Subject:
GLENAYRE TECHNOLOGIES INC
(NASDAQ:GEMS) files SEC Form 10-Q
Date:
Wed, 29 Oct 1997 18:40:49 -0800 (PST)
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Topic: Glenayre Technologies
Quote.com News Item #4385966
Headline: GLENAYRE TECHNOLOGIES INC (NASDAQ:GEMS) files SEC Form 10-Q
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
Glenayre Technologies, Inc. ("Glenayre" or the "Company") designs, manufactures,
markets and services telecommunications equipment and software used in wireless
personal communications systems throughout the world. The Company's product
families are grouped in either (i) Wireless Messaging (including products and
services sold into the paging and Narrowband Personal Communication Services
("NPCS") marketplace and the Company's major service and support groups); (ii)
Integrated Network (including the Company's MVP(R) Modular Voice Processing
system and the network management systems of its newly acquired subsidiary,
CNET, Inc. ("CNET")); and (iii) Wireless Interconnect (products for microwave
communications systems). On January 9, 1997 the Company completed the
acquisition of CNET. The operating results of CNET are included in the operating
results of the Company since the acquisition date.
On October 15, 1997, the Company completed the acquisition of Open Development
Corporation, a developer of enhanced service software and products for
telecommunications providers. Additionally, in November 1997, the Company
expects to complete the acquisition of Wireless Access Inc., a developer and
marketer of two-way paging devices.
In September 1997, the Company announced plans to divest its microwave
communications systems unit.
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and related Notes and the Cautionary
Statement included as Exhibit 99.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
NET SALES
The Company's net sales for the nine months ended September 30, 1997 increased
to $328 million from net sales for the nine months ended September 30, 1996 of
$286 million, an increase of $42 million, or 15%. The increase in sales was
primarily due to increased delivery of the Company's MVP systems. Net sales of
the Wireless Messaging, Integrated Network and Wireless Interconnect groups were
approximately $250 million, $54 million and $24 million, respectively, for the
nine months ended September 30, 1997 compared to approximately $248 million, $17
million, and $21 million, respectively, for the nine months ended September 30,
1996. Sales to a single customer totaled approximately 12% and 15% of sales for
the nine months ended September 30, 1997 and 1996, respectively. The Company
believes that the dependence on any one customer is mitigated by the large
number of companies in the Company's customer base and the timing for
development and expansions of their systems.
The Company anticipates continued growth in 1997 sales of its paging products to
the international market and delivery of its MVP systems. However, due to the
current constrained financing market for the U.S. paging industry and existing
capacity of paging providers to serve their subscribers, the Company expects
1997 shipments to the domestic market of its one-way paging products to be below
1996 levels. These are forward-looking statements and the Company's actual
results could differ
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materially due to rapid technological advances in the wireless
telecommunications industry, delays in the market acceptance of NPCS products
and systems, competition, limits on protection of Glenayre's proprietary
technology, changes in governmental regulation and international business risks.
GROSS PROFIT
Gross profit increased to $175 million, or 53% of net sales, for the nine months
ended September 30, 1997, from $157 million, or 55% of net sales, for the nine
months ended September 30, 1996. The decrease in gross margin percentage is
primarily the result of: (i) a change in the product mix which included a
greater portion of sales of products with lower margins including increased
revenue from international turn-key projects; and (ii) additional customer
support costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $73 million, or 22% of
net sales, for the nine months ended September 30, 1997, from $58 million, or
20% of net sales, for the nine months ended September 30, 1996. The increase is
primarily due to: (i) the addition of sales, marketing, and administrative
personnel and other expenses associated with the Company's higher international
sales volume; (ii) the inclusion of operating expenses incurred by CNET since
its acquisition on January 9, 1997; and (iii) general increases in personnel
costs and other purchased services.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $14 million or 4% of net
sales, for the nine months ended September 30, 1997 from $10 million or 3% of
net sales for the nine months ended September 30, 1996. The increase is
primarily attributable to: (i) the continuing purchases of equipment to meet the
growth of the business and (ii) the amortization of goodwill related to the
acquisition of CNET in January 1997.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs increased to $28 million, or 9% of net sales, for
the nine months ended September 30, 1997, from $21 million, or 7% of net sales,
for the nine months ended September 30, 1996, an increase of $7 million, or 36%.
The Company relies on its research and development programs related to new
products and the improvement of existing products for the continued growth of
its business. The increase in expense is primarily a result of additional
expenditures in manpower and materials for these programs and the inclusion of
expenditures incurred by CNET since its acquisition on January 9, 1997. Research
and development costs are expensed as incurred.
