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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, 2001
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 8,282,009 shares of common stock, par value $.01 per share,
of the Registrant outstanding as of January 22, 2002.
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IFR SYSTEMS, INC.
FORM 10-Q
INDEX
<Table>
<Caption>
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31,
2001 and March 31, 2001 3
Condensed Consolidated Statements of Operations for the three and nine
months ended December 31, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 15
Item 6. Exhibits and reports on Form 8-K 15
SIGNATURES 16
</Table>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2001 2001
------------ ----------
(UNAUDITED) (NOTE)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,140 $ 5,087
Accounts receivable, less $622 and $565
allowance for doubtful accounts, respectively 20,274 30,887
Inventories:
Finished products 10,992 12,137
Work in process 7,038 7,566
Materials 15,770 16,207
------------ ----------
33,800 35,910
Prepaid expenses and sundry 6,850 4,163
Deferred income taxes 2,809 2,020
------------ ----------
TOTAL CURRENT ASSETS 68,873 78,067
PROPERTY AND EQUIPMENT:
Property and equipment 42,440 40,586
Allowances for depreciation (23,791) (21,167)
------------ ----------
18,649 19,419
PROPERTY UNDER CAPITAL LEASE:
Building and machinery 5,599 5,561
Allowances for depreciation (3,379) (2,931)
------------ ----------
2,220 2,630
OTHER ASSETS:
Goodwill 25,472 19,381
Developed technology, less amortization
of $3,666 and $2,964, respectively 15,134 15,836
Other intangibles, less amortization of $1,878
and $3,298, respectively 2,388 11,468
Other 2,027 2,084
------------ ----------
45,021 48,769
------------ ----------
TOTAL ASSETS $ 134,763 $ 148,885
============ ==========
</Table>
Note: The balance sheet at March 31, 2001 has been derived from the audited
financial statements at that date and does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
2001 2001
------------ ----------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings $ 23,000 $ 23,000
Accounts payable 7,849 12,370
Accrued compensation and payroll taxes 3,257 4,040
Other liabilities and accrued expenses 9,128 5,867
Federal and state income taxes and local taxes 413 1,213
Current maturity of capital lease obligations 366 326
Current maturity of long-term debt in default 55,135 9,250
------------ ----------
TOTAL CURRENT LIABILITIES 99,148 56,066
CAPITAL LEASE OBLIGATIONS 3,069 3,214
LONG-TERM DEBT - 46,885
DEFERRED INCOME TAXES 8,539 11,676
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 7,132 7,192
Cost of common stock in treasury--984,241
and 994,241 shares, respectively (8,018) (8,100)
Accumulated other comprehensive income (loss) (6,673) (7,173)
Retained earnings 31,473 39,032
------------ ----------
24,007 31,044
------------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 134,763 $ 148,885
============ =========
</Table>
See notes to condensed consolidated financial statements.
4
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
--------- --------- --------- ---------
SALES $ 26,304 $ 34,512 $ 88,268 $ 104,920
COST OF PRODUCTS SOLD 16,477 19,411 55,104 59,980
--------- --------- --------- ---------
GROSS PROFIT 9,827 15,101 33,164 44,940
OPERATING EXPENSES:
Selling 4,833 5,795 15,132 17,474
Administrative 2,338 2,928 7,802 8,509
Engineering 3,489 3,490 10,509 10,683
Amortization of intangibles 318 633 954 1,899
--------- --------- --------- ---------
10,978 12,846 34,397 38,565
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (1,151) 2,255 (1,233) 6,375
OTHER INCOME (EXPENSE):
Interest, net (2,077) (1,958) (5,574) (5,943)
Loss on interest rate swaps (1,969) -- (1,969) --
Gain on sale of machine shop assets -- -- -- 493
Sublease writeoff (651) -- (651) --
Other, net (434) (48) (1,077) 379
--------- --------- --------- ---------
(5,131) (2,006) (9,271) (5,071)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (6,282) 249 (10,504) 1,304
INCOME TAX EXPENSE (BENEFIT) (1,886) 75 (2,945) 401
--------- --------- --------- ---------
NET INCOME (LOSS) $ (4,396) $ 174 $ (7,559) $ 903
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE - BASIC $ (0.53) $ 0.02 $ (0.91) $ 0.11
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE - DILUTED $ (0.53) $ 0.02 $ (0.91) $ 0.11
========= ========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING 8,282 8,271 8,280 8,257
========= ========= ========= =========
DILUTIVE COMMON SHARES OUTSTANDING 8,282 8,276 8,280 8,290
========= ========= ========= =========
</Table>
See notes to condensed consolidated financial statements.
