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UNITED STATES
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, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-13947
RELTEC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3227019
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
5900 Landerbrook Drive, Suite 300
Cleveland, Ohio 44124-4019
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (440) 460-3600
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 ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding as of August 7, 1998
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Common stock, par value 56,370,617
$0.01 per share
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RELTEC CORPORATION
INDEX TO FORM 10-Q
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Operations........... 4
Condensed Consolidated Statements of Cash Flows........... 5
Notes to Condensed Consolidated Financial Statements...... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.... 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................. 14
ITEM 2. Changes in Securities and Use of Proceeds..................... 14
ITEM 3. Defaults Upon Senior Securities............................... 14
ITEM 4. Submission of Matters to a Vote of Security Holders........... 14
ITEM 5. Other Information............................................. 14
ITEM 6. Exhibits and Reports on Form 8-K.............................. 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RELTEC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 30, December 31,
(Dollars in millions) 1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 27.6 $ 11.9
Accounts receivable, net ........................................................ 164.2 141.4
Inventories ..................................................................... 104.3 94.7
Deferred income taxes ........................................................... 27.1 26.7
Other current assets ............................................................ 13.6 18.4
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Total current assets ...................................................... 336.8 293.1
Property, plant and equipment, net ................................................... 121.6 111.4
Goodwill and intangible assets, net .................................................. 370.6 384.0
Other noncurrent assets .............................................................. 25.5 16.1
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Total assets .............................................................. $854.5 $804.6
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of debt ...................................................... $ 16.3 $ 20.9
Accounts payable ................................................................ 85.4 78.8
Other current liabilities ....................................................... 66.4 66.2
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Total current liabilities ................................................. 168.1 165.9
Long-term debt ....................................................................... 112.0 250.3
Other noncurrent liabilities ......................................................... 39.0 40.5
Preferred stock, $.01 par value; 1,000 shares of Series A redeemable preferred stock
issued and outstanding with $1,000 per share redemption value at June 30, 1998 and
December 31, 1997, respectively .................................................. 1.0 1.0
Redeemable common stock, $.01 par value; 295,104 shares issued and outstanding at
December 31, 1997 ................................................................ - 3.4
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 56,370,617 shares and 49,743,504 shares issued and
outstanding at June 30, 1998 and December 31, 1997, respectively ............. 0.6 0.5
Additional paid-in capital ....................................................... 515.1 341.2
Accumulated earnings (deficit) ................................................... 13.3 (3.7)
Currency translation adjustment .................................................. 5.4 5.5
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Total stockholders' equity ................................................ 534.4 343.5
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Total liabilities and stockholders' equity ................................ $854.5 $804.6
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
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RELTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions, except share data) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net sales ...................................... $278.0 $216.0 $518.2 $412.7
Cost of sales .................................. 189.8 151.9 360.8 296.9
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Gross profit ............................... 88.2 64.1 157.4 115.8
Operating expenses:
Research and product engineering .......... 17.1 13.7 33.7 26.7
Selling and administrative ................ 33.2 21.0 63.0 39.7
Goodwill and intangible amortization ...... 8.4 7.9 16.6 15.8
Other expense ............................. 0.8 - 1.9 0.4
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Total operating expenses ....................... 59.5 42.6 115.2 82.6
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Operating income ............................... 28.7 21.5 42.2 33.2
Interest expense ............................... 1.9 4.9 6.4 9.7
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Income before income taxes ..................... 26.8 16.6 35.8 23.5
Income tax provision ........................... 12.8 8.4 18.7 13.2
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Net income ..................................... $ 14.0 $ 8.2 $ 17.1 $ 10.3
