<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, 2000
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 8,271,009 shares of common stock, par value $.01 per share, of
the Registrant outstanding as of October 17, 2000.
<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 September 30, 2000 and
March 31, 2000 3
Condensed Consolidated Statements of Operations for the three and
six months ended September 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows for the three and
six months ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II -- OTHER INFORMATION
Item 5. Other Events 15
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>
SEPTEMBER 30, MARCH 31,
2000 2000
------------ ---------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,686 $ 3,169
Accounts receivable, less $501 and $600
allowance for doubtful accounts, respectively 30,758 29,267
Inventories:
Finished products 12,400 13,278
Work in process 9,422 9,174
Materials 13,776 14,537
------------ ----------
35,598 36,989
Prepaid expenses and sundry 4,041 4,301
Deferred income taxes 2,226 2,248
------------ ----------
TOTAL CURRENT ASSETS 75,309 75,974
PROPERTY AND EQUIPMENT:
Property and equipment 38,810 39,172
Allowances for depreciation (19,695) (17,976)
------------ ----------
19,115 21,196
PROPERTY UNDER CAPITAL LEASE:
Building and machinery 5,201 5,201
Allowances for depreciation (2,640) (2,414)
------------ ----------
2,561 2,787
OTHER ASSETS:
Cost in excess of net assets acquired, less
amortization of $1,928 and $1,556, respectively 19,753 20,125
Developed technology, less amortization
of $2,496 and $2,028, respectively 16,304 16,772
Other intangibles, less amortization of $2,872
and $2,446, respectively 11,894 12,320
Other 2,536 1,972
------------ ----------
50,487 51,189
------------ ----------
TOTAL ASSETS $ 147,472 $ 151,146
============ ==========
</TABLE>
Note: The balance sheet at March 31, 2000 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,
2000 2000
------------- ----------
(UNAUDITED) (NOTE)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 20,900 $ 15,700
Accounts payable 9,575 12,493
Accrued compensation and payroll taxes 3,731 4,262
Other liabilities and accrued expenses 5,833 6,355
Federal and state income taxes and local taxes 3,172 1,800
Current maturity of capital lease obligations 200 190
Current maturity of long-term debt 6,750 5,250
---------- ---------
TOTAL CURRENT LIABILITIES 50,161 46,050
CAPITAL LEASE OBLIGATIONS 3,140 3,248
LONG-TERM DEBT 52,135 56,135
DEFERRED INCOME TAXES 10,619 10,895
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 7,199 7,330
Cost of common stock in treasury--995,241
and 1,025,722 shares, respectively (8,108) (8,357)
Accumulated other comprehensive income (loss) (6,320) (2,072)
Retained earnings 38,553 37,824
---------- ---------
31,417 34,818
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 147,472 $ 151,146
========== =========
</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,
-------------------------------- ------------------------------
2000 1999 2000 1999
------------- -------------- ------------- -----------
<S> <C> <C> <C> <C>
Sales $ 35,862 $ 34,705 $ 70,408 $ 68,696
COST OF PRODUCTS SOLD 20,555 20,954 40,569 40,015
-------- -------- -------- --------
GROSS PROFIT 15,307 13,751 29,839 28,681
OPERATING EXPENSES:
Selling 5,642 5,749 11,679 11,935
Administrative 2,935 3,182 5,581 6,260
Engineering 3,754 3,963 7,193 8,238
Intangibles 633 633 1,266 1,266
-------- -------- -------- --------
12,964 13,527 25,719 27,699
-------- -------- -------- --------
OPERATING INCOME 2,343 224 4,120 982
OTHER INCOME (EXPENSE):
Interest income 20 55 73 72
Interest expense (2,045) (1,814) (4,058) (4,327)
Other, net 39 (18) 920 (126)
-------- -------- -------- --------
(1,986) (1,777) (3,065) (4,381)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 357 (1,553) 1,055 (3,399)
INCOME TAX EXPENSE (BENEFIT) 110 (560) 326 (1,305)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 247 (993) 729 (2,094)
INCOME FROM DISCONTINUED OPERATIONS
LESS APPLICABLE INCOME TAXES - 10,134 - 10,460
-------- -------- -------- --------
NET INCOME $ 247 $ 9,141 $ 729 $ 8,366
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE - BASIC:
Income (loss) from continuing operations $ 0.03 $ (0.12) $ 0.09 $ (0.25)
