<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 1-5407
WHITTAKER CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4033076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1955 NORTH SURVEYOR AVENUE, SIMI VALLEY, CALIFORNIA 93063
(Address of principal executive offices)
(805) 526-5700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter 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
--- ---
The number of outstanding shares of the registrant's Common Stock, par
value $.01 per share, was 11,029,108 as of May 31, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WHITTAKER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
($ in 000 except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended April 30, Ended April 30,
-------------------- ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 47,605 $31,682 $92,025 $58,368
-------- ------- ------- -------
Costs and expenses
Cost of sales 27,484 19,057 52,384 35,087
Engineering and development 3,882 865 6,977 1,109
Selling, general and administrative 15,280 7,117 27,015 13,623
Acquired in-process research and development 11,700 3,250 11,700 3,250
Restructuring costs 540 - 540 -
-------- ------- ------- -------
Operating profit (loss) (11,281) 1,393 (6,591) 5,299
Interest expense 2,031 1,192 3,686 2,414
Interest income (5,460) (202) (5,622) (330)
Other expense 45 159 46 152
-------- ------- ------- -------
Income (loss) before provision for taxes (7,897) 244 (4,701) 3,063
Provision (benefit) for taxes (3,007) 89 (1,701) 1,188
-------- ------- ------- -------
Net income (loss) $ (4,890) $ 155 $(3,000) $ 1,875
======== ======= ======= =======
Average common and common
equivalent shares outstanding (000) 9,471 9,582 9,136 9,585
======== ======= ======= =======
Earnings (loss) per share $ (0.52) $ 0.02 $ (0.33) $ 0.20
======== ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
(2)
<PAGE>
WHITTAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in 000)
<TABLE>
<CAPTION>
April 30, October 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
- ---------------
Cash $ 1,931 $ 161
Receivables 78,540 64,708
Inventories 52,206 38,975
Other current assets 4,553 2,053
Income taxes recoverable 4,196 1,452
Deferred income taxes 19,813 15,151
-------- --------
Total Current Assets 161,239 122,500
Property and equipment, at cost 108,819 78,059
Less accumulated depreciation and amortization (59,249) (36,641)
-------- --------
Net Property and Equipment 49,570 41,418
Other Assets
- ------------
Goodwill, net of amortization 93,382 33,414
Other intangible assets, net of amortization 48,801 10,585
Notes and other noncurrent receivables 3,806 4,218
Other noncurrent assets 15,222 11,709
Net assets held for sale 29,284 27,115
-------- --------
Total Other Assets 190,495 87,041
-------- --------
Total Assets $401,304 $250,959
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
- -------------------
Current maturities of long-term debt $ 9,669 $ 6,048
Accounts payable 18,360 14,650
Accrued liabilities 42,912 29,530
-------- --------
Total Current Liabilities 70,941 50,228
Other Liabilities
- -----------------
Long-term debt 141,568 70,694
Other noncurrent liabilities 11,240 11,340
Deferred income taxes 27,794 16,273
-------- --------
Total Other Liabilities 180,602 98,307
Stockholders' Equity
- --------------------
Capital stock
Preferred stock 1 1
Common stock 110 86
Additional paid-in capital 74,818 19,261
Retained earnings 74,832 83,076
-------- --------
Total Stockholders' Equity 149,761 102,424
-------- --------
Total Liabilities and Stockholders' Equity $401,304 $250,959
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
(3)
<PAGE>
WHITTAKER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in 000)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended April 30,
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,000) $ 1,875
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,322 3,059
Net periodic pension income (120) (1,100)
Acquired in-process research and development 11,700 3,250
Decrease (increase) in income taxes recoverable (2,744) 66
Change in deferred taxes (4,938) (925)
Changes in operating assets and liabilities:
Decrease in receivables 5,304 9,253
Increase in inventories and other current
assets (5,151) (2,358)
Decrease in accounts payable and other
liabilities (3,601) (4,433)
-------- --------
Net cash provided by operating activities 3,772 8,687
-------- --------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (2,536) (2,022)
Purchased businesses (69,210) (31,013)
Net decrease in notes receivable 903 571
Increase in net assets held for sale (2,169) (802)
Other items, net (49) (117)
-------- --------
Net cash used by investing activities (73,061) (33,383)
-------- --------
FINANCING ACTIVITIES
New convertible subordinated debt - 15,000
Borrowing related to new credit agreement 135,000 67,950
Paydown related to previous credit agreement (60,750) (59,000)
Reduction of other debt (148) (144)
Deferred debt costs (3,185) (1,033)
Other items, net 142 147
-------- --------
Net cash provided by financing activities 71,059 22,920
-------- --------
Net increase (decrease) in cash 1,770 (1,776)
Cash at beginning of year 161 3,507
-------- --------
Cash at end of period $ 1,931 $ 1,731
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,033 $ 2,318
======== ========
Income taxes $ 150 $ 1,307
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
(4)
<PAGE>
WHITTAKER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements of Whittaker Corporation
("Whittaker" or the "Company") and its subsidiaries have been prepared in
conformity with generally accepted accounting principles, consistent in all
material respects with those applied in the Annual Report on Form 10-K for the
year ended October 31, 1995. The interim financial information is unaudited, but
reflects all adjustments which are of a normal recurring nature and, in the
opinion of management, necessary to provide a fair statement of the results for
the interim periods presented. The interim financial statements should be read
in conjunction with the financial statements and related notes in the Company's
Annual Report on Form 10-K for the year ended October 31, 1995. The results of
operations for interim periods are not necessarily indicative of the results of
operations for the full year.
