such as measurement date spot and forward rates.
Interest Rate Swap Contracts –
The fair value of our outstanding interest rate swap contracts were based on
valuations received from the counterparties and corroborated by measurement date
equivalent swap rates.
9.
|
Long
Term Debt and Credit Agreements
|
The fair
value of our debt instruments are summarized as follows:
March 31, 2010
|
||||||||
Carrying
|
Estimated
|
|||||||
Amount
|
Fair Value
|
|||||||
(In
thousands)
|
||||||||
Senior
secured B-1 term loan
|
$ | 389,944 | $ | 370,446 | ||||
Senior
secured B-2 term loan
|
121,857 | 114,546 | ||||||
Senior
unsecured notes
|
225,000 | 236,250 | ||||||
Senior
subordinated unsecured term loan
|
160,827 | 140,724 | ||||||
Other
|
1,085 | 1,085 | ||||||
Total
debt
|
$ | 898,713 | $ | 863,051 |
The
carrying value of debt of $889.3 million as of June 30, 2009 had a fair value of
$661.9 million.
The
estimated fair values of each of our debt instruments are based on quoted market
prices for the same or similar issues. Fair value estimates related to our debt
instruments are made at a specific point in time based on relevant market
information. These estimates are subjective in nature and involve
uncertainties and matters of significant judgments and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
As of
March 31, 2010, we are in compliance with all of the covenants contained in our
loan agreements.
Interest
paid was $52.8 million and $44.1 million for the nine months ended March 31,
2010 and 2009, respectively. Accrued interest of $7.2 million and $14.0 million
was included in accrued expenses and other current liabilities at March 31, 2010
and June 30, 2009, respectively.
10.
|
Loss
on Liquidation of Foreign
Subsidiary
|
In
connection with the acquisition of one of our Wireless businesses in the U.K. in
2003, we set up a foreign partnership to finance the acquisition. We
invested $19.5 million in the partnership and the partnership advanced those
funds to our foreign holding company in the form of a loan, the proceeds of
which was used for the acquisition.
During
the quarter ended September 30, 2009, the loan was fully repaid to the
partnership, with interest, and we received a return of capital and
dividends. The partnership is substantially liquidated.
As a
result of changes in foreign currency rates, there was a cumulative translation
adjustment of $7.7 million remaining after substantially all of the assets have
been returned to us and substantially all of the liabilities have been
satisfied. In accordance with U.S. GAAP, this remaining cumulative
translation adjustment has been expensed in the period during which the
substantial liquidation of the partnership occurred and presented as a non-cash
loss on liquidation of foreign subsidiary in our Condensed Consolidated
Statement of Operations for the nine months ended March 31,
2010. This loss is not deductible for income tax
purposes.
- 16
-
11.
|
Comprehensive
Income
|
The
components of comprehensive income (loss) were as follows:
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March 31,
|
March 31,
|
March 31,
|
March 31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Net
income (loss)
|
$ | 2,856 | $ | (13,734 | ) | $ | (28,301 | ) | $ | (24,738 | ) | |||||
Increase
(decrease) in fair value of interest rate swap contracts, net of tax
provision (benefit) of $927, $282, $2,013 and $(7,280)
|
1,460 | 479 | 3,285 | (12,396 | ) | |||||||||||
Valuation
allowance against non-current marketable securities
|
780 | (219 | ) | 1,002 | (2,422 | ) | ||||||||||
Foreign
currency translation adjustment, net of tax benefit of $1,033, $0, $416
and $0
|
(7,890 | ) | (4,467 | ) | (1,877 | ) | (60,447 | ) | ||||||||
Total
comprehensive income (loss)
|
$ | (2,794 | ) | $ | (17,941 | ) | $ | (25,891 | ) | $ | (100,003 | ) |
Accumulated
other comprehensive income (loss) was as follows:
Unrealized
|
||||||||||||||||||||
Gain (Loss)
|
Valuation
|
Minimum
|
Foreign
|
|||||||||||||||||
on Interest
|
Allowance Against
|
Pension
|
Currency
|
|||||||||||||||||
Rate Swap
|
Non-Current
|
Liability
|
Translation
|
|||||||||||||||||
Contracts
|
Marketable
|
Adjustment
|
Adjustment
|
Total
|
||||||||||||||||
(net of tax)
|
Securities
|
(net of tax)
|
(net of tax)
|
(net of tax)
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Balance,
June 30, 2009
|
$ | (9,602 | ) | $ | (2,268 | ) | $ | (499 | ) | $ | (42,331 | ) | $ | (54,700 | ) | |||||
Nine
months' activity
|
3,285 | 1,002 | - | (1,877 | ) | 2,410 | ||||||||||||||
Balance,
March 31, 2010
|
$ | (6,317 | ) | $ | (1,266 | ) | $ | (499 | ) | $ | (44,208 | ) | $ | (52,290 | ) |
The
valuation allowance for non-current marketable securities is not adjusted for
income taxes as it would create a capital loss carryforward upon realization for
which we would record a valuation allowance against the related deferred tax
asset.
Prior to
fiscal 2009, the foreign currency translation adjustments were not adjusted for
income taxes as they related to indefinite investments in non-U.S.
subsidiaries. Deferred U.S. income taxes have been provided on
undistributed foreign earnings for years subsequent to fiscal 2008 since we
expect that substantially all of these earnings will be distributed to the
U.S. As of March 31, 2010, we have recorded a deferred U.S. income
tax on the foreign currency translation adjustment created by the post-fiscal
2008 undistributed foreign earnings.
- 17
-
12.
|
Legal
Matters
|
In March
2005, we sold the net assets of our shock and vibration control device
manufacturing business, which we refer to as VMC. Under the terms of
the sale agreements, we retained certain liabilities relating to adverse
environmental conditions that existed at the premises occupied by VMC as of the
date of sale. We recorded a liability for the estimated remediation
costs related to adverse environmental conditions that existed at the VMC
premises when it was sold. The accrued environmental liability at March 31, 2010
is $1.1 million, of which $322,000 is expected to be paid within one
year.
During
the quarter ended March 31, 2007, we became aware that certain RadHard
bidirectional multipurpose transceivers sold by us since 1999 may have been
subject to the licensing jurisdiction of the U.S. Department of State in
accordance with the International Traffic in Arms Regulations,
or ITAR. Accordingly, we filed a Voluntary Disclosure with the
Directorate of Defense Trade Controls, Department of State, describing the
details of the possible inadvertent misclassification and identifying certain
unauthorized exports from the United States to end-users in a number of
countries, including China and Russia. Simultaneously, we filed a Commodity
Jurisdiction request providing detailed information and data supporting our
contention that the product is not subject to ITAR and requesting a
determination that such product is not ITAR controlled. On November 15, 2007, we
were informed that the U.S. Department of State had determined in response to
our Commodity Jurisdiction request that the product is subject to the licensing
jurisdiction of the U.S. Department of State in accordance with the ITAR. We
requested reconsideration of this determination. On February 7, 2008, we filed
an addendum to the above referenced Voluntary Disclosure advising the
Directorate of Defense Trade Controls that other products sold by us, similar in
nature to the transceiver described above, may also be subject to the ITAR. The
Directorate of Defense Trade Controls agreed to extend our time to file such
addendum to the Voluntary Disclosure until a decision was rendered with respect
to our request for reconsideration of the determination in connection with the
above-referenced Commodity Jurisdiction request. On August 5, 2008, we received
a letter from the Office of Defense Trade Controls Compliance, or DTCC,
requesting that we provide documentation and/or information relating to our
compliance initiatives after November 15, 2007 as well as the results of any
product reviews conducted by us, and indicating that a civil penalty against us
could be warranted in connection with this matter following the review of such
materials. We have provided all of the materials and documentation requested by
the DTCC. Our request for reconsideration of the Commodity
Jurisdiction request was denied by the Directorate of Defense Trade Controls on
August 19, 2008 which determined that the product is subject to the licensing
jurisdiction of the Department of State in accordance with the ITAR.
Accordingly, on September 18, 2008, we filed an addendum to our Voluntary
Disclosure identifying other products that may have been subject to the
licensing jurisdiction of the U.S. Department of State in accordance with the
ITAR but were inadvertently misclassified and exported without a
license. At this time it is not possible to determine whether any
fines or other penalties will be asserted against us or the materiality of any
outcome.
We have
also identified other ITAR noncompliance in our past business activities as well
as in the pre-acquisition business activities of a recently acquired company.
These include the inadvertent export of products without a required license and
the disclosure of controlled technology to certain foreign national employees.
These matters were formally disclosed to the U.S. Department of State in 2009
and 2010.
Compliance
with the directives of the U.S. Department of State may result in substantial
legal and other expenses and the diversion of management time. In the event that
a determination is made that we or any entity we have acquired has violated ITAR
with respect to any matters, we may be subject to substantial monetary penalties
that we are unable to quantify at this time, and/or suspension or revocation of
its export privileges and criminal sanctions, which may adversely affect our
business, results of operations and financial condition.
- 18
-
On
October 14, 2009, BAE Systems Information and Electronic Systems, or BAE,
commenced an action against both us and one of our subsidiaries in the United
States District Court for the District of Delaware. BAE is alleging
that under a subcontract it entered into with us in 2002, BAE provided to us
certain proprietary information and know how relating to a high performance
direct infrared countermeasure system for use in military aircraft and certain
other platforms, known as the “DIRCM System”, which enabled us to fabricate for
BAE an assembly component of the third generation of the DIRCM
System. BAE is alleging that, in violation of the provisions of the
subcontract and a Proprietary Information Agreement, we fabricated or
facilitated the fabrication of one or more items that were identical or
substantially identical to items that we exclusively fabricated for BAE under
the subcontract. BAE further claims that our actions ostensibly
enabled a competitor of BAE to build and market, in competition with BAE, an
infrared countermeasure system that included an unlawful copy of the
component. Based on these allegations, BAE has asserted claims
against us for patent infringement, trade secret misappropriation, breach of
contract, conversion and unjust enrichment and has requested, by way of relief,
unspecified damages, injunctive relief and an accounting. We have
evaluated BAE’s claims and believe that there is no basis for the allegations or
claims made by BAE. Nevertheless, there can be no assurance that we
will prevail in the matter. We do not believe that the ultimate
resolution of this matter will have a material adverse effect on our business,
results of operations, financial position, liquidity or capital
resources.
We are
also involved in various other claims and legal actions that arise in the
ordinary course of business. We do not believe that the ultimate resolution of
any of these actions will have a material adverse effect on our business,
results of operations, financial position, liquidity or capital
resources.
