<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 0-7438
DYNATECH CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2258582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 New England Executive Park
Burlington, Massachusetts 01803-5087
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (617) 272-6100
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ] .
At October 15, 1997 there were 16,871,573 shares of common stock of the
registrant outstanding.
<PAGE> 2
2
PART I. Financial Information
Item 1. Financial Statements
DYNATECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales $115,856 $85,725 $220,176 $166,847
Cost of sales 50,812 31,262 93,449 61,510
-------- ------- -------- --------
Gross profit 65,044 54,463 126,727 105,337
Selling, general and administrative expense 33,278 27,888 65,037 53,947
Product development expense 13,384 10,256 27,079 19,902
Amortization of intangibles 1,439 1,559 2,882 3,125
-------- ------- -------- --------
Operating income 16,943 14,760 31,729 28,363
Interest expense (429) (173) (781) (279)
Interest income 872 581 1,364 1,224
Other income 282 305 452 422
-------- ------- -------- --------
Income before income taxes 17,668 15,473 32,764 29,730
Provision for income taxes 7,156 6,196 13,270 12,041
-------- ------- -------- --------
Net Income $ 10,512 $ 9,277 $ 19,494 $ 17,689
======== ======= ======== ========
Income per common share $ 0.60 $ 0.52 $ 1.12 $ 0.98
======== ======= ======== ========
Weighted average number of common shares 17,426 17,914 17,394 18,106
======== ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
3
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Sept. 30 March 31
1997 1997
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43,544 $ 39,782
Accounts receivable, net 69,751 70,930
Inventories:
Raw materials 21,185 19,423
Work in process 12,899 11,376
Finished goods 13,825 9,326
-------- --------
47,909 40,125
Other current assets 8,833 11,074
-------- --------
Total current assets 170,037 161,911
Property and equipment, net 25,312 23,833
Intangible assets, net 40,938 43,813
Other assets 20,786 20,478
-------- --------
$257,073 $250,035
======== ========
LIABILITIES & EQUITY
Current liabilities:
Notes payable & current portion of long-term debt $ 164 $ 201
Accounts payable 14,774 16,900
Accrued expenses:
Compensation and benefits 15,743 23,912
Deferred revenue 9,132 8,876
Other accrued expenses 12,585 22,455
Net liabilities of discontinued operations 4,172 9,173
-------- --------
Total current liabilities 56,570 81,517
Long-term debt 21,163 5,226
Deferred income taxes 989 1,025
Deferred compensation 2,087 1,581
SHAREHOLDERS' EQUITY
Common stock 3,721 3,721
Additional paid-in capital 8,321 9,887
Retained earnings 215,000 195,506
Cumulative translation adjustments (2,107) (1,247)
Treasury stock (48,671) (47,181)
-------- --------
Total shareholders' equity 176,264 160,686
-------- --------
$257,073 $250,035
======== ========
</TABLE>
See notes to condensed consolidated financial statements
<PAGE> 4
4
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 19,494 $ 17,689
Adjustments for noncash items included in net income:
Depreciation 5,730 4,441
Amortization of intangibles 2,882 3,125
Other 32 698
Change in operating assets and liabilities (18,978) (7,054)
-------- --------
Net cash flows provided by continuing operations 9,160 18,899
Net cash flows used in discontinued operations (10,197) (5,744)
-------- --------
Net cash flows provided by (used in) operating activities (1,037) 13,155
Investing activities:
Purchases of property and equipment (7,796) (4,318)
Proceeds from sale of businesses -- 10,267
Other (58) 169
-------- --------
Net cash flows provided by (used in) continuing operations (7,854) 6,118
Net cash flows provided by (used in) discontinued operations 507 (884)
-------- --------
Net cash flows provided by (used in) investing activities (7,347) 5,234
Financing activities:
Debt borrowings 16,000 6,700
Repayment of notes payable -- (571)
Proceeds from exercise of stock options 2,177 1,195
Purchases of treasury stock (5,330) (22,334)
-------- --------
Net cash flows provided by (used in) financing activities 12,847 (15,010)
Effect of exchange rate on cash (701) (89)
-------- --------
Increase in cash and cash equivalents 3,762 3,290
Cash and cash equivalents at beginning of year 39,782 46,094
-------- --------
Cash and cash equivalents at end of period $ 43,544 $ 49,384
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
5
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, 1997, and the unaudited consolidated statements of
income and unaudited consolidated condensed statements of cash flows for
the interim periods ended September 30, 1997 and 1996 include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly these financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The year-end balance sheet data
was derived from audited financial statements, but does not include
disclosures required by generally accepted accounting principles. It is
suggested that these condensed statements be read in conjunction with the
Company's most recent Form 10-K and Annual Report as of March 31, 1997.
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, product demand and
market acceptance risks, the effect of economic conditions, the impact of
competitive products and pricing, product development, commercialization
and technological difficulties, capacity and supply constraints or
difficulties, availability of capital resources, general business and
economic conditions, the effect of the Company's accounting policies, and
other risks detailed in the Company's most recent Form 10-K and Annual
Report as of March 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Significant estimates in these
financial statements include allowances for accounts receivable, net
realizable value of inventories, and tax valuation reserves. Actual results
could differ from those estimates.
