<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 December 31, 1996
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 January 15, 1997 there were 18,605,706 shares of common stock of the
registrant outstanding.
<PAGE> 2
2
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
DYNATECH CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales $92,007 $80,540 $258,854 $215,811
Cost of sales 33,522 30,623 95,032 82,134
------- ------- -------- --------
Gross profit 58,485 49,917 163,822 133,677
Selling, general and administrative expense 30,084 26,238 84,031 72,947
Product development expense 10,163 9,094 30,065 27,290
Purchased incomplete technology 20,627 -- 20,627 16,852
Amortization of intangibles 1,558 1,389 4,683 3,643
------- ------- -------- --------
Operating income (Loss) (3,947) 13,196 24,416 12,945
Interest expense (86) (506) (365) (1,537)
Interest income 942 526 2,166 1,644
Other income 130 490 552 916
------- ------- -------- --------
Income (Loss) from continuing operations
before income taxes (2,961) 13,706 26,769 13,968
Provision (Benefit) for income taxes (65) 5,565 11,976 5,663
------- ------- -------- --------
Income (Loss) from continuing operations (2,896) 8,141 14,793 8,305
Loss from discontinued operations, net of taxes -- (334) -- (866)
------- ------- -------- --------
Net income (Loss) $(2,896) $ 7,807 $ 14,793 $ 7,439
======= ======= ======== ========
Income (Loss) per common share:
Continuing Operations $ (0.16) $ 0.45 $ 0.82 $ 0.46
Discontinued Operations -- $ (.02) -- $ (.05)
------- ------- -------- --------
$ (0.16) $ 0.43 $ 0.82 $ 0.41
======= ======= ======== ========
Weighted average number of common shares 18,161 18,336 18,124 17,930
======= ======= ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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DYNATECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
Dec. 31 March 31
1996 1996
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 56,781 $ 46,094
Accounts receivable, net 63,018 45,367
Inventories:
Raw materials 18,002 10,210
Work in process 12,573 9,381
Finished goods 8,798 7,325
-------- --------
39,373 26,916
Other current assets 8,985 5,981
Net assets of discontinued operations held for sale 4,283 22,824
-------- --------
Total current assets 172,440 147,182
Property and equipment, net 22,264 18,551
Intangible assets, net 49,538 28,406
Other assets 18,393 11,050
-------- --------
$262,635 $205,189
======== ========
LIABILITIES
Current liabilities:
Notes payable & current portion of long-term debt $ 511 $ 655
Accounts payable 14,954 9,849
Other accrued expenses 49,079 30,817
-------- --------
Total current liabilities 64,544 41,321
Long-term debt 40,280 1,800
Deferred income taxes 156 531
Deferred compensation 1,333 818
SHAREHOLDERS' EQUITY
Common stock 3,721 3,721
Additional paid-in capital 8,769 12,102
Retained earnings 180,450 165,657
Cumulative translation adjustments 1,760 342
Treasury stock (38,378) (21,103)
-------- --------
Total shareholders' equity 156,322 160,719
-------- --------
$262,635 $205,189
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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4
DYNATECH CORPORATION
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
December 31
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Income from continuing operations $ 14,793 $ 8,305
Adjustments for noncash items included in net income:
Depreciation 6,710 6,255
Amortization of intangibles 4,683 3,643
Purchased incomplete technology 20,627 16,852
Increase (Decrease) in deferred taxes 938 (2,635)
Other 390 81
Change in operating assets and liabilities, net of effects
of business acquisitions and divestitures (29,451) (6,746)
-------- --------
Net cash flows provided by continuing operations 18,690 25,755
Net cash flows provided by (used in) discontinued operations 3,761 (15,318)
-------- --------
Net cash flows provided by operating activities 22,451 10,437
-------- --------
Investing activities:
Purchases of property and equipment (6,676) (6,255)
Disposals of property and equipment 186 117
Proceeds from sales of businesses 44,467 5,901
Business acquired in purchase transaction (65,751) (12,322)
Other (256) (614)
-------- --------
Net cash flows (used in) continuing operations (28,030) (13,173)
Net cash flows provided by (used in) discontinuing operations (911) 1,130
-------- --------
Net cash flows used in investing activities (28,941) (12,043)
-------- --------
Financing activities:
Debt borrowings 39,750 7,857
Repayment of debt (390) (462)
Proceeds from exercise of stock options 1,382 586
Purchases of treasury stock (22,334) --
-------- --------
Net cash flows provided by financing activities 18,408 7,981
-------- --------
Effect of exchange rate on cash (1,231) 257
-------- --------
Increase in cash and cash equivalents 10,687 6,632
-------- --------
Cash and cash equivalents at beginning of year 46,094 27,795
-------- --------
Cash and cash equivalents at end of period $ 56,781 $ 34,427
======== ========
Supplemental data:
Cash paid during the period for interest $ 426 $ 1,498
Cash paid during the period for income taxes $ 22,471 $ 7,911
Tax benefit of disqualifying dispositions of stock options $ -- $ 126
Stock issued for acquisition of Tele-Path Industries $ -- $ 13,700
</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 ("Dynatech" or the "Company"), the unaudited
condensed consolidated balance sheet at December 31, 1996, and the
unaudited consolidated statements of income and unaudited consolidated
condensed statements of cash flows for the interim periods ended December
31, 1996 and 1995 include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly those financial
statements.
