<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, 1998
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 48-1197645
(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 8,208,015 shares of common stock, par value $.01 per share,
of the Registrant outstanding as of January 11, 1999.
<PAGE>
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, 1998
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the three
and six months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
six months ended December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ --------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS (IN THOUSANDS)
CURRENT ASSETS
Cash and cash equivalents $ 4,663 $ 159
Accounts receivable, less $915 and $927
allowance for doubtful accounts, respectively 34,474 41,761
Inventories:
Finished products 17,022 18,122
Work in process 11,816 9,556
Materials 19,616 19,298
-------- --------
48,454 46,976
Prepaid expenses and sundry 4,206 4,083
Deferred income taxes 4,036 4,025
-------- --------
TOTAL CURRENT ASSETS 95,833 97,004
PROPERTY AND EQUIPMENT, LESS
ALLOWANCES FOR DEPRECIATION (DEDUCTION) 26,200 27,425
PROPERTY UNDER CAPITAL LEASE, LESS
ALLOWANCES FOR DEPRECIATION (DEDUCTION) 3,347 3,317
OTHER ASSETS
Cost in excess of net assets acquired, less
amortization of $5,588 and $4,973, respectively 27,999 28,629
Developed technology, less amortization
of $858 and $390, respectively 17,942 18,410
Other intangibles, less amortization of $1,395
and $955, respectively 13,385 13,825
Other 2,222 2,147
-------- --------
61,548 63,011
-------- --------
$186,928 $190,757
======== ========
</TABLE>
Note: The balance sheet at June 30, 1998 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
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ --------
(UNAUDITED) (NOTE)
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (Note 3) $ 15,000 $ 11,000
Accounts payable 9,817 11,168
Accrued compensation and payroll taxes 5,478 8,169
Other liabilities and accrued expenses 12,447 12,669
Federal and state income taxes and local taxes (123) 621
Current maturity of capital lease obligations 185 185
Current maturity of long-term debt 4,000 3,500
--------- ---------
TOTAL CURRENT LIABILITIES 46,804 47,312
CAPITAL LEASE OBLIGATIONS 3,488 3,580
LONG-TERM DEBT 95,125 96,500
DEFERRED INCOME TAXES 11,008 11,284
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 93 93
Additional paid-in capital 7,086 7,121
Cost of common stock in treasury---1,058,235
and 1,065,313 shares, respectively (deduction) (8,622) (8,679)
Accumulated other comprehensive income (Note 2) 827 386
Retained earnings 31,119 33,160
--------- ---------
30,503 32,081
--------- ---------
$ 186,928 $ 190,757
========= =========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------------
1998 1997 1998 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SALES $ 44,118 $ 27,539 $ 85,018 $ 53,060
COST OF PRODUCTS SOLD 24,727 15,316 47,194 29,900
-------- -------- -------- --------
GROSS PROFIT 19,391 12,223 37,824 23,160
OPERATING EXPENSES
Selling 7,883 3,102 15,126 5,820
Administrative 3,875 2,465 8,902 4,364
Engineering 5,850 2,921 12,238 6,062
-------- -------- -------- --------
17,608 8,488 36,266 16,246
-------- -------- -------- --------
OPERATING INCOME 1,783 3,735 1,558 6,914
OTHER INCOME (EXPENSE) (2,433) 105 (4,746) 58
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (650) 3,840 (3,188) 6,972
INCOME TAX EXPENSE (BENEFIT) (249) 1,549 (1,147) 2,806
-------- -------- -------- --------
NET INCOME (LOSS) $ (401) $ 2,291 $ (2,041) $ 4,166
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE $ (0.05) $ 0.28 $ (0.25) $ 0.51
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION $ (0.05) $ 0.26 $ (0.25) $ 0.48
======== ======== ======== ========
AVERAGE COMMON SHARES
OUTSTANDING 8,208 8,228 8,206 8,198
======== ======== ======== ========
DILUTIVE COMMON SHARES
OUTSTANDING 8,208 8,711 8,206 8,632
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(2,041) $ 4,166
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 3,008 1,211
Amortization of intangibles 1,523 280
Deferred income taxes (287) --
Changes in operating assets and liabilities:
Accounts receivable 8,459 399
Inventories (1,516) (107)
Other current assets (123) (245)
Accounts payable and accrued liabilities (5,236) 689
Other current liabilities (744) 966
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,043 7,359
INVESTING ACTIVITIES
Purchases of property and equipment (2,107) (1,734)
Sundry (70) 45
------- -------
NET CASH USED IN INVESTING ACTIVITIES (2,177) (1,689)
FINANCING ACTIVITIES
Purchases of capital stock for treasury -- (1,332)
Principal payments on capital lease obligations (92) --
Principal payments on long-term debt (875) --
Principal payments on short-term bank borrowings (1,300) (1,480)
Proceeds from short-term bank borrowings 5,300 1,150
Proceeds from exercise of common stock options 24 946
Payment of dividends -- (577)
------- -------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 3,057 (1,293)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 581 5
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 4,504 4,382
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 159 2,379
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,663 $ 6,761
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
IFR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
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, 1998 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1999. 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, 1998.
