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CONFORMED
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the six months ended September 30, 1996 Commission File No. 33-78806
TELEX COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3521030
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9600 ALDRICH AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (612) 884-4051
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
--- ---
500 COMMON SHARES WERE OUTSTANDING AS OF OCTOBER 31, 1996
THIS DOCUMENT CONTAINS 12 PAGES.
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TELEX COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements Page No.
--------
<S> <C> <C>
Condensed Consolidated Statements of Operations 3
(Unaudited) for the three and six months ended
September 30, 1996 and 1995
Condensed Consolidated Balance Sheets at 4
September 30, 1996 (Unaudited) and March 31, 1996
Condensed Consolidated Statements of Cash 5
Flows (Unaudited) for the six months ended
September 30, 1996 and 1995
Notes to Condensed Consolidated Financial 6-7
Statements (Unaudited)
ITEM 2 Management's Discussion and Analysis of 8-11
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) There were no reports on Form 8-K for the
three months ended September 30, 1996
SIGNATURES 12
</TABLE>
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TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Sales $41,646 $ 33,913 $78,850 $ 65,920
Cost of sales 24,021 20,904 45,354 40,979
------- -------- ------- --------
17,625 13,009 33,496 24,941
Operating expenses:
Engineering and development 1,663 1,571 3,391 3,382
Marketing 4,803 4,107 9,136 8,706
General and administrative 2,080 1,806 4,060 3,380
Amortization of goodwill and other 411 879 823 1,781
intangibles ------- -------- ------- --------
8,957 8,363 17,410 17,249
------- -------- ------- --------
Operating profit 8,668 4,646 16,086 7,692
Interest expense (3,135) (3,130) (6,287) (6,242)
Other income 418 159 808 394
------- -------- ------- --------
Income before income taxes 5,951 1,675 10,607 1,844
Provision for income taxes 2,423 669 4,136 738
------- -------- ------- --------
Net income $ 3,528 $ 1,006 $ 6,471 $ 1,106
======= ======== ======= ========
</TABLE>
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TELEX COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,870 $ 23,001
Accounts receivable, net of allowance 25,412 25,438
Inventories 24,461 21,711
Deferred income taxes 2,433 2,433
Other 1,345 1,057
------- -------
Total current assets 78,521 73,640
Property, plant and equipment, net of accumulated depreciation 19,404 17,616
Deferred financing costs 2,699 2,884
Deferred income taxes 4,629 4,629
Intangible assets, net of accumulated amortization 21,224 22,048
------- -------
$126,477 $120,817
------- -------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 7,319 $ 9,091
Accrued wages and benefits 3,057 3,289
Taxes other than income taxes 471 717
Other accrued liabilities 6,441 6,329
Accrued interest 2,521 2,508
Income taxes 4,348 3,436
------- -------
Total current liabilities 24,157 25,370
Long-term debt 100,000 100,000
Due to parent 2,018 2,029
Pension accrual 1,844 1,207
Other accrued liabilities 56 280
Shareholder's equity (deficit):
Common stock and capital in excess of par 20,001 20,001
Retained earnings (accumulated deficit) (21,599) (28,070)
------- -------
Total shareholder's equity (deficit) (1,598) (8,069)
------- -------
$126,477 $120,817
======= =======
</TABLE>
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------
1996 1995
<S> <C> <C>
Operating activities:
Net income $ 6,471 $ 1,106
Adjustments to reconcile net income to cash
flows from operations:
Depreciation 1,996 2,803
Amortization of intangibles and deferred financing 1,009 1,966
Provision for bad debts 75 75
Change in operating assets and liabilities:
Receivables (49) (1,773)
Inventories (2,750) (2,598)
Other current assets (288) 178
Accounts payable and accrued expenses (682) (1,768)
Accrued interest 13 (33)
Income taxes payable 912 1,764
Change in non-current liabilities 402 (337)
------ -----
Net cash provided by operating activities 7,109 1,383
------ -----
Investing activities:
Additions to property, plant and equipment (5,240) (2,123)
Acquisition of product line - (252)
------ -----
Net cash (used in) investing activities (5,240) (2,375)
Cash and cash equivalents:
Net increase (decrease) 1,869 (992)
Beginning of period 23,001 7,793
------ -----
End of period $ 24,870 $ 6,801
====== =====
</TABLE>
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TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. Telex Communications, Inc. ("Telex" or the "Company"), a Delaware
corporation, is a wholly owned subsidiary of Telex Communications Group,
Inc. ("TCG").
