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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
**************
For Quarter Ended July 1, 1994 Commission File No. 1-7744
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PACIFIC SCIENTIFIC COMPANY
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(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-0744970
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
620 Newport Center Drive, Suite 700, Newport Beach, California 92660
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 720-1714
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Former address:
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(Former name, address and 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 .
----- -----
(APPLICABLE ONLY TO CORPORATE ISSUERS)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
5,437,598 shares
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PACIFIC SCIENTIFIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 1, 1994 AND DECEMBER 31, 1993
(In $000's)
<TABLE>
<CAPTION>
JULY 1 DECEMBER 31
1994 1993
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<S> <C> <C>
ASSETS
- - ------
CURRENT ASSETS:
Cash............................................... $ 2,927 $ 2,081
Short-term investments............................. 1,960 1,962
Trade receivables (less allowance for doubtful
accounts of $758 and $668, respectively)....... 38,838 36,666
Inventories, lower of cost (principally average)
or market:
Finished goods................................. 5,006 3,914
Work-in-process................................ 13,147 13,244
Raw materials and purchased parts.............. 20,105 16,335
Deferred income taxes.............................. 3,733 3,733
Other current assets............................... 1,938 1,797
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Total Current Assets..................... 87,654 79,732
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PROPERTY AT COST:
Land and buildings................................. 9,404 9,160
Machinery and equipment............................ 70,305 65,967
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Total......................................... 79,709 75,127
Less accumulated depreciation...................... 48,009 43,677
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Net Property.................................. 31,700 31,450
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RESTRICTED CASH........................................ 6,089 6,092
NOTE RECEIVABLE........................................ 4,241 4,468
NOTES, PATENTS AND OTHER............................... 6,051 6,579
EXCESS OF COST OVER NET ASSETS ACQUIRED................ 32,849 32,936
-------- --------
TOTAL............................... $168,584 $161,257
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LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
Short-term borrowings.............................. $ 4,000 $ 5,250
Accounts payable................................... 14,383 14,426
Accrued employee compensation and benefits......... 5,368 4,859
Other current liabilities.......................... 6,487 6,580
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Total Current Liabilities................ 30,238 31,115
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LONG-TERM DEBT:
Notes payable...................................... 30,875 26,625
Convertible subordinated debentures................ 17,481 17,481
DEFERRED ITEMS:
Accrued employee benefit plan liabilities.......... 3,325 3,547
Deferred income taxes.............................. 1,533 1,533
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Total Noncurrent Liabilities............. 53,214 49,186
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STOCKHOLDERS' EQUITY:
Common stock, $1 par value......................... 5,438 5,398
Additional paid-in-capital......................... 5,336 4,791
Retained earnings.................................. 74,358 70,767
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Total Stockholders' Equity............... 85,132 80,956
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TOTAL............................... $168,584 $161,257
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
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PACIFIC SCIENTIFIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JULY 1, 1994 AND JUNE 25, 1993
(In $000's)
<TABLE>
<CAPTION>
QUARTER ENDED YEAR-TO-DATE
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JULY 1 JUNE 25 JULY 1 JUNE 25
1994 1993 1994 1993
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<S> <C> <C> <C> <C>
NET SALES................................. $57,188 $49,927 $108,773 $91,306
------- ------- -------- -------
COSTS AND EXPENSES:
Cost of sales ........................ 38,684 35,096 74,324 63,865
Selling and marketing................. 6,431 4,722 11,805 8,922
General and administrative............ 5,573 5,453 10,729 10,034
Research and development ............. 2,233 1,977 4,357 3,860
------- ------- -------- -------
Total Costs and Expenses...... 52,921 47,248 101,215 86,681
------- ------- -------- -------
OPERATING INCOME ......................... 4,267 2,679 7,558 4,625
------- ------- -------- -------
Interest expense-net...................... (677) (491) (1,319) (895)
Other income.............................. 86 580 182 950
------- ------- -------- -------
Net Other Expense.............. (591) 89 (1,137) 55
------- ------- -------- -------
INCOME BEFORE INCOME TAX PROVISION........ 3,676 2,768 6,421 4,680
INCOME TAX PROVISION...................... (1,433) (1,135) (2,504) (1,919)
------- ------- -------- -------
NET INCOME BEFORE ACCOUNTING CHANGE....... 2,243 1,633 3,917 2,761
CUMULATIVE ACCOUNTING CHANGE.............. 1,060
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NET INCOME ............................... $ 2,243 $ 1,633 $ 3,917 $ 3,821
------- ------- -------- -------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE........ $ 0.40 $ 0.30 $ 0.70 $ 0.51
CUMULATIVE EFFECT ON PRIOR YEARS OF
CHANGE IN METHOD OF ACCOUNTING
FOR INCOME TAXES...................... 0.20
------- ------- -------- -------
NET INCOME PER SHARE.................. $ 0.40 $ 0.30 $ 0.70 $ 0.71
------- ------- -------- -------
CASH DIVIDENDS PER COMMON SHARE $ 0.03 $ 0.03 $ 0.06 $ 0.06
------- ------- -------- -------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of this statement.
