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 September 30, 1999
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.)
1601 Trapelo Road, Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 890-5655
----------------------------------------------
(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 November 12, 1999
Common Stock, $2.50 par value 10,307,929 shares
<PAGE>2
KOLLMORGEN CORPORATION AND SUBSIDIARIES
INDEX
Page No.
PART I - Financial Information
Unaudited Consolidated Statements of 3
Operations for the Three Months and Nine
Months Ended September 30, 1999 and 1998
Unaudited Consolidated Balance Sheets 4
as of September 30, 1999 and
December 31, 1998
Unaudited Consolidated Statements of Cash Flows 5
for the Nine Months Ended September 30, 1999
and 1998
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II - Other Information
<PAGE>3
<TABLE>
PART I - FINANCIAL INFORMATION
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except Share and per share amounts)
(Unaudited)
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $62,974 $61,891 $182,367 $179,024
Cost of sales 44,405 42,410 129,282 123,464
--------- -------- -------- --------
Gross profit 18,569 19,481 53,085 55,560
Selling and marketing expenses 6,504 5,694 19,026 17,390
General and administrative expenses 7,997 6,203 21,201 17,558
Research and development expenses 3,041 2,609 9,528 8,539
Restructuring charge - - 3,065 -
Impairment of goodwill and assets
held for sale - - - 2,733
Tender offer costs - - - 1,273
--------- -------- --------- -------
Income from operations 1,027 4,975 265 8,067
Other income (expense):
Interest expense (1,042) (888) (2,956) (2,574)
Interest income 23 70 144 720
Intellectual property license,
net of expenses - - - 21,217
Other, net 1,386 372 2,285 7,842)
-------- -------- --------- ---------
Income (loss) before income taxes
and minority interest 1,394 4,529 (262) 19,588
(Provision) benefit for income taxes (488) (1,400) 92 (8,539)
-------- -------- --------- ---------
Income (loss) before minority interest 906 3,129 (170) 11,049
Minority interest 6 (11) 200 (92)
-------- -------- --------- ---------
Net income $ 912 $3,118 $30 $10,957
======== ======== ========= =========
Earnings per common share:
Basic $0.09 $0.31 $0.00 $1.09
Diluted $0.09 $0.30 $0.00 $1.04
======== ======== ========= =========
Number of shares used in calculating Earnings per common share:
Basic 10,288,974 10,094,692 10,219,144 10,068,581
Diluted 10,468,515 10,488,452 10,461,134 10,519,120
========== ========== ========== ==========
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
<PAGE>4
<TABLE>
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,598 $ 13,086
Accounts receivable (net of reserve of
$502 in 1999 and $581 in 1998) 52,085 48,927
Recoverable amounts on long-term contracts 6,211 2,597
Inventories 33,906 27,838
Prepaid expenses and other current assets 3,767 1,885
--------- ---------
Total current assets 102,567 94,333
Property, plant and equipment, net 32,377 30,809
Intangible assets, net 41,073 20,420
Deferred income taxes 9,376 9,448
Other assets 14,651 13,623
-------- ---------
Total assets $200,044 $168,633
========= =========
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,745 $ 14,336
Income taxes payable 3,722 6,733
Accrued liabilities 34,170 28,110
Line of credit and notes payable 19,712 9,270
Current portion of long-term debt 2,350 2,419
--------- ---------
Total current liabilities 77,699 60,868
Long-term debt 50,938 36,120
Other liabilities 13,945 14,943
Minority interest - 175
Shareholders' equity:
Common stock 26,950 26,932
Additional paid-in capital 13,413 12,882
Retained earnings 22,191 22,772
Accumulated other comprehensive loss (884) (270)
Less: common stock in treasury, at cost (4,208) (5,789)
--------- ---------
Total shareholders' equity 57,462 56,527
--------- ---------
Total liabilities and shareholders' equity $200,044 $168,633
========= =========
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
<PAGE>5
<TABLE>
