SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 000-21770
SIGNAL TECHNOLOGY CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 04-2758268
(State Or Other Jurisdiction Of (I.R.S. Employer Identification No.)
Incorporation Or Organization)
222 ROSEWOOD DRIVE, DANVERS, MA 01923-4502
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 774-2281
--------------------
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 Registrant's classes of
Common Stock as of the latest practicable date.
Common Stock Outstanding at November 9, 1999
$.01 Par Value 7,672,089 shares
<PAGE>
<TABLE>
INDEX
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 Qualitative and Quantitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURE 16
</TABLE>
Page 2 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
September 30, December 31,
1999 1998
-------------------- --------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 5,665 $ 2,366
Accounts receivable, net 13,316 12,894
Inventories 9,541 11,358
Deferred income taxes 4,254 1,562
Refundable income taxes 733 2,319
Other current assets 389 208
-------------------- --------------------
Total current assets 33,898 30,707
-------------------- --------------------
Property, plant and equipment, net 14,288 14,935
Intangible assets, net 2,189 2,505
Other assets 829 836
-------------------- --------------------
Total assets $ 51,204 $ 48,983
==================== ====================
Liabilities and stockholders' equity:
Current maturities of long-term debt $ 480 $ 480
Accounts payable 3,047 3,067
Accrued expenses 9,591 7,456
Customer advances 762 3
-------------------- --------------------
Total current liabilities 13,880 11,006
-------------------- --------------------
Deferred income taxes 1,562 1,562
Long-term debt, net of current maturities 5,728 9,928
Stockholders' equity
Common stock 78 75
Additional paid-in capital 13,599 12,947
Retained earnings 17,257 14,365
-------------------- --------------------
30,934 27,387
Less treasury stock (900) (900)
-------------------- --------------------
Total stockholders' equity 30,034 26,487
-------------------- --------------------
Total liabilities and stockholders' equity $ 51,204 $ 48,983
==================== ====================
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
Page 3 of 16
<PAGE>
<TABLE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
<CAPTION>
Quarter ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 20,819 $ 22,766 $ 62,189 $ 68,643
Cost of sales 14,010 16,863 43,349 60,552
-------- -------- -------- --------
Gross profit (loss) 6,809 5,903 18,840 8,091
Selling, general and administrative expense 4,770 5,585 14,228 15,101
Research and development expense 559 32 1,384 160
-------- -------- -------- --------
Operating income (loss) 1,480 286 3,228 (7,170)
Other expense 1,250 -- 1,250 --
Interest expense 94 201 346 698
-------- -------- -------- --------
Income (loss) before income taxes 136 85 1,632 (7,868)
Income tax expense (benefit) (1,292) -- (1,260) (324)
-------- -------- -------- --------
Net income (loss) $ 1,428 85 2,892 $ (7,544)
======== ======== ======== ========
Net income (loss) per share
Basic $ 0.19 $ .01 $ 0.38 $ (1.02)
Diluted $ 0.18 $ .01 $ 0.36 $ (1.02)
Shares used in calculating net income (loss) per share
Basic 7,652 7,349 7,580 7,364
Diluted 8,106 7,618 7,981 7,364
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
Page 4 of 16
<PAGE>
<TABLE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 8,263 $ 2,349
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,361) (1,138)
Proceeds from disposal of property, plant and
equipment -- 39
Other assets 7 7
-------- --------
Net cash used by investing activities (1,354) (1,092)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 373 72
Proceeds from Employee Stock Purchase Plan 217 183
Borrowings on bank revolving credit facility 4,600 21,100
Payments on bank revolving credit facility (8,600) (21,200)
Repurchase of treasury stock -- (869)
Payments of long-term debt (200) (400)
-------- --------
Net cash used by financing activities (3,610) (1,114)
-------- --------
Net increase in cash 3,299 143
Cash and cash equivalents, beginning of period 2,366 1,127
-------- --------
Cash and cash equivalents, end of period $ 5,665 $ 1,270
======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated financial statements.
