UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 8,270,009 shares of common stock, par value $.01 per share, of
the Registrant outstanding as of January 2, 2001.
IFR SYSTEMS, INC.
FORM 10-Q
INDEX
PART I -- FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31,
2000 and March 31, 2000 3
Condensed Consolidated Statements of Operations for
the three and nine months ended December 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flow for the
nine months ended December 31, 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 10
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
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
2000 2000
----------- ---------
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,586 $ 3,169
Accounts receivable, less $494 and $600
allowance for doubtful accounts, respectively 29,246 29,267
Inventories:
Finished products 11,687 13,278
Work in process 10,007 9,174
Materials 14,974 14,537
--------- ---------
36,668 36,989
Prepaid expenses and sundry 3,974 4,301
Deferred income taxes 2,237 2,248
--------- ---------
TOTAL CURRENT ASSETS 77,711 75,974
PROPERTY AND EQUIPMENT:
Property and equipment 39,556 39,172
Allowances for depreciation (20,457) (17,976)
--------- ---------
19,099 21,196
PROPERTY UNDER CAPITAL LEASE:
Building and machinery 5,201 5,201
Allowances for depreciation (2,752) (2,414)
--------- ---------
2,449 2,787
OTHER ASSETS:
Cost in excess of net assets acquired, less
amortization of $2,114 and $1,556, respectively 19,567 20,125
Developed technology, less amortization
of $2,730 and $2,028, respectively 16,070 16,772
Other intangibles, less amortization of $3,085
and $2,446, respectively 11,681 12,320
Other 2,310 1,972
--------- ---------
49,628 51,189
--------- ---------
TOTAL ASSETS $ 148,887 $ 151,146
========= =========
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
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
2000 2000
----------- ---------
(UNAUDITED) (NOTE)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 23,000 $ 15,700
Accounts payable 9,285 12,493
Accrued compensation and payroll taxes 4,137 4,262
Other liabilities and accrued expenses 5,763 6,355
Federal and state income taxes and local taxes 3,029 1,800
Current maturity of capital lease obligations 200 190
Current maturity of long-term debt 8,000 5,250
--------- ---------
TOTAL CURRENT LIABILITIES 53,414 46,050
CAPITAL LEASE OBLIGATIONS 3,040 3,248
LONG-TERM DEBT 49,510 56,135
DEFERRED INCOME TAXES 10,481 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 7,202 7,330
Cost of common stock in treasury--996,241
and 1,025,722 shares, respectively (8,116) (8,357)
Accumulated other comprehensive loss (5,464) (2,072)
Retained earnings 38,727 37,824
--------- ---------
32,442 34,818
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 148,887 $ 151,146
========= =========
See notes to condensed consolidated financial statements.
4
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
SALES $ 34,512 $ 35,265 $ 104,920 $ 103,961
COST OF PRODUCTS SOLD 19,411 21,872 59,980 61,887
--------- --------- --------- ---------
GROSS PROFIT 15,101 13,393 44,940 42,074
OPERATING EXPENSES:
Selling 5,795 6,148 17,474 18,083
Administrative 2,928 4,411 8,509 10,671
Engineering 3,490 4,315 10,683 12,553
Amortization of intangibles 633 633 1,899 1,899
--------- --------- --------- ---------
12,846 15,507 38,565 43,206
--------- --------- --------- ---------
OPERATING INCOME (LOSS) 2,255 (2,114) 6,375 (1,132)
OTHER INCOME (EXPENSE):
Interest income 73 67 146 139
Interest expense (2,031) (1,881) (6,089) (6,208)
Other, net (48) (184) 872 (310)
--------- --------- --------- ---------
(2,006) (1,998) (5,071) (6,379)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 249 (4,112) 1,304 (7,511)
INCOME TAX EXPENSE (BENEFIT) 75 (1,480) 401 (2,785)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS 174 (2,632) 903 (4,726)
INCOME FROM DISCONTINUED OPERATIONS
LESS APPLICABLE INCOME TAXES -- -- -- 10,460
--------- --------- --------- ---------
NET INCOME (LOSS) $ 174 $ (2,632) $ 903 $ 5,734
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE - BASIC:
Income (loss) from continuing operations $ 0.02 $ (0.32) $ 0.11 $ (0.57)
Income from discontinued operations -- -- -- 1.27
--------- --------- --------- ---------
Net income (loss) $ 0.02 $ (0.32) $ 0.11 $ 0.70
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE - DILUTED:
Income (loss) from continuing operations $ 0.02 $ (0.32) $ 0.11 $ (0.57)
Income from discontinued operations -- -- -- 1.27
--------- --------- --------- ---------
Net income (loss) $ 0.02 $ (0.32) $ 0.11 $ 0.70
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING 8,271 8,236 8,257 8,230
========= ========= ========= =========
DILUTIVE COMMON SHARES OUTSTANDING 8,276 8,236 8,290 8,230
========= ========= ========= =========
See notes to condensed consolidated financial statements.