The condensed consolidated balance sheet as of September 30, 1996, the
condensed consolidated statements of operations for the three and six
months ended September 30, 1996 and 1995, and the condensed consolidated
statements of cash flows for the six months ended September 30, 1996 and
1995, have been prepared by the Company without being audited.
In the opinion of management, these financial statements reflect all
adjustments (which include only normal recurring accruals) necessary to
present fairly the financial position of Telex Communications, Inc. at
September 30, 1996 and the results of its operations and cash flows for all
periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Therefore, these statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's Form 10-K as filed with the SEC
on June 28, 1996. The condensed consolidated balance sheet at March 31,
1996 is derived from the audited consolidated balance sheet as of that
date.
The results of operations for interim periods are not necessarily
indicative of results which will be realized for the full fiscal year.
Certain prior-year amounts have been reclassified to conform to the
September 30, 1996 presentation.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1996 1996
---- ----
<S> <C> <C>
Raw materials and parts $ 16,709 $ 13,975
Work in process 4,285 2,827
Finished products 3,467 4,909
------ ------
$ 24,461 $ 21,711
====== ======
</TABLE>
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TELEX COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED STATEMENTS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
3. Telex's tax provision is calculated on a separate company basis, and
Telex's taxable income is included in the consolidated federal income tax
returns of TCG. The amount listed as "Due to parent" represents the tax
benefit Telex received from TCG.
4. The Company calculated its income tax provision for interim periods by
estimating its annual effective tax rate and applying this rate to the
income before income taxes for the interim period. The effective tax rate
applied was 40.7 and 39.0 percent for the three and six months ended
September 30, 1996, respectively. The effective tax rate for the same
periods in Fiscal 1995 was 40.0 percent.
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TELEX COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
FORWARD LOOKING STATEMENTS
The statements in Part I of this Form 10-Q that are forward looking are
based on current expectations, and actual results may differ materially.
Forward looking statements involve numerous risks and uncertainties that could
cause actual results to differ materially, including, but not limited to: the
timely development and market acceptance of new products; the impact of
competitive products and pricing; the effect of changing general and industry
specific economic conditions; the Company's ability to access external sources
of capital; and such risks and uncertainties detailed from time-to-time in the
Company's Securities and Exchange Commission reports and filings.
RESULTS OF OPERATIONS
General. Telex Communications, Inc. ("Telex" or the "Company"), a
Delaware corporation, is a wholly owned subsidiary of Telex Communications
Group, Inc. ("TCG"). TCG has no operations, and its principal asset is its
investment in the Company.
The following tables set forth, for the periods indicated, the Company's
net sales in thousands:
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
Professional Sound $ 14,922 $ 12,812 $ 28,605 $ 25,441
Multimedia/Audio Communications 14,364 10,475 26,154 18,908
RF/Communications 5,764 4,665 11,532 9,821
Hearing Instruments 6,596 5,961 12,559 11,750
====== ====== ====== ======
Total net sales $ 41,646 $ 33,913 $ 78,850 $ 65,920
</TABLE>
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RESULTS OF OPERATIONS (CONTINUED)
Three and Six Months Ended September 30, 1996 Compared to the Three and Six
Months Ended September 30, 1995
Consolidated net sales increased $7,733,000 (22.8%), and $12,930,000
(19.6%) for the quarter and six months ended September 30, 1996, respectively,
due to increased shipments in each of the four business segments.
