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 December 31, 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 January 15, 1996 there were 18,330,207 shares of common stock of the
registrant outstanding.
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
---------------------- ----------------------
1995 1994 1995 1994
---- ---- ---- ----
Sales ........................................ $ 126,764 $ 127,242 $ 359,055 $ 366,391
Cost of sales ................................ 56,783 60,003 162,815 174,301
--------- --------- --------- ---------
Gross profit ................................. 69,981 67,239 196,240 192,090
Selling, general and administrative expense .. 40,835 42,179 119,316 120,607
Product development expense .................. 14,549 12,888 43,380 38,331
Purchased incomplete technology .............. -- -- 16,852 --
Business restructuring activities ............ -- -- 800 --
Amortization of intangibles .................. 1,978 2,041 5,623 6,405
--------- --------- --------- ---------
Operating income ............................. 12,619 10,131 10,269 26,747
Interest expense ............................. (506) (922) (1,537) (3,328)
Interest income .............................. 526 301 1,644 895
Other income ................................. 509 253 1,052 774
--------- --------- --------- ---------
Income from continuing operations before
income taxes .............................. 13,148 9,763 11,428 25,088
Provision for income taxes ................... 5,341 4,155 4,636 10,736
--------- --------- --------- ---------
Income from continuing operations ............ 7,807 5,608 6,792 14,352
Reversal of disposition loss from discontinued
operations, net of taxes .................. -- -- 647 --
--------- --------- --------- ---------
Net income ................................... $ 7,807 $ 5,608 $ 7,439 $ 14,352
--------- --------- --------- ---------
Income per common share
Continuing operations ........................ $ 0.43 $ 0.32 $ 0.37 $ 0.80
Discontinued operations ...................... -- -- $ 0.04 --
--------- --------- --------- ---------
$ 0.43 $ 0.32 $ 0.41 $ 0.80
--------- --------- --------- ---------
Weighted average number of common shares ..... 18,336 17,469 17,930 17,945
--------- --------- --------- ---------
See notes to condensed consolidated financial statements.
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31 March 31
1995 1995
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 34,427 $ 27,795
Accounts receivable, net ............................ 81,740 72,152
Inventories:
Raw materials .................................. 24,476 26,752
Work in process ................................ 12,406 14,168
Finished goods ................................. 18,730 19,560
--------- ---------
55,612 60,480
Other current assets ................................ 19,658 24,251
--------- ---------
Total current assets ........................... 191,437 184,678
Property and equipment, net ............................. 32,310 34,791
Intangible assets, net .................................. 30,649 29,104
Other assets ............................................ 11,846 7,819
--------- ---------
$ 266,242 $ 256,392
--------- ---------
LIABILITIES
Current liabilities:
Notes payable and current portion of long-term debt . 4,441 4,374
Accounts payable .................................... 16,539 19,651
Streamlining and restructuring accrual .............. 8,024 22,556
Other accrued expenses .............................. 48,994 46,584
--------- ---------
Total current liabilities ...................... 77,998 93,165
Long-term debt .......................................... 14,815 7,915
Deferred income taxes ................................... 630 992
Deferred compensation ................................... 678 --
SHAREHOLDERS' EQUITY
Common stock ............................................ 3,721 3,721
Additional paid-in capital .............................. 11,549 7,432
Retained earnings ....................................... 158,853 151,414
Cumulative foreign currency adjustments ................. 977 2,659
Treasury stock .......................................... (2,979) (10,906)
--------- ---------
Total shareholders' equity .......................... 172,121 154,320
--------- ---------
$ 266,242 $ 256,392
--------- ---------
See notes to condensed consolidated financial statements
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
December 31
-----------------
1995 1994
---- ----
Operating activities:
Income from continuing operations ........................ $ 6,792 $ 14,352
Adjustments for noncash items included in net income:
Depreciation ......................................... 11,073 10,800
Amortization of intangibles .......................... 5,623 6,405
Purchased incomplete technology ...................... 16,852 --
Increase (decrease) in deferred taxes ................ (3,995) 3,273
Other ................................................ 134 96
Change in operating assets and liabilities, net of effects
of purchase acquisitions and divestitures ............ (26,042) (9,097)
-------- --------
Net cash flows provided by continuing operations ......... 10,437 25,829
Net cash flows used in discontinued operations ........... -- (3,250)
-------- --------
Net cash flows provided by operating activities .......... 10,437 22,579
-------- --------
Investing activities:
Purchases of property and equipment ...................... (9,910) (11,351)
Disposals of property and equipment ...................... 157 403
Proceeds from sale of businesses ......................... 5,901 24,654
Business acquired in purchase transaction ................ (12,322) (1,056)
Other .................................................... 4,131 (387)
-------- --------
Net cash flows provided by (used in) investing activities (12,043) 12,263
-------- --------
Financing activities:
Debt borrowings .......................................... 7,857 612
Repayment of debt ........................................ (462) (3,291)
Proceeds from exercise of stock options .................. 586 720
Purchases of treasury stock .............................. -- (12,576)
-------- --------
Net cash flows provided by (used in) financing activities 7,981 (14,535)
-------- --------
Effect of exchange rate on cash ............................. 257 1,655
-------- --------
Increase in cash and cash equivalents ....................... 6,632 21,962
Cash and cash equivalents at beginning of year .............. 27,795 23,101
-------- --------
