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 March 31, 1998
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 8,195,948 shares of common stock, par value $.01 per share, of
the Registrant outstanding as of April 17, 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 March 31, 1998 3
Condensed Consolidated Statements of Income for the three
and nine months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II -- OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 12
SIGNATURES 13
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
1998 1997
----------- ----------
(UNAUDITED) (NOTE)
ASSETS (000'S OMITTED)
CURRENT ASSETS
Cash and cash equivalents $ 366 $ 2,379
Accounts receivable, less $848 and $500
allowance for doubtful accounts, respectively 42,567 19,707
Inventories:
Finished products 20,990 8,744
Work in process 14,254 6,517
Materials 19,599 7,144
----------- ----------
54,843 22,405
Prepaid expenses and sundry 1,844 99
Deferred income taxes 2,868 2,191
----------- ----------
TOTAL CURRENT ASSETS 102,488 46,781
PROPERTY AND EQUIPMENT
Property and equipment 97,802 18,231
Allowances for depreciation (deduction) (68,684) (10,053)
----------- ----------
29,118 8,178
PROPERTY UNDER CAPITAL LEASE
Building and machinery 4,809 3,761
Allowances for depreciation (deduction) (1,514) (1,278)
----------- ----------
3,295 2,483
OTHER ASSETS
Cost in excess of net assets acquired and other
intangibles, less amortization of $5,180 and
$4,111, respectively 43,773 8,202
Developed technology, less amortization
of $156 and $0, respectively 18,644 -
Other 3,641 186
----------- ----------
66,058 8,388
----------- ----------
$ 200,959 $ 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
MARCH 31, JUNE 30,
1998 1997
----------- ----------
(UNAUDITED) (NOTE)
(000's OMITTED)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank borrowings (Note 2) $ 9,000 $ 330
Accounts payable 14,248 3,649
Accrued compensation and payroll taxes 7,339 5,634
Other liabilities and accrued expenses 19,255 2,222
Current maturity of capital lease obligations 175 175
Current maturity of long-term debt (Note 2) 1,750 -
Federal and state income taxes and local taxes 1,903 1,256
----------- ----------
TOTAL CURRENT LIABILITIES 53,670 13,266
CAPITAL LEASE OBLIGATIONS 3,765 3,765
LONG-TERM DEBT (NOTE 2) 98,250 -
DEFERRED INCOME TAXES 11,305 645
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 93 62
Additional paid-in capital 6,183 6,400
Cost of common stock in treasury---1,075,813
and 1,130,014 shares, respectively (deduction) (8,764) (8,040)
Cumulative translation adjustment 178 58
Retained earnings 36,279 49,674
----------- ----------
33,969 48,154
----------- ----------
$ 200,959 $ 65,830
----------- ----------
----------- ----------
See notes to condensed consolidated financial statements.
4
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------------------------------
1998 1997 1998 1997
(000'S OMITTED, EXCEPT PER SHARE DATA)
SALES $ 45,778 $ 26,238 $ 98,838 $ 76,483
COST OF SALES (NOTE 5) 31,252 15,305 61,152 45,984
--------- -------- --------- --------
GROSS PROFIT 14,526 10,933 37,686 30,499
OPERATING EXPENSES
Selling 6,099 2,817 11,919 8,624
Administrative 3,478 2,142 7,842 6,177
Acquired R&D (Note 5) 15,700 - 15,700 -
Engineering 5,040 2,938 11,102 8,082
--------- -------- --------- --------
30,317 7,897 46,563 22,883
--------- -------- --------- --------
OPERATING INCOME (LOSS) (15,791) 3,036 (8,877) 7,616
OTHER EXPENSE 1,350 128 1,292 57
--------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES (17,141) 2,908 (10,169) 7,559
INCOME TAXES (BENEFIT) (157) 1,182 2,649 3,007
--------- -------- --------- --------
NET INCOME (LOSS) $ (16,984) $ 1,726 $ (12,818) $ 4,552
--------- -------- --------- --------
--------- -------- --------- --------
NET INCOME (LOSS) PER COMMON SHARE $ (2.08) $ 0.21 $ (1.57) $ 0.56
--------- -------- --------- --------
--------- -------- --------- --------
NET INCOME (LOSS) PER COMMON SHARE
ASSUMING DILUTION $ (2.08) $ 0.20 $ (1.57) $ 0.54
--------- -------- --------- --------
--------- -------- --------- --------
AVERAGE COMMON SHARES
OUTSTANDING 8,173 8,164 8,190 8,169
--------- -------- --------- --------
--------- -------- --------- --------
DILUTIVE COMMON SHARES
OUTSTANDING 8,173 8,499 8,190 8,485
--------- -------- --------- --------
--------- -------- --------- --------
See notes to condensed consolidated financial statements.
