<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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: (781) 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, 1998 there were 16,862,674 shares of common stock of the
registrant outstanding.
<PAGE>
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 Nine Months Ended
December 31 December 31
1997 1996 1997 1996
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Sales $133,138 $92,007 $353,314 $258,854
Cost of sales 58,265 33,522 151,714 95,032
---------- ---------- --------- --------
Gross profit 74,873 58,485 201,600 163,822
Selling, general & 38,512 30,084 103,549 84,031
administrative expense
Product development expense 14,484 10,163 41,563 30,065
Purchased incomplete technology --- 20,627 --- 20,627
Amortization of intangibles 1,445 1,558 4,327 4,683
---------- ---------- --------- --------
Operating income (loss) 20,432 (3,947) 52,161 24,416
Interest expense (164) (86) (945) (365)
Interest income 886 942 2,250 2,166
Other income 244 130 694 552
---------- ---------- --------- --------
Income (loss) before income taxes 21,398 (2,961) 54,160 26,769
Income tax provision (benefit) 8,663 (65) 21,933 11,976
---------- ---------- --------- --------
Net income (loss) $ 12,735 $(2,896) $ 32,227 $ 14,793
========== ========== ========= ========
Income (loss) per common share:
Basic $ 0.76 $ (0.16) $ 1.92 $ 0.86
Diluted 0.73 (0.16) 1.85 0.82
========== ========== ========= ========
Weighted average number of
common shares:
Basic 16,817 17,074 16,826 17,257
Diluted 17,395 17,074 17,413 18,124
========== ========== ========= ========
</TABLE>
- ----------------------------
See notes to condensed consolidated financial statements.
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Dec. 31 March 31
1997 1997
ASSETS (Unaudited)
Current assets: ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 47,569 $ 39,782
Accounts receivable, net 73,330 70,930
Inventories:
Raw materials 21,076 19,423
Work in process 11,970 11,376
Finished goods 12,362 9,326
------------ ------------
Total inventory 45,408 40,125
Other current assets 11,870 11,074
------------ ------------
Total current assets 178,177 161,911
Property and equipment, net 25,178 23,833
Intangible assets, net 39,496 43,813
Other assets 20,926 20,478
------------ ------------
$263,777 $250,035
============ ============
LIABILITIES & EQUITY
Current Liabilities:
Current portion of long-term debt $ 171 $ 201
Accounts payable 20,345 16,900
Accrued expenses:
Compensation and benefits 21,923 23,912
Deferred revenue 9,954 8,876
Other accrued expenses 14,009 22,455
Net liabilities of discontinued operations 2,793 9,173
------------ ------------
Total current liabilities 69,195 81,517
Long-term debt 109 5,226
Deferred income taxes 989 1,025
Deferred compensation 2,112 1,581
SHAREHOLDERS' EQUITY
Common stock 3,721 3,721
Additional paid-in capital 7,169 9,887
Retained earnings 227,733 195,506
Cumulative translation adjustment (1,938) (1,247)
Treasury stock (45,313) (47,181)
------------ ------------
Total shareholders' equity 191,372 160,686
------------ ------------
$263,777 $250,035
============ ============
</TABLE>
- ----------------------------
See notes to condensed consolidated financial statements.
<PAGE>
DYNATECH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 32,227 $ 14,793
Adjustments for noncash items included in net
income:
Depreciation 8,926 6,710
Amortization of intangibles 4,327 4,683
Purchased incomplete technology --- 20,627
Increase (decrease) in deferred taxes (36) 938
Other 192 390
Change in operating assets and liabilities (8,155) (29,451)
----------- -----------
Net cash flows provided by continuing operations 37,481 18,690
Net cash flows provided by (used in) discontinued
operations (12,680) 3,761
----------- -----------
Net cash flows provided by operating activities 24,801 22,451
Investing activities:
Purchases of property and equipment (11,026) (6,676)
Proceeds from sale of businesses --- 44,467
Business acquired in purchase transaction --- (65,751)
Other 85 (70)
----------- -----------
Net cash flows used in continuing operations (10,941) (28,030)
Net cash flows provided by (used in) discontinued
operations 507 (911)
----------- -----------
Net cash flows used in investing activities (10,434) (28,941)
Financing activities:
Debt borrowings (repayments) (5,000) 39,750
Repayment of notes payable --- (390)
Proceeds from exercise of stock options 4,332 1,382
Purchases of treasury stock (5,330) (22,334)
----------- -----------
Net cash flows provided by (used in) financing
activities (5,998) 18,408
Effect of exchange rate on cash (582) (1,231)
----------- -----------
Increase in cash and cash equivalents 7,787 10,687
Cash and cash equivalents at beginning of year 39,782 46,094
----------- -----------
Cash and cash equivalents at end of period $ 47,569 $ 56,781
=========== ===========
</TABLE>
- ----------------------------
See notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited condensed consolidated balance
sheet at December 31, 1997, and the unaudited consolidated statements of
income and unaudited consolidated condensed statements of cash flows for
the interim periods ended December 31, 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. NEW PRONOUNCEMENTS
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.