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
For the
Nine Months Ended
September 30,
------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 30 $ 10,957
Adjustments to reconcile income to
net cash provided by (used in) operating activities:
Depreciation 4,660 3,892
Amortization 1,451 1,282
Restructuring charge 3,065 -
Impaired asset charge - 2,733
(Gain) loss on sale of assets (267) 25
Deferred income taxes - (3,572)
Minority interest and other non-cash expenses (55) 111
Changes in operating assets and liabilities
Accounts receivable 6,647 (5,497)
Recoverable amounts on long-term contracts (3,614) (186)
Inventories (3,499) (3,083)
Prepaid expenses (534) 445
Accounts payable and accrued liabilities (6,888) 2,671
Other (695) 901
--------- ---------
Net cash provided by operating activities 301 10,679
--------- ---------
Cash flows from investing activities:
Capital expenditures (5,543) (6,327)
Proceeds from sale of assets 2,137 250
Acquisitions and equity investments, net (18,497) (10,250)
Other (199) (558)
--------- ---------
Net cash used in investing activities (22,102) (16,885)
--------- ---------
Cash flows from financing activities:
Borrowings under credit lines, net 2,673 3,145
Proceeds from common stock issued from treasury 982 (5)
Borrowings (repayments) of long-term debt, net 12,886 (32)
Dividends paid (611) (602)
--------- ---------
Net cash provided by financing activities 15,930 2,506
--------- ---------
Effect of exchange rate changes on cash (617) (241)
--------- ---------
Net decrease in cash and cash equivalents (6,488) (3,941)
Cash and cash equivalents at beginning of period 13,086 14,854
--------- ---------
Cash and cash equivalents at end of period $ 6,598 $ 10,913
========= =========
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
<PAGE>6
KOLLMORGEN CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(In thousands, except per share amounts)
1. The accompanying unaudited consolidated financial statements include the
accounts of Kollmorgen Corporation and its subsidiaries (the "Company").
2. In the opinion of management, the unaudited consolidated financial
statements included herein contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial condition at September 30, 1999, the results of operations
for the three month and nine month periods ended September 30, 1999 and
1998, and the cash flows for the nine month periods ended September 30,
1999 and 1998. The balance sheet as of December 31, 1998 was derived
from the audited financial statements as of December 31, 1998. 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, 1998.
3. Inventories consist of the following:
September 30, December 31,
1999 1998
------------ -----------
Raw materials $12,499 $12,187
Work in process 15,973 8,073
Finished goods 5,434 7,578
--------- ---------
$33,906 $27,838
========= =========
4. The Company's comprehensive earnings (loss) were as follows:
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 912 $ 3,118 $ 30 $10,957
Foreign currency
translation adjustment, net 519 367 (399) 243
------- ------- ------- -------
$ 1,431 $ 3,485 $ (369) $11,200
======= ======= ======= =======
5. The following table includes certain financial information relating to each
of the Company's segments:
<TABLE>
Industrial Aerospace
and and Corporate,
Commercial Defense Interest Special
Group Group And Other Items Total
<S> <C> <C> <C> <C> <C>
Three months ended:
September 30,1999:
Sales $ 33,993 $ 28,981 - - $ 62,974
Profit (loss) before tax 1,688 1,955 (2,249) - 1,394
September 30,1998:
Sales 37,326 24,565 - - 61,891
Profit (loss) before tax 2,892 2,984 (1,347) - 4,529
Nine months ended:
September 30,1999:
Sales 98,822 83,545 - - 182,367
Profit (loss) before tax 1,993 8,046 (7,236) (3,065) (262)
September 30,1998
Sales 102,408 76,616 - - 179,024
Profit (loss) before tax 6,294 8,787 (4,279) 8,786 19,588
</TABLE>
<PAGE>7
6. In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FAS Statement 133," which postponed the adoption date of SFAS No. 133.
