<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
Commission File No. 1-5562
KOLLMORGEN CORPORATION
(Exact name of registrant as specified in its charter)
New York 04-2151861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160l Trapelo Road, Waltham, Massachusetts 02154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 890-5655
NONE
(Former name, former address and former fiscal year, if changed since
last report.)
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
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at May 12, 1998
Common Stock, $2.50 par value 10,069,120 shares
<PAGE>
<PAGE>2
KOLLMORGEN CORPORATION
INDEX
Page No.
PART I - Financial Information
Consolidated Statements of Operations 3
for the Three Months Ended
March 31, 1998 and 1997 (unaudited)
Consolidated Balance Sheets as of 4
March 31, 1998 (unaudited)
and December 31, 1997
Consolidated Statements of Cash Flows 5-6
for the Three Months Ended
March 31, 1998 and 1997 (unaudited)
Notes to Unaudited Consolidated Financial Statements 7-10
Management's Discussion and Analysis 10-13
of Financial Condition and
Results of Operations
PART II - Other Information 14
<PAGE>
<PAGE>3
<TABLE>
PART I - FINANCIAL INFORMATION
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
<CAPTION>
For the
Three Months Ended
March 31,
------------------
1998 1997
(unaudited) (unaudited)
-------- --------
<S> <C> <C>
Net sales $ 56,793 $ 50,587
Cost of sales 39,666 35,306
--------- ---------
Gross profit 17,127 15,281
--------- ---------
Selling and marketing expense 5,619 4,728
General and administrative expense 5,122 5,766
Research and development expense 3,181 1,979
Impairment of goodwill and assets held for sale 2,733 -
Tender offer costs 1,273 -
--------- ---------
Income (loss) from operations (801) 2,808
Interest expense, net (457) (1,086)
Intellectual property license, net of expenses 21,217 -
Other income (expense), net (8,336) 20
--------- ---------
Income before income taxes, joint
venture, and minority interest 11,623 1,742
Provision for income taxes 6,072 478
--------- ---------
Income before joint venture and minority interest 5,551 1,264
Equity in earnings of joint venture - 670
Minority interest 9 76
--------- ---------
Net income $ 5,560 $ 2,010
========= =========
Net income available to common shareholders $ 5,560 $ 2,010
Earnings per common share:
Basic $ 0.55 $ 0.21
Diluted $ 0.52 $ 0.20
====== ======
Number of shares used in calculating
earnings per common share:
Basic 10,038,399 9,765,436
Diluted 11,598,545 10,177,411
========== ==========
<FN>
See accompanying notes to these unaudited consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>4
<TABLE>
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
ASSETS
March 31,
1998 December 31,
(unaudited) 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,572 $ 14,854
Accounts receivable (net of allowance of
$1,028 in 1998 and $971 in 1997) 40,843 39,528
Recoverable amounts on long-term contracts 7,698 5,762
Inventories, net 26,040 25,162
Prepaid expenses and other current assets 2,416 2,041
--------- ---------
Total current assets 105,569 87,347
--------- ---------
Property, plant and equipment, net 27,129 26,673
Goodwill, patents and other intangible assets 12,289 14,343
Deferred income taxes 9,375 5,802
Other assets 11,587 11,279
--------- ---------
$ 165,949 $ 145,444
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,075 $ 18,467
Accrued liabilities 36,110 32,310
Income taxes payable 8,717 3,442
Line of credit 5,364 5,232
Current portion of long-term debt 1,995 2,012
--------- ---------
Total current liabilities 74,261 61,463
--------- ---------
Long-term debt 36,675 36,379
Other liabilities 7,532 5,874
Minority interest 334 136
Shareholders' equity:
Common stock 26,922 26,921
Additional paid-in capital 12,830 12,682
Retained earnings 14,629 9,268
Cumulative translation adjustments (892) (602)
Less common stock in treasury, at cost (6,342) (6,677)
--------- ---------
Total common shareholders' equity 47,147 41,592
--------- ---------
$ 165,949 $ 145,444
========= =========
<FN>
See accompanying notes to these unaudited consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>5