13.
|
Business
Segments
|
Our
business segments and major products included in each segment, are as
follows:
Microelectronic
Solutions
|
·
|
Hi-Rel
microelectronics/semiconductors
|
|
·
|
RF
and microwave components
|
|
·
|
Mixed-signal/digital
ASICs
|
|
·
|
Motion
control products
|
Test
Solutions
|
·
|
Wireless
test equipment
|
|
·
|
Military
and Private Mobile Radio, or PMR, test
equipment
|
|
·
|
Avionics
test equipment
|
|
·
|
Synthetic
test equipment
|
|
·
|
General
purpose test equipment and other
|
We are a
manufacturer of advanced technology systems and components for commercial
industry, government and defense contractors. Approximately 32% and
34% of our sales for the three months ended March 31, 2010 and 2009, and 33% and
35% of our sales for the nine months ended March 31, 2010 and 2009,
respectively, were to agencies of the United States government or to prime
defense contractors or subcontractors of the United States government. No
customer constituted more than 10% of sales during any of the periods presented.
Inter-segment sales were not material and have been eliminated from the tables
below.
The
majority of our operations are located in the United States; however, we also
have operations in Europe and Asia, with our most significant foreign operations
in the United Kingdom (“U.K.”). Net sales from facilities located in
the U.K. were approximately $33.6 million and $32.2 million for the three months
ended March 31, 2010 and 2009 and $89.5 million and $100.0 million for the nine
months ended March 31, 2010 and 2009, respectively. Total assets of
the U.K. operations were $163.1 million as of March 31, 2010 and $188.2 million
as of June 30, 2009.
- 19
-
Net
sales, based on the customers’ locations, attributed to the United States and
other regions were as follows:
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March 31,
|
March 31,
|
March 31,
|
March 31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
United
States of America
|
$ | 94,700 | $ | 79,397 | $ | 267,089 | $ | 251,454 | ||||||||
Europe
and Middle East
|
40,975 | 43,583 | 103,684 | 103,481 | ||||||||||||
Asia
and Australia
|
29,550 | 14,201 | 85,655 | 75,263 | ||||||||||||
Other
regions
|
3,210 | 2,258 | 8,862 | 6,901 | ||||||||||||
$ | 168,435 | $ | 139,439 | $ | 465,290 | $ | 437,099 |
- 20
-
Selected
financial data by segment was as follows:
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Net
sales:
|
||||||||||||||||
Microelectronic
solutions ("AMS")
|
$ | 83,418 | $ | 70,232 | $ | 229,939 | $ | 208,564 | ||||||||
Test
solutions ("ATS")
|
85,017 | 69,207 | 235,351 | 228,535 | ||||||||||||
Net
sales
|
$ | 168,435 | $ | 139,439 | $ | 465,290 | $ | 437,099 | ||||||||
Segment
adjusted operating income:
|
||||||||||||||||
-
AMS
|
$ | 23,029 | $ | 14,783 | $ | 59,940 | $ | 44,767 | ||||||||
-
ATS
|
19,005 | 8,700 | 47,156 | 34,304 | ||||||||||||
-
General corporate expense
|
(2,189 | ) | (2,854 | ) | (7,378 | ) | (9,421 | ) | ||||||||
Adjusted
operating income
|
39,845 | 20,629 | 99,718 | 69,650 | ||||||||||||
Amortization
of acquired intangibles
|
||||||||||||||||
-
AMS
|
(8,733 | ) | (8,829 | ) | (26,312 | ) | (27,968 | ) | ||||||||
-
ATS
|
(6,675 | ) | (6,127 | ) | (20,215 | ) | (19,578 | ) | ||||||||
Share-based
compensation
|
||||||||||||||||
-
Corporate
|
(518 | ) | (489 | ) | (1,563 | ) | (1,466 | ) | ||||||||
Restructuring
charges
|
||||||||||||||||
-
ATS
|
(105 | ) | (582 | ) | (356 | ) | (2,792 | ) | ||||||||
Merger
related expenses - Corporate
|
(647 | ) | (815 | ) | (2,111 | ) | (3,621 | ) | ||||||||
Acquired
in-process R&D costs
|
||||||||||||||||
-
AMS
|
- | (1,665 | ) | - | (1,665 | ) | ||||||||||
-
ATS
|
- | (626 | ) | - | (626 | ) | ||||||||||
Loss
on liquidation of foreign subsidiary - ATS
|
- | - | (7,696 | ) | - | |||||||||||
Current
period impact of acquisition related adjustments:
|
||||||||||||||||
Inventory
– AMS
|
- | - | (246 | ) | - | |||||||||||
Depreciation
- AMS
|
(251 | ) | (285 | ) | (791 | ) | (857 | ) | ||||||||
Depreciation
– ATS
|
(172 | ) | (629 | ) | (989 | ) | (2,043 | ) | ||||||||
Depreciation
- Corporate
|
(55 | ) | (55 | ) | (165 | ) | (165 | ) | ||||||||
Deferred
revenue - ATS
|
(31 | ) | (64 | ) | (96 | ) | (240 | ) | ||||||||
Operating
income (GAAP)
|
22,658 | 463 | 39,178 | 8,629 | ||||||||||||
Interest
expense
|
(20,815 | ) | (20,566 | ) | (63,272 | ) | (63,031 | ) | ||||||||
Other
income (expense), net
|
222 | (47 | ) | 701 | 12,366 | |||||||||||
Income
(loss) before income taxes
|
$ | 2,065 | $ | (20,150 | ) | $ | (23,393 | ) | $ | (42,036 | ) |
Management
evaluates the operating results of the two segments based upon adjusted
operating income, which is pre-tax operating income, before costs related to
amortization of acquired intangibles, share-based compensation, restructuring
charges, merger related expenses, acquired in-process research and development
costs, loss on liquidation of foreign subsidiary and the impact of any
acquisition related adjustments. We have set out above our adjusted
operating income (loss) by segment and in the aggregate, and have provided a
reconciliation of operating income (loss) to adjusted operating income (loss)
for the periods presented.
- 21
-
14.
|
Guarantor/Non-Guarantor
Financial Information
|
The
following supplemental condensed consolidating financial information sets forth,
on an unconsolidated basis, the balance sheets at March 31, 2010 and June 30,
2009, the statements of operations for the three and nine months ended March 31,
2010 and 2009 and the statements of cash flows for the nine months ended March
31, 2010 and 2009 for Aeroflex Incorporated (the “Parent Company”), the
guarantor subsidiaries and, on a combined basis, the non-guarantor
subsidiaries. The supplemental condensed consolidating financial
information reflects for all fiscal periods presented, the investments of the
Parent Company in the guarantor subsidiaries as well as the investments of the
Parent Company and the guarantor subsidiaries in the non-guarantor subsidiaries,
in all cases using the equity method. For purposes of this footnote,
guarantor subsidiaries refer to the subsidiaries of the Parent Company that have
guaranteed principal debt obligations of the Parent Company. The
Parent Company’s purchase price allocation adjustments, including applicable
intangible assets, arising from business acquisitions have been pushed down to
the applicable subsidiary columns (see Note 3).
Each of
the subsidiary guarantors is 100% owned by the Parent Company and guarantees the
debt on an unconditional and joint and several basis. The Parent
Company, as the registrant and issuer of the registered debt, files annual and
quarterly financial statements with the Securities and Exchange Commission and
includes, in a note to the financial statements, condensed consolidating
financial information as described above.
Condensed
Consolidating Statement of Operations
For
the Three Months Ended March 31, 2010
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Net
sales
|
$ | - | $ | 115,931 | $ | 54,171 | $ | (1,667 | ) | $ | 168,435 | |||||||||
Cost
of sales
|
- | 59,178 | 20,776 | (1,816 | ) | 78,138 | ||||||||||||||
Gross
profit
|
- | 56,753 | 33,395 | 149 | 90,297 | |||||||||||||||
Selling,
general and administrative costs
|
3,409 | 19,247 | 8,721 | - | 31,377 | |||||||||||||||
Research
and development costs
|
- | 14,023 | 6,831 | - | 20,854 | |||||||||||||||
Amortization
of acquired intangibles
|
- | 13,250 | 2,158 | - | 15,408 | |||||||||||||||
Operating
income (loss)
|
(3,409 | ) | 10,233 | 15,685 | 149 | 22,658 | ||||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Interest
expense
|
(20,797 | ) | (17 | ) | (1 | ) | - | (20,815 | ) | |||||||||||
Other
income (expense), net
|
138 | 213 | (129 | ) | - | 222 | ||||||||||||||
Intercompany
charges
|
19,808 | (19,317 | ) | (491 | ) | - | - | |||||||||||||
Income
(loss) before income taxes
|
(4,260 | ) | (8,888 | ) | 15,064 | 149 | 2,065 | |||||||||||||
Provision
(benefit) for income taxes
|
(774 | ) | 928 | 2,697 | (3,642 | ) | (791 | ) | ||||||||||||
Equity
income (loss) of subsidiaries
|
6,342 | 12,049 | - | (18,391 | ) | - | ||||||||||||||
Net
income (loss)
|
$ | 2,856 | $ | 2,233 | $ | 12,367 | $ | (14,600 | ) | $ | 2,856 |
- 22
-
Condensed
Consolidating Statement of Operations
For
the Three Months Ended March 31, 2009
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Net
sales
|
$ | - | $ | 100,972 | $ | 40,784 | $ | (2,317 | ) | $ | 139,439 | |||||||||
Cost
of sales
|
- | 52,418 | 22,170 | (1,754 | ) | 72,834 | ||||||||||||||
Gross
profit
|
- | 48,554 | 18,614 | (563 | ) | 66,605 | ||||||||||||||
Selling,
general and administrative costs
|
4,214 | 18,790 | 7,950 | - | 30,954 | |||||||||||||||
Research
and development costs
|
- | 11,980 | 5,961 | - | 17,941 | |||||||||||||||
Amortization
of acquired intangibles
|
- | 12,706 | 2,250 | - | 14,956 | |||||||||||||||
Acquired
in-process R&D costs
|
- | 626 | 1,665 | - | 2,291 | |||||||||||||||
Operating
income (loss)
|
(4,214 | ) | 4,452 | 788 | (563 | ) | 463 | |||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Interest
expense
|
(20,542 | ) | (23 | ) | (1 | ) | - | (20,566 | ) | |||||||||||
Other
income (expense), net
|
711 | 180 | (938 | ) | - | (47 | ) | |||||||||||||
Intercompany
charges
|
18,433 | (18,115 | ) | (318 | ) | - | - | |||||||||||||
Income
(loss) before income taxes
|
(5,612 | ) | (13,506 | ) | (469 | ) | (563 | ) | (20,150 | ) | ||||||||||
Provision
(benefit) for income taxes
|
