<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 June 30, 1999
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 8,226,265 shares of common stock, par value $.01 per share,
of the Registrant outstanding as of July 19, 1999.
<PAGE>
IFR SYSTEMS, INC.
FORM 10 - Q
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30,
1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 1999 and 1998. 5
Condensed Consolidated Statements of Cash Flow for the
three months ended June 30, 1999 and 1998 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 15
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
----------- ----------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,542 $ 5,086
Accounts receivable, less $723 and $731
allowance for doubtful accounts, respectively 27,177 27,306
Inventories:
Finished products 13,969 15,568
Work in process 9,358 8,811
Materials 14,252 13,650
----------- ---------
37,579 38,029
Prepaid expenses and sundry 6,312 6,042
Deferred income taxes 2,465 2,492
Current assets of discontinued operations 18,710 17,460
----------- ---------
TOTAL CURRENT ASSETS 96,785 96,415
PROPERTY AND EQUIPMENT:
Property and equipment 36,381 36,079
Allowances for depreciation (14,956) (13,835)
----------- ---------
21,425 22,244
PROPERTY UNDER CAPITAL LEASE:
Building and machinery 5,201 5,201
Allowances for depreciation (2,075) (1,962)
----------- ---------
3,126 3,239
PROPERTY AND EQUIPMENT OF DISCONTINUED OPERATIONS,
NET OF ALLOWANCES FOR DEPRECIATION OF $4,538 AND
$4,380, RESPECTIVELY 3,051 3,058
OTHER ASSETS:
Cost in excess of net assets acquired, less
amortization of $998 and $812, respectively 21,299 21,485
Developed technology, less amortization
of $1,326 and $1,092, respectively 17,474 17,708
Other intangibles, less amortization of $1,807
and $1,594, respectively 12,959 13,172
Other 2,300 2,090
Other assets related to discontinued operations - net 7,434 7,632
----------- ---------
61,466 62,087
----------- ---------
TOTAL ASSETS $ 185,853 $187,043
----------- ---------
----------- ---------
</TABLE>
Note: The balance sheet at March 31, 1999 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>
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
---------- ---------
(UNAUDITED) (NOTE)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (NOTE 2) $ 19,100 $ 17,700
Accounts payable 8,655 9,883
Accrued compensation and payroll taxes 4,383 4,401
Other liabilities and accrued expenses 9,038 8,890
Federal and state income taxes and local taxes 1,479 1,120
Current maturity of capital lease obligations 185 185
Current maturity of long-term debt 4,500 4,250
Current liabilities of discontinued operations 5,456 3,823
---------- ---------
TOTAL CURRENT LIABILITIES 52,796 50,252
CAPITAL LEASE OBLIGATIONS 3,395 3,442
LONG-TERM DEBT 92,000 93,125
DEFERRED INCOME TAXES 11,445 11,828
DEFERRED INCOME TAXES OF DISCONTINUED OPERATIONS 196 168
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 7,229 7,368
Cost of common stock in treasury--1,039,985
and 1,056,985 shares, respectively (8,473) (8,611)
Accumulated other comprehensive income (loss) (2,618) (1,187)
Retained earnings 29,790 30,565
---------- ---------
26,021 28,228
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 185,853 $ 187,043
---------- ---------
---------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------------------
1999 1998
<S> <C> <C>
SALES $ 33,991 $ 39,815
COST OF PRODUCTS SOLD 19,061 27,578
---------- ---------
GROSS PROFIT 14,930 12,237
OPERATING EXPENSES:
Selling 6,186 7,492
Administrative 3,711 3,560
Engineering 4,275 4,418
---------- ---------
14,172 15,470
---------- ---------
OPERATING INCOME (LOSS) 758 (3,233)
OTHER INCOME (EXPENSE):
Interest income 113 202
Interest expense (2,609) (2,329)
Other, net (108) (74)
---------- ---------
(2,604) (2,201)
---------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,846) (5,434)
INCOME TAX BENEFIT (745) (2,395)
---------- ---------
LOSS FROM CONTINUING OPERATIONS (1,101) (3,039)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
LESS APPLICABLE INCOME TAXES (NOTE 3) 326 (80)
---------- ---------
NET LOSS $ (775) $ (3,119)
---------- ---------
---------- ---------
EARNINGS (LOSS) PER SHARE - BASIC:
