PART 1
DYNATECH CORP FILES QUARTERLY REPORT (10-Q)
EDGAR Online SEC Filings - August 05, 1999 15:15
The EDGAR Online Glimpse is an extraction of the Management's
Discussion and Analysis section contained in the full 10-Q, available
from EDGAR Online
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All SEC Filings for DYNATECH CORP from EDGAR Online
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the impact of competitive
products and pricing, product development, commercialization and technological
difficulties, capacity and supply constraints or difficulties, availability of
capital resources, general business and economic conditions, the effect of the
Company's accounting policies, and other risks detailed in the Company's most
recent Form 10-K as of March 31, 1999.
Overview
During fiscal 1999 the Company's communications test and industrial
computing and communications segments had been experiencing certain order
delays due to the telecommunications equipment and service providers facing
capital market volatility, reduced financing availability, as well as an
overall economic slowdown in Asia. During the first quarter of fiscal 2000,
the Company shipped products at record levels. However, the Company cannot
predict whether this trend will continue due in part to the volatility of the
global economy, the unpredictability of the purchasing patterns of the
Regional Bell Operating Companies ("RBOCs"), and the timing and size of such
customers' orders, among other things.
In accordance with the terms of agreements relating to the Recapitalization
and to other matters, the Company may elect to call vested stock options of
certain employees upon termination of their services. During the first three
months of fiscal 2000, the Company provided $13.3 million for such option
calls and other expenses, most of which amount related to the retirement of
John F. Reno, former Chairman, President and Chief Executive Officer of the
Company.
The total cash to be paid for the call of these options is approximately
$14.9 million. At the time of the Merger the Company recorded a charge of $5.8
million, specifically related to these options, in connection with
accelerating the vesting upon consummation of the Merger. Accordingly, an
additional charge of $9.1 million has been recorded during the first quarter
of fiscal 2000.
During the first quarter of fiscal 1999, the Company acquired Pacific
Systems, Inc. ("Pacific") for a total purchase price of $20 million. This
acquisition resulted in approximately $18 million of goodwill which is being
amortized over 30 years. Pacific is a subsidiary within the Company's visual
communications segment.
Also during the first quarter of fiscal 1999, the Company sold the assets
of ComCoTec, Inc. ("ComCoTec") for $21 million. The Company recognized a gain
of $15.9 million from the sale of ComCoTec and recorded the gain in other
income. ComCoTec was a subsidiary within the Company's visual communications
segment.
Results of Operations
Three Months Ended June 30, 1999 as Compared to Three Months Ended June 30,
1998
Sales. For the three months ended June 30, 1999 consolidated sales
increased $51.6 million or 47.3% to $160.8 million as compared to $109.1
million for the three months ended June 30, 1998. The increase occurred within
all three operating segments yet was primarily attributable to increased
shipments of the Company's ruggedized laptop computers as a result of the
large backlog of orders at March 31, 1999.
International sales (defined as sales outside of North America) were $14.3
million or 8.9% of consolidated sales for the three months ended June 30,
1999, as compared to $15.9 million or 14.6% of consolidated sales for the
three months ended June 30, 1998. The slight dollar decrease in international
sales was a result of slower international sales throughout the Company. The
large percentage decrease was a result of the increase in sales to a large
domestic RBOC as a result of the large backlog at March 31, 1999.
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Gross Profit. Consolidated gross profit increased $23.8 million to $86.8
million or 54.0% of consolidated sales for the three months ended June 30,
1999 as compared to $63.0 million or 57.7% of consolidated sales for the three
months ended June 30, 1998. The percentage decrease was attributable to a
change in the sales mix within the consolidated group along with lower gross
margins within the Company's industrial computing and communications segment.
Operating Expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; recapitalization and
other related costs; amortization of intangibles; and amortization of unearned
compensation. Total operating expenses were $70.4 million or 43.8% of
consolidated sales for the three months ended June 30, 1999, as compared to
$93.5 million or 85.7% of consolidated sales for the three months ended June
30, 1998. Excluding the impact of the recapitalization and other related
costs, total operating expenses were $57.2 million or 35.6% of consolidated
sales and $50.1 million or 45.9% of consolidated sales for the three months
ended June 30, 1999 and 1998, respectively. The percentage decrease in total
operating expenses excluding the recapitalization and other related expenses
is due primarily to operating expenses having increased at a rate slower than
sales growth, which is consistent with the Company's continued focus on cost
containment.