(2,805 | ) | (7,207 | ) | 3,436 | 160 | (6,416 | ) | ||||||||||||
Equity
income (loss) of subsidiaries
|
(10,927 | ) | (3,439 | ) | - | 14,366 | - | |||||||||||||
Net
income (loss)
|
$ | (13,734 | ) | $ | (9,738 | ) | $ | (3,905 | ) | $ | 13,643 | $ | (13,734 | ) |
- 23
-
Condensed
Consolidating Statement of Operations
For
the Nine Months Ended March 31, 2010
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Net
sales
|
$ | - | $ | 333,946 | $ | 135,530 | $ | (4,186 | ) | $ | 465,290 | |||||||||
Cost
of sales
|
- | 170,892 | 56,743 | (4,230 | ) | 223,405 | ||||||||||||||
Gross
profit
|
- | 163,054 | 78,787 | 44 | 241,885 | |||||||||||||||
Selling,
general and administrative costs
|
11,217 | 56,403 | 25,568 | - | 93,188 | |||||||||||||||
Research
and development costs
|
- | 36,169 | 19,127 | - | 55,296 | |||||||||||||||
Amortization
of acquired intangibles
|
- | 39,909 | 6,618 | - | 46,527 | |||||||||||||||
Loss
on liquidation of foreign subsidiary
|
- | 7,696 | - | - | 7,696 | |||||||||||||||
Operating
income (loss)
|
(11,217 | ) | 22,877 | 27,474 | 44 | 39,178 | ||||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Interest
expense
|
(63,218 | ) | (51 | ) | (3 | ) | - | (63,272 | ) | |||||||||||
Other
income (expense), net
|
479 | 587 | (365 | ) | - | 701 | ||||||||||||||
Intercompany
charges
|
59,399 | (57,953 | ) | (1,446 | ) | - | - | |||||||||||||
Income
(loss) before income taxes
|
(14,557 | ) | (34,540 | ) | 25,660 | 44 | (23,393 | ) | ||||||||||||
Provision
(benefit) for income taxes
|
(5,573 | ) | 436 | 4,962 | 5,083 | 4,908 | ||||||||||||||
Equity
income (loss) of subsidiaries
|
(19,317 | ) | 19,683 | - | (366 | ) | - | |||||||||||||
Net
income (loss)
|
$ | (28,301 | ) | $ | (15,293 | ) | $ | 20,698 | $ | (5,405 | ) | $ | (28,301 | ) |
- 24
-
Condensed
Consolidating Statement of Operations
For
the Nine Months Ended March 31, 2009
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Net
sales
|
$ | - | $ | 308,770 | $ | 133,443 | $ | (5,114 | ) | $ | 437,099 | |||||||||
Cost
of sales
|
- | 161,170 | 73,410 | (4,604 | ) | 229,976 | ||||||||||||||
Gross
profit
|
- | 147,600 | 60,033 | (510 | ) | 207,123 | ||||||||||||||
Selling,
general and administrative costs
|
14,673 | 55,120 | 26,819 | - | 96,612 | |||||||||||||||
Research
and development costs
|
- | 34,422 | 17,623 | - | 52,045 | |||||||||||||||
Amortization
of acquired intangibles
|
- | 40,582 | 6,964 | - | 47,546 | |||||||||||||||
Acquired
in-process R&D costs
|
- | 626 | 1,665 | - | 2,291 | |||||||||||||||
Operating
income (loss)
|
(14,673 | ) | 16,850 | 6,962 | (510 | ) | 8,629 | |||||||||||||
Other
income (expense):
|
||||||||||||||||||||
Interest
expense
|
(62,952 | ) | (68 | ) | (11 | ) | - | (63,031 | ) | |||||||||||
Other
income (expense), net
|
49 | 545 | 11,772 | - | 12,366 | |||||||||||||||
Intercompany
charges
|
55,345 | (54,341 | ) | (1,004 | ) | - | - | |||||||||||||
Income
(loss) before income taxes
|
(22,231 | ) | (37,014 | ) | 17,719 | (510 | ) | (42,036 | ) | |||||||||||
Provision
(benefit) for income taxes
|
(8,239 | ) | (15,268 | ) | 6,139 | 70 | (17,298 | ) | ||||||||||||
Equity
income (loss) of subsidiaries
|
(10,746 | ) | 12,452 | - | (1,706 | ) | - | |||||||||||||
Net
income (loss)
|
$ | (24,738 | ) | $ | (9,294 | ) | $ | 11,580 | $ | (2,286 | ) | $ | (24,738 | ) |
- 25
-
Condensed
Consolidating Balance Sheet
As
of March 31, 2010
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$ | 69,723 | $ | (190 | ) | $ | 26,815 | $ | - | $ | 96,348 | |||||||||
Accounts
receivable, net
|
- | 72,673 | 44,035 | - | 116,708 | |||||||||||||||
Inventories
|
- | 100,744 | 28,550 | (853 | ) | 128,441 | ||||||||||||||
Deferred
income taxes
|
7,460 | 25,718 | 5,591 | - | 38,769 | |||||||||||||||
Prepaid
expenses and other current assets
|
2,828 | 3,672 | 3,318 | - | 9,818 | |||||||||||||||
Total
current assets
|
80,011 | 202,617 | 108,309 | (853 | ) | 390,084 | ||||||||||||||
Property,
plant and equipment, net
|
12,379 | 65,749 | 18,780 | - | 96,908 | |||||||||||||||
Non-current
marketable securities, net
|
9,779 | - | - | - | 9,779 | |||||||||||||||
Deferred
financing costs, net
|
22,176 | - | - | - | 22,176 | |||||||||||||||
Other
assets
|
13,270 | 4,325 | 285 | - | 17,880 | |||||||||||||||
Intangible
assets with definite lives, net
|
- | 213,314 | 31,365 | - | 244,679 | |||||||||||||||
Intangible
assets with indefinite lives
|
- | 85,404 | 24,887 | - | 110,291 | |||||||||||||||
Goodwill
|
(10 | ) | 389,422 | 37,472 | - | 426,884 | ||||||||||||||
Total
assets
|
$ | 137,605 | $ | 960,831 | $ | 221,098 | $ | (853 | ) | $ | 1,318,681 | |||||||||
Liabilities and Stockholder's
Equity
|
||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||
Current
portion of long-term debt
|
$ | 5,176 | $ | 340 | $ | - | $ | - | $ | 5,516 | ||||||||||
Accounts
payable
|
67 | 16,006 | 10,630 | - | 26,703 | |||||||||||||||
Advance
payments by customers and deferred revenue
|
- | 16,547 | 12,457 | - | 29,004 | |||||||||||||||
Income
taxes payable
|
(745 | ) | (96 | ) | 7,451 | - | 6,610 | |||||||||||||
Accrued
payroll expenses
|
1,620 | 16,317 | 1,553 | - | 19,490 | |||||||||||||||
Accrued
expenses and other current liabilities
|
24,868 | 9,937 | 11,163 | - | 45,968 | |||||||||||||||
Total
current liabilities
|
30,986 | 59,051 | 43,254 | - | 133,291 | |||||||||||||||
Long-term
debt
|
892,452 | 745 | - | - | 893,197 | |||||||||||||||
Deferred
income taxes
|
(10,969 | ) | 139,431 | 13,127 | 5,082 | 146,671 | ||||||||||||||
Defined
benefit plan obligations
|
5,942 | - | - | - | 5,942 | |||||||||||||||
Other
long-term liabilities
|
980 | 1,321 | 1,632 | - | 3,933 | |||||||||||||||
Intercompany
investment
|
(268,850 | ) | 46,154 | 222,696 | - | - | ||||||||||||||
Intercompany
receivable/payable
|
(834,765 | ) | 871,089 | (35,840 | ) | (484 | ) | - | ||||||||||||
Total
liabilities
|
(184,224 | ) | 1,117,791 | 244,869 | 4,598 | 1,183,034 | ||||||||||||||
Stockholder's
equity
|
321,829 | (156,960 | ) | (23,771 | ) | (5,451 | ) | 135,647 | ||||||||||||
Total
liabilities and stockholder's equity
|
$ | 137,605 | $ | 960,831 | $ | 221,098 | $ | (853 | ) | $ | 1,318,681 |
- 26
-
Condensed
Consolidating Balance Sheet
As
of June 30, 2009
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Assets
|
||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$ | 31,221 | $ | (15 | ) | $ | 26,542 | $ | - | $ | 57,748 | |||||||||
Accounts
receivable, net
|
- | 86,530 | 43,899 | - | 130,429 | |||||||||||||||
Inventories
|
- | 103,674 | 32,827 | (898 | ) | 135,603 | ||||||||||||||
Deferred
income taxes
|
3,452 | 25,681 | 6,031 | - | 35,164 | |||||||||||||||
Prepaid
expenses and other current assets
|
2,623 | 2,542 | 4,773 | - | 9,938 | |||||||||||||||
Total
current assets
|
37,296 | 218,412 | 114,072 | (898 | ) | 368,882 | ||||||||||||||
Property,
plant and equipment, net
|
12,720 | 67,624 | 20,563 | - | 100,907 | |||||||||||||||
Non-current
marketable securities, net
|
17,677 | - | - | - | 17,677 | |||||||||||||||
Deferred
financing costs, net
|
25,754 | - | - | - | 25,754 | |||||||||||||||
Other
assets
|
12,551 | 2,243 | 631 | - | 15,425 | |||||||||||||||
Intangible
assets with definite lives, net
|
- | 253,225 | 39,328 | - | 292,553 | |||||||||||||||
Intangible
assets with indefinite lives
|
- | 85,404 | 26,862 | - | 112,266 | |||||||||||||||
Goodwill
|
(10 | ) | 388,913 | 39,230 | - | 428,133 | ||||||||||||||
Total
assets
|
$ | 105,988 | $ | 1,015,821 | $ | 240,686 | $ | (898 | ) | $ | 1,361,597 | |||||||||
Liabilities and Stockholder's
Equity
|
||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||
Current
portion of long-term debt
|
$ | 5,250 | $ | 340 | $ | - | $ | - | $ | 5,590 | ||||||||||
Accounts
payable
|
285 | 20,553 | 15,736 | - | 36,574 | |||||||||||||||
Advance
payments by customers and deferred revenue
|
- | 17,433 | 15,985 | - | 33,418 | |||||||||||||||
Income
taxes payable
|
587 | - | 4,493 | - | 5,080 | |||||||||||||||
Accrued
payroll expenses
|
1,600 | 15,148 | 2,128 | - | 18,876 | |||||||||||||||
Accrued
expenses and other current liabilities
|
25,418 | 11,079 | 11,441 | - | 47,938 | |||||||||||||||
Total
current liabilities
|
33,140 | 64,553 | 49,783 | - | 147,476 | |||||||||||||||
Long-term
debt
|
883,013 | 745 | - | - | 883,758 | |||||||||||||||
Deferred
income taxes
|
(11,453 | ) | 138,725 | 15,776 | - | 143,048 | ||||||||||||||
Defined
benefit plan obligations
|
6,079 | - | - | - | 6,079 | |||||||||||||||
Other
long-term liabilities
|
16,825 | 1,271 | 3,380 | - | 21,476 | |||||||||||||||
Intercompany
investment
|
(268,635 | ) | 41,022 | 227,613 | - | - | ||||||||||||||
Intercompany
receivable/payable
|
(880,752 | ) | 902,126 | (20,891 | ) | (483 | ) | - | ||||||||||||
Total
liabilities
|
(221,783 | ) | 1,148,442 | 275,661 | (483 | ) | 1,201,837 | |||||||||||||
Stockholder's
equity
|
327,771 | (132,621 | ) | (34,975 | ) | (415 | ) | 159,760 | ||||||||||||
Total
liabilities and stockholder's equity
|
$ | 105,988 | $ | 1,015,821 | $ | 240,686 | $ | (898 | ) | $ | 1,361,597 |
- 27
-
Condensed
Consolidating Statement of Cash Flows
For
the Nine Months Ended March 31, 2010
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||
Net
income (loss)
|
$ | (28,301 | ) | $ | (15,293 | ) | $ | 20,698 | $ | (5,405 | ) | $ | (28,301 | ) | ||||||
Changes
in operating assets and liabilities and non-cash items included in net
income (loss)
|
66,418 | 23,792 | (15,064 | ) | 5,405 | 80,551 | ||||||||||||||
Net
cash provided by (used in) operating activities
|
