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, 1997 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 48-0777904 (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 8,225,445 shares of common stock, par value $.01 per share, of the Registrant outstanding as of January 9, 1998. IFR SYSTEMS, INC. FORM 10 - Q INDEX PART I -- FINANCIAL INFORMATION PAGE Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at June 30, 1997 and December 31, 1997 3 Condensed Consolidated Statements of Income for the three and six months ended December 31, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 1997 and 1996 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II -- OTHER INFORMATION Item 6. Exhibits and reports on Form 8-K 10 SIGNATURES 11 2 PART I -- FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IFR SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, JUNE 30, 1997 1997 ------------- --------- (UNAUDITED) (NOTE) ASSETS (000'S OMITTED) CURRENT ASSETS Cash and cash equivalents $ 6,761 $ 2,379 Accounts receivable, less $530 and $500 allowance for doubtful accounts, respectively 19,442 19,707 Inventories: Finished products 8,543 8,744 Work in process 7,208 6,517 Materials 7,274 7,144 --------- --------- 23,025 22,405 Prepaid expenses and sundry 487 99 Deferred income taxes 2,191 2,191 --------- --------- TOTAL CURRENT ASSETS 51,906 46,781 PROPERTY AND EQUIPMENT Property and equipment 19,323 18,231 Allowances for depreciation (deduction) (11,111) (10,053) --------- --------- 8,212 8,178 PROPERTY UNDER CAPITAL LEASE Building and machinery 4,519 3,761 Allowances for depreciation (deduction) (1,423) (1,278) --------- --------- 3,096 2,483 OTHER ASSETS Cost in excess of net assets acquired, less amortization of $2,584 and $2,329, respectively 8,898 8,177 Patents, trademarks and other intangibles, less amortization of $1,807 and $1,782, respectively - 25 Other 141 186 --------- --------- 9,039 8,388 --------- --------- $ 72,253 $ 65,830 --------- --------- --------- --------- Note: The balance sheet at June 30, 1997 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 DECEMBER 31, JUNE 30, 1997 1997 ------------ --------- (UNAUDITED) (NOTE) (000'S OMITTED) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank borrowings (Note 2) $ - $ 330 Accounts payable 4,540 3,649 Accrued compensation and payroll taxes 4,513 5,634 Other liabilities and accrued expenses 5,081 2,222 Current maturity of capital lease obligations 175 175 Federal and state income taxes and local taxes 2,222 1,256 -------- --------- TOTAL CURRENT LIABILITIES 16,531 13,266 CAPITAL LEASE OBLIGATIONS 3,765 3,765 DEFERRED INCOME TAXES 645 645 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 (Note 3) 93 62 Additional paid-in capital 6,258 6,400 Cost of common stock in treasury---1,060,805 and 1,130,014 shares, respectively (deduction) (8,315) (8,040) Cumulative translation adjustment 13 58 Retained earnings 53,263 49,674 -------- --------- 51,312 48,154 -------- --------- $ 72,253 $ 65,830 -------- --------- -------- --------- See notes to condensed consolidated financial statements. 4 IFR SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 ------------------------ ----------------------- (000'S OMITTED, EXCEPT PER SHARE DATA) SALES $ 27,539 $ 26,987 $ 53,060 $ 50,245 COST OF SALES 15,316 16,285 29,900 30,679 --------- -------- -------- -------- GROSS PROFIT 12,223 10,702 23,160 19,566 OPERATING EXPENSES Selling 3,102 3,275 5,820 5,807 Administrative 2,465 2,081 4,364 4,035 Engineering 2,921 2,773 6,062 5,144 --------- -------- -------- -------- 8,488 8,129 16,246 14,986 --------- -------- -------- -------- OPERATING INCOME 3,735 2,573 6,914 4,580 OTHER INCOME 105 76 58 71 --------- -------- -------- -------- INCOME BEFORE INCOME TAXES 3,840 2,649 6,972 4,651 INCOME TAXES 1,549 1,033 2,806 1,825 --------- -------- -------- -------- NET INCOME $ 2,291 $ 1,616 $ 4,166 $ 2,826 ======== ======== ======= ======= NET INCOME PER COMMON SHARE $ 0.28 $ 0.20 $ 0.51 $ 0.35 ======== ======== ======= ======= NET INCOME PER COMMON SHARE ASSUMING DILUTION $ 0.26 $ 0.19 $ 0.48 $ 0.34 ======== ======== ======= ======= AVERAGE COMMON SHARES OUTSTANDING 8,228 8,037 8,198 8,113 ======== ======== ======= ======= DILUTIVE COMMON SHARES OUTSTANDING 8,711 8,360 8,632 8,410 ======== ======== ======= ======= See notes to condensed consolidated financial statements. 