5
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-----------------------
2000 1999
-------- --------
OPERATING ACTIVITIES
Net income $ 903 $ 5,734
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation of property and equipment 3,084 3,659
Amortization of intangibles 1,899 2,032
Amortization of loan origination fees 597 298
Gain on sale of discontinued operations -- (17,207)
Deferred income taxes (403) (489)
Deferred compensation expense -- 90
Changes in operating assets and liabilities:
Accounts receivable 21 560
Inventories 321 574
Other current assets 327 37
Accounts payable and accrued liabilities (3,816) 372
Other current liabilities 1,120 1,841
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,053 (2,499)
INVESTING ACTIVITIES
Proceeds from sale of discontinued operations -- 43,988
Purchases of property and equipment (1,594) (2,738)
Proceeds from sale of equipment 86 87
Sundry (935) (269)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,443) 41,068
FINANCING ACTIVITIES
Principal payments on capital lease obligations (198) (189)
Principal payments on long-term debt (3,875) (34,865)
Principal payments on short-term bank borrowings (27,200) (24,960)
Proceeds from short-term bank borrowings 34,500 20,060
Proceeds from exercise of common stock options 113 165
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,340 (39,789)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,533) 448
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,417 (772)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,169 5,086
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,586 $ 4,314
======== ========
See notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 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 nine-month period ended December 31,
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 December 31, 2000. As of December 31, 2000, the
Company has no capacity for additional borrowings under its lines of credit.
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
($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
The results of operations for the OTM Division have been segregated and
classified as discontinued operations in the consolidated statements of
operations. Selected results of operations for the OTM Division follows (in
thousands):
Nine Months
Ended
December 31,
1999
------------
Sales $ 8,335
Income tax expense 310
Income from discontinued operations 326
Net gain on discontinued operations 10,134
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):
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
Net income $ 174 $(2,632) $ 903 $ 5,734
Other comprehensive income:
Foreign currency translation 856 (851) (3,392) 224
------- ------- ------- -------
Total comprehensive income (loss) $ 1,030 $(3,483) $(2,489) $ 5,958
======= ======= ======= =======
8
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)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
NUMERATOR
Income (loss) from continuing operations
available to common shareholders $ 174 $(2,632) $ 903 $(4,726)
======= ======= ======= =======
DENOMINATORS
Basic earnings (loss) per share:
Weighted-average common shares outstanding 8,271 8,236 8,257 8,230
======= ======= ======= =======
Basic earnings (loss) per share from
continuing operations $ 0.02 $ (0.32) $ 0.11 $ (0.57)
======= ======= ======= =======
Diluted earnings (loss) per share:
Weighted-average common shares outstanding 8,271 8,236 8,257 8,230
Effect of stock options 5 8 33 4
------- ------- ------- -------
Diluted weighted-average shares outstanding 8,276 8,244 8,290 8,234
======= ======= ======= =======
Diluted earnings (loss) per share from
continuing operations $ 0.02 $ (0.32) $ 0.11 $ (0.57)
======= ======= ======= =======
Note - Since the effect of stock options for the three and nine month periods
ended December 31, 1999 is antidilutive, the face of the statements of
operations reflects diluted per share amounts equal to the basic per share
amounts.
9
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
($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.