In accordance with the rules of the Securities and Exchange Commission,
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 Annual Report or Form 10-K for the fiscal
year ended March 31, 1996.
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, consolidating of capital resources, general
business and economic conditions, the effect of the Company's accounting
policies, and other risks detailed in the Company's Annual Report and 10-K
for the fiscal year ended March 31, 1996.
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 costs 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, tax valuation reserves, and its net
realizable value of assets from discontinued operations held for sale.
Actual results could differ from those estimates.
B. Acquisitions
On December 31, 1996 Dynatech acquired substantially all of the business
and assets and assumed certain liabilities of Itronix Corporation
("Itronix") of Spokane, Washington for approximately $65.8 million in
cash, of which approximately $40 million of debt was borrowed under the
Company's line of credit. Itronix designs and manufactures ruggedized
integrated computing and communications devices which help make inside
service technicians more efficient. The products are used by organizations
with large mobile service fleets, such as telephone companies,
communication service providers and insurance companies. Acquired complete
technology and other intangible assets of approximately $26.5 million are
being amortized over two to fifteen years.
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Incident to this acquisition, the Company purchased the incomplete
technology activities of Itronix, resulting in a one-time pretax charge in
the quarter ended December 31, 1996 of approximately $20.6 million, or
($.74) per share after tax. 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 market and to the completion of the
products that will ultimately be marketed by the Company.
C. Divestments
During the first nine months of fiscal 1997, the Company sold six
businesses for approximately $44.5 million in cash. The effects of these
transactions were reflected in the net assets held for sale and did not
effect fiscal 1997 earnings. In January 1997 the Corporation sold one
business which had been classified as discontinued operations for
approximately $1.7 million. The Company intends to dispose of the
remaining units held for sale during fiscal 1997. Management believes that
the net proceeds from these dispositions will exceed the carrying amounts
and anticipated ongoing costs to operate the business in 1997. Anticipated
gains will not be reflected in the statements of operations until they are
realized at the completion of the divestiture program.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Continuing Operations
Results of Continuing Operations
- --------------------------------
Consolidated sales increased 14.2% and 20.0% for the three and nine months ended
December 31, 1996, respectively, compared to the equivalent prior year periods.
Communications Test sales rose 25.0% for the nine months ended in fiscal 1997.
The increase is attributable in part to sale of test systems reflecting the
ongoing investment by new service providers to expand their network
infrastructures. Sales for the Industrial and Scientific Communications and
Non-Broadcast Video Technology business were up 10.0% and 14.0%, respectively,
over the corresponding nine months ended December 31, 1996. Backlog from ongoing
operations was $52.4 million at December 31, 1996 as compared with $57.3 million
at March 31, 1996. The decrease is due in part to the high level of shipments of
wireless test products in the Communications Test business.