As such, the Company is not required to adopt the statement until fiscal
2001. Had the Company implemented SFAS 133 for the current reporting
period, there would have been no material effect on the financial
statements.
7. Basic EPS excludes the dilutive effect of common stock equivalent
securities and is computed by dividing net income 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 earnings of the entity. A reconciliation between
basic and diluted EPS is as follows:
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
1999 1998 1999 1998
------- ------- ------- -------
Net income $ 912 $ 3,118 $ 30 $ 10,957
Shares used in net income
per share - basic 10,289 10,095 10,219 10,069
Effect of dilutive securities:
Stock options 180 393 242 450
------- ------- ------- -------
Shares used in net income
per share - diluted 10,469 10,488 10,461 10,519
Net income
per share-basic $0.09 $0.31 $0.00 $1.09
Net income
per share-diluted $0.09 $0.30 $0.00 $1.04
During the third quarter of 1999, options to purchase 562,919 shares of
common stock with exercise prices ranging from $12.50 to $20.94 and with
expiration dates ranging up to August 15, 2009 were outstanding, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
shares. During the first nine months of 1999, options to purchase
531,405 shares of common stock with exercise prices ranging from $13.88
to $20.94 and with expiration dates ranging up to August 15, 2009 were
outstanding, but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average
market price of the common shares. During both the third quarter and the
first nine months of 1999, 853,000 common equivalent shares of the
convertible subordinated debentures were not included in the diluted EPS
calculation as a result of their antidilutive effect.
Options to purchase 548,495 and 1,874 shares of common stock during the
third quarter and the first nine months of 1998, respectively, with
exercise prices ranging from $17.75 to $20.94 and with expiration dates
of May 26, 2008, were outstanding, but were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares.
Additionally, during both the third quarter and the first nine months of
1998, 905,000 common equivalent shares of the convertible subordinated
debentures were not included in the diluted EPS calculation as a result
of their antidilutive effect.
<PAGE>8
8. Effective May 1, 1999, the Company purchased the assets of New England
Affiliated Technologies ("NEAT") for $16.3 million from Instrument
Industries, Inc. The acquisition was accounted for as a purchase. The
purchase price consists of assets acquired of $4.7 million, liabilities
assumed of $1.8 million and goodwill of $13.4 million. NEAT is a leader
in the application of high-performance motion control for advanced
positioning systems. The company has approximately 100 employees at its
manufacturing facility in Lawrence, MA, and recorded sales of
approximately $13 million in 1998.
9. The Company recorded a $3.1 million restructuring charge in the second
quarter of 1999 for the consolidation of its worldwide drives and
controls business and cost reductions in its Industrial and Commercial
motion control operations. The charge was primarily for severance costs
of $2.3 million associated with the termination of approximately 87
employees in the U.S., Europe, and Israel. The balance of the charge was
mainly to provide for the subletting of a leased facility which will
allow the Company to move one of its operations to a smaller, more cost
effective facility. At September 30, 1999, approximately $0.7 million
for the termination of 33 people has been charged against the
restructuring accrual.
10. On July 1, 1999, the Company completed the purchase of its long-time
naval systems partner, Calzoni S.p.A. of Bologna, Italy for
approximately $13.0 million. Of the purchase price $2.7 million was paid
in cash and a note payable was issued for the remainder of the purchase
price and is payable within the next twelve months. The purchase price
consists of assets acquired of $33 million, liabilities assumed of $30
million and goodwill of $10 million. Calzoni designs and builds motion
systems and components primarily for naval platforms and is a leading
maker of submarine masts. Calzoni has facilities in Bologna, as well as
Milan and Florence. Sales in 1998 were approximately $25 million.
11. Over the past several years, the Company has notified a number of
domestic and foreign companies that it believes infringe certain motion
control patents owned by the Company. As previously reported, the
Company has concluded royalty bearing licenses and settlements with
third parties with respect to these patents. The Company believes that
its patents are an important asset of the Company, and intends to
enforce its legal rights against alleged infringers.