</FN>
</TABLE>
Page 5 of 16
<PAGE>
SIGNAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Notes To The Condensed Consolidated Financial Statements
(in thousands, except per share data)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of the Company as of
September 30, 1999, and for the three and nine months ended September 30,
1999 and 1998 are unaudited. All adjustments (consisting only of normal
recurring adjustments) have been made, which in the opinion of management
are necessary for a fair presentation. Results of operations for the
three and nine months ended September 30, 1999 are not necessarily
indicative of the results that may be achieved for the full fiscal year
or for any future period. These financial statements should be read in
conjunction with the audited financial statements for the fiscal year
ended December 31, 1998, included in the Company's annual report on Form
10-K. The year end condensed balance sheet data was derived from the
audited financial statements and does not include all the disclosures
required by generally accepted accounting principles.
The Company's fiscal quarter consists of a thirteen week period ending on
the Saturday closest to September 30. For ease of presentation, interim
periods are designated to have ended on September 30.
2. EARNINGS PER SHARE
The Company presents basic and diluted earnings per share ("EPS"). Basic
EPS is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common
shares consist of the incremental common shares issuable upon the
exercise of stock options using the treasury stock method.
<TABLE>
A reconciliation of the numerator and denominator of both basic and
diluted EPS is provided as follows:
<CAPTION>
Quarter ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic and Diluted EPS
Net income (loss) $ 1,428 $ 85 $ 2,892 $(7,544)
======= ======= ======= =======
Basic EPS
Common shares outstanding 7,652 7,349 7,580 7,364
------- ------- ------- -------
Basic earnings (loss) per share $ 0.19 $ 0.01 $ 0.38 $ (1.02)
======= ======= ======= =======
Diluted EPS
Common shares outstanding 7,652 7,349 7,580 7,364
Effect of Dilutive Securities -
Common Stock Options 454 269 401 --
------- ------- ------- -------
8,106 7,618 7,981 7,364
Diluted EPS
Diluted earnings (loss) per share $ 0.18 $ 0.01 $ 0.36 $ (1.02)
======= ======= ======= =======
</TABLE>
Page 6 of 16
<PAGE>
3. COMPREHENSIVE INCOME (LOSS)
There were no differences between net income and comprehensive income for
the quarter and nine months ended September 30, 1999 and September 30,
1998.
<TABLE>
4. Details of certain balance sheet accounts are as follows:
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Net inventories:
Raw materials $ 2,073 $ 3,595
Work in progress 10,499 10,936
Finished goods 244 279
-------- --------
12,816 14,810
Less: unliquidated progress payments (3,275) (3,452)
-------- --------
$ 9,541 $ 11,358
======== ========
Property, plant and equipment:
Land $ 992 $ 992
Building and improvements 10,042 9,986
Machinery and equipment 26,564 25,570
Furniture and fixtures 3,197 3,025
-------- --------
40,795 39,573
Less accumulated depreciation (26,507) (24,638)
-------- --------
Net property, plant and equipment $ 14,288 $ 14,935
======== ========
</TABLE>
5. INCOME TAXES
In the quarter and nine months ended September 30, 1999, the Company
recorded a benefit for income taxes of $1,292 and $1,260 respectively.
The benefit for income taxes relates to the reversal of a valuation
allowance on the deferred tax asset which the Company believes is more
likely than not to be realized, based on the Company's earnings
performance. In the quarter and nine months ended September 30, 1998, the
Company recorded an income tax expense of $0 and a benefit for income
taxes of $324 respectively which reflects loss carrybacks to the extent
available.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in litigation incidental to its
business including the following:
Weymouth Environmental Contamination:
In April 1996, the Company sold its facility in Weymouth, Massachusetts
but retained the environmental liability and responsibility associated
with groundwater contaminants present at the site. This facility has been
classified as a tier 1A disposal site by the Massachusetts Department of
Environmental Protection ("DEP"), as a result of past releases of
petroleum based solvents. Environmental assessment reports prepared by
independent consultants indicate that contaminants present in the Town of
Weymouth well field across the street from the facility are similar to
those reportedly released at the facility and still present in the
groundwater at the facility; however, these reports also indicate that
the contaminants do not exceed safe drinking water levels in the finished
water after normal treatment. Other contaminants which did not originate
at the facility have also been detected in the well field.