10
RESULTS OF OPERATIONS
IFR SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS-PERCENT OF SALES
(UNAUDITED) (1999 NORMALIZED FOR COST REDUCTIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- INCREASE ------------------ INCREASE
2000 1999 (DECREASE) 2000 1999 (DECREASE)
------ ------ ---------- ------ ------ ----------
SALES 100.0% 100.0% 100.0% 100.0%
COST OF PRODUCTS SOLD 56.2% 60.0% 57.2% 58.8%
----- ----- ----- -----
GROSS PROFIT 43.8% 40.0% 3.8% 42.8% 41.2% 1.6%
OPERATING EXPENSES:
Selling 16.8% 16.6% 0.2% 16.7% 17.1% (0.4%)
Administrative 8.5% 7.8% 0.7% 8.1% 8.7% (0.6%)
Engineering 10.1% 11.3% (1.2%) 10.2% 11.8% (1.6%)
Goodwill 1.8% 1.8% 0.0% 1.8% 1.8% 0.0%
----- ----- ---- ----- ----- -----
37.2% 37.5% (0.3%) 36.8% 39.4% (2.6%)
OPERATING INCOME 6.6% 2.5% 4.1% 6.0% 1.8% 4.2%
OTHER INCOME (EXPENSE):
Interest income 0.2% 0.2% 0.0% 0.1% 0.1% 0.0%
Interest expense (5.9%) (5.3%) (0.6%) (5.8%) (6.0%) 0.2%
Other, net (0.1%) (0.5%) 0.4% 0.8% (0.3%) 1.1%
----- ----- ---- ----- ----- -----
(5.8%) (5.6%) (0.2%) (4.9%) (6.2%) 1.3%
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 0.8% (3.1%) 3.9% 1.1% (4.4%) 5.5%
INCOME TAX EXPENSE (BENEFIT) 0.2% (1.1%) (1.3%) 0.4% (1.6%) (2.0%)
----- ----- ---- ----- ----- -----
INCOME (LOSS) FROM CONTINUING OPERATIONS 0.6% (2.0%) 2.6% 0.7% (2.8%) 3.5%
===== ===== ==== ===== ===== =====
Note: Gross margin and operating expenses for the three and nine months ended
December 31, 1999 above exclude the one time cost reduction charges of $720,000
in cost of products sold, $286,000 in selling expense, $1,659,000 in
administrative expense and $323,000 in engineering expense incurred during the
third quarter of last year.
FY01 THIRD QUARTER COMPARED TO NORMALIZED FY00 THIRD QUARTER
Explanations for gross margin and operating expenses below exclude the one
time cost reduction charges of $720,000 in cost of products sold, $286,000 in
selling expense, $1,659,000 in administrative expense and $323,000 in
engineering expense incurred during the third quarter of last year.
Sales for the third quarter ended December 31, 2000 were $34,512,000
compared to $35,265,000 in the third quarter of the prior year. This represents
a decrease of 2.1% or $753,000 due to a 8.3% increase in sales of radio test
sets, automated test equipment, service and solutions offset by a 13.0% decrease
in sales of microwave test sets, frequency agile test sets and avionics. Gross
margins increased to 43.8% for the current year quarter as compared to 40.0% in
the previous year quarter. The increase is due to a favorable product mix and
the implementation of factory floor cost structure reductions in the prior year.
11
Operating expenses for the third quarter ended December 31, 2000 were
$12,846,000 compared to $13,239,000 in the third quarter of the prior year. This
represents a decrease to 37.2% of sales for the current quarter from 37.5% in
the third quarter of the prior year. Administrative expenses increased 0.7%,
selling expenses increased 0.2% and engineering expenses decreased 1.2% 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 third quarter ended December 31, 2000 were
$2,255,000 compared to $874,000 in the third quarter of the prior year.
Operating income as a percent of sales increased to 6.5% for the current year
quarter as compared to 2.5% in the previous year quarter. The improvement in
operating profit is due to the increase in gross margin and the reduction in
operating expenses.
Other expenses for the third quarter ended December 31, 2000 were
$2,006,000 compared to $1,998,000 in the third quarter of the prior year. Other
expenses as a percent of sales increased to 5.8% for the current year quarter as
compared to 5.6% in the previous year quarter. The increase in other expenses is
due to the increase in interest expense offset by exchange gains and asset
sales.
The estimated effective income tax rate was 30.1% compared to 36.0% 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.
FY01 YEAR-TO-DATE COMPARED TO NORMALIZED FY00 YEAR-TO-DATE
Explanations for gross margin and operating expenses below exclude the one
time cost reduction charges of $720,000 in cost of products sold, $286,000 in
selling expense, $1,659,000 in administrative expense and $323,000 in
engineering expense incurred during the third quarter of last year.
Sales for the nine months ended December 31, 2000 were $104,920,000
compared to $103,961,000 in the previous year. This represents an increase 0.9%
or $959,000 due to a 4.4% increase in sales of radio test sets, automated test
equipment, service and solutions offset by a 3.0% decrease in sales of microwave
test sets, frequency agile test sets and avionics. Gross margins increased to
42.8% for the current nine month period as compared to 41.2% in the previous
year nine month period. The increase is due to a favorable product mix and the
implementation of factory floor cost structure reductions in the prior year.
Operating expenses for the nine months ended December 31, 2000 were
$38,565,000 compared to $40,938,000 in the prior year. This represents a
decrease of 2.6% to 36.8% of sales for the nine months from 39.4% in the prior
year. Operating expenses in general decreased as a percent of sales because of
the implementation of cost reduction programs in the prior year.