NOTE 2 -- COMPREHENSIVE INCOME
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (Statement 130).
Statement 130 requires the Company's foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. As a consequence of this change, certain
balance sheet reclassifications were necessary for previously reported amounts
to achieve the required presentation of comprehensive income. Implementation of
this disclosure statement did not affect the Company's financial position or
results of operations. The Company's total comprehensive income was as follows
($000's):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (401) $ 2,291 $(2,041) $ 4,166
Other comprehensive income:
Foreign currency translation (980) 127 441 (45)
------- ------- ------- -------
Total comprehensive income (loss) $(1,381) $ 2,418 $(1,600) $ 4,121
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
7
<PAGE>
NOTE 3 -- BANK BORROWINGS
In March 1998, the Company entered into an amended and restated Credit
Agreement with the bank syndication (the Credit Agreement) to provide available
lines of credit aggregating $30,000,000. The Credit Agreement expires on
February 5, 2004. Under the terms of the Credit Agreement, borrowings bear
interest at a spread over LIBOR based on certain financial criteria. The total
interest rate on the outstanding portion of the lines of credit was 8.36% at
December 31, 1998. The Credit Agreement also includes a counter indemnity with a
foreign bank to provide letters of credit and overdraft facilities totaling
$8,500,000. As of December 31, 1998, the Company has available lines of credit
aggregating $6,500,000. On November 3, 1998, the Company completed an amendment
to the Credit Agreement which increases the interest rate by approximately 75
basis points.
NOTE 4 -- ACQUISITIONS
MARCONI INSTRUMENTS
On February 6, 1998, IFR acquired for cash all of the issued and
outstanding capital stock of Marconi Instruments Limited, Hertfordshire, U.K.
(Marconi), from The General Electric Company, p.l.c. (GEC). The purchase price
for Marconi was approximately $109,000,000, paid in cash funded primarily by
debt . The acquired business is engaged in the design, manufacture, distribution
and sale of test and measurement equipment for the telecommunications and
electronics industries. As a result of the acquisition, IFR acquired the foreign
subsidiaries of Marconi which conduct business in France, Germany, Spain, and
the United States. Marconi also has branches in the Netherlands, Singapore, Hong
Kong, and China.
The acquisition has been accounted for as a purchase and, accordingly, the
net assets and results of operations are included in the consolidated financial
statements from the effective date of acquisition. The purchase price was
allocated to the assets and liabilities based on their estimated fair values at
the date of acquisition.
8
<PAGE>
YORK SENSORS
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 assumed
liabilities of approximately $1,902,000 for a nominal purchase price. This
resulted in goodwill of approximately $972,000 which is being amortized over 10
years. The acquisition has been accounted for as a purchase and, accordingly,
the net assets and results of operations are included in the consolidated
financial statements from the effective date of acquisition. The purchase price
was allocated to the assets and liabilities based on their estimated fair values
at the date of acquisition.
The following pro forma data presents the consolidated results of
operations as if the acquisitions had occurred on July 1, 1997, after giving
effect to certain adjustments including amortization of intangibles, increased
interest expense and related income tax effects. The pro forma data does not
include non-recurring charges related to acquired research and development
($15,700,000) and inventory valuations ($11,844,000). The pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the acquisitions
been in effect on the date indicated or which may occur in the future.
<TABLE>
<CAPTION>
(in thousands, except per share data) Three Months Six Months
Ended Ended
December 31, 1997 December 31, 1997
----------------------------------------
<S> <C> <C>
Sales $ 54,703 $ 108,558
Net income $ 1,895 $ 3,264
Net income per common share $ 0.23 $ 0.40
Net income per common share
assuming dilution $ 0.22 $ 0.38
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking
statements and information that is based on management's beliefs and
assumptions, as well as information currently available to management. When used
in this document, the words "anticipate", "estimate", "expect", "intend",
"believe", and similar expressions are intended to identify forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable and are based on reasonable
assumptions within the bounds of its knowledge of its business and operations,
it can give no assurance that such expectations will prove to be correct and
that actual results will not differ materially from the Company's expectations.
