<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number 0-14224
IFR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 48-0777904
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10200 WEST YORK STREET, WICHITA, KANSAS 67215
(Address and zip code of principal executive offices)
(316) 522-4981
(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 periods 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 ____.
There were 5,416,624 shares of common stock, par value $.01 per share, of
the Registrant outstanding as of January 10, 1997.
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IFR SYSTEMS, INC.
FORM 10 - Q
INDEX
PART I -- FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1996
and December 31, 1996 3
Condensed Consolidated Statements of Income for the three
and six months ended December 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 10
SIGNATURES 11
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
(UNAUDITED) (NOTE)
(000'S OMITTED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 839 $ 266
Accounts receivable, less $435 and $431
allowance for doubtful accounts, respectively 19,663 16,494
Inventories:
Finished products 9,472 9,146
Work in process 7,907 7,167
Materials 7,601 7,513
---------- ----------
24,980 23,826
Prepaid expenses and sundry 246 150
Deferred income taxes 1,032 1,032
---------- ----------
TOTAL CURRENT ASSETS 46,760 41,768
PROPERTY AND EQUIPMENT
Property and equipment 17,326 15,487
Allowances for depreciation (deduction) (9,405) (8,115)
---------- ----------
7,921 7,372
PROPERTY UNDER CAPITAL LEASE
Building and machinery 3,220 3,435
Amortization (deduction) (1,203) (1,328)
---------- ----------
2,017 2,107
OTHER ASSETS
Cost in excess of net assets acquired, less
amortization of $2,066 and $1,818, respectively 8,686 8,647
Patents, trademarks and other intangibles, less
amortization of $1,637 and $1,492, respectively 170 315
Loan proceeds appropriated for debt service
and other 491 504
---------- ----------
9,347 9,466
---------- ----------
$ 66,045 $ 60,713
---------- ----------
---------- ----------
</TABLE>
Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
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<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
------------ ----------
(UNAUDITED) (NOTE)
(000'S OMITTED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (Note 2) $ 6,855 $ 3,065
Accounts payable 3,272 3,218
Accrued compensation and payroll taxes 3,817 4,207
Other liabilities and accrued expenses 2,682 1,566
Current maturity of capital lease obligations 228 249
Current maturity of long-term debt (Note 3) 67 1,649
Federal and state income taxes and local taxes 1,075 541
---------- ----------
TOTAL CURRENT LIABILITIES 17,996 14,495
CAPITAL LEASE OBLIGATIONS 1,993 2,110
LONG-TERM DEBT (NOTE 3) 693 645
DEFERRED INCOME TAXES 95 95
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value---authorized
1,000,000 shares, none issued --- ---
Common stock, $.01 par value---authorized
50,000,000 shares, issued 6,177,500 shares 62 62
Additional paid-in capital 6,409 6,135
Cost of common stock in treasury---761,584
and 654,195 shares, respectively (deduction) (7,636) (5,708)
Cumulative translation adjustment 579 (149)
Retained earnings 45,854 43,028
---------- ----------
45,268 43,368
---------- ----------
$ 66,045 $ 60,713
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
4
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------- --------- --------- ---------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SALES $ 26,987 $ 23,507 $ 50,245 $ 43,364
COST OF PRODUCTS SOLD 16,285 14,872 30,679 27,655
--------- --------- --------- ---------
GROSS PROFIT 10,702 8,635 19,566 15,709
OPERATING EXPENSES
Selling 3,275 2,675 5,807 5,060
Administrative 2,081 1,628 4,035 3,122
Engineering 2,773 2,101 5,144 4,473
--------- --------- --------- ---------
8,129 6,404 14,986 12,655
--------- --------- --------- ---------
OPERATING INCOME 2,573 2,231 4,580 3,054
OTHER INCOME (EXPENSE) 76 (83) 71 (233)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 2,649 2,148 4,651 2,821
INCOME TAXES 1,033 855 1,825 1,120
--------- --------- --------- ---------
NET INCOME $ 1,616 $ 1,293 $ 2,826 $ 1,701
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income Per Common Share $ 0.29 $ 0.24 $ 0.50 $ 0.31
--------- --------- --------- ---------
--------- --------- --------- ---------
Average Common Shares
Outstanding 5,569 5,489 5,602 5,489
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
5
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1996 1995
---------- ----------
(000'S OMITTED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,826 $ 1,701
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property
and equipment 1,189 1,057
Amortization of intangibles 393 416
Changes in operating assets and liabilities:
Accounts receivable (3,456) (4,708)
Inventories (1,154) 786
Other current assets (96) (67)
Accounts payable and accrued liabilities 780 (571)