Consolidated Gross Profit for the current quarter and nine months was 63.6% and
63.3% of sales, respectively, compared to 62.0% and 61.9% for each of the
respective prior year periods. The increase in Gross Profit is a result of
increased sales of certain higher margin products. Product Development expense
was 11.0% of total sales for the current quarter and 11.6% of total sales for
the first nine months of fiscal 1997 as compared to 11.3% and 12.6%,
respectively, for the comparable periods in the prior year. Selling, General and
Administrative expenses were 32.7% and 32.5% for the three and nine months ended
December 31, 1996, respectively, as compared to 32.6% and 33.8%, respectively,
for the corresponding periods a year ago. While relatively unchanged for the
current three months, the nine month decrease is due to greater efficiencies in
selling communications test products, leverage in sales costs in the industrial
and scientific communications business and the effect of 1996 communications
test acquisitions. The increase
<PAGE> 7
7
in amortization of intangible assets, $1.6 million for the third quarter and
$4.7 million for the nine months as compared to $1.4 million and $3.6 million,
respectively, for the prior year, is due to Communication Test acquisitions made
during the second half of fiscal 1996. Interest income increased due to earnings
on cash received from proceeds of assets held for sale. The effective tax rate
for the nine months ended December 31, 1996 was 40.5% excluding a one-time
charge for purchased incomplete technology. The effective rate including the
one-time charge is 44.7%. The difference in rate is attributable to the non-tax
deductibility on a state basis of the incomplete technology charge.
Capital Resources and Liquidity
- -------------------------------
The Company's funded debt was 20.7% of total capital at December 31, 1996, as
compared to 1.5% at March 31, 1996. The increase is due to borrowings utilized
to facilitate the acquisition of Itronix Corporation in the third quarter. The
current ratio rate decreased to 2.7 to 1 at December 31, 1996 from 3.6 to 1 at
March 31, 1996. Cash inflows from proceeds of business assets held for sale
approximated $44.5 million in the first nine months of fiscal 1997 with related
cash inflows of approximately $3.8 million from discontinued operations. Cash
outflows of approximately $65.8 million were expended for the purchase of
Itronix Corporation in the third quarter. Net cash flows from operating
activities were $18.7 million for the nine-month period ended December 31, 1996.
Cash outflows of approximately $22.3 million were used to purchase 697,500
shares of treasury stock. The total number of shares authorized for repurchase
under the current plan has been increased to 3,000,000. Approximately 1,500,000
have been repurchased to date. Dynatech believes it has sufficient resources to
finance its cash requirements over the next year.
PART II. OTHER INFORMATION
--------------------------
Item 6.
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed by the registrant on October 21, 1996, pursuant to
Item 2 of Form 8-K, reporting the sale of business assets of Unex
Corporation.
A Form 8-K was filed by the registrant on December 31, 1996. Pursuant to
Item 7(a)(4) of Form 8-K, the registrant will file financial statements of
the business being acquired and pro forma financial information as soon as
it is available on Form 8-K/A, and in any event, by March 17, 1997.
<PAGE> 8
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNATECH CORPORATION
-----------------------------------------
Date February 12, 1997 ALLAN M. KLINE
----------------------- -----------------------------------------
Vice President, Chief Financial Officer
and Treasurer
Date February 12, 1997 ROBERT W. WOODBURY, JR.
----------------------- -----------------------------------------
Corporate Controller,
Principal Accounting Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000030841
<NAME>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 56,781
<SECURITIES> 0
<RECEIVABLES> 64,444
<ALLOWANCES> 1,426
<INVENTORY> 39,373
<CURRENT-ASSETS> 8,985
<PP&E> 62,128
<DEPRECIATION> 39,864
<TOTAL-ASSETS> 262,635
<CURRENT-LIABILITIES> 64,544
<BONDS> 0
0
0
<COMMON> 3,721
<OTHER-SE> 152,601
<TOTAL-LIABILITY-AND-EQUITY> 262,635
<SALES> 258,854
<TOTAL-REVENUES> 258,854
<CGS> 95,032
<TOTAL-COSTS> 139,406
<OTHER-EXPENSES> (552)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,801)
<INCOME-PRETAX> 26,769
<INCOME-TAX> 11,976
<INCOME-CONTINUING> 14,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,793
<EPS-PRIMARY> .82
<EPS-DILUTED> .82
</TABLE>