B. PRO FORMA FINANCIAL INFORMATION
On December 31, 1996 the Company acquired substantially all of the assets
and assumed certain liabilities of Itronix Corporation ("Itronix") located
in Spokane, Washington, for $65.4 million in cash. The following unaudited
pro forma information presents a summary of consolidated results of
operations of the Company as if the acquisition had occurred at the
beginning of fiscal 1997, with pro forma adjustments to give effect to
amortization of goodwill and intangibles, interest expense on acquisition
debt, and certain other adjustments, together with related income tax
effects.
<PAGE> 6
6
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, 1996 September 30, 1996
(in thousands except (in thousands except
per share data) per share data)
<S> <C> <C>
Revenue $106,380 $208,392
Net income $ 9,526 $ 17,382
Earnings per share $ 0.53 $ 0.96
Weighted average shares 17,914 18,106
</TABLE>
C. NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128 ,
"Earnings per Share," which modifies the way in which earnings per share
("EPS") is calculated and disclosed. Currently, the Company discloses
primary and fully diluted EPS. Upon adoption of this standard for the
interim period ending December 31, 1997, the Company will disclose basic
and diluted EPS for fiscal 1998 and will restate all prior period EPS data
presented. The Company does not anticipate this change will have a material
impact on EPS.
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" which establishes standards for the
reporting and display of comprehensive income in general-purpose financial
statements. The Company has not assessed the impact of this Standard on its
financial statements.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the reporting of operating segments in the
financial statements. The Company has not assessed the impact of this
Standard on its financial statements.
<PAGE> 7
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Continuing Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1996
Consolidated sales for the three months ended September 30, 1997 were $115.9
million as compared to $85.7 million for the prior year's second quarter, and
$106.4 million including the pro forma effects related to the acquisition of
Itronix, a company purchased on December 31, 1996. Sales of communications test
products increased $5.4 million to $57.6 million or 10.3% over the same period a
year ago, reflecting continued stable growth in the U.S. market for
communications test solutions. Sales for industrial computing and communication
products increased $22.7 million to $38.8 million or 140.7% over the same period
last year due primarily to the Itronix acquisition. Sales of Itronix's portable
communications products included sales of its new Pentium product released
during the first week of the second quarter. Sales of catalog-related products
within the industrial communications products increased 21% due to increased
demand. Sales of visual communications products increased $2.1 million to $19.5
million or 11.9% due to continued demand for aircraft cabin video information
services.
Consolidated gross profit was $65.0 million or 56.1% of consolidated sales in
the three months ended September 30, 1997, compared to $54.5 million or 63.5%
for the comparable period a year ago. The percentage decrease was primarily
attributed to a higher proportion of lower margin industrial communications
sales within the overall sales mix.
Selling, general and administrative expense for the three months ended September
30, 1997 was $33.3 million or 28.7% of consolidated sales as compared to $27.9
million or 32.5% for the same period last year. The dollar increase and the
percent decrease were primarily the result of the acquisition of Itronix, in
which the percentage of selling, general and administrative expense to sales for
Itronix is less than the consolidated average.
Product development expense was $13.4 million or 11.6% of consolidated sales as
compared to $10.3 million or 12% of consolidated sales for the same period last
year. The increase was primarily driven by increased spending on industrial
communications products including the effects related to the acquisition of
Itronix.
Amortization of intangibles during the second quarter was $1.4 million as
compared to $1.6 million for the second quarter last year. Amortization expense
decreased due to the write-off of goodwill and certain intangibles related to
product and distribution transitions at the end of fiscal 1997 and was offset by
an increase in goodwill amortization related to the acquisition of Itronix.
Interest income, net of interest expense, was $443 thousand during the second
quarter of fiscal 1997, as compared to $408 thousand for the same period a year
ago. Interest expense during the second quarter was higher than the same quarter
last year due to higher average borrowings, offset by interest income received
on a prior year tax abatement.
Net income for the second quarter of fiscal 1997 was $10.5 million, an increase
of 13.3% over the same period a year ago. Earnings per share increased 15.4%
compared to the same period last year, partially due to the effect of the
Company's stock buyback program in which the stock was repurchased during fiscal
1997 and the first quarter of fiscal 1998.
<PAGE> 8
8
SIX MONTHS ENDED SEPTEMBER 30, 1997 VERSUS SIX MONTHS ENDED SEPTEMBER 30, 1996
Sales for the six months ended September 30, 1997 were $220.2 million, an
increase of 32% for the same six month period a year ago, and 5.7% including the
pro forma effects related to the acquisition of Itronix. The increase was
attributable to increased demand for communications test products, catalog sales
of industrial communications products, and aircraft cabin video information
services.
