<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, 1997
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 8,225,445 shares of common stock, par value $.01 per share, of
the Registrant outstanding as of January 9, 1998.
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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, 1997
and December 31, 1997 3
Condensed Consolidated Statements of Income for the three
and six months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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
DECEMBER 31, JUNE 30,
1997 1997
------------- ---------
(UNAUDITED) (NOTE)
ASSETS (000'S OMITTED)
CURRENT ASSETS
Cash and cash equivalents $ 6,761 $ 2,379
Accounts receivable, less $530 and $500
allowance for doubtful accounts, respectively 19,442 19,707
Inventories:
Finished products 8,543 8,744
Work in process 7,208 6,517
Materials 7,274 7,144
--------- ---------
23,025 22,405
Prepaid expenses and sundry 487 99
Deferred income taxes 2,191 2,191
--------- ---------
TOTAL CURRENT ASSETS 51,906 46,781
PROPERTY AND EQUIPMENT
Property and equipment 19,323 18,231
Allowances for depreciation (deduction) (11,111) (10,053)
--------- ---------
8,212 8,178
PROPERTY UNDER CAPITAL LEASE
Building and machinery 4,519 3,761
Allowances for depreciation (deduction) (1,423) (1,278)
--------- ---------
3,096 2,483
OTHER ASSETS
Cost in excess of net assets acquired, less
amortization of $2,584 and $2,329, respectively 8,898 8,177
Patents, trademarks and other intangibles, less
amortization of $1,807 and $1,782, respectively - 25
Other 141 186
--------- ---------
9,039 8,388
--------- ---------
$ 72,253 $ 65,830
--------- ---------
--------- ---------
Note: The balance sheet at June 30, 1997 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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DECEMBER 31, JUNE 30,
1997 1997
------------ ---------
(UNAUDITED) (NOTE)
(000'S OMITTED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (Note 2) $ - $ 330
Accounts payable 4,540 3,649
Accrued compensation and payroll taxes 4,513 5,634
Other liabilities and accrued expenses 5,081 2,222
Current maturity of capital lease obligations 175 175
Federal and state income taxes and local taxes 2,222 1,256
-------- ---------
TOTAL CURRENT LIABILITIES 16,531 13,266
CAPITAL LEASE OBLIGATIONS 3,765 3,765
DEFERRED INCOME TAXES 645 645
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 9,266,250
shares (Note 3) 93 62
Additional paid-in capital 6,258 6,400
Cost of common stock in treasury---1,060,805
and 1,130,014 shares, respectively (deduction) (8,315) (8,040)
Cumulative translation adjustment 13 58
Retained earnings 53,263 49,674
-------- ---------
51,312 48,154
-------- ---------
$ 72,253 $ 65,830
-------- ---------
-------- ---------
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,
1997 1996 1997 1996
------------------------ -----------------------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SALES $ 27,539 $ 26,987 $ 53,060 $ 50,245
COST OF SALES 15,316 16,285 29,900 30,679
--------- -------- -------- --------
GROSS PROFIT 12,223 10,702 23,160 19,566
OPERATING EXPENSES
Selling 3,102 3,275 5,820 5,807
Administrative 2,465 2,081 4,364 4,035
Engineering 2,921 2,773 6,062 5,144
--------- -------- -------- --------
8,488 8,129 16,246 14,986
--------- -------- -------- --------
OPERATING INCOME 3,735 2,573 6,914 4,580
OTHER INCOME 105 76 58 71
--------- -------- -------- --------
INCOME BEFORE INCOME TAXES 3,840 2,649 6,972 4,651
INCOME TAXES 1,549 1,033 2,806 1,825
--------- -------- -------- --------
NET INCOME $ 2,291 $ 1,616 $ 4,166 $ 2,826
======== ======== ======= =======
NET INCOME PER COMMON SHARE $ 0.28 $ 0.20 $ 0.51 $ 0.35
======== ======== ======= =======
NET INCOME PER COMMON SHARE
ASSUMING DILUTION $ 0.26 $ 0.19 $ 0.48 $ 0.34
======== ======== ======= =======
AVERAGE COMMON SHARES
OUTSTANDING 8,228 8,037 8,198 8,113
======== ======== ======= =======
DILUTIVE COMMON SHARES
OUTSTANDING 8,711 8,360 8,632 8,410
======== ======== ======= =======
</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,
1997 1996
--------- ---------
(000'S OMITTED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,166 $ 2,826
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property and equipment 1,211 1,189
Amortization of intangibles 280 393
Changes in operating assets and liabilities:
Accounts receivable 399 (3,456)
Inventories (107) (1,154)
Other current assets (245) (96)
Accounts payable and accrued liabilities 689 780
Other current liabilities 966 534
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,359 1,016
INVESTING ACTIVITIES
Purchases of property and equipment (1,734) (1,444)
Sundry 45 13
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,689) (1,431)
FINANCING ACTIVITIES
Purchases of capital stock for treasury (1,332) (3,114)
Principal payment on capital lease obligations - (138)
Principal payment on long-term debt - (183)
Principal payments on short-term bank borrowings (1,480) (12,890)
Proceeds from short-term bank borrowings 1,150 16,680
Proceeds from exercise of common stock options 946 286
Payment of dividends (577) -
--------- ---------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (1,293) 641
EFFECT OF EXCHANGE RATE CHANGES ON CASH 5 347
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 4,382 573
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,379 266
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,761 $ 839
--------- ---------
--------- ---------
</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, 1997
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 considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 30,
1998. 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, 1997.