The Company is continuing to conduct investigations of the facility for
soil and groundwater contamination and operate a pilot remediation system
in cooperation with the DEP. It is not possible at this stage of the
proceedings to predict exactly what additional remediation and
Page 7 of 16
<PAGE>
the costs thereby, if any, will be required. The Company has been
informed by its insurers that no recovery of costs incurred in the
treatment of the ground water at the facility is possible under existing
insurance arrangements. During the fourth quarter 1998 the Company took a
charge for environmental remediation costs due to a settlement with the
State of Massachusetts and a revision to its estimates for future
remediation costs at the site.
Sunnyvale Indemnification Claim:
Eaton Corporation has filed a suit against the Company in United States
District Court, Northern District of California, alleging that it has a
contractual duty to indemnify Eaton Corporation for costs incurred as a
result of environmental contamination and subsequent remediation. The
claim is based upon allegations that the Company assumed certain
liabilities when it acquired one of the divisions of Eaton Corporation.
The indemnification claim was recently dismissed at the trial level, but
is now being appealed by Eaton Corporation. The Company believes that the
ultimate disposition will not materially affect its financial position or
results of operations.
DeCoursey v. Signal Technology Corporation:
The case was filed on August 25, 1998 in the United States District Court
for the District of Massachusetts. Plaintiffs allege that they purchased
Common Stock of the Company between April 28, 1997 and August 17, 1998
and seek to represent the class of all persons purchasing during that
period. The Complaint, which was amended on March 29, 1999, alleges that
the Company and its former Chief Executive Officer, Dale Peterson,
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 and seeks monetary damages. The Amended Complaint alleges that
various public statements by the Company during 1997 and 1998 were false
or misleading as a result of alleged accounting irregularities. On June
11, 1999, the Company filed a motion to dismiss the Amended Complaint.
Subsequently, the parties reached an agreement-in-principle to settle.
The agreement-in-principle is subject to a number of customary
contingencies, including court approval of the settlement. During the
third quarter 1999 the Company recorded a charge in other expense to
establish a reserve of $1,250 in connection with the
agreement-in-principle related to this litigation.
L-3 Communications Corporation v. Signal Technology Corporation, et al:
This case was filed on September 3, 1998 in the Superior Court in Fulton
County, Georgia. The Complaint alleges that certain former employees of
L-3 Communications now working for the Company unlawfully misappropriated
confidential and trade secret information on behalf of the Company and
unlawfully induced other L-3 Communications employees to join the
Company. L-3 Communications has brought claims for civil conspiracy,
tortuous interference with prospective and contractual relations, under
both the Georgia Deceptive Trade Practices Act and the Uniform Trade
Secrets Act and seeks monetary damages. The complaint was dismissed in
October without prejudice.
T-3 Contract:
The Company is currently committed to a long term contract at its Keltec
division (the T-3 contract) for amplifiers for Raytheon Company. The
current contract value is $764. If Raytheon Company exercises all of its
options within this contract, the total value could be in excess of
$19,000. Based on an assessment by management if all options are
exercised at current estimated costs and prices, the Company's loss could
total up to $4,000. In March 1999 the Company negotiated new prices and
specifications for the same amplifiers under a new contract and the
Company believes prices are at Keltec's manufacturing cost. The Company
believes that other future orders and options for T-3 amplifiers will be
renegotiated.
Page 8 of 16
<PAGE>
7. SEGMENT INFORMATION
The Company is engaged in the engineering, manufacturing and marketing of
electronic components and subsystems. The Company has five operating
divisions referred to as Arizona, California, Systems, Keltec and
Olektron and reports its operations within three segments: Microwave
Components and Subsystems (Arizona, California and Systems), Power
Management Products (Keltec) and Radio Frequency (RF) Components and
Subsystems (Olektron). The operations aggregated into the microwave
components and subsystems segment have similar products, production
processes and types of customers.
The Company's reportable segments are as follows:
Microwave Components and Subsystems
Engaged in the design and manufacture of microwave oscillators, frequency
synthesizers and converters, space qualified microwave assemblies,
microwave amplifiers and microwave switch matrices.
Power Management Products
Engaged in the design and manufacture of military high and low voltage
power supplies, DC to DC converters and military high power amplifiers
and transmitters for use in radar systems.
Radio Frequency (RF) Components and Subsystems
Engaged in the design and manufacture of radio frequency and intermediate
frequency signal processing components, integrated multi-function
devices, and switching systems for the Space, Telecommunications and
Military markets.