In May 1999, the Company commenced a patent infringement action against
Yaskawa Electric Corporation and Yaskawa America, Inc. in the United
States District Court, Western District of Virginia, Roanoke Division,
alleging that defendants' products infringe certain of the Company's
patents. The Company is seeking monetary damages and equitable relief.
In June 1999, Allen-Bradley Company L.L.C. and Reliance Motion Control,
Inc. commenced an action in the Eastern District Court, Eastern District
of Wisconsin against the Company for a declaratory judgement of
non-infringement requesting the court to enter a judgement that
plaintiffs' products do not infringe certain of the Company's motion
control patents.
12. In early November, 1999 the Corporation acquired an eastern European
manufacturer of precision motors for a purchase price of approximately
$12 million. The Corporation utilized its existing lines of credit to
fund this acquisition.
<PAGE>9
Management's Discussion and Analysis of Financial Condition
and Results of Operations
For the three months ended September 30, 1999, the Company had sales
of $63.0 million and a net income of $0.9 million or $0.09 per common share
(diluted). These results compare with sales for the three months ended
September 30, 1998 of $61.9 million and net income of $3.1 million, equal to
$0.30 per common share (diluted). For the nine months ended September 30, 1999,
the Company had sales of $182.4 million and net income, after restructuring
charges, of $30,000, or $0.00 per common share (diluted). These results
compare with sales for the nine months ended September 30, 1998 of $179.0
million and net income of $11.0 million, equal to $1.04 per common share
(diluted). Excluding the restructuring charge recorded in 1999, and discussed
below, the Company's net income for the nine months ended September 30 would
have been $2.0 million, equal to $0.19 per share (diluted). Excluding the impact
of the Special Items in 1998 discussed below, the Company's net income for the
nine months ended September 30, 1998 would have been $7.4 million, equal to
$0.70 per share (diluted).
The Company recorded a $3.1 million restructuring charge in the second
quarter of 1999 for the consolidation of its worldwide drives and controls
business, and for cost reductions in its industrial and commercial motion
control operations (the "Restructuring"). The impact of the consolidation and
cost-reduction efforts will result in a more efficient organization and is
expected to produce annual savings of approximately $5 million in 2000.
During the first quarter of 1998, 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 counsel to continue enforcement of the Company's patent
estate, and accordingly, has recorded a charge of $6.8 million to cover legal
expenses and other related costs. The Company recorded a pre-tax charge of $2.7
million, primarily relating to the write-down of goodwill from its 1994
acquisition of the assets of Sperry Marine. Also in the first quarter of 1998,
the Company incurred $1.3 million of 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 a positive impact in 1998
of $8.8 million to the reported income before income taxes of the Company and
$3.6 million to the net income of the Company. Collectively, the items in this
paragraph from the first quarter of 1998 will be referred to as the "Special
Items" to provide for comparative discussion of the Company's results on a
consistent basis.
RESULTS OF OPERATIONS
The following table reflects the results of operations for the Company's
two operating segments excluding the impact of the Restructuring and the Special
Items. This comparison provides a consistent basis by which to view the results
of the Company's two operating segments (in millions):
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- --------- --------- ----------
Industrial and Commercial Group:
Bookings $ 37.8 $ 26.1 $ 107.9 $ 100.1
Sales 34.0 37.3 98.8 102.4
Profit before tax 1.7 2.9 2.0 6.3
Aerospace and Defense Group:
Bookings $ 32.7 $ 18.3 $ 118.1 $ 78.4
Sales 29.0 24.6 83.5 76.6
Profit before tax 2.0 3.0 8.0 8.8
<PAGE>10
1999 versus 1998
The profit before taxes for the three months ending September 30, 1999
of $1.4 million compares with a profit before taxes of $4.5 million in the same
period of 1998. The loss before taxes for the nine months ending September 30,
1999 of $0.3 million compares with profit before tax of $19.6 million in the
same period of 1998. Excluding the Restructuring in 1999 and the Special Items
in 1998 discussed above, the income before taxes would have been $2.8 million
for the nine months ending September 30, 1999 compared with profit before taxes
of $10.8 million for the nine months ending September 30, 1998.