5 IFR SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED DECEMBER 31, 1997 1996 --------- --------- (000'S OMITTED) OPERATING ACTIVITIES Net income $ 4,166 $ 2,826 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 1,211 1,189 Amortization of intangibles 280 393 Changes in operating assets and liabilities: Accounts receivable 399 (3,456) Inventories (107) (1,154) Other current assets (245) (96) Accounts payable and accrued liabilities 689 780 Other current liabilities 966 534 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,359 1,016 INVESTING ACTIVITIES Purchases of property and equipment (1,734) (1,444) Sundry 45 13 --------- --------- NET CASH USED IN INVESTING ACTIVITIES (1,689) (1,431) FINANCING ACTIVITIES Purchases of capital stock for treasury (1,332) (3,114) Principal payment on capital lease obligations - (138) Principal payment on long-term debt - (183) Principal payments on short-term bank borrowings (1,480) (12,890) Proceeds from short-term bank borrowings 1,150 16,680 Proceeds from exercise of common stock options 946 286 Payment of dividends (577) - --------- --------- NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (1,293) 641 EFFECT OF EXCHANGE RATE CHANGES ON CASH 5 347 --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 4,382 573 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,379 266 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,761 $ 839 --------- --------- --------- --------- See notes to condensed consolidated financial statements. 6 IFR SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DECEMBER 31, 1997 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 considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 31, 1997 are not necessarily indicative of the results that may be expected for the year ending June 30, 1998. 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, 1997. NOTE 2 -- SHORT TERM BANK BORROWINGS The Company has unsecured lines of credit with a bank whereby it could borrow in the aggregate up to $15,000,000 at interest rates approximating the prime rate charged by major banks. At December 31, 1997, the effective interest rate charged by the bank was 7.75 percent and the Company had unused lines of credit aggregating $15,000,000. NOTE 3 -- COMMON STOCK On November 7, 1997, the Company's Board of Directors approved a three-for- two stock split to be effected in the form of a 50% stock dividend. The additional stock was distributed on December 5, 1997 to shareholders of record on November 21, 1997. All references to number of shares, share prices and per share amounts have been restated to reflect the stock split. NOTE 4 -- YORK SENSORS LTD ACQUISITION On December 22, 1997, the Company acquired York Sensors Ltd. in Hampshire, U.K. The acquired business is involved in the design and manufacture of distributed temperature sensing (DTS) equipment based on optical time domain reflectometer (OTDR) technology for the electric utility, oil exploration and other industries. The Company acquired assets of approximately $930,000 and liabilities of approximately $1,902,000 for a nominal purchase price. This resulted in goodwill of approximately $972,000. The acquisition has been accounted for as a purchase and, 7 accordingly, the net assets and results of operations are included in the consolidated financial statements from the effective date of acquisition. The purchase price has been allocated to the assets and liabilities based on their estimated fair values at the date of acquisition. NOTE 5 -- EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 2ND QUARTER FY98 COMPARED TO 2ND QUARTER FY97 Sales for the second quarter ended December 31, 1997 were $27,539,000 compared to $26,987,000 in the second quarter of the prior year. This represents an increase of 2.0% or $552,000 and was due to higher sales of fiber optic test equipment and commercial communication test equipment partially offset by lower government communication test equipment and avionics. Gross margins increased 4.7% to 44.4% of sales for the current quarter. This increase is due to a higher mix of fiber optics test equipment, completion of the U.S. Army SINCGARS contract in March 1997 and introduction of higher margin commercial communication test equipment. Operating expenses increased 0.7% to 30.8% of sales for the current quarter. Administrative expenses increased 1.3% to 9.0% of sales due to increased corporate expenses. Engineering expenses increased 0.3% to 10.6% of sales in support of the development of new test instruments for the fiber optics and emergency wireless digital telecommunications markets. Selling expenses decreased 0.9% to 11.3% of sales due to lower commissions and advertising costs. Other income increased by $29,000 for the current quarter due to higher interest income and lower interest expense offset by a lower translation gain. 8 The estimated effective income tax rate was 