5
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IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
2001 2000
--------- --------
OPERATING ACTIVITIES
Net income (loss) $ (7,559) $ 903
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 3,066 3,084
Amortization of intangibles 954 1,899
Amortization of loan origination fees 675 597
Deferred income taxes (1,189) (403)
Changes in operating assets and liabilities:
Accounts receivable 10,613 21
Inventories 2,110 321
Other current assets (2,687) 327
Accounts payable and accrued liabilities (2,043) (3,816)
Other current liabilities (800) 1,120
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,140 4,053
INVESTING ACTIVITIES
Purchases of property and equipment (1,756) (1,594)
Proceeds from sale of equipment 31 86
Sundry (618) (935)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,343) (2,443)
FINANCING ACTIVITIES
Principal payments on capital lease obligations (131) (198)
Principal payments on long-term debt (1,000) (3,875)
Principal payments on short-term bank borrowings -- (27,200)
Proceeds from short-term bank borrowings -- 34,500
Proceeds from capital lease 26 --
Proceeds from exercise of common stock options 22 113
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,083) 3,340
EFFECT OF EXCHANGE RATE CHANGES ON CASH 339 (2,533)
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS 53 2,417
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,087 3,169
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,140 $ 5,586
========= ========
</Table>
See notes to condensed consolidated financial statements.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 2001
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. Certain reclassifications have been made to prior year
amounts to confirm to current year presentation. 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, 2001 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2002. 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, 2001.
The Company operates in one business segment, electronic test and
measurement (ETM).
NOTE 2 -- BANK BORROWINGS
As of December 31, 2001 the Company is not in compliance with two of the
financial covenants of Amendment 6 of the loan agreement. The covenants are the
minimum fixed charge coverage ratio and the maximum leverage ratio. The Company
has not received a waiver for these violations. Further, the Company did not
make its November interest payment which is a default of the credit agreement.
Accordingly, the Company has reclassified its long-term debt associated with the
default to current liabilities. However, the Company did reach a forbearance
agreement which allows the Company to continue to operate under its current debt
structure until March 4, 2002. The Company is actively seeking various
refinancing alternatives for its current debt structure. In the event the
Company is unable to obtain financing, current cash flows may not be sufficient
for continued operations at present levels. There can be no assurance that such
financing will be available or, if available, will be obtainable on acceptable
terms.
NOTE 3 -- INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 142
(FAS 142), Goodwill and Other Intangible Assets, effective April 1, 2001. FAS
142 discontinues the amortization of goodwill and requires future periodic
testing of goodwill for impairment. In addition, the statement requires
reassessment of the useful lives of previously recognized intangible assets.
As required by the statement, intangible assets that do not meet the
criteria for recognition apart from goodwill must be reclassified. As a result
of the Company's analysis, $6,091,000 of workforce related intangibles were
transferred to goodwill as of April 1, 2001.
7
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With the adoption of the statement, the Company ceased amortization of
goodwill as of April 1, 2001. The following table presents the quarterly results
of the Company on a comparable basis:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------ -------------- ------------- -----------
REPORTED NET INCOME (LOSS) $(4,396) $ 174 $(7,559) $ 903
Goodwill and workforce amortization (net of tax) - 275 - 825
------------ -------------- ------------- -----------
Adjusted net income (loss) $(4,396) $ 449 $(7,559) $ 1,728
============ ============== ============= ===========
BASIC EARNINGS PER SHARE:
Reported net income (loss) $(0.53) $ 0.02 $ (0.91) $ 0.11
Goodwill and workforce amortization (net of tax) - 0.03 - 0.10
------------ -------------- ------------- -----------
Adjusted net income (loss) $(0.53) $ 0.05 $ (0.91) $ 0.21
============ ============== ============= ===========
DILUTED EARNINGS PER SHARE:
Reported net income (loss) $(0.53) $ 0.02 $ (0.91) $ 0.11
Goodwill and workforce amortization (net of tax) - 0.03 - 0.10
------------ -------------- ------------- -----------
Adjusted net income (loss) $(0.53) $ 0.05 $ (0.91) $ 0.21
============ ============== ============= ===========
</Table>
The Company has completed the preliminary goodwill impairment test as required.
The test indicated that an impairment exists. Prior to March 31, 2002 the
Company will complete step two of the required impairment test. This test will
involve the measurement of the amount of impairment loss by comparing the fair
value of the reporting unit with the carrying amount of that goodwill. The
Company expects the impairment loss to be material to the results of operations
for the period as well as to the financial position of the Company.