Loss from continuing operations $ (0.13) $ (0.37)
Income (loss) from discontinued operations 0.04 (0.01)
---------- ---------
Net loss $ (0.09) $ (0.38)
---------- ---------
---------- ---------
EARNINGS (LOSS) PER SHARE - DILUTED:
Loss from continuing operations $ (0.13) $ (0.37)
Income (loss) from discontinued operations 0.04 (0.01)
---------- ---------
Net loss $ (0.09) $ (0.38)
---------- ---------
---------- ---------
AVERAGE COMMON SHARES OUTSTANDING 8,223 8,196
---------- ---------
---------- ---------
DILUTIVE COMMON SHARES OUTSTANDING 8,223 8,196
---------- ---------
---------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (775) $ (3,119)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation of property and equipment 1,392 1,678
Amortization of intangibles 766 1,138
Deferred income taxes (428) (5,047)
Utilization of acquired tax loss carryforwards - 416
Changes in operating assets and liabilities:
Accounts receivable (723) 806
Inventories 61 7,867
Other current assets (179) 1,630
Accounts payable and accrued liabilities (224) (8,857)
Other current liabilities 1,118 (1,282)
--------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,008 (4,770)
INVESTING ACTIVITIES
Purchases of property and equipment (874) (1,374)
Proceeds from sale of equipment 17 1,071
Sundry (210) 1,704
--------- ----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (1,067) 1,401
FINANCING ACTIVITIES
Principal payments on capital lease obligations (47) (175)
Principal payments on long-term debt (875) -
Principal payments on short-term bank borrowings (1,100) -
Proceeds from short-term bank borrowings 2,500 2,000
Proceeds from exercise of common stock options (1) 1,023
--------- ----------
NET CASH PROVIDED IN FINANCING ACTIVITIES 477 2,848
EFFECT OF EXCHANGE RATE CHANGES ON CASH (962) 314
--------- ----------
DECREASE IN CASH AND CASH EQUIVALENTS (544) (207)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,086 366
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,542 $ 159
--------- ----------
--------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
IFR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
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 month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ending March 31, 2000. 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 March 31, 1999.
The Company operates in one significant business segment, electronic
test and measurement (ETM Division).
NOTE 2 -- BANK BORROWINGS
In March 1998, the Company entered into an amended and restated
Credit Agreement with a bank syndication (the Agreement) to provide available
lines of credit aggregating $30,000,000. The Agreement expires on February 5,
2004. Under the terms of the Agreement, borrowings bear interest at a spread
over LIBOR based on certain financial criteria. The Agreement also includes a
counter indemnity with a foreign bank to provide letters of credit and
overdraft facilities totaling $3,300,000. As of June 30, 1999, the Company
has available unused lines of credit aggregating $5,700,000.
On March 31, 1999, the Company completed an amendment to the
Agreement which increased the interest rate by approximately 25 basis points
effective June 1, 1999. The interest rate on the outstanding portion of the
lines of credit was 8.32% at June 30, 1999. In addition, the amendment
provides for a reduction in the aggregate revolving loan commitment from
$30,000,000 to $25,000,000.
On June 25, 1999, the Company completed an amendment to the
Agreement which modified certain financial covenants, effective July 1, 1999.
7
<PAGE>
NOTE 3 -- DISCONTINUED OPERATIONS
On June 25, 1999, the Board of Directors approved a formal plan to
sell the Company's Optical Test and Measurement (OTM) Division. The sale was
completed on July 7, 1999 to GN Nettest, a company in the GN Great Nordic
Group, Copenhagen, Denmark for $43,000,000 in cash. A net of tax gain of
approximately $12,000,000 (approximately $1.45 per share) will be recorded in
the quarter ending September 30, 1999. The proceeds from the sale were used
to reduce the Company's outstanding debt obligation in July 1999, with
$31,740,000 applied to long-term debt and $11,260,000 used to reduce
short-term debt.