<TABLE>
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
For the
Three Months Ended
March 31,
------------------
1998 1997
(unaudited) (unaudited)
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income from operations $ 5,560 $ 2,010
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,274 1,099
Amortization 417 282
Impaired asset charge 2,733 0
Equity in income of joint venture 0 (670)
Deferred income taxes (3,572) 0
Minority interest 198 (76)
Other non-cash expenses 33 9
Changes in operating assets and liabilities:
Accounts and notes receivable (1,708) 1,533
Recoverable amounts on long-term contracts (1,936) 652
Inventories (1,087) 286
Prepaid expenses (379) 155
Accounts payable and accrued liabilities 12,401 (4,596)
Other deferred expenses 1,258 (118)
--------- ---------
Net cash provided by operating activities 15,192 566
--------- ---------
Cash flows from investing activities:
Capital expenditures (1,924) (1,033)
Other 111 180
--------- ---------
Net cash used in investing activities (1,813) (853)
--------- ---------
Cash flows from financing activities:
Borrowings (repayments) under credit lines, net 284 (195)
Proceeds from common stock issued from treasury 42 135
Borrowings (repayments) of long-term debt 358 (774)
Dividends (201)(195)
--------- ---------
Net cash provided by (used for) financing activities 483 (1,029)
--------- ---------
<PAGE>
<PAGE>6
Effect of exchange rate changes on cash (144) (180)
--------- ---------
Net increase (decrease) in cash and cash equivalents 13,718 (1,496)
Cash and cash equivalents at beginning of period 14,854 13,445
--------- ---------
Cash and cash equivalents at end of period $ 28,572 $ 11,949
========= =========
<FN>
See accompanying notes to these unaudited consolidated financial statements.
</TABLE>
<PAGE>
<PAGE>7
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 1998
(Dollars in thousands, except per share amounts)
1. The accompanying unaudited consolidated financial statements include
the accounts of Kollmorgen Corporation (the Company ) and all of its
majority owned subsidiaries.
2. In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments, consisting only of
normal recurring adjustments, (except for items discussed in Notes 7
through 10), necessary to present fairly the Company s and its
consolidated subsidiaries financial condition at March 31, 1998, the
results of operations for the three-month periods ended March 31, 1998 and
1997 and the cash flows for the three month period ended March 31, 1998
and 1997. Certain reclassifications have been made to the prior year s
financial statements to conform to 1998 classifications. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for the full year. See Management s Discussion
and Analysis of Financial Condition and Results of Operations for
additional information. These interim financial statements should be read
in conjunction with the Company s Annual Report on Form 10-K for the year
ended December 31, 1997.
3. Net inventories consist of the following:
March 31, December 31,
1998 1997
---------------------
Raw materials $ 12,532 $ 12,640
Work in process 8,914 8,871
Finished goods 4,594 3,651
-------- --------
$ 26,040 $ 25,162
======== ========
4. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 ( SFAS 130 ), Reporting Comprehensive
Income. This Statement establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption
of this Statement had no impact on the Company s net income or
shareholders equity. The Company s comprehensive earnings were as
follows:
<PAGE>
<PAGE>8
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
For the
Three Months Ended
1998 1997
--------- ------------
Net income $ 5,560 $ 2,010
Foreign currency translation
adjustment, net (200) (210)
--------- ---------
$ 5,360 $ 1,800
======== ========
5. In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 131 ( SFAS 131 ),
"Disclosures about Segments of an Enterprise and Related Information",
which must be adopted for fiscal years beginning after December 15, 1997.
Under the new standard, companies will be required to report certain
information about operating segments in consolidated financial statements.