On a go forward basis, the estimated aggregate amortization expense for the
intangible assets for the year ended March 31, 2002 is approximately $1,271,000,
and $1,236,000 for each of the four years thereafter.
NOTE 4 - DERIVATIVES
The Company adopted Statement of Financial Accounting Standards No. 133
(FAS 133), Accounting for Derivative Instruments and Hedging Activities,
effective April 1, 2001. The Company's derivative activities are initiated
within the guidelines of documented corporate risk-management policies and do
not create additional risk because gains and losses on derivative contracts
offset gains and losses on the assets, liabilities and transactions being
hedged. As derivative contracts are initiated, the Company designates the
instruments individually as either a fair value hedge or a cash flow hedge.
Management reviews the correlation and effectiveness of its derivatives on a
periodic basis.
8
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For derivative contracts that are designated and qualify as fair value
hedges, the derivative instrument is marked to market with gains and losses
recognized currently in income to offset the respective gains and losses
recognized on the underlying exposure. For derivative contracts that are
designated and qualify as cash flow hedges, the effective portion of gains and
losses on these contracts is reported as a component of other comprehensive
income and reclassified into earnings in the same period the hedged transaction
affects earnings. Hedge ineffectiveness is immediately recognized in earnings.
Derivative contracts that are not designated as hedging instruments are recorded
at fair value with the gain or loss recognized in current earnings during the
period of change.
In the normal course of business, operations of the Company are exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing and operating activities. The Company addresses a portion
of these risks through a controlled program of risk management that includes the
use of derivative financial instruments. The objective in controlling these
risks is to limit the impact on earnings of fluctuations of interest rates. The
Company's primary interest rate risk exposure results from changes in short-term
U.S. dollar interest rates. In an effort to manage interest rate exposures, the
Company may enter interest rate swaps. Interest rate swaps that convert floating
rate debt to a fixed-rate are designated as cash flow hedges. Interest expense
on the debt is adjusted to include the payments made or received under the swap
agreements.
At December 31, 2001, the Company's cash flow hedges were determined to be
ineffective because it was no longer probable that the Company would maintain
debt levels corresponding to the underlying notional value of the swaps. Amounts
reflected in accumulated other comprehensive loss related to the ineffective
portion of fair value cash flow hedges were immediately recognized in earnings
in the quarter ended December 31, 2001. This loss on interest rate swaps was
$1,969,000.
NOTE 5 - COMPREHENSIVE INCOME
Total comprehensive loss was $5,420,000 and $7,059,000 for the three and
nine months ended December 31, 2001. The difference between the total
comprehensive loss and net income (loss) is due to foreign currency translation
adjustments. Details are as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
--------- -------- ---------- --------
NET INCOME (LOSS) $(4,396) $ 174 $(7,559) $ 903
Other comprehensive income:
Unrecognized loss on interest rate derivative:
Accumulated impact of accounting change - - (1,022) -
Change in current period market value - - 1,022 -
------- ------- ------- -------
- - - -
Foreign currency translation (1,024) 856 500 (3,392)
------- ------- ------- -------
TOTAL COMPREHENSIVE INCOME (LOSS) $(5,420) $ 1,030 (7,059) (2,489)
======= ======= ======= =======
</Table>
9
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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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ------- --------- -------
NUMERATOR
Income (loss) available to common shareholders $ (4,396) $ 174 $ (7,559) $ 903
======== ====== ======== ======
DENOMINATORS
Basic earnings (loss) per share:
Weighted-average common shares outstanding 8,282 8,271 8,280 8,257
======== ====== ======== ======
Basic income (loss) per share $ (0.53) $ 0.02 $ (0.91) $ 0.11
======== ====== ======== ======
Diluted earnings (loss) per share:
Weighted-average common shares outstanding 8,282 8,271 8,280 8,257
Effect of stock options (A) - 5 - 33
-------- ------ -------- ------
Diluted weighted-average shares outstanding 8,282 8,276 8,280 8,290
======== ====== ======== ======
Diluted income (loss) per share $ (0.53) $ 0.02 $ (0.91) $ 0.11
======== ====== ======== ======
</Table>
(A) - Since the effect of stock options for the fiscal year 2002 interim period
is antidilutive, the face of the statements of operations reflects diluted per
share amounts equal to the basic per share amounts.