Primary earnings per share have been computed based on the weighted average
number of common and common equivalent shares outstanding. Common stock
equivalents include Series D Participating Convertible Preferred Stock and
dilutive employee stock options calculated using the treasury stock method.
Fully diluted earnings per share include the additional potential dilutive
effects of employee stock options under the treasury stock method and additional
shares issued assuming conversion of the convertible subordinated debt. Fully
diluted earnings per share are not presented because the calculations result in
dilution of less than 3%. Loss per share calculations exclude common stock
equivalents, which would reduce the loss per share if included.
Certain previously reported amounts have been reclassified to conform to the
current period presentation.
Note 2. Acquisitions
On April 10, 1996, the Company acquired all of the capital stock of Xyplex, Inc.
("Xyplex"), a wholly-owned subsidiary of Raytheon Company ("Raytheon"). Xyplex
is a producer of high-speed internetworking equipment, terminal servers and
shared media products for business local area networks. Xyplex also provides
remote access products that interconnect with phone companies' wide area
networks. The purchase price was $67.5 million in cash, subject to certain
adjustments, and $50.0 million in the form of 1,974,333 newly issued shares of
the Company's common stock. Other direct costs associated with the acquisition
were approximately $1.3 million. The cash paid to Raytheon was obtained from an
amendment to the Company's existing credit facility entered into on April 10,
1996.
The Xyplex acquisition was accounted for as a purchase and the balance sheet of
Xyplex was combined with the Company's balance sheet as of April 30, 1996. The
valuation of assets acquired and liabilities assumed is preliminary and subject
to further review and change as the Company's integration plans for Xyplex are
finalized. The transaction resulted in the acquisition of intangible assets
valued at $37.2 million which will be amortized on a straight-line basis over
periods ranging from five to fifteen years, goodwill of $59.6 million which will
be amortized on a straight-line basis over twenty years, and liabilities assumed
of $16.6 million.
(5)
<PAGE>
WHITTAKER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Acquisitions - (Continued)
Acquired in-process research and development valued at $11.7 million was
expensed at the acquisition date.
On April 24, 1995, the Company acquired all of the capital stock of Hughes LAN
Systems, Inc., a subsidiary of Hughes Electronics Corporation. The subsidiary
was renamed Whittaker Communications, Inc. ("WCI") and is a designer and
manufacturer of high-speed switches and Asynchronous Transfer Mode ("ATM")
compatible local area network communication hubs and network management software
systems. WCI was acquired for a purchase price of $16.0 million in cash, subject
to certain adjustments, and a $15.0 million 7% convertible subordinated note.
The convertible note is due on May 1, 2005, and is convertible to the Company's
common stock at a price of $24.25 per share. The acquisition agreement also
provides for contingent deferred payments, not to exceed $25 million, over the
years 1996 to 1999 based on future sales of WCI's hub products and derivatives.
The WCI acquisition was accounted for as a purchase and the balance sheet of WCI
was combined with the Company's balance sheet as of April 30, 1995. The
transaction resulted in the acquisition of intangible assets valued at $8.9
million which are being amortized on a straight-line basis over periods ranging
from five to fifteen years, goodwill of $14.2 million which is being amortized
on a straight-line basis over twenty years, and liabilities assumed of $18.1
million. Acquired in-process research and development valued at $3.3 million was
expensed at the acquisition date.
The accompanying consolidated financial statements reflect the operating results
of Xyplex and WCI since the effective date of the acquisitions. The Company has
not completed all appraisals and evaluations necessary to finalize Xyplex's
purchase price allocations and accordingly, actual adjustments that reflect
appraisals and other evaluations of the purchased assets and assumed liabilities
may differ from the pro forma adjustments presented herein. The unaudited pro
forma results of operations which follow are presented for illustrative purposes
only and are not necessarily indicative of the consolidated results of
operations of the Company that would have been reported had the business
combinations occurred on the dates indicated, nor do they represent a forecast
of the consolidated results of operations of the Company for any future period.
The unaudited pro forma results of operations for the six months ended April 30,
1996 and 1995, assuming the consummation of the acquisitions and issuance of 7%
debt and common stock at the beginning of each period are summarized below (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Six Months Six Months
Ended April 30, Ended April 30,
1996 1995
----- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $147,017 $134,916
Net loss $ (1,333) $ (3,745)
Loss per share $ (0.12) $ (0.36)
</TABLE>
(6)
<PAGE>
WHITTAKER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
($ in 000)
April 30, October 31,
1996 1995
--------- -----------
(Unaudited)
<S> <C> <C>
Raw materials $23,490 $23,518
Work in process 16,844 11,500
Finished goods 10,974 3,332
Costs relating to long term contracts 1,849 1,744
Unliquidated progress billings (951) (1,119)
------- -------
$52,206 $38,975
======= =======
</TABLE>
Note 4. Commitments and Contingencies
In certain years, after evaluating the availability and cost of insurance, the
Company did not purchase insurance for certain risks, including workers'
compensation and product liability. Consequently, the Company is without
insurance for various risks, including product liability for certain products
manufactured in the past. The Company does, however, have product liability
insurance for products it currently manufactures. The Company's insurance
carriers have taken the position that in certain cases the Company is uninsured
for environmental matters, a position that the Company disputes in certain
instances.