For the three months ended September 30, 1999, the Company's sales
increased $1.1 million or 2% as compared to the same period a year ago. The
Aerospace and Defense Group's revenue increased 18% to $29.0 million for the
three months ended September 30, 1999 from $24.6 million for the three months
ended September 30, 1998. The increase reflects the Calzoni acquisition, and
increased revenues for its defense systems and aerospace subsystems offsetting a
decline in sales of the group's motion control components. The Industrial and
Commercial Group's motion control businesses continued to be affected by the
slowdown in the domestic machine tool sector and the continued impact of the
Asian economy on the group's high volume business. Sales to the Industrial and
Commercial Group's markets of $34.0 million for the three months ended September
30, 1999 represented a decrease of 9% from the $37.3 million of sales in same
period of 1998, excluding the acquisition of NEAT sales declined 20%.
The Company's sales increased $3.3 million or 2% for the nine months
ended September 30, 1999 as compared to the same period a year ago. The
Aerospace and Defense Group's revenue increased 9% to $83.5 million for the nine
months ended September 30, 1999 from $76.6 million for the nine months ended
September 30, 1998. The increase reflects the acquisition of Calzoni in July
1999 and initial shipments under long term aerospace contracts by the group's
French operation. These increases offset declines in the Industrial and
Commercial Group's motion control businesses due to a slowdown in the domestic
machine tool sector and the continued impact of the Asian economy on the group's
high volume business. Sales to the Industrial and Commercial Group's markets of
$98.8 million for the nine months ended September 30, 1999 represented a 4%
decline from the $102.4 million in same period of 1998. This decline was
partially offset by the acquisitions of NEAT and Magnedyne, and excluding these
acquisitions sales declined 16%.
The Company's overall gross margin as a percentage of sales declined for
both the three and nine months ended September 30, 1999 compared to the same
periods in 1998. The Industrial and Commercial Group had an increase in gross
margin as a percentage of sales to 31% for the third quarter of 1999 from 29% in
1998. The increase in margin was primarily due to the NEAT acquisition. The
Industrial and Commercial Group's gross margin as a percentage of sales improved
significantly over the 25% reported for the second quarter due, in large part,
to the Restructuring, where the Company has reduced its overhead costs. The
Aerospace and Defense Group had a decline in gross margin as a percentage of
sales to 26% for the third quarter of 1999 from 33% in 1998 as a result of a
volume decline in its component sales. For the nine months ended September 30,
1999 the Industrial and Commercial Group's gross margin as a percentage of sales
was 28%, down from 31% in the same period of the prior year. The decline in
margin reflects the lower gross profit attained by the group in the first nine
months of 1999 as compared to 1998 which was due to lower revenues without a
corresponding reduction in fixed costs. The Aerospace and Defense Group's gross
margin for the nine months ended September 30, 1999 declined to 29% from 31% for
the comparable period in 1998. This decline was a result of a volume decline in
its component sales.
Sales and marketing expenses were $6.5 million or 10% of sales in the
second quarter of 1999 as compared to $5.7 million or 9% for the same period in
1998. Sales and marketing expenses were $19.0 million or 10% in the first nine
months of 1999 as compared to $17.4 million or 10% for the same period in 1998.
The increased spending is principally due to the NEAT and Calzoni acquisitions.
General and administrative expenses were $8.0 million or 13% of sales in
the third quarter of 1999 as compared to $6.2 million or 10% of sales for the
same period in 1998. General and administrative expenses were $21.2 million or
12% in the first nine months of 1999 as compared to $17.6 million or 10% for the
same period in 1998. This increase reflects the inclusion of Magnedyne, NEAT,
and Calzoni costs and goodwill amortization in 1999, and external consulting
costs associated with improvements made to the Company's information systems.