10
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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," "plan," "intend," "believe," "will,"
"potential," "strategy," "forecast," 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 materially 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) uncertain 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)
difficulty in implementing the Company's strategies to reduce costs and improve
cash flow, which will require, among other things (a) working capital reductions
to generate cash flow and allow the Company to reduce its debt; (b) streamlining
of the Company's overhead structure; and (c) capital spending reductions while
continuing to support new product sales and development, (16) the Company's
ability to avoid periods of net losses which could require the Company to find
additional sources of financing to fund operations, implement its business
strategy, meet anticipated capital expenditures, research and development costs
and financing commitments, (17) difficulties in implementing the Company's
strategies to amend, renegotiate or replace the Company's outstanding Amended
and Restated Credit Agreement (as amended) upon favorable terms, (18) inability
to reduce the Company's debt and limit the Company's vulnerability to general
adverse economic conditions; increase its ability to compete with competitors
that are less leveraged; increase its ability to fund future working capital
needs, capital expenditures, acquisitions, research and development costs and
other general corporate requirements; and increase its flexibility to react to
changes in the businesses and industry in which it operates, (19) inability to
comply with the covenants in the Amended Credit Agreement and certain of the
agreements governing short-term lines of credit, the failure of which has
resulted in an event of
11
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default, (20) inability to cure existing loan defaults or to negotiate further
forbearance agreements, and (21) other risks described herein.
RESULTS OF OPERATIONS
FY02 THIRD QUARTER COMPARED TO FY01 THIRD QUARTER
Included in gross margin and operating expenses are one time cost reduction
charges of $0.1 million in cost of products sold, $0.2 million in selling
expense, $0.2 million in administrative expense and $0.3 million in engineering
expense incurred during the third quarter.
Sales for the third quarter ended December 31, 2001 were $26.3 million
compared to $34.5 million in the third quarter of the prior year. This
represents a decrease of 23.8% due to a 42.2% decrease in sales of radio test
sets, frequency agile test sets, sources and automated test equipment offset by
an 8.0% increase in sales of microwave test sets, avionics and service. Gross
margins decreased to 37.4% for the current year quarter as compared to 43.8% in
the previous year quarter. The decrease is due to an unfavorable product mix and
fixed cost allocated to a reduced sales base.
Operating expenses for the third quarter ended December 31, 2001 were $11.0
million, compared to $12.8 million in the third quarter of the prior year. This
represents a 14.5% decrease from the third quarter of the prior year. Compared
to the third quarter of the prior year administrative and selling expenses
decreased 20.2% and 16.6%, respectively, and engineering expenses remained
constant. Intangible amortization decreased to $0.3 million in the current
quarter from $0.6 million in the prior year quarter due to the early adoption of
a new accounting standard. In general, operating expenses increased as a percent
of sales because of the reduced sales base.
Operating losses for the third quarter ended December 31, 2001 were $1.2
million compared to operating profits of $2.3 million in the third quarter of
the prior year. The decline in operating profit is due to reduced sales and a
corresponding reduction in gross margin offset by reductions in operating
expenses.
Other expenses for the third quarter ended December 31, 2001 were $5.1
million compared to $2.0 million in the third quarter of the prior year. The
increase in other expenses is due to a loss of $2.0 million related to interest
rate swaps, the write-off of deferred sub-lease costs of $0.7 million and
amortization of $0.2 million related to loan origination fees.
The estimated effective income tax rate was 30.0% compared to 30.1% for the
previous year period.
FY02 YEAR-TO-DATE COMPARED TO FY01 YEAR-TO-DATE
Included in gross margin and operating expenses are one time cost reduction
charges of $0.3 million in cost of products sold, $0.3 million in selling
expense, $0.5 million in administrative expense and $0.3 million in engineering
expense incurred during the second and third quarters of this year.
Sales for the nine months ended December 31, 2001 were $88.3 million
compared to $104.9 million in the previous year. This represents a decrease of
15.9% due a 24.7% decrease in sales of radio test sets, frequency agile test
sets, sources, signal analyzers and automated test equipment offset by an 11.1%
increase in sales of avionics, service and solutions. Gross margins decreased to
37.6% for the current nine month period as compared to 42.8% in the previous
year
12
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nine month period. The decrease is due to an unfavorable product mix and fixed
cost allocated to a reduced sales base.
Operating expenses for the nine months ended December 31, 2001 were $34.4
million compared to $38.6 million in the prior year. This represents a 10.8%
decrease from the prior year nine-month period. Compared to the prior year
comparable period, administrative and selling expenses decreased 13.4% and 8.3%,
respectively. Additionally, engineering expenses decreased 1.6% from the prior
year period. Intangible amortization decreased to $1.0 million in the current
nine-month period from $1.9 million in the prior year nine-month period due to
the early adoption of a new accounting standard. In general, operating expenses
increased as a percent of sales because of the reduced sales base.