As a result primarily of the activities of its discontinued operations, the
Company is a potentially responsible party in a number of actions filed under
the Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA"). CERCLA, also known as "Superfund," is the main Federal law enacted
to address public health and environmental concerns arising with respect to the
past treatment and disposal of hazardous substances. The Company is also a
potentially responsible party in a number of other actions brought under state
laws patterned after CERCLA. In nearly all of these matters, the Company
contributed a small amount (generally less than 1%) of the total treated or
disposed of waste. In addition to the CERCLA and similar actions described
above, the Company also, from time to time, conducts or participates in remedial
investigations and cleanup activities at facilities currently or formerly
occupied by its operating units. There are also various other claims and suits
pending against the Company.
At April 30, 1996, the Company had provided for its aggregate liability related
to various claims, including uninsured risks and potential claims in connection
with the environmental matters noted above. The amounts provided on the
Company's books for contingencies, including environmental matters, are recorded
at gross amounts. Because of the uncertainty with respect to the amount of
probable insurance recoveries, these potential insurance recoveries are not
taken
(7)
<PAGE>
WHITTAKER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 4. Commitments and Contingencies (Continued)
into account as a reduction of those amounts provided unless an insurance
carrier has agreed to such coverage. The Company does not anticipate that these
matters will have a material adverse effect on the Company's financial position,
or on its ability to meet its working capital and capital expenditure needs.
Although the Company has recorded estimated liabilities for contingent losses,
including uninsured risks and claims in connection with environmental matters,
in accordance with generally accepted accounting principles, the absence of or
denial of various insurance coverages represents a potential exposure for the
Company, and the net income of the Company in future periods could be adversely
affected if uninsured losses in excess of amounts recorded were to be incurred.
Note 5. Long-Term Debt
On April 10, 1996, the Company and its existing agent bank entered into an
amendment to its credit agreement which was subsequently syndicated to include
nine additional banks. The amendment increased the amount of the facility to
$170.0 million, which consists of an $85.0 million revolving credit facility
with a five-year term expiring in April 2001 and an $85.0 million term loan that
is to be repaid in quarterly installments over five years. Interest on loans
outstanding under the credit agreement are based, at the Company's option, on
LIBOR or the agent bank's prime rate. The annual interest rate based on LIBOR
may range between LIBOR plus 1.0% and LIBOR plus 2.25%, and the annual interest
rate based on the prime rate may range between prime and prime plus 1.0%. The
Company is obligated to pay letter of credit fees which may range between .625%
per annum and 2.375% per annum on the aggregate amount of outstanding letters of
credit, and commitment fees which may range between .25% per annum and .50% per
annum on the unused amount of the revolving credit facility. The agreement
includes financial covenants with respect to financial leverage, cash flow, and
net worth. Proceeds from the amended credit facility were used to pay off the
prior credit facility and to fund the acquisition of Xyplex, and will be used
going forward to fund working capital and other corporate requirements. The
Company's obligations under the credit agreement are secured by a pledge of
shares of stock of subsidiaries of the Company, accounts receivable, inventory,
equipment, intellectual property, and other assets of the Company and its
subsidiaries.
At April 30, 1996, the Company's debt totaled $151.2 million, which consisted of
$50.0 million of loans under a revolving bank credit facility, $85.0 million
under a bank term loan, $15.0 million of convertible subordinated debt, and $1.2
million of other debt. In addition, there were $12.5 million of letters of
credit outstanding under the revolving credit facility. At April 30, 1996, there
was $9.7 million of debt which was due within the next twelve months and
therefore was classified as current.
(8)
<PAGE>
WHITTAKER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5. Long-Term Debt (Continued)
The current portion of long-term debt under the amended term loan is $9.0
million, of which $4.0 million is due by October 31, 1996. Annual maturities of
long-term debt under the term loan are as follows, for the fiscal years ended
October 31: $10.0 million in 1997, $18.0 million in 1998, $20.0 million in 1999,
$22.0 million in 2000, and $11.0 million in 2001.
Note 6. Business Segments
The Company develops specialized aerospace and electronics technologies to
create products and customer solutions for aircraft, defense, communications and
industrial markets. The Company operates in two business segments: Aerospace,
which designs, manufactures, and distributes a wide variety of fluid control
devices and fire detection systems, as well as defense electronics products and
systems, and Communications, which designs, develops, and markets a
comprehensive line of networking products and services. Prior to April 30, 1995,
the Company's communications operations were not material enough to comprise a
separate business segment.
Operating profit (loss) is total revenue less operating expenses. General
corporate expenses have not been allocated to the business segments and are
shown as a separate expense element of operating profit (loss) to reconcile to
consolidated operating profit (loss). Communications segment operating results
in 1996 and 1995 reflect the write-offs of in-process research and development
costs of $11.7 million and $3.3 million, respectively, which were recorded as
expenses at the acquisition dates of Xyplex and WCI. Aerospace segment operating
results for the quarter and year-to-date periods ended April 30, 1996 reflect
restructuring costs of $0.5 million.
