<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 29, 1996
COMMISSION FILE NUMBER: 0-4384
MICRODYNE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-0856493
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3601 EISENHOWER AVENUE, ALEXANDRIA, VA 22304
(Address of principal executive office) (Zip Code)
(703) 329-3700
(Registrant's telephone number, including area code)
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 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 DECEMBER 29, 1996
- ---------------------------- --------------------------------
Common stock, $.10 par value 12,836,809
Page 1 of 10 pages
Exhibit Index appears on page 10
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MICRODYNE CORPORATION
INDEX
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Statements of Earnings
Three months ended December 29, 1996
and December 31, 1995 3
Balance Sheets
December 29, 1996 and September 29, 1996 4
Statements of Cash Flows
Three months ended December 29, 1996
and December 31, 1995 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports. 10
SIGNATURES 10
2
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MICRODYNE CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
Dollars and shares in thousands, December 29, December 31,
except per share data 1996 1995
- ----------------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C>
Product $16,950 $29,348
Service 3,971 3,669
------- -------
Total revenue 20,921 33,017
Cost of product sold and service provided:
Product 10,222 22,024
Service 2,796 2,381
------- -------
Total cost of product sold and service provided 13,018 24,405
Gross profit 7,903 8,612
Selling, general and administrative 4,741 5,978
Research and development 929 1,161
Amortization of intangibles 741 451
------- -------
Earnings from operations 1,492 1,022
Other income (expense), net (527) (445)
------- -------
Earnings before income taxes 965 577
Provision for income taxes 355 219
------- -------
Net earnings $ 610 $ 358
======= =======
Net earnings per share $ 0.05 $ 0.03
======= =======
Weighted average shares outstanding 12,837 12,793
======= =======
</TABLE>
The notes on the following pages are an integral part of these statements
3
<PAGE> 4
MICRODYNE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 29 September 29,
Dollars in thousands 1996 1996
- ----------------------------------------------------------------------------------------------------
(unaudited) (audited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,103 $ 1,791
Accounts receivable 28,655 30,954
Inventories 20,080 24,100
Income tax receivable 1,221 1,946
Prepaid expenses and other 929 1,231
Deferred income tax asset 1,162 1,053
--------- ---------
Total current assets 53,150 61,075
PROPERTY AND EQUIPMENT, net 3,468 3,746
PRODUCT LINE ACQUISITION COST 13,680 14,417
OTHER ASSETS 1,355 756
--------- ---------
$ 71,653 $ 79,994
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of
long-term obligations $ 16,525 $ 15,719
Accounts payable - trade 7,977 9,365
Accrued liabilities 4,861 7,315
--------- ---------
Total current liabilities 29,363 32,399
LONG-TERM OBLIGATIONS
net of current maturities 5,053 11,071
DEFERRED INCOME TAX PAYABLE - -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value
authorized 50,000,000 shares,
12,836,809 shares issued and
outstanding at December 29, 1996, and
12,832,203 shares issued and
outstanding at September 29, 1996 1,285 1,283
Additional paid-in-capital 10,117 10,016
Retained earnings 25,835 25,225
--------- ---------
Total Stockholders' Equity 37,237 36,524
--------- ---------
$ 71,653 $ 79,994
========= =========
</TABLE>
The notes on the following pages are an integral part of these statements
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MICRODYNE CORPORATION
Consolidated Statement of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
12/29/96 12/31/95
-------- --------
<S> <C> <C>
Increase (Decrease) in Cash Cash flows from operating activities:
Net earnings $ 610 $ 358
Adjustments to reconcile earnings to net cash from operating activities,
exclusive of effect of acquisitions and dispositions:
Depreciation and amortization 960 715
Provision for doubtful accounts receivable and
inventory obsolescence 80 181
Changes in assets and liabilities
Decrease in accounts receivable 2,309 9,189
Decrease (increase) in inventories 3,930 (3,086)
Decrease (increase) in prepaid expenses 301 (1,019)
Decrease (increase) in other assets 55 (94)
Decrease in income tax receivable 725 218
Increase in deferred tax asset (763) (62)
Decrease in accounts payable and
other accruals (3,842) (5,567)
------ ------
Net cash provided by operating activities 4,365 833
Cash flows from investing activities:
Product line acquisitions - (12)
Additions to property and equipment (95) (168)
Payments from officers - 20
------ ------
Net cash used in investing activities (95) (160)
Cash flows from financing activities:
Payments on bank debt (4,186) (1,200)
Payments on notes payable (875) (170)
Issuance of common stock 103 50
------ ------
Net cash used in financing activities (4,958) (1,320)
------ ------
Net decrease in Cash (688) (647)
Cash at beginning of period 1,791 4,587
------ ------
Cash at end of period $1,103 $3,940
====== ======
</TABLE>
The notes on the following pages are an integral part of these statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim financial information is unaudited. In the opinion of
management, financial statements included in this report reflect all normal
recurring adjustments which Microdyne Corporation ("the Company") considers
necessary for a fair presentation of the results of operations for the interim
periods covered and of the financial position of the Company at the date of the
interim balance sheet. The results for interim periods are not necessarily
indicative of the results for the entire year.
