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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 000-07438
ACTERNA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2258582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20410 Observation Drive
Germantown, Maryland 20876
(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (301) 353-1550
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 _.
At August 14, 2002 there were 192,247,507 shares of common stock of the
registrant outstanding.
PART I. Financial Information
-----------------------------
Item 1. Financial Statements
ACTERNA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
2002 2001
--------- ---------
(In thousands except per share data)
Net sales $ 170,345 $ 338,920
Cost of sales 86,436 147,520
--------- ---------
Gross profit 83,909 191,400
Selling, general & administrative expense 81,117 124,819
Product development expense 30,614 41,317
Restructuring 6,156 ---
Amortization of intangibles 263 11,552
--------- ---------
Total operating expense 118,150 177,688
--------- ---------
Operating (loss) income (34,241) 13,712
Interest expense (22,296) (26,277)
Interest income 72 486
Other expense, net (1,475) (1,832)
--------- ---------
Loss from continuing operations before
income taxes (57,940) (13,911)
Benefit for income taxes (16,917) (4,721)
--------- ---------
Net loss from continuing operations (41,023) (9,190)
Income from discontinued operations net of
tax effect of $659 and $928, respectively 1,112 3,040
--------- ---------
Net loss $ (39,911) $ ( 6,150)
========= =========
Income (loss) per common share - Basic and diluted:
Continuing operations $ (0.22) $ (0.05)
Discontinued operations $ 0.01 $ 0.02
--------- ---------
Net loss per common share -
Basic and diluted $ (0.21) $ (0.03)
========= =========
Weighted average number of common shares:
Basic and diluted 192,248 191,186
========= =========
- ---------------------
See notes to unaudited consolidated financial statements.
2
ACTERNA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, March 31,
2002 2002
------------- -------------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 49,090 $ 42,739
Accounts receivable, net 113,825 119,246
Inventories:
Raw materials 40,898 37,604
Work in process 34,669 35,885
Finished goods 34,513 35,250
---------- ----------
Total inventory 110,080 108,739
Deferred income taxes 17,642 18,878
Income tax receivable 28,045 77,479
Other current assets 36,750 30,254
Current assets of discontinued operations held
for sale 13,654 15,430
---------- ----------
Total current assets 369,086 412,765
Property, plant and equipment, net 125,415 118,213
Goodwill, net 409,916 408,922
Intangible assets, net 2,068 1,828
Deferred debt issuance costs, net 25,292 26,582
Other assets, net 20,729 19,979
Long-term assets of discontinued operations held for sale 26,078 26,267
---------- ----------
$ 978,584 $1,014,556
========== ==========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes payable $ 3,282 $ 2,523
Current portion of long-term debt 33,486 28,937
Accounts payable 53,261 68,262
Accrued expenses:
Compensation and benefits 32,950 36,752
Deferred revenue 48,006 49,231
Warranty 17,434 16,907
Interest 5,892 10,700
Restructuring 10,366 14,185
Other 38,279 31,657
Taxes other than income taxes 5,798 8,079
Accrued income taxes 32,608 31,262
Current liabilities of discontinued operations held for sale 10,539 10,644
---------- ----------
Total current liabilities 291,901 309,139
Long-term debt 990,608 979,187
Long-term notes payable 76,875 76,875
Deferred income taxes 15,967 17,581
Other long-term liabilities 70,583 68,549
Commitments and contingencies --- ---
Stockholders' deficit:
Common stock 1,922 1,922
Additional paid-in capital 786,537 786,537
Accumulated deficit (1,210,550) (1,170,639)
Unearned compensation (49,066) (53,925)
Accumulated other comprehensive income (loss) 3,807 (670)
---------- ----------
Total stockholders' deficit (467,350) (436,775)
---------- ----------
$ 978,584 $1,014,556
========== ==========
- --------
See notes to unaudited consolidated financial statements.
