-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QLiB5XXq26qB2rBjcJmiBBH0hnQEY2GY2GBiECQxh9XelCG64PPsk1PUEEOhTzr7 U4g6AcmF/UDLd1fsEoh9Ww== 0000912057-01-004702.txt : 20010214 0000912057-01-004702.hdr.sgml : 20010214 ACCESSION NUMBER: 0000912057-01-004702 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IFR SYSTEMS INC CENTRAL INDEX KEY: 0000785546 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 480777904 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14224 FILM NUMBER: 1536025 BUSINESS ADDRESS: STREET 1: 10200 W YORK ST CITY: WICHITA STATE: KS ZIP: 67215 BUSINESS PHONE: 3165224981 MAIL ADDRESS: STREET 1: 10200 WEST YORK STREET CITY: WICHITA STATE: KS ZIP: 67215 10-Q 1 a2037677z10-q.txt FORM 10-Q 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 14 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. 15 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) 16 -----END PRIVACY-ENHANCED MESSAGE-----