In addition, preparation of financial statements in conformance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts 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
reporting period. Actual results could differ from these estimates.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions for Form 10-Q, and therefore footnote
disclosures normally accompanying financial statements have been substantially
omitted. These condensed financial statements should be read in conjunction with
complete disclosures accompanying the financial statements contained in the
Company's most recent Annual Report on Form 10-K.
2. The provision for income taxes presented in the Statements of Operations is
based upon the estimated effective tax rate at fiscal year-end, and is largely
determined by management's estimate as of the interim date of projected taxable
income for the entire fiscal year.
3. In the Balance Sheets, Product Line Acquisition Cost includes the long-term
portion of minimum royalties due Attachmate (formerly DCA) under the Token Ring
purchase agreement and intangibles acquired under the Eagle Technology, National
Semiconductor, and Novell purchase agreements.
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PART 1. - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Year-on-year sales decreased in the first quarter of fiscal 1997 by
$12.1 million, or 36.6% from the first quarter of fiscal 1996, while net
earnings increased $252,000, or 70.3%. The decrease in revenue reflects
fundamental changes in the Company's Networking Products Division, while the
increase in earnings reflects the Company's efforts to control costs in the wake
of those changes and continued strength in Aerospace Telemetry and Manufacturer
Support Services ("MSS") operations.
In January 1996, the Company announced a program to lower the amount of
Networking Products inventory held by distributors in order to bring such
inventories in line with point of sale (POS) data available at that time. That
program continued through the first quarter of fiscal 1997. Also, sales of
Networking Products hardware bundled with Novell Inc. ("Novell") software
("Bundled Products") were significantly lower due to the continued impact from
changes in Novell's distribution policies and practices. These changes included
a decision by Novell to reduce the amount of its inventory in its distribution
channel by de-emphasizing sales of its products as traditional, stand-alone
software and by lowering the Company's discount on Novell software purchases.
The collective result of the Company's program and Novell's changes was a
decrease in Networking Products sales to $12.4 million in 1997's first quarter
from $24.8 million in 1996's first quarter. Of the decline, $9.2 million was
attributable to lower Bundled Products sales.
In reaction to these decreased sales levels, the Company moved
aggressively to cut corporate and Networking Products Division operating
expenses through a combination of personnel downsizing and expense constraints.
The effectiveness of this program is seen in the Company's Selling, general and
administrative expense, which fell from $6.0 million in 1996's first quarter to
$4.8 million in 1997's first quarter, a reduction of $1.2 million or 20.0%. The
Company achieved this overall reduction without affecting SG&A spending at its
Aerospace Telemetry or MSS divisions.
Looking forward, the Company believes its Networking Products
Division ("NPD") to be at a crossroads, with the second quarter of 1997 being a
pivotal one for determining the future course of the division.
NPD has a number of product lines that sell well and customers that
generate continuing orders. For example, NPD is well positioned in government
business, and in the past year has developed a healthy OEM activity. NPD's
traditional products, such as its minicomputer connectivity product line, have
little competition and generate excellent margins. The Company believes the
long-term prospects for acceptable profitability in these product lines are
good. However, in the mainstream adapter card market, NPD competes against
companies that have substantially larger marketing and other resources.