Such forward-looking statements speak not only as of the date of this report,
and the Company cautions readers not to place undue reliance on such statements.
Factors that could cause actual results to differ from expectations
include: (1) the degree and nature of competition, including pricing pressure
and the development of new products or discoveries of new technologies by
competitors, (2) fluctuations in the global economy and various foreign
countries including recent developments adversely affecting the economies of
various Asian countries, (3) demand for the Company's products, (4) loss of
significant customers, (5) the Company experiencing delays in developing new
products and technologies, (6) the ability of the Company to continue the
transition to digital technologies in the communications test equipment
products, (7) the failure of such technologies or products to perform according
to expectations, (8) difficulties in manufacturing new products so they may be
profitably priced on a competitive basis, (9) lack of adequate market acceptance
of new products or technologies, (10) changes in products or sales mix and the
related effects on gross margins, (11) availability of components, parts, and
supplies from third party suppliers on a timely basis and at reasonable prices,
(12) currency fluctuations, (13) inventory risks due to changes in market demand
of the Company's business strategies, (14) unanticipated problems arising from
the failure of one or more suppliers or customers of the Company or others to be
able to maintain normal business operations after 1999 because of "Year 2000"
computer difficulties, (15) inability to hire sufficient personnel at reasonable
levels of compensation and other labor problems, (16) inability to realize
anticipated efficiencies and savings from the Company's recent acquisition of
Marconi Instruments Limited, and (17) other risks described herein.
10
<PAGE>
YEAR 2000 MATTERS
The Company, like all other companies, is confronted with so-called "Year
2000" issues that might arise as a result of existing computer programs and
systems not being able to properly recognize a date in a year that begins with
"20" rather than "19". Year 2000 problems can arise (a) because the operating,
manufacturing, and the information technology equipment operated by the Company
fails to operate properly after December 31, 1999 (is not "Year 2000
compliant"), (b) because the Company's products will not operate properly after
that date, or (c) because material customers and vendors of the Company, or
public utilities, financial systems, or others on whom the Company is dependent
are unable to conduct their business operations normally because of Year 2000
problems.
Because of the pervasive nature of computers and computer systems in the
Company's products and equipment, as well as throughout the nation and world, it
is impossible for the Company to provide any assurance that its efforts at
identifying and remedying Year 2000 issues will be totally effective or that
Year 2000 problems of others will not have a material adverse effect on the
Company's operations and profits notwithstanding any efforts the Company may
make. Accordingly, the following discussion contains numerous "forward looking"
statements that are subject to the qualifications and cautionary statements
contained in this report under the heading "Forward Looking Statements".
Based on the results to date of its assessment of the Year 2000 issues of
which the Company is aware at this time, the Company does not believe Year 2000
problems will have a materially adverse effect on the Company or its operations.
No assurance can be given, however, that the Company has been able to identify
all potential Year 2000 problems or that if Year 2000 problems are discovered by
the Company in the future, it will be able to resolve them satisfactorily and at
an affordable cost.
IFR PRODUCTS. The Company has evaluated all of its existing products and
those used by customers and has concluded such products now being manufactured
or in the field will not require modification in order to be Year 2000
compliant.
IFR'S OPERATING AND MANUFACTURING EQUIPMENT. IFR has conducted an
assessment of the majority of its manufacturing and other operating equipment
and has either upgraded or made arrangements for the upgrading of all material
items of equipment that are found not to be Year 2000 compliant. To date, the
Company has incurred approximately $220,000 in Year 2000 equipment upgrade
expenditures and anticipates spending approximately $20,000 to complete the
upgrade process. IFR does not anticipate any serious difficulty in completing
the upgrade process and testing its equipment prior to December 31, 1999.
11
<PAGE>
INFORMATION TECHNOLGY AND ACCOUNTING SYSTEMS. IFR is also completing its
assessment of its material information technology and principal accounting
systems and believes it has made a substantial portion of the modifications for
them to be Year 2000 compliant. Total expenditures to date for such
modifications have been approximately $1,400,000 of which approximately
$1,100,000 was spent to acquire new equipment or software prior to the time it
would otherwise have been acquired. It is anticipated that the Company will
incur additional expenditures of approximately $50,000 to upgrade its
information technology and accounting systems in order to make them Year 2000
compliant.
