February 3, 1999 (Part 1)
DYNATECH CORP (DYNA)
Quarterly Report (SEC form 10-Q)
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, 1998.
Overview
The Merger. On May 21, 1998 the Company was merged with CDRD Merger Corporation ("MergerCo"), a nonsubstantive
transitory merger vehicle organized at the direction of Clayton, Dubilier & Rice, Inc. ("CDR"), a private investment firm, with the
Company continuing as the surviving corporation (the "Merger"). The Merger and related transactions were treated as a
recapitalization (the "Recapitalization") for financial reporting purposes. Accordingly, the historical basis of the Company's assets
and liabilities was not affected by these transactions.
In the Merger, (i) each then outstanding share of common stock, par value $0.20 per share, of the Company (the "Common
Stock") was converted into the right to receive $47.75 in cash and 0.5 shares of common stock, no par value, of the Company
(the "Recapitalized Common Stock") and (ii) each then outstanding share of common stock of MergerCo was converted into
one share of Recapitalized Common Stock.
As a result of the Merger, Clayton, Dubilier & Rice Fund V Limited Partnership, an investment partnership managed by CDR
("CDR Fund V"), holds approximately 92.3% of the Recapitalized Common Stock. John F. Reno, the Chairman, President and
Chief Executive Officer of the Company, together with two family trusts, holds approximately 0.7% of the Recapitalized
Common Stock and other stockholders hold approximately 7.0% of the Recapitalized Common Stock.
In connection with the Merger and related transactions, Dynatech LLC (formerly known as Telecommunications Techniques
Co., LLC), Dynatech Corporation's wholly owned subsidiary ("Dynatech LLC"), became the primary obligor (and Dynatech
Corporation, a guarantor) with respect to indebtedness of Dynatech Corporation, including the 9 3/4% Senior Subordinated
Notes due 2008 (the "Senior Subordinated Notes") and the Senior Secured Credit Facilities referred to elsewhere in this
report.
Dynatech Corporation has fully and unconditionally guaranteed the Senior Subordinated Notes. Dynatech Corporation,
however, is a holding company with no independent operations and no significant assets other than its membership interest in
Dynatech LLC. See "Capital Resources and Liquidity." Accordingly, the condensed consolidated financial statements of
Dynatech Corporation, presented in this report, are not materially different from those of Dynatech LLC. Management has not
included separate financial statements of Dynatech LLC because management has determined that they would not be material to
holders of the Senior Subordinated Notes or to the holders of Dynatech Corporation's common stock. Dynatech LLC is
subject, under the agreements governing its indebtedness, to prohibitions on its ability to make distributions to Dynatech
Corporation (with limited exceptions) and other significant restrictions on its operations. See "Capital Resources and Liquidity."
Acquisition. On June 19, 1998 the Company, through one of its indirect wholly owned subsidiaries, acquired all of the
outstanding capital stock of Pacific Systems Corporation of Kirkland, Washington ("Pacific") for a total purchase price of $20
million, including an incentive earnout, which resulted in approximately $18 million of goodwill. The acquisition was accounted
for using the purchase method of accounting. Pacific designs and manufactures customer-specified avionics and integrated cabin
management equipment for the corporate and general aviation market.
Divestiture. On June 30, 1998 the Company sold the assets of ComCoTec, Inc. ("ComCoTec") located in Lombard, Illinois to
The Potomac Group, Inc. for $21 million. ComCoTec is a supplier of pharmacy management software and services and was a
subsidiary within the Company's visual communications products group.
Current Trends
Growth rates of enterprises engaged in the manufacture and provision of telecommunications equipment and services will likely
be affected by the current trend of consolidation among such enterprises. In addition, particularly in the near term, recent capital
market volatility and reduced financing availability may affect growth rates for certain customers, particularly those that may be
highly leveraged with significant capital requirements and those that are located in emerging markets, as well as growth of the
economy in general. Any resulting slowdown in such growth could result in delays or reductions of orders for the Company's
products, and accordingly affect the Company's own growth.
In the shorter term, the Company believes that such consolidation is being reflected in delays in orders for certain of the
Company's test products as consolidating companies integrate or coordinate their purchasing practices. Conversely, the
Company has experienced a recent influx of large orders from certain of the Regional Bell Operating Companies ("RBOCs") for
the Company's ruggedized laptop computers.
In the Company's largest business, communications test, sales have been relatively flat for the nine month period ended
December 31, 1998 (a decrease of 1.4%), compared to the same period a year ago. The Company cannot predict whether
growth will continue at historical rates in either its own business or in the markets in which it participates, due in part to recent
global economic events.
Itronix, as a manufacturer of ruggedized portable computing and communications hardware, generally has lower margins than
the Company's other businesses. As a result, profitability of the Company's industrial computing and communications business is
lower than the average profitability of the Company's other businesses.
Itronix had been facing significant manufacturing and marketing challenges earlier in this fiscal year, as well as in fiscal 1998. The
Company has taken several steps designed to improve the operating performance of Itronix, including programs designed to
reduce costs and streamline manufacturing, as well as a change in Itronix senior management. During the third quarter Itronix
received orders totaling more than $72 million, primarily from two RBOCs. As a result, Itronix's performance during the third
quarter has significantly improved. However, results of operations for Itronix are expected to continue to vary widely because of
the relatively small number of potential customers with large field-service work forces and the irregularity of the timing and size
of such customers' orders.
Growth at ICS in the near term is expected to lag behind historical growth rates. The Company is assessing the current market
trend for these products. |