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PACIFIC SCIENTIFIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JULY 1, 1994 AND JUNE 25, 1993
(In $000's)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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JULY 1 JUNE 25
1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including cumulative gain in 1993............ $ 3,917 $ 3,821
Depreciation and amortization........................... 5,731 4,886
Deferred income taxes................................... (1,841)
Decrease in accrued employee benefit plan liabilities... (222) (384)
Loss on disposal of property............................ 91 627
Effect on cash of changes in assets and liabilities,
net of the effects of acquisitions:
Trade receivables.................................... (1,252) (2,246)
Inventories.......................................... (4,156) (1,542)
Other current assets................................. (80) (434)
Accounts payable..................................... (1,000) (2,090)
Accrued employee compensation and benefits........... 510 943
Other current liabilities............................ (129) (700)
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Net cash flows provided by operating activities...... 3,410 1,040
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for business acquisition, net of cash acquired.. (1,290) (6,026)
Net decrease (increase) in short-term investments....... 2 (2,897)
Purchase of property.................................... (4,766) (2,721)
Net decrease in restricted cash and other assets....... 231 384
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Net cash flows used in investing activities.......... (5,823) (11,260)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt (repayments) issuance....................... (1,250) 1,900
Issuance of long-term debt.............................. 4,250 7,000
Net issuances of common stock............................... 585 177
Cash dividends on common stock.......................... (326) (321)
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Net cash flows provided by financing activities...... 3,259 8,756
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NET INCREASE (DECREASE) IN CASH........................... 846 (1,464)
BEGINNING CASH............................................ 2,081 4,567
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ENDING CASH............................................... $ 2,927 $ 3,103
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</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this statement.
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PACIFIC SCIENTIFIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) INTERIM ACCOUNTING POLICY
Interim periods are viewed as an integral part of the annual period.
Accordingly, the results for each of the interim periods presented
are based on the accounting principles and practices followed by the
Company in the preparation of its annual financial statements.
Certain costs and expenses are assigned to the periods presented so
that the interim periods bear a reasonable portion of the anticipated
annual amount. Included among these are estimated amounts for
inventory adjustments, performance bonuses, employee fringe benefits
and income taxes. The financial statements presented, in the opinion
of management, include all adjustments necessary to present fairly
the Company's interim financial statements.
2) SHORT-TERM INVESTMENTS
Effective as of the beginning of fiscal year 1994, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
The adoption of this standard required the Company to classify and
account for investments in equity securities that have readily
determinable fair values and for all debt securities into three
categories; (1) debt securities that the Company has the intent and
the ability to hold to maturity are classified as "held-to-maturity
securities" and reported at amortized cost; (2) debt and equity
securities that are bought and held principally for the purpose of
selling them in the near term are classified as "trading securities"
and reported at fair value, with unrealized gains and losses included
in earnings; and (3) debt and equity securities not classified as
held-to-maturity securities or trading securities are classified as
"available-for-sale securities" and reported at fair value, with
unrealized gains and losses excluded from earnings and reported in a
separate component of stockholders' equity.
At January 1, 1994 and at July 1, 1994, all of the Company's
investments represent short-term available-for-sale securities and
have been recorded at fair value which approximates the historical
cost of the investments. These investments are primarily composed of
debt securities of municipalities of the Commonwealth of Puerto Rico
with contractual maturities beginning in 1998 or later. The
Company's adoption of SFAS 115 did not have a material effect of the
financial statements on the Company.
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3) EARNINGS PER SHARE
Earnings per common and common equivalent share were computed by
dividing net income by the weighted average number of common and
common equivalent shares outstanding during each period. Common
equivalent shares consist of the estimated number of shares issuable
upon exercise of dilutive stock options reduced by the number of
common shares assumed to have been reacquired with the proceeds from
exercise of the options.