Selling, general and administrative expense was $39.9 million or 24.8% of
consolidated sales for the three months ended June 30, 1999 as compared to
$35.2 million or 32.2% of consolidated sales for the three months ended June
30, 1998. The percentage decrease is in part a result of the increase in
sales. In addition, the Company's ICSADVENT Corporation subsidiary, formerly
Industrial Computer Source, reduced its expense on its Industrial Computer
Source-Book catalog as this subsidiary has implemented an on-line ordering
system via the internet.
Product development expense was $15.3 million or 9.5% of consolidated sales
for the three months ended June 30, 1999 as compared to $13.5 million or 12.4%
of consolidated sales for the same period a year ago. The Company continues to
invest in product development and enhancement within all three segments.
However, the percentage decrease is primarily due to the timing of expenses
related to ongoing research and development programs as well as the increase
in sales.
Recapitalization and other related costs were $13.3 million and $43.4
million at June 30, 1999 and June 30, 1998, respectively. The fiscal 2000
expense relates to the cost incurred by the Company's call of certain
terminating employees' vested stock options as well as other related
termination expenses. Recapitalization costs totaling $43.4 million were
incurred during the first quarter of fiscal 1999 in connection with the
Merger, consisting of $39.9 million (including a $14.6 million non-cash
charge) for the cancellation payments of employee stock options and
compensation expense due to the acceleration of unvested stock options (of
which $5.8 million relates to the terminating employees' unvested options as
described above), and $3.5 million for certain other expenses resulting from
the Merger, including employee termination expense.
Amortization of intangibles was $1.6 million for the three months ended
June 30, 1999 as compared to $1.4 million for the same period a year ago. The
increase was primarily attributable to increased goodwill amortization related
to the acquisition of Pacific in June, 1998.
Amortization of unearned compensation of $0.4 million during the first
quarter of fiscal 2000 related to the amortization of the $9.7 million
recorded within shareholders' equity related to the 14.3 million options that
originally were issued in July, 1998 at a grant price lower than fair market
value.
Operating income (loss). Operating income increased to $16.4 million or
10.2% of consolidated sales for the three months ended June 30, 1999 as
compared to an operating loss of $30.5 million or (28.0%) of consolidated
sales for the same period a year ago. The increase was primarily a result of
the recapitalization and other related costs during fiscal 1999. Excluding
these expenses, the Company generated operating income of $29.7 million or
18.4% of consolidated sales and $12.9 million or 11.8% of consolidated sales
for the three months ended June 30, 1999 and 1998, respectively. This
percentage increase was primarily the result of slower growth in operating
expenses relative to the increase in sales described above.
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Interest. Interest expense, net of interest income, was $12.1 million for
the three months ended June 30, 1999 as compared to $5.3 million for the same
period a year ago. The increase in net interest expense was attributable to a
full quarter of interest expense in fiscal 2000 as compared to 41 days of
interest expense in the first quarter of fiscal 1999, as the debt was incurred
in connection with the Merger on May 21, 1998.
Gain on sale. On June 30, 1998 the Company sold the assets of ComCoTec for
$21 million which resulted in a gain of $15.9 million. ComCoTec was a
subsidiary within the Company's visual communications segment.
Taxes. The effective tax rate for the three months ended June 30, 1999 was
40.0%, which is essentially at the same level for the same period last year.
Net income. Net income increased $14.5 million to $2.6 million or $0.02 per
share on a diluted basis for the three months ended June 30, 1999 as compared
to a net loss of $11.9 million or a $0.19 loss per share on a diluted basis
for the same period a year ago. The increase was primarily attributable to the
lower recapitalization and other related expenses and higher sales during
fiscal 2000 as compared to the same period last year.
Backlog. Backlog at June 30, 1999 was $169.2 million, an decrease of 0.5%
as compared to $170.1 million at March 31, 1999.