(9)
<PAGE>
WHITTAKER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Business Segments (Continued)
Information about the Company's operations by business segment at April 30, 1996
and 1995 and for the periods then ended follows (in thousands):
<TABLE>
<CAPTION>
UNAUDITED
For the Three Months For the Six Months
Ended April 30, Ended April 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Aerospace $ 33,396 $31,682 $62,506 $58,368
Communications 14,209 - 29,519 -
-------- ------- ------- -------
$ 47,605 $31,682 $92,025 $58,368
======== ======= ======= =======
Operating profit (loss):
Aerospace $ 6,079 $ 6,611 $12,254 $12,160
Communications (15,098) (3,250) (14,801) (3,250)
Corporate and Other (2,262) (1,968) (4,044) (3,611)
-------- ------- ------- -------
$(11,281) $ 1,393 $(6,591) $ 5,299
======== ======= ======= =======
</TABLE>
(10)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Comparison of Three Months Ended April 30, 1996 and 1995
- --------------------------------------------------------
Sales. The Company's second quarter 1996 sales of $47.6 million increased by
- -----
$15.9 million (50.3%) over second quarter sales in the prior fiscal year. The
increase was due primarily to $14.2 million of sales generated by the Company's
Communications segment, which did not exist in the prior period of comparison.
The Communications segment, consisting of Whittaker Communications, Inc. ("WCI")
and Xyplex, Inc. ("Xyplex"), was formed as a result of the acquisitions of these
entities, which occurred on April 24, 1995 and on April 10, 1996, respectively.
Communications segment sales for the second quarter decreased by 7.2% from the
level achieved in the first quarter of 1996, despite the inclusion of Xyplex for
the period since acquisition. This decrease was the result of two separate
factors: delays in the receipt of anticipated orders and, to a lesser degree,
delays in the release of certain new and upgraded products. It is expected that
the effect of the delays in the release of certain new and upgraded products
will also be felt during the remainder of fiscal 1996. The Company currently
intends to release certain new and upgraded products through its Communications
segment during the balance of fiscal 1996. Delays in the introduction of new or
enhanced products or failure to achieve significant customer acceptance for
these new products may have an adverse effect on the Company's revenues and
results of operations for this business segment in future periods. Although the
Company does not currently anticipate any particular difficulties, there can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products and product enhancements or that its new products and product
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance.
The Company's Aerospace segment sales for the second quarter of fiscal 1996 were
up $1.7 million (5.4%) from the same period of 1995, due to increased business
in commercial aircraft and industrial product lines, which was partially offset
by decreased sales of defense electronics products. The outlook for future sales
in the Aerospace segment is impacted by the price and availability of crude oil,
the strength of the economy, the degree of military conflict, and the U.S.
defense budget. Any negative effect on Aerospace segment sales related to these
factors may be offset in the future by contracts for new, technologically
advanced electronic defense systems, new commercial products, and sales of
aerospace and electronics products into industrial markets. New aircraft
production appears to be on the rise and is expected to contribute to an
improved business climate for commercial aircraft product lines.
(11)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
Gross Margin. The Company's gross margin for the second quarter of 1996 as a
- ------------
percentage of sales was 42.3%, compared to 39.8% for the second quarter of 1995.
The second quarter 1996 gross margin consists of Communications segment gross
margin of $6.8 million (48.1% of sales), and Aerospace segment gross margin of
$13.3 million (39.8% of sales). Although Aerospace segment margin as a
percentage of sales was flat during the two periods of comparison (39.8% in both
1996 and 1995), there were improvements in margins in the commercial aircraft
and industrial product lines which were offset by lower margins in defense
electronics products, resulting in part from the contribution to 1995 sales and
gross margin of a claim settlement of $1.1 million.
Engineering and Development. Engineering and development expenses for the
- ---------------------------
second quarter of 1996 increased by $3.0 million from the second quarter of
1995. The second quarter 1996 engineering and development expenses consist of
Communications segment expenses of $3.4 million (23.7% of sales) and Aerospace
segment expenses of $0.5 million (1.5% of sales). To maintain its competitive
market position in the Communications segment, the Company expects to continue
to invest a significant amount of its resources in the development of new
Communications products and product enhancements. Aerospace segment engineering
and development expenses decreased by $0.4 million from 1995 to 1996 as there
was a reduced level of Company funded expense within the defense electronics
business.
Selling, General and Administrative. Selling, general and administrative
- -----------------------------------
expenses for the second quarter of 1996 increased by $8.2 million from the
second quarter of 1995, from 22.5% of sales in 1995 to 32.1% of sales in 1996.
Communications segment selling, general and administrative expenses for the
second quarter of 1996 were $6.9 million (48.3% of sales), which includes
amortization expense of $1.1 million related to goodwill and intangible assets.
Aerospace segment selling, general and administrative expenses increased to $6.2
million (18.4% of sales) for the second quarter of 1996 compared to $5.1 million
(16.3% of sales) for the same period in 1995. In the second quarter of 1995,
Aerospace segment selling, general and administrative expenses reflected a
credit of approximately $1.0 million for income from the Company's defined
benefit pension plan and a recovery related to the Company's insurance claim for
earthquake damage from the 1994 Northridge, California earthquake. Without this
credit, 1995 second quarter Aerospace segment selling, general and
administrative expenses would have been 19.4% of sales, the same dollar amount
as incurred in 1996. In the second quarter of 1996, these expenses were reduced
for defense electronics products as streamlining actions took effect,
(12)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
and sales increases in commercial aircraft and industrial products were more
than proportional to expense increases.