38,117 | 8,499 | 5,634 | - | 52,250 | |||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||
Payment
for purchase of business
|
(4,000 | ) | - | - | - | (4,000 | ) | |||||||||||||
Capital
expenditures
|
(171 | ) | (9,444 | ) | (3,561 | ) | - | (13,176 | ) | |||||||||||
Proceeds
from sale of marketable securities
|
8,580 | - | - | - | 8,580 | |||||||||||||||
Proceeds
from the sale of property, plant and equipment
|
- | 770 | 251 | - | 1,021 | |||||||||||||||
Other,
net
|
(12 | ) | - | - | - | (12 | ) | |||||||||||||
Net
cash provided by (used in) investing activities
|
4,397 | (8,674 | ) | (3,310 | ) | - | (7,587 | ) | ||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||
Debt
repayments
|
(4,012 | ) | - | - | - | (4,012 | ) | |||||||||||||
Net
cash provided by (used in) financing activities
|
(4,012 | ) | - | - | - | (4,012 | ) | |||||||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
- | - | (2,051 | ) | - | (2,051 | ) | |||||||||||||
Net
increase (decrease) in cash and cash equivalents
|
38,502 | (175 | ) | 273 | - | 38,600 | ||||||||||||||
Cash
and cash equivalents at beginning of period
|
31,221 | (15 | ) | 26,542 | - | 57,748 | ||||||||||||||
Cash
and cash equivalents at end of period
|
$ | 69,723 | $ | (190 | ) | $ | 26,815 | $ | - | $ | 96,348 |
- 28
-
Condensed
Consolidating Statement of Cash Flows
For
the Nine Months Ended March 31, 2009
(In
thousands)
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Consolidated
|
||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||
Net
income (loss)
|
$ | (24,738 | ) | $ | (9,294 | ) | $ | 11,580 | $ | (2,286 | ) | $ | (24,738 | ) | ||||||
Changes
in operating assets and liabilities and non-cash items included in net
income (loss)
|
26,373 | 18,186 | 12,886 | 2,286 | 59,731 | |||||||||||||||
Net
cash provided by (used in) operating activities
|
1,635 | 8,892 | 24,466 | - | 34,993 | |||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||
Payment
for purchase of businesses, net of
|
||||||||||||||||||||
cash
acquired
|
(7,832 | ) | - | - | - | (7,832 | ) | |||||||||||||
Capital
expenditures
|
(11 | ) | (8,406 | ) | (4,541 | ) | - | (12,958 | ) | |||||||||||
Proceeds
from the sale of property, plant and equipment
|
- | 1,145 | 214 | - | 1,359 | |||||||||||||||
Other,
net
|
(4 | ) | - | - | - | (4 | ) | |||||||||||||
Net
cash provided by (used in) investing activities
|
(7,847 | ) | (7,261 | ) | (4,327 | ) | - | (19,435 | ) | |||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||
Debt
repayments
|
(4,125 | ) | (4 | ) | - | - | (4,129 | ) | ||||||||||||
Debt
financing costs
|
(340 | ) | - | - | - | (340 | ) | |||||||||||||
Net
cash provided by (used in) financing activities
|
(4,465 | ) | (4 | ) | - | - | (4,469 | ) | ||||||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
- | - | (11,307 | ) | - | (11,307 | ) | |||||||||||||
Net
increase (decrease) in cash and cash equivalents
|
(10,677 | ) | 1,627 | 8,832 | - | (218 | ) | |||||||||||||
Cash
and cash equivalents at beginning of period
|
39,285 | (2,379 | ) | 17,243 | - | 54,149 | ||||||||||||||
Cash
and cash equivalents at end of period
|
$ | 28,608 | $ | (752 | ) | $ | 26,075 | $ | - | $ | 53,931 |
- 29
-
15.
|
Subsequent
Events
|
Registration Statement
Filing
On April
6, 2010, our parent company, Aeroflex Holding Corp. (formerly known as AX
Holding Corp.), filed a registration statement with the SEC relating to the
proposed initial public offering of its common stock. The offered shares are
expected to be sold by Aeroflex Holding Corp. and, as selling stockholder, VGG
Holding LLC, the parent company of Aeroflex Holding Corp.
Acquisition of
Willtek
On May 7,
2010, we acquired certain assets and assumed certain liabilities from Willtek
Communications for $2.8 million, subject to a post closing, downward only,
purchase price adjustment based on net assets.
ITEM
2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking
Statements
This
Report contains "forward-looking statements." All statements other than
statements of historical fact are forward-looking statements for purposes of the
U.S. federal and state securities laws. These statements may be identified by
the use of forward looking terminology such as "anticipate," "believe,"
"continue," "could," "estimate," "expect," "intend," "may," "might," "plan,"
"potential," "predict," "should" or "will" or the negative thereof or other
variations thereon or comparable terminology.
We have
based these forward-looking statements on our current expectations, assumptions,
estimates and projections. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward looking statements are
only predictions and involve known and unknown risks and uncertainties, many of
which are beyond our control. These and other important factors may cause our
actual results, performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements. Some of the key factors that could cause actual
results to differ from our expectations include:
|
•
|
adverse
developments in the global economy;
|
|
•
|
our
inability to make payments on our significant
indebtedness;
|
|
•
|
our
dependence on growth in our customers’
businesses;
|
|
•
|
our
inability to remain competitive in the markets we
serve;
|
|
•
|
our
inability to continue to develop, manufacture and market innovative,
customized products and services that meet customer requirements for
performance and reliability;
|
|
•
|
any
failure of our suppliers to provide us with raw materials and/or properly
functioning component parts;
|
|
•
|
termination
of our key contracts, including technology license agreements, or loss of
our key customers;
|
|
•
|
our
inability to protect our intellectual
property;
|
- 30
-
|
•
|
our
failure to comply with regulations such as ITAR and any changes in
regulations;
|
|
•
|
our
exposure to auction rate securities and the impact this exposure has on
our liquidity;
|
|
•
|
our
failure to realize anticipated benefits from completed acquisitions,
divestitures or restructurings, or the possibility that such acquisitions,
divestitures or restructurings could adversely affect
us;
|
|
•
|
the
loss of key employees;
|
|
•
|
our
exposure to foreign currency exchange rate
risks;
|
•
|
terrorist
acts or acts of war; and
|
|
•
|
other
risks and uncertainties, including those listed under the caption "Risk
Factors" disclosed in our Fiscal 2009 Form
10-K.
|
Given
these risks and uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. The forward-looking statements included in this
Form 10-Q are made only as of the date hereof. We undertake no obligation to
update or revise any forward-looking statements, either to reflect new
developments, or for any other reason, except as required by law.
Overview
We are a
leading global provider of RF and microwave integrated circuits, components and
systems used in the design, development and maintenance of technically
demanding, high-performance wireless communication systems. Our solutions
include highly specialized microelectronic components and test and measurement
equipment used by companies in the space, avionics, defense, commercial wireless
communications, medical and other markets. We have targeted customers in these
end markets because we believe our solutions address their technically demanding
requirements. We were founded in 1937 and have proprietary technology that is
based on extensive know-how and a long history of research and development
focused on specialized technologies, often in collaboration with our
customers.
- 31
-
Results
of Operations
The
following table sets forth our historical results of operations as a percentage
of net sales for the periods indicated below:
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March 31, 2010
|
March 31, 2009
|
March 31, 2010
|
March 31, 2009
|
|||||||||||||
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Costs
of sales
|
46.4 | 52.2 | 48.0 | 52.6 | ||||||||||||
Gross
profit
|
53.6 | 47.8 | 52.0 | 47.4 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative costs
|
18.6 | 22.2 | 20.0 | 22.1 | ||||||||||||
Research
and development costs
|
12.4 | 12.9 | 11.9 | 11.9 | ||||||||||||
Amortization
of acquired intangibles
|
9.1 | 10.7 | 10.0 | 10.9 | ||||||||||||
Acquired
in-process research and development costs
|
- | 1.7 | - | 0.5 | ||||||||||||
Loss
on liquidation of foreign subsidiary
|
- | - | 1.7 | - | ||||||||||||
Total
operating expenses
|
40.1 | 47.5 | 43.6 | 45.4 | ||||||||||||
Operating
income
|
13.5 | 0.3 | 8.4 | 2.0 | ||||||||||||
Interest
expense
|
(12.4 | ) | (14.8 | ) | (13.6 | ) | (14.4 | ) | ||||||||
Other
income (expense), net
|
0.1 | - | 0.2 | 2.8 | ||||||||||||
Income
(loss) before income taxes
|
1.2 | (14.5 | ) | (5.0 | ) | (9.6 | ) | |||||||||
Provision
(benefit) for income taxes
|
(0.5 | ) | (4.6 | ) | 1.1 | (3.9 | ) | |||||||||
Net
income (loss)
|
1.7 | % | (9.9 | ) % | (6.1 | ) % | (5.7 | ) % |
- 32
-
Statements
of Operations
Management
evaluates the operating results of our two segments based upon adjusted
operating income, which is pre-tax operating income, before costs related to
amortization of acquired intangibles, share-based compensation, restructuring
charges, merger related expenses, acquired in-process research and development
costs, loss on liquidation of foreign subsidiary and the impact of any
acquisition related adjustments. We have set out below our adjusted operating
income (loss) by segment and in the aggregate, and have provided a
reconciliation of operating income (loss) to adjusted operating income (loss)
for the periods presented.