INTEREST INCOME, NET
The Company realized net interest income of $8.1 million for the nine months
ended September 30, 1997 compared to net interest income realized of $7.3
million for the nine months ended September 30, 1996. Higher balances in notes
receivable and higher average interest rates experienced on cash equivalents and
short-term investments were offset by lower average balances in cash, cash
equivalents and short-term investments.
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OTHER EXPENSE, NET
The increase in expense for the nine months ended September 30, 1997 from the
same period in the prior year is primarily a result of expenses resulting from a
realignment of certain domestic sales, management, and engineering personnel in
order to enhance organizational efficiencies.
INCOME TAXES
The difference between the combined U.S. federal and state statutory tax rate of
approximately 40% and the effective tax rate of 34% for the nine months ended
September 30, 1997 and 29% for the nine months ended September 30, 1996 is
primarily the result of: (i) the utilization of the Company's net operating
losses; (ii) lower tax rates on earnings indefinitely reinvested in certain
non-U.S. jurisdictions and (iii) the application of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," ("SFAS 109"), in
computing the Company's tax provision. The difference between the effective tax
rate of 34% in 1997 and 29% in 1996 is primarily the result of a variance
between the 1997 and 1996 adjustments for realization of tax benefits of net
operating loss carryforwards for financial statement purposes in accordance with
SFAS 109 primarily due to revisions during each period to the estimated future
taxable income during the Company's loss carryforward period. See Note 4 to the
Condensed Consolidated Financial Statements.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
NET SALES
The Company's net sales for the three months ended September 30, 1997 increased
to $112 million from net sales for the three months ended September 30, 1996 of
$92 million, an increase of $20 million, or 22%. The increase in sales was
primarily due to increased delivery of the Company's MVP systems and one-way
paging products. Net sales of the Wireless Messaging, Integrated Network and
Wireless Interconnect groups were approximately $85 million, $20 million and $7
million, respectively, for the three months ended September 30, 1997 compared to
approximately $78 million, $6 million, and $8 million, respectively, for the
three months ended September 30, 1996. No single customer accounted for more
than 10% of sales for the three months ended September 30, 1997. Sales to a
single customer totaled approximately 16% of sales for the three months ended
September 30, 1996.
GROSS PROFIT
Gross profit increased to $60 million, or 53% of net sales, for the three months
ended September 30, 1997, from $48 million, or 52% of net sales, for the three
months ended September 30, 1996. The increase in gross margin percentage is
primarily attributable to a change in the product mix partially offset by
increased revenue from international turn-key projects which typically realize
lower margins.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $25 million, or 22% of
net sales, for the three months ended September 30, 1997, from $21 million, or
23% of net sales, for the three months ended September 30, 1996. The increase in
expense is primarily due to: (i) the addition of sales, marketing, and
administrative personnel and other expenses associated with the Company's higher
international sales volume; (ii) the inclusion of operating expenses incurred by
CNET since its acquisition on January 9, 1997; and (iii) general increases in
personnel costs and other purchased services.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $4.9 million or 4% of net
sales, for the three months ended September 30, 1997 from $3.5 million or 4% of
net sales for the three months ended September 30, 1996. The increase is
primarily attributable to: (i) the continuing purchases of equipment to meet the
growth of the business and (ii) the amortization of goodwill related to the
acquisition of CNET in January 1997.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs increased to $10.2 million, or 9% of net sales,
for the three months ended September 30, 1997, from $7.3 million, or 8% of net
sales, for the three months ended September 30, 1996, an increase of $2.9
million, or 39%. The increase in expense is primarily a result of additional
expenditures in manpower and the inclusion of expenditures incurred by CNET
since its acquisition on January 9, 1997.
INTEREST INCOME, NET
The Company realized net interest income of $3.1 million for the three months
ended September 30, 1997 compared to net interest income realized of $2.6
million for the three months ended September 30, 1996. Higher balances in notes
receivable and higher average interest rates experienced on cash equivalents and
short-term investments were offset by lower average balances in cash, cash
equivalents and short-term investments.
OTHER EXPENSE, NET
The increase in expense for the three months ended September 30, 1997 from the
same period in the prior year is primarily a result of expenses resulting from a
realignment of certain domestic sales, management, and engineering personnel in
order to enhance organizational efficiencies.