Acquired In-Process Research and Development. The Communications segment
- --------------------------------------------
reflected acquired in-process research and development write-offs of $11.7
million during the second quarter of 1996 and $3.3 million during the second
quarter of 1995. These write-offs related to the acquisitions of Xyplex and WCI,
which occurred during the respective periods.
Restructuring Costs. During the second quarter of 1996, the Aerospace segment
- -------------------
incurred costs of $0.5 million related to the streamlining of the Company's
defense electronics business unit. As discussed further in the section on
Operating Results below, the Communications segment will incur restructuring
expenses in the third quarter, and possibly the fourth quarter, of fiscal 1996.
Interest Expense. Interest expense increased to $2.0 million for the second
- ----------------
quarter of 1996 from $1.2 million in the same period of 1995 primarily as a
result of incremental debt related to the acquisition of WCI, and to a lesser
degree, Xyplex. Because the Xyplex acquisition occurred late in the quarter,
interest expense for the second quarter of 1996 does not fully reflect the
expected additional quarterly interest costs associated with that acquisition.
Interest Income. During the second quarter of 1996, the Company received $5.2
- ---------------
million of interest income related to an income tax refund received for the
years 1987 and 1988.
Income Taxes. In the second quarter of fiscal 1996, the Company's effective tax
- ------------
rate was a benefit of 38.1%, compared to an effective tax rate of 36.5% for the
second quarter of fiscal 1995. The nondeductible goodwill associated with the
Xyplex acquisition is expected to result in an increase in the effective tax
rate to approximately 46% for the remainder of the year.
Operating Results. As described under Sales above, the Communications segment
- -----------------
experienced lower revenues than expected during the second quarter of fiscal
1996 and expects to experience the effect of delays in the release of certain
new and upgraded products during the balance of fiscal 1996. Operating expenses
for the Communications segment were established based on expected revenues in
excess of what was actually achieved, which contributed to the second quarter
operating results of the Communications segment. In the third quarter of fiscal
1996, the Company has adjusted operating expenses on account of the lower than
expected revenues in order to improve operating results. In addition, upon the
acquisition of Xyplex, management identified certain redundancies with respect
to various functions and sales office locations at Xyplex and WCI. Management's
intent was to take certain restructuring, streamlining, and integration actions
as soon as
(13)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
practicable after the Xyplex acquisition in order to improve the profitability
of the Communications segment. Implementation of these actions has not been as
rapid as expected, but the recent appointment of a chief executive officer for
the Communications business and other management actions are expected to assist
in completing the implementation. As a consequence of both of these factors --
lower than expected revenues and delays in implementation of restructuring and
cost reduction actions -- the Communications segment may experience additional
operating losses.
Comparison of Six Months Ended April 30, 1996 and 1995
- ------------------------------------------------------
Sales. The Company's sales for the six months ended April 30, 1996 of $92.0
- -----
million increased by $33.7 million (57.7%) over sales in the same period of the
prior fiscal year. The increase was due primarily to $29.5 million of sales
generated by the Communications segment, which did not exist prior to April 30,
1995. Aerospace segment sales for the six months ended April 30, 1996 increased
by $4.1 million (7.1%) over sales in the same period of the prior fiscal year,
due to increased sales in commercial aircraft product lines.
Gross margin. The Company's gross margin for the six months ended April 30,
- ------------
1996 as a percentage of sales was 43.1%, compared to 39.9% for the same period
of the prior fiscal year.The gross margin for the six months ended April 30,
1996 consists of Communications segment gross margin of $13.8 million (46.9% of
sales), and Aerospace segment gross margin of $25.8 million (41.3% of sales).
The improvement in Aerospace segment gross margin percentage from 1995 (39.9% of
sales) to 1996 (41.3% of sales) is due to increased margins and improved
manufacturing yields on commercial aircraft and industrial product lines,
partially offset by decreased margins on defense electronics products and the
absence in 1996 of a claim settlement which contributed $1.1 million
to gross margin in the second quarter of 1995.
Engineering and Development. Engineering and development expenses for the six
- ---------------------------
months ended April 30, 1996 increased by $5.9 million from the same period of
the prior fiscal year. Engineering and development expenses for 1996 consist of
Communications segment expenses of $5.5 million (18.5% of sales) and Aerospace
segment expenses of $1.5 million (2.4% of sales). Aerospace segment engineering
and development expenses increased by $0.4 million from 1995 to 1996 due to
increased spending on industrial business product lines.
Selling, General and Administrative. Selling, general and administrative
- -----------------------------------
expenses for the six months ended April 30, 1996 increased by $13.4 million from
the same period of the prior fiscal year, from 23.3% of sales in 1995 to 29.4%
of sales in 1996. Communications segment selling, general and administrative
expenses for the six months ended April 30, 1996 were $11.5 million (39.0% of
sales), which includes amortization expense of $1.6 million related to goodwill
and intangible assets. Aerospace segment selling, general and administrative
expenses were $11.5 million (18.4% of sales) for the six months ended April 30,
1996 compared to $10.0 million
(14)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
RESULTS OF OPERATIONS (CONTINUED)
- ---------------------------------
(17.2% of sales) for the same period in 1995. In the six months ended April 30,
1995, Aerospace segment selling, general and administrative expenses
reflected a credit of approximately $1.1 million for income from the Company's
defined benefit pension plan and a $0.8 million recovery related to the
Company's insurance claim for earthquake damage from the 1994 Northridge,
California earthquake. Without these items, Aerospace segment selling, general
and administrative expenses would have been 20.4% of sales during the first six
months of 1995.