C. 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. As a percentage of
sales, the gross margin and selling, general and administrative expenses of
Itronix are lower than the consolidated financial results of the Company
prior to the acquisition. Therefore, the pro forma income statements below
reflect a lower gross margin and selling, general and administrative
expenses as a percent of consolidated sales. Hence, in order to demonstrate
the Company's operating performance versus the previous years, 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. (In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, 1996 December 31, 1996
<S> <C> <C>
Revenue $114,284 $322,676
Cost of sales 48,726 140,854
-------- --------
Gross profit 65,558 181,822
Selling, general and
Administrative expense 32,694 91,784
Product development exp 12,150 35,313
Amortization 2,244 6,743
-------- --------
Operating income 18,470 47,982
Interest expense (923) (2,821)
Interest income 942 2,166
Other income 129 551
-------- --------
Income before taxes 18,618 47,878
-------- --------
Net income $ 11,131 $ 28,513
======== ========
Income per share:
Basic $ 0.65 $ 1.65
Diluted $ 0.61 $ 1.57
Weighted average shares:
Basic 17,074 17,257
Diluted 18,161 18,124
</TABLE>
<PAGE>
D. Income (earnings) per share
The Company adopted Statement of Financial Accounting Standards No. 128.
"Earnings per Share," which modifies the calculation of earnings per share
("EPS"). The Standard replaces the previous presentation of primary and
fully diluted EPS to basic and diluted EPS. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS includes the dilution of common stock equivalents, and is computed
similarly to fully diluted EPS pursuant to APB Opinion 15. All prior periods
presented have been restated to reflect this adoption. (In thousands except
per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 12,735 $ (2,896) $ 32,227 $ 14,793
======== ======== ======== ========
BASIC:
Common stock outstanding, net of
treasury stock, beginning of period 16,757 17,062 16,803 17,594
Weighted average treasury stock issued
during the period 60 12 103 123
Weighted average treasury stock
repurchased --- --- (80) (460)
-------- -------- -------- --------
Weighted average common stock
outstanding, net of treasury stock,
end of period 16,817 17,074 16,826 17,257
======== ======== ======== ========
Income per common share $ 0.76 $ (0.16) $ 1.92 $ 0.86
======== ======== ======== ========
DILUTIVE:
Common stock outstanding, net of
treasury stock, beginning of period 16,757 17,062 16,803 17,594
Weighted average treasury stock issued
during the period 60 12 103 123
Weighted average common stock
equivalents (a) 578 --- 587 867
Weighted average treasury stock
repurchased --- --- (80) (460)
-------- -------- -------- --------
Weighted average common stock
outstanding, net of treasury stock,
end of period 17,395 17,074 17,413 18,124
======== ======== ======== ========
Income per common share $ 0.73 $ (0.16) $ 1.85 $ 0.82
======== ======== ======== ========
</TABLE>
(a) not included if antidilutive
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Continuing Operations
On December 22, 1997 the Company announced a management-led
recapitalization plan in which the public shareholders of the Company will
receive $49 per share, consisting of $47.75 per share in cash and 0.5
shares of common stock of the recapitalized company. As a result of such
recapitalization, the public shareholders will own an approximately 7.0%
equity interest in the recapitalized company. The remaining equity will be
held by Dynatech management and Clayton, Dubilier, & Rice, Inc. (CD&R). The
total transaction is valued at approximately $900 million and will be
financed through a $277 million equity investment by CD&R with the
remainder financed through a combination of debt and cash on-hand. The
recapitalization is subject to shareholder and regulatory approvals and
other customary conditions, and is expected to be completed during the
first half of calendar 1998.
Accounting Changes
During the quarter the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," which modifies the calculation of
earnings per share ("EPS"). The Standard replaces the previous presentation
of primary and fully diluted EPS to basic and diluted EPS. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to APB
Opinion 15. All prior periods presented have been restated to reflect this
adoption.