Operating segments will be determined based on the method by which
management organizes its business for making operating decisions and
assessing performance. The standard also requires that companies report
certain information about their products and services, the geographic
areas in which they operate, and their major customers. The Company is
currently evaluating the effect, if any, of implementing SFAS 131.
6. The Company has adopted SFAS 128, which requires the presentation of
basic and diluted earnings per share ("EPS"). Basic EPS excludes the
dilutive effect of common stock equivalent securities and is computed by
dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other instruments
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earning
of the entity. In accordance with SFAS 128, as of December 31, 1997, the
Company has restated all prior period EPS data presented. A
reconciliation between basic EPS and diluted EPS is as follows:
<PAGE>
<PAGE>9
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
----------------------- ------------------------
<S> <C> <C> <C> <C>
Income Shares Income Shares
---------- ---------- ---------- ----------
Basic EPS:
Net income available to
common shareholders $ 5,560 10,038,399 $ 2,010 9,765,436
Effect of dilutive securities:
Options 604,105 411,975
Convertible debentures 476 956,041 - -
---------- ---------- ---------- ----------
Diluted EPS:
Income available to common
shareholders and assumed
conversions $ 6,036 11,598,545 $ 2,010 10,177,411
---------- ---------- ---------- ----------
Earnings per common share:
Basic $ 0.55 $ 0.21
====== ======
Diluted $ 0.52 $ 0.20
====== ======
</TABLE>
During the first quarter of 1998, there were no options to purchase
common stock that had an exercise price greater than the average market
price of the common shares. Therefore, no options were excluded from the
computation of diluted EPS.
During the first quarter of 1997, options to purchase 5,000 shares of
common stock with exercise prices of $14.06 per share and with expiration
dates of November 13, 1999, were outstanding but were not included in the
computation of diluted EPS because the options exercise price was greater
than the average market price of the common shares. Also, 1,086,987
common equivalent shares of the convertible subordinated debentures were
not included in the diluted EPS calculation as a result of their
antidilutive effect.
<PAGE>
<PAGE>10
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
7. During the quarter, the Company announced a license agreement for its
electronic motion control patents in the amount of $27.2 million, which,
after legal and other expenses, resulted in income of $21.2 million. In
connection with its patent enforcement program, the Company has engaged
outside legal counsel to continue enforcement of the Company s patent
estate, and, accordingly, has recorded a charge in Other expense of $6.8
million to cover legal expenses and other related costs.
8. The Company recorded a charge of $2.7 million to record the
impairment of assets. Of this amount $2.0 million related to the write-
down of goodwill from its 1994 acquisition of the assets of Sperry Marine.
Additionally, the Company increased its reserve for impaired real estate
by $0.7 to reflect its current assessment of the fair value of real estate
held for sale.
9. In the first quarter of 1998, the Company incurred $1.3 million in
expenses in conjunction with the tender offer for Pacific Scientific
Company.
10. Effective January 1, 1998, the Company elected to change the vesting
method for post-retirement medical insurance benefits, resulting in a
curtailment charge in Other expense of $1.6 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This filing 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. Please
refer to the "Forward-Looking Statements" and "Risk Factors" included in
the Registration Statement on Form S-4 dated January 15, 1998.
RESULTS OF OPERATIONS
In the first quarter, the Company s results of operations were
impacted by a number of events which should be described separately. The
Company announced the first major license agreement for its pioneering
electronic motion control patents in the amount of $27.2 million, which,
after legal and other expenses, resulted in income of $21.2 million. In
connection with its patent enforcement program, the Company has engaged
outside legal counsel to continue enforcement of the Company's patent
<PAGE>
<PAGE>11
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
estate, and, accordingly, has recorded a charge of $6.8 million to cover
legal expenses and other related costs. The Company recorded a charge of
$2.7 million, primarily relating to the write-down of goodwill from its
1994 acquisition of the assets of Sperry Marine. In the first quarter, the
company incurred $1.3 million in expenses in conjunction with the tender
offer for Pacific Scientific Company. Finally, the company elected to
change the vesting method for post-retirement medical insurance benefits,
resulting in a charge of $1.6 million. The total of these items had an
impact of $8.8 million to the income before income taxes. Collectively,
the above items will be referred to as the Special Items to provide for
comparative discussion of the Company s results on a consistent basis.