Interest Expense. Interest expense increased to $3.7 million for the six
- ----------------
months ended April 30, 1996 from $2.4 million in 1995 primarily as a result of
incremental debt related to the acquisition of WCI, and to a lesser degree,
Xyplex. Because the Xyplex acquisition occurred late in the period, interest
expense for the six months ended April 30, 1996 does not fully reflect the
expected additional periodic interest costs associated with that acquisition.
Income Taxes. The Company's effective tax rate for the six months ended April
- ------------
30, 1996 was a benefit of 36.2%, compared to an effective tax rate of 38.8% for
the same period of the prior fiscal year. The higher effective rate (lower
benefit) in 1996 compared to 1995 is due to nondeductible goodwill associated
with the WCI acquisition. The nondeductible goodwill associated with the Xyplex
acquisition is expected to result in an increase in the effective tax rate to
approximately 46% for the remainder of the year.
Acquisition
- -----------
On April 10, 1996, the Company acquired all of the stock of Xyplex, a wholly-
owned subsidiary of Raytheon Company ("Raytheon"). Xyplex is a producer of high-
speed internetworking equipment, terminal servers and shared media products for
business local area networks. Xyplex also provides remote access products that
interconnect with phone companies' wide area networks. The purchase price was
$67.5 million in cash, subject to certain adjustments, and $50.0 million in the
form of 1,974,333 newly issued shares of the Company's common stock. Other
direct costs associated with the acquisition were approximately $1.3 million.
The cash paid to Raytheon was obtained under an amendment to the Company's
credit facility entered into on April 10, 1996. The acquisition was accounted
for as a purchase and the balance sheet of Xyplex was combined with the
Company's balance sheet as of April 30, 1996. The valuation of assets acquired
and liabilities assumed is preliminary and subject to further review and change
as the Company's integration plans for Xyplex are finalized. The transaction
resulted in the acquisition of intangible assets valued at $37.2 million which
will be amortized on a straight-line basis over periods ranging from five to
fifteen years, goodwill of $59.6 million which will be amortized on a straight-
line basis over twenty years, and liabilities assumed of $16.6 million. Acquired
in-process research and development valued at $11.7 million was expensed at the
acquisition date.
Management expects that sales of Xyplex products and services will contribute
substantial revenues to the Company beginning in the third quarter as well as
result in increased operating expenses. A significant portion of the increase in
operating expenses for the second quarter of 1996 over the second quarter of
1995 were due to the acquisition of Xyplex and the 1995 acquisition of Hughes
LAN Systems, Inc.
(15)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Quarterly amortization expense for goodwill and intangible assets of the
Communications segment after inclusion of Xyplex for full quarters is expected
to increase by $1.8 million, to approximately $2.9 million per quarter, as a
result of the acquisition of Xyplex.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
On April 10, 1996, in conjunction with the purchase of Xyplex, the Company
borrowed $135.0 million under its amended credit facility with its existing bank
and paid off its prior credit facility, which then totaled $58.5 million. The
amended credit agreement consists of an $85.0 million revolving credit facility
with a five-year term and an $85.0 million term loan repayable in quarterly
installments over five years. The cash payment to Xyplex on April 10, 1996 was
$67.3 million. At April 30, 1996, there was $22.5 million of available credit
remaining under the amended credit facility.
At April 30, 1996, the Company's debt totaled $151.2 million, which consisted of
$50.0 million of loans under the revolving credit facility, $85.0 million under
the term loan, $15.0 million of convertible subordinated debt, and $1.2 million
of other debt. In addition, there were $12.5 million of letters of credit
outstanding under the revolving credit facility. At April 30, 1996, there was
$9.7 million of debt which was due within the next twelve months and therefore
was classified as current.
The Company believes that its existing cash and available credit will be
adequate to meet future operating cash needs. It is anticipated that the Company
will generate sufficient cash flow to service debt under the amended credit
facility. The cash flow required to service the Company's debt will reduce its
liquidity, which may in turn reduce its ability to fund internal growth,
additional acquisitions, and capital improvements. The Company intends to
continue its previously announced strategy of growth by selective acquisitions
that complement the Company's core businesses. Such acquisitions may necessitate
issuance of new debt or equity securities of the Company. The Company intends to
pursue its acquisition strategy with careful regard for profitability, the need
for liquidity, and the potential dilutive effect of any additional issuance of
equity securities. There can be no assurance, however, that any acquisitions
will occur or that an acquisition that does occur will not adversely affect the
Company's net income or liquidity.
The Company's ratio of long-term debt, including the current portion, to
capitalization (stockholders' equity plus debt) was 50.2% at April 30, 1996,
compared to 42.8% at October 31, 1995. The current ratio at April 30, 1996 was
2.27, compared with 2.44 at October 31, 1995, while working capital was $90.3
million at April 30, 1996, compared with $72.3 million at October 31, 1995. The
increases in debt and working capital and reduction in current ratio were
primarily due to the acquisition of Xyplex. Excluding the balances related to
Xyplex, long-term debt increased by $6.8 million and working capital increased
by $3.3 million. The increase in debt was due primarily to $4.7 million in other
direct acquisition and deferred financing costs incurred by
(16)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
the Company as a result of the acquisition.