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EARNINGS PER COMMON SHARE DATA (NOTE 2):
Basic net income per common share .............. $ 0.25 $ 0.16 $ 0.32 $ 0.21
Weighted average shares outstanding ............ 56.4 49.9 53.9 47.7
Diluted net income per common share ............ $ 0.24 $ 0.16 $ 0.31 $ 0.21
Weighted average shares and options outstanding. 58.2 50.7 55.5 48.5
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
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RELTEC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Six Months Ended
June 30,
(Dollars in millions) 1998 1997
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OPERATING ACTIVITIES:
Net income ............................................................... $ 17.1 $ 10.3
Adjustments to net income to arrive at net cash provided by operating
activities:
Depreciation and amortization .......................................... 27.2 25.9
Deferred income taxes .................................................. (2.6) (4.7)
Changes in operating assets and liabilities:
Accounts receivable, net ............................................... (22.8) (7.3)
Inventories ............................................................ (9.6) (15.2)
Accounts payable ....................................................... 6.6 (4.1)
Receivable from seller ................................................. - 5.0
License termination .................................................... - (11.0)
Other assets and liabilities ........................................... 1.4 5.8
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Net cash provided by operating activities .......................... 17.3 4.7
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............................. (20.5) (12.7)
Investment in new business systems ..................................... (8.8) -
Other acquisitions and investments ..................................... - (5.0)
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Net cash used for investing activities ............................. (29.3) (17.7)
FINANCING ACTIVITIES:
New Credit Facility net repayments ..................................... (151.8) (56.1)
Money Market lines of credit and other debt net borrowings ............. 8.9 22.0
Net proceeds from initial public stock offering ........................ 170.3 -
Other repurchases of common stock, net ................................. 0.3 50.2
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Net cash provided by financing activities .......................... 27.7 16.1
Net increase in cash and cash equivalents ..................................... 15.7 3.1
Cash and cash equivalents, beginning of period ................................ 11.9 8.7
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Cash and cash equivalents, end of period ...................................... $ 27.6 $ 11.8
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
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RELTEC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of RELTEC Corporation
include the accounts of RELTEC Corporation and its subsidiaries ("RELTEC" or the
"Company"). The condensed consolidated financial statements are unaudited, but
in the opinion of management contain all adjustments, which are of a normal
recurring nature, necessary to present fairly the Company's financial position,
results of operations and cash flows. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to rules and regulations promulgated by the Securities and Exchange
Commission. The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1997 which have been set
forth in the Company's Registration Statement on Form S-1, File No. 333-44277
filed by the Company with the Securities and Exchange Commission. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the full year.
2. EARNINGS PER SHARE
Basic earnings per common share is computed using the weighted average number of
common shares outstanding during the year; diluted earnings per common share is
computed after consideration of the dilutive effect of stock options.
The following table reconciles net income available for common shareholders and
the weighted average shares outstanding for basic and diluted earnings per
common share for the periods presented:
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Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions, except per share data) 1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income ............................................. $14.0 $ 8.2 $17.1 $10.3
Less: preferred stock dividends ....................... - - 0.1 0.1
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Net income available to common shareholders ............ $14.0 $ 8.2 $17.0 $10.2
Basic earnings per common share:
Weighted average common shares outstanding (in millions) 56.4 49.9 53.9 47.7
Basic earnings per common share ........................ $0.25 $0.16 $0.32 $0.21
Diluted earnings per common share:
Weighted average common shares outstanding (in millions) 56.4 49.9 53.9 47.7
Add: effect of dilutive options (in millions) ......... 1.8 0.8 1.6 0.8
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58.2 50.7 55.5 48.5
Diluted earnings per common share ...................... $0.24 $0.16 $0.31 $0.21
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</TABLE>
3. DANTHERM HEAT MANAGEMENT JOINT VENTURE
In February 1998, the Company agreed to establish a new European commercial
joint venture based in Skive, Denmark. This joint venture between the Company
and A/S Dantherm will be 50% owned by each party. The purpose of the joint
venture is to design, manufacture and sell advanced heat management systems to
the worldwide telecommunications market. Each party will contribute certain
assets, including existing technology and customer accounts to the joint venture
in exchange for their respective interests.