Income from discontinued operations - 1.23 - 1.27
-------- -------- -------- --------
Net income $ 0.03 $ 1.11 $ 0.09 $ 1.02
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE - DILUTED:
Income (loss) from continuing operations $ 0.03 $ (0.12) $ 0.09 $ (0.25)
Income from discontinued operations - 1.23 - 1.27
-------- -------- -------- --------
Net income $ 0.03 $ 1.11 $ 0.09 $ 1.02
======== ======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 8,256 8,231 8,250 8,227
======== ======== ======== ========
DILUTIVE COMMON SHARES OUTSTANDING 8,300 8,231 8,324 8,227
======== ======== ======== ========
</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,
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 729 $ 8,366
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation of property and equipment 2,090 2,531
Amortization of intangibles 1,266 1,399
Amortization of loan origination fees 373 193
Gain on sale of discontinued operations - (17,207)
Deferred income taxes (254) (340)
Deferred compensation expense - 44
Changes in operating assets and liabilities:
Accounts receivable (1,491) 424
Inventories 1,391 316
Other current assets 260 (558)
Accounts payable and accrued liabilities (3,862) 4,707
Other current liabilities 1,263 (2,010)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,765 (2,135)
INVESTING ACTIVITIES
Proceeds from sale of discontinued operations - 43,988
Purchases of property and equipment (895) (2,134)
Proceeds from sale of equipment 57 44
Sundry (937) (260)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,775) 41,638
FINANCING ACTIVITIES
Principal payments on capital lease obligations (98) (94)
Principal payments on long-term debt (2,500) (33,740)
Principal payments on short-term bank borrowings (21,300) (19,560)
Proceeds from short-term bank borrowings 26,500 14,060
Proceeds from exercise of common stock options 118 164
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,720 (39,170)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,193) (474)
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (483) (141)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,169 5,086
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,686 $ 4,945
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
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 six-month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2001. 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, 2000.
The Company operates in one business segment, electronic test and
measurement (ETM).
NOTE 2 -- BANK BORROWINGS
In June 2000, the Company entered into an amendment of its Credit
Agreement with the bank syndication (the "Agreement"). Both of the term loans
are payable in quarterly installments of principal pursuant to a schedule
contained in the Agreement which calls for such payments to increase over the
term of the loan. Term Loan A and Term Loan B are due June 30, 2002. Under
certain conditions the Company has the ability to extend the term to June 30,
2003. Under the terms of the Agreement, borrowings bear interest at a spread
over LIBOR based on certain financial criteria. The interest rate on the
outstanding portion of the lines of credit was 3.25% over LIBOR at September
30, 2000. As of September 30, 2000, the Company has available unused lines of
credit aggregating $2,100,000.
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 $11,031,000 (approximately $1.34 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.
7
<PAGE>
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
------------------------------------------------------------
<S> <C>
Sales $8,335
Income tax expense 310
Income from discontinued operations 326
Net gain on discontinued operations 10,134
</TABLE>
The consolidated statements of cash flows for 1999 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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 247 $ 9,141 $ 729 $ 8,366
Other comprehensive income:
Foreign currency translation (1,903) 2,506 (4,248) 1,075
----------- ---------- ----------- -----------
Total comprehensive income (loss) $ (1,656) $ 11,647 $ (3,519) $ 9,441
=========== ========== =========== ===========
</TABLE>
NOTE 5 - 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):
IFR SYSTEMS, INC.
Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NUMERATOR
Income (loss) from continuing operations
available to common shareholders $ 247 $ (993) $ 729 $ (2,094)
======= ======== ====== =========
DENOMINATORS
Basic earnings (loss) per share:
Weighted-average common shares outstanding 8,256 8,231 8,250 8,227
Basic earnings (loss) per share from ======= ======== ====== =========
continuing operations $ 0.03 $ (0.12) $ 0.09 $ (0.25)
======= ======== ====== =========
Diluted earnings (loss) per share:
Weighted-average common shares outstanding 8,256 8,231 8,250 8,227
Effect of stock options 44 16 74 4
------- -------- ------ ---------
Diluted weighted-average shares outstanding 8,300 8,247 8,324 8,231
Diluted earnings (loss) per share from ======= ======== ====== =========
continuing operations $ 0.03 $ (0.12) $ 0.09 $ (0.25)
======= ======== ====== =========
</TABLE>
Note - Since the effect of stock options for the three and six month
periods ended September 30, 1999 is antidilutive, the face of the statements
of operations reflects diluted per share amounts equal to the basic per share
amounts.
8
<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, (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)
inability to hire sufficient personnel at reasonable levels of compensation
and other labor problems, (15) inability to realize anticipated efficiencies
and savings from the Company's acquisition of Marconi Instruments, Limited
and (16) other risks described herein.
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 $11,031,000 (approximately $1.34 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. The consolidated statements of cash flows in 1999 include the OTM
Division.
RESULTS OF OPERATIONS
9
<PAGE>
<TABLE>
<CAPTION>
IFR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERTIONS--PERCENT OF SALES
(UNAUDITED)
THREE MONTHS ENDED INCREASE SIX MONTHS INCREASE
SEPTEMBER 30, (DECREASE) SEPTEMBER 30, (DECREASE)
------------------------ ----------------------
2000 1999 2000 1999
---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
SALES 100.0% 100.0% 100.0% 100.0%
COST OF PRODUCTS SOLD 57.3% 60.4% 57.6% 58.2%
--------- -------- -------- -------
GROSS PROFIT 42.7% 39.6% 3.1% 42.4% 41.8% 0.6%
OPERATING EXPENSES:
Selling 15.7% 16.6% (0.9)% 16.6% 17.4% (0.8)%
Administrative 8.2% 9.2% (1.0)% 7.9% 9.1% 1.2)%
Engineering 10.5% 11.4% (0.9)% (10.2) 12.0% (1.8)%
Goodwill 1.8% 1.8% 0.0% 1.8% 1.8% 0.0%
---------- -------- ------- -------- -------- -------
36.2% 39.0% (2.8)% 36.5% 40.3% (3.8)%
OPERATING INCOME 6.5% 0.6% 5.9% 5.9% 1.5% 4.4%
OTHER INCOME (EXPENSE):
Interest income 0.1% 0.2% (0.1%) 0.1% 0.1% 0.0%
Interest expense (5.7%) (5.2%) (0.5%) (5.8%) (6.3%) 0.5%
Other, net 0.1% (0.1%) 0.2% 1.3% (0.2%) 1.5%
--------- -------- ------ -------- ------- -----
(5.5%) (5.1%) (0.4%) (4.4%) (6.4%) 2.0%
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1.0% (4.5%) 5.5% 1.5% (4.9%) 6.4%
INCOME TAX EXPENSE (BENEFIT) 0.3% (1.6%) (1.9%) 0.5% (1.9%) (2.4%)
--------- -------- ------ -------- ------- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS 0.7% (2.9%) 3.6% 1.0% (3.0%) 4.0%
</TABLE>
10
<PAGE>
FY01 SECOND QUARTER COMPARED TO FY00 SECOND QUARTER
Sales for the second quarter ended September 30, 2000 were $35,862,000
compared to $34,705,000 in the second quarter of the prior year. This
represents an increase of 3.3% or $1,157,000 due to a 2.8% increase in sales
of test instruments, primarily radio test sets and microwave test sets offset
by lower sales to the government of frequency agile test sets and higher
sales of automated test equipment, and solutions of 0.5% offset by lower
sales of service.
Gross margins increased to 42.7 % for the current year quarter as
compared to 39.6% in the previous year quarter. The increase of 3.1% is due
to a favorable product mix and the implementation of factory floor cost
structure reductions in the prior year.
Operating expenses for the second quarter ended September 30, 2000 were
$12,964,000 compared to $13,527,000 in the second quarter of the prior year.