Adoption of Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information"("FAS 131")
During the fourth quarter of fiscal 1999 the Company adopted FAS 131 which
establishes standards for the reporting of operating segments in the financial
statements. The Company measures the performance of its subsidiaries by the
their respective new orders received ("bookings"), sales and earnings before
interest and taxes ("EBIT"). The discussion below includes bookings, sales and
EBIT (excluding recapitalization and other related costs and the gain on sale
of subsidiary) for the three segments in which the Company participates:
communications test, industrial computing and communications, and visual
communications (in thousands).
Three Months Ended
June 30,
-------------------
1999 1998
SEGMENT --------- ---------
Communications test:
Bookings................................................. $ 76,358 $ 49,743
Sales.................................................... 67,281 53,801
EBIT..................................................... 10,125 6,741
Industrial computing & communications:
Bookings................................................. $ 56,198 $ 39,510
Sales.................................................... 69,977 33,951
EBIT..................................................... 13,042 166
Visual communications:
Bookings................................................. $ 24,821 $ 26,067
Sales.................................................... 23,513 21,391
EBIT..................................................... 6,900 6,538
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
-- Communications Test Products
Bookings for communications test products increased $26.6 million or 53.5%
to $76.4 million for the three months ended June 30, 1999 as compared to $49.7
million for the same period a year ago. Orders for the Company's
communications test instruments products continue to recover from last year's
slowdown which was a result of the communications industry consolidation and
the Asia economic crisis.
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Sales of communications test products increased $13.5 million or 25.1% to
$67.3 million for the three months ended June 30, 1999 as compared to $53.8
million for the three months ended June 30, 1998. During fiscal 1999 the
Company experienced a decrease in demand for its core instruments in part due
to the RBOC's consolidating their purchasing practices as well as the economic
slowdown in Asia. The increase in sales is in part a result of the high
backlog position for products within this segment at March 31, 1999.
EBIT for the communications test products increased $3.4 million or 50.2%
to $10.1 million for the three months ended June 30, 1999 as compared to $6.7
million for the same period a year ago. The increase in EBIT is directly
related to the increase in sales.
The backlog for the Company's communications test products was $69.7
million, an increase of 15.0% from the fiscal year ended March 31, 1999.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
-- Industrial Computing and Communications Products
Bookings for the industrial computing and communications products increased
42.2% to $56.2 million for the three months ended June 30, 1999 as compared to
$39.5 million for the same period a year ago. The increase is primarily
attributable to a few significant orders received during the first quarter of
fiscal 2000 from one of the large RBOCs for ruggedized laptops.
Sales of industrial computing and communications products increased 106.1%
to $70.0 million for the three months ended June 30, 1999 as compared to $34.0
million for the three months ended June 30, 1998. The increase was primarily
due to increased shipments of the Company's ruggedized laptop computers to the
RBOCs due to the high backlog position for products within this segment at
March 31, 1999.
EBIT for the industrial computing and communications products was $13.0
million for the three months ended June 30, 1999 as compared to $0.2 million
for the same period a year ago. The increase was primarily attributable to the
additional shipments of the ruggedized laptop computers. In addition the
Company's ICSADVENT Corporation subsidiary, formerly Industrial Computer
Source, reduced its expense on its Industrial Computer Source-Book catalog as
this subsidiary has implemented an on-line ordering system via the internet.
The backlog for the Company's industrial computing and communications
products was $68.0 million, a decrease of 14.2% from the fiscal year ended
March 31, 1999.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
-- Visual Communications Products
Bookings for the visual communications products decreased $1.2 million or
4.8% to $24.8 million for the three months ended June 30, 1999 as compared to
$26.1 million for the same period a year ago. The decrease was primarily a
result of bookings for the Company's ComCoTec subsidiary, which was sold in
June 1998, offset by bookings at Pacific, which was acquired in June 1998. In
addition the Company booked approximately $2.4 million in fiscal 1999 related
to Parallax which was closed in December 1998.
Sales for the Company's visual communications products increased $2.1
million or 9.9% to $23.5 million for the three months ended June 30, 1999 as
compared to $21.4 million for the same period a year ago. The increase in
shipments is primarily a result of shipments at Pacific during the first three
months of fiscal 2000 offset by shipments at Parallax and ComCoTec for the
same period last year.