Net sales of Professional Sound products increased $2,110,000 (16.5%) and
$3,164,000 (12.4%) for the quarter and six months ended September 30, 1996,
respectively, due primarily to increased shipments of intercom systems,
slightly offset by decreased shipments of microphones. The increased sales of
intercom systems were in part due to continued growth in sales of new products
introduced last year and an increase in broadcast equipment demand related to
the 1996 Olympics.
Net sales of Multimedia/Audio Communications products increased $3,889,000
(37.1%) and $7,246,000 (38.3%) for the quarter and six months ended September
30, 1996, respectively, primarily as a result of increased shipments of
computer audio and LCD projection products. The increase in sales volume of
computer audio and LCD projection products resulted from the continued growth
of computer audio and multimedia applications use.
Net sales of RF/Communications products increased $1,099,000 (23.6%) and
$1,711,000 (17.4%) for the quarter and six months ended September 30, 1996,
respectively, as a result of increased shipments of talking book players to the
Library of Congress and new wireless LAN antenna products, partially offset by
reduced shipments of military vehicular antennas. The increase in sales of
talking book players is the result of a higher unit volume and selling price
associated with the current contract compared to the previous contract in the
same period last year. Shipments of military vehicular antennas ended as the
last shipments under the remaining contract with the United States Department
of Defense were made in the fourth quarter of Fiscal 1996. Sales under the
military vehicular antenna contract accounted for 2.6% of net sales for the
quarter ended September 30, 1995. The Company does not expect to ship these
products again in the foreseeable future.
Net sales of Hearing Instruments products increased $635,000 (10.7%) and
$809,000 (6.9%) for the quarter and six months ended September 30, 1996,
respectively. This improvement is due to higher unit volumes of the Company's
hearing aid and auditory trainer products.
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Gross profit increased $4,616,000 (35.5%) and $8,555,000 (34.3%) for the
quarter and six months ended September 30, 1996, respectively. The impact from
the Company's adoption of and accounting for impairment of long-lived assets in
the fourth quarter of Fiscal 1996 increased gross profit for the quarter and
six months ended September 30, 1996 by approximately $349,000 and $698,000,
respectively, due to lower levels of depreciation expense. Gross margin
increased 3.9 and 4.7 percentage points to 42.3% and 42.5% for the quarter and
six months ended September 30, 1996, respectively. The rate increase was the
result of higher gross margins in the Multimedia/Audio Communications,
RF/Communications and Hearing Instruments segments. The gross margin rate in
the Professional Sound segment remained unchanged. The increase in
Multimedia/Audio Communications gross margin is in part due to increased
shipments of higher margin products combined with lower production costs and
productivity improvements realized in the manufacturing processes. In
addition, gross margin for LCD projection products increased from the recent
introduction of the next generation LCD projection products, which experienced
lower gross margins from an inventory reduction program in place in the same
periods in Fiscal 1996. The increase in gross margin in the RF/Communications
segment was due principally to (i) the new talking book player contract and
(ii) the absence of military vehicular antenna shipments as noted above, which
resulted in increased gross margins due to the fact that gross margins for
military vehicular antennas were significantly lower than the segment's other
product lines. The increase in gross margin in the Hearing Instruments segment
was in part due to increased prices and lower production costs of hearing aids,
and sales of a new product introduced in the previous quarter. During the
quarter ended September 30, 1996, the Company began initial production at its
manufacturing facility in Hermosillo, Sonora, Mexico and will be seeking to
improve its gross margins over the next several years by locating a portion of
its manufacturing at such facility.
Operating expenses increased $594,000 (7.1%) and $161,000 (0.9%) for the
quarter and six months ended September 30, 1996, respectively. Total operating
expenses represented 21.5% and 22.1% of net sales for the quarter and six
months ended September 30, 1996, respectively, compared to 24.7% and 26.2% of
net sales for the same periods in Fiscal 1996. The impact from the Company's
adoption of and accounting for impairment of long-lived assets in the fourth
quarter of Fiscal 1996 resulted in decreased amortization expense for the
quarter and six months ended September 30, 1996 of approximately $468,000 and
$950,000, respectively. Engineering expenses increased slightly by $92,000
(5.9%) and $9,000 (0.3%) for the quarter and six months ended September 30,
1996, respectively, principally due to increased outside development costs and
related expenses. Marketing expenses increased $696,000 (16.9%) and $430,000
(4.9%) for the quarter and six months ended September 30, 1996, respectively.
