<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 September 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 8,232,428 shares of common stock, par value $.01 per share,
of the Registrant outstanding as of October 20, 1999.
<PAGE>
IFR SYSTEMS, INC.
FORM 10 - Q
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30,1999
and March 31, 1999 3
Condensed Consolidated Statements of Operations for the three
and six months ended September 30,1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the
six months ended September 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 5. Other Information 16
Item 6. Exhibits and reports on Form 8-K 16
SIGNATURES 17
</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>
SEPTEMBER 30, MARCH 31,
1999 1999
------------ ---------
(UNAUDITED) (NOTE)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,945 $ 5,086
Accounts receivable, less $661 and $731
allowance for doubtful accounts, respectively 26,030 27,306
Inventories:
Finished products 13,929 15,568
Work in process 9,010 8,811
Materials 14,385 13,650
------------ ---------
37,324 38,029
Prepaid expenses and sundry 6,647 6,042
Deferred income taxes 2,482 2,492
Current assets of discontinued operations - 17,460
------------ ---------
TOTAL CURRENT ASSETS 77,428 96,415
PROPERTY AND EQUIPMENT:
Property and equipment 38,164 36,079
Allowances for depreciation (15,936) (13,835)
------------ ---------
22,228 22,244
PROPERTY UNDER CAPITAL LEASE:
Building and machinery 5,201 5,201
Allowances for depreciation (2,188) (1,962)
------------ ---------
3,013 3,239
PROPERTY AND EQUIPMENT OF DISCONTINUED OPERATIONS,
NET OF ALLOWANCES FOR DEPRECIATION OF $0 AND
$4,380, RESPECTIVELY - 3,058
OTHER ASSETS:
Cost in excess of net assets acquired, less
amortization of $1,184 and $812, respectively 21,113 21,485
Developed technology, less amortization
of $1,560 and $1,092, respectively 17,240 17,708
Other intangibles, less amortization of $2,020
and $1,594, respectively 12,746 13,172
Other 2,197 2,090
Other assets related to discontinued operations - net - 7,632
------------ ---------
53,296 62,087
------------ ---------
TOTAL ASSETS $ 155,965 $ 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>
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ---------
(UNAUDITED) (NOTE)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term bank borrowings (NOTE 2) $ 12,200 $ 17,700
Accounts payable 8,193 9,883
Accrued compensation and payroll taxes 4,117 4,401
Other liabilities and accrued expenses 7,333 8,890
Federal and state income taxes and local taxes 7,571 1,120
Current maturity of capital lease obligations 190 185
Current maturity of long-term debt 4,750 4,250
Current liabilities of discontinued operations - 3,823
------------- ---------
TOTAL CURRENT LIABILITIES 44,354 50,252
CAPITAL LEASE OBLIGATIONS 3,343 3,442
LONG-TERM DEBT 58,885 93,125
DEFERRED INCOME TAXES 11,550 11,828
DEFERRED INCOME TAXES OF DISCONTINUED OPERATIONS - 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 7,344 7,368
Cost of common stock in treasury--1,033,822
and 1,056,985 shares, respectively (8,423) (8,611)
Accumulated other comprehensive income (loss) (112) (1,187)
Retained earnings 38,931 30,565
------------- ---------
37,833 28,228
------------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,965 $ 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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SALES $ 34,705 $ 33,157 $ 68,696 $ 72,972
COST OF PRODUCTS SOLD 20,954 18,152 40,015 45,730
--------- --------- --------- ---------
GROSS PROFIT 13,751 15,005 28,681 27,242
OPERATING EXPENSES:
Selling 5,749 6,052 11,935 13,544
Administrative 3,815 4,328 7,526 7,888
Engineering 3,963 4,890 8,238 9,308
--------- --------- --------- ---------
13,527 15,270 27,699 30,740
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 224 (265) 982 (3,498)
OTHER INCOME (EXPENSE):
Interest income 55 179 72 381
Interest expense (1,814) (2,398) (4,327) (4,727)
Other, net (18) 16 (126) (58)
--------- --------- --------- ---------
(1,777) (2,203) (4,381) (4,404)
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,553) (2,468) (3,399) (7,902)
INCOME TAX BENEFIT (560) (919) (1,305) (3,314)
--------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (993) (1,549) (2,094) (4,588)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
LESS APPLICABLE INCOME TAXES (NOTE 3) 10,134 (91) 10,460 (171)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 9,141 $ (1,640) $ 8,366 $ (4,759)
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE - BASIC:
Loss from continuing operations $ (0.12) $ (0.19) $ (0.25) $ (0.56)
Earnings (loss) from discontinued operations 1.23 (0.01) 1.27 (0.02)
--------- --------- --------- ---------
Net Earnings (loss) $ 1.11 $ (0.20) $ 1.02 $ (0.58)
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS (LOSS) PER SHARE - DILUTED:
Loss from continuing operations $ (0.12) $ (0.19) $ (0.25) $ (0.56)
Earnings (loss) from discontinued operations 1.23 (0.01) 1.27 (0.02)
--------- --------- --------- ---------
Net Earnings (loss) $ 1.11 $ (0.20) $ 1.02 $ (0.58)
--------- --------- --------- ---------
--------- --------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING 8,231 8,205 8,227 8,200
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTIVE COMMON SHARES OUTSTANDING 8,231 8,205 8,227 8,200
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 8,366 $ (4,759)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 2,531 3,159
Amortization of intangibles 1,399 1,906
Amortization of loan origination fees 189 -
Gain on sale of OTM Division (17,207) -
Deferred income taxes 543 (5,205)
Deferred compensation expense 44 -
Utilization of acquired tax loss carryforwards - 416