6
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4. INVENTORIES
Inventories are valued at the lower of cost or market and are stated on a
first-in, first-out (FIFO) cost basis. Inventories consisted of the following:
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June 30, December 31,
(Dollars in millions) 1998 1997
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Raw materials ......................... $ 60.6 $58.4
Work in process ....................... 17.2 18.8
Finished goods ........................ 26.5 17.5
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Total ........................... $104.3 $94.7
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</TABLE>
5. INITIAL PUBLIC OFFERING OF COMMON STOCK
RELTEC completed an initial public offering of 6.3 million shares of common
stock on March 18, 1998. The Company used the net proceeds of $170.3 million to
reduce its aggregate outstanding debt and for general corporate purposes.
Prior to the initial public offering, the Company increased its authorized
shares of common stock to 150,000,000 shares and increased its authorized shares
of preferred stock to 20,000,000 shares.
In connection with the initial public offering, shares of common stock
previously classified as redeemable common stock have been reclassified to
stockholders' equity, as the right to put such shares to the Company by the
holder has been canceled. These shares were subject to a put agreement at
December 31, 1997.
6. COMPREHENSIVE INCOME
In June 1997 the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130"). SFAS 130 discusses how to report and display
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income. The
following table reconciles the Company's net income to comprehensive income for
the periods presented:
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Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 1998 1997 1998 1997
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Net income .............................. $14.0 $8.2 $17.1 $10.3
Other comprehensive income
Currency translation adjustments ... (1.4) 0.6 (0.1) (2.4)
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Comprehensive income .................... $12.6 $8.8 $17.0 $ 7.9
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7. COMMITMENTS AND CONTINGENCIES
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company relating to the conduct of its business, including
those pertaining to environmental, safety and health, employment and contract
matters. Although the outcome of litigation cannot be predicted with certainty
and some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, management believes the disposition of matters which are pending or
asserted will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
7
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8. SUBSEQUENT EVENTS
In July 1998, SPLICE do Brasil Telecommunicacoes e Eletronica S.A. ("SPLICE")
and the Company agreed to establish RELTEC Sistemas de Energia Ltda. ("RSEL"), a
new Latin American commercial joint venture based in San Paulo, Brazil. This
newly formed company will market and support power products and systems for the
telecommunications markets in Brazil and other Latin American countries. The
joint venture combines RELTEC's power products and power system configurations
technology with SPLICE's manufacturing capabilities and knowledge of the
Brazilian telecommunications markets. RSEL will be 50% owned by each party.
In July 1998, the Company initiated plans to restructure its European operations
by closing one facility in the United Kingdom and reducing its workforce in the
United Kingdom. As a result of this restructuring, the Company will record a
nonrecurring pre-tax charge of approximately $4.0 million to $6.0 million in the
third quarter of 1998 to cover facility closing costs and planned work force
reductions.
In August 1998, the Company announced an agreement to acquire the assets of
Evergood Telecom Enclosures ("Evergood"), a wholly owned subsidiary of the
Walker Group, Inc, for approximately $13.3 million in cash. This acquisition
will be accounted for using the purchase method of accounting. Based in Welcome,
North Carolina, Evergood designs and manufactures power transfer devices and
custom enclosures used in wireline and wireless telecommunications applications.
In August 1998, the Company and Positron Fiber Systems Corporation ("PFS")
announced a definitive merger agreement under which the Company has undertaken
to make an offer to purchase all outstanding common shares of PFS for US$13.625
per share in cash. The aggregate value of the transaction is approximately
$200.0 million. The Company will finance this transaction through borrowing
availability under its existing credit facilities. This acquisition will be
accounted for using the purchase method of accounting. Based in Montreal,
Quebec, Canada, PFS is a leading manufacturer of innovative telecommunications
equipment for high reliability and critical service applications. This
acquisition creates a family of broadband access platforms for delivering
multimedia services and advances the Company's position in the multi-billion
dollar SONET/SDH broadband access delivery market.