Three Months
|
Three Months
|
Nine Months
|
Nine Months
|
|||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
|||||||||||||
March 31,
|
March 31,
|
March 31,
|
March 31,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Net
sales:
|
||||||||||||||||
Microelectronic
solutions ("AMS")
|
$ | 83,418 | $ | 70,232 | $ | 229,939 | $ | 208,564 | ||||||||
Test
solutions ("ATS")
|
85,017 | 69,207 | 235,351 | 228,535 | ||||||||||||
Net
sales
|
$ | 168,435 | $ | 139,439 | $ | 465,290 | $ | 437,099 | ||||||||
Segment
adjusted operating income:
|
||||||||||||||||
-
AMS
|
$ | 23,029 | $ | 14,783 | $ | 59,940 | $ | 44,767 | ||||||||
-
ATS
|
19,005 | 8,700 | 47,156 | 34,304 | ||||||||||||
-
General corporate expense
|
(2,189 | ) | (2,854 | ) | (7,378 | ) | (9,421 | ) | ||||||||
Adjusted
operating income
|
39,845 | 20,629 | 99,718 | 69,650 | ||||||||||||
Amortization
of acquired intangibles
|
||||||||||||||||
-
AMS
|
(8,733 | ) | (8,829 | ) | (26,312 | ) | (27,968 | ) | ||||||||
-
ATS
|
(6,675 | ) | (6,127 | ) | (20,215 | ) | (19,578 | ) | ||||||||
Share-based
compensation
|
||||||||||||||||
-
Corporate
|
(518 | ) | (489 | ) | (1,563 | ) | (1,466 | ) | ||||||||
Restructuring
charges
|
||||||||||||||||
-
ATS
|
(105 | ) | (582 | ) | (356 | ) | (2,792 | ) | ||||||||
Merger
related expenses - Corporate
|
(647 | ) | (815 | ) | (2,111 | ) | (3,621 | ) | ||||||||
Acquired
in-process R&D costs
|
||||||||||||||||
-
AMS
|
- | (1,665 | ) | - | (1,665 | ) | ||||||||||
-
ATS
|
- | (626 | ) | - | (626 | ) | ||||||||||
Loss
on liquidation of foreign subsidiary - ATS
|
- | - | (7,696 | ) | - | |||||||||||
Current
period impact of acquisition related adjustments:
|
||||||||||||||||
Inventory
- AMS
|
- | - | (246 | ) | - | |||||||||||
Depreciation
- AMS
|
(251 | ) | (285 | ) | (791 | ) | (857 | ) | ||||||||
Depreciation
- ATS
|
(172 | ) | (629 | ) | (989 | ) | (2,043 | ) | ||||||||
Depreciation
- Corporate
|
(55 | ) | (55 | ) | (165 | ) | (165 | ) | ||||||||
Deferred
revenue - ATS
|
(31 | ) | (64 | ) | (96 | ) | (240 | ) | ||||||||
Operating
income (GAAP)
|
22,658 | 463 | 39,178 | 8,629 | ||||||||||||
Interest
expense
|
(20,815 | ) | (20,566 | ) | (63,272 | ) | (63,031 | ) | ||||||||
Other
income (expense), net
|
222 | (47 | ) | 701 | 12,366 | |||||||||||
Income
(loss) before income taxes
|
$ | 2,065 | $ | (20,150 | ) | $ | (23,393 | ) | $ | (42,036 | ) |
- 33
-
Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009
Net Sales. Net sales
increased 21% to $168.4 million for the three months ended March 31, 2010 from
$139.4 million for the three months ended March 31, 2009.
Net sales
in the AMS segment increased 19% to $83.4 million for the three months ended
March 31, 2010 from $70.2 million for the three months ended March 31, 2009. The
increase in sales was primarily volume driven as a result of a general
strengthening in the marketplace. Specific variances include a $4.7 million
increase in sales of motion control products (of which $2.9 million was from
Airflyte Electronics, acquired in June 2009); a $4.4 million increase in sales
of microelectronic modules; a $2.9 million increase in sales of Integrated
Circuits (“ICs”); and a $1.4 million increase in sales of
components.
Net sales
in the ATS segment increased 23% to $85.0 million for the three months ended
March 31, 2010 from $69.2 million for the three months ended March 31, 2009. The
increase in sales was primarily due to a volume driven $13.1 million
increase in sales of wireless test products; a volume driven $3.0 million
increase in sales of synthetic test products; and a $2.5 million increase in
sales from VI Technology, acquired in March 2009; partially offset by a volume
driven $1.9 million decrease in sales of avionic products.
Gross Profit. Gross profit
equals net sales less cost of sales. Cost of sales includes materials, direct
labor, amortization of capitalized software development costs and overhead
expenses such as engineering labor, fringe benefits, depreciation, allocable
occupancy costs and manufacturing supplies.
On a
consolidated basis, gross profit was $90.3 million, or 53.6% of net sales, for
the three months ended March 31, 2010 and $66.6 million, or 47.8% of net sales,
for the three months ended March 31, 2009. Both segments contributed to the
increase in gross profits. The increase in gross margin was mainly due to a
shift in the mix of products and a substantial increase in the gross margins of
the ATS segment, principally attributable to increased sales of wireless
products, which have margins higher than the segment average.
Gross Profit
|
||||||||||||||||||||||||
Three Months
|
||||||||||||||||||||||||
Ended
|
% of
|
% of
|
% of
|
|||||||||||||||||||||
March 31,
|
AMS
|
Net Sales
|
ATS
|
Net Sales
|
Total
|
Net Sales
|
||||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||||||
2009
|
$ | 33,095 | 47.1 | % | $ | 33,510 | 48.4 | % | $ | 66,605 | 47.8 | % | ||||||||||||
2010
|
$ | 42,286 | 50.7 | % | $ | 48,011 | 56.5 | % | $ | 90,297 | 53.6 | % |
Gross
margins in the AMS segment were 50.7% for the three months ended March 31, 2010
and 47.1% for the three months ended March 31, 2009. Margins were favorably
impacted by increased sales of microelectronic modules and lCs, which have
margins higher than the segment average. In addition, gross margins improved for
certain component products as a result of increased sales volume, a favorable
sales mix, and cost savings measures.
Gross
margins in the ATS segment were 56.5% for the three months ended March 31, 2010
and 48.4% for the three months ended March 31, 2009. The increase in gross
margins is principally attributable to increased sales of wireless products,
which have margins higher than the segment average.
Selling, General and Administrative
Costs. Selling, general and administrative costs, or SG&A, include
office and management salaries, fringe benefits, commissions, insurance and
professional fees.
- 34
-
On a
consolidated basis SG&A costs increased $423,000, or 1%, to $31.4 million.
As a percentage of sales, SG&A costs decreased from 22.2% for the three
months ended March 31, 2009 to 18.6% for the three months ended March 31,
2010.
Selling, General and Administrative Costs
|
||||||||||||||||||||||||||||
Three Months
|
||||||||||||||||||||||||||||
Ended
|
% of
|
% of
|
% of
|
|||||||||||||||||||||||||
March 31,
|
AMS
|
Net Sales
|
ATS
|
Net Sales
|
Corporate
|
Total
|
Net Sales
|
|||||||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||||||||||
2009
|
$ | 11,019 | 15.7 | % | $ | 15,721 | 22.7 | % | $ | 4,214 | $ | 30,954 | 22.2 | % | ||||||||||||||
2010
|
$ | 10,799 | 12.9 | % | $ | 17,169 | 20.2 | % | $ | 3,409 | $ | 31,377 | 18.6 | % |
In the
AMS segment, SG&A costs decreased $220,000, or 2%, to $10.8 million for the
three months ended March 31, 2010. As a percentage of sales, SG&A costs in
the AMS segment decreased from 15.7% for the three months ended March 31, 2009
to 12.9% for the three months ended March 31, 2010. The components group reduced
SG&A costs by $679,000, primarily due to cost savings initiatives. These
savings in the AMS segment were partially offset by additional costs of $405,000
related to Airflyte Electronics, acquired in June 2009.
In the
ATS segment, SG&A costs increased $1.4 million, or 9%, to $17.2 million for
the three months ended March 31, 2010. As a percentage of sales, SG&A costs
in the ATS segment decreased from 22.7% for the three months ended March 31,
2009 to 20.2% for the three months ended March 31, 2010. The decrease in
SG&A, as a percentage of sales, was primarily the result of our ability to
control costs while sales increased.
Corporate
general and administrative expenses decreased $805,000, primarily due to
reductions in merger related expenses, employee related expenses and
professional fees.
Research and Development Costs.
Research and development costs include materials, engineering labor and
allocated overhead.
On a
consolidated basis, research and development costs increased $2.9 million. As a
percentage of sales, research and development costs decreased from 12.9% for the
three months ended March 31, 2009 to 12.4% for the three months ended March 31,
2010.
Research and Development Costs
|
||||||||||||||||||||||||
Three Months
|
||||||||||||||||||||||||
Ended
|
% of
|
% of
|
% of
|
|||||||||||||||||||||
March 31,
|
AMS
|
Net Sales
|
ATS
|
Net Sales
|
Total
|
Net Sales
|
||||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||||||
2009
|
$ | 7,579 | 10.8 | % | $ | 10,362 | 15.0 | % | $ | 17,941 | 12.9 | % | ||||||||||||
2010
|
$ | 8,709 | 10.4 | % | $ | 12,145 | 14.3 | % | $ | 20,854 | 12.4 | % |
AMS
segment self-funded research and development costs increased $1.1 million, or
15%, to $8.7 million for the three months ended March 31, 2010, primarily due to
increased spending on microelectronic modules. As a percentage of sales, AMS
segment research and development costs decreased from 10.8% to
10.4%.
ATS
segment self-funded research and development costs increased $1.8 million, or
17%, to $12.1 million for the three months ended March 31, 2010, primarily due
to the development of products within our radio test division and wireless
products. As a percentage of sales, ATS research and development costs decreased
from 15.0% to 14.3%.
- 35
-
Amortization of Acquired
Intangibles. Amortization of acquired intangibles increased $452,000 in
the three months ended March 31, 2010 primarily due to additional amortization
of $424,000 related to VI Technology, acquired in March 2009, and $290,000
related to Airflyte Electronics, acquired in June 2009, offset by various net
reductions totaling $262,000. By segment, the amortization decreased $95,000 in
the AMS segment and increased $547,000 in the ATS segment.
Other income (Expense).
Interest expense was $20.8 million for the three months ended March 31,
2010 and $20.6 million for the three months ended March 31, 2009. Other income
(expense) of $222,000 for the three months ended March 31, 2010 consisted of
$329,000 of interest and miscellaneous income, partially offset by $107,000 of
foreign currency transaction losses. Other income (expense) of $(47,000) for the
three months ended March 31, 2009 consisted of $669,000 of foreign currency
transaction losses partially offset by $622,000 of interest and miscellaneous
income.