SUPPLIERS AND CUSTOMERS. The Company has written certain of its customers
and vendors whose failure to be able to conduct business normally after December
31, 1999, because of Year 2000 problems might materially affect IFR, requesting
written information as to their Year 2000 compliance and preparation. The
Company has received written responses from most of such customers and vendors
that appear to indicate generally they are or expect to be sufficiently Year
2000 compliant. The Company intends to continue to closely monitor the Year 2000
compliance and preparation of its material customers and vendors. This portion
of the Company's Year 2000 compliance and assessment program has not resulted in
the incurrence of material expenditures by IFR and is not anticipated to do so.
POTENTIAL EFFECTS OF YEAR 2000 PROBLEMS. The Company is unable to predict
with any degree of certainty the potential consequences to it of Year 2000
issues. Obviously, any sort of major prolonged inability of public utilities or
financial systems in any portion of the world where the Company operates
manufacturing facilities or has substantial customers or vendors could
materially adversely impact the Company's revenue or delay the receipt of
revenue and could, theoretically, even cause a national or global economic
crisis or downturn. Similarly, the inability of a significant number of the
Company's customers or vendors to operate normally, either because of their own
Year 2000 problems or because of Year 2000 problems of persons on whom they, in
turn, are dependent, could have a material adverse impact on the Company. There
is also some likelihood that an inability of the Company to deliver its products
in the normal manner might cause it to lose customers or incur contractual
liability to customers. While the Company has no reason to believe that any of
such matters will occur in such a manner as to produce severe economic
consequences to the Company, all of these matters are beyond the ability of the
Company to predict or quantify with any assurance.
CONTINGENCY PLANS. The Company has not adopted any Year 2000 contingency
plan. It is considering the need to do so.
12
<PAGE>
RESULTS OF OPERATIONS
2ND QUARTER FY99 COMPARED TO 2ND QUARTER FY98
Sales for the second quarter ended December 31, 1998 were $44,118,000
compared to $27,539,000 in the second quarter of the prior year. This represents
an increase of 60.2% or $16,579,000. The current year includes sales of
$21,669,000 from the acquisition of IFR Ltd. which was completed on February 6,
1998. Excluding the acquisition, sales declined by $5,090,000 or 18.5% due to
lower sales of communication test instruments to government and commercial
customers and lower sales of production and lab test equipment to fiber optic
manufacturers.
Gross margins decreased to 44.0% for the current year quarter as compared
to 44.4% in the previous year quarter.
Operating expenses increased 9.1% to 39.9% of sales for the current
quarter. Selling expenses increased 6.6% as a percentage of sales due to the
utilization of a direct sales force after the purchase of Marconi and increased
product marketing communications. Administrative expenses decreased 0.3% as a
percentage of sales primarily due to cost reductions offset by recurring
amortization charges related to the acquisition. Engineering expenses increased
2.7% in support of the development of new test instruments for the fiber optics
and emerging wireless digital telecommunications markets. The Company is
implementing a program to bring costs in line with current sales, including
reductions in personnel, wage freezes and other cost reductions. When fully
implemented, these cost reductions are expected to reduce expenses by
approximately $6,000,000 annually.
Other expenses increased $2,538,000 compared to the prior year quarter as
the result of higher interest expense related to the debt incurred to fund the
acquisition.
The estimated effective income tax rate was approximately 38.3% for the
current period and 40.3% for the previous year period. The decrease represents
the impact of the foreign subsidiaries and their related tax rates.
13
<PAGE>
FY99 YEAR-TO-DATE COMPARED TO FY98 YEAR-TO-DATE
Sales for the six months ended December 31, 1998 were $85,018,000 compared
to $53,060,000 in the previous year. This represents an increase of 60.2% or
$31,958,000. The current year includes sales valued at $42,761,000 from the
acquisition of IFR Ltd. which was completed on February 6, 1998. Excluding the
acquisition, sales declined by $10,803,000 or 20.4% due to lower sales of
communication test instruments to government and commercial customers and lower
sales of production and lab test equipment to fiber optic manufacturers.
Gross margins increased 0.9% to 44.5% of sales for the six month period.
This increase is due to a more favorable product mix.
Operating expenses increased 12.1% to 42.7% of sales for the six month
period. Selling expenses increased 6.8% as a percentage of sales due to the
utilization of a direct sales force after the purchase of Marconi and increased
product marketing communications. Administrative expenses increased 2.3% as a
percentage of sales primarily due to recurring amortization charges related to
the acquisition partially offset by cost reductions. Engineering expenses
increased 3.0% in support of the development of new test instruments for the
fiber optics and emerging wireless digital telecommunications markets. The
Company is implementing a program to bring costs in line with current sales,
including reductions in personnel, wage freezes and other cost reductions. When
fully implemented, these cost reductions are expected to reduce expenses by
approximately $6,000,000 annually.