8
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS ARE TO BE
CONSIDERED FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE
MANY RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO, RAPID TECHNOLOGICAL
CHANGE, THE IMPORTANCE OF DEVELOPING AND SUCCESSFULLY MARKETING NEW PRODUCTS,
UNCERTAIN MARKETS FOR THE COMPANY'S SYSTEMS AND PRODUCTS, UNPREDICTABLE SALES
CYCLES, COMPETITION, A CHANGING REGULATORY ENVIRONMENT, CUSTOMER CONCENTRATION,
RISKS ASSOCIATED WITH ACQUISITIONS AND INTERNATIONAL OPERATIONS AND NUMEROUS
OTHER RISKS WHICH HAVE BEEN SET FORTH IN THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-1, FILE NO. 333-44277 FILED BY THE COMPANY WITH THE SECURITIES AND
EXCHANGE COMMISSION. THE COMPANY ADVISES THE READER OF THESE STATEMENTS THAT
ACTUAL RESULTS OR CONDITIONS MAY DIFFER MATERIALLY FROM THOSE SET FORTH HEREIN.
OVERVIEW
RELTEC Corporation was formed in July 1995 by management and certain affiliates
of Kohlberg Kravis Roberts & Co. L.P. to acquire Reliance Comm/Tec Corporation
from Reliance Electric Company, a subsidiary of Rockwell International
Corporation. RELTEC is a leader in the design, manufacture and sale of a broad
range of telecommunications systems, products and services. Its Access Systems,
Integrated Wireless Solutions and Network Components and Services are sold to
wireline and wireless service providers and OEMs around the globe. RELTEC
operates manufacturing plants in North America, Europe, Asia/Pacific and Latin
America and has over 5,900 employees worldwide.
The Company conducts business in a single industry segment, the global
telecommunications equipment market. This segment includes integrated systems,
components and services for voice, video and data communications. The Company's
net sales are divided into three groupings: Access Systems, Integrated Wireless
Solutions and Network Components and Services. The Company's products are sold
directly to end users, such as Regional Bell Operating Companies ("RBOCs") and
other telecommunications service providers, to telecommunications OEMs and, to a
lesser extent, through third party distributors. For certain products,
particularly in Access Systems, the purchase decision process may be long and
unpredictable, and may involve a protracted standardization and evaluation
process.
The Company's operating results may fluctuate significantly from quarter to
quarter due to several factors, including, without limitation, the volume and
timing of orders from and shipments to major customers, the timing of new
product announcements by, and the availability of products from, the Company or
its competitors, the overall level of capital expenditures by public network
providers, market acceptance of new and enhanced versions of the Company's
products, variations in the mix of products, systems and services sold by the
Company or its sales channels and the availability and cost of key components.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, net sales by product
line offerings, expressed in dollar volumes:
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Three Months Ended Percentage
June 30, Change
(Dollars in millions) 1998 1997
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Net Sales:
Access Systems ................ $ 97.4 $ 72.8 33.8%
Integrated Wireless Solutions . 48.0 41.8 14.8%
Network Components and Services 132.6 101.4 30.8%
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Total ..................... $278.0 $216.0 28.7%
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</TABLE>
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Six Months Ended Percentage
June 30, Change
(Dollars in millions) 1998 1997
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<S> <C> <C> <C>
Net Sales:
Access Systems ................ $177.9 $132.3 34.5%
Integrated Wireless Solutions . 98.6 97.0 1.6%
Network Components and Services 241.7 183.4 31.8%
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Total ..................... $518.2 $412.7 25.6%
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9
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NET SALES
Net sales increased $62.0 million, or 28.7%, to $278.0 million for the quarter
ended June 30, 1998 from $216.0 million for the quarter ended June 30, 1997.
Included in the 1998 second quarter results were $17.3 million of net sales
contributed by businesses acquired in 1997.
Net sales increased $105.5 million, or 25.6%, to $518.2 million for the six
months ended June 30, 1998 from $412.7 million for the six months ended June 30,
1997. Included in the results of the first six months of 1998 were $32.9 million
of net sales contributed by businesses acquired in 1997.
The net sales increase was primarily from higher sales of Access Systems and
Network Components and Services. The growth of Access Systems resulted from
continued strong demand for the Company's Next Generation Digital Loop Carrier
("NGDLC") platform including its industry-leading fiber-to-the-curb technology.
Network Components and Services increased over the same periods in the prior
years led by a strong demand for engineering and installation services by a
broad range of ILEC, CLEC, wireless and alternative carrier customers.