Gross margin for the six months ended September 30, 1997 was 57.6% down from
63.1% a year ago due to the increase of lower margin volume within the
industrial communications businesses, primarily associated with the Itronix
acquisition.
The effective tax rate for the six-month period ending September 30, 1997 and
1996, respectively, was 40.5%.
Net income for the six month period was $19.5 million, an increase of 10.2% over
the same period a year ago, primarily attributable to the increase in sales.
Backlog at September 30, 1997 was $90.0 million, an increase of 25.5% over the
backlog at March 31, 1997, primarily attributable to increased orders at
Itronix.
CAPITAL RESOURCES AND LIQUIDITY
The Company's funded debt was 11% of total capital at September 30, 1997, as
compared to 3.3% as of March 31, 1997. The increase in debt of $16 million was
primarily to help fund cash requirements for discontinued operations of $10.2
million, to repurchase 163 thousand shares of the Company's common stock in May
1997, and the purchase of property and equipment.
Dynatech believes that with its current cash, cash generated from operations,
and its current and future borrowing capacity it will be able to finance at
least 12 months of capital expenditures, working capital requirements and
potential acquisitions.
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128 , "Earnings
per Share," which modifies the way in which earnings per share ("EPS") is
calculated and disclosed. Currently, the Company discloses primary and fully
diluted EPS. Upon adoption of this standard for the interim period ending
December 31, 1997, the Company will disclose basic and diluted EPS for fiscal
1998 and will restate all prior period EPS data presented. The Company does not
anticipate this change will have a material impact on EPS.
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" which establishes standards for the reporting and display
of comprehensive income in general-purpose financial statements. The Company
has not assessed the impact of this Standard on its financial statements.
The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the reporting of operating segments in the financial statements.
The Company has not assessed the impact of this Standard on its financial
statements.
<PAGE> 9
9
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
The Annual Meeting of Stockholders was held on July 30, 1997 in Boston,
Massachusetts. A class of three directors as nominated by the Board of Directors
to serve for a three-year term were elected at the meeting. At such meeting,
16,675,563 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.
<TABLE>
<CAPTION>
IN FAVOR WITHHELD
-------- --------
<S> <C> <C>
John F. Reno 14,186,426 57,519
L. Dennis Kozlowski 14,187,284 56,661
Peter van Cuylenburg 14,188,207 55,738
</TABLE>
The terms of O. Gene Gabbard and Richard K. Lochridge will expire in 1998 and
the terms of William R. Cook and Robert G. Paul will expire at the annual
meeting in 1999.
The results of the voting of the additional items were as follows:
(a) To ratify the selection of Coopers & Lybrand L.L.P. as the Company's
independent auditors for the current fiscal year.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
--- ------- ------- ---------------
<S> <C> <C> <C> <C>
Selection of Auditors 14,176,685 20,421 46,839 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibits in the Exhibit Table of Item 601 of
Regulation S-K:
Exhibit Number Description
-------------- -----------
11 Computation of Earnings Per Share
27 Financial Data Schedule
(b) No current reports on Form 8-K were filed by the Registrant during the
quarter ended September 30, 1997.
<PAGE> 10
10
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 13, 1997 /s/ ALLAN M. KLINE
----------------------------------------
Allan M. Kline
Vice President, Chief Financial Officer
and Treasurer
Date November 13, 1997 /s/ ROBERT W. WOODBURY, JR.
----------------------------------------
Robert W. Woodbury, Jr.
Vice President, Corporate Controller and
Principal Accounting Officer
<PAGE> 1
Exhibit 11
Computation of Earnings per Share
(In thousands except per share amount)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $10,512 $ 9,277 $19,494 $17,689
======= ======= ======= =======
Common stock outstanding, net of treasury stock,
beginning of period 16,697 17,401 16,803 17,594
Weighted average treasury stock issued during the period 24 25 65 96
Weighted average common stock equivalents 705 837 645 756
Weighted average treasury stock repurchased 0 (349) (119) (340)
------- ------- ------- -------
Weighted average common stock outstanding, net of
treasury stock, end of period 17,426 17,914 17,394 18,106
======= ======= ======= =======
Income per common share $ 0.60 $ 0.52 $ 1.12 $ 0.98
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 43,544
<SECURITIES> 0
<RECEIVABLES> 71,372
<ALLOWANCES> 1,621
<INVENTORY> 47,909
<CURRENT-ASSETS> 170,037
<PP&E> 67,249
<DEPRECIATION> 41,937
<TOTAL-ASSETS> 257,073
<CURRENT-LIABILITIES> 56,570
<BONDS> 0
0
0
<COMMON> 3,721
<OTHER-SE> 172,543
<TOTAL-LIABILITY-AND-EQUITY> 257,073
<SALES> 220,176
<TOTAL-REVENUES> 220,176
<CGS> 71,699
<TOTAL-COSTS> 93,449
<OTHER-EXPENSES> 94,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 781
<INCOME-PRETAX> 32,764
<INCOME-TAX> 13,270
<INCOME-CONTINUING> 19,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,494
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.12
</TABLE>