Results of Operations
Pro Forma Financial Statements
On December 31, 1996 the Company acquired substantially all of the assets
and assumed certain liabilities of Itronix Corporation ("Itronix"). The
following discussion, as it relates to the three and nine month periods
ended December 31, 1996, refers to the financial information presented in
Note C, "Pro Forma Financial Information" of the Notes to Condensed
Consolidated Financial Statements, which presents a summary of consolidated
results of operations of the Company as if the acquisition had occurred at
the beginning of fiscal 1997.
THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE MONTHS ENDED DECEMBER 31,
1996 ON A PRO FORMA BASIS
Sales. Consolidated sales increased $18.9 million or 16.5% to $133.1
million for the three months ended December 31, 1997 as compared to
$114.3 million for the same period a year ago on a pro forma basis. The
increase is primarily attributable to increased demand for communications
test products, catalog sales of industrial computing and communications
products, and aircraft cabin video information services.
Sales of communications test products increased $11.4 million to $70.2
million or 19.4% reflecting continued growth in the U.S. market for
communications test solutions. During the quarter Regional Bell Operating
Companies ("RBOCs") spent their remaining budgeted funds before year-end.
Sales for industrial computing and communication products increased $7.0
million to $43.5 million or 19.2% over the same period last year on a pro
forma basis. The Company was positively impacted by continued strength in
its catalog-marketed rack-mounted computers and higher sales into the
Original Equipment Manufacturer (OEM) market. In addition, Itronix had
significant shipments of its ruggedized laptop computers to the field
services market in the quarter.
Sales of visual communications products increased $0.4 million to $19.4
million or 2%. Sales for the Company's real-time flight information
passenger video displays increased as more airlines integrated this product
into their inflight entertainment systems. Offsetting this increase were
lower sales in the video compression and graphical user-interface (GUI)
product lines.
Gross Profit. Consolidated gross profit increased $9.3 million to $74.9
million or 56.2% of consolidated sales for the three months ended December
31, 1997 as compared to $65.6 million or 57.4% of consolidated sales for
the same period a year ago on a pro forma basis. The percentage decrease
was primarily attributed to a change in sales mix within the consolidated
group along with lower gross margins for Itronix products due to additional
manufacturing costs to rework the Pentium-based laptops. The Company
believes that the trend toward increased sales of Itronix products with
lower gross margins may continue and would result in further decreases in
consolidated gross margin as a percentage of consolidated sales in the
future.
Operating Expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; and amortization of
intangibles. Total operating expenses were $54.4 million or 40.9% of
consolidated sales as compared to $47.1 million or 41.2% of consolidated
sales for the same period last year on a pro forma basis.
Selling, general and administrative expense was $38.5 million or 28.9% of
consolidated sales for the three months ended December 31, 1997 as compared
to $32.7 million or 28.6% of consolidated sales for the same period a year
ago on a pro forma basis. The increase was primarily attributable to the
increase in sales, the relocation of one of the Company's subsidiaries and
increased incentive compensation costs.
Product development expense was $14.5 million or 10.9% of consolidated
sales as compared to $12.2 million or 10.6% of consolidated sales for the
same period last year on a pro forma basis. The increase was primarily due
to the Company's communications test subsidiary continuing its development
of a new test system and new CPU and chassis product development for
rack-mounted computers.
Amortization of intangibles during the third quarter was $1.4 million as
compared to $2.2 million for the same period last year on a pro forma
basis. 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.
Interest. Interest income, net of interest expense, was $0.7 million for
the third quarter of fiscal 1998 as compared to $0 for the same period last
year on a pro forma basis. Assuming consummation of the recapitalization of
the Company described above, the interest expense of the Company will
substantially increase as a result of borrowing relating to such
recapitalization.
Other income. Other income for the third quarter was $244 thousand as
compared to $129 thousand for the same period a year ago on a pro forma
basis.
Net income. Net income was $12.7 million or $0.73 per share on a diluted
basis for the three months ended December 31, 1997 as compared to $11.1
million or $0.61 per share on a diluted basis for the same period a year
ago on a pro forma basis.
Backlog. Backlog at December 31, 1997 was $77.5 million, an increase of
$5.8 million over the backlog at March 31, 1997.