The marketing expense increase was the result of higher sales related costs,
including sales demonstration costs, increased commissions related to the
increased sales volume, and an increase in advertising costs. General and
administrative expenses increased $274,000 (15.2%) and $680,000 (20.1%) for the
quarter and six months ended September 30, 1996, respectively, primarily as a
result of increased travel and outside service costs.
Other income increased $259,000 (163%) and $414,000 (105%) for the quarter
and six months ended September 30, 1996. This increase is principally the
result of interest income on higher average cash balances compared to the same
periods in Fiscal 1996.
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The Company's effective tax rate was 40.7 and 39.0 percent for the quarter
and six months ended September 30, 1996, respectively. The effective tax rate
for the same periods the prior fiscal year was 40.0 percent.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had cash and cash equivalents of
$24,870,000 compared to $23,001,000 at March 31, 1996. The increase in cash
and cash equivalents relates principally to an increase in income from
operations. Inventory turns remained at 3.9 for the periods ended September
30, 1996 and March 31, 1996. The ratio of current assets to current
liabilities increased to 3.25 to 1 at September 30, 1996 compared to 2.9 to 1
at March 31, 1996, due to increased cash and inventories.
The Company's principal source of funds has consisted of cash generated
from operating activities. Historically, the Company's principal non-operating
uses of cash have been for interest expense, repayments of long-term debt,
capital expenditures, and certain repurchases of TCG securities. Net cash
provided from operations for the six months ended September 30, 1996, was
$7,109,000 versus $1,383,000 for the comparable period in Fiscal 1996. The
Company's capital expenditures were $5,240,000 for the six months ended
September 30, 1996, compared to $2,123,000 for the same period in Fiscal 1996.
The increase in first half capital expenditures was anticipated, as the Company
began the implementation in May 1996 of a project to replace and upgrade the
Company's computer information systems. Fiscal 1997 capital expenditures for
this project are anticipated to be approximately $3,000,000. In addition, the
Company anticipates that capital expenditures to complete this project in
Fiscal 1998 will total approximately $1,300,000. The Company anticipates
capital expenditures for Fiscal 1997, other than for the new computer
information systems project, will continue at, or exceed, the level experienced
in Fiscal 1996.
The Company's consolidated indebtedness at September 30, 1996 was
$100,000,000. The degree to which the Company is leveraged could have
important consequences, including the following: (i) the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on the Company's long-term debt
and its other existing indebtedness; (iii) the agreements governing the
Company's long-term indebtedness contain certain restrictive financial and
operating covenants; (iv) the Company is substantially more leveraged than
certain of its competitors, which might place the Company at a competitive
disadvantage; (v) the Company may be hindered in its ability to adjust rapidly
to changing market conditions; and (vi) the Company's substantial degree of
leverage could make it more vulnerable in the event of a downturn in general
economic conditions or its business.
The Company has a revolving credit agreement with a commitment of
$25,000,000, subject to a borrowing base calculation. As of September 30,
1996, there were no borrowings outstanding and net availability under the
credit agreement (computed by deducting approximately $5,911,000 of letters of
credit outstanding) totaled approximately $19,089,000.
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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.
TELEX COMMUNICATIONS, INC.
<TABLE>
<S><C>
Dated: November 1, 1996 By: /s/ John L. Hale
---------------- -----------------------
John L. Hale
Chairman of the Board
(President and Chief
Executive Officer)
TELEX COMMUNICATIONS, INC.
Dated: November 1, 1996 By: /s/ John T. Hislop
---------------- -----------------------
John T. Hislop
Vice President and Chief Financial
Officer, Treasurer and Assistant Secretary
(Principal Financial & Accounting
Officer)
</TABLE>
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