The results of operations for the OTM Division have been segregated
and classified as discontinued operations in the consolidated statements of
operations and prior periods have been restated. Selected results of
operations for the OTM Division follows: (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $8,335 $9,416
Income tax expense 310 193
Income (loss) from discontinued operations 326 (80)
</TABLE>
The consolidated balance sheets have been segregated to reflect the
OTM Division as discontinued operations and prior periods have been restated.
The consolidated statements of cash flows include the OTM Division.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive loss was $2,206,000 and $2,908,000 for the three
months ended June 30, 1999 and 1998, respectively. The difference between the
total comprehensive loss and net loss is foreign currency translation
adjustments.
NOTE 5 - RESTRUCTURING
Restructuring liabilities from the Marconi acquisition of
approximately $7,700,000 were recorded for severance and related costs
associated with the shutdown of certain acquired facilities. Payments in the
amount of $6,634,000 have been charged against the liability through June 30,
1999.
8
<PAGE>
NOTE 6 - EARNINGS PER SHARE DATA
The following is a reconciliation of the numerator and denominators
used in computing basic and diluted earnings per share from continuing
operations (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
NUMERATOR
Loss from continuing operations
available to common shareholders $(1,101) $(3,039)
--------------------------------------------
--------------------------------------------
DENOMINATORS
Basic earnings (loss) per share:
Weighted-average common shares
outstanding 8,223 8,196
--------------------------------------------
--------------------------------------------
Basic loss per share from
continuing operations $(0.13) $(0.37)
--------------------------------------------
--------------------------------------------
Diluted earnings (loss) per share:
Weighted-average common shares
outstanding 8,223 8,196
Effect of stock options 1 414
--------------------------------------------
Weighted-average common shares
outstanding - diluted 8,224 8,610
--------------------------------------------
--------------------------------------------
Diluted loss per share from
continuing operations $(0.13) $(0.35)
--------------------------------------------
--------------------------------------------
</TABLE>
Note - Because the effect of stock options for 1999 and 1998 is
antidilutive for the periods presented, diluted per share amounts are equal to
the basic per share amounts.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains
forward-looking statements and information that are based on management's
beliefs and assumptions, as well as information currently available to
management. Forward-looking statements are all statements other than
statements of historical fact included in this report. 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 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 or 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 acquisition of Marconi Instruments, Limited
and (17) other risks described herein.
10
<PAGE>
YEAR 2000 READINESS DISCLOSURES
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 assurances 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 private
securities litigation reform act of 1995 - "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 has evaluated those used by customers and has concluded such products now
being manufactured will not require modification in order to be Year 2000
compliant.
IFR'S OPERATING AND MANUFACTURING EQUIPMENT. IFR has conducted an
assessment of all of its manufacturing and other operating equipment and has
either upgraded or made arrangements for the upgrade of all significant items
of equipment that are found not to be Year 2000 compliant. To date, the
Company has incurred approximately $300,000 in Year 2000 equipment upgrade
expenditures and anticipates spending approximately $10,000 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 TECHNOLOGY AND ACCOUNTING SYSTEMS. IFR has completed its
assessment of its significant information technology and principal accounting
systems and has made a substantial portion of the modifications necessary for
them to be Year 2000 compliant. Total expenditures to date for such
modifications have been approximately $1,575,000 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 $185,000 to complete the
upgrade of its information technology in order to be Year 2000 compliant.
SUPPLIERS AND CUSTOMERS. The Company has written to 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 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 and is continuing to develop
contingency plans that address the processes necessary to maintain critical
business functions should a significant third party system or critical
internal system fail. These contingency plans generally include the repair of
existing systems and, in some instances, the use of alternative systems or
procedures. The Company is developing business continuity plans specific to
Year 2000 issues that are based on these existing plans.
12
<PAGE>
DISCONTINUED OPERATIONS
On June 25, 1999, the Board of Directors approved a formal plan to
sell the Company's Optical Test and Measurement (OTM) Division. The sale was
completed on July 7, 1999 to GN Nettest, a company in the GN Great Nordic
Group, Copenhagen, Denmark for $43,000,000 in cash. A net of tax gain of
approximately $12,000,000 (approximately $1.45 per share) will be recorded in
the quarter ending September 30, 1999. The proceeds from the sale were used
to reduce debt in July 1999, with $31,740,000 applied to long-term debt and
$11,260,000 used to reduce short-term debt. The sale will allow the Company
to further focus on the ETM Division.
