U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
Commission file number 0-7438
DYNATECH CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2258582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (617) 272-6100
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
At October 13, 1995 there were 18,327,907 shares of common stock of the
registrant outstanding.
<PAGE>
PART I. Financial Information
Item I. Financial Statements
<TABLE>
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ......................................... $ 114,026 $ 121,377 $ 232,291 $ 239,149
Cost of sales ................................. 51,421 57,574 106,032 114,298
------------------------------------------------
Gross profit .................................. 62,605 63,803 126,259 124,851
Selling, general and administrative expense ... 38,833 39,294 78,481 78,428
Product development expense ................... 14,177 12,647 28,831 25,443
Purchased incomplete technology ............... 16,852 -- 16,852 --
Business restructuring activities ............. 800 -- 800 --
Amortization of intangibles ................... 1,849 2,316 3,645 4,364
------------------------------------------------
Operating income (loss) ....................... (9,906) 9,546 (2,350) 16,616
Interest expense .............................. (482) (1,249) (1,031) (2,406)
Interest income ............................... 557 358 1,118 594
Other income .................................. 338 242 543 521
------------------------------------------------
Income (loss) from continuing operations before
income taxes ............................ (9,493) 8,897 (1,720) 15,325
Provision (benefit) for income taxes .......... (3,853) 3,813 (705) 6,581
------------------------------------------------
Income (loss) from continuing operations ...... (5,640) 5,084 (1,015) 8,744
Reversal of disposition loss from discontinued
operations, net of taxes ............. 647 -- 647 --
------------------------------------------------
Net income (loss) ............................. $ (4,993) $ 5,084 $ (368) $ 8,744
================================================
Income (loss) per common share
Continuing operations ......................... $ (0.32) $ 0.29 $ (0.06) $ 0.48
Discontinued operations ....................... 0.04 -- 0.04 --
------------------------------------------------
$ (0.28) $ 0.29 $ (0.02) $ 0.48
================================================
Weighted average number of common shares ...... 17,858 17,778 17,727 18,184
================================================
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30 March 31
1995 1995
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 30,288 $ 27,795
Accounts receivable, net .......................... 74,354 72,152
Inventories:
Raw materials ................................ 23,895 26,752
Work in process .............................. 13,722 14,168
Finished goods ............................... 19,533 19,560
----------------------
57,150 60,480
Other current assets .............................. 21,861 24,251
----------------------
Total current assets ......................... 183,653 184,678
Property and equipment, net ........................... 33,735 34,791
Intangible assets, net ................................ 32,864 29,104
Other assets .......................................... 14,701 7,819
----------------------
$ 264,953 $ 256,392
======================
LIABILITIES
Current liabilities:
Notes payable and current portion of long-term debt 4,437 4,374
Accounts payable .................................. 16,241 19,651
Streamlining and restructuring accrual ............ 10,914 22,556
Other accrued expenses ............................ 44,744 46,584
----------------------
Total current liabilities .................... 76,336 93,165
Long-term debt ........................................ 22,115 7,915
Deferred income taxes ................................. 730 992
Deferred compensation ................................. 442 --
SHAREHOLDERS' EQUITY
Common stock .......................................... 3,721 3,721
Additional paid-in capital ............................ 11,776 7,432
Retained earnings ..................................... 151,046 151,414
Cumulative foreign currency adjustments ............... 1,791 2,659
Treasury stock ........................................ (3,004) (10,906)
----------------------
Total shareholders' equity ........................ 165,330 154,320
----------------------
$ 264,953 $ 256,392
======================
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
September 30
1995 1994
---- ----
<S> <C> <C>
Operating activities:
Income (loss) from continuing operations ................. $ (1,015) $ 8,744
Adjustments for noncash items included in net income:
Depreciation ......................................... 7,274 7,124
Amortization of intangibles .......................... 3,645 4,364
Purchased incomplete technology ...................... 16,852 --
Increase (decrease) in deferred taxes ................ (4,717) 3,010
Other ................................................ (69) 83
Change in operating assets and liabilities, net of effects
of purchase acquisitions and divestitures ............ (23,280) (10,544)
---------------------
Net cash flows provided by (used in) continuing operations (1,310) 12,781
Net cash flows used in discontinued operations ........... -- (3,250)
---------------------
Net cash flows provided by (used in) operating activities (1,310) 9,531
---------------------
Investing activities:
Purchases of property and equipment ...................... (6,893) (7,123)
Disposals of property and equipment ...................... 108 246
Proceeds from sale of businesses ......................... 3,819 14,271
Business acquired in purchase transaction ................ (9,868) --
Other .................................................... 974 1,315
---------------------
Net cash flows provided by (used in) investing activities (11,860) 8,709
---------------------
Financing activities:
Debt borrowings .......................................... 14,901 116
Repayment of debt ........................................ (488) (1,161)
Proceeds from exercise of stock options .................. 586 169
Purchases of treasury stock .............................. -- (12,533)
---------------------
Net cash flows provided by (used in) financing activities 14,999 (13,409)
---------------------
Effect of exchange rate on cash ............................. 664 1,973
---------------------
Increase in cash and cash equivalents ....................... 2,493 6,804
Cash and cash equivalents at beginning of year .............. 27,795 23,101
---------------------
Cash and cash equivalents at end of period .................. $ 30,288 $ 29,905
=====================
Supplemental data:
Cash paid during the period for interest ................. $ 960 $ 2,507
Cash paid during the period for income taxes ............. $ 5,218 $ 2,020
Tax benefit of disqualifying dispositions of stock options $ 126 $ --
Stock issued for acquisition of Tele-Path Industries ..... $ 13,700 $ --
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. Condensed Consolidated Financial Statements
In the opinion of management, the unaudited condensed consolidated balance
sheet at September 30, 1995, and the unaudited consolidated statements of
income and unaudited consolidated condensed statements of cash flows for
the interim periods ended September 30, 1995 and 1994 include all
adjustments (including normal recurring adjustments) necessary to present
fairly these financial statements.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The year-end balance
sheet data was derived from audited financial statements, but does not
include disclosures required by generally accepted accounting principles.
