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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
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 July 15, 1997 there were 16,689,890 shares of common stock of the registrant
outstanding.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three Months Ended
June 30
1997 1996
---- ----
Sales $ 104,320 $ 81,122
Cost of sales 42,637 30,248
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Gross profit 61,683 50,874
Selling, general and administrative
expense 31,759 26,059
Product development expense 13,695 9,646
Amortization of intangibles 1,443 1,566
--------- ---------
Operating income 14,786 13,603
Interest expense (352) (106)
Interest income 492 643
Other income 170 117
--------- ---------
Income before income taxes 15,096 14,257
Provision for income taxes 6,114 5,845
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Net income $ 8,982 $ 8,412
========= =========
Income per common share $ 0.52 $ 0.46
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Weighted average number of common shares 17,343 18,301
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DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30 March 31
1997 1997
---- ----
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 42,103 $ 39,782
Accounts receivable, net 64,228 70,930
Inventories:
Raw materials 23,936 19,423
Work in process 12,958 11,376
Finished goods 11,419 9,326
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Total inventory 48,313 40,125
Other current assets 9,280 11,074
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Total current assets 163,924 161,911
Property and equipment, net 24,479 23,833
Intangible assets, net 42,380 43,813
Other assets 20,807 20,478
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$ 251,590 $ 250,035
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LIABILITIES:
Current liabilities:
Notes payable and current portion of
long-term debt $ 150 $ 201
Accounts payable 17,760 16,900
Other accrued expenses 34,748 54,586
Accrued income taxes 1,152 657
Net liabilities of discontinued
operations 4,391 9,173
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Total current liabilities 58,201 81,517
Long-term debt 25,226 5,226
Deferred income taxes 989 1,025
Deferred compensation 2,050 1,581
SHAREHOLDERS' EQUITY:
Common stock 3,721 3,721
Additional paid-in capital 9,468 9,887
Retained earnings 204,488 195,506
Cumulative translation adjustments (1,557) (1,247)
Treasury stock (50,996) (47,181)
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Total shareholders' equity 165,124 160,686
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$ 251,590 $ 250,035
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DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
June 30
1997 1996
---- ----
Operating activities:
Net income $ 8,982 $ 8,412
Adjustments for noncash items included in net income:
Depreciation 2,840 2,156
Amortization of intangibles 1,443 1,566
Increase in deferred taxes -- 110
Other 48 121
Change in operating assets and
liabilities (13,133) (12,264)
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Net cash flows provided by continuing
operations 180 101
Net cash flows provided by (used in)
discontinued operations (9,963) 8,205
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Net cash flows provided by (used in)
operating activities (9,783) 8,306
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Investing activities:
Purchases of property and equipment (4,022) (1,862)
Proceeds from disposals of property
and equipment 18 30
Proceeds from sale of businesses -- 10,267
Other 76 17
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Net cash flows provided by (used in)
continuing operations (3,928) 8,452
Net cash flows provided by (used in)
discontinued operations 507 (526)
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Net cash flows provided by (used in)
investing activities (3,421) 7,926
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Financing activities:
Debt borrowings 20,000 --
Repayment of debt -- (2,125)
Proceeds from exercise of stock
options 1,054 638
Purchases of treasury stock (5,330) (9,469)
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Net cash flows provided by (used in)
financing activities 15,724 (10,956)
-------- --------
Effect of exchange rate on cash (199) (72)
-------- --------
Increase in cash and cash equivalents 2,321 5,204
Cash and cash equivalents at beginning
of year 39,782 46,094
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Cash and cash equivalents at end of
period $ 42,103 $ 51,298
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Condensed Consolidated Financial Statements
In the opinion of management, the unaudited condensed consolidated balance
sheet at June 30, 1997, and the unaudited consolidated statements of
income and unaudited consolidated condensed statements of cash flows for
the interim periods ended June 30, 1997 and 1996 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 Company's most recent Form 10-K and Annual Report as of March 31,
1997.
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, product
demand and market acceptance risks, the effect of economic conditions, the
impact of competitive products and pricing, product development,
commercialization and technological difficulties, capacity and supply
constraints or difficulties, availability of capital resources, general
business and economic conditions, the effect of the Company's accounting
policies, and other risks detailed in the Company's most recent Form 10-K
and Annual Report as of March 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Significant estimates in these
financial statements include allowances for accounts receivable, net
realizable value of inventories, and tax valuation reserves. Actual
results could differ from those estimates.
B. Pro Forma Financial Information
On December 31, 1996 the Company acquired substantially all of the assets
and assumed certain liabilities of Itronix Corporation ("Itronix") located
in Spokane, Washington, for $65.4 million in cash. The following unaudited
pro forma information presents a summary of consolidated results of
operations of the Company as if the acquisition had occurred at the
beginning of fiscal 1996, with pro forma adjustments to give effect to
amortization of goodwill and intangibles, interest expense on acquisition
debt, and certain other adjustments, together with related income tax
effects.