As a consequence of the divestiture, the results of operations for
the OTM Division have been segregated and classified as discontinued
operations in the consolidated statements of operations and prior periods
have been restated. The consolidated balance sheets have been segregated to
reflect the OTM Division as discontinued operations and prior periods have
been restated. The consolidated statements of cash flows include the OTM
Division.
RESULTS OF OPERATIONS
Sales for the first quarter ended June 30, 1999 were $33,991,000
compared to $39,815,000 in the first quarter of the prior year. This
represents a decrease of 14.6% or $5,824,000 due to lower sales of
communication test instruments to government and commercial customers.
Gross margins increased to 43.9 % for the current year quarter as
compared to 30.7% in the previous year quarter. The previous year quarter
included inventory valuation charges related to the Marconi acquisition of
$7,106,000. Excluding the effect of the acquisition adjustment, gross margins
for the previous year quarter was 48.6%. The decrease of 4.7% is due to an
unfavorable product mix and lower sales volume to cover fixed overhead costs.
Operating expenses increased 2.8% to 41.7% of sales for the current
quarter. Administrative expenses increased 1.9%, engineering expenses
increased 1.5% and selling expenses decreased 0.6% as a percentage of sales.
Operating expenses in general increased as a percent of sales because of the
lower sales volume.
Other expenses increased $403,000 compared to the prior year
quarter due mainly to the higher interest expense related to the debt
incurred to fund the acquisition.
The estimated effective income tax rate was approximately 40.4% for
the current period and 44.1% for the previous year period. The decrease
represents the impact of the foreign subsidiaries and their related tax rates.
13
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company maintains an adequate financial position with working
capital of $43,989,000 at June 30, 1999. The Company generated cash from
operations of $1,008,000 for the three months period ended June 30, 1999
compared to a cash outflow of $4,770,000 for the previous year quarter. The
increase in cash provided from operations was due to a decrease in the net
loss for the period ($2,344,000) and decreases in working capital accounts.
Cash used in investing activities was $1,067,000 for the current
quarter compared to cash inflows of $1,401,000 in the previous year quarter.
The decrease in funds provided is due to proceeds from the sale of Company
owned cars and cash inflows related to reclassification of restructuring
costs in the previous year quarter.
Cash flows provided in financing activities was $477,000 and
$2,848,000 for the three months period ended June 30, 1999 and 1998,
respectively. The decrease in funds provided was due primarily to principal
payments on long-term debt and reduced proceeds from the exercise of stock
options.
No cash dividends were paid in fiscal year 1999 and no cash
dividends are anticipated to be paid in fiscal year 2000. 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.
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 the
dilution of stock option exercises and as a utilization of the anticipated
excess cash flow during the year. As of June 30, 1999, 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 June 30, 1999, $19,100,000 was outstanding under the lines of
credit.
On March 31, 1999, the Company completed an amendment to the
Agreement which increased the interest rate by approximately 25 basis points
effective June 1, 1999. In addition, the amendment provides for a reduction
in the aggregate revolving loan commitment from $30,000,000 to $25,000,000.
At June 30, 1999 the Company was in violation of the leverage ratio
restrictive covenant in the Agreement and obtained an appropriate waiver from
the bank. On June 25, 1999, the Company completed an amendment to the
Agreement which modified certain financial covenants, effective July 1, 1999,
to more obtainable terms. The Company expects to be in compliance with the
financial covenants for the next twelve months.
The Company anticipates that available lines of credit and funds
generated from operations will be adequate to meet capital asset
expenditures, debt payments, interest and working capital needs for the
current fiscal year ending March 31, 2000.