Integrated Wireless Solutions sales increased over the comparable period in the
prior year, but were below management expectations. The wireless market weakness
in Europe was partially offset by period-to-period increases in North America.
The European weakness was due to excess customer inventories, the delay of
awards of new GSM licenses and the continuing strength of the British pound
against other European currencies. The Company initiated a plan in early July
1998 to restructure its European operations. As a result of this restructuring,
the Company will close one of its U.K. facilities, reduce its U.K. workforce and
transfer its heat management business to a recently formed joint venture in
Denmark. This restructuring will result in a nonrecurring charge of
approximately $4.0 million to $6.0 million in the third quarter of 1998 related
to facility closing costs and planned workforce reductions.
GROSS PROFIT
Gross profit as a percentage of net sales increased to 31.7% for the quarter
ended June 30, 1998 from 29.7% for the quarter ended June 30, 1997.
Gross profit as a percentage of net sales increased to 30.4% for the six months
ended June 30, 1998 from 28.1% for the six months ended June 30, 1997.
The increase in gross profit as a percentage of sales resulted primarily from
benefits associated with product cost reduction initiatives, process
improvements and increased sales volumes of higher margin products. An increase
in the percentage of services revenues, which carry lower margins, moderated
some of the improvements in systems product margins.
RESEARCH AND PRODUCT ENGINEERING
Research and product engineering expense increased $3.4 million, or 24.8%, to
$17.1 million for the quarter ended June 30, 1998 from $13.7 million for the
quarter ended June 30, 1997. Research and product engineering costs were 6.2% of
net sales for the second quarter of 1998 and 6.3% of net sales for the second
quarter of 1997.
Research and product engineering expense increased $7.0 million, or 26.2%, to
$33.7 million for the six months ended June 30, 1998 from $26.7 million for the
six months ended June 30, 1997. Research and product engineering costs were 6.5%
of net sales for both the six months ended June 30, 1998 and the six months
ended June 30, 1997.
Approximately one-half of the Company's research and product engineering expense
in these periods was related to Access Systems, reflecting the Company's
continued focus on this product line.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses increased $12.2 million to 11.9% of net
sales from 9.7% of net sales for the quarter ended June 30, 1998 compared to the
quarter ended June 30, 1997.
Selling and administrative expenses increased $23.3 million to 12.2% of net
sales from 9.6% of net sales for six months ended June 30, 1998 compared to the
six months ended June 30, 1997.
10
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The increase in selling and administrative expenses was primarily due to
RELTEC's continued organizational investments in Latin America and Asia/Pacific,
higher sales commissions on sales outside of North America, the costs associated
with the implementation of new business systems and seasonal marketing expenses.
GOODWILL AND INTANGIBLE AMORTIZATION
Goodwill and intangible amortization increased $0.5 million, or 6.3%, to $8.4
million for the quarter ended June 30, 1998 from $7.9 million for the same
period in 1997. Goodwill and intangible amortization were $4.7 million and $3.7
million, respectively, for the three months ended June 30, 1998 compared to $4.4
million and $3.5 million, respectively, for the three months ended June 30,
1997.
Goodwill and intangible amortization increased $0.8 million, or 5.1%, to $16.6
million for the six months ended June 30, 1998 from $15.8 million for the same
period in 1997. Goodwill and intangible amortization were $9.4 million and $7.2
million, respectively, for the six months ended June 30, 1998 compared to $8.8
million and $7.0 million, respectively, for the six months ended June 30, 1997.
This increase is primarily the result of the additional goodwill resulting from
an October 1997 acquisition.
INTEREST EXPENSE
Interest expense decreased $3.0 million to $1.9 million for the quarter ended
June 30, 1998 from $4.9 million for the quarter ended June 30, 1997.
Interest expense decreased $3.3 million to $6.4 million for the six months ended
June 30, 1998 from $9.7 million for the six months ended June 30, 1997.
This decrease resulted from lower debt levels due to the Company's initial
public offering of common stock that was completed on March 18, 1998 and the
application of proceeds to repay debt.