Research and development expenses were $3.0 million or 5% of sales for
the third quarter of 1999 as compared with $2.6 million or 4% of sales for the
same period in the prior year. For the first nine months of 1999, research and
development expenses were $9.5 million or 5% of sales compared to $8.5 or 5% of
sales in the same period of the prior year. The increase in R&D expenses is
attributable to increased spending on aerospace programs by the Company's
subsidiary in France, and the NEAT acquisition.
<PAGE>11
Interest and Taxes
Interest expense was $3.0 million and $2.6 million for the nine month
periods ending September 30, 1999 and 1998, respectively. The increase in
interest expense is due to an increase in borrowing to fund the purchase of the
NEAT assets during the second quarter of 1999.
The Company recorded a tax provision of 35% for the three months and
nine months ended September 30, 1999. The tax rate for the nine months ended
September 30, 1998 was 44%. The 1998 rate reflected the impact of the patent
licensing income, recorded in the first quarter of 1998, taxable in the U.S. and
subject to Japan withholding tax. Excluding this Special Item, the Company's
effective tax rate was 31% in 1998. The Company's effective tax rate, excluding
Special Items, 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, or the Company is operating under a tax holiday agreement.
Bookings increased by $26.1 million or 59% for the third quarter of 1999
as compared to the third quarter of 1998. Without the impact of acquisitions,
bookings increased $18.6 million or 42%, reflecting increased bookings in the
Aerospace and Defense Group's system and subsystem businesses, and improved
bookings by the Industrial and Commercial Group due to increases in the
semiconductor and electronics sector and the high volume business. Bookings
increased $47.5 million or 27% during the first nine months of 1999 as compared
to the same period in the prior year. The increase is due to the improved
bookings in the Aerospace and Defense Group, which included a $22 million
submarine periscope order, and the impact of acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash position decreased by $6.5 million
during the nine months ended September 30, 1999. Cash provided by operations was
$0.3 million, $22.1 million was used for investing activities, and financing
activities provided $16 million.
The Company used $5.5 million to fund working capital requirements. This
was principally due to increased requirements by the Aerospace and Defense
Group's systems business reflecting increased inventory procured under long term
military contracts.
The Company's investing activities used $22.1 million primarily relating
to the acquisitions of NEAT and Calzoni which totaled $18.5 million. Capital
expenditures used $5.5 million, and the Company received $2.1 million in
connection with the sale of buildings.
The Company's financing activities provided $16 million of cash during
the nine months ended September 30, 1999. This was principally due to the
borrowing under the Company's credit facility to fund the purchase of NEAT.
Common dividends paid were $0.6 million or $0.06 per common share for the nine
months ended September 30, 1999.
The Company believes that it can generate sufficient cash from
operations and its current line of credit to finance its cash requirements for
capital expenditures, mandatory sinking fund payments, potential acquisitions,
and working capital needs for the next twelve months.
Year 2000 Issue
The year 2000 issue is the result of computer programs having been written
using two digits, rather than four, to define the applicable year. Any of the
Company's computers, computer programs, manufacturing and administration
equipment or products that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the Company's
systems or equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
send and receive electronic data with third parties or engage in similar normal
business activities.
During 1998, the Company formed an ongoing internal review team to address
the year 2000 issue that encompasses operating and administrative areas of the
Company. A team of global professionals has been engaged in a process to work
with Company personnel to identify and resolve significant year 2000 issues in a
timely manner. In addition, executive management regularly monitors the status
of the Company's year 2000 remediation plans. The process includes an assessment
of issues and development of remediation plans, where necessary, as they relate
to internally used software, computer hardware and use of computer applications
in the Company's manufacturing processes and products. In addition, the Company
is engaged in assessing the year 2000 issue with significant suppliers.
<PAGE>12
The assessment process has been completed at the Company's U.S. operations.