14
<PAGE>
OUTLOOK
The sale of the OTM Division, effective July 7, 1999, helps restore
the Company's financial flexibility and positions the Company to benefit from
the opportunities presented by the continuing change in the test and
measurement marketplace. All of the Company's efforts are now focused on
building the Electronic Test & Measurement (ETM) Division business where
long-term growth opportunities have been identified in the expanding wireless
communications and related market segments. The continuing investments in
engineering and marketing have strengthened the Company's competitive
position in these areas. The Company is optimistic that it is properly
positioned to benefit from future growth in the global test equipment
industry. In the meantime, a variety of cost reduction steps have been
implemented which, together with reduced interest expense, should result in
better financial performance for the balance of the fiscal year.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.24 Waiver to Credit Agreement, dated as of July 16,
1999, for the fiscal quarter ending June 30, 1999.
27.0 Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended June 30, 1999.
15
<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: July 27, 1999 /s/ Iain M. Robertson
------------- ---------------------
Iain M. Robertson,
Director, President and
Chief Operating Officer
(Duly authorized officer)
/s/ Jeffrey A. Bloomer
----------------------
Jeffrey A. Bloomer,
Executive Vice President,
Chief Financial Officer
and Treasurer
(Principal financial and chief
accounting officer)
16
<PAGE>
July 16, 1999
IFR SYSTEMS, INC.
10200 West York Street
Wichita, KS 67215
Attention: Chief Financial Officer
Dear Sir:
Reference is hereby made to that certain Amended and
Restated Credit Agreement dated as of March 19, 1998 by and among IFR
Systems, Inc., a Delaware corporation (the "BORROWER"), the lenders from time
to time parties thereto (collectively, the "LENDERS") and The First National
Bank of Chicago, as one of the Lenders and in its capacity as contractual
representative (the "AGENT") on behalf of itself and the other Lenders, as
amended by an Amendment No. 1 and Waiver, an Amendment No. 2 and an Amendment
No. 3, dated as of November 3, 1998, March 31, 1999 and June 25, 1999,
respectively (as amended and as the same may be amended, restated,
supplemented or otherwise modified from time to time, the "CREDIT
AGREEMENT"). Terms used herein and not otherwise defined herein shall have
the meanings set forth in the Credit Agreement.
The Borrower has informed the Lenders that it has
consummated the sale of the OTM Division, and in connection therewith has
caused the proceeds of the sale of the OTM Division to be placed in escrow
pending the expiration and termination of any applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In
accordance with the provisions of SECTION 10.3 of the Credit Agreement, the
Borrower has requested that, subject to the terms hereof and only so long as
such proceeds remain in escrow, the Required Lenders waive any default
arising solely from the Borrower's failure to maintain a Leverage Ratio less
than 5.75 to 1.00 for the fiscal quarter ending June 30, 1999.
The Required Lenders hereby agree to such waiver.
Very truly yours,
THE FIRST NATIONAL BANK OF
CHICAGO, as Agent and as Lender
By:
-------------------------------
Name:
Title:
<PAGE>
INTRUST BANK, as a Lender
By:
-------------------------------
Name:
Title:
THE BANK OF NOVA SCOTIA, as a Lender
By:
-------------------------------
Name:
Title:
HARRIS TRUST AND SAVINGS BANK, as a Lender
By:
-------------------------------
Name:
Title:
NATIONAL WESTMINSTER BANK PLC, as a Lender
By:
-------------------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A., as a Lender
By:
-------------------------------
Name:
Title:
LLOYDS BANK PLC, as a Lender
By:
-------------------------------
Name:
Title:
WAIVER DATED JULY 16, 1999
<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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,542
<SECURITIES> 0
<RECEIVABLES> 27,900
<ALLOWANCES> 723
<INVENTORY> 37,579
<CURRENT-ASSETS> 96,785
<PP&E> 41,582
<DEPRECIATION> 17,031
<TOTAL-ASSETS> 185,853
<CURRENT-LIABILITIES> 52,796
<BONDS> 95,395
0
0
<COMMON> 93
<OTHER-SE> 25,928
<TOTAL-LIABILITY-AND-EQUITY> 185,853
<SALES> 33,991
<TOTAL-REVENUES> 33,991
<CGS> 19,061
<TOTAL-COSTS> 19,061
<OTHER-EXPENSES> 14,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,609
<INCOME-PRETAX> (1,846)
<INCOME-TAX> (745)
<INCOME-CONTINUING> (1,101)
<DISCONTINUED> 326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (775)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