<PAGE>
NINE MONTHS ENDED DECEMBER 31, 1997 VERSUS NINE MONTHS ENDED DECEMBER 31,
1996 ON A PRO FORMA BASIS
Sales. Consolidated sales for the nine months ended December 31, 1997
increased $30.6 million or 9.5% to $353.3 million as compared to $322.7
million for the same period last year on a pro forma basis. The increase
was attributable to increased demand for communications test products,
catalog sales of industrial computing and communications products, and
aircraft cabin video information services.
Sales for communications test products increased $23.4 million to $184.9
million or 14.5%. The increase is primarily attributable to increased
volume as a result of network expansions of the local Telco service
providers.
Sales for industrial computing and communications products increased $2.1
million or 2.0% to $111.0 million as compared to $108.9 million for the
same period last year on a pro forma basis. The increase in sales for the
Company's rack-mounted computers, as new products were introduced through
the catalog, was offset by slightly lower sales of the Company's ruggedized
laptop computers.
Sales of visual communications products increased $5.1 million to $57.5
million or 9.6% as compared to $52.4 million for the same period a year ago
on a pro forma basis. Sales for the Company's real-time flight information
passenger video displays increased as more airlines integrated this product
into their inflight entertainment systems. In addition, key strategic
alliances have been formed with certain airline companies, which have
greatly improved market penetration. Offsetting this increase were lower
sales volume in the video compression and graphical user-interface (GUI)
product lines.
Gross Profit. Consolidated gross profit increased $19.8 million to $201.6
million or 57.1% of consolidated sales for the nine months ended December
31, 1997, as compared to $181.8 million or 56.3% of consolidated sales for
the same period last year on a pro forma basis. Gross margin increased
slightly due to the increased shipment volume of higher margin
communications test equipment and airline passenger video displays.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; and amortization of
intangibles. Total operating expenses were $149.4 million or 42.3% of
consolidated sales as compared to $133.8 million or 41.5% of consolidated
sales for the same period last year on a pro forma basis. The percent
increase is primarily attributable to an increase in selling, general and
administrative expenses as a percent of sales.
Selling, general and administrative expense was $103.5 million or 29.3% of
consolidated sales for the nine months ended December 31, 1997, as compared
to $91.8 million or 28.4% of consolidated sales for the same period last
year on a pro forma basis. The increase is primarily attributable to
additional expenses related to information systems upgrades and increased
selling expenses due to the increased sales volume within the
communications test business.
Product development expense was $41.6 million or 11.8% of consolidated
sales as compared to $35.3 million or 10.9% of consolidated sales for the
same period last year on a pro forma basis. The increase is primarily
attributable to the development of a new test system at the Company's
communications test subsidiary and new CPU and chassis products which
were developed for rack-mounted computers.
Amortization of intangibles for the first nine months was $4.3 million as
compared to $6.7 million for the same period last year on a pro forma
basis. 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.
Interest. Interest income, net of interest expense, was $1.3 million for
the nine months ended December 31, 1997, as compared to net interest
expense of $0.6 million for the same period a year ago on a pro forma
basis. Assuming consummation of the recapitalization of the Company
described above, the interest expense of the Company will substantially
increase as a result of borrowing relating to such recapitalization.
Other income. Other income was $694 thousand for the nine month period
ended December 31, 1997 and compared to $551 thousand for the same period
last year.
Taxes. The effective tax rate for the nine month periods ending December
31, 1997 and 1996 was 40.5%.
Net income. Net income for the nine month period was $32.2 million or $1.85
per share on a diluted basis, as compared to $28.5 million or $1.57 per
share on a diluted basis for the same period last year on a pro forma
basis. The increase is primarily attributable to the increase in sales.
HISTORICAL FINANCIAL STATEMENTS
The following discussion, as it relates to the three and nine month periods
ended December 31, 1996, refers to the historical financial information
presented in Item I. Financial Statements-Consolidated Statements of
Income, which presents a summary of consolidated results of operations of
the Company including the acquisition of Itronix at December 31, 1996,
excluding the pro forma effects of the acquisition.
THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE MONTHS ENDED DECEMBER 31,
1996 ON A HISTORICAL BASIS
Consolidated sales increased $41.1 million or 44.7% to $133.1 million for
the three months ended December 31, 1997 as compared to $92.0 million for
the same period a year ago. Sales of communications test products increased
$11.4 million to $70.2 million or 19.4% reflecting continued growth in the
U.S. market for communications test solutions. Sales for industrial
computing and communication products increased $29.3 million to $43.5
million or 206.3% over the same period last year due both to the Itronix
acquisition and continued strength in the OEM market for catalog-marketed
rack-mounted PCs. Sales of visual communications products increased $0.4
million to $19.4 million or 2%.