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, 1997, the effective interest
rate charged by the bank was 7.75 percent and the Company had unused lines of
credit aggregating $15,000,000.
NOTE 3 -- COMMON STOCK
On November 7, 1997, the Company's Board of Directors approved a three-for-
two stock split to be effected in the form of a 50% stock dividend. The
additional stock was distributed on December 5, 1997 to shareholders of record
on November 21, 1997. All references to number of shares, share prices and per
share amounts have been restated to reflect the stock split.
NOTE 4 -- YORK SENSORS LTD ACQUISITION
On December 22, 1997, the Company acquired York Sensors Ltd. in Hampshire,
U.K. The acquired business is involved in the design and manufacture of
distributed temperature sensing (DTS) equipment based on optical time domain
reflectometer (OTDR) technology for the electric utility, oil exploration and
other industries.
The Company acquired assets of approximately $930,000 and liabilities of
approximately $1,902,000 for a nominal purchase price. This resulted in
goodwill of approximately $972,000. The acquisition has been accounted for as a
purchase and,
7
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accordingly, the net assets and results of operations are included in the
consolidated financial statements from the effective date of acquisition. The
purchase price has been allocated to the assets and liabilities based on
their estimated fair values at the date of acquisition.
NOTE 5 -- EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
2ND QUARTER FY98 COMPARED TO 2ND QUARTER FY97
Sales for the second quarter ended December 31, 1997 were $27,539,000
compared to $26,987,000 in the second quarter of the prior year. This
represents an increase of 2.0% or $552,000 and was due to higher sales of
fiber optic test equipment and commercial communication test equipment
partially offset by lower government communication test equipment and
avionics.
Gross margins increased 4.7% to 44.4% of sales for the current quarter.
This increase is due to a higher mix of fiber optics test equipment,
completion of the U.S. Army SINCGARS contract in March 1997 and introduction
of higher margin commercial communication test equipment.
Operating expenses increased 0.7% to 30.8% of sales for the current
quarter. Administrative expenses increased 1.3% to 9.0% of sales due to
increased corporate expenses. Engineering expenses increased 0.3% to 10.6%
of sales in support of the development of new test instruments for the fiber
optics and emergency wireless digital telecommunications markets. Selling
expenses decreased 0.9% to 11.3% of sales due to lower commissions and
advertising costs.
Other income increased by $29,000 for the current quarter due to higher
interest income and lower interest expense offset by a lower translation gain.
8
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The estimated effective income tax rate was 40.3% for the second quarter
ended December 31, 1997 and 39.0% for the second quarter of the prior year.
FY98 YEAR-TO-DATE COMPARED TO FY97 YEAR-TO-DATE
Sales for the six months ended December 31, 1997 were $53,060,000 compared
to $50,245,000 in the previous year. This represents an increase of 5.6% or
$2,815,000 and was due to higher sales of fiber optics test equipment and
commercial communication test equipment partially offset by lower government
communication test equipment and avionics.
Gross margins increased 4.7% to 43.6% of sales for the six month period.
This increase is due to a higher mix of fiber optics test equipment, completion
of the U.S. Army SINCGARS contract in March 1997 and introduction of higher
margin commercial communication test equipment.
Operating expenses increased 0.8% to 30.6% of sales for the six month
period. Engineering expenses increased 1.2% to 11.4% of sales in support of the
development of new test instruments for the fiber optics and emerging wireless
digital telecommunications markets. Administrative expenses increased 0.2% to
8.2% of sales. Selling expenses decreased 0.6% to 11.0% of sales due to lower
commissions and advertising costs.