For the three months ended March 31, 1998, the Company had sales of
$56.8 million and net income of $5.6 million, equal to $0.52 per common
share (diluted). These results compare with sales for the three months
ended March 31, 1997 of $50.6 million and net income of $2.0 million equal
to $0.20 per common share (diluted). Excluding the impact of the Special
Items discussed above, the Company s net income for the three months ended
March 31, 1998 would have been $2.0 million equal to $0.19 per share.
Operating income for the three months ending March 31, 1998 declined
to a loss of $0.8 million from income in the same period of the prior year
of $2.8 million. Excluding the Special Items discussed above, operating
income would have been $3.2 million for the three months ending March 31,
1998, an increase of 14% over 1997. The increase in operating income was
a result of improved performance in the Aerospace and Defense Group,
offsetting a decline in the Company s engineering consulting business.
The Company's sales increased $6.2 million or 12% for the three
months ended March 31, 1998 as compared to the same period a year ago.
The Industrial and Commercial Group's revenue increased to $31.4 million
for the three months ended March 31, 1998 from $26.6 million or 18% as
compared to the first three months of 1997. The increase reflects
improved results by the motion technology business, the acquisitions of
Seidel and Servotronix which were not part of the Company in the first
quarter of 1997, and which were partially offset by declines in the
Company's engineering consulting business. Sales by the Aerospace and
Defense Group increased 6% from $24.0 million for the first three months
of 1997 to $25.4 million in 1998 as a result of increased sales of
submarine optronic systems.
The Company s overall gross margin as a percent of sales of 30.2% for
the three months ended March 31, 1998 was consistent with the same period
in the prior year. The Industrial and Commercial Group had a decline in
gross margin as a percent of sales to 30.1% for the first three months of
1998 from 31.9% in 1997, reflecting the volume driven margin declines in
<PAGE>
<PAGE>12
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
the Company's engineering consulting business which more than offset
margin gains in the motion technology business. The Aerospace and Defense
Group had an increase in gross margin as a percent of sales from 28.4% for
the first three months of 1997 to 30.2% in 1998 reflecting improved
margins in the motion control components portion of that group.
Sales and marketing expenses were $5.6 million or 9.9% of sales in
the first quarter of 1998 as compared to $4.7 million or 9.3% of sales for
the same period in 1997. The increase in spending for sales and marketing
was in the Industrial and Commercial Group due to the Seidel and
Servotronix acquisitions, and increased sales and marketing expense of the
U.S. motion technology group.
General and administrative expenses declined to $5.1 million or 9.0%
of sales in the first quarter of 1998 from $5.8 million or 11.4% of sales
for the same period in 1997. The decline in G&A spending reflects
decreased corporate costs including retiree medical insurance costs,
insurance expense, and other costs.
Research and development expenses were $3.2 million or 5.6% of sales
for the three months ended March 31, 1998 as compared with $2.0 million or
3.9% of sales for the same period in the prior year. R&D spending by the
Industrial and Commercial Group increased to $1.8 million for the first
three months of 1998 from $0.9 million in 1997. This increase in spending
reflects increased development costs and the acquisitions of Seidel and
Servotronix. R&D spending by the Aerospace and Defense Group increased
for the period ending March 31, 1998 to $1.4 million from $1.1 million in
the same period in the prior year.