40.3% for the second quarter ended December 31, 1997 and 39.0% for the second quarter of the prior year. FY98 YEAR-TO-DATE COMPARED TO FY97 YEAR-TO-DATE Sales for the six months ended December 31, 1997 were $53,060,000 compared to $50,245,000 in the previous year. This represents an increase of 5.6% or $2,815,000 and was due to higher sales of fiber optics test equipment and commercial communication test equipment partially offset by lower government communication test equipment and avionics. Gross margins increased 4.7% to 43.6% of sales for the six month period. This increase is due to a higher mix of fiber optics test equipment, completion of the U.S. Army SINCGARS contract in March 1997 and introduction of higher margin commercial communication test equipment. Operating expenses increased 0.8% to 30.6% of sales for the six month period. Engineering expenses increased 1.2% to 11.4% of sales in support of the development of new test instruments for the fiber optics and emerging wireless digital telecommunications markets. Administrative expenses increased 0.2% to 8.2% of sales. Selling expenses decreased 0.6% to 11.0% of sales due to lower commissions and advertising costs. Other income decreased by $13,000 due to a lower translation gain offset by higher interest income and lower interest expense. The estimated effective income tax rate was 40.2% for the six months ended December 31, 1997 and 39.2% in the previous year. LIQUIDITY AND CAPITAL RESOURCES Cash flows provided by operations were $7,359,000 and $1,016,000 for the six month period ended December 31, 1997 and 1996, respectively. The increase in funds provided was due to an increase in accounts receivable of $399,000 for the current period compared to a decrease of $3,456,000 in the prior year. Also contributing to the increase in funds provided was a decrease in inventory of $107,000 for the current period compared to a decrease of $1,154,000 in the prior year. The remaining increase in funds provided results from a higher net income of $4,166,000 in the current period compared to net income of $2,826,000 in the prior year. Cash flows used in financing activities was $1,293,000 for the six month period ended December 31, 1997 compared to $641,000 for the six month period ended December 31, 1996. The increase in funds used is due to dividend payments and lower bank borrowings partially offset by lower discretionary purchases of treasury stock. A $.03 per share dividend was authorized by the Board of Directors on November 7, 1997 and was paid on December 5, 1997. A $.03 per share dividend was 9 also paid in the first quarter of this year. The Board of Directors will review quarterly the appropriateness of future dividend payments taking into consideration numerous factors including the Company's cash requirements and performance. Working capital increased to $35,375,000 at December 31, 1997 compared to $33,515,000 at June 30, 1997. 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 stock option exercises from treasury stock and as a utilization of the anticipated excess cash flow during the year. As of December 31, 1997, the Company had purchased an aggregate of 425,000 shares under the program. The Company has available unsecured lines of credit for $15,000,000 which expire on June 30, 1998. At December 31, 1997, there were no borrowings under the lines of credit. 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, 1998. SAFE HARBOR STATEMENTS The statements which are not actual reported financial results or historical facts contained in this Management's Discussions and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve certain risks and uncertainties. These risks and uncertainties include, but are not limited to, product demand and market acceptance, competition and pricing, product development, product mix, capacity and supply constraints, timing of orders and shipments, availability of capital resources, general business and economic conditions, regulatory changes and other risks described in the Company's most recent Form 10-K and Annual Report as of June 30, 1997. PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11.0 Statement Re: Computation of Per Share Earnings 27.0 Financial Data Schedule No form 8-K was filed during the quarter ended December 31, 1997. 10 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: January 29, 1998 /s/ Alfred H. Hunt, III ------------------------ Alfred H. Hunt, III, President and CEO (Duly authorized officer) /s/ Jeffrey A. Bloomer -------------------------- Jeffrey A. Bloomer Chief Financial Officer and Treasurer (Principal financial and chief accounting officer) 11