Moreover, recently reported POS data from the first quarter of fiscal 1997
provide clear indication that total sales to end-user customers declined
significantly in the quarter; concurrently, data reported by other companies,
including the industry's largest adapter card manufacturer, indicated a general
softening in the market for such products in December. Many of the Company's
competitors fabricate their own integrated circuits and thus have substantially
lower component costs than the Company. In February, 1997, the two largest
adapter card manufacturers cut prices of Fast Ethernet adapter cards by as much
as 40%. Accordingly, the Company has determined that the program previously
undertaken to match distribution levels with sales of networking products will
not be adequate to produce consistent profitability in the NPD in the future and
that substantial additional steps will be necessary. Possible choices open to
the Company with regard to NPD include but are not limited to: remaining a
full-line networking products supplier; becoming a limited-market or
limited-line supplier; augmenting the existing business via product line
extensions or acquisitions; and exiting the networking products business.
Implementation of certain of the preceding options would have a substantial,
though non-recurring impact on the Company's reported performance in the quarter
in which they are taken; though the Company's goal in taking any such action
would be to improve the Company's performance thereafter. Actions to implement
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these options could result in the reporting of minimal NPD sales or the
elimination of such sales altogether, or the writing down of tangible and
intangible assets associated with NPD. The Company expects to make a
determination which of these options to pursue during the second quarter of
1997.
The Company believes demand for its Aerospace Telemetry products is
strong and that such demand should continue. In December 1996, the Aerospace
Telemetry Division received an $11 million systems integration contract from the
Italian Ministry of Defense. The Company expects to recognize approximately $8
million of this revenue during fiscal 1997.
Manufacturer Support Services revenue continues to meet the Company's
revenue and profit contribution expectations. In March 1996, the Company
announced a five-year extension of a customer contract, and in January 1997, the
Company signed an additional contract to handle certain overflow telephone
technical support calls.
The statements in this Management's Discussion and Analysis contain
forward-looking statements that involve a number of risks and uncertainties, the
possible realization of which could have material adverse effects on the
Company's future operating results. Factors that may cause actual results to
differ materially include: development of new products and rapid changes in
technology that may displace products sold by the Company; the highly
competitive networking products environment in which the Company operates; NPD's
dependence upon Novell and the effect that changes by Novell in its distribution
and other policies may have on the Company; NPD's reliance upon distributors to
sell networking products; fluctuations in the Company's quarterly results of
operations and the timing of orders from customers; the declining average
selling prices of NPD's products; the Company's dependence upon a limited number
of subcontractors for the manufacture of the Company's products and upon a
limited numbers of suppliers for the availability of components used in the
Company's products; the Company's success in identifying, acquiring and
incorporating commercially successful technology, products, or businesses; the
Company's relationships with sources of external financing; and the risk factors
listed from time to time in the Company's SEC filings, including but not limited
to the S-3 Registration Statement dated November 9, 1995 and the Annual Report
on Form 10-K for the year ended September 29, 1996.
Any shortfall in revenue or earnings from the levels expected by
securities analysts could have an immediate and significant effect of the
trading price of the Company's common stock in any given period. Moreover, as in
the first quarter of fiscal 1996, the Company may not learn of such shortfalls
until late in the fiscal quarter as a result of historical ordering patterns.
Late receipt of this information could result in an even more immediate and
adverse effect on the trading price of the Company's stock.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 29, 1996 COMPARED TO QUARTER ENDED DECEMBER 31, 1995
Revenue for the first quarter of fiscal year 1997 decreased to
$20.9 million from $33.0 million in the first quarter of fiscal year 1996, a
decrease of 36.6%.
Networking Products revenue decreased to $12.4 million in 1997 from
$24.8 million in 1996. Bundled Products sales were $1.0 million in 1997 versus
$10.3 million in 1996. Bundled Products sales in 1997 reflect changes in
Novell's policies and practices as outlined in the section above. Sales of
hardware products were $11.3 million in 1997 versus $14.5 million in the
year-earlier quarter. Both quarters' sales reflected ongoing efforts to reduce
the level of inventories held by distributors.
Aerospace Telemetry sales were $4.8 million in 1997's first quarter
versus $5.0 million in 1996, but reflect a higher percentage of product sales in
1997 than in the year-earlier period. MSS revenue grew to $3.9 million in 1997
from $3.5 million in 1996, reflecting continued growth in support activities.