It is suggested that these condensed statements be read in conjunction
with the Corporation's most recent Form 10-K and Annual Report as of March
31, 1995.
B. Acquisition
On September 1, 1995 Dynatech acquired substantially all of the business
and assets of Virginia Tele-Path Industries, Inc. (TPI) of Salem, Virginia
for approximately $10 million in cash and 688,096 shares of the
Corporation's common stock. The Corporation may be required to make
additional payments contingent upon the sale of any of the issued shares
before December 1, 1995 at an aggregate price below the $19.91 per share.
The Corporation has provided a contingency reserve of $2.3 million at the
closing date, which will be adjusted when the contingency is resolved.
Dynatech has the option to repurchase up to 537,418 shares at $19.91 per
share if the market value falls below $15 per share prior to December 1,
1995. TPI manufactures communication test instruments used by regional
Bell operating companies and other communication service providers to test
North American ISDN technology standards. Acquired complete technology and
other intangible assets of approximately $6.7 million are being amortized
over five years.
Incident to this acquisition, the Company purchased the incomplete
technology activities of TPI, resulting in a one-time pretax charge in the
second quarter of approximately $16.9 million, or ($.56) per share. This
purchased incomplete technology that had not reached technological
feasibility and which had no alternative future use was valued using a
risk adjusted cash flow model, under which future cash flows associated
with in-process research and development were discounted considering risks
and uncertainties related to the viability of and potential changes in
future target markets and to the completion of the products that will
ultimately be marketed by the Company.
C. Business Restructuring Activities
In the quarter ended September 30, 1995 Management decided to exit the
graphics portion of its video equipment business in order to achieve a
more focused product strategy on signal transmission and routing
switchers. The Corporation recorded a $3.3 million provision to reflect
the revaluation of assets related to discontinued imaging products. In
addition, as a result of completing the sale of businesses announced
under the corporate-wide restructuring plan in April 1994, the Corporation
reversed $3.6 million of the streamlining and restructuring charges
recorded against operations in fiscal 1994 of which $2.5 million is
reflected as income from continuing operations and $1.1 million, or
$647,000 net of tax, is reflected as a reversal of the disposition loss
from discontinued operations.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Consolidated sales for the six months ended September 30, 1995 declined 2.9% to
$232,291,000 from $239,149,000 for the comparable period in the prior year due
to divestments of certain businesses and product lines. Information Support
Products segment sales rose 10% for the six months ended in fiscal 1996
reflecting a 16% growth for communications test products and a 29% increase for
industrial connectivity products. Sales of medical and diagnostic products in
the Diversified Instrumentation segment rose 2% as compared to the comparable
period in the prior year. The sale of thirteen businesses and product lines
during fiscal 1995 and 1996 resulted in an overall sales reduction of $25.1
million, or 38% for the Diversified Instrumentation segment. Backlog from
ongoing operations was $64.9 million at September 30, 1995 compared with $72.1
million at March 31, 1995 reflecting planned backlog reductions in
communications test and medical and diagnostic product lines.