Consolidated gross margin increased $16.4 million to $74.9 million or 56.2%
of consolidated sales for the three months ended December 31, 1997 as
compared to $58.5 million or 63.6% of consolidated sales for the same
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 was $38.5 million or 28.9% of
consolidated sales for the three months ended December 31, 1997, compared
to $30.1 million or 32.7% of consolidated sales for the same period a year
ago. 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 $14.5 million or 10.9% of consolidated
sales as compared to $10.2 million or 11.1% 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 third quarter was $1.4 million as
compared to $1.6 million for the third 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 $0.7 million for the third
quarter of fiscal 1998 as compared to $0.9 million for the same period last
year.
Net income was $12.7 million or $0.73 per share on a diluted basis for the
three months ended December 31, 1997 as compared to a loss of $(2.9)
million or $(0.16) per share on a diluted basis primarily attributable to
the one-time pre tax charge of $20.6 million in 1996 for the writeoff of
the incomplete technology.
Backlog at December 31, 1997 was $77.5 million, an increase of $5.8 million
over the backlog at March 31, 1997.
NINE MONTHS ENDED DECEMBER 31, 1997 VERSUS NINE MONTHS ENDED DECEMBER 31,
1996 ON A HISTORICAL BASIS
Sales for the nine months ended December 31, 1997 increased 36.5% to $353.3
million as compared to $258.9 million for the same period a year ago. The
increase was attributable to the Itronix acquisition and increased demand
for communications test products, catalog sales of industrial computing and
communications products, and aircraft cabin video information services.
Gross margin for the nine months ended December 31, 1997 was 57.1%, down
from 63.3% a year ago due to the increase of lower margin sales within the
industrial communications businesses, related to both the acquisition of
Itronix and additional shipments of products to OEM manufacturers.
The effective tax rate for the nine month periods ending December 31, 1997
and 1996 was 40.5%. The 40.5% rate at December 31, 1996 excluded the one-
time charge for purchased incomplete technology related to the acquisition
of Itronix.
Net income for the nine month period was $32.2 million, an increase of
117.9% over the same period a year ago, primarily attributable to the
increase in sales and the 1996 write-off of the incomplete technology.
CAPITAL RESOURCES AND LIQUIDITY
Cash flows. The Company's cash and cash equivalents increased $7.8 million
during the first nine months of fiscal 1998. Net cash provided by operating
activities generated $24.8 million after $12.7 million was used for the
payment of expenses related to discontinued operations.
Working Capital. The Company's working capital increased by $8.2 million.
Inventory levels increased from $40.1 million to $45.4 million, resulting
in a $5.3 million use of cash, primarily attributable to the increased
volume for the Company's rack-mounted computers. Accounts receivable
increased from $70.9 million to $73.3 million, resulting in a use of cash
of $2.4 million, as a result of higher shipments in the month of December.
Other current assets increased, resulting in a use of cash of $800
thousand. Accounts payable increased from $16.9 million to $20.3 million,
resulting in a source of cash of $3.4 million, as the Company continues to
manage its working capital. Other current liabilities decreased from $64.4
million to $48.7 million due to both a reduction of discontinued operations
liabilities of $12.7 million and a reduction of $3.0 million for continued
operations.
The Company's investing activities totaled $10.4 million primarily for the
purchase and replacement of property and equipment.
During the quarter the Company repaid all of its borrowings under its two
existing credit facilities. In addition the Company repurchased 163
thousand shares of its common stock for $5.3 million during the first
quarter of fiscal 1998. During the first nine months of fiscal 1998 the
Company generated $4.3 million from the exercise of stock options.
Credit Agreements
In April 1997 the Company entered into a $150 million revolving credit and
term loan agreement with several commercial banks. The agreement allows for
borrowings using various instruments with interest payable at Eurodollar
rate plus an applicable margin based on the Company's leverage ratio or
base rate quoted by the lender.
In June 1997 the Company entered into a $30 million credit line for general
working capital requirements. The agreement allows the Company to borrow
funds in its sole discretion with interest payable at fixed interest (money
market) rates quoted by the bank.