This represents a decrease of 2.8% to 36.2% of sales for the current quarter
from 39.0% in the second quarter of the prior year. Administrative expenses
decreased 1.0%, engineering expenses decreased 0.9% and selling expenses
decreased 0.9% as a percentage of sales. Goodwill amortization remained at
$633,000 or 1.8% in both periods. Operating expenses in general decreased as
a percent of sales because of the implementation of cost reductions in the
prior year.
Operating profits for the second quarter ended September 30, 2000 were
$2,343,000 compared to $224,000 in the second quarter of the prior year.
Operating income as a percent of sales increased to 6.5% for the current year
quarter as compared to 0.6% in the previous year quarter. The improvement in
operating profit of 5.9% is due to the increase in gross margin of 3.1% and
the reduction in operating expenses of 2.8%.
Other expenses for the second quarter ended September 30, 2000 were
$1,986,000 compared to $1,777,000 in the second quarter of the prior year.
Other expenses as a percent of sales increased to 5.5% for the current
year quarter as compared to 5.1% in the previous year quarter. The increase
in other expenses of 0.4% is due to the increase in interest expense of 0.6%
offset by foreign currency exchange gains of 0.2%.
The estimated effective income tax rate was an expense of approximately
30.8% for the current period and a benefit of 36.1% for the previous year
period. The continuing decrease in the effective rate represents the impact
of the foreign subsidiaries tax strategies and their related tax rates. The
increase in tax expense recognizes the profits of the Company of $357,000 for
the second quarter ended September 30, 2000 compared to a loss of $1,553,000
in the second quarter of the prior year.
FY01 YEAR-TO-DATE COMPARED TO FY00 YEAR-TO-DATE
Sales for the six months ended September 30, 2000 were $70,408,000
compared to $68,696,000 in the previous year. This represents an increase of
2.5% or $1,712,000 due to an increase in sales of test instruments of 2.4%,
primarily radio test sets, microwave test sets and frequency agile test sets
offset by lower sales of avionics test sets and increased sales of automated
test equipment of 0.1%.
Gross margins increased to 42.4% for the six months ended September 30,
2000 as compared to 41.8% in the previous year. The increase of 0.6% is due
to a favorable product mix and the implementation of factory floor cost
structure reductions in the prior year.
11
<PAGE>
Operating expenses for the six months ended September 30, 2000 were
$25,719,000 compared to $27,699,000 in the prior year. This represents a
decrease of 3.8% to 36.5% of sales for the six months from 40.3% in the prior
year. Administrative expenses decreased 1.2%, engineering expenses decreased
1.8% and selling expenses decreased 0.8% as a percentage of sales. Goodwill
amortization remained at $1,266,000 or 1.8% in both periods. Operating
expenses in general decreased as a percent of sales because of the
implementation of cost reductions in the prior year.
Operating profits for the six months ended September 30, 2000 were
$4,120,000 compared to $982,000 in the prior year. Operating income as a
percent of sales increased to 5.9% the six months ended September 30, 2000 as
compared to 1.5% in the previous year. The improvement in operating profit of
4.4% is due to the increase in gross margin of 0.6% and the reduction in
operating expenses of 3.8% as a percentage of sales.
Other expenses for the six months ended September 30, 2000 were
$3,065,000 compared to $4,381,000 in the prior year. Other expenses as a
percent of sales decreased to 4.4% for the six months ended September 30,
2000 as compared to 6.4% in the previous year. The decrease in other expenses
of 2.0% is due to the increase in interest rates of approximately 100 basis
points offset by lower average debt balances and by foreign currency exchange
gains of 1.1%.
The estimated effective income tax rate was an expense of approximately
30.9% for the six months ended September 30, 2000 and a benefit of 38.4% for
the previous year. The decrease in the effective rate of 7.5% represents the
impact of the foreign subsidiaries tax strategies and their related tax
rates. The increase in tax expense recognizes the profits of the Company of
$1,055,000 for the six months ended September 30, 2000 compared to a loss of
$3,399,000 in the prior year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company maintains an adequate financial position with working
capital of $25,148,000 at September 30, 2000. The Company generated cash from
operations of $1,765,000 for the six months period ended September 30, 2000
compared to cash used in operations of $2,135,000 for the previous year. The
increase in cash provided from operations was due to an increase in operating
profits after tax of $2,823,000 offset by an increase in net working capital.