Gross profit decreased to $7.9 million in 1997 from $8.6 million in
1996, but as a percentage of sales increased to 37.8% from 26.1%. The dollar
decline in gross profit was the result of lower
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Networking Product sales. The increase in gross margin as a percentage of sales
reflects a higher percentage of hardware products as a percentage of Networking
Products' sales, a higher percentage of Aerospace Telemetry product sales, and
the absence of royalty payments to Novell in 1997 that were included in cost of
goods sold in 1996.
SG&A expense decreased to $4.7 million in 1997 from $6.0 million in
1996 but, as a percentage of sales, grew to 22.7% in 1997 from 18.1% in 1996.
The decrease in SG&A expense reflects corporate and NPD cost reductions.
Research and development expense was $929,000 in 1997 compared to $1.2 million
in 1996. 1997's reduced expense was mostly attributable to lower engineering
staffing levels. Amortization expense rose to $741,000 in 1997 from $451,000 in
1996, principally as a result of the purchase of Novell marketing rights in
April 1996.
Interest and other expense in both 1997 and 1996 is primarily interest
expense associated with outstanding borrowings against the Company's line of
credit. Interest expense in 1997 also includes interest associated with the
Novell notes payable.
The tax rates utilized in 1997 and 1996 were comparable at 37% and 38%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company financed its operations through internally
generated funds, and used external financing in connection with product-line and
technology acquisitions and the repurchase of its common stock. In the first
half of 1996, the Company used external funds to finance its operations, and at
March 31, 1996, bank debt stood at $26.8 million. Since that time, the Company
has worked to reduce its indebtedness by producing substantial cash flow from
operations. Through this recapitalization, bank debt was reduced to $13.3
million at December 29, 1996.
As of December 29, 1996, the Company's $13.3 million of bank debt
consisted of a $1.9 million term note which is repaid in monthly payments and is
scheduled to be fully satisfied in May 1997; and $11.4 million in outstanding
borrowings under a revolving line of credit facility. On December 29, 1996, the
Company had $1.1 million of cash and $6.1 million in unused line of bank credit.
The revolving line of credit is scheduled to be reduced to $8.0 million by March
31, 1997, and to $5.0 million by June 30, 1997.
In April 1996, the Company utilized cash and notes to purchase from
Novell the exclusive, royalty-free perpetual right to market certain hardware
and related technology which were previously sold by the Company under license
from Novell, and to convert certain accounts payable. As of December 29, 1996,
notes payable due Novell totaled $7.2 million, of which $2.6 million has been
classified as a short-term obligation and $4.6 million as a long-term obligation
on the December 29, 1996 Balance Sheet.
During the first quarter of fiscal 1997, cash provided by operating
activities was $4.4 million. Capital expenditures were minimal and the Company
has no material commitments for future capital expenditures.
During the first quarter on 1997, the Company repaid a total of $5.0
million of debt, including $4.2 million of bank debt and $875,000 of other debt.
The Company believes its available cash, funds generated from
operations, and funds available under its credit facilities should be sufficient
to finance its continuing operations. The Company may from time to time consider
the acquisition of businesses, products, or technologies that may require
additional funds.
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PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports.
(a) No exhibits are enclosed herein.
(b) No Form 8-K was filed during the quarter ended December 29, 1996.
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.
MICRODYNE CORPORATION
Registrant
Date: February 11, 1997 /s/ Philip T. Cunningham
-------------------------- ------------------------
Philip T. Cunningham
President and Chief Executive Officer
[Duly Authorized Officer]
Date: February 11, 1997 /s/ Christian J. Spitz
-------------------------- ------------------------
Christian J. Spitz
Vice President and Chief
Financial Officer
[Principal Financial Officer]
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-29-1996
<CASH> 1,103
<SECURITIES> 0
<RECEIVABLES> 29,767
<ALLOWANCES> (1,112)
<INVENTORY> 20,080
<CURRENT-ASSETS> 53,150
<PP&E> 11,700
<DEPRECIATION> (8,232)
<TOTAL-ASSETS> 71,653
<CURRENT-LIABILITIES> 29,363
<BONDS> 0
0
0
<COMMON> 1,285
<OTHER-SE> 35,952
<TOTAL-LIABILITY-AND-EQUITY> 71,653
<SALES> 20,921
<TOTAL-REVENUES> 20,921
<CGS> 13,018
<TOTAL-COSTS> 13,018
<OTHER-EXPENSES> 6,411
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 527
<INCOME-PRETAX> 965
<INCOME-TAX> 355
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