In connection with the recapitalization described above, the Company would
terminate its existing credit line agreements and enter into certain senior
secured credit facilities (including a $110 million revolving credit
facility and $260 million term loan facilities) and would sell senior
subordinated notes in an aggregate amount of $275 million.
Other
The Company has hired consultants or otherwise begun inquiries on preparing
its internal administrative computer systems and related applications to
accommodate date-sensitive information relating to the Year 2000. The
Company has not completed its determination of the effort and costs likely
to be required to ensure that its systems will be Year 2000 compliant.
There can be no assurance that Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company's expenditures for property and equipment were $11.0 million
for the nine-month period ended December 31, 1997, primarily for the
replacement of existing property and equipment as well as computer systems
and software upgrades. The Company anticipates capital expenditures to be
at the same level for the next 12 months.
The Company believes that, subsequent to the recapitalization, cash
generated from operations, together with amounts available under the new
credit agreement and any other available financing sources, will be
adequate to permit the Company to meet its debt service obligations,
capital expenditure program requirements, ongoing operating costs and
working capital needs, although the Company's future operating performance
and ability to service, repay, extend or refinance its anticipated
substantial indebtedness to be incurred in connection with the
recapitalization will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the
Company's control. The Company's substantial anticipated indebtedness may
have other important consequences, as described below under "Proposed
Merger."
Proposed Merger
On December 22, 1997 the Company announced a management-led
recapitalization plan (the "Merger") in which the public shareholders of
the Company will receive $49 per share and the remaining equity will be
held by Dynatech management and Clayton, Dubilier & Rice, Inc. ("CD&R").
The total transaction is valued at approximately $900 million and will be
financed through a $277 million equity investment by CD&R with the
remainder financed through debt and cash on-hand. In order to consummate
the transactions contemplated by the Merger, the Company will enter into
a financing to (i) fund payment of the cash consideration for the Merger,
(ii) pay fees and expenses incurred in connection with securing the
financing and consummating the Merger and (iii) provide working capital to
the Company. Although the definitive terms of the financing have not been
finalized as of the date of this Form 10-Q, the Company expects that such
terms will include significant restrictions, including limitations on the
Company's ability to incur indebtedness, create liens, sell assets, engage
in mergers or consolidations, make investments and pay dividends. As of
December 31, 1997, after giving pro forma effect to the Merger and the
financing and the application of the net proceeds therefrom, the Company
would have had approximately (i) $568.2 million of consolidated
indebtedness and (ii) because the cash payments to existing stockholders in
connection with the Merger and all fees and expenses related to the Merger
will be charged to stockholders' equity, approximately $351.4 million of
consolidated stockholders deficit. Such level of consolidated indebtedness
is substantially greater than the Company's pre-Merger indebtedness. Such
high leverage may have important consequences for the Company, including
the following: (a) the Company's ability to obtain additional financing for
future acquisitions (if any), working capital, capital expenditures or
other purposes may be impaired or any such financing may not be on terms
favorable to the Company; (b) a substantial amount of the Company's cash
flow available from operations after satisfying certain liabilities arising
in the ordinary course of business will be dedicated to the payment of
principal and interest on its indebtedness thereby reducing funds that
would otherwise be available for future business opportunities; (c) a
substantial decrease in net operating cash flows or an increase in expenses
of the Company could make it difficult for the Company to meet its debt
service requirements or force it to modify its operations or sell assets;
and (d) a substantial degree of leverage may also hinder the Company's
ability to adjust rapidly to market, industry and economic conditions.
The Company believes that the Merger financing has been structured so that
it would be able to meet its working capital needs after the Merger,
however, no assurance can be given that the Company will be able to meet
its debt obligations after the Merger.
<PAGE>
NEW PRONOUNCEMENTS
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>
PART II. Other Information
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
-------------- -----------
27 Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K dated December 20, 1997
relating to a merger by Dynatech Corporation and CDRD Merger Corporation.
<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.
DYNATECH CORPORATION
--------------------
Date January 27, 1998 /s/ ALLAN M. KLINE
---------------- ------------------
Allan M. Kline
Vice President, Chief Financial
Officer and Treasurer
Date January 27, 1998 /s/ ROBERT W. WOODBURY, JR.
---------------- ---------------------------
Robert W. Woodbury, Jr.
Vice President, Corporate Controller
and Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 73,330
<ALLOWANCES> 1,000
<INVENTORY> 45,408
<CURRENT-ASSETS> 178,177
<PP&E> 68,403
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0
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<COMMON> 3,721
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<SALES> 353,314
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