Income taxes. Primarily due
to interest expense associated with our debt, we currently project we will have
a pre-tax loss in the U.S. for fiscal 2010, but project that we will generate
taxable income from foreign operations. In the fourth quarter of fiscal 2009, we
decided to no longer permanently reinvest post-fiscal 2008 foreign earnings in
our foreign operations and began to distribute a substantial portion of our
foreign earnings to the U.S. to partially fund interest and principal payments
on our debt. Accordingly, we have provided for foreign and U.S. income taxes on
fiscal 2009 and 2010 foreign taxable income. The benefit available for foreign
tax credits against our U.S. income tax on foreign earnings has not been
recognized, because it was not considered to be more likely than not that we
would generate sufficient foreign source income, after allocation of the
significant amount of our interest expense to the foreign source income, to
allow us to utilize the credit. This significantly increased the effective tax
rate for each of fiscal 2009 and fiscal 2010. If factors change that affect our
assessment of the likelihood of whether we can generate sufficient foreign
source income as a result of a reduced amount of allocated interest to the
foreign source income, or otherwise, and we can conclude that it is more likely
than not that we will be able to utilize our foreign tax credits, then we would
recognize this benefit through the elimination of the valuation allowance we
have set up against the foreign tax credits.
Our
income tax benefit was $791,000 for the three months ended March 31, 2010, on
our consolidated pre-tax income of $2.1 million. We had an income tax benefit
for the three months ended March 31, 2009 of $6.4 million on a consolidated
pre-tax loss of $20.1 million, an effective income tax rate of 31.9%. The net
tax benefits are a combination of U.S. tax benefits on domestic losses and
foreign taxes on foreign earnings and, for fiscal 2010, domestic taxes provided
on foreign earnings, as we expect that substantially all these earnings will be
distributed to the U.S. The effective income tax rate for both 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,
for fiscal 2010, is impacted by the valuation allowance recorded for foreign tax
credits, as discussed above.
In the
three months ended March 31, 2010, we paid income taxes of $622,000 and received
tax refunds of $0. In the three months ended March 31, 2009, we paid income
taxes of $597,000 and received tax refunds of $1.3 million.
Net income (loss). Our net
income was $2.9 million for the three months ended March 31, 2010 and our net
loss was $13.7 million for the three months ended March 31, 2009. The $16.6
million improvement is comprised of the following: an increase in sales of $29.0
million resulting in an increase of $23.7 million in gross profit, an
elimination of an in-process research and development charge of $2.3 million,
partially offset by an increase of $3.8 million in operating expenses and a
decrease in our tax benefit of $5.6 million.
- 36
-
Nine
Months Ended March 31, 2010 Compared to Nine Months Ended March 31,
2009
Net Sales. Net sales
increased 6% to $465.3 million for the nine months ended March 31, 2010 from
$437.1 million for the nine months ended March 31, 2009.
Net sales
in the AMS segment increased 10% to $229.9 million for the nine months ended
March 31, 2010 from $208.6 million for the nine months ended March 31, 2009. The
increase in sales was primarily volume driven. Specific variances include a
$10.4 million increase in sales of microelectronic modules; a $9.3 million
increase in sales of ICs; sales of $8.2 million from Airflyte Electronics,
acquired in June 2009; partially offset by a $5.7 million decrease in sales of
components, due to decreased sales volumes in the first half of the year, as
well as certain price reductions created by industry competition.
Net sales
in the ATS segment increased 3% to $235.4 million for the nine months ended
March 31, 2010 from $228.5 million for the nine months ended March 31, 2009. The
increase in sales was primarily due to a volume driven $12.3 million
increase in sales of wireless test products; a $9.8 million increase in
sales from VI Technology, acquired in March 2009; a volume driven $6.2 million
increase in sales of synthetic test products; partially offset by a $9.2 million
decrease in sales of radio test sets, due to a delay in the timing of shipments
on a number of large orders; a volume driven $7.3 million decrease in sales of
avionic products; and a volume driven $3.5 million decrease in sales of
frequency synthesizers.
Gross Profit. On a
consolidated basis, gross profit was $241.9 million, or 52.0% of net sales, for
the nine months ended March 31, 2010 and $207.1 million, or 47.4% of net sales,
for the nine months ended March 31, 2009. Both segments contributed to the
increase in gross profit. The increase in gross margin was mainly due to a shift
in the mix of products and a substantial increase in the gross margins of the
ATS segment, principally attributable to increased sales of wireless products,
which have margins higher than the segment average.
Gross Profit
|
||||||||||||||||||||||||
Nine Months
|
||||||||||||||||||||||||
Ended
|
% of
|
% of
|
% of
|
|||||||||||||||||||||
March 31,
|
AMS
|
Net Sales
|
ATS
|
Net Sales
|
Total
|
Net Sales
|
||||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||||||
2009
|
$ | 98,191 | 47.1 | % | $ | 108,932 | 47.7 | % | $ | 207,123 | 47.4 | % | ||||||||||||
2010
|
$ | 112,487 | 48.9 | % | $ | 129,398 | 55.0 | % | $ | 241,885 | 52.0 | % |
Gross
margins in the AMS segment were 48.9% for the nine months ended March 31, 2010
and 47.1% for the nine months ended March 31, 2009. Margins were favorably
impacted by increased sales of microelectronic modules and lCs, which have
margins higher than the segment average.
Gross
margins in the ATS segment were 55.0% for the nine months ended March 31, 2010
and 47.7% for the nine months ended March 31, 2009. The increase in gross
margins is principally attributable to increased sales of wireless products,
which have margins higher than the segment average.
- 37
-
Selling, General and Administrative
Costs. On a consolidated basis SG&A costs decreased $3.4 million, or
4%, to $93.2 million. As a percentage of sales, SG&A costs decreased from
22.1% for the nine months ended March 31, 2009 to 20.0% for the nine months
ended March 31, 2010.
Selling, General and Administrative Costs
|
||||||||||||||||||||||||||||
Nine Months
|
||||||||||||||||||||||||||||
Ended
|
% of
|
% of
|
% of
|
|||||||||||||||||||||||||
March 31,
|
AMS
|
Net Sales
|
ATS
|
Net Sales
|
Corporate
|
Total
|
Net Sales
|
|||||||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||||||||||
2009
|
$ | 32,104 | 15.4 | % | $ | 49,835 | 21.8 | % | $ | 14,673 | $ | 96,612 | 22.1 | % | ||||||||||||||
2010
|
$ | 31,382 | 13.6 | % | $ | 50,589 | 21.5 | % | $ | 11,217 | $ | 93,188 | 20.0 | % |
In the
AMS segment, SG&A costs decreased $722,000, or 2%, to $31.4 million for the
nine months ended March 31, 2010. As a percentage of sales, SG&A costs in
the AMS segment decreased from 15.4% for the nine months ended March 31, 2009 to
13.6% for the nine months ended March 31, 2010. The components group reduced
SG&A costs by $2.3 million, primarily due to cost savings initiatives. These
savings in the AMS segment were partially offset by additional costs of $1.2
million related to Airflyte Electronics, acquired in June 2009.
In the
ATS segment, SG&A costs increased $754,000, or 2%, to $50.6 million for the
nine months ended March 31, 2010 principally due to the additional cost of $1.9
million related to VI Technology, acquired in March 2009, which was partially
offset by various reductions in the other ATS business units. These reductions
were primarily the result of cost savings initiatives and efforts to consolidate
and reorganize our various European locations. As a percentage of sales,
SG&A costs in the ATS segment decreased from 21.8% for the nine months ended
March 31, 2009 to 21.5% for the nine months ended March 31, 2010, primarily the
result of controlling costs while sales increased.
Corporate
general and administrative expenses decreased $3.5 million, primarily due to
reductions in merger related expenses, employee related expenses and
professional fees.
Research and Development
Costs. On a consolidated basis, research and development costs increased
by $3.3 million. As a percentage of sales, research and development costs was
11.9% for both the nine months ended March 31, 2009 and the nine months ended
March 31, 2010.
Research and Development Costs
|
||||||||||||||||||||||||
Nine Months
|
||||||||||||||||||||||||
Ended
|
% of
|
% of
|
% of
|
|||||||||||||||||||||
March 31,
|
AMS
|
Net Sales
|
ATS
|
Net Sales
|
Total
|
Net Sales
|
||||||||||||||||||
(In thousands, except percentages)
|
||||||||||||||||||||||||
2009
|
$ | 22,178 | 10.6 | % | $ | 29,867 | 13.1 | % | $ | 52,045 | 11.9 | % | ||||||||||||
2010
|
$ | 22,202 | 9.7 | % | $ | 33,094 | 14.1 | % | $ | 55,296 | 11.9 | % |
AMS
segment self-funded research and development costs increased $24,000, to $22.2
million for the nine months ended March 31, 2010. Increases in spending on
microelectronic modules and ICs, were offset by reductions in spending on
components and motion control products. As a percentage of sales, AMS segment
research and development costs decreased from 10.6% to 9.7%.
ATS
segment self-funded research and development costs increased $3.2 million, or
11%, to $33.1 million for the nine months ended March 31, 2010, primarily due to
the development of next generation products in our radio and avionics test
division and wireless products. As a percentage of sales, ATS research and
development costs increased from 13.1% to 14.1%.
- 38
-
Amortization of Acquired
Intangibles. Amortization of acquired intangibles decreased $1.0 million
in the nine months ended March 31, 2010 primarily due to certain intangibles
becoming fully amortized during the first quarter of fiscal 2009. The decrease
is partially offset by additional amortization of $1.6 million related to VI
Technology, acquired in March 2009, and $871,000 related to Airflyte
Electronics, acquired in June 2009. By segment, the amortization decreased $1.7
million in the AMS segment and increased $637,000 in the ATS
segment.
Loss on Liquidation of Foreign
Subsidiary. During the nine months ended March 31, 2010, we recognized a
non-cash $7.7 million loss on liquidation of a foreign subsidiary relating to
the write-off of the foreign currency translation balance upon substantial
dissolution. There was no similar charge recorded in the nine months ended March
31, 2009.
Other income (Expense).
Interest expense was $63.3 million for the nine months ended March 31,
2010 and $63.0 million for the nine months ended March 31, 2009. Other income
(expense) of $701,000 for the nine months ended March 31, 2010 consisted of $1.4
million of interest and miscellaneous income, partially offset by $692,000 of
foreign currency transaction losses. Other income (expense) of $12.4 million for
the nine months ended March 31, 2009 consisted of $10.5 million of foreign
currency transaction gains and $1.9 million of interest and miscellaneous
income.
Income taxes. Primarily due
to interest expense associated with our debt, we currently project we will have
a pre-tax loss in the U.S. for fiscal 2010, but project that we will generate
taxable income from foreign operations. In the fourth quarter of fiscal 2009, we
decided to no longer permanently reinvest post-fiscal 2008 foreign earnings in
our foreign operations and began to distribute a substantial portion of our
foreign earnings to the U.S. to partially fund interest and principal payments
on our debt. Accordingly, we have provided for foreign and U.S. income taxes on
fiscal 2009 and 2010 foreign taxable income. The benefit available for foreign
tax credits against our U.S. income tax on foreign earnings has not been
recognized, because it was not considered to be more likely than not that we
would generate sufficient foreign source income, after allocation of the
significant amount of our interest expense to the foreign source income, to
allow us to utilize the credit. This significantly increased the effective tax
rate for each of fiscal 2009 and fiscal 2010. If factors change that affect our
assessment of the likelihood of whether we can generate sufficient foreign
source income as a result of a reduced amount of allocated interest to the
foreign source income, or otherwise, and we can conclude that it is more likely
than not that we will be able to utilize our foreign tax credits, then we would
recognize this benefit through the elimination of the valuation allowance we
have set up against the foreign tax credits.