Three months ended
June 30, 1996
(in thousands)
Revenue $102,012
Net income $ 7,856
Earnings per share $ 0.43
Weighted average shares 18,301
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C. New Pronouncements
The Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share," which modifies the way in which earnings per share
("EPS") is calculated and disclosed. Currently, the Company discloses
primary and fully diluted EPS. Upon adoption of this standard for the
interim period ending December 31, 1997, the Company will disclose basic
and diluted EPS for fiscal 1998 and will restate all prior period EPS data
presented. The Company does not anticipate this change will have a
material impact on the calculation of EPS.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
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Consolidated sales for the three months ended June 30, 1997 were $104.3 million
compared to $81.1 million in the prior year's first quarter and $102.0 million
including the pro forma effects of the acquisition of Itronix, a company
purchased on December 31, 1996. Sales of communications test products increased
$6.6 million or 13% over the same period a year ago reflecting continued demand
for new products which support the installation of communications' services and
networks. Sales for industrial computing and communication products increased
$14.0 million or 95% over the same period last year due primarily to the Itronix
acquisition. Sales of Itronix's portable communications products were lower than
expected as shipments of the new Pentium-based field-service products were
delayed in order to complete final fail-safe tests. Sales of catalog-related
products of industrial communications products increased 25% due to increased
demand. Sales of visual communications products increased $2.6 million or 16%
due to continued demand for aircraft cabin video information services. Backlog
at June 30, 1997 was $74.8 million, an increase of 4% over the backlog at March
31, 1997.
Consolidated gross profit was $61.7 million or 59.1% of consolidated sales,
compared to $50.9 million or 62.7% for the comparable period a year ago. The
percentage decrease was primarily attributed to increased sales of industrial
computing and communications products which have a lower gross margin than the
consolidated average.
Selling, general and administrative expense was $31.8 million or 30.4% of
consolidated sales, as compared to $26.1 million or 32.1% of consolidated sales
for the first quarter a year ago. The percent decrease was primarily attributed
to revenues increasing at a rate higher than overall administrative expense.
Product development expense was $13.7 million or 13.1% of consolidated sales as
compared to $9.6 million or 11.9% of consolidated sales for the first quarter in
the prior year. The increase was primarily driven by increased spending on
industrial computer products associated with new CPU products to support the
Company's catalog business plus the effects related to the acquisition of
Itronix. In addition, the communications test business incurred additional
expense related to the development of products that are expected to be
introduced within the next 12 months.
Amortization of intangibles during the first quarter of 1997 and 1996 were $1.4
million and $1.6 million, respectively. Amortization expense decreased due to
the writeoff of goodwill and certain intangibles related to product and
distribution transitions at the end of fiscal 1997, and was offset by an
increase in goodwill amortization related to the acquisition of Itronix.
Interest income, net of interest expense, decreased to $140 thousand from $537
thousand for the same period last year. The decrease was attributable to the
increase in long-term debt, which was used to fund a stock repurchase and other
cash payments related to discontinued operations and working capital
requirements.
The effective tax rate for the first quarter in 1997 was 40.5% essentially at
the same level of 41.0% in the prior year quarter.
Net income for the first quarter of 1997 was $9.0 million, an increase of 6.8%
over the same period a year ago. Earnings per share increased 13% compared to
the year earlier period, partially due to the effect of the stock buyback
program.
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Capital Resources and Liquidity
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The Company's funded debt was 13.3% of total capital at June 30, 1997 as
compared to 3.3% as of March 31, 1997. The increase in debt was primarily to
fund cash requirements for discontinued operations of $10.0 million, $4.0
million for capital expenditures, and $5.3 million to repurchase 163 thousand
shares of the Company's common stock. The total number of shares repurchased
since February 1996 is approximately two million.
Dynatech believes that with its current cash, cash generated from operations and
its current and future borrowing capacity it will be able to finance at least 12
months of capital expenditures, working capital requirements and potential
acquisitions.
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share," which modifies the way in which earnings per share ("EPS") is calculated
and disclosed. Currently, the Company discloses primary and fully diluted EPS.
Upon adoption of this standard for the interim period ending December 31, 1997,
the Company will disclose basic and diluted EPS for fiscal 1998 and will restate
all prior period EPS data presented.The Company does not anticipate this change
will have a material impact on the calculation of EPS.
PART II. OTHER INFORMATION
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Item 6. (a) Exhibits
The exhibit numbers in the following list correspond to the number assigned to
such exhibits in the Exhibit Table of Item 601 of Regulation S-K:
Exhibit 10 - Credit Line Agreement dated June 25, 1997 by and between
the Company and BankBoston, N.A.
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
Item 6. (b) Reports on Form 8-K
During the quarter ended June 30, 1997, the Registrant filed a Current
Report on Form 8-K dated March 21, 1997 relating to the sale of the
assets of Computerized Medical Systems, Inc.
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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
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Date August 13, 1997 /s/ Allan M. Kline
- ---------------------------- -------------------------------------------
Allan M. Kline
Corporate Vice President, Chief Financial
Officer and Treasurer
Date August 13, 1997 /s/ Robert W. Woodbury, Jr.
- ---------------------------- -------------------------------------------
Robert W. Woodbury, Jr.
Corporate Vice President, Controller and
Principal Accounting Officer
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