EFFECTIVE INCOME TAX RATE
The Company's effective income tax rate decreased to 47.8% for the quarter ended
June 30, 1998 from 50.6% for the same period in 1997.
The Company's effective income tax rate decreased to 52.2% for the six months
ended June 30, 1998 from 56.2% for the same period in 1997.
The overall decreases in the Company's effective income tax rate were due to
higher income before taxes in relation to the levels of nondeductible goodwill
amortization.
NET INCOME AND DILUTED EARNINGS PER SHARE
Net income for the quarter ended June 30, 1998 increased $5.8 million ($0.08 per
diluted share), to $14.0 million ($0.24 per diluted share) from $8.2 million
($0.16 per diluted share) for the quarter ended June 30, 1997. This increase
represented a 70.7% increase from the comparable period in 1997 (50.0% increase
per diluted share).
Net income for the six months ended June 30, 1998 increased $6.8 million ($0.10
per diluted share), to $17.1 million ($0.31 per diluted share) from $10.3
million ($0.21 per diluted share) for the six months ended June 30, 1997. This
increase represented a 66.0% (47.6% per diluted share) increase from the
comparable period in 1997.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
("SFAS 130"). SFAS 130 discusses how to report and display comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
11
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Comprehensive income for the quarter ended June 30, 1998 increased to $12.6
million from $8.8 million for the quarter ended June 30, 1997.
Comprehensive income for the six months ended June 30, 1998 increased to $17.0
million from $7.9 million for the six months ended June 30, 1997.
These increases resulted primarily from higher net earnings in comparative
periods and changes in currency translation rates for the Company's non-U.S.
affiliates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are working capital requirements, capital
expenditures and investments such as acquisitions, strategic investments and
joint ventures. The Company's working capital requirements have grown as the
Company has grown. Capital expenditures, exclusive of acquisitions and
investments in new business systems, were $8.9 million and $7.9 million for the
quarters ended June 30, 1998 and 1997, and $20.5 and $12.7 for the six months
ended June 30, 1998 and 1997, respectively.
The Company has funded its liquidity requirements principally from cash flows
from operations and borrowings under its credit facilities, issuances of its
common stock and to a lesser extent, from capital leases for new equipment.
On March 18, 1998, the Company consummated an initial public offering of 6.3
million shares of common stock, which resulted in net proceeds of $170.3
million. The Company applied $167.3 million of the net proceeds to repay
indebtedness resulting in a net decrease of indebtedness from $271.2 million at
December 31, 1997 to $128.3 million at June 30, 1998. As of June 30, 1998, the
Company's aggregate borrowing availability under its credit facilities was
$323.9 million.
Cash flows provided by operating activities were $17.3 million and $4.7 million
for the six months ended June 30, 1998 and 1997, respectively. Cash flows from
operating activities increased by $12.6 million for the six months ended June
30, 1998 compared to the same period in 1997 primarily due to overall higher net
earnings and accounts payable, offset by increases in accounts receivable and
inventory.
The Company believes that its cash balances, cash generated from future
operations and its existing credit facilities will be adequate to satisfy
anticipated working capital requirements, capital expenditures for equipment and
other investment requirements for the next twelve months. As business and market
conditions permit, the Company may, from time to time, invest in, or acquire,
complementary technologies, products or businesses. These activities may require
the Company to seek additional equity and/or debt to fund such activities, which
could result in dilution to existing stockholders.
The Company has assessed its financial and operational systems and developed
plans to modify and/or replace those systems impacted by the year 2000 issue. A
program is currently underway to address all affected systems with a completion
date prior to the year 2000. The Company currently estimates that the cost of
this program will be approximately $31.0 million. Nonetheless, there can be no
assurance that the systems used by outside service providers or third parties
upon which the Company's systems rely will be timely remediated or that failure
to convert by another company, or a conversion that is incompatible with the
Company's system would not have a material adverse affect on the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 - "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. The Company must implement SFAS 131 by December 31, 1998. The
Company has not completed its evaluation of this statement, but does not
anticipate a material impact on the consolidated financial statements from
the adoption of the additional disclosure requirements of this accounting
standard.