Other income decreased by $13,000 due to a lower translation gain offset by
higher interest income and lower interest expense.
The estimated effective income tax rate was 40.2% for the six months ended
December 31, 1997 and 39.2% in the previous year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $7,359,000 and $1,016,000 for the
six month period ended December 31, 1997 and 1996, respectively. The increase
in funds provided was due to an increase in accounts receivable of $399,000 for
the current period compared to a decrease of $3,456,000 in the prior year. Also
contributing to the increase in funds provided was a decrease in inventory of
$107,000 for the current period compared to a decrease of $1,154,000 in the
prior year. The remaining increase in funds provided results from a higher net
income of $4,166,000 in the current period compared to net income of $2,826,000
in the prior year.
Cash flows used in financing activities was $1,293,000 for the six month
period ended December 31, 1997 compared to $641,000 for the six month period
ended December 31, 1996. The increase in funds used is due to dividend
payments and lower bank borrowings partially offset by lower discretionary
purchases of treasury stock. A $.03 per share dividend was authorized by the
Board of Directors on November 7, 1997 and was paid on December 5, 1997. A
$.03 per share dividend was
9
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also paid in the first quarter of this year. The Board of Directors will
review quarterly the appropriateness of future dividend payments taking into
consideration numerous factors including the Company's cash requirements and
performance.
Working capital increased to $35,375,000 at December 31, 1997 compared to
$33,515,000 at June 30, 1997.
On September 20, 1996, the Board of Directors of the Company authorized the
repurchase of up to 750,000 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, 1997, the Company had purchased an aggregate of
425,000 shares under the program.
The Company has available unsecured lines of credit for $15,000,000 which
expire on June 30, 1998. At December 31, 1997, there were no borrowings 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, 1998.
SAFE HARBOR STATEMENTS
The statements which are not actual reported financial results or
historical facts contained in this Management's Discussions and Analysis of
Financial Condition and Results of Operations are forward-looking statements
that involve certain risks and uncertainties. These risks and uncertainties
include, but are not limited to, product demand and market acceptance,
competition and pricing, product development, product mix, capacity and supply
constraints, timing of orders and shipments, availability of capital resources,
general business and economic conditions, regulatory changes and other risks
described in the Company's most recent Form 10-K and Annual Report as of June
30, 1997.
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, 1997.
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 29, 1998 /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
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IFR SYSTEMS, INC.
EXHIBIT (11.0) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
-------- ------- -------- --------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 8,228 8,037 8,198 8,113
Net Income $ 2,291 $ 1,616 $ 4,166 $ 2,826
======== ======== ======== ========
Per Share Amount $ 0.28 $ 0.20 $ 0.51 $ 0.35
======== ======== ======== ========
DILUTED:
Average shares outstanding 8,228 8,037 8,198 8,113
Net effect of dilutive stock
options-based on the treasury
stock method using the average
market price 483 317 434 291
Assumed conversion of 10%
convertible notes - 6 - 6
-------- -------- -------- --------
Totals 8,711 8,360 8,632 8,410
======== ======== ======== ========
Net Income $ 2,291 $ 1,616 $ 4,166 $ 2,826
Add 10% convertible note interest,
net of federal income tax effect - 1 - 2
-------- -------- -------- --------
Totals $ 2,291 $ 1,617 $ 4,166 $ 2,828
======== ======== ======== ========
Per Share Amount $ 0.26 $ 0.19 $ 0.48 $ 0.34
======== ======== ======== ========
</TABLE>
Note - All references to number of shares, share prices and per share
amounts have been restated to reflect the stock split.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
INCOME IN THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785546
<NAME> IFR SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,761
<SECURITIES> 0
<RECEIVABLES> 19,972
<ALLOWANCES> 530
<INVENTORY> 23,025
<CURRENT-ASSETS> 51,906
<PP&E> 23,842
<DEPRECIATION> 12,534
<TOTAL-ASSETS> 72,253
<CURRENT-LIABILITIES> 16,531
<BONDS> 3,940
0
0
<COMMON> 93
<OTHER-SE> 51,219
<TOTAL-LIABILITY-AND-EQUITY> 72,253
<SALES> 53,060
<TOTAL-REVENUES> 53,060
<CGS> 29,900
<TOTAL-COSTS> 29,900
<OTHER-EXPENSES> 16,246
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> 6,972
<INCOME-TAX> 2,806
<INCOME-CONTINUING> 4,166
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,166
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.48
</TABLE>