<TABLE>
The following tables display net sales and operating income by business
segment for the quarter and nine months ended September 30, 1999 and
1998:
<CAPTION>
Quarter ended Nine Months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales
---------
Microwave Components & Subsystems $ 11,754 $ 12,863 $ 33,456 $ 38,555
Power Management Products 5,918 5,972 19,923 17,581
RF Components & Subsystems 3,147 3,931 8,810 12,507
-------- -------- -------- --------
$ 20,819 $ 22,766 62,189 $ 68,643
======== ======== ======== ========
Operating Income
----------------
Microwave Components & Subsystems $ 1,452 $ 1,121 $ 3,063 $ 1,256
Power Management Products 898 (154) 2,437 (8,097)
RF Components & Subsystems (24) 470 231 1,729
Other (1) (846) (1,151) (2,503) (2,058)
-------- -------- -------- --------
$ 1,480 $ 286 $ 3,228 $ (7,170)
======== ======== ======== ========
<FN>
(1) Other is primarily corporate selling, general and administrative expenses
that have not been allocated to the business segments.
</FN>
</TABLE>
Page 9 of 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Results of Operations for the Three Months Ended September 30, 1999 and 1998
Net sales in the third quarter of 1999 decreased $1.9 million, or 8.6% as
compared to the third quarter of 1998. A reduction in third and fourth quarter
1998 new orders at the Microwave and RF Components and Subsystems businesses was
the primary reason for the decreased sales in the third quarter 1999 compared to
the third quarter 1998.
Gross profit during the third quarter of 1999 increased $.9 million as compared
to the third quarter of 1998. For the third quarter of 1999 gross profit as a
percentage of sales increased to 32.7% from 25.9% in the third quarter of 1998.
The improved performance is attributable to the Company's corrective actions
taken including a new management team at Keltec, strengthening performance
assessment, tightening financial controls, streamlining operations as well as
changes in contract mix.
Selling, general and administrative expenses decreased $815 thousand or 14.6% as
compared to the third quarter of 1998. As a percentage of sales, these expenses
were 22.9% for the third quarter of 1999 and 24.5% for the third quarter of
1998. The decrease in selling, general and administrative expense is primarily
due to a reduction in selling expenses and commissions.
Company-funded research and development increased to $559 thousand for the third
quarter of 1999 from $32 thousand in the third quarter of 1998. The Company has
instituted an enhanced research and development program for 1999.
Other expense of $1,250 thousand is a charge to third quarter 1999 earnings in
connection with reaching an agreement-in-principle to settle the pending
securities class action.
Interest expense was $107 thousand lower for the third quarter 1999 as compared
to the third quarter 1998 primarily due to lower levels of borrowings. Total
debt decreased to $6.2 million at September 30, 1999 from $13.4 million at
September 30, 1998.
In the third quarter of 1999 the Company recorded a benefit for income taxes of
$1,292 thousand resulting from the reversal of a valuation allowance on the
deferred tax asset which the Company believes is more likely than not to be
realized, based on the Company's earnings performance compared to an income tax
expense of $0 thousand in the third quarter of 1998. The third quarter 1998
reflects loss carry backs to the extent available.
Business Segments
The Company has five operating divisions referred to as Arizona, California,
Systems, Keltec and Olektron and reports its operations within three segments:
Microwave Components and Subsystems (Arizona, California and Systems), Power
Management Products (Keltec) and Radio Frequency (RF) Components and Subsystems
(Olektron).
Page 10 of 16
<PAGE>
The following tables display net sales and operating income by business segment
for each of the quarters ending September 30:
(amounts in thousands) 1999 1998
---- ----
Net Sales
- ---------
Microwave Components & Subsystems $ 11,754 $ 12,863
Power Management Products 5,918 5,972
RF Components & Subsystems 3,147 3,931
-------- --------
$ 20,819 $ 22,766
======== ========
Operating Income
- ----------------
Microwave Components & Subsystems $ 1,452 $ 1,121
Power Management Products 898 (154)
RF Components & Subsystems (24) 470
Other (1) (846) (1,151)
-------- --------
$ 1,480 $ 286
======== ========
(1) Other is primarily corporate selling, general and administrative expenses
that have not been allocated to the business segments.
Microwave Components & Subsystems
Net sales of Microwave Components and Subsystems decreased by 8.6% in the third
quarter of 1999 compared to the third quarter of 1998. The primary reason for
the decrease was a reduction in third and fourth quarter 1998 orders.