Consolidated gross profit for the current quarter and six months was 54.9% and
54.4% of sales, respectively, compared to 52.6% and 52.2% for each of the
respective prior year periods. The increase in rate was primarily driven by
operating efficiencies from business restructuring. Information Support Products
gross margin declined slightly to 56.5% compared to 56.6% in the first half of
the prior year, however, medical and diagnostic product margins in the
Diversified Instrumentation segment declined to 50.5% compared to 52.5% in the
first half of the prior year. Selling, general and administrative expenses were
higher as a percent of sales for the second quarter and first half periods from
the comparative prior year periods resulting in part from increased selling
costs from expanding worldwide sales efforts. Product development expense was
12.4% of sales for the current half year compared to 10.6% in the first half of
the prior year. The increase was attributed to communication test and display
businesses. Amortization of intangibles, of which $2 million in the first half
of fiscal 1996 and $2.3 million in the first half of the prior year related to
product technology and was excluded from cost of sales, declined due to business
divestments and discontinuance of product lines. Interest expense declined for
the current half year as compared with the prior year as a result of repayment
of loan debt from operating cash flow. Interest income increased due to higher
investment rates and earnings on notes acquired in divestment activities. The
effective tax rate declined to 40.5% for the current first half compared to
42.9% in the prior year resulting from lower nondeductible amortization charges.
Excluding the impact of the one time pretax charge of purchased incomplete
technology and the provision for discontinued products in the Display product
line, offset partially by expense reversals for streamlining and restructuring
charges, net income for the current quarter declined 5% to $4,855,000, or $.27
per share, from $5,084,000, or $.29 per share, for the second quarter of the
prior year, reflecting higher product development, expenses. Sales from ongoing
operations exclusive of divested operations, for the second quarter rose 8% from
the comparable prior year quarter reflecting growth principally for
communications test, data communications and industrial connectivity products.
CAPITAL RESOURCES AND LIQUIDITY
The Company's funded debt was 14% of total capital at September 30, 1995, a
slight increase from the year-end level in Company history of 7% at March 31,
1995. The working capital ratio improved to 2.4 to 1 at September 30, 1995 from
2 to 1 at March 31, 1995. Cash outlays for the streamlining and restructuring
actions approximated $2.6 million in the first half of the year. Dynatech
believes it has sufficient resources to finance its cash requirements over the
next year. The current capital structure provides sufficient financial
flexibility to pursue business opportunities.
6
<PAGE>
PART I. OTHER INFORMATION
ITEM 6. (A) EXHIBITS
Exhibit 27 - Financial Data Schedule
PART II. OTHER INFORMATION
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on July 27, 1995 in Boston,
Massachusetts. A class of three Directors as nominated by management to serve
for a three-year term were elected at the meeting. At such meeting 15,919,763
shares were entitled to vote and a plurality of the votes cast were needed for
election. The table below discloses the vote with respect to each nominee for
office.
IN FAVOR WITHHELD
Richard K. Lochridge 15,872,101 47,662
O. Gene Gabbard 15,867,085 52,678
Ronald L. Bittner 15,859,727 60,036
The terms of William R. Cook, Robert G. Paul and James B. Hangstefer expire
in 1996 and the terms of John F. Reno and Theodore Cohn expire at the annual
meeting in 1997.
The results of the voting of the following additional items were as follows:
(A) To approve an increase in the authorized Common Stock.
(B) To approve the Amendment to the 1994 Stock Option and Incentive Plan
(as forth in the Board's Proxy Statement).
(C) To approve the Non-Employee Directors' Stock Compensation Plan
BROKER
FOR AGAINST ABSTAIN NON VOTE
Increase Common Stock ...... 14,364,005 1,506,125 49,633
Stock Option Amendment ..... 11,331,423 1,087,694 100,298 3,400,348
Directors' Stock Plan ...... 11,474,673 1,172,752 95,374 3,176,964
Proposal
7
<PAGE>
ITEM 6. REPORTS ON FORM 8-K
(b) A Form 8-K was filed by the Registrant on September 7, 1995
reporting the acquisition of Virginia Tele-Path Industries, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATECH CORPORATION
Date November 3, 1995 ROBERT H. HERTZ
------------------------ Chief Financial Officer and Treasurer
8
<TABLE> <S> <C>
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<LEGEND>
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<NAME> DYNATECH CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> JUN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1.000
<CASH> 30,288
<SECURITIES> 0
<RECEIVABLES> 74,354
<ALLOWANCES> 0
<INVENTORY> 57,150
<CURRENT-ASSETS> 21,861
<PP&E> 33,735
<DEPRECIATION> 0
<TOTAL-ASSETS> 264,953
<CURRENT-LIABILITIES> 76,336
<BONDS> 22,115
<COMMON> 3,721
0
0
<OTHER-SE> 161,609
<TOTAL-LIABILITY-AND-EQUITY> 264,953
<SALES> 232,291
<TOTAL-REVENUES> 232,291
<CGS> 106,032
<TOTAL-COSTS> 106,032
<OTHER-EXPENSES> 128,066
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,031
<INCOME-PRETAX> (1,720)
<INCOME-TAX> (705)
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</TABLE>