3
ACTERNA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
2002 2001
---------- -----------
(in thousands)
Operating activities:
Net loss $ ( 39,911) $ ( 6,150)
Adjustments for non-cash items included in net loss:
Depreciation expense 7,633 7,376
Amortization of intangibles 326 11,523
Amortization of unearned compensation 4,859 6,542
Amortization of deferred debt issuance costs 1,289 1,031
Tax benefit from stock option exercise - 994
Other - 2,244
Change in deferred income taxes (34) 996
Change in operating assets and liabilities 39,047 (64,267)
-------- --------
Net cash flows provided by (used in) operating activities 13,209 (39,711)
Investing activities:
Purchases of property and equipment (10,090) (15,631)
Other --- (2,258)
----------- ----------
Net cash flows used in investing activities (10,090) ( 17,889)
Financing activities:
Net borrowings under revolving facility and term loan
debt 2,967 41,972
Net repayments of notes payable and other debt (1,790) (18)
Proceeds from issuance of common stock, net of
expenses - 1,080
----------- ----------
Net cash flows provided by financing activities 1,177 43,034
Effect of exchange rate change on cash and cash
equivalents 2,673 (3,091)
Increase (decrease) in cash and cash equivalents 6,969 (17,657)
Cash and cash equivalents of discontinued operations (618) ---
Cash and cash equivalents at beginning of period 42,739 63,053
----------- ----------
Cash and cash equivalents at end of period $ 49,090 $ 45,396
=========== ==========
Change in operating asset and liability components:
Decrease in trade accounts receivable $6,986 $5,073
Increase in inventories (1,018) (15,337)
Decrease (increase) in other assets 54,558 (905)
Decrease in accounts payable (15,580) (15,676)
Decrease in accrued expenses, taxes and other (5,899) (37,422)
----------- -----------
Change in operating assets and liabilities 39,047 (64,267)
=========== ===========
See notes to unaudited consolidated financial statements.
4
ACTERNA CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
A. FORMATION, BACKGROUND AND RECLASSIFICATION OF FINANCIAL STATEMENT
PRESENTATION
Acterna Corporation (the "Company"),formerly Dynatech Corporation, was
formed in 1959 and is a global communications equipment company focused on
network technology solutions. The Company's operations are conducted by
wholly owned subsidiaries located principally in the United States of
America and Europe with other operations, primarily sales offices, located
in Asia and Latin America. The Company's continuing operations are managed
in three business segments: communications test, industrial computing and
communications and da Vinci. The Company also has another segment, Airshow,
which is classified as a discontinued operation. (See Note F. Discontinued
Operations)
The communications test business develops, manufactures and markets
instruments, systems, software and services used to test, deploy, manage
and optimize communications networks, equipment and services. The Company
offers products that test and manage the performance of equipment found in
modern, converged networks, including optical transmission systems for data
communications, voice services, wireless voice and data services, cable
services and video delivery.
The industrial computing and communications segment (Itronix) provides
computer products to the ruggedized personal computer market.
da Vinci provides digital color enhancement systems used in the production
of television commercials and programming. Their products are sold to
post-production and video production professionals and producers of content
for standard and high-definition television markets.
On June 13, 2002, the Company signed a definitive agreement to sell its
Airshow, Inc. business("Airshow") to Rockwell Collins, Inc., for $160
million in cash, subject to adjustment. The consummation of this
transaction occurred on August 9, 2002. The Company expects to record a
gain in relation to this transaction, and intends to use the net proceeds
of the sale (after fees and expenses) to repay a portion of its debt or
invest in its business. The Company has accounted for this business as
discontinued operation in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets".
The Company previously reported the industrial computing and communications
segment as discontinued operations. This segment was comprised of two
subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the
Company divested its ICS Advent subsidiary, but decided to retain Itronix
based on current market conditions (see Note F. Discontinued Operations).
The decision to retain Itronix required the Company to make certain
reclassifications to its Statement of Operations for the three months ended
June 30, 2001. The Statement of Operations was reclassified to include the
results of operations of ICS Advent and Itronix as continuing operations.
The Statement of Cash Flows for the period ended June 30, 2001 was not
reclassified as this statement was not previously presented on a
discontinued basis.
The Company operates on a fiscal year ended March 31 in the calendar year
indicated (e.g., references to fiscal 2003 are references to the Company's
fiscal year which began April 1, 2002 and will end March 31, 2003). Unless
the context otherwise requires, the "Company" or "Acterna" refers to
Acterna Corporation and its subsidiaries.