Other current liabilities 534 797
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 1,016 (589)
INVESTING ACTIVITIES
Purchases of property and equipment (1,444) (801)
Sundry 13 (24)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,431) (825)
FINANCING ACTIVITIES
Purchases of capital stock for treasury (3,114) (235)
Principal payment on capital lease obligations (138) (95)
Principal payment on long-term debt (183) (33)
Principal payments on short-term bank borrowings (12,890) (9,145)
Proceeds from short-term bank borrowings 16,680 11,230
Proceeds from exercise of common stock options 286 20
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 641 1,742
Effect of exchange rate changes on cash 347 (47)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 573 281
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 266 662
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 839 $ 943
--------- ---------
--------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
6
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IFR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1996
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
December 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1997. For further information, refer to
the Consolidated Financial Statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended June 30, 1996.
NOTE 2 -- SHORT TERM BANK BORROWINGS
The Company has unsecured lines of credit with a bank whereby it could
borrow in the aggregate up to $15,000,000 at interest rates approximating the
prime rate charged by major banks. At December 31, 1996, the effective interest
rate charged by the bank was 7.75 percent and the Company had unused lines of
credit aggregating $8,145,000.
NOTE 3 -- LONG-TERM DEBT
The Company had a note payable due to York 1995 Limited, related to the
acquisition made during June 1995. Final payment was made on December 31, 1996
via 80,000 shares of common stock and cash of $166,000. At December 31, 1996,
no balance due is remaining.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales for the quarter ended December 31, 1996 increased $3,480,000, or 15
percent compared to the same period in the prior year. This increase was
primarily a result of increased sales of communication test equipment which was
up 33 percent over the prior year quarter and avionics test equipment, up 45
percent over the previous year period. Included in the sales of communications
test equipment were sales to the U.S. Army of $804,000, an increase of 34
percent as compared to the previous year
7
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quarter. Sales of test and measurement (spectrum analyzers) and fiber optics
test equipment were essentially flat compared to the prior year quarter.
Gross margin for the current quarter was 40 percent compared to 37 percent
for the previous year quarter. This improvement is related to a more favorable
product mix and improved manufacturing efficiencies.
Total operating expenses as percent of sales increased three percent from
the prior year quarter. Selling expenses increased one percent as percent of
sales, which was related to higher commissions expense during the period and the
addition of sales and marketing personnel. Administrative expenses increased
$453,000, or as a percent of sales, from seven percent to eight percent. This
increase is related to recruiting costs incurred during the period. Engineering
expenses increased as a percent of sales from nine percent to ten percent. The
increase in engineering expenses is primarily due to the expansion of the
Company's engineering staff.
Net other income was $76,000 for the quarter compared to net other expense
of $83,000 in the prior year quarter. This improvement is related to a
favorable foreign currency exchange rate during the period.
The estimated effective income tax rate was 39 percent as compared to 40
percent in the previous year quarter. The decrease in the rate is related to
the anticipated research and development credits for the current year and an
increase in the estimated annual pre-tax income relative to the amount of non-
deductible goodwill amortization.
Sales for the six months ended December 31, 1996 increased $6,881,000, or
16% compared to a year ago. Sales of communications test equipment was up 23
percent as compared to the prior year. Sales of avionics test equipment was up
39 percent as compared to the previous year period. Sales of Test and
Measurement (spectrum analyzers) equipment were flat compared to the prior year,
while Fiber Optics test equipment was up ten percent on a year to year basis.
Gross margins were 39 percent compared to 36 percent for the prior year.
Operating expenses increased as a percent of sales one percent compared to the
previous year. Selling and engineering expenses remained unchanged as a percent
of sales while administrative expenses as percent of sales increased one
percent. This increase is related to higher recruiting costs for the period.