Operating income of Microwave Components and Subsystems was $1,452 thousand for
the third quarter 1999 compared to $1,121 thousand for the third quarter 1998.
For the third quarter of 1999 gross profit as a percentage of sales increased to
35.5% from 28.7% in the third quarter of 1998. The increase is attributable to a
renewed emphasis on cost control and changes in contract mix.
Power Management Products
Net sales of Power Management Products decreased by 1.0% in the third quarter of
1999 compared to the third quarter of 1998.
Operating income of Power Management Products was $898 thousand for the third
quarter 1999 compared to an operating loss of $154 thousand for the third
quarter of 1998. For the third quarter of 1999 gross profit as a percentage of
sales increased to 32.1% from 15.7% in the third quarter of 1998. The increase
in gross profit margin is attributable to improvements in manufacturing
efficiencies, tightening of financial controls and changes in contract mix.
RF Components and Subsystems
Net sales of RF Components and Subsystems decreased by 19.9% in the third
quarter of 1999 compared to the third quarter of 1998. The primary reason for
the decreased sales was a reduction in new orders during the last half of 1998
and first quarter 1999.
The operating loss of RF Components and Subsystems was $24 thousand for the
third quarter of 1999 compared to operating income of $470 thousand for the
third quarter of 1998. The $494 thousand decrease in operating income is
attributable to the above mentioned decrease in sales volume, technical problems
on the Sparrow program and changes in contract mix.
Page 11 of 16
<PAGE>
Results of Operations for the Nine Months Ended September 30, 1999 and 1998
Net sales in the first nine months of 1999 decreased $6.5 million, or 9.4% as
compared to the first nine months of 1998. Backlog increased from $64.8 million
at December 31, 1998 to $75.0 million at September 30, 1999 on new orders of
$72.4 million. This compares to a decrease in backlog from $88.7 million at
December 31, 1997 to $76.5 million at September 30, 1998 on new orders of $56.5
million in the first nine months of 1998. A reduction in third and fourth
quarter 1998 new orders at the Microwave and RF Components and Subsystems
businesses was the primary reason for the decreased sales in the first nine
months of 1999 compared to the first nine months of 1998.
Gross Profit during the first nine months of 1999 increased $10.7 million as
compared to the first nine months of 1998. Gross profit was adversely effected
during the first nine months of 1998 by contract adjustments and inventory
write-downs at the Company's Keltec Operation and to a lesser extent at its
Microwave Components and Subsystems businesses. The impact of these adjustments
in the first nine months of 1998 was approximately $8.2 million and were a
result of an investigation by Corporate management with the aid of its
independent accountants and outside counsel into contract and inventory
accounting practices at its Keltec Operation. For the first nine months of 1999
gross profit as a percentage of sales was 30.3%. The improved performance over
the first nine months of 1998 is attributable to the Company's corrective
actions taken including a new management team at Keltec, strengthening
performance assessment, tightening financial controls, streamlining operations
as well as changes in contract mix.
Selling, general and administrative expenses decreased $873 thousand or 5.8% as
compared to the first nine months of 1998. The decrease in selling, general and
administrative expense is primarily due to a reduction in selling expenses and
commissions.
Company funded research and development increased to $1,384 thousand for the
first nine months of 1999 from $160 thousand in the first nine months of 1998.
The Company has instituted an enhanced research and development program for
1999.
Other expense of $1,250 thousand is a charge to earnings in connection with
reaching an agreement-in-principle to settle the pending securities class
action.
Interest expense was $352 thousand lower for the first nine months of 1999 as
compared to the first nine months of 1998 primarily due to lower levels of
borrowings. Total debt decreased to $6.2 million at September 30, 1999 from
$13.4 million at September 30, 1998.
During the first nine months of 1999 the Company recorded a benefit for income
taxes of $1,260 thousand resulting from the reversal of a valuation allowance on
the deferred tax asset which the Company believes is more likely than not to be
realized, based on the Company's earnings performance compared to an income tax
benefit of $324 thousand for the first nine months of 1998. The year to date
1998 benefit reflects loss carry backs to the extent available.