Cash used in investing activities was $1,775,000 for the six months
period ended September 30, 2000 compared to cash provided by investing
activities of $41,638,000 in the previous year. Excluding the proceeds from
the sale of the OTM of $43,988,000, cash used in investing activities in the
prior period was $2,350,000. The primary component of cash used is the
payment of loan origination costs for amendment #5 to the credit agreement
offset by reduced purchases of capital assets.
Cash flows provided by financing activities was $2,720,000 for the six
months period ended September 30, 2000 and cash flows used in financing
activities of $39,170,000 in the previous year. The increase in funds
provided was due primarily to the proceeds of short-term borrowings offset by
normal long-term debt principal payments and the prior period paydown of debt
with the proceeds from the OTM division sale.
No cash dividends were paid in fiscal year 2000 and no cash dividends
are anticipated to be paid in fiscal year 2001. Restrictive payment covenants
in the amended debt agreement 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
12
<PAGE>
the anticipated excess cash flow during the year. As of September 30, 2000,
the Company had purchased an aggregate of 470,000 shares under the program.
Restrictive covenants in the amended debt Agreement limit the amount of
capital stock allowed to be purchased.
At September 30, 2000, $20,900,000 was outstanding under the lines of
credit.
In June 2000, the Company completed an amendment to the Agreement which
increased the interest rate by approximately 25 basis points effective June
15, 2000. In addition, the amendment provides for a reduction in the
aggregate revolving loan commitment from $25,000,000 to $23,000,000.
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, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. The Company does not
enter into derivatives or other financial instruments for trading or
speculative purposes.
The Company is exposed to interest rate risk primarily
from its Credit Agreement ("the Agreement") in which floating rates are based
upon the relationship between earnings before interest, depreciation and
taxes (EBITDA) and total debt. To mitigate the impact of fluctuations in
interest rates, the Company has entered into two interest rate swap contracts
on $50,000,000 of the associated debt. The first contract with a notional
amount of $25,000,000 has a fixed rate of 5.76% and expires on March 31,
2001. The contract includes at the option of the provider to extend the swap
until March 31, 2003. The second contract with a notional amount of
$25,000,000 has a fixed rate of 5.8% and expires on March 31, 2001. The
contract also includes at the option of the provider to extend the swap until
March 31, 2003. Because of the Company's interest rate swap agreements a
hypothetical 10% movement in interest rates would not have a material impact
on net income.
Due to the global nature of its operations, the Company conducts its
business in various foreign currencies (primarily the currencies of Western
Europe) and as a result, is subject to the exposures that arise from foreign
exchange rate movements. Such exposures arise primarily from the translation
of results of operations from outside the United States. Because the Company
intends to maintain its international operations and not repatriate earnings
from those operations, IFR does not hedge its net investment exposure.
OUTLOOK
CONTINUED FOCUS ON TECHNOLOGY. Earlier this year, the Company created
dedicated engineering and marketing customer response teams. Each group -
radio test sets, signal sources, signal analyzers, microwave analyzers and
avionics has the resources and structure to concentrate our product
development and marketing efforts. We are seeing improved results from this
reorganization. We have accelerated our new technology initiatives as they
relate to advanced digital wireless systems development. In addition, we have
dramatically improved our involvement with these customer development groups.
Through the marketing functions of these business units, we have conducted
over 50 marketing/engineering related meetings with over 500 key
decision-makers in targeted markets that IFR believes to be critical in our
future success. The Company is realizing benefits from these efforts with
accelerated development-to-delivery processes and improved customer service.
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A primary focus will continue to be on advanced digital wireless test for
the next generation of digital cellular systems. In addition, our test systems
for new European and American digital public and private mobile radio systems
are beginning to gain momentum with the release of new products.
We will continue to strengthen our position in wireless signal generators
and analyzers with enhanced analog and digital functions, and focus new
resources on advanced digital test systems for R&D, production and service
applications.