12
<PAGE>
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132 - "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS 132"). SFAS 132 revises employers' disclosures about pension
and other postretirement benefit plans but does not change the measurement or
recognition of these plans. SFAS 132 is effective for fiscal years beginning
after December 31, 1997. Restatement of disclosures for earlier periods provided
for comparative purposes is required unless the information is not readily
available. The Company has not completed its evaluation of this statement, but
does not anticipate a material impact on the consolidated financial statements
from the adoption of the additional disclosure requirements of this accounting
standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 - "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. Earlier application of this statement is encouraged, but is
permitted only as of the beginning of any fiscal quarter beginning after June of
1998. SFAS 133 is not to be applied retroactively to financial statements of
prior years. The Company has not completed its evaluation of this statement, but
does not anticipate a material impact on the consolidated financial statements
from the adoption of this accounting standard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1997, Advanced Fibre Communications, Inc. ("AFC") filed suit
against the Company in the Superior Court of the State of California alleging
trade secret misappropriation and other wrongful acts related to the
Company's engagement of Vidar Sun Moon Star ("VSMS") to provide certain
engineering services. AFC alleged that the Company wrongfully obtained AFC's
proprietary trade secret information from VSMS, a licensee of certain AFC
technology, in connection with development work performed by VSMS on the
Company's MatrixExpress-TM- product. In addition to monetary damages, AFC
sought injunctive relief prohibiting RELTEC from using AFC proprietary trade
secret information, destroying AFC documents prior to trial and selling,
manufacturing, or marketing the Company's MatrixExpress-TM- product. On May
1, 1998, the Superior Court of the State of California, County of Sonoma
denied AFC's request for a preliminary injunction that would have prohibited
the Company from selling, manufacturing or marketing MatrixExpress-TM-.
Because the Company has firmly denied possession or use of any AFC
proprietary trade secret information, the Company agreed to an order
prohibiting it from using AFC proprietary trade secret information and
destroying documents prior to trial. Accordingly, the Superior Court of the
State of California entered a preliminary injunction consistent with the
scope of this stipulation.
On June 10, 1998, AFC filed an amended complaint in which they made allegations
similar to the above with respect to the Company's Matrix product and undefined
pots line card to be used in the Company's DISC*S-Registered Trademark- product.
The Company continues to believe that AFC's claims are without merit and
intends to defend vigorously this suit. A trial date has not yet been set. If
the Company is unsuccessful at trial, the Company may be unable to continue
the development, marketing or sale of the MatrixExpress-TM- and/or Matrix
products or may be required to modify the current designs, which would delay
or interrupt the deployment of MatrixExpress-TM- and/or Matrix products. In
addition, the Company may be unable to continue marketing or selling the
version of the DISC*S-Registered Trademark- pot line card that AFC references
in its complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. 27
Financial Data Schedule
(b) Reports on Form 8-K:
Not Applicable
14
<PAGE>
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.
RELTEC Corporation
August 14, 1998 By:
-------------------------------
John L. Wilson
Vice President and Controller
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RELTEC'S
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 27,600,000
<SECURITIES> 0
<RECEIVABLES> 168,600,000
<ALLOWANCES> 4,400,000
<INVENTORY> 104,300,000
<CURRENT-ASSETS> 336,800,000
<PP&E> 165,500,000
<DEPRECIATION> 43,900,000
<TOTAL-ASSETS> 854,500,000
<CURRENT-LIABILITIES> 168,100,000
<BONDS> 112,000,000
1,000,000
0
<COMMON> 600,000
<OTHER-SE> 533,800,000
<TOTAL-LIABILITY-AND-EQUITY> 854,500,000
<SALES> 518,200,000
<TOTAL-REVENUES> 518,200,000
<CGS> 360,800,000
<TOTAL-COSTS> 360,800,000
<OTHER-EXPENSES> 115,200,000
<LOSS-PROVISION> 1,300,000
<INTEREST-EXPENSE> 6,400,000
<INCOME-PRETAX> 35,800,000
<INCOME-TAX> 18,700,000
<INCOME-CONTINUING> 17,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,100,000
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
