UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter ended March 31, 1995 Commission file number 0-14224 IFR SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 48-0777904 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 10200 WEST YORK STREET WICHITA, KANSAS 67215 (Address of principal executive offices) (Zip Code) (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 . ------ ---- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock - $.01 par value per share--5,429,831 as of April 28, 1995. IFR SYSTEMS, INC. PART I. FINANCIAL INFORMATION IFR SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, JUNE 30, 1995 1994 ----------- ---------- (UNAUDITED) (NOTE) (000'S OMITTED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 80 $ 64 Accounts receivable, less $357 and $241 allowance for doubtful accounts, respectively 12,959 13,758 Inventories: Finished products 6,984 6,308 Work in process 8,147 7,824 Materials 5,617 5,000 --------- --------- 20,748 19,132 Prepaid expenses and sundry 370 253 Deferred income taxes 851 851 --------- --------- TOTAL CURRENT ASSETS 35,008 34,058 PROPERTY AND EQUIPMENT Property and equipment 12,517 11,589 Allowance for depreciation (deduction) (6,357) (4,906) --------- --------- 6,160 6,683 PROPERTY UNDER CAPITAL LEASE Building and machinery 3,456 3,456 Amortization (deduction) (1,091) (933) --------- --------- 2,365 2,523 OTHER ASSETS Cost in excess of net assets acquired, less amortization of $1,181 and $908, respectively 6,182 6,455 Patents, trademarks and other intangibles, less amortization of $1,095 and $774, respectively 712 1,033 Loan proceeds appropriated for debt service and other 495 480 --------- --------- 7,389 7,968 --------- --------- $ 50,922 $ 51,232 --------- --------- --------- --------- Note: The balance sheet at June 30, 1994 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. MARCH 31, JUNE 30, 1995 1994 --------- --------- (UNAUDITED) (NOTE) (000'S OMITTED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank borrowings (Note 2) $ 2,175 $ 4,970 Accounts payable 3,211 3,041 Accrued compensation and payroll taxes 2,137 1,703 Other liabilities and accrued expenses 1,985 1,548 Current maturity of capital lease obligations 230 230 Current maturity of long-term debt 65 408 Federal and state income taxes and local taxes 391 660 --------- --------- TOTAL CURRENT LIABILITIES 10,194 12,560 CAPITAL LEASE OBLIGATIONS 2,430 2,602 LONG-TERM DEBT 65 817 DEFERRED INCOME TAXES 451 451 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 6,177,500 shares 62 62 Additional paid in capital 6,403 6,574 Cost of common stock in treasury---750,873 and 920,947 shares, respectively (deduction) (6,400) (7,849) Unamortized deferred compensation (16) -- Retained earnings 37,733 36,015 --------- --------- 37,782 34,802 --------- --------- $ 50,922 $ 51,232 --------- --------- --------- --------- See notes to condensed consolidated financial statements. IFR SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, -------------------------------------------------------- 1995 1994 1995 1994 (000'S OMITTED, EXCEPT PER SHARE DATA) SALES $ 19,384 $ 15,629 $ 57,800 $ 47,755 COST OF PRODUCTS SOLD 12,146 9,647 36,330 29,899 --------- --------- --------- --------- GROSS PROFIT 7,238 5,982 21,470 17,856 OPERATING EXPENSES Selling 2,236 2,008 6,784 6,049 Administrative 1,343 1,153 3,851 3,460 Engineering 2,479 2,203 7,600 6,647 --------- --------- --------- --------- 6,058 5,364 18,235 16,156 --------- --------- --------- --------- OPERATING INCOME 1,180 618 3,235 1,700 OTHER INCOME (EXPENSE) (22) (91) (290) (216) --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 1,158 527 2,945 1,484 INCOME TAXES 503 327 1,227 758 --------- --------- --------- --------- NET INCOME $ 655 $ 200 $ 1,718 $ 726 --------- --------- --------- --------- --------- --------- --------- --------- Net Income Per Common Share: Primary $ 0.12 $ 0.04 $ 0.32 $ 0.14 --------- --------- --------- --------- --------- --------- --------- --------- Fully diluted $ 0.12 $ 0.04 $ 0.31 $ 0.14 --------- --------- --------- --------- --------- --------- --------- --------- Average Common Shares Outstanding: Primary 5,479 5,281 5,391 5,290 --------- --------- --------- --------- --------- --------- --------- --------- Fully diluted 5,693 5,434 5,682 5,443 --------- --------- --------- --------- --------- --------- --------- --------- See notes to condensed consolidated financial statements. IFR SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED MARCH 31, 1995 1994 ---------- ---------- (000'S OMITTED) OPERATING ACTIVITIES Net income $ 1,718 $ 726 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 1,609 1,501 Amortization of intangibles 594 598 Deferred compensation expense 46 83 Changes in operating assets and liabilities: Accounts receivable 799 1,213 Inventories (1,616) (3,310) Other current assets (117) (87) Accounts payable and accrued liabilities: 1,041 (315) Other current liabilities (269) 194 -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 3,805 603 INVESTING ACTIVITIES Purchases of property and equipment (928) (1,938) Sundry (15) 331 -------- --------- NET CASH USED IN INVESTING ACTIVITIES (943) (1,607) FINANCING ACTIVITIES Principal payment on capital lease obligations (172) (160) Principal payment on long-term debt (65) --- Proceeds from issuance of common stock 186 57 Proceeds from short-term bank borrowings 18,835 17,880 Principal payments on short-term bank borrowings (21,630) (16,615) -------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,846) 1,162 -------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 16 158 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 64 65 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80 $ 223 -------- --------- -------- --------- IFR SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 1995 are not necessarily indicative of the results that may be expected for the year ending June 30, 1995. 