U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 Commission file number 0-7438 DYNATECH CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2258582 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3 New England Executive Park Burlington, Massachusetts 01803-5087 (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (617) 272-6100 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 period 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 . At October 13, 1995 there were 18,327,907 shares of common stock of the registrant outstanding. PART I. Financial Information Item I. Financial Statements DYNATECH CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data) (Unaudited) Three Months Ended Six Months Ended September 30 September 30 1995 1994 1995 1994 ---- ---- ---- ---- Sales ......................................... $ 114,026 $ 121,377 $ 232,291 $ 239,149 Cost of sales ................................. 51,421 57,574 106,032 114,298 ------------------------------------------------ Gross profit .................................. 62,605 63,803 126,259 124,851 Selling, general and administrative expense ... 38,833 39,294 78,481 78,428 Product development expense ................... 14,177 12,647 28,831 25,443 Purchased incomplete technology ............... 16,852 -- 16,852 -- Business restructuring activities ............. 800 -- 800 -- Amortization of intangibles ................... 1,849 2,316 3,645 4,364 ------------------------------------------------ Operating income (loss) ....................... (9,906) 9,546 (2,350) 16,616 Interest expense .............................. (482) (1,249) (1,031) (2,406) Interest income ............................... 557 358 1,118 594 Other income .................................. 338 242 543 521 ------------------------------------------------ Income (loss) from continuing operations before income taxes ............................ (9,493) 8,897 (1,720) 15,325 Provision (benefit) for income taxes .......... (3,853) 3,813 (705) 6,581 ------------------------------------------------ Income (loss) from continuing operations ...... (5,640) 5,084 (1,015) 8,744 Reversal of disposition loss from discontinued operations, net of taxes ............. 647 -- 647 -- ------------------------------------------------ Net income (loss) ............................. $ (4,993) $ 5,084 $ (368) $ 8,744 ================================================ Income (loss) per common share Continuing operations ......................... $ (0.32) $ 0.29 $ (0.06) $ 0.48 Discontinued operations ....................... 0.04 -- 0.04 -- ------------------------------------------------ $ (0.28) $ 0.29 $ (0.02) $ 0.48 ================================================ Weighted average number of common shares ...... 17,858 17,778 17,727 18,184 ================================================ See notes to condensed consolidated financial statements. 2 DYNATECH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30 March 31 1995 1995 (Unaudited) ASSETS Current assets: Cash and cash equivalents ......................... $ 30,288 $ 27,795 Accounts receivable, net .......................... 74,354 72,152 Inventories: Raw materials ................................ 23,895 26,752 Work in process .............................. 13,722 14,168 Finished goods ............................... 19,533 19,560 ---------------------- 57,150 60,480 Other current assets .............................. 21,861 24,251 ---------------------- Total current assets ......................... 183,653 184,678 Property and equipment, net ........................... 33,735 34,791 Intangible assets, net ................................ 32,864 29,104 Other assets .......................................... 14,701 7,819 ---------------------- $ 264,953 $ 256,392 ====================== LIABILITIES Current liabilities: Notes payable and current portion of long-term debt 4,437 4,374 Accounts payable .................................. 16,241 19,651 Streamlining and restructuring accrual ............ 10,914 22,556 Other accrued expenses ............................ 44,744 46,584 ---------------------- Total current liabilities .................... 76,336 93,165 Long-term debt ........................................ 22,115 7,915 Deferred income taxes ................................. 730 992 Deferred compensation ................................. 442 -- SHAREHOLDERS' EQUITY Common stock .......................................... 3,721 3,721 Additional paid-in capital ............................ 11,776 7,432 Retained earnings ..................................... 151,046 151,414 Cumulative foreign currency adjustments ............... 1,791 2,659 Treasury stock ........................................ (3,004) (10,906) ---------------------- Total shareholders' equity ........................ 165,330 154,320 ---------------------- $ 264,953 $ 256,392 ====================== See notes to condensed consolidated financial statements. 3 DYNATECH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six Months Ended September 30 1995 1994 ---- ---- Operating activities: Income (loss) from continuing operations ................. $ (1,015) $ 8,744 Adjustments for noncash items included in net income: Depreciation ......................................... 7,274 7,124 Amortization of intangibles .......................... 3,645 4,364 Purchased incomplete technology ...................... 16,852 -- Increase (decrease) in deferred taxes ................ (4,717) 3,010 Other ................................................ (69) 83 Change in operating assets and liabilities, net of effects of purchase acquisitions and divestitures ............ (23,280) (10,544) --------------------- Net cash flows provided by (used in) continuing operations (1,310) 12,781 Net cash flows used in discontinued operations ........... -- (3,250) --------------------- Net cash flows provided by (used in) operating activities (1,310) 9,531 --------------------- Investing activities: Purchases of property and equipment ...................... (6,893) (7,123) Disposals of property and equipment ...................... 108 246 Proceeds from sale of businesses ......................... 3,819 14,271 Business acquired in purchase transaction ................ (9,868) -- Other .................................................... 974 1,315 --------------------- Net cash flows provided by (used in) investing activities (11,860) 8,709 --------------------- Financing activities: Debt borrowings .......................................... 14,901 116 Repayment of debt ........................................ (488) (1,161) Proceeds from exercise of stock options .................. 586 169 Purchases of treasury stock .............................. -- (12,533) --------------------- Net cash flows provided by (used in) financing activities 14,999 (13,409) --------------------- Effect of exchange rate on cash ............................. 664 1,973 --------------------- Increase in cash and cash equivalents ....................... 2,493 6,804 Cash and cash equivalents at beginning of year .............. 27,795 23,101 --------------------- Cash and cash equivalents at end of period .................. $ 30,288 $ 29,905 ===================== Supplemental data: Cash paid during the period for interest ................. $ 960 $ 2,507 Cash paid during the period for income taxes ............. $ 5,218 $ 2,020 Tax benefit of disqualifying dispositions of stock options $ 126 $ -- Stock issued for acquisition of Tele-Path Industries ..... $ 13,700 $ -- See notes to condensed consolidated financial statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. Condensed Consolidated Financial Statements In the opinion of management, the unaudited condensed consolidated balance sheet at September 30, 1995, and the unaudited consolidated statements of income and unaudited consolidated condensed statements of cash flows for the interim periods ended September 30, 1995 and 1994 include all adjustments (including normal recurring adjustments) necessary to present fairly these financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The year-end balance sheet data was derived from audited financial statements, but does not include disclosures required by generally accepted accounting principles. It is suggested that these condensed statements be read in conjunction with the Corporation's most recent Form 10-K and Annual Report as of March 31, 1995. B. Acquisition On September 1, 1995 Dynatech acquired substantially all of the business and assets of Virginia Tele-Path Industries, Inc. (TPI) of Salem, Virginia for approximately $10 million in cash and 688,096 shares of the Corporation's common stock. The Corporation may be required to make additional payments contingent upon the sale of any of the issued shares before December 1, 1995 at an aggregate price below the $19.91 per share. The Corporation has provided a contingency reserve of $2.3 million at the closing date, which will be adjusted when the contingency is resolved. Dynatech has the option to repurchase up to 537,418 shares at $19.91 per share if the market value falls below $15 per share prior to December 1, 1995. TPI manufactures communication test instruments used by regional Bell operating companies and other communication service providers to test North American ISDN technology standards. Acquired complete technology and other intangible assets of approximately $6.7 million are being amortized over five years. Incident to this acquisition, the Company purchased the incomplete technology activities of TPI, resulting in a one-time pretax charge in the second quarter of approximately $16.9 million, or ($.56) per share. This purchased incomplete technology that had not reached technological feasibility and which had no alternative future use was valued using a risk adjusted cash flow model, under which future cash flows associated with in-process research and development were discounted considering risks and uncertainties related to the viability of and potential changes in future target markets and to the completion of the products that will ultimately be marketed by the Company. C. Business Restructuring Activities In the quarter ended September 30, 1995 Management decided to exit the graphics portion of its video equipment business in order to achieve a more focused product strategy on signal transmission and routing switchers. The Corporation recorded a $3.3 million provision to reflect the revaluation of assets related to discontinued imaging products. In addition, as a result of completing the sale of businesses announced under the corporate-wide restructuring plan in April 1994, the Corporation reversed $3.6 million of the streamlining and restructuring charges recorded against operations in fiscal 1994 of which $2.5 million is reflected as income from continuing operations and $1.1 million, or $647,000 net of tax, is reflected as a reversal of the disposition loss from discontinued operations. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Consolidated sales for the six months ended September 30, 1995 declined 2.9% to $232,291,000 from $239,149,000 for the comparable period in the prior year due to divestments of certain businesses and product lines. Information Support Products segment sales rose 10% for the six months ended in fiscal 1996 reflecting a 16% growth for communications test products and a 29% increase for industrial connectivity products. Sales of medical and diagnostic products in the Diversified Instrumentation segment rose 2% as compared to the comparable period in the prior year. The sale of thirteen businesses and product lines during fiscal 1995 and 1996 resulted in an overall sales reduction of $25.1 million, or 38% for the Diversified Instrumentation segment. Backlog from ongoing operations was $64.9 million at September 30, 1995 compared with $72.1 million at March 31, 1995 reflecting planned backlog reductions in communications test and medical and diagnostic product lines. Consolidated gross profit for the current quarter and six months was 54.9% and 54.4% of sales, respectively, compared to 52.6% and 52.2% for each of the respective prior year periods. The increase in rate was primarily driven by operating efficiencies from business restructuring. Information Support Products gross margin declined slightly to 56.5% compared to 56.6% in the first half of the prior year, however, medical and diagnostic product margins in the Diversified Instrumentation segment declined to 50.5% compared to 52.5% in the first half of the prior year. Selling, general and administrative expenses were higher as a percent of sales for the second quarter and first half periods from the comparative prior year periods resulting in part from increased selling costs from expanding worldwide sales efforts. Product development expense was 12.4% of sales for the current half year compared to 10.6% in the first half of the prior year. The increase was attributed to communication test and display businesses. Amortization of intangibles, of which $2 million in the first half of fiscal 1996 and $2.3 million in the first half of the prior year related to product technology and was excluded from cost of sales, declined due to business divestments and discontinuance of product lines. Interest expense declined for the current half year as compared with the prior year as a result of repayment of loan debt from operating cash flow. Interest income increased due to higher investment rates and earnings on notes acquired in divestment activities. The effective tax rate declined to 40.5% for the current first half compared to 42.9% in the prior year resulting from lower nondeductible amortization charges. Excluding the impact of the one time pretax charge of purchased incomplete technology and the provision for discontinued products in the Display product line, offset partially by expense reversals for streamlining and restructuring charges, net income for the current quarter declined 5% to $4,855,000, or $.27 per share, from $5,084,000, or $.29 per share, for the second quarter of the prior year, reflecting higher product development, expenses. Sales from ongoing operations exclusive of divested operations, for the second quarter rose 8% from the comparable prior year quarter reflecting growth principally for communications test, data communications and industrial connectivity products. CAPITAL RESOURCES AND LIQUIDITY The Company's funded debt was 14% of total capital at September 30, 1995, a slight increase from the year-end level in Company history of 7% at March 31, 1995. The working capital ratio improved to 2.4 to 1 at September 30, 1995 from 2 to 1 at March 31, 1995. Cash outlays for the streamlining and restructuring actions approximated $2.6 million in the first half of the year. Dynatech believes it has sufficient resources to finance its cash requirements over the next year. The current capital structure provides sufficient financial flexibility to pursue business opportunities. 6 PART I. OTHER INFORMATION ITEM 6. (A) EXHIBITS Exhibit 27 - Financial Data Schedule PART II. OTHER INFORMATION ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on July 27, 1995 in Boston, Massachusetts. A class of three Directors as nominated by management to serve for a three-year term were elected at the meeting. At such meeting 15,919,763 shares were entitled to vote and a plurality of the votes cast were needed for election. The table below discloses the vote with respect to each nominee for office. IN FAVOR WITHHELD Richard K. Lochridge 15,872,101 47,662 O. Gene Gabbard 15,867,085 52,678 Ronald L. Bittner 15,859,727 60,036 The terms of William R. Cook, Robert G. Paul and James B. Hangstefer expire in 1996 and the terms of John F. Reno and Theodore Cohn expire at the annual meeting in 1997. The results of the voting of the following additional items were as follows: (A) To approve an increase in the authorized Common Stock. (B) To approve the Amendment to the 1994 Stock Option and Incentive Plan (as forth in the Board's Proxy Statement). (C) To approve the Non-Employee Directors' Stock Compensation Plan BROKER FOR AGAINST ABSTAIN NON VOTE Increase Common Stock ...... 14,364,005 1,506,125 49,633 Stock Option Amendment ..... 11,331,423 1,087,694 100,298 3,400,348 Directors' Stock Plan ...... 11,474,673 1,172,752 95,374 3,176,964 Proposal 7 ITEM 6. REPORTS ON FORM 8-K (b) A Form 8-K was filed by the Registrant on September 7, 1995 reporting the acquisition of Virginia Tele-Path Industries, Inc. 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. DYNATECH CORPORATION Date November 3, 1995 ROBERT H. HERTZ ------------------------ Chief Financial Officer and Treasurer 8