Net other income was $71,000 for the six month ended period compared to net
other expense of $233,000 in the previous year. This improvement is related to
reduced interest expense and a favorable foreign currency exchange rate for the
year.
The estimated effective income tax rate was 39 percent for the six month
ended period compared to 40 percent in the previous year. The decrease in the
effective rate is related to the anticipated research and development credits
for the current year and an increase in the estimated annual pre-tax income
relative to the amount of non-deductible goodwill amortization.
8
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LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $994,000 for the six month period
ended December 31, 1996. This compares to cash flows used in operations of
$589,000 in the prior year period. This increase is primarily related to an
increase in accounts payable and accrued liabilities of $780,000 for the six
months ended as compared to a decrease of $571,000 in the prior year period.
Working capital increased from $27,273,000 at June 30, 1996 to $28,764,000 at
December 31, 1996.
On September 20, 1996, the Board of Directors of the Company authorized the
repurchase of up to 500,000 shares of the Company's common stock. The main
purpose of the shares buyback program is to offset stock option exercises from
treasury stock and as a utilization of the anticipated excess cash flow during
the year. As of December 31, 1996, the company had purchased an aggregate of
63,012 shares under the program.
The Company has available unsecured lines of credit for $15,000,000 which
expire on June 30, 1997. At December 31, 1996, $6,855,000 was outstanding under
the lines of credit.
The Company anticipates that available lines of credit and funds generated
from operations will be adequate to meet capital asset expenditures and working
capital needs for the current fiscal year ending June 30, 1997.
9
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.0 Statement Re: Computation of Per Share Earnings
27.0 Financial Data Schedule
No form 8-K was filed during the quarter ended December 31, 1996.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFR SYSTEMS, INC.
Date: January 27, 1997 /s/ Alfred H. Hunt, III
---------------- ---------------------------------------
Alfred H. Hunt, III,
President and CEO
(Duly authorized officer)
/s/ Jeffrey A. Bloomer
---------------------------------------
Jeffrey A. Bloomer
Chief Financial Officer
and Treasurer
(Principal financial and chief
accounting officer)
11
<PAGE>
Exhibit (11.0)
IFR SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
--------- --------- --------- ---------
(000's OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 5,358 5,489 5,409 5,489
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 211 111 193 133
--------- --------- --------- ---------
Totals 5,569 5,600 5,602 5,622
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income $ 1,616 $ 1,293 $ 2,826 $ 1,701
--------- --------- --------- ---------
--------- --------- --------- ---------
Per Share Amount $ 0.29 $ 0.23 $ 0.50 $ 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED:
Average shares outstanding 5,358 5,489 5,409 5,489
Net effect of dilutive stock
options-based on the treasury
stock method using the period-
end market price, if greater
than average market price 218 111 225 133
Assumed conversion of 10%
convertible notes 4 16 4 16
--------- --------- --------- ---------
Totals 5,580 5,616 5,638 5,638
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Income $ 1,616 $ 1,293 $ 2,826 $ 1,701
Add 10% convertible note interest,
net of federal income tax effect 1 2 2 4
--------- --------- --------- ---------
Totals $ 1,617 $ 1,295 $ 2,828 $ 1,705
--------- --------- --------- ---------
--------- --------- --------- ---------
Per Share Amount $ 0.29 $ 0.23 $ 0.50 $ 0.30
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM FORM
10-Q FOR DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 839
<SECURITIES> 0
<RECEIVABLES> 20098
<ALLOWANCES> 435
<INVENTORY> 24980
<CURRENT-ASSETS> 46760
<PP&E> 20546
<DEPRECIATION> 10608
<TOTAL-ASSETS> 66045
<CURRENT-LIABILITIES> 17996
<BONDS> 2686
0
0
<COMMON> 62
<OTHER-SE> 45206
<TOTAL-LIABILITY-AND-EQUITY> 66045
<SALES> 50245
<TOTAL-REVENUES> 50245
<CGS> 30679
<TOTAL-COSTS> 45665
<OTHER-EXPENSES> 52
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> 4651
<INCOME-TAX> 1825
<INCOME-CONTINUING> 2826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2826
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