INCOME TAXES
The difference between the combined U.S. federal and state statutory tax rate of
approximately 40% and the effective tax rate of 32% for the three months ended
September 30, 1997 and 25% for the three months ended September 30, 1996 is
primarily the result of: (i) lower tax rates on earnings indefinitely reinvested
in certain non-U.S. jurisdictions and (ii) the application of Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes," ("SFAS
109"), in computing the
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Company's tax provision. The difference between the effective tax rate of 32% in
1997 and 25% in 1996 is primarily the result of a variance between the 1997 and
1996 adjustments for realization of tax benefits of net operating loss
carryforwards for financial statement purposes in accordance with SFAS 109
primarily due to revisions during each period to the estimated future taxable
income during the Company's loss carryforward period. See Note 4 to the
Condensed Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital at September 30, 1997 was $281 million, including
cash and cash equivalents and short-term investments of $135 million. During the
nine months ended September 30, 1997, the Company received cash of $2.0 million
from the exercise of stock options. Accounts receivable, accounts payable, and
accrued liabilities at September 30, 1997 increased from December 31, 1996
primarily as a result of increased operating activities and timing differences.
Notes receivables at September 30, 1997 increased from December 31, 1996 due to
customer financing primarily for purchases of the Company's one-way paging and
NPCS products. Goodwill at September 30, 1997 increased from December 31, 1996
as a result of the CNET acquisition in January 1997. During the nine months
ended September 30, 1997, the Company spent $20 million for capital
expenditures. These expenditures were necessary in order to provide the
equipment to meet the growth of the business. Additionally, in 1996, the Company
began the implementation of a new operating business system. This business
system is expected to be operational by the second quarter of 1998 at a total
capitalized cost of approximately $16 million. Of this total approximately $10.6
million ($7.1 million in 1997) has been paid as of September 30, 1997.
The Company's cash and cash equivalents are placed in short-term investments
consisting of high-grade commercial paper, bank certificates of deposit, U.S.
Treasury bills and notes, and repurchase agreements backed by U.S. Government
securities with original maturities of three months or less. The Company's
short-term investments are comprised of identical types of investments except
that their original maturities are greater than three months, but do not exceed
one year.
The Company expects to use its cash, cash equivalents, and short-term
investments for working capital and other general corporate purposes, including
the expansion and development of its existing products and markets, and the
possible expansion into complementary businesses.
In the fourth quarter 1997, the Company has completed or expects to complete
acquisitions which will significantly reduce its cash and cash equivalents and
short term investments (see Note 6 to the Condensed Consolidated Financial
Statements). On October 15, 1997, the Company completed the acquisition of Open
Development Corporation ("ODC"). The purchase price for ODC of approximately $48
million consisted of approximately 243 thousand shares of the Company's common
stock issuable upon exercise of stock options valued at approximately $3
million, approximately $44 million in cash and approximately $1 million in
acquisition costs. On October 1, 1997, the Company entered into an agreement to
acquire Wireless Access Inc. ("WAI"). The estimated purchase price for WAI of
approximately $101 million will consist of approximately 1.4 million shares of
the Company's common stock issuable upon exercise of stock options valued at
approximately $17 million, approximately $82 million in cash and approximately
$2 million in acquisition costs. The WAI acquisition is expected to be completed
in November 1997. The Company expects to record a fourth quarter 1997 charge of
approximately $110 to $120 million in the aggregate for purchased research and
development technology as part of the ODC and WAI acquisitions.
In September 1996, the Board of Directors authorized the purchase of 2,500,000
shares of the Company's common stock. As of September 30, 1997, no shares had
been repurchased under the 1996 authorization.
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Additionally, the competitive telecommunications market often requires customer
financing commitments. These commitments may be in the form of guarantees,
secured debt or lease financing. At September 30, 1997, the Company had
agreements to finance and arrange financing for approximately $95 million of
paging and voice mail products. The Company cannot currently predict the extent
to which these commitments will be utilized, since certain customers may be able
to obtain more favorable terms using traditional financing sources. From time to
time, the Company also arranges for third-party investors to assume a portion of
its commitments. If exercised, the financing arrangements will generally be
secured by the equipment sold by Glenayre.
The Company believes that funds generated from continuing operations, together
with its current cash reserves, will be sufficient to support its short-term and
long-term liquidity requirements for current operations (including capital
expenditures and stock repurchases).
Glenayre has received commitments from a group of banks to loan the Company up
to $50 million under a one-year unsecured revolving credit agreement. The
agreement contains covenants that include certain financial tests, including a
maximum leverage ratio, minimum fixed charge coverage ratio and minimum net
worth. The Company will pay a commitment fee of no more than 0.225% annually of
the unused portion of the line. The Company anticipates closing on the credit
agreement in the fourth quarter of 1997. Company management believes that, if
needed, it can establish additional borrowing arrangements with lending
institutions.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's Form 10-K, Annual Report to Stockholders, Form 10-Q or any Form
8-K or any other written or oral statements made by or on behalf of the Company
may include forward-looking statements reflecting the Company's current views
with respect to future events and financial performance.
Although certain cautionary statements have been made in this Form 10-Q related
to factors which may affect future operating results, a more detailed discussion
of these factors is set forth in Exhibit 99 of this Form 10-Q.
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