5
IFR SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
1998 1997
---------- ----------
(000'S OMITTED)
OPERATING ACTIVITIES
Net income (loss) $ (12,818) $ 4,552
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation of property and equipment 2,556 1,720
Amortization of intangibles 1,069 597
Write off of acquired R&D 15,700 -
Changes in operating assets and liabilities:
Accounts receivable (3,887) (1,824)
Inventories 5,943 (892)
Other current assets 1,115 (144)
Accounts payable and accrued liabilities 1,813 1,686
Other current liabilities (3,038) 365
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,453 6,060
INVESTING ACTIVITIES
Payments for acquired businesses (108,851) -
Purchases of property and equipment (3,169) (2,240)
Sundry (3,536) 317
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (115,556) (1,923)
FINANCING ACTIVITIES
Purchases of capital stock for treasury (2,026) (4,178)
Principal payment on capital lease obligations - (2,359)
Principal payment on long-term debt - (221)
Principal payments on short-term bank borrowings (3,535) (23,325)
Proceeds from acquisition loan 100,000 -
Proceeds from short-term bank borrowings 10,150 24,600
Proceeds from issuance of Industrial Revenue Bond - 3,940
Proceeds from exercise of common stock options 1,116 799
Payment of dividends (577) -
---------- ----------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES 105,128 (744)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (38) 94
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,013) 3,487
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,379 266
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 366 $ 3,753
---------- ----------
---------- ----------
See notes to condensed consolidated financial statements.
6
IFR SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1998
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 normal recurring
adjustments considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended March 31, 1998 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 -- BANK BORROWINGS
In connection with the Marconi acquisition (Note 4), on February 5, 1998
the Company entered into a Credit Agreement with The First National Bank of
Chicago to borrow a maximum of $130,000,000 in the form of two term loans in the
principal amount of $50,000,000 each and the remaining $30,000,000 in the form
of a revolving line of credit. At March 31, 1998, the Company has borrowed
$100,000,000 under the term loan provisions and $9,000,000 under the revolving
loan provisions of the Credit Agreement.
The loans are secured by the pledge of all of the capital stock and by
security interests on substantially all of the assets of the Company's United
States subsidiaries and by a pledge of 65% of the common stock of IFR Systems
Limited, a United Kingdom subsidiary. The loans bear interest either at the
"Alternate Base Rate" (a fluctuating interest rate equal to the higher of First
Chicago's base rate or the sum of the reported "federal funds" rate plus 0.5%
per annum) or at the "Eurocurrency Base Rate" (the LIBOR rate for the applicable
currency for the relevant interest period). Both of such rates are increased by
an applicable "margin" which varies up to 2.5% per annum.
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.
7
All references to number of shares, share prices and per share amounts have been
restated to reflect the stock split.
NOTE 4 -- MARCONI INSTRUMENTS LIMITED ACQUISITION
On February 6, 1998, the Company acquired for cash all of the issued and
outstanding stock of Marconi Instruments Limited in Hertfordshire, England
(collectively with its subsidiaries "Marconi") from The General Electric
Company, p.l.c. ("GEC"). The purchase price was $64,350,000 plus L26,000,000
for a total purchase price of $106,939,000. The acquired business is engaged in
the design, manufacture, distribution and sale of test and measurement equipment
for the telecommunications and electronics industries.
The acquisition has been accounted for as a purchase and, 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 as follows:
($000's)
---------
Purchase price $ 106,939
Acquisition fees 1,912
---------
Total purchase price $ 108,851
---------
---------
Total current assets $ 61,737
Property & equipment - net 20,850
Other assets 70,090
---------
Total assets 152,677
Total current liabilities (31,530)
Deferred income taxes (12,296)
---------
Total net assets $ 108,851
---------
---------
The following unaudited pro forma data presents the consolidated results of
operations as if the acquisition had occurred on July 1, 1996 after giving
effect to certain adjustments, including amortization of intangibles, increased
interest expense and related income tax expense. The pro forma results have
been provided for comparative purposes only and do not purport to indicate the
results of operations which would have actually occurred had the acquisition
been in effect on the date indicated, or which may occur in the future.
8
($000's omitted, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Sales $56,205 $57,694 $164,274 $158,470
Net Income $ 1,069 $ 1,924 $ 5,985 $ 3,320
Net Income Per
Common Share $ 0.13 $ 0.24 $ 0.73 $ 0.41
Net Income Per
Common Share
Assuming Dilution $ 0.12 $ 0.23 $ 0.69 $ 0.39
NOTE 5 -- NON-RECURRING ACQUISITION COSTS
Included in cost of sales and operating expenses for the quarter and nine
months ended March 31, 1998 are non-recurring charges of $4,738,000 and
$15,700,000, respectively, related to the inventory and acquired R&D valuation
at acquisition.