NEW PRODUCT INTRODUCTIONS. The Company announced a number of new products
and new product enhancements during the quarter. We introduced the 2029 Digital
I/Q modulator for wireless/cellular systems. This technology allows designers
and manufacturing engineers the ability to upgrade existing analog signal
generators to digital capabilities with minimal capital expenditures.
The Company is a global leader in the Public Mobile Radio (PMR) market. The
Company recently announced significant improvements in our 2968 TErrestrial
Trunked RAdio (TETRA) test system. The enhanced 2968 Test Set is fully compliant
with TIPv2 (TETRA Interoperability Profile version 2), which ensures future
compatibility with the wide range of TETRA terminals now being developed. The
Company launched the 2975 Digital PMR test set for testing the new P25 standard
being deployed by a number of police and public safety operations. The Company
sees a bright future for its products in this market.
IFR also announced two enhancements to our 6800 microwave test systems.
These include a Group Delay module that adds group delay measurements and
frequency modulation for microwave test applications, and Guided Scalar
Measurement software that allows the 6800 to be configured so that unskilled
operators can simply and precisely perform complex or repetitive measurements.
STRATEGIC ALLIANCES. IFR continues to look for strategic partners to
leverage existing distribution channels and to add value for our customers.
During the second quarter, IFR forged two new alliances with internationally
renowned test equipment manufacturers.
LeCroy, headquartered in Chestnut Ridge, N.Y, is a leading supplier of
high performance digital oscilloscopes and test equipment. Under a newly
created partnership, IFR will be the exclusive distributor for LeCroy's test
and measurement products in Spain and Portugal. LeCroy will become a key
distributor for IFR's test and measurement products in Italy and an exclusive
distributor for IFR in Switzerland.
IFR became the exclusive distributor for Hameg Instruments,
headquartered in Frankfurt, Germany, for the United States and Canada. This
arrangement allows Hameg to utilize IFR's distribution expertise in North
America, and also complements IFR offerings with a line of reliable,
cost-effective test equipment.
The Company does not expect sales of any one of these new products to be
large enough to drive growth by itself. The Company's primary focus will be
on advanced digital wireless test applications. The Company's objective is to
dramatically broaden new communications product offerings to allow the
Company to address more applications. The Company's new product development
structure allows the Company to work directly with existing and potential
customers to solve their specific test problems by establishing immediate
feedback models.
The Company expects our new products to represent an increasing share of
total sales in the quarters ahead. You can look for more product
announcements throughout the fiscal year with the primary focus on advanced
digital wireless test applications.
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PART II -- OTHER INFORMATION
ITEM 5. OTHER EVENTS
At the Registrant's 2000 annual meeting of stockholders held on August 25,
2000 (the "Annual Meeting"), shareholders elected the two proposed nominees as
Directors, approved the appointment of Ernst & Young LLP as independent
auditors, and approved the 1992 Amended and Restated Nonqualified Option Plan
(the "Option Plan"). Reference is hereby made to the definitive proxy statement
for the Annual meeting filed by the Registrant, which is hereby incorporated by
reference, for a description of the Option Plan and for information concerning
the two persons elected Directors and the five persons whose terms have not
expired as Directors.
The following table sets information concerning the voting on each matter
submitted for consideration at the Annual Meeting.
<TABLE>
<CAPTION>
Matter For Against Withheld Broker Non-Votes
------ --- ------- -------- ----------------
<S> <C> <C> <C> <C>
Election of Directors:
Alfred H Hunt III 7,530,197 205,032 -
Frederick R. Hume 7,503,146 232,083 -
Approval of Appointment
Of Auditors 7,691,317 30,941 12,971 -
Option Plan 5,750,340 1,911,679 41,421 31,789
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.0 Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFR SYSTEMS, INC.
DATE: November 13, 2000 /s/ Jeffrey A. Bloomer
----------- -------------------------------------
Jeffrey A. Bloomer,
Director, President and
Chief Executive Officer
(Duly authorized officer)
DATE: November 13, 2000 /s/ Dennis H. Coley
----------- -------------------------------------
Dennis H. Coley,
Chief Financial Officer
and Treasurer
(Principal financial and chief
accounting officer)
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