Our
provision for income taxes was $4.9 million for the nine months ended March 31,
2010, on a consolidated pre-tax loss of $23.4 million. We had an income tax
benefit for the nine months ended March 31, 2009 of $17.3 million on a
consolidated pre-tax loss of $42.0 million, an effective income tax rate of
41.2%. The provisions are a combination of U.S. tax benefits on domestic losses
and foreign taxes on foreign earnings and, for fiscal 2010, domestic taxes
provided on foreign earnings, as we expect that substantially all these earnings
will be distributed to the U.S. The effective income tax rate for both 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, for fiscal 2010, is impacted by the valuation allowance recorded for
foreign tax credits, as discussed above.
In the
nine months ended March 31, 2010, we paid income taxes of $5.2 million and
received tax refunds of $627,000. In the nine months ended March 31, 2009, we
paid income taxes of $3.0 million and received tax refunds of $2.0
million.
Net Loss.
Our net loss was $28.3
million for the nine months ended March 31, 2010 and $24.7 million for the nine
months ended March 31, 2009. The $3.6 million increase in net loss is comprised
of the following: a non-cash loss on liquidation of a foreign subsidiary of $7.7
million in the nine months ended March 31, 2010; an unfavorable variance in
foreign currency gains/losses of $11.2 million; and an increase in income taxes
of $22.2 million; offset by an increase in sales of $28.2 million, resulting in
an increase of $34.8 million in gross profit; a reduction in in-process research
and development of $2.3 million; and a reduction of $1.2 million of operating
expenses.
- 39
-
Liquidity
and Capital Resources
As of
March 31, 2010, we had $96.3 million of cash and cash equivalents, $256.8 million in working
capital and our current ratio was 2.9 to 1.
In early
February 2008, when auctions began to fail, our gross investment in marketable
securities consisted of $46.5 million of auction rate securities. Auction rate
securities represent long-term variable rate bonds that generally carry
maturities of ten years to thirty-five years from the date of issuance, and
whose rates are tied to short-term interest rates that are reset through an
auction process every seven to thirty-five days, and are classified as available
for sale securities. From early February 2008 to June 30, 2009, $26.5 million of
auction rate securities were redeemed by the issuers or sold at par. During the
nine months ended March 31, 2010, an additional $8.9 million of our auction rate
securities were redeemed by the issuer at an average of 96.4% of
par. The resulting $320,000 realized loss was recorded in the
statement of operations for the three and nine months ended March 31,
2010. The $11.1 million of auction rate securities that we currently
hold are partially offset by a valuation allowance of $1.3 million.
All but
one (with the one security having a carrying value of $1.7 million and a rating
of A-) of our remaining auction rate securities retain a triple-A rating by at
least one nationally recognized statistical rating organization.
Should
credit market disruptions continue or increase in magnitude, we may be required
to record a further impairment on our investments or consider that an ultimate
liquidity event may take longer than currently anticipated.
Our
principal liquidity requirements are to service our debt and interest and meet
our working capital and capital expenditure needs. As of March 31, 2010, we had
$898.7 million of debt outstanding (of which $893.2 million was long-term),
including approximately $511.8 million under our senior secured credit facility,
$225.0 million of senior notes and $160.8 million under our senior subordinated
unsecured credit facility, including paid-in-kind
interest. Additionally, at March 31, 2010 we had $50.0 million of
availability under the revolving portion of our senior secured credit
facility.
The
following is a summary of required principal repayments of our debt for the next
five years and thereafter as of March 31, 2010:
Twelve Months Ended
March 31,
|
(In thousands)
|
|||
2011
|
$ | 5,516 | ||
2012
|
5,610 | |||
2013
|
5,635 | |||
2014
|
5,250 | |||
2015
|
876,702 | |||
Thereafter
|
- | |||
Total
|
$ | 898,713 |
- 40
-
As of
March 31, 2010, we and our subsidiaries were in compliance with all of the
covenants contained in our loan agreements. Certain loan covenants
are based on Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA (net income
(loss) before interest expense, income taxes, depreciation and amortization)
adjusted to add back certain non-cash, non-recurring and other items, as
required by various covenants in our debt agreements. Our use of the
term Adjusted EBITDA may vary from others in our industry. EBITDA and
Adjusted EBITDA are not measures of operating income (loss), performance or
liquidity under U.S. GAAP and are subject to important limitations. A
reconciliation of net income (loss), which is a U.S. GAAP measure of our
operating results, to Adjusted EBITDA, as defined in our debt agreements, is as
follows:
Three Months ended March 31,
|
Nine Months Ended March 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Net
income (loss)
|
$ | 2,856 | $ | (13,734 | ) | $ | (28,301 | ) | $ | (24,738 | ) | |||||
Interest
expense
|
20,815 | 20,566 | 63,272 | 63,031 | ||||||||||||
Provision
(benefit) for income taxes
|
(791 | ) | (6,416 | ) | 4,908 | (17,298 | ) | |||||||||
Depreciation
and amortization
|
20,404 | 20,008 | 62,178 | 63,659 | ||||||||||||
EBITDA
|
43,284 | 20,424 | 102,057 | 84,654 | ||||||||||||
Non-cash
purchase accounting adjustments
|
31 | 2,355 | 342 | 2,531 | ||||||||||||
Merger
related expenses
|
647 | 815 | 2,111 | 3,621 | ||||||||||||
Restructuring
costs and related pro forma savings from such activities(a)
|
105 | 4,457 | 356 | 6,667 | ||||||||||||
Share-based
compensation (b)
|
518 | 489 | 1,563 | 1,466 | ||||||||||||
Non-cash
loss on liquidation of foreign subsidiary
|
- | 2,250 | 7,696 | 2,250 | ||||||||||||
Other
defined adjustments (c)
|
(4 | ) | (1,676 | ) | (346 | ) | 5,299 | |||||||||
Adjusted
EBITDA
|
$ | 44,581 | $ | 29,114 | $ | 113,779 | $ | 106,488 |
(a)
|
Primarily
reflects costs associated with the reorganization of our U.K. operations
and the pro forma savings related thereto. Pro forma savings
reflects the amount of costs that we estimate would have been eliminated
during the period in which a restructuring occurred had the restructuring
occurred as of the first day of that
period.
|
(b)
|
Reflects
non-cash share-based compensation
expense.
|
(c)
|
Reflects
other adjustments required in calculating our debt covenant compliance.
These other defined items include non-cash inventory adjustments for a
discontinued product and pro forma EBITDA for periods prior to the
acquisition dates for companies acquired during the periods
presented.
|
Financial
covenants in our senior secured credit facility include (i) a maximum leverage
ratio of total debt (less up to $15.0 million of unrestricted cash) to Adjusted
EBITDA, as defined in our senior secured credit facility, and (ii) maximum
consolidated capital expenditures. The maximum leverage ratio permitted for the
twelve months ended March 31, 2010 and 2009 was 7.10 and 8.00, respectively,
whereas our actual leverage ratio was 5.79 and 6.08, respectively. At the end of
fiscal years 2010 and 2011 the maximum leverage ratio permitted decreases to
6.80 and 5.90, respectively.
Our
senior secured credit facility contains various additional customary affirmative
and negative covenants (subject to materiality thresholds, baskets, and
customary exceptions and qualifications), including, but not limited to,
restrictions on the ability of the borrowers and its subsidiaries to (i) dispose
of assets or stock; (ii) incur additional indebtedness and guarantee
obligations; (iii) pay certain dividends; (iv) create liens on assets; (v) make
investments, loans or advances; (vi) restrict distributions to the borrowers or
guarantors from their subsidiaries; (vii) engage in mergers or consolidations;
(viii) engage in certain transactions with affiliates; (ix) incur additional
negative pledges; (x) incur capital expenditures; (xi) change our fiscal year or
accounting practices or the lines of business in which we and our subsidiaries
are involved; (xii) enter into sale-leaseback transactions; (xiii) prepay
principal of, premium, or interest on, or redeem, purchase, retire, defease, or
create a sinking fund or make a similar payment with respect to, any
subordinated indebtedness and certain other debt; (xiv) change the conduct of
business; (xv) conduct activities of any parent holding company; or (xvi) amend
our organizational documents.
- 41
-
If for
any reason we fail to comply with the covenants in our senior secured credit
facility, we would be in default under the terms of our senior secured credit
facility. If such a default were to occur, the lenders under our
senior secured credit facility could elect to declare all amounts outstanding
under our senior secured credit facility immediately due and payable, and the
lenders would not be obligated to continue to advance funds to us. In
addition, if such a default were to occur, any amounts then outstanding under
the senior subordinated unsecured credit facility or senior notes could become
immediately due and payable. If the amounts outstanding under these
debt agreements are accelerated, our assets may not be sufficient to repay in
full the money owed to our debt holders.
We expect
that cash generated from operating activities and availability under the
revolving portion of our senior secured credit facility will be our principal
sources of liquidity. Our ability to make payments on and to refinance our
indebtedness and to fund working capital needs and planned capital expenditures
will depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive and other factors
that are beyond our control. In addition, to the extent we have consolidated
excess cash flows, as defined in the credit agreement governing our senior
secured credit facility, we must use specified portions of the excess cash flows
to prepay senior secured debt. Based on our current level of operations, we
believe our cash flow from operations and available borrowings under our senior
secured credit facility will be adequate to meet our liquidity needs for at
least the next twelve months. We cannot assure you, however, that our business
will generate sufficient cash flow from operations, or those future borrowings
will be available to us under our senior secured credit facility in an amount
sufficient to enable us to repay our indebtedness or to fund other liquidity
needs. We may need to refinance all or a portion of our indebtedness on or
before the maturity thereof. We cannot assure you that we will be
able to refinance any of our indebtedness at commercially reasonable terms or at
all.
Cash
Flows
For the
nine months ended March 31, 2010, our cash flow provided by operations was $52.3
million. Our investing activities used cash of $7.6 million, primarily for
capital expenditures of $13.2 million and a $4.0 million contingent
consideration payment for the purchase of a business, partially offset by $8.6
million in proceeds from the sale of marketable securities and $1.0 million from
the sale of property, plant and equipment. Our financing activities used cash of
$4.0 million to repay indebtedness.
For the
nine months ended March 31, 2009, our cash flow provided by operations was $35.0
million. Our investing activities used cash of $19.4 million, primarily $13.0
million for capital expenditures and $7.8 million of payments for the purchase
of businesses. Our financing activities used cash of $4.5 million, primarily to
repay $4.1 million of indebtedness.