NOTE 6 -- 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, 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 7 -- 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.
9
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
3RD QUARTER FY98 COMPARED TO 3RD QUARTER FY97
Sales for the third quarter ended March 31, 1998 were $45,778,000 compared
to $26,238,000 in the third quarter of the prior year. This represents an
increase of 74.5%. The current quarter included sales of $21,858,000 from the
Marconi acquisition. Excluding the acquisition, sales declined by $2,308,000 or
8.8% due to lower sales of communications test instruments to government and
commercial customers. Sales of the Model 1900 CSA digital communications
service monitors for PCS and TDMA protocols met the Company's expectations for
the quarter. However, sales of other test instruments remained soft, reflecting
the current worldwide slowdown in the wireless communications industry.
Gross margins decreased 10% to 31.7% of sales for the current quarter due
to inventory valuations related to the acquisition ($4,738,000). Excluding the
effect of the acquisition adjustment, gross margin for the quarter of 42.1% is
slightly higher than the third quarter of the prior year.
Operating expenses increased 36.1% to 66.2% of sales for the current
quarter due to a non-recurring write-off of in-process research and development
technology related to the acquisition ($15,700,000). Excluding the effect of the
acquisition adjustment, operating expenses were 31.9% which are 1.8% higher than
the third quarter of the prior year and are mostly due to additional sales
commissions related to the higher sales volume (2.6%) offset by a decrease in
administrative (0.6%) and engineering (0.2%) expenses.
Other expense increased by $1,222,000 due to interest expense related to
the acquisition debt.
Excluding the effect of the acquisition adjustment, the estimated effective
income tax rate was 37.5% for the third quarter compared to 40.7% in the third
quarter of the prior year. The decrease represents the activity of the
acquisition and the impact of the United Kingdom tax rate of 31%.
10
FY98 YEAR-TO-DATE COMPARED TO FY97 YEAR-TO-DATE
Sales for the nine months ended March 31, 1998 were $98,838,000 compared to
$76,483,000 in the previous year. This represents an increase of 29.2% and
includes $21,858,000 from the Marconi acquisition. Excluding the acquisition,
sales were relatively flat (increase of $497,000 or 0.06%).
Gross margins decreased 1.8% to 38.1% of sales for the nine month period.
After the effect of inventory valuations related to the acquisition
($4,738,000), normalized gross margins of 42.9% were 3.0% higher than the
previous year. This increase is due to a higher mix of fiber optic 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 17.2% to 47.1% of sales for the nine month
period due to a non-recurring write-off of in-process research and development
technology related to the acquisition ($15,700,000). Excluding the effect of the
acquisition adjustment, operating expenses of 31.2% are 1.3% higher than the
previous year and are due to additional sales commissions to support the higher
sales volume (0.8%) and higher engineering expenses (0.6%) for the development
of new test instruments for the fiber optics and emerging wireless digital
telecommunications markets. Administrative expenses decreased 0.1% to 7.9% of
sales.
Other expense increased by $1,235,000 due to interest expense related to
the acquisition debt.
Excluding the effect of the acquisition adjustment, the estimated effective
income tax rate was 39.2% for the nine months period compared to 39.8% for the
previous year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $8,453,000 and $6,060,000 for the
nine month periods ended March 31, 1998 and 1997, respectively. The increase in
funds provided was due to increases in operating income before non-cash,
non-recurring charges coupled with improved asset management.
Cash flows used in investing activities and cash flows provided in
financing activities reflect primarily the acquisition payment and resulting
loans.
A $.03 per share cash dividend was authorized by the Board of Directors and
paid in the second and 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.
11
Working capital increased to $48,818,000 at March 31, 1998 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 March 31, 1998, the Company had purchased 470,000 shares under
the program.
The Company has available a revolving line of credit for $30,000,000 which
expires on February 5, 2004. At March 31, 1998, there were $9,000,000
borrowings under the line of credit.
The Company anticipates that the available line of credit and funds
generated from operations will be adequate to meet capital asset expenditures,
interest and debt requirements and working capital needs for the next twelve
months.
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
10.0 Termination agreement between the Company and Jeffrey A.
Bloomer
10.1 Termination agreement between the Company and Iain M.
Robertson
11.0 Statement Re: Computation of Per Share Earnings
27.0 Financial Data Schedule
12
(b) Reports on Form 8-K
Form 8-K Filed on February 2, 1998 (Restructure of Organization)
Form 8-K Filed on February 20, 1998 (Marconi acquisition)
Form 8-K/A (Amend. No. 1) Filed on March 2, 1998 (Marconi acquisition)
Form 8-K/A (Amend. No. 2) Filed on April 22, 1998 (Marconi
acquisition)
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: May 13, 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)
13