Other expenses increased $4,804,000 compared to the prior year period as
the result of higher interest expense related to the debt incurred to fund the
acquisition.
The estimated effective income tax rate was 36.0 % for the six months ended
December 31, 1998 and 40.2% in the previous year. The decrease represents the
impact of the foreign subsidiaries and their related tax rates.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $3,043,000 and $7,359,000 for the
six months period ended December 31, 1998 and 1997, respectively. The decrease
in funds provided was due to lower operating income, a decrease in accounts
payable and accrued liabilities, and higher inventories. Partially offsetting
these items was a decrease in accounts receivable and an increase in
depreciation and amortization of intangibles.
Cash flows provided (used) in financing activities were $3,057,000 and
($1,293,000) for the six months period ended December 31, 1998 and 1997,
respectively. The increase in funds provided is due primarily to short-term bank
borrowings.
A $.033 per share cash dividend was authorized by the Board of Directors
and paid in the first and second quarter of fiscal 1998. Certain restrictive
payments concerning the debt incurred with the purchase of Marconi allow for
cash dividends to be paid only when certain leverage ratios are obtained.
Working capital decreased from $49,692,000 at June 30, 1998 to $49,029,000
at December 31, 1998.
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, 1998, the Company had purchased an aggregate of
470,000 shares under the program. Certain restrictive covenants concerning the
debt incurred with the purchase of Marconi limit the amount of capital stock
allowed to be purchased.
At December 31, 1998, $15,000,000 was outstanding under the lines of
credit.
On November 3, 1998, the Company signed and completed negotiations on
an amendment to its primary credit agreement (the Agreement). In addition, the
leverage ratio test is suspended through the fiscal quarters ending on March 31,
1999. The Company anticipates the negotiations of new financial covenants after
this date.
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, 1999.
15
<PAGE>
OUTLOOK
The Company expects the current softness in orders and sales to
continue for several quarters. The Company's cost reduction program has been
implemented and management expects profits to resume in the second half of the
fiscal year.
In addition to efforts on the cost side, management is committed to the
development of new products. A number of new products were launched during the
first and second quarter, including test instruments for GSM digital protocols
and other new wireless and fiber optic communication protocols. More new
products are scheduled to be introduced during the fiscal year.
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
(b) No Form 8-K was filed during the quarter ended December 31, 1998.
16
<PAGE>
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: February 3, 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)
17
<PAGE>
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,
1998 1997 1998 1997
----- ----- ----- -----
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 8,208 8,228 8,206 8,198
-------- ------- -------- -------
-------- ------- -------- -------
Net income (loss) $ (401) $ 2,291 $(2,041) $ 4,166
-------- ------- -------- -------
-------- ------- -------- -------
Per share amount $ (0.05) $ 0.28 $ (0.25) $ 0.51
-------- ------- -------- -------
-------- ------- -------- -------
DILUTED:
Average shares outstanding 8,208 8,228 8,206 8,198
Net effect of dilutive stock
options-based on the treasury
stock method using the average
market price 14 483 52 434
-------- ------- -------- -------
Totals 8,222 8,711 8,258 8,632
-------- ------- -------- -------
-------- ------- -------- -------
Net income (loss) $ (401) $ 2,291 $(2,041) $ 4,166
-------- ------- -------- -------
-------- ------- -------- -------
Per share amount (A) $ (0.05) $ 0.26 $ (0.25) $ 0.48
-------- ------- -------- -------
-------- ------- -------- -------
(A) - Since the per share amounts for the FY99 interim periods are
antidilutive, the face of the statements of operations reflects diluted
per share amounts equal to the basic per share amounts.
</TABLE>
<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
OPERATIONS IN THE COMPANY'S FORM 10-Q 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4663
<SECURITIES> 0
<RECEIVABLES> 35389
<ALLOWANCES> 915
<INVENTORY> 48454
<CURRENT-ASSETS> 95833
<PP&E> 47738
<DEPRECIATION> 18191
<TOTAL-ASSETS> 186928
<CURRENT-LIABILITIES> 46804
<BONDS> 98613
0
0
<COMMON> 93
<OTHER-SE> 30410
<TOTAL-LIABILITY-AND-EQUITY> 186928
<SALES> 85018
<TOTAL-REVENUES> 85018
<CGS> 47194
<TOTAL-COSTS> 47194
<OTHER-EXPENSES> 36266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4988
<INCOME-PRETAX> (3188)
<INCOME-TAX> (1147)
<INCOME-CONTINUING> (2041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2041)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