Net interest expense was $0.5 million and $1.1 million for the
periods ending March 31, 1998 and 1997, respectively. The decrease in
interest expense in 1998 as compared to 1997 was due to the repayment in
the second quarter of 1997 of the balance of the $25 million term loan the
Company entered into to fund the redemption of its Preferred Stock in
1996, and the reduction in long-term debt as a result of the Company's
annual mandatory sinking fund payments on its two convertible subordinated
debentures.
The Company incurred a tax rate of 52% for the first quarter which is
significantly higher than its expected 31% tax rate for the year
reflecting the impact of the patent licensing income. The patent
licensing income was subject to Japanese withholding tax which the Company
is not certain will be fully recoverable in 1998. Additionally, this
income is fully subject to U.S. taxes and is taxed at a higher rate than
the Company s effective tax rate. The Company s effective tax rate is
less than the statutory U.S. tax rate as some of the Company s foreign
subsidiaries operate in countries where the statutory rate is less than
the U.S. rate.
<PAGE>
<PAGE>13
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements (continued)
Bookings increased $9.2 million or 16.4% during the first quarter of
1998 as compared to the same period in the prior year. The increase
reflects improved bookings for industrial and commercial motion technology
products, bookings of the Seidel and Servotronix acquisitions, and which
were offset in part by a bookings decline for the Company s engineering
consulting services.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash position increased by $13.7 million
during the first three months of 1998. Cash provided from operations was
$15.2 million, $1.8 million was used for investing activities, and $0.5
million was used for financing activities.
Accounts receivable used $1.7 million reflecting weaker than
anticipated collections and resulting in an increase in days sales
outstanding to 65 from 61 in the fourth quarter of 1997, but consistent
with the 65 days sales outstanding for the full year of 1997. Recoverable
amounts on long-term contracts used $1.9 million of cash as a result of
revenue recognized under long-term contracts. Inventories used $1.1
million of cash reflecting an increase in inventory by the Company s high
volume business for a new customer. Accounts payable and accrued
liabilities provided $12.4 million as a result of the accruals associated
with the Special Items and an increase in taxes payable.
The Company's investing activities in the first quarter of 1998
included capital expenditures of $1.9 million primarily for replacement of
existing equipment to improve the efficiency of manufacturing.
The Company's financing activities provided $0.5 million of cash
during the year. The Company paid common dividends of $0.2 million or
$0.02 per common share. The Company is required, under the terms of the
8.75% convertible subordinated debenture, to make certain mandatory
sinking fund payments each year through the year 2009.
The Company believes that it can generate sufficient cash from
operations and its current borrowing line of credit to finance its cash
requirements for capital expenditures, sinking fund payments, and working
capital needs for the next twelve months.
<PAGE>
<PAGE>14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -- Listed below are the exhibits filed with this
report.
27. Financial Data Schedules.
(b) Reports on Form 8-K.
None
<PAGE>
<PAGE>15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KOLLMORGEN CORPORATION
By: /s/ Robert J. Cobuzzi
Robert J. Cobuzzi, Senior Vice President
Treasurer and Chief Financial Officer
Date: May 15, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE>5
<LEGEND>
KOLLMORGEN CORPORATION AND SUBSIDIARIES EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,572
<SECURITIES> 0
<RECEIVABLES> 40,843
<ALLOWANCES> 1,028
<INVENTORY> 26,040
<CURRENT-ASSETS> 105,569
<PP&E> 102,160
<DEPRECIATION> 75,031
<TOTAL-ASSETS> 165,949
<CURRENT-LIABILITIES> 74,261
<BONDS> 31,090
<COMMON> 26,922
0
0
<OTHER-SE> 20,225
<TOTAL-LIABILITY-AND-EQUITY> 165,949
<SALES> 52,558
<TOTAL-REVENUES> 56,793
<CGS> 36,005
<TOTAL-COSTS> 39,666
<OTHER-EXPENSES> 17,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 834
<INCOME-PRETAX> 11,632
<INCOME-TAX> 6,072
<INCOME-CONTINUING> 5,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,560
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.52
</TABLE>