EBIT for the visual communications products increased $0.4 million or 5.5%
to $6.9 million for the three months ended June 30, 1999 as compared to $6.5
million for the same period a year ago.
The backlog for the Company's visual communications products was $31.5
million, an increase of 4.3% from the fiscal year ended March 31, 1999.
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Capital Resources and Liquidity
The Company broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments.
In addition, liquidity includes the ability to obtain appropriate debt and
equity financing and to convert into cash those assets that are no longer
required to meet existing strategic and financial objectives. Therefore,
liquidity cannot be considered separately from capital resources that consist
of current or potentially available funds for use in achieving long-range
business objectives and meeting debt service commitments.
The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the Merger and from the
funding of working capital and capital expenditures. As of June 30, 1999, the
Company had $517.1 million of indebtedness, primarily consisting of $275.0
million principal amount of the Senior Subordinated Notes, $236.8 million in
borrowings under the Term Loan Facility and $5.0 million under the Revolving
Credit Facility.
Cash Flows. The Company's cash and cash equivalents decreased $24.4 million
during the three months ended June 30, 1999.
Working Capital. For the three months ended June 30, 1999, the Company's
working capital decreased as its operating assets and liabilities used $15.9
million of cash. Accounts receivable decreased, creating a source of cash of
$1.7 million. Inventory levels also decreased, creating a source of cash of
$4.0 million, due primarily to improved inventory management throughout the
organization. Other current assets increased, creating a use of cash of $1.5
million. Accounts payable decreased, creating a use of cash of $9.5 million.
Other current liabilities decreased, creating a use of cash of $10.7 million.
The decrease is due in part to management incentive payments made during the
first quarter of fiscal year 2000.
Investing activities. The Company's investing activities totaled $5.2
million for the three months ended June 30, 1999 in part for the purchase and
replacement of property and equipment.
The Company's capital expenditures during the first three months of fiscal
2000 were $3.7 million as compared to $2.4 million for the same period last
year. The increase was primarily due to the timing of certain capital
expenditure commitments at the Company's communications test and industrial
computing and communications businesses. The Company anticipates that fiscal
2000 capital expenditures will increase from fiscal 1999 levels and return to
or exceed fiscal 1998 levels as the Company anticipates replacing certain of
its Enterprise Resource Planning (ERP) systems at the communications test and
industrial computing and communications businesses. The Company is, in
accordance with the terms of the Senior Secured Credit Agreement, subject to
maximum capital expenditure levels.
Debt and equity. The Company's financing activities used $10.2 million in
cash during the first quarter of fiscal 2000, due mainly to the repayment of
debt.
Debt
Principal and interest payments under the new Senior Secured Credit
Agreement and interest payments on the Senior Subordinated Notes represent
significant liquidity requirements for the Company. With respect to the $260
million initially borrowed under the Term Loan Facility (which is divided into
four tranches, each of which has a different term and repayment schedule), the
Company is required to make scheduled principal payments of the $50 million of
tranche A term loan thereunder during its six-year term, with substantial
amortization of the $70 million tranche B term loan, $70 million tranche C
term loan and $70 million tranche D term loan thereunder occurring after six,
seven and eight years, respectively. The balances of the revolving credit
facility, and tranches A, B, C, and D at June 30, 1999 were $5.0 million,
$34.7 million, $67.4 million, $67.4 million, and
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$67.4 million, respectively. The $275 million of Senior Subordinated Notes
will mature in 2008, and bear interest at 9 3/4% per annum. Total interest
expense including $0.8 million of deferred debt issuance costs amortization
was $12.9 million for the first quarter of fiscal 2000.
The Company is required, under the terms of its Senior Secured Credit
Facilities, to make a mandatory prepayment and principal reduction in an
amount equal to 50% of the Company's excess cash flow (the "Recapture")
calculated at the end of the Company's fiscal year. The Company was required
to prepay $14.5 million on June 30, 1999 for its excess cash flow calculated
as of March 31, 1999 in accordance with the terms of the Senior Secured Credit
Facilities. The Company elected to use this recapture as a prepayment of the
mandatory $8 million amortization due in fiscal 2000 which subsequently
reduced the mandatory principal payments to approximately $2.6 million during
fiscal 2000.
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