B. RECENT DEVELOPMENTS AND LIQUIDITY
The global economic downturn has exacerbated the severe downturn in the
Company's communications test segment and its other businesses. As a
result, the Company continues to experience diminished product demand,
excess manufacturing capacity and erosion of average selling prices.
5
The downturn in the communications test segment results from, among other
things, a significant decrease in network expansion activity and capital
spending generally by the Company's telecommunications customers.
In response to the continuing decline in product demand, the Company
continues to implement cost reduction programs aimed at aligning its
ongoing operating costs with its expected revenues and enabling the Company
to remain compliant with the liquidity and earnings covenants under the
Senior Secured Credit Facility. Given the severity of current market
conditions, however, the Company cannot provide any assurance that these
cost reduction programs will actually align the Company's operating
expenses and revenues and enable the Company to comply with such covenants
or be sufficient to avoid operating losses, or that additional cost
reduction programs will not be necessary in the future.
As of June 30, 2002, the Company has liquidity of approximately $129
million, which includes cash and cash equivalents of $49 million and
available credit under its revolving credit facility of $80 million.
The Company's cash requirements for debt service and ongoing operations are
substantial. Based on current forecasts of revenues and results of
operations, assuming timely completion and execution of the cost reduction
programs, and based on the increasing and significant debt repayment
obligations beginning in 2003, the Company believes that its current
capital structure may need to be renegotiated, extended or refinanced.
There can be no assurance that, in the event the Company is required to
extend, refinance or repay its debt, new or additional sources of financing
will be available, or will be available on terms acceptable to the Company.
During July 2002, the Company's lenders agreed to modify its EBITDA
covenants. (See Note G. Debt) The related amendments to the Senior Secured
Credit Facility became effective on August 7, 2002. Notwithstanding these
amendments, the Company may also be required to obtain further amendments
to the Senior Secured Credit Facility in the future in order to continue to
comply with its financial covenant requirements, however, it cannot provide
any assurance that it will be able to reach agreement with its lenders with
respect to such amendments on reasonable terms. Inability to further modify
the covenants could result in an event of default and cause the lenders to
require immediate repayment of all debt under the Senior Secured Credit
Facility and limit or cancel the availability of borrowings under the
Company's Revolving Credit Facility. The Company may be required to find
other sources of capital and to substantially reduce its cost of
operations. In addition, the Company may need to raise additional capital
to meet its needs after 2003, in order to develop new products and to
enhance existing products in response to competitive pressures, and to
acquire complementary products, businesses or technologies. Inability to
repay the debt obligations or arrange for alternative financing would have
a material negative impact on the financial position of the Company.
The Company's future operating performance and ability to repay, extend or
refinance the Senior Secured Credit Facility (including the Revolving
Credit Facility) or any new borrowings, and to service and repay or
refinance the Convertible Notes and the Senior Subordinated Notes, will be
subject to future economic, financial and business conditions and other
factors, including demand for communications test equipment, many of which
are beyond the Company's control.
These and other risks associated with the Company's business are described
in the Company's Securities and Exchange Commission reports, including the
Company's Annual Report on Form 10-K/A for the fiscal year ended March 31,
2002 (the "2002 Form 10-K").
C. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the
6
"SEC"). Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted
accounting principles has been condensed or omitted in accordance with the
rules and regulations of the SEC. These statements should be read in
conjunction with the Company's 2002 Form 10-K/A. The balance sheet amounts
at March 31, 2002 in this report were extracted from the Company's audited
2002 financial statements included in the 2002 Form 10-K/A. Certain prior
period amounts have been reclassified to conform to the current-year
financial statement presentation. The assets and liabilities from the
Airshow business have been broken-out and included in assets and
liabilities of discontinued operations. The information reflects all
adjustments that, in the opinion of management, are necessary to present
fairly the Company's results of operations, financial position and cash
flows for the periods indicated. All such adjustments are of a normal
recurring nature with the exception of those entries resulting from
discontinued operations. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect both the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities, as of the date of the financial statements. Such estimates
in these financial statements include allowances for accounts receivable,
net realizable value of inventories, warranty accruals and tax valuation
allowances. Actual results could differ from those estimates. The results
of operations for the three months ended June 30, 2002 are not necessarily
indicative of the results of the entire fiscal year.
D. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143
addresses accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company does not expect the application of SFAS
No. 143 to have a material impact on its financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections", which rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt. This change amended APB Opinion No. 30, which
required all gains and losses from the extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result, the criteria set forth by the
amended APB Opinion No. 30 will now be used to classify those gains and
losses. SFAS No. 145 also amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. Lastly, SFAS No. 145 amended other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. The provisions of
SFAS No. 145 are effective for fiscal years beginning after May 15, 2002,
with early adoption encouraged. The Company does not anticipate a material
impact to its financial results as a result of adopting this standard.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses
accounting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity." This statement is effective for exit disposal activities
that are initiated after December 31, 2002, with early adoption encouraged.
The Company is currently assessing the impact of SFAS 146 on its financial
position and results of operations.
E. ACQUIRED INTANGIBLE ASSETS AND GOODWILL
The acquired intangible assets as of June 30, 2002 and March 31, 2002 are
as follows (in thousands):
7
June 30, March 31,
2002 2002
Amortized intangible assets:
Gross carrying amount $ 9,189 $ 8,758
Accumulated amortization (7,121) (6,930)
--------- ---------
Total $ 2,068 $ 1,828
========= =========
Aggregate amortization expense:
For the three months ended June 30, 2002 $ 263
Estimated amortization expense:
For the year ended March 31, 2003 $ 1,052
For the year ended March 31, 2004 $ 1,052
For the year ended March 31, 2005 $ 227
Intangible assets are amortized over a weighted average life of 8
years. Net intangible assets of Airshow presented in discontinued
operations were $562 thousand and $625 thousand at June 30, 2002 and March
31, 2002, respectively.
The changes in the carrying amount of goodwill during the three
months ended June 30, 2002, are as follows (in thousands):
Reporting Units
--------------------------------------------------
Communications
Test Itronix da Vinci Total
--------------- -------- ------------ -------
Balance as of March 31, 2002 $376,171 $ 31,645 $ 1,106 $408,922
Goodwill adjustments 470 491 33 994
-------- -------- ------- --------
Balance as of June 30, 2002 $376,641 $ 32,136 $ 1,139 $409,916
======== ======== ======== ========
The goodwill adjustments in every reporting unit resulted from currency
translation adjustments.
The Company completed its annual impairment test of goodwill for all
reporting units as required under SFAS 142 as of March 31, 2002 and
determined that goodwill was not impaired. The impairment testing was based
on discounted cash flow analyses of expected future earnings for each of
the reporting units over the remaining estimated lives of the separately
identifiable intangible assets. As a result of the continued industry
slowdown, the Company continues to assess the value of goodwill on a
quarterly basis. Such an assessment was performed at June 30, 2002 and
based on current quarter operating results and expectations of future
earnings, the Company determined that its goodwill was not impaired at June
30, 2002. The Company will continue to assess the value of goodwill for
impairment on a quarterly basis and can provide no assurance that an
impairment adjustment will not be necessary in the future.
F. DISCONTINUED OPERATIONS
In May 2000, the Board of Directors approved a plan to divest the
industrial computing and communications segment, which consisted of its ICS
Advent and Itronix Corporation subsidiaries. In October 2001, the Company
divested its ICS Advent subsidiary, but decided to retain Itronix based on
current market conditions. The decision to retain Itronix required the
Company to make certain reclassifications to its Statement of Operations
for the three months ended June 30, 2001. Management had previously
expected that proceeds on disposal of both businesses
8
comprising the segment would exceed net assets, including operating losses
incurred subsequent to May 2000, and accordingly these operating losses
were deferred.
The net operating losses for ICS Advent and Itronix were restated to be
included within continuing operations for the three months ended June 30,
2001 and were offset by an equal net income amount presented on the
discontinued operations line within the Statement of Operations. Therefore,
the net loss in total for the Company as previously reported for this
period did not change. The income reported as discontinued operations, as
reclassified for the three months ended June 30, 2001 includes net
operating losses previously deferred for ICS Advent and Itronix. The
Statement of Cash Flows for the three months ended June 30, 2001 was not
reclassified as this statement was not previously presented on a
discontinued basis.