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 June 30, 1994. NOTE 2--SHORT TERM BANK BORROWINGS The Company has unsecured lines of credit with a bank, which expire June 30, 1995, whereby it could borrow in the aggregate up to $7,500,000 at interest rates approximating the prime rate charged by major banks. At March 31, 1995 the Company had unused lines of credit aggregating $5,325,000. NOTE 3--ACCOUNTING CHANGES On March 31, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This statement is effective for fiscal years beginning after December 15, 1995, with earlier application encouraged. The Company has not yet determined the timing of adoption; however, this standard is not expected to have a material impact on the Company's consolidated results of operations and consolidated financial position. MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Sales for the three months ended March 31, 1995 increased 24 percent over the same period in the prior year. This increase was primarily the result of higher sales to the U.S. Army. The remaining increase was generated from sales of commercial communication equipment and fiber optics test instruments. Sales of avionics test instruments and test and measurement products (spectrum analyzers) remained flat compared to the prior year quarter. Gross margin for the current year quarter was 37 percent compared to 38 percent for the previous year quarter. This decrease was attributed to a lower margin product mix. Total operating expenses as a percent of sales decreased three percent from the prior year quarter. Selling expenses decreased two percent as a percent of sales and engineering expenses decreased one percent as a percent of sales from the prior year quarter. Administrative expenses as a percent of sales were unchanged compared to the prior year quarter. The estimated effective income tax rate was 43 percent for the current year quarter compared to 62 percent in the prior year period. The decrease in the effective rate is due to an increase in the estimated annual pre-tax income relative to the amount of non-deductible goodwill amortization. Sales for the first nine months increased 21 percent compared to the same period of the prior year. This increase was largely a result of higher sales to the U.S. Army and higher sales of fiber optics test instruments. Sales of avionics test equipment are down slightly compared to the previous year. Test and measurement products (spectrum analyzers) remain flat compared to the prior year. Gross margins remained unchanged at 37 percent for both periods. Operating expenses decreased two percent as a percent of sales compared to the previous year. Selling expenses and engineering expenses decreased one percent as a percent of sales for the current year. Administrative expenses remained unchanged as a percent of sales at seven percent for the current year. For the nine months ended period of fiscal 1995 and fiscal 1994, the effective income tax rate was 42 percent and 51 percent, respectively. The decrease in the effective rate is due to an increase in the estimated annual pre-tax income relative to the amount of nondeductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operations were $3,805,000 for the nine month period ended March 31, 1995 as compared to $601,000 in the prior year period. This increase was primarily due to a reduction in accounts payable and inventory. Working capital increased from $21,498,000 at June 30, 1994 to $24,814,000 at March 31, 1995. The Board of Directors of the Company has authorized the repurchase of up to 1,000,000 shares of the Company's common stock. As of March 31, 1995, the Company has purchased an aggregate of 793,450 shares under the program. The Company has available unsecured lines of credit for $5,000,000 and $2,500,000 which expire on June 30, 1995. The Company plans to extend this line of credit for an additional year. Negotiations have not commenced at March 31, 1995. The Company anticipates that available lines of credit and funds generated from operations will be adequate to meet capital asset expenditures and working capital needs for the current fiscal year ending June 30, 1995. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) The following exhibit is included herein: EXHIBIT 11-STATEMENT REGARDING PER SHARE EARNINGS b) No Form 8-K was filed during the quarter ended March 31, 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IFR SYSTEMS, INC. DATE: May 8, 1995 /s/ Alfred H. Hunt, III -------------------- ------------------------------ Alfred H. Hunt, III, President and CEO DATE: May 8, 1995 /s/ Bruce C. Bingham -------------------- ------------------------------ Bruce C. Bingham, Principal Financial Officer