Operating losses for the nine months ended December 31, 2001 were $1.2
million compared to an operating profit of $6.4 million in the prior year. The
decline in operating profit is due to reduced sales and a corresponding
reduction in gross margin offset by reductions in operating expenses.
Other expenses for the nine months ended December 31, 2001 were $9.3
million compared to $5.1 million in the prior year. The net increase of $4.2
million in other expenses is due to the current year loss of $2.0 million
related to interest rate swaps, the write-off of deferred sub-lease costs of
$0.7 million, losses of $0.7 million related to amortization of loan origination
fees, and a gain of $0.5 million from the sale of machine shop assets in the
prior year period.
The estimated effective income tax rate was 28.0% for the nine months ended
December 31, 2001 compared to 30.8% for the previous year.
LIQUIDITY AND SOURCES OF CAPITAL
The Company had a negative working capital of $30.3 million at December 31,
2001. The negative working capital stems from the Company's long term debt,
which is currently callable by the lender on the termination of the forbearance
agreement March 4, 2002. Excluding the reclassification of long term debt to
current liabilities the Company's working capital was $24.8 million. The Company
generated cash from operations of $3.1 million for the nine month period ended
December 31, 2001 compared to cash generated from operations of $4.1 million for
the previous year comparable period.
Cash used in investing activities was $2.3 million for the nine month
period ended December 31, 2001 compared to cash used in investing activities of
$2.4 million in the previous year. The primary component of cash used in both
periods was the purchase of capital assets.
Cash used in financing activities was $1.1 million for the nine months
period ended December 31, 2001 primarily related to payments made on long-term
debt, compared to cash provided by net financing activities of $3.3 million for
the prior year period.
No cash dividends were paid in fiscal year 2001 and no cash dividends are
anticipated to be paid in fiscal year 2002.
The Board of Directors of the Company authorized the repurchase of up to
750,000 shares of the Company's common stock. As of December 31, 2001, 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, 2001, $23.0 million was outstanding under the lines of
credit and $55.1 million in current maturities of long-term debt. As of December
31, 2001 the Company is not in compliance with certain financial covenants of
the loan agreement nor has the Company received a waiver for these violations.
The Company defaulted on the credit agreement in November 2001. However, the
Company did reach a forbearance agreement which allows the Company to continue
to operate under its current debt structure until March 4, 2002. The Company is
actively
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seeking various refinancing alternatives for its current debt structure. In the
event the Company is unable to obtain financing, current cash flows may not be
sufficient for continued operations at present levels. There can be no assurance
that such financing will be available or, if available, will be obtainable on
acceptable terms.
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 million of the
associated debt. The first contract with a notional amount of $25 million has a
fixed rate of 5.76% and expires on 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,
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.
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PART II -- OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of December 31, 2001 the Company is in default of several financial
covenants of the loan agreement. The defaulted covenants are the minimum
fixed charge coverage ratio, the maximum leverage ratio for the periods
September 30, 2001 and December 31, 2001, non-payment when due of all
scheduled principal payments, accrued interest and fees beginning November 9,
2001 through the filing of this report and the non-payment of hedging
obligations due December 31, 2001. The Company has not received a waiver for
these violations. As of the date of the filing of this report the Company is
in default of scheduled principal and interest payments through February 14,
2002. These defaults result in estimated principal and interest arrearages in
the amount of $0.5 million and $3.3 million respectively. The Company has
reclassified its long-term debt associated with the payment default to
current liabilities. However, the Company did reach a forbearance agreement
with its bank lenders that allows the Company to continue to operate under
its current debt structure until March 4, 2002. The Company is actively
seeking various refinancing alternatives for its current debt structure. In
the event the Company is unable to obtain financing, current cash flows may
not be sufficient for continued operations at present levels. There can be no
assurance that such financing will be available or, if available, will be
obtainable on acceptable terms.
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, 2001.
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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 14, 2002 /s/ Jeffrey A. Bloomer
---------------------------------
- ---------------------- Jeffrey A. Bloomer,
Director, President and
Chief Executive Officer
(Duly authorized officer)
Date: February 14, 2002 /s/ Stephen P. Todd
---------------------------------
- ----------------------- Stephen P. Todd,
Interim Chief Financial Officer
(Principal financial and chief
accounting officer)
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