On June 13, 2002, the Company signed a definitive agreement to sell its
Airshow business to Rockwell Collins, Inc., for $160 million in cash,
subject to adjustment. The consummation of this transaction occurred on
August 9, 2002. The Company expects to record a gain in relation to this
transaction, and intends to use the net proceeds of the sale (after fees
and expenses) to repay a portion of its debt or invest in its business. The
Company has accounted for the Airshow business as a discontinued operation
in accordance with SFAS No. 144, and accordingly, the results of operations
of this business have been segregated from continuing operations and
reported within income from discontinued operations, net of tax in the
Company's Consolidated Statements of Operations for all periods presented.
Additionally, the assets and liabilities of the Airshow business are
reflected within the assets and liabilities of discontinued operations in
the accompanying Condensed Consolidated Balance Sheets. The Statements of
Cash Flows have not been restated for discontinued operations.
G. DEBT
During July 2002, the Company reached agreement with its lenders regarding
amendments to its Senior Secured Credit Facility. Under the amendments,
which became effective on August 7, 2002, the lenders, among other things,
approved the sale of the Company's Airshow business to Rockwell Collins,
Inc. and agreed to certain changes to financial covenants in the Revolving
Credit Facility. As part of this agreement, the minimum liquidity
requirement of $25 million at the end of each quarter will remain the same;
however, the minimum EBITDA covenants have been modified as follows:
negative $40 million for the two quarters ended September 2002; negative
$17 million for the three quarters ended December 2002; and $0 for the four
quarters ended March 2003. Additionally, if the Company repays $100 million
of term debt prior to June 2003, minimum EBITDA covenants for the trailing
four quarters will be modified as follows: $20 million for June 2003; $30
million for September 2003; $40 million for December 2003; and $50 million
for March 2004. In addition, the lenders have agreed that the Company may
use up to $24 million to purchase a portion of Acterna LLC's 9 3/4 percent
Senior Subordinated Notes due 2008 pursuant to the combined tender offers
described below.
On June 24, 2002, the Company commenced cash tender offers, as amended, for
up to $155 million, on a combined basis, in principal amount of its
outstanding 9 3/4 percent Senior Subordinated Notes due 2008. The
consideration for each $1,000 principal amount of the notes tendered
pursuant to this offer will be $220. The tender offers were made by Acterna
LLC and CD&R VI (Barbados), Ltd. ("CD&R Barbados"), for principal amounts
of up to $109 million and $46 million, respectively. In connection with the
combined tender offers, Acterna LLC granted CD&R Barbados the right (which
CD&R Barbados agreed to exercise only at the request of the administrative
agent under Acterna LLC's credit facility) to invest all future cash
interest received, on an after tax basis, on all the Senior Subordinated
Notes held by CD&R Barbados upon completion of the tender offers in new
senior secured convertible notes of Acterna LLC. The new notes will have
terms substantially similar to the 12% Senior Secured Convertible Notes due
2007 issued to Clayton Dubilier & Rice Fund VI Limited Partnership ("CD&R
Fund VI") in January 2002 except that the interest rate and the conversion
rate applicable to any series of new notes will be determined at the time
of issuance. CD&R Barbados is a Barbados company holding an International
Business Company license. All of the capital stock of CD&R Barbados is
owned by CD&R Fund VI. The combined tender offers expired in accordance
with their terms as amended, on August 12, 2002. At the close of business
on August 12, 2002, approximately $149.6 million principal amount of
9
the Senior Subordinated Notes had been validly tendered, representing
Senior Subordinated Notes with an aggregate purchase price of approximately
$32.9 million.
H. RESTRUCTURING
The Company continues to implement cost reduction programs aimed at
aligning its ongoing operating costs with its expected revenues. During the
first quarter of fiscal 2003, the Company announced additional
restructuring actions primarily related to the reduction of workforce. As a
result, the Company incurred a restructuring charge of $6.2 million during
the first quarter of fiscal 2003. Based on current estimates of its
revenues and operating profitability and losses, the Company plans to take
additional and significant cost reductions to remain in compliance with its
financial covenant requirements under its Senior Secured Credit Facility.
The Company believes that such cost reduction programs will be implemented
and executed on a timely basis and will align costs with revenues, but no
assurance can be given in that regard.