Capital
Expenditures
Capital
expenditures were $13.2 million and $13.0 million, for the nine months ended
March 31, 2010 and 2009, respectively. The maximum consolidated
capital expenditures permitted in our debt covenants for fiscal year 2010 is
$25.0 million. Our capital expenditures primarily consist of equipment
replacements.
- 42
-
Contractual
Obligations
The
following table summarizes our obligations and commitments to make future
payments under debt and other obligations as of March 31, 2010:
Payments Due By Period (1)
|
||||||||||||||||||||
(In millions)
|
||||||||||||||||||||
Beyond
|
||||||||||||||||||||
Total
|
Year 1
|
Years 2 - 3
|
Years 4 - 5
|
5 Years
|
||||||||||||||||
Senior
secured credit facility
|
$ | 511.8 | $ | 5.2 | $ | 10.5 | $ | 496.1 | $ | - | ||||||||||
Senior
notes
|
225.0 | - | - | 225.0 | - | |||||||||||||||
Subordinated
unsecured credit facility
|
160.8 | - | - | 160.8 | - | |||||||||||||||
Other
long-term debt
|
1.1 | 0.4 | 0.7 | - | - | |||||||||||||||
Operating
leases
(2)
|
19.3 | 6.6 | 8.0 | 3.0 | 1.7 | |||||||||||||||
Employment
agreements
|
7.1 | 3.8 | 3.0 | 0.3 | - | |||||||||||||||
Advisory
fee (3)
|
7.4 | 2.2 | 4.4 | 0.8 | - | |||||||||||||||
Total
|
$ | 932.5 | $ | 18.2 | $ | 26.6 | $ | 886.0 | $ | 1.7 |
(1)
|
Amounts
do not include interest payments.
|
(2)
|
We
do not expect any future minimum sub-lease rentals associated with
operating lease commitments shown in the above
table.
|
(3)
|
The
annual advisory fee is payable to affiliates of our sponsors – The Veritas
Capital Fund III, L.P., Golden Gate Private Equity, Inc. and GS Direct,
L.L.C. - throughout the term of an advisory agreement, which has an
initial term expiring on December 31, 2013 and is automatically renewable
for additional one year terms thereafter unless terminated. For purposes
of this table we have assumed that such agreement terminates December 31,
2013. The annual fee is the greater of $2.2 million or 1.8% of Adjusted
EBITDA (as defined in the agreement governing our senior secured credit
facility) for the prior fiscal
year.
|
We may be
required to pay contingent consideration for business acquisitions up to the
following amounts: (i) $5 million on October 31, 2010 and $6 million on October
31, 2011 in connection with our acquisition of Gaisler if certain financial
targets are achieved for fiscal 2010 and fiscal 2011, respectively; (ii) $3
million on October 31, 2010 in connection with our acquisition of Airflyte
Electronics if certain financial targets are achieved for fiscal 2010; and (iii)
an aggregate of $2.0 million over the next five years in connection with our
acquisition of Hi-Rel Components if certain financial targets are achieved
through fiscal 2014.
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 March 31, 2010, will have a material
adverse affect on our liquidity.
Off-Balance
Sheet Arrangements
We do not
maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have
material current or future effect upon our financial condition or results of
operations.
Seasonality
Historically
our net sales and earnings increase sequentially from quarter to quarter within
a fiscal year, but the first quarter is typically less than the previous year’s
fourth quarter.
- 43
-
Critical
Accounting Policies and Estimates
This
discussion and analysis of the Company’s financial condition and results of
operations is based upon the unaudited condensed consolidated financial
statements included in this Quarterly Report, which have been prepared in
accordance with U.S. GAAP and applicable SEC regulations for preparation of
interim financial statements.
The
preparation of financial statements and related disclosures in conformity with
U.S. GAAP requires that management of the Company make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the more significant estimates included in our
consolidated financial statements are revenue and cost recognition under
long-term contracts; the valuation of accounts receivable, inventories,
investments and deferred tax assets; the depreciable lives of fixed assets and
useful lives of amortizable intangible assets; the valuation of assets acquired
and liabilities assumed in business combinations; the recoverability of
long-lived amortizable intangible assets, tradenames and goodwill; share-based
compensation; restructuring charges; asset retirement obligations; fair value
measurement of financial assets and liabilities and certain accrued expenses and
contingencies.
We are
subject to uncertainties such as the impact of future events, economic,
environmental and political factors and changes in the business climate;
therefore, actual results may differ from those estimates. When no estimate in a
given range is deemed to be better than any other when estimating contingent
liabilities, the low end of the range is accrued. Accordingly, the accounting
estimates in the preparation of our consolidated financial statements will
change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. Changes in
estimates are made when circumstances warrant them. Such changes and refinements
in estimation methodologies are reflected in reported results of operations; if
material, the effects of changes in estimates are disclosed in the notes to the
condensed consolidated financial statements.
We
believe that the critical accounting policies involving significant estimates
listed below are important to the portrayal of our financial condition, results
of operations and cash flows, and require critical management judgments and
estimates about matters that are inherently uncertain.
|
·
|
Revenue
Recognition
|
|
·
|
Acquisition
Accounting
|
|
·
|
Long-Lived
Assets
|
|
·
|
Income
Taxes
|
|
·
|
Foreign
Currency Translations
|
|
·
|
Financial Instruments and
Derivatives
|
Further
information regarding these policies appears within the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2009. During the nine month period ended March 31, 2010, there were
no significant changes to any critical accounting policies or to the related
estimates and judgments involved in applying those policies, except that
effective July 1, 2009 we adopted new authoritative revenue recognition
principles, the effect of which was immaterial. This is further
discussed in Note 1 to the unaudited financial statements contained elsewhere in
this Form 10-Q.
- 44
-
Recently
Adopted Accounting Pronouncements
See Note
2 of the notes to the unaudited condensed consolidated financial
statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted
See Note
2 of the notes to the unaudited condensed consolidated financial
statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Interest Rate
Risk. We are subject to interest rate risk in connection with
borrowings under our senior secured credit facility. Although we
currently have interest rate swap agreements hedging portions of this debt,
these will expire before the borrowings are fully repaid. As of March 31, 2010,
we have $511.8 million outstanding under the term-loan portion of our senior
secured credit facility, the un-hedged portion of which is subject to variable
interest rates. Each change of 1% in interest rates would result in a $1.7
million change in our annual interest expense on the un-hedged portion of the
term-loan borrowings and a $507,000 change in our annual interest expense on the
revolving loan borrowings, assuming the entire $50.0 million was
outstanding. Any debt we incur in the future may also bear interest
at floating rates.
Foreign Currency
Risk. Foreign
currency contracts are used to protect us from exchange rate fluctuation from
the time customers are invoiced in local currency until such currency is
exchanged for U.S. dollars. We periodically enter into foreign currency
contracts, which are not designated as hedges, and the change in the fair value
is included in income currently within other income (expense). As of March 31,
2010, we had $43.4 million of notional value foreign currency forward contracts
maturing through April 30, 2010. Notional amounts do not quantify risk or
represent assets or liabilities of the Company, but are used in the calculation
of cash settlements under the contracts. The fair value of these contracts at
March 31, 2010 was an asset of $446,000. If foreign currency exchange
rates (primarily the British pound and the Euro) change by 10% from the levels
at March 31, 2010, the effect on our comprehensive income would be approximately
$20.7 million.
Inflation
Risk. Inflation has not had a material impact on our results
of operations or financial condition during the preceding three
years.
ITEM
4T. CONTROLS AND
PROCEDURES
Our
disclosure controls and procedures under the Securities Exchange Act of 1934, as
amended, are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. The Principal Executive Officer and the Principal Financial Officer,
with the assistance from other members of management, have reviewed the
effectiveness of our disclosure controls and procedures as of March 31, 2010
and, based on their evaluation, have concluded that the disclosure controls and
procedures were effective as of such date.
There
have been no changes in our internal controls over financial reporting that
occurred during the quarter ended March 31, 2010 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
- 45
-
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
On
October 14, 2009, BAE Systems Information and Electronic Systems (“BAE”)
commenced an action against both us and one of our subsidiaries in the United
States District Court for the District of Delaware. BAE essentially
is alleging that under a subcontract it entered into with us in 2002, BAE
provided to us certain proprietary information and know how relating to a high
performance direct infrared countermeasure system for use in military aircraft
and certain other platforms (“DIRCM System”), which enabled us to fabricate for
BAE an assembly component of the third generation of the DIRCM
System. BAE is alleging that, in violation of the provisions of the
subcontract and a Proprietary Information Agreement, we fabricated or
facilitated the fabrication of one or more items that were identical or
substantially identical to items that we exclusively fabricated for BAE under
the subcontract. BAE further claims that our actions ostensibly
enabled a prime competitor of BAE to build and market, in competition with BAE,
an infrared countermeasure system that included an unlawful copy of the
component. Based on these allegations, BAE has asserted claims
against us for patent infringement, trade secret misappropriation, breach of
contract, conversion and unjust enrichment and has requested, by way of relief,
unspecified damages, injunctive relief and an accounting. We have
evaluated BAE’s claims and believe that there is no basis for the allegations or
claims made by BAE. Nevertheless, there can be no assurance that we
will prevail in the matter. We do not believe that the ultimate
resolution of this matter will have a material adverse effect on our financial
position, results of operations, liquidity or capital resources.
Reference
is made to Item 3 of our Fiscal 2009 Form 10-K for information as to other legal
matters and proceedings.
Item 1A. Risk
Factors
There
have been no material changes in our risk factors disclosed in our Fiscal 2009
Form 10-K.
Item
2. Unregistered Sales of Equity Securities and
Use of Proceeds
None
Item
3. Defaults upon Senior Securities
None
Item
4. [Removed and Reserved]
None
Item 5. Other
Information
None
- 46
-
Item
6. Exhibits
Exhibit No.
|
Exhibit Description
|
|
31.1
|
Certification
pursuant to Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Chief Executive
Officer)
|
|
31.2
|
Certification
pursuant to Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Chief Financial
Officer)
|
|
31.3
|
Certification
pursuant to Rules 13a-14(a)/15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Principal Accounting
Officer)
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Chief Executive
Officer)
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Chief Financial
Officer)
|
- 47
-
SIGNATURE
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)
|
||
May
12, 2010
|
/s/
John Adamovich, Jr.
|
|
John
Adamovich, Jr.
|
||
Senior
Vice President and
|
||
Chief
Financial Officer
|
||
- 48
-
EXHIBIT
INDEX
Exhibit No.
|
Exhibit Description
|
|
31.1
|
Certification
pursuant to Rules 13a-14(a)/15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive
Officer)
|
|
31.2
|
Certification
pursuant to Rules 13a-14(a)/15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
Financial Officer)
|
|
31.3
|
Certification
pursuant to Rules 13a-14(a)/15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting
Officer)
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive
Officer)
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial
Officer)
|
- 49
-