Operating profits for the nine months ended December 31, 2000 were
$6,375,000 compared to $1,856,000 in the prior year. Operating income as a
percent of sales increased to 6.0% the nine months ended December 31, 2000 as
compared to 1.8% in the previous year. The improvement in operating profit is
due to the increase in gross margin and the reduction in operating expenses as a
percentage of sales.
Other expenses for the nine months ended December 31, 2000 were $5,071,000
compared to $6,379,000 in the prior year. Other expenses as a percent of sales
decreased to 4.9% for the nine months ended December 31, 2000 as compared to
6.2% in the previous year. The decrease in other expenses 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.
12
The estimated effective income tax rate was 30.8% for the nine months ended
December 31, 2000 compared to 37.1% for the previous year. The decrease in the
effective rate of 6.3% represents the impact of the foreign subsidiaries tax
strategies and their related tax rates.
LIQUIDITY AND SOURCES OF CAPITAL
The Company maintains an adequate financial position with working capital
of $24,297,000 at December 31, 2000. The Company generated cash from operations
of $4,053,000 for the nine months period ended December 31, 2000 compared to
cash used in operations of $2,499,000 for the previous year. The increase in
cash provided from operations was due to an increase in net income from
continuing operations of $5,629,000 offset by a decrease in net working capital.
Cash used in investing activities was $2,443,000 for the nine months period
ended December 31, 2000 compared to cash provided by investing activities of
$41,068,000 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
$2,920,000. The primary component of cash used was the payment of loan
origination costs for amendment to the credit agreement offset by reduced
purchases of capital assets.
Cash flows provided by financing activities was $3,340,000 for the nine
months period ended December 31, 2000 compared to cash flows used in financing
activities of $39,789,000 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 2001 and no cash dividends are
anticipated to be paid in fiscal year 2002. 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 the anticipated excess cash flow during the
year. As of December 31, 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 December 31, 2000, $23,000,000 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 provided 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.
13
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, the ability 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 may also, at the option of the
provider, be extended 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
EXPANDING FOCUS ON TECHNOLOGY. The Company's objectives to focus resources
on digital wireless technology are starting to pay off. The Company recently
employed a new Vice-President of Human Resources and has pursued an aggressive
recruiting drive to increase its capabilities for future product development. It
has expanded the search past national borders with a significant recruiting
drive in India and Eastern Europe. This talented pool of engineering resources
will add an exciting new dimension to the Company's technology base and will
position it for development efforts for the next generation of digital wireless
systems.
The Company is continuing to see better results from its improved
management structure. The Company is pushing to accelerate its new technology
initiatives as they relate to advanced digital wireless systems development.
During the last quarter, the Company has finalized its direction for test in
advanced digital wireless systems, with the primary focus on the next generation
of digital cellular systems.
The Company will continue to strengthen its 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.
FOCUS ON SALES PERFORMANCE. The Company began a strategic assessment of its
international sales processes during fiscal year 2000. The Company is pleased to
report that much of the effort in refining and restructuring its international
sales groups has begun to show improvement. For the last quarter, the Company
saw order bookings jump by over 26% compared to the same time last year. This is
due to improved response times to customer inquiries and improved technical
exchanges between the customer and IFR sales engineers earlier on in the sales
process to closer determine technical requirements.
While the Company has made significant progress in its sales force over the
last year, it will continue to explore new ways to respond to customer inquiries
and to develop improved target marketing strategies for determining additional
new sales opportunities. This effort will be concentrated on improved marketing
and sales processes.
IMPROVED MARKETING STRATEGIES. The Company continues to look for strategic
marketing opportunities with key partners to leverage existing distribution
channels and to add value for its customers. The Company will also be looking
for improvement in its e-commerce
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functions with the goal of capturing inquiries and formulating fast response
e-commerce capabilities to maximize customer value and to quickly leverage its
sales force in meeting customer needs. In addition to these initiatives, the
Company will be launching a formalized program to increase awareness of IFR's
capabilities and product offerings internationally.
NEW PRODUCT DEVELOPMENT. The Company has a number of new product launches
and has continued to increase the investment into its development group. The
Company will continue to announce new product initiatives over the coming year.
PART II -- OTHER INFORMATION
ITEM 5. OTHER EVENTS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) No Form 8-K was filed during the quarter ended December 31, 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: February 13, 2001 /s/ Jeffrey A. Bloomer
--------------------------------
Jeffrey A. Bloomer,
Director, President and
Chief Executive Officer
(Duly authorized officer)
Date: February 13, 2001 /s/ Dennis H. Coley
--------------------------------
Dennis H. Coley,
Chief Financial Officer and Treasurer
(Principal financial and chief
accounting officer)
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