The following table summarizes the restructuring expenses and payments
incurred during the three months ended June 30, 2002 (in thousands):
Balance Balance
March 31, June 30,
2002 Expense Paid 2002
---------- ------- ---- ----------
Workforce-related $ 13,388 $ 5,656 $(9,475) $ 9,569
Facilities 371 --- --- 371
Other 426 500 (500) 426
------------ -------- -------- ------------
Total $ 14,185 $ 6,156 $( 9,975) $ 10,366
============ ======== ======== ============
The restructuring accrual presented above excludes an Airshow accrual of
$293 thousand and $377 thousand at June 30, 2002 and March 31, 2002,
respectively.
I. INCOME TAXES
A tax benefit of $16.9 million was recorded during the three months ended
June 30, 2002. Although a valuation allowance remains on the U.S. and
certain foreign deferred tax assets generated in prior years, it was
projected that the gain on the sale of Airshow will generate sufficient
taxable income to offset the taxable losses projected for the year. As a
result, a tax benefit was recognized on the losses incurred during the
quarter.
J. COMPREHENSIVE LOSS
Comprehensive loss consisted of the following (in thousands):
Three Months Ended
June 30, July 1,
2002 2001
------- -------
Net loss $ (39,911) $ (6,150)
Foreign currency translation adjustments 4,477 (950)
--------- ----------
Comprehensive loss $ (35,434) $ (7,100)
========= ==========
10
K. LOSS PER SHARE
Loss per share is calculated as follows (in thousands except per share
data):
Three Months Ended
June 30,
2002 2001
------- -------
Net income (loss):
Continuing operations $ (41,023) $ (9,190)
Discontinued operations 1,112 3,040
--------- ----------
Net loss $ (39,911) $ (6,150)
========= ==========
BASIC AND DILUTED:
Common stock outstanding, beginning of period 192,248 190,953
Weighted average common stock issued during
the period --- 233
--------- ---------
Weighted average common stock outstanding,
End of period 192,248 191,186
========= =========
Loss per common share:
Continuing operations $ (0.22) $ (0.05)
Discontinued operations 0.01 0.02
--------- ---------
Net loss per common share $ (0.21) $ (0.03)
========= =========
Stock options were excluded from the diluted loss per share calculation due
to their anti-dilutive effect.
L. SEGMENT INFORMATION
Net sales, earnings before interest, taxes and amortization ("EBITA") and
total assets for the three months ended June 30, 2002 and 2001 are shown
below (in thousands):
11
Three Months Ended
June 30,
2002 2001
------ ------
Communications test segment:
Net sales $ 136,212 $ 276,583
EBITA (24,874) 34,925
Total assets 854,329 1,098,022
Industrial computing and communications segment:
Sales 28,156 54,350
EBITA 70 (553)
Total assets 78,584 138,042
da Vinci:
Sales 5,977 7,987
EBITA 1,998 2,029
Total assets 4,712 10,229
Discontinued Operations:
Total assets 39,732 43,901
Corporate:
Loss before interest and taxes (1,388) (1,712)
Total assets 1,227 105,806
Total company:
Sales 170,345 338,920
EBITA (24,194) 34,689
Total assets $978,584 $1,396,000
The following are excluded from the calculation of EBITA:
Operating (loss) income $(34,241) $13,712
Amortization of unearned
compensation 4,723 6,542
Restructuring charges 6,156 ---
Non-recurring cost reduction --- 4,715
Amortization of intangibles 263 11,552
Bank fees 380 ---
------- ----------
Total excluded items $ 11,522 $ 22,809
Less other expense (1,475) (1,832)
----------- ----------
EBITA $ (24,194) $ 34,689
============ ==========
M. SUBSEQUENT EVENTS
On August 7, 2002, certain amendments to the Company's Senior Secured
Credit Facility, including, among other things, changes to minimum EBITDA
covenants, became effective. (See Note G. Debt) On August 9, 2002, the
Company consummated the sale of its Airshow business to Rockwell Collins,
Inc. for $160 million in cash proceeds, subject to adjustment. (see Note F
Discontinued Operations). On August 12, 2002, the combined cash tender
offers made by Acterna LLC and CD&R Barbados for up to $155 million in
principal amount of the Senior Subordinated Notes expired in accordance
with their terms, as amended. (See Note G Debt).
N. SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF ACTERNA CORPORATION AND
ACTERNA LLC
In connection with the Company's recapitalization and related transactions,
Acterna LLC became the primary obligor with respect to substantially all of
the indebtedness of Acterna Corporation, including the 9 3/4% Senior
Subordinated Notes due 2008 (the "Senior Subordinated Notes").
Acterna Corporation has fully and unconditionally guaranteed the Senior
Subordinated Notes. Acterna Corporation, however, is a holding company with
no independent operations and no significant assets other than its
membership interest in Acterna LLC. Certain other
12
subsidiaries of the Company are not guarantors of the Senior Subordinated
Notes. The condensed consolidating financial statements presented herein
include the statement of operations, balance sheets, and statements of cash
flows without additional disclosure as the Company has determined that the
additional disclosure is not material to investors.
13
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Three Months Ended June 30, 2002
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Net sales $--- $56,799 $113,546 --- $170,345
Cost of sales --- 29,722 56,714 --- 86,436
------------ --------- ----------- ---------- ----------
Gross profit --- 27,077 56,832 --- 83,909
Selling, general and administrative
expense --- 39,301 41,816 --- 81,117
Product development expense --- 14,186 16,428 --- 30,614
Restructuring --- 2,675 3,481 --- 6,156
Amortization of intangibles --- --- 263 --- 263
------------ ----------- ------------ ---------- ----------
Total operating expense --- 56,162 61,988 --- 118,150
------------ ----------- ------------ ---------- ----------
Operating loss --- (29,085) (5,156) --- (34,241)
Interest expense --- (19,436) (2,860) --- (22,296)
Interest income --- - 72 --- 72
Intercompany interest income (expense) --- 5,219 (5,219) --- --
Intercompany royalty income --- (717) 717 --- ---
Other income (expense) --- (5,332) 3,857 --- (1,475)
------------ ----------- ------------ ---------- ----------
Loss from continuing
operations before income taxes --- (49,351) (8,589) --- (57,940)
Provision (benefit) for income taxes --- (17,650) 733 --- (16,917)
----------- --------- ----------- ---------- ----------
Net loss from continuing
operations --- (31,701) (9,322) --- (41,023)
Equity income (loss) (39,911) (8,210) --- 48,121 ---
Income from discontinued operations --- --- 1,112 --- 1,112
------------ ---------- ----------- ----------- -----------
Net loss $ (39,911) $ (39,911) $ (8,210) $ 48,121 $(39,911)
========== ========== ========== =========== ==========
14
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For The Three Months Ended June 30, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Net sales $ --- $ 87,676 $251,244 $ --- $338,920
Cost of sales --- 31,426 116,094 --- 147,520
--------- --------- ---------- ---------- ----------
Gross profit --- 56,250 135,150 --- 191,400
Selling, general and administrative expense --- 58,405 66,414 --- 124,819
Product development expense --- 12,447 28,870 --- 41,317
Amortization of intangibles --- 145 11,407 --- 11,552
--------- ---------- ----------- ---------- -----------
Operating income (loss) --- (14,747) 28,459 --- 13,712
Interest expense --- (22,430) (3,847) --- (26,277)
Interest income --- 114 372 --- 486
Intercompany income (expense) --- 19 (19) --- ---
Other income (expense), net --- (5,326) 3,494 --- (1,832)
------ --------- --------- ------ ----------
Income (loss) before income taxes --- (42,370) 28,459 --- (13,911)
Provision (benefit) for income taxes --- (15,215) 10,494 --- (4,721)
--------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations --- (27,155) 17,965 --- (9,190)
Income (loss) from discontinued operations --- --- 3,040 --- 3,040
Equity income (loss) (6,150) 21,005 --- (14,855) ---
--------- ---------- ---------- ---------- ----------
Net income (loss) $ (6,150) $ (6,150) $ 21,005 $(14,855) $ (6,150)
========== ========== ========== ========== ==========
15
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2002
(Unaudited)
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ --- $ 20,134 $ 28,956 $--- $ 49,090