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
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July 1, June 25, July 1, June 25,
1994 1993 1994 1994
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<S> <C> <C> <C> <C>
AVERAGE NUMBER OF
SHARES OUTSTANDING 5,422,736 5,350,153 5,415,242 5,345,172
AVERAGE NUMBER OF
SHARES ASSUMING EXERCISE
OF DILUTIVE EMPLOYEE
STOCK OPTIONS 161,119 24,062 159,407 31,121
--------- --------- --------- ---------
COMMON AND COMMON
EQUIVALENT SHARES 5,583,856 5,374,215 5,574,649 5,376,293
========= ========= ========= =========
</TABLE>
NOTE: The Company has outstanding convertible subordinated
debentures. Inclusion of these debentures would be
antidilutive and, accordingly, they have been excluded
from the above totals.
4) CONTINGENCIES
The Company is a co-defendant in an action filed in July, 1993 in
connection with the sales of certain assets in 1990 and 1991 and with
a covenant not to compete with the Company entered into for a five
year period. The complaint alleges, among other things, breach of
contract, and claims damages of $7,000,000 plus punitive damages of
ten times the actual damages. The Company intends to defend this
matter vigorously and believes any related award or settlement
would not have a material effect on the Company's financial
statements.
5) RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 amounts to
conform to the 1994 financial statement presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
QUARTERLY COMPARISON (SECOND QUARTER 1994 VS. SECOND QUARTER 1993)
Net sales were $57,188,000 in the second quarter of 1994, a 15% or $7,261,000
increase in sales over the same period in the prior year. Second quarter sales
in the Electrical Equipment segment were up 28% or $8,694,000. The
acquisitions of Powertec Industrial Corporation and Automation Intelligence,
Inc. in the third quarter of 1993 and Royce Thompson Electric Ltd. in the
second quarter of 1994 accounted for $6,890,000 of the increase in sales. The
sales from the Safety Equipment segment decreased by 8% or $1,433,000.
Gross margin on sales increased 2.7% in the current quarter from the prior year
reflecting control of costs and expenses. Selling, general and administrative
expenses increased from 20.4% of sales in 1993 to 21% in 1994 due to added
marketing expenses which should contribute to future sales growth. Research
and development expenses increased by 13% reflecting continued emphasis on new
product development.
Income before taxes increased 33% primarily due to a 15% increase in sales and
improved gross margins. Acquisitions made in 1993 and 1994 accounted for
$396,000 or 44% of the increase in pre-tax income.
The estimated annual effective tax rate for 1994 is 39% as compared to last
year's estimate of 41% for the second quarter. The actual annual effective tax
rate for 1993 was approximately 35% reflecting principally the settlement of an
IRS examination for 1986, 1987 and 1988 and the refinement of estimates made
during the first half of 1993. The increase in the estimated effective tax
rate for 1994 to 39% reflects the impact of recent tax legislation and the non
deductibility of certain intangibles acquired after the first quarter of 1993.
Net income of $0.40 per share in 1994 compares to $0.30 per share in the second
quarter of 1993.
Orders for Electrical Equipment totaled $43,209,000, up 58% as compared to the
same period in the prior year. Orders for Safety Equipment during the second
quarter totaled $15,856,000, down 17% as compared to the same quarter of the
prior year. This decline reflects both delays and reduction in military
procurement and reductions within the total aerospace industry.
The backlog of orders at July 1, 1994 and June 25, 1993 was $96,709,000 and
$88,411,000, respectively. The current backlog includes $5,292,000 as a result
of the acquisitions of Powertec Industrial Corporation and Automation
Intelligence, Inc. during the third quarter of fiscal 1993.
The Company's inertia reels, used as personnel restraints on military aircraft,
which were temporarily suspended in 1991, have not yet been requalified by the
U.S. Air Force and relisted on the "Qualified Product List" (QPL). However,
certain military agencies are again purchasing the Company's inertia reels by
waiving the QPL requirement. Although the Company continues to believe, after
more than thirty years experience, that its inertia reels are designed and
manufactured to meet all known requirements, it is not possible to project when
the U.S. Air Force will approve our products for the QPL.
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SIX MONTHS COMPARISON (FIRST HALF 1994 VS. FIRST HALF 1993)
Net sales were $108,773,000 in the first half of 1994, a 19%or $17,467,000
increase in sales over the same period in the prior year. First half sales in
the Electrical Equipment segment were up 29% or $17,143,000. The acquisitions
of Powertec Industrial Corporation and Automation Intelligence, Inc. in the
third quarter of 1993 and Royce Thompson Electric Ltd. in the second quarter of
1994 accounted for $12,125,000 of the increase in sales. The sales from the
Safety Equipment segment increased by 1% or $324,000. The acquisition of the
Unidynamics product line in April, 1993 accounted for $2,512,000 of this
increase in sales.