With respect to the Company's international operations, the assessment process
has been completed for computer software and hardware information technology
systems used internally by the Company. In addition, the Company is finalizing
its assessment of significant suppliers at all major locations to determine the
extent to which the Company is vulnerable to third parties' failure to remediate
their own year 2000 issues. Finally, related to products sold by the Company,
the Company believes it has little if any exposure to contingencies related to
year 2000 issues.
During the past three years, as part of business modernization programs
intended to reduce cycle time and improve profitability, the Company has
purchased Enterprise Resource Planning ("ERP") Systems for some of its
operations in the U.S. and other international locations, which the software
vendors have indicated are year 2000 compliant. The Company is in the
implementation phase for these systems and other ancillary financial systems
with many sites expected to achieve full implementation before November 30,
1999. Some sites are not expected to implement new ERP systems by the end of
1999 and accordingly, the Company has begun making the current systems year 2000
compliant. The cost of making those adaptations are not expected to be
material and will be expensed in the period incurred. It is expected that the
Company's internal systems will be in full compliance before the year 2000.
If, due to unforeseen circumstances, the implementation of the plan is not
completed on a timely basis, the year 2000 could have a material impact on
the operations of the Company.
The Euro
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency, the euro. The euro now trades on
currency exchanges and may be used in business transactions. The conversion to
the euro eliminates currency exchange rate risk among the eleven member
countries. Beginning in January 2002, new euro-denominated bills and coins will
be issued. The Company's business units significantly affected by the euro
conversion have established plans to address the issues raised by the euro
currency conversion, and expect to be substantially complete with these plans by
the year 2000. These issues include, among others, the need to adapt computer
and financial systems, business processes and equipment, and the need to
accommodate euro-denominated transactions and the impact of one common currency
on product pricing, taxation and governmental and legal regulations. The Company
does not expect the system and equipment conversion costs to be material to its
financial condition, results of operations or cash flows. Due to numerous
uncertainties, the Company cannot reasonably estimate the effects currency will
have on pricing and the resulting impact, if any, on its financial condition
results of operations or cash flows.
Forward Looking Information
Certain statements in this report are "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All forward
looking statements involve risks and uncertainties. In particular, any statement
contained herein, in press releases, written statements or other documents filed
with the Securities and Exchange Commission, or in the Company's communications
and discussions with investors and analysts in the normal course of business
through meetings, phone calls and conference calls, regarding the consummation
and benefits of future acquisitions, as well as expectations with respect to
future sales, operating efficiencies and product expansion, are subject to known
and unknown risks, uncertainties and contingencies, many of which are beyond the
control of the Company. These factors may cause actual results, performance or
achievements to differ materially from anticipated results, performances or
achievements. Factors that might affect such forward looking statements include,
but are not limited to, overall economic and business conditions; the demand for
the Company's goods and services; the timing of and market acceptance of new
products; competitive factors in the industries and geographic markets in which
the Company competes; changes in tax requirements (including tax rate changes,
new tax laws and revised tax law interpretations); interest rate fluctuations
and other capital market conditions, including foreign currency rate
fluctuations; economic and political conditions in international markets; the
ability to achieve anticipated synergies and other cost savings in connection
with acquisitions; the ability to achieve cost savings and its subsequent
financial performance from its second quarter restructuring; the timing, impact
and other uncertainties of future acquisitions; and the Company's ability and
its customers' and suppliers' ability to replace, modify or upgrade computer
programs in order to adequately address the year 2000 issue. Any forward
looking statements should be considered in light of these factors.
<PAGE>13
PART II - OTHER INFORMATION
Item 5. Other Information
In early November, 1999, the Company acquired a manufacturer of
brushless electronic servo motors located in Brno, Czech Republic. These motors
are sold primarily in eastern and western Europe to manufacturers of industrial
machinery and equipment. The purchase price for this acquisition was
approximately $12 million.
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>14
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: November 12, 1999
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