Cash flow provided by operations in the first six months of 1996 was $3.8
million, compared to $8.7 million in the first six months of 1995. The $4.9
million decrease from period to period is due primarily to a smaller reduction
in receivables relating to the Aerospace segment for the first six months of
1996 relative to 1995, and the buildup of recoverable income taxes of $2.8
million.
Capital expenditures during the first six months of 1996 were $2.5 million,
compared to $2.0 million for the same period in 1995. At April 30, 1996, there
were approximately $0.9 million of approved capital expenditures outstanding for
the replacement and upgrade of existing plant and equipment at the Company's
various facilities. Funds for these and other capital expenditures are expected
to be provided from operations. Capital expenditures are subject to limitations
by covenants contained in the Company's credit agreement. It is anticipated that
the amounts under the covenants will be sufficient to allow the Company to
continue to maintain and upgrade existing facilities.
In April of 1996, the Company received a federal income tax refund related to
1987 and 1988 tax returns of $5.2 million and related interest income of $5.2
million.
The Company's program for divestiture of its discontinued operations was
substantially complete by the end of fiscal 1992. A 996-acre parcel of land,
which was formerly used by a discontinued technology unit, remains. The land is
located in the city of Santa Clarita, California, approximately 35 miles from
downtown Los Angeles. In September of 1995, the City granted entitlements
necessary to develop this property as a mixed-use residential, commercial, and
light industrial development. The initial term of the entitlements was ten
years. In February of 1996, the City approved a development agreement which,
among other things, extended the ten-year term of the entitlements to 20 years.
The Company is evaluating the most advantageous means to realize the value of
this asset. Cash expenditures related to this property were $2.1 million during
the first six months of fiscal 1996.
(17)
<PAGE>
EXHIBITS TO PART I
- ------------------
I(a) Calculation of Earnings (Loss) Per Share.
(18)
<PAGE>
Exhibit I(a)
WHITTAKER CORPORATION
CALCULATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended
April 30,
------------------------
1996 1995
---- ----
<S> <C> <C>
PRIMARY EARNINGS (LOSS) PER SHARE
EARNINGS (LOSS)
Net income (loss) $(3,000) $1,875
Deduct:
Dividends on $ 5.00 Cumulative
Convertible Preferred Stock - (5)
------- ------
Net income (loss) used in primary earnings
per share calculations $(3,000) $1,870
======= ======
AVERAGE COMMON AND COMMON EQUIVALENT SHARES
Weighted average number of common shares
outstanding 9,136 8,498
Common equivalent shares:
Series D Participating Convertible
Preferred Stock - 292
Stock options included under treasury
stock method - 795
------- ------
TOTAL 9,136 9,585
======= ======
Primary Earnings (Loss) Per Share $ (0.33) $ 0.20
======= ======
</TABLE>
NOTE
Common equivalent shares have been excluded from the 1996 calculations as they
would have reduced the loss per share.
Unaudited
(19)
<PAGE>
Exhibit I(a)
WHITTAKER CORPORATION
CALCULATION OF EARNINGS (LOSS) PER SHARE - (Continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Six Months Ended
April 30,
----------------------
1996 1995
---- ----
<S> <C> <C>
FULLY DILUTED EARNINGS (LOSS) PER SHARE
EARNINGS (LOSS)
Net income (loss) used in primary earnings
per share calculation (above) $(3,000) $1,870
Adjustments:
Net income (loss) used in fully diluted earnings
per share calculations - -
------- ------
$(3,000) $1,870
======= ======
AVERAGE SHARES USED TO CALCULATE FULLY DILUTED
EARNINGS (LOSS) PER SHARE
Average common and common equivalent shares (above) 9,136 9,585
Add:
Additional stock options included under
treasury stock method - 74
Additional shares assuming conversion
of subordinated convertible debt - 88
------- ------
TOTAL 9,136 9,747
======= ======
Fully Diluted Earnings (Loss) Per Share $ (0.33) $ 0.19
======= ======
</TABLE>
NOTES
Earnings per share have been computed based on the weighted average number of
common and common equivalent shares outstanding during the periods, after
deducting from net income the dividend requirements on the outstanding $5.00
Cumulative Convertible Preferred Stock. Common stock equivalents include Series
D Participating Convertible Preferred Stock, and dilutive employee stock options
calculated using the treasury stock method. Fully diluted earnings per share
include the additional potential dilutive effect of employee stock options.
Common equivalent shares and additional shares assuming conversion of
subordinated convertible debt have been excluded from the 1996 calculations as
they would have reduced the loss per share.