Changes in operating assets and liabilities:
Accounts receivable 7,932 8,886
Inventories 10,108 5,043
Other current assets (227) 1,324
Accounts payable and accrued liabilities (7,354) (10,891)
Other current liabilities 6,451 (1,838)
--------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 12,775 (1,959)
INVESTING ACTIVITIES
Proceeds from OTM Sale 43,988 -
Disposal of OTM investment (16,463) -
Purchases of property and equipment (2,134) (2,484)
Proceeds from sale of property and equipment 44 1,071
Sundry (256) 1,805
----------- ----------
NET CASH PROVIDED IN INVESTING ACTIVITIES 25,179 392
FINANCING ACTIVITIES
Principal payments on capital lease obligations (94) (221)
Principal payments on long-term debt (33,740) (875)
Principal payments on short-term bank borrowings (19,560) -
Proceeds from short-term bank borrowings 14,060 2,000
Proceeds from exercise of common stock options 164 1,037
---------- ----------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (39,170) 1,941
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,075 1,333
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (141) 1,707
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,086 366
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,945 $ 2,073
---------- ----------
---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
IFR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 and six month
periods ended September 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. The Agreement also includes a swing line
facility aggregating $5,000,000. As of September 30, 1999, the Company has
available unused lines of credit aggregating $12,800,000.
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 8.69% at September 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 $43,988,000 in cash. A net of tax gain of approximately
$10,134,000 (approximately $1.23 per share) was 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>
Six Months Ended September 30,
------------------------------
1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 8,335 $17,159
Income tax expense 310 214
Income (loss) from discontinued operations 326 (171)
Net gain on discontinued operations 10,134 -
</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
The Company's total comprehensive income was as follows: (IN THOUSANDS):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 9,141 $(1,640) $ 8,366 $(4,759)
Other comprehensive income:
Foreign currency translation 2,506 1,421 1,075 1,632
-------------------------------------------------------------
Total comprehensive income (loss) $11,647 $ (219) $ 9,441 $(3,127)
=============================================================
</TABLE>
8
<PAGE>
NOTE 5 - RESTRUCTURING
Restructuring liabilities from the Marconi acquisition of approximately
$7,700,000 were recorded for the period ended June 30, 1998 for severance and
related costs associated with the shutdown of certain acquired facilities.
Payments in the amount of $7,041,000 have been charged against the liability
through September 30, 1999.
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMERATOR
Loss from continuing operations
available to common shareholders $ (993) $(1,549) $(2,094) $(4,588)
================================================================
DENOMINATORS
Basic earnings (loss) per share:
Weighted-average common shares
Outstanding 8,231 8,205 8,227 8,200
Basic loss per share from ================================================================
continuing operations $ (0.12) $ (0.19) $ (0.25) $ (0.56)
================================================================
Diluted earnings (loss) per share:
Weighted-average common shares
Outstanding 8,231 8,205 8,227 8,200
Effect of stock options 16 61 4 164
Weighted-average common shares ----------------------------------------------------------------
Outstanding - diluted 8247 8,266 8,231 8,364
Diluted loss per share from ================================================================
continuing operations $ (0.12) $ (0.19) $ (0.25) $ (0.55)
================================================================
</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
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 $300,000 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 TECHNOLOGY 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 $1,710,000 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 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 $43,988,000 in cash. A net of tax gain of approximately
$10,134,000 (approximately $1.23 per share) has been 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
2ND QUARTER FY00 COMPARED TO 2ND QUARTER FY99
Sales for the second quarter ended September 30, 1999 were $34,705,000
compared to $33,157,000 in the second quarter of the prior year. This represents
an increase of 4.7% or $1,548,000 due to higher sales of spectrum analysers and
avionics test sets offset by lower sales of sources & analyzers test sets.
Gross margins decreased to 39.6% for the current year quarter as
compared to 45.3% in the previous year quarter. The decline in gross margin was
due to the product mix.
Operating expenses decreased 7.1% to 39.0% of sales for the current
quarter as compared to 46.1% in the previous year quarter. The reduction in
operating expenses was across the board with engineering expenses decreasing by
3.3%, administrative expenses were 2.1% less and selling expenses were 1.7%
lower. The decrease in operating expenses was due to head count reductions and
expense controls.
Other expenses decreased $426,000 compared to the prior year quarter as
the result of reduced interest expense resulting from the paydown of debt with
proceeds from the OTM sale.