Gross margin on sales increased 1.6% in the first half from the prior year
reflecting control of costs and expenses. Selling, general and administrative
expenses remained the same as a percent of sales in 1994 as in 1993.
Research and development expenses increased 13% reflecting continued emphasis
on new product development.
Income before cumulative accounting change and taxes increased 37% primarily
due to a 19% increase in sales and improvement in gross margin and control of
operating expenses. Acquisitions made in 1993 and 1994 accounted for $554,000
or 32% of the increase in pre-tax income.
Net income of $0.70 per share in 1994 compares to $0.71 per share in the first
half of 1993 including the cumulative effect of a required accounting change
which accounted for $0.20 per share in the first quarter of 1993.
Orders for Electrical Equipment totaled $82,017,000, up 41% as compared to the
same period in the prior year. Orders for Safety Equipment during the first
half totaled $31,692,000, up 9% as compared to the same period of the prior
year.
FINANCIAL POSITION AND LIQUIDITY
Debt less cash, restricted cash, and short-term investments was $41,380,000 at
the end of the first six months in 1994 as compared to the $26,417,000 in the
prior year quarter. This increase of $14,963,000 resulted principally from the
acquisition of certain businesses in 1993 and 1994 for a total cash outlay of
$24,977,000.
Operations provided cash of $3,410,000 in the first six months of 1994 as
compared to providing cash of $1,040,000 in the same period of the prior year.
This increase in cash flow from operations is primarily due to:
<TABLE>
<S> <C>
Increase in inventories $(2,614,000)
Deferred income taxes 1,841,000
Decrease in trade receivables 994,000
Increase in accounts payable 1,090,000
Increase in depreciation and amortization 845,000
Other 214,000
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Increase in Cash Flow from Operating Activities $ 2,370,000
===========
</TABLE>
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The Company's working capital was $57,416,000 on July 1, 1994 for a current
ratio of 2.9:1. On June 25, 1993 working capital was $50,035,000.
At the end of the second quarter of 1994, the Company had unused lines of
credit of $17,750,000.
The Company believes that internally generated funds will provide sufficient
capital resources to finance operations, fund planned capital expenditures, pay
interest and dividends on outstanding debt and common stock, and reduce
outstanding debt.
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PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
The Company is a co-defendant in an action originally filed July 22,
1993 by Accuflex Inc., a Texas company established to purchase a
product line of commercial mechanical seals originally developed by
the Company's Belfab Division. In March 1990, the plaintiff
purchased the Accuflex trade name, unsold inventory, used equipment,
supporting materials and manufacturing training, all for a purchase
price of $200,000. The Company also agreed not to compete with
Accuflex for a five (5) year period. In September 1991, the Company
sold the remaining assets of its Belfab Division to John Crane
Inc.(Crane). Crane was a pre-existing and long established
competitor of Accuflex and is named as the co-defendant.
The complaint alleges common law fraud and conspiracy, breach of
fiduciary duty, breach of confidential relationship, breach of
contract, breach of implied warranty and implied duty to perform
contract in good faith, deceptive trade practices, negligence and
gross negligence, tortious interference with contract,
misappropriation of trade secrets and confidential business
information and conversion of assets.
The complaint contains no allegation concerning the specific amount
of damages allegedly suffered by Accuflex. However, on June 27,
1994, the plaintiff stated that its damages were, under the various
legal theories asserted in the complaint, in the range of $7 million
plus punitive damages of three (3) times actual damages. On July 12,
1994, the plaintiff revised the claim for punitive damages and
advised the Company of its intention to ask for an amount equal to
ten (10) times the actual damages.
The Company's 1991 agreement with Crane provides that the Company
will indemnify Crane for any claims including costs, expenses and
reasonable attorney's fees arising from a breach of the covenant
not to compete.
The Company has submitted a motion requesting the court to grant a
summary judgement and dismiss each of the claims asserted. Crane has
submitted a similar motion. No response has been received concerning
either motion. The United States District Court for the Southern
District of Texas, Galveston Division, has scheduled August 8, 1994
as a date for the trial to begin.
ITEM 6 Exhibits and Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PACIFIC SCIENTIFIC COMPANY, Registrant
By: /s/ Richard V. Plat
--------------------------------
Richard V. Plat
Executive Vice President
Date: July 25, 1994
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