Page 12 of 16
<PAGE>
Business Segments
The following tables display net sales and operating income by business segment
for the nine months ending September 30:
(amounts in thousands) 1999 1998
---- ----
Net Sales
- ---------
Microwave Components & Subsystems $ 33,456 $ 38,555
Power Management Products 19,923 17,581
RF Components & Subsystems 8,810 12,507
-------- --------
$ 62,189 $ 68,643
======== ========
Operating Income
- ----------------
Microwave Components & Subsystems $ 3,063 $ 1,256
Power Management Products 2,437 (8,097)
RF Components & Subsystems 231 1,729
Other (1) (2,503) (2,058)
======== ========
$ 3,228 $ (7,170)
======== ========
(1) Other is primarily corporate selling, general and administrative expenses
that have not been allocated to the business segments.
Microwave Components & Subsystems
Net sales of Microwave Components and Subsystems decreased by 13.2% in the first
nine months of 1999 compared to the first nine months of 1998. The primary
reason for the decrease was a reduction in third and fourth quarter 1998 orders.
Operating income of Microwave components and Subsystems was $3,063 thousand for
the first nine months of 1999 compared to $1,256 thousand for the first nine
months of 1998. Gross profit was adversely effected during the first nine months
of 1998 by contract adjustments and inventory write-downs of approximately $1.9
million.
Power Management Products
Net sales of Power Management Products increased by 13.3% in the first nine
months of 1999 compared to the first nine months of 1998. The primary reason for
the increase was a focused effort by the new management team to increase
efficiencies in manufacturing and ship delinquent orders during the first six
months of 1999.
Operating income of Power Management Products was $2,437 thousand for the first
nine months of 1999 compared to an operating loss of $8,097 thousand for the
first nine months of 1998. Gross profit was adversely effected during the first
nine months of 1998 by contract adjustments and inventory write-downs of
approximately $6.3 million. Contributing to the increase in operating income
during the first nine months of 1999 was increased sales volume, greater
efficiencies in manufacturing, tightening of financial controls as well as
changes in contract mix.
RF Components and Subsystems
Net sales of RF Components and Subsystems decreased by 29.6% in the first nine
months of 1999 compared to the first nine months of 1998. The primary reason for
the decreased sales was a reduction in new orders during the last six months of
1998 and first quarter 1999.
Operating income of RF Components and Subsystems was $231 thousand for the first
nine months 1999 compared to $1,729 thousand for the first nine months of 1998.
The $1,498 thousand decrease in operating income is mainly attributable to the
above mentioned decrease
Page 13 of 16
<PAGE>
in sales volume, technical problems on the Sparrow program as well as changes in
the contract mix.
Liquidity and Capital Resources
At September 30, 1999, the Company had working capital of $20.0 million,
including cash and cash equivalents of $5.7 million, as compared to working
capital of $19.7 million and cash and cash equivalents of $2.4 million,
respectively at December 31, 1998. In the first nine months of 1999, the Company
repaid borrowings under the Company's revolving credit facility of $4.0 million
reducing to zero the amount borrowed under the facility. Net cash flow from
operations was $8.2 million for the first nine months of 1999 compared to $2.3
million for the first nine months of 1998. A $1.8 million reduction in
inventories and a $0.8 million increase in customer advances contributed to the
increased cash flow from operations.
The Company's borrowing arrangement requires the Company to maintain certain
minimum balances and ratios, the most significant of which requires the
maintenance of a minimum net worth. The Company was in compliance with all debt
convenants at September 30, 1999.
The Company continues to investigate acquisition opportunities in complementary
businesses, product lines and markets, but has no binding commitments for
additional acquisitions at this time. The Company believes that it has adequate
cash, working capital and available financing to meet its operating and capital
requirements in the foreseeable future and to pursue acquisition opportunities.
Impact of Year 2000
Management has been aware of the potential software and hardware anomalies
associated with the upcoming date change commonly known as the Year 2000 problem
(Y2K). A comprehensive review of the Company's computer systems, software and
internal embedded systems has been completed and management believes at this
time that all Year 2000 issues have been addressed.