The estimated effective income tax rate was approximately 36.1% for the
current period and 37.2% for the previous year period. The decrease represents
the impact of the foreign subsidiaries and their related tax rates.
13
<PAGE>
FY00 YEAR-TO-DATE COMPARED TO FY99 YEAR-TO-DATE
Sales for the six months ended September 30, 1999 were $68,696,000
compared to $72,972,000 in the previous year. This represents a decrease of 5.9%
or $4,276,000, due to lower sales of communication test instruments to
government and commercial customers offset by higher avionics and spectrum
analyzer sales.
Gross margins increased 4.5% to 41.8% of sales for the six-month
period. The previous year 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 were 47.1%. The decrease of 5.3%
is due to the product mix and lower sales volume to cover fixed overhead costs.
Operating expenses decreased 1.8% to 40.3% of sales for the six-month
period. Selling expenses decreased 1.2%, engineering expenses decreased 0.8%,
and administrative expenses increased 0.2% as a percentage of sales. The
decrease in operating expenses was due to head count reductions and expense
controls.
Other expenses decreased $23,000 compared to the prior year period as
the result of reduced interest expense and interest income.
The estimated effective income tax rate was 38.4 % for the six months
ended September 30, 1999 and 41.9% in the previous year. The decrease represents
the impact of the foreign subsidiaries and their related tax rates.
14
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company maintains an adequate financial position with working
capital of $33,074,000 at September 30, 1999. The Company generated cash from
operations of $12,775,000 for the six months period ended September 30,1999
compared to a cash outflow of $1,959,000 for the prior year end period. The
increase in funds provided was primarily due to the sale of the OTM Division
$12,600,000.
Cash flows provided in investing activities were $25,179,000 and
$392,000 for the six months period ended September 30, 1999 and 1998,
respectively. The increase in funds provided is due primarily to the proceeds
from the sale of the OTM Division.
Cash flows used in financing activities for the six-month period ended
September 30, 1999 were $39,170,000 compared to cash inflows of $1,941,000 in
the prior year period. Funds from the sale of the OTM Division were used to
reduce long-term debt.
No cash dividends were paid in fiscal year 1999 and no cash dividends
are anticipated to be paid in fiscal year 2000. Certain restrictive debt
covenants allow for the payment of cash dividends 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 September 30, 1999, the Company had purchased an aggregate of
470,000 shares under the program. Certain restrictive covenants limit the amount
of capital stock allowed to be repurchased.
At September 30, 1999, $12,200,000 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.
On June 25, 1999, the Company completed an amendment to the Agreement
which modified certain financial covenants, effective July 1, 1999, to more
favorable 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.
15
<PAGE>
OUTLOOK
The Company is looking for better results in the future. Recently the
Company has begun to see encouraging signs of improving conditions in its
primary communications and test and measurement (T&M) markets. The Company has
seen an increase in requests for proposals and some firming in new orders.
The Company intends to continue to invest heavily in new product
development, with particular emphasis on the expanding wireless communications
and related T&M market segments. This development program is expected to yield a
suite of new products that are scheduled for sale later this fiscal year and
during fiscal year 2001. It is anticipated that these new products will solidify
the Company's competitive position in its target markets.
PART II -- OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 5, 1999, IFR Systems Inc. announced that its President and
Chief Operating Officer, Iain M. Robertson, has elected to take retirement,
effective immediately. Jeffrey A. Bloomer, CEO, assumed Mr. Robertson's
responsibilities as President.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K Filed on July 22, 1999 (Announcement of Sale of
OTM Division)
Form 8-K Filed on September 3, 1999 (Announcement of Appointed
Officers and results of annual meeting).
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: November 12, 1999 /s/ Jeffrey A. Bloomer
---------------- -----------------------------
Jeffrey A. Bloomer,
Chief Executive Officer
(Duly authorized officer)
/s/ Dennis H. Coley
-----------------------------
Dennis H. Coley,
Chief Financial Officer
and Treasurer
(Principal financial and chief
accounting officer)
17
<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> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,945
<SECURITIES> 0
<RECEIVABLES> 26,691
<ALLOWANCES> 661
<INVENTORY> 37,324
<CURRENT-ASSETS> 77,428
<PP&E> 43,365
<DEPRECIATION> 18,124
<TOTAL-ASSETS> 155,965
<CURRENT-LIABILITIES> 44,354
<BONDS> 62,228
0
0
<COMMON> 93
<OTHER-SE> 37,740
<TOTAL-LIABILITY-AND-EQUITY> 155,965
<SALES> 68,696
<TOTAL-REVENUES> 68,696
<CGS> 40,015
<TOTAL-COSTS> 40,015
<OTHER-EXPENSES> 27,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,327
<INCOME-PRETAX> (3,399)
<INCOME-TAX> (1,305)
<INCOME-CONTINUING> (2,094)
<DISCONTINUED> 10,460
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,366
<EPS-BASIC> 1.02
<EPS-DILUTED> 1.02
</TABLE>