Cash and cash equivalents at end of period .................. $ 34,427 $ 45,063
-------- --------
Supplemental data:
Cash paid during the period for interest ................. $ 1,498 $ 4,323
Cash paid during the period for income taxes ............. $ 8,611 $ 5,118
Tax benefit of disqualifying dispositions of stock options $ 126 $ 84
Stock issued for acquisition of Tele-Path Industries ..... $ 13,700 --
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Condensed Consolidated Financial Statements
In the opinion of management, the unaudited condensed consolidated balance
sheet at December 31, 1995, and the unaudited consolidated statements of
income and unaudited consolidated condensed statements of cash flows for
the interim periods ended December 31, 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 and Divestments
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 $12.6 million in cash including a $2.6 million
contingent adjustment for the stock price, and 688,096 shares of the
Corporation's common stock. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Consolidated sales for the three and nine months ended December 31, 1995 as
compared to the equivalent periods ended December 31, 1994 are reported in two
business segments; Information Support Products and Diversified Instrumentation,
as summarized below:
Sales by Segment
(In thousands)
Three Months Ended Nine Months Ended
December 31, December 31,
1995 1994 1995 1994
---- ---- ---- ----
Information support products ....... $111,877 $ 98,329 $303,977 $272,234
Diversified Instrumentation:
Medical and diag. prod ........ 14,821 14,790 46,904 46,214
-------- -------- -------- --------
Subtotal - ongoing businesses ...... $126,698 $113,119 $350,881 $318,448
Divested businesses ........... 66 14,123 8,174 47,943
-------- -------- -------- --------
$126,764 $127,242 $359,055 $366,391
-------- -------- -------- --------
Sales from operations not divested in fiscal 1995 or 1996 (ongoing operations)
increased 12% and 10% for the three and nine months ended December 31, 1995
compared to the equivalent prior year periods. Sales declined $14.1 million
(11%) and $39.8 million (11%) for the comparable three and nine month periods
due to business divestments which included the sale of fourteen businesses. This
results in a consolidated sales decline of .4% for the three months and 2% for
the nine months ended December 31, 1995 compared to the respective prior year
periods. Information Products segment sales increased 14% in the quarter and 12%
in the nine months led by strong test and industrial connectivity product growth
and solid performance from the recently acquired Tele-Path Industries, Inc.,
partially offset by continued poor performance in the video products area. Sales
of medical and diagnostic products in the Diversified Instrumentation segment
were flat for the quarter and up slightly for the nine months. Backlog from
ongoing operations was $67.7 million at December 31, 1995 reflecting a small
increase for the quarter.
Consolidated gross profit for the current quarter and nine months was 55.2% and
54.7% of sales, respectively, compared to 52.8% and 52.4% for each of the
respective prior year periods. The improvement in rate was primarily driven by
operating efficiencies from business restructuring and divestitures. Information
Support Products gross margin declined slightly in the current nine months to
56.4% compared to 56.7% in the first nine months of the prior year. Medical and
diagnostic product margins in the Diversified Instrumentation segment declined
to 49.9%, primarily due to introduction of raw material specification changes,
compared to 50.8% in the first nine months of the prior year. Selling, general
and administrative expenses declined as a percent of sales in the current
quarter resulting from prior restructuring actions but were higher as a percent
of sales for the first nine months as compared to the comparable periods in the
prior year. Product development expense was 11.5% and 12.1% of sales for the
current three and nine months, respectively, compared to 10.1% and 10.5% in the
first three and nine months of the prior year. The increase reflects increased
investment in the communication test and display businesses. Amortization of
intangibles, was $3 million in the first nine months of fiscal 1996 and $3.3
million in the first nine months of the prior year. The decline was due to
business divestments and discontinuance of product lines. Interest expense
declined for the current nine months 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 40.6% for the current nine months
compared to 42.8% in the prior year resulting from lower nondeductible
amortization charges.
Net income for the current quarter increased 39% to $7.8 million from $5.6
million for the third quarter of the prior year, resulting in a 34% increase in
earings per share for the comparative period. The increase reflects higher gross
margins and lower selling general and administrative expenses and tax rate,
offset partially by higher product development investment. For the nine months
ended December 31, 1995, excluding one-time charges recorded in the second
quarter, earnings per share of $.96 were 20% higher than the $.80 for the
comparable period in the prior year.
CAPITAL RESOURCES AND LIQUIDITY
The Company's funded debt was 10% of total capital at December 31, 1995. The
working capital ratio improved to 2.4 to 1 at December 31, 1995 from 2 to 1 at
March 31, 1995. The Company has begun the process of selling the majority of its
medical and diagnostic operations as part of plans to focus on its core
communications business. Dynatech believes it has sufficient resources to
finance its cash requirements over the next year and that the current capital
structure provides sufficient financial flexibility to pursue future business
opportunities.
PART I. OTHER INFORMATION
ITEM 6. (A) EXHIBITS
Exhibit 27 Financial Data Schedule
PART II. OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8-K
(a) Exhibit 4 - Revolving Credit and Term Loan Agreement dated
October 27, 1995 between Dynatech and the First National Bank of
Boston, ABN AMRO Bank N.V., and Mellon Bank is filed herewith.
(b) No current reports on Form 8-K were filed by the Registrant
during the quarter ended December 31, 1995.
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 January 23, 1996 ROBERT H. HERTZ
-------------------- -------------------------------------
Chief Financial Officer and Treasurer