The Company has met its schedule in its corporate-wide plan to achieve
compliance by the third quarter of 1999. The Company has completed the final
phase of a five-phase plan to attempt to ensure compliance in all of its
products, internal systems, and suppliers and thus has mitigated against any
disruption of the Company's business at the end of 1999. The five phases of the
Company's plan were Awareness, Assessment, Remediation, Testing, and
Implementation. The last phase, Implementation, was completed during the third
quarter 1999. The areas of focus were: Signal Technology Products, Computer
Software, Computer Hardware, Embedded Systems, and Supplier Compliance. Each of
the Company's five operating divisions, coordinated by the Company's Chief
Information Officer, have separately implemented the plans for their division.
The Company has evaluated all of its product lines and has not identified any
product that the Company believes will pose substantial risk of failure as a
result of the Year 2000 date change.
As part of its overall plan, the Company has surveyed its suppliers to determine
their Y2K readiness. The Company understands that its suppliers are an integral
part of the Company's success. To the extent the Company management determines
that any of its suppliers are not or will not be Y2K compliant, the Company may
seek alternative sourceses.
The projected costs of approximately $475 thousand associated with the Company's
overall plan to achieve Y2K compliance are not expected to have a material
effect on the Company's results of operations or financial position. These costs
include internal labor, outside
Page 14 of 16
<PAGE>
consultants and, to a lesser extent, new computer hardware and software required
to achieve Y2K compliance. To date, the Company has expended approximately $290
thousand.
The Company has not developed a "worst case" scenario or an overall year 2000
contingency plan and does not intend to do so, unless management determines that
such a plan is warranted.
Risks associated with the Y2K problem include, among other things, (i) failure
of systems and software used by the Company's customers which will impact their
financial ability to purchase products from the Company, (ii) failure of systems
and software used by vendors and third-party service providers upon which the
Company relies for outsourced services and products, (iii) Y2K problems with the
Company's suppliers which could negatively impact the Company's ability to
fulfill its own orders promptly, and (iv) errors or failures of systems in which
the Company's devices are implemented which could result in improper interfacing
or operation of such devices.
Cautionary Note
This Form 10-Q may contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended including without limitation (i) the
anticipated outcome and impact of proceedings in which the Company is involved,
(ii) the impact of an amendment to the Company's credit facility on its
liquidity, (iii) the Company's ability to meet its operating and capital
requirements and to pursue acquisition opportunities, (iv) projected costs of
ameliorating risks associated with, and problems caused by, the Year 2000
problem, and (v) certain other statements identified or qualified by words such
as "likely", "will", "suggests", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", "is optimistic
about", or similar expressions (and variants of such words or expressions).
Investors are cautioned that forward-looking statements are inherently
uncertain. These forward-looking statements represent the best judgement of the
Company as on the date of this Form 10-Q, and the Company cautions readers not
to place undue reliance on such statements. Actual performance and results of
operations may differ materially from those projected or suggested in the
forward-looking statements due to certain risks and uncertainties including,
without limitation, risks associated with fluctuations in the Company's
operating results, volume and timing of orders received, changes in the mix of
products sold, competitive pricing pressure, the Company's ability to meet or
renegotiate customer demands, the ability to anticipate changes in the market,
the Company's ability to finance its operations on terms that are acceptable,
the Company's ability to attract and retain qualified personnel including the
Company's management, changes in the global economy, changes in regulatory
processes, the Company's dependence on certain key customers (including the U.S.
Government), the Company's ability to realize sufficient margins on sales of its
products, the availability and timing of funding for the Company's current
products and the development of future products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in trading market risk sensitive instruments or
purchasing hedging instruments or "other than trading" instruments that are
likely to expose the Company to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. The Company has not
purchased options or entered into swaps or forward or futures contracts. The
Company's primary market risk exposure is that of interest rate risk on
borrowings under its revolving credit facility, which are subject to interest
rates based on the bank's base rate plus 1/2%. The Company also has a
collateralized real estate loan at the
Page 15 of 16
<PAGE>
bank's base rate and a change in the applicable interest rate on such loan would
affect the rate at which the Company could borrow funds.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 6 - Commitments and Contingencies to the Company's Condensed Consolidated
Financial Statements contained elsewhere in this Quarterly Report is
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibits Description
-------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirement 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.
SIGNAL TECHNOLOGY CORPORATION
By: /s/ Robert Nelsen
Robert Nelsen
Chief Financial Officer and
Principal Accounting Officer
(duly authorized officer)
DATE: November 12, 1999
Page 16 of 16
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