Unaudited
(20)
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
Environmental Matters
- ---------------------
As a result primarily of the activities of its discontinued operations, the
Company is a potentially responsible party in a number of actions filed under
the Comprehensive Environmental Response Compensation and Liability Act of 1980
("CERCLA"). CERCLA, also known as "Superfund," is the main Federal law enacted
to address public health and environmental concerns arising with respect to the
past treatment and disposal of hazardous substances. The Company is also a
potentially responsible party in a number of other actions brought under state
laws patterned after CERCLA. In nearly all of these matters, the Company
contributed a small amount (generally less than 1%) of the total treated or
disposed of waste. In addition to the CERCLA and similar actions described
above, the Company also, from time to time, conducts or participates in remedial
investigations and cleanup activities at facilities currently or formerly
occupied by its operating units.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on March 22, 1996. At the
Annual Meeting, stockholders voted on the election of Joseph F. Alibrandi as a
director and ratified the appointment of Ernst & Young LLP as the Company's
independent auditor for the fiscal year ending October 31, 1996. The votes cast
with respect to each of these matters were as follows:
<TABLE>
<CAPTION>
Votes Against
Votes For or Withheld
--------- -----------
<S> <C> <C>
1. Election of Joseph F. Alibrandi as Director 7,441,859 34,815
2. Ratification of Appointment of
Ernst & Young LLP 7,459,786 16,888
</TABLE>
Directors whose term of office continued after the meeting were George H.
Benter, Jr., Thomas A. Brancati, Jack L. Hancock, Edward R. Muller, Gregory T.
Parkos, and Malcolm T. Stamper.
(21)
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.*
4.1 Stockholder's Agreement dated as of April 10, 1996 between
Registrant and Raytheon Company (Exhibit 4.1 to Form 8-K dated
April 24, 1996).
4.2 Term Note, dated April 10, 1996 (Exhibit 4.2 to Form 8-K dated
April 24, 1996).
4.3 Revolving Note, dated April 10, 1996 (Exhibit 4.3 to Form 8-K
dated April 24, 1996).
10.1 Stock Purchase Agreement dated as of March 2, 1996 between
Registrant and Raytheon Company (Exhibit 10.1 to Form 8-K dated
April 24, 1996).
10.2 Amended and Restated Credit Agreement dated as of April 10, 1996
among Registrant, NationsBank of Texas, N.A., as Agent, and the
financial institutions named therein as Initial Lenders (Exhibit
10.2 to Form 8-K dated April 24, 1996).
11. Statements re computation of per share earnings for the six months
ended April 30, 1996 (Exhibit I(a) of Part I to this Form 10-Q).
22. See Part II, Item 4 of this Form 10-Q.
27. Financial Data Schedule.
- --------------
* Exhibits followed by a parenthetical reference are incorporated by reference
to the documents described therein.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on April 25, 1996. The form reports, in
Item 2 thereof, the acquisition by the Company of Xyplex, Inc. The
financial statements required to be filed with the Form 8-K will be filed
pursuant to Item 7(a)(4) thereof.
A report on Form 8-K was filed on May 7, 1996. The form reports, in Item
5 thereof, the Company's expected lower sales and an operating loss for
its Communications segment in its second quarter, ended April 30, 1996.
A report on Form 8-K was filed on May 28, 1996. The form reports, in Item
5 thereof, the Company's earnings for its second fiscal quarter, ended
April 30, 1996.
(22)
<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.
WHITTAKER CORPORATION
Date: June 13, 1996 By: /s/ Richard Levin
-----------------------------
Richard Levin, Vice President
Chief Financial Officer
(23)
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit No.* Description Numbered Page
- ----------- ----------- -------------
4.1 Stockholder's Agreement dated as of April 10,
1996 between Registrant and Raytheon Company
(Exhibit 4.1 to Form 8-K dated April 24, 1996).
4.2 Term Note, dated April 10, 1996 (Exhibit 4.2 to
Form 8-K dated April 24, 1996).
4.3 Revolving Note, dated April 10, 1996 (Exhibit 4.3
to Form 8-K dated April 24, 1996).
10.1 Stock Purchase Agreement dated as of March 2, 1996
between Registrant and Raytheon Company (Exhibit
10.1 to Form 8-K dated April 24, 1996).
10.2 Amended and Restated Credit Agreement dated as of
April 10, 1996 among Registrant, NationsBank of Texas,
N.A., as Agent, and the financial institutions named
therein as Initial Lenders (Exhibit 10.2 to Form 8-K
dated April 24, 1996).
11. Statements re computation of per shareearnings for the six
months ended April 30, 1996 (Exhibit I(a) of Part I to this
Form 10-Q).
22. See Part II, Item 4 of this Form 10-Q.
27. Financial Data Schedule.
- --------------
* Exhibits followed by a parenthetical reference are incorporated by reference
to the document described therein.
(24)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> APR-30-1996
<CASH> 1,931
<SECURITIES> 0
<RECEIVABLES> 78,540
<ALLOWANCES> 0
<INVENTORY> 52,206
<CURRENT-ASSETS> 161,239
<PP&E> 108,819
<DEPRECIATION> 59,249
<TOTAL-ASSETS> 401,304
<CURRENT-LIABILITIES> 70,941
<BONDS> 141,568
0
1
<COMMON> 110
<OTHER-SE> 149,650
<TOTAL-LIABILITY-AND-EQUITY> 401,304
<SALES> 92,025
<TOTAL-REVENUES> 92,025
<CGS> 52,384
<TOTAL-COSTS> 52,384
<OTHER-EXPENSES> 19,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,686
<INCOME-PRETAX> (4,701)
<INCOME-TAX> (1,701)
<INCOME-CONTINUING> (3,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,000)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0
</TABLE>
