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MRV COMMUNICATIONS INC 10-Q
Filing Date: 8/14/98 Filing Index
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ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated statements of
operations data of the Company expressed as a percentage of revenues.
Six Months Ended Three Months Ended
------------------------------------------ --------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------------------------------- --------------------------------------
REVENUES, net 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 55.9 57.3 55.9 57.9
Research and develop-
ment expenses 8.3 7.7 8.0 7.7
Selling, general and
administrative expenses 18.6 16.0 18.4 15.8
Purchased technology
in progress 24.2 -- -- --
Restructuring costs 18.3 -- -- --
--------------------------------------------------------------------------------- --------------------------------------
Operating (loss) income (25.3) 19.0 17.6 18.6
Interest expense related to
convertible debentures
and acquisition -- 0.6 -- 0.0
Other income (expense), net 1.1 0.2 1.0 0.7
Provision for income taxes 0.3 5.7 5.4 6.0
Minority interests 0.2 0.1 0.0 0.2
--------------------------------------------------------------------------------- --------------------------------------
NET INCOME (LOSS) (24.7)% 12.7% 13.3% 13.2%
--------------------------------------------------------------------------------- --------------------------------------
Revenues
Revenues for the three and six months ended June 30, 1998 were $65,742,000 and
$126,568,000, respectively, as compared to revenues for the three and six months
ended June 30, 1997 of $39,528,000 and $75,092,000, respectively. The changes
represented increases of $26,214,000 or 66.3% for the quarter ended June 30,
1998 over the quarter ended June 30, 1997 and $51,476,000 or 68.6% for the six
months ended June 30, 1998 over the six months ended June 30, 1997. Revenues
increased as a result of a larger sales force, greater marketing efforts and
greater market acceptance of the Company's products, both domestically and
internationally. International sales accounted for approximately 60% and 62% of
revenues for the quarter and six months ended June 30, 1998, respectively, as
compared to 58% and 57% of revenues for the quarter and six months ended June
30, 1997, respectively. International sales, as a percentage of total revenues,
increased mainly because of increased sales, marketing and support resources in
place in Europe. Sales of networking products represented approximately 82%
of total sales for both the quarter and six months ended June 30, 1998
compared to approximately 75% of total sales during each of the quarter and six
months ended June 30, 1997.
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Gross Profit
Gross profit for the quarter and six months ended June 30, 1998 were $28,993,000
and $55,814,000, respectively, compared to a gross profit of $16,643,000 and
$32,031,000 for the quarter and six months ended June 30, 1997, respectively.
The changes represented increases of $12,350,000 and $23,783,000 for the quarter
and six months ended June 30, 1998, respectively, or 74.2% for both the quarter
and six months ended June 30, 1998 over the quarter and six months ended June
30, 1997. Gross Profit as a percentage of revenues increased from 42.1% and
42.7% during the quarter and six months ended June 30, 1997, respectively, to
44.1% during each of the quarter and six months ended June 30, 1998 as a result
of increased sales of higher margin products.
Research and Development
Research and development ("R&D") expenses were $5,282,000 and $10,525,000, and
represented 8.0% and 8.3% of revenues, for the quarter and six months ended June
30, 1998, respectively. R&D expenses were $3,041,000 and $5,789,000 for the
three months and six months ended June 30, 1997, respectively, and represented
7.7% of revenues for both periods. The increases of 73.7% and 81.8% in R&D
spending during the quarter and six months ended June 30, 1998 over the
comparable periods in 1997 were attributable to the continued development of, as
well as for new projects involving, the Company's networking and fiber optic
products. The Company intends to continue to invest in the research and
development of new products. Management believes that the ability of the Company
to develop and commercialize new products is an important competitive factor.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to $12,119,000
and $23,581,000 for the quarter ended and six months ended June 30, 1998 from
$6,232,000 and $12,007,000 for the quarter ended June 30, 1997. As a percentage
of revenues, SG&A increased from 15.8% and 16.0% for the quarter and six months
ended June 30, 1997, respectively, to 18.4% and 18.6% for the quarter and six
months ended June 30, 1998, respectively. The increases in SG&A expense, both in
dollar amounts and as a percentage of sales, are due primarily to substantially
increased marketing efforts as well as increased personnel and overhead costs in
expanded locations.
Purchased Technology in Progress and Restructuring Costs; Interest Expense
Purchased technology in progress for the six months ended June 30, 1998 of
$30,571,000 was related to R&D projects of Xyplex in progress at the time of the
Xyplex Acquisition on January 30, 1998. Restructuring costs during the six
months ended June 30, 1998 were $23,194,000. The restructuring costs in the
first six months of 1998 were associated with a plan adopted by the Company in
March, 1998 calling for the reduction of workforce, closing of certain
facilities, elimination of particular product lines, settlement of distribution
agreements and other costs. The Company did not incur these charges in the
quarter ended June 30, 1998 or quarter and six months ended June 30, 1997. The
Company did, however, incur charges of $19,000 and $427,000 during the quarter
and six months ended June 30, 1997, respectively, as additional interest expense
related to the issuance in 1996 of convertible subordinated debentures (the
"Debentures"), proceeds from which were used to finance the Company's
acquisition of the Fibronics business in 1996. The Company did not report
charges relating to the issuance of the Debentures for periods after June 30,
1997 as the outstanding principal and accrued interest were paid in full at
April 4, 1997 through conversion into Common Stock.
Net Income (Loss)
The Company reported net income (loss) of $8,735,000 and ($31,286,000) during
the three and six months ended June 30, 1998, respectively, compared to net
income of $5,209,000 and $9,552,000 during the three and six months ended June
30, 1997. Net income increased by $3,526,000 or 67.7% for the three months ended
June 30, 1998 over the three months ended June 30, 1997. Net income for the six
months ended June 30, 1998 would have been $16,213,000, excluding $53,765,000 of
charges, associated with the Xyplex Acquisition, as compared to net
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income of $9,979,000, excluding non-recurring charges of $427,000 relating to
interest expenses attributable to financing the acquisition of the Fibronics
business. Excluding these non-recurring, net income increased by $6,234,000 or
63% for the six months ended June 30, 1998 over the six months ended June 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, the Company completed a follow-on public offering of
2,785,000 shares of Common Stock raising net proceeds of approximately
$93,320,000. In June 1998, the Company sold an aggregate $100,000,000 principal
amount of 5% convertible subordinated notes due 2003 (the "Notes") in a private
placement raising net proceeds of $96,423,000 (the "1998 Private Placement").
The Notes are convertible into Common Stock of the Company at a conversion price
of $27.0475 per share (equivalent to a conversion rate of approximately 36.97
shares per $1,000 principal amount of notes), representing an initial conversion
premium of 24 percent, for a total of approximately 3.7 million shares of common
stock of the Company. The Notes have a five-year term and are not callable for
the first three years. Interest on the Notes, at 5 percent per annum, is payable
semi-annually on June 15 and December 15, commencing on December 15, 1998.
Cash and cash equivalents and short-term investments totaled approximately
$138,622,000 at June 30, 1998. Such cash and cash equivalents and short-term
investments, as well as cash flow from operations, are the Company's principal
sources of liquidity.
Net cash used in operating activities for the six months ended June 30, 1998 was
$13,553,000. The funds were used primarily to purchase technology in progress
and for restructuring costs in connection with the Xyplex Acquisition. Net cash
provided by investing activities for the six months ended June 30, 1998 was
$14,120,000. Cash provided by the sale of investments to finance the Xyplex
acquisition accounted for most of the cash provided by investing activities
for the six months ended June 30, 1998 and cash used in the Xyplex acquisition
accounted for most of the cash used in investing activities for the same period.
The sale of the Notes in the 1998 Private Placement accounted for substantially
all of the $96,904,000 of cash provided by financing activities during the six
months ended June 30, 1998.
Accounts receivable were $60,636,000 at June 30, 1998 as compared to $47,258,000
at December 31, 1997. The increase in accounts receivable was primarily
attributable to the increase in overall sales in Europe where terms of sale are
traditionally longer than in the U.S.
Inventories were $45,389,000 at June 30, 1998 as compared to $41,689,000 at
December 31, 1997. The increase in inventories was primarily attributable to the
Company's decision to add larger inventories to shorten lead times for customers
and the Xyplex Acquisition. Management believes that MRV's inventory levels at
various points in time may not necessarily be comparable to those of many other
companies in its industry. This is because MRV conducts significant in-house
manufacturing of various components used in its products and thus carries
substantial raw materials and work-in-progress in addition to finished products
in its inventories. In contrast, many competitors outsource to turnkey contract
manufacturers substantial portions of their production requirements and thus do
not include material amounts of raw materials or work in progress in inventories
and may in some circumstances not even include finished products in inventory if
the contract manufacturer ships directly to the competitors' customers.
EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES
The Company believes that the relatively moderate rate of inflation in the
United States over the past few years has not had a significant impact on the
Company's sales or operating results or on the prices of raw materials. However,
in view of the Company's recent expansion of operations in Israel which has
experienced substantial inflation, there can be no assurance that inflation in
Israel will not have a materially adverse effect on the Company's operating
results in the future.
The Company's sales are currently denominated in U.S. dollars and to date its
business has not been significantly affected by currency fluctuations or
inflation. However, the Company conducts business in several different countries
and thus fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive in particular countries, leading to
a reduction in sales in that country. In addition, inflation in such countries
could increase the Company's expenses. To date, the Company has not hedged
against currency exchange risks. In the future, the Company may engage in
foreign currency
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denominated sales or pay material amounts of expenses in foreign currencies and,
in such event, may experience gains and losses due to currency fluctuations. The
Company's operating results could be adversely affected by such fluctuations or
as a result of inflation in particular countries where material expenses are
incurred.
YEAR 2000
Many existing computer programs, including some programs used by the Company,
use only two digits to identify a year in the date field. These programs were
designed without considering the impact of the upcoming change in the century.
If not corrected, these computer applications and systems could fail or create
erroneous results by, at, or after the year 2000. Based on the Company's
investigation to date, management does not anticipate that the Company will
incur material operating expenses or be required to incur material costs to be
year 2000 compliant. To the extent the Company's systems are not fully year 2000
compliant, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a material adverse effect on
the Company's business, financial condition, results or operations and business
prospects.
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