Accounts receivable, net --- 30,435 83,390 --- 113,825
Inventory --- 20,721 89,359 110,080
Deferred income taxes --- 15,383 2,259 --- 17,642
Other current assets --- 32,882 31,913 --- 64,795
Current assets of discontinued
operations held for sale --- -- 13,654 --- 13,654
------------- ----------- --------- ---------- -----------
Total current assets --- 119,555 249,531 --- 369,086
Property and equipment, net --- 36,620 88,795 --- 125,415
Investments in and advances to
consolidated subsidiaries (467,350) (197,665) (597,295) 1,262,310 ---
Goodwill, net --- 16,908 393,008 --- 409,916
Intangible assets, net --- --- 2,068 --- 2,068
Deferred debt issuance costs, net --- 25,292 --- --- 25,292
Other assets --- 1,793 18,936 --- 20,729
Long-term assets of discontinued ---
operations held for sale --- 26,078 --- 26,078
------------- ----------- --------- ---------- -----------
$(467,350) $ 2,503 $ 181,121 $1,262,310 $978,584
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Notes payable and current portion
of long-term debt --- $ 26,750 $ 10,018 --- $ 36,768
Accounts payable --- 20,966 32,295 --- 53,261
Accrued expenses:
Compensation and benefits --- 10,935 22,015 --- 32,950
Deferred revenue --- 9,309 38,697 --- 48,006
Warranty --- 6,341 11,093 --- 17,434
Interest --- 5,601 291 --- 5,892
Taxes, other than income taxes --- 995 4,803 --- 5,798
Other --- 20,457 28,188 --- 48,645
Accrued income taxes --- 28,468 4,140 --- 32,608
Current liabilities of discontinued --- ---
operations held for sale --- 10,539 10,539
-------------- ------------ ------------- ----------- -----------
Total current liabilities --- 129,822 162,079 --- 291,901
Long-term debt and notes payable --- 949,775 117,708 --- 1,067,483
Deferred income taxes --- 15,739 228 --- 15,967
Other long-term liabilities --- 8,186 62,397 --- 70,583
Stockholders' deficit:
Common stock 1,922 (16,200) 17,214 (1,014) 1,922
Additional paid-in capital 786,537 (13,784) 203,097 (189,313) 786,537
Accumulated deficit (1,210,550) (1,060,431) (388,593) 1,449,024 (1,210,550)
Unearned compensation (49,066) (49,066) --- 49,066 (49,066)
Accumulated other comprehensive income 3,807 38,462 6,991 (45,453) 3,807
-------------- ------------ ------------- ----------- -----------
Total stockholders'
deficit (467,350) (1,101,019) (161,291) 1,262,310 (467,350)
-------------- ------------ ------------- ----------- -----------
$ (467,350) $ 2,503 $ 181,121 $ 1,262,310 $ 978,584
============= ============= ============= ============= =============
16
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2002
(Unaudited)
Acterna Acterna Non-Guarantor Total
ASSETS Corp LLC Subsidiaries Elimination Consolidated
--------- --------- ------------- ----------- ------------
(In thousands)
Current assets:
Cash and cash equivalents $ --- $ 14,969 $ 27,770 $ --- $ 42,739
Accounts receivable, net --- 38,875 80,371 --- 119,246
Inventory --- 23,623 85,116 --- 108,739
Other current assets --- 91,233 35,378 --- 126,611
Current assets of discontinued operations
held for sale --- --- 15,430 --- 15,430
---------- ---------- ----------- ----------- ------------
Total current assets --- 168,700 244,065 --- 412,765
Property and equipment, net --- 31,255 86,958 --- 118,213
Investments in and advances to
consolidated subsidiaries (430,762) (234,866) (593,530) 1,259,158 ---
Goodwill, net --- 16,908 392,014 --- 408,922
Intangible assets, net --- --- 1,828 --- 1,828
Deferred income taxes --- (9,284) 9,284 --- ---
Other assets --- 40,574 5,987 --- 46,561
Long-term assets of discontinued operations
held for sale --- --- 26,267 --- 26,267
---------- ---------- ----------- ----------- ------------
$ (430,762) $13,287 $172,873 $1,259,158 $1,014,556
========== ========== =========== =========== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable and current portion of debt $ --- $ 23,000 $ 8,460 $ --- $ 31,460
Accounts payable --- 27,547 40,715 --- 68,262
Accrued expenses --- 87,349 111,424 --- 198,773
Current liabilities of discontinued
operations held for sale --- --- 10,644 --- 10,644
---------- ---------- ----------- ----------- ------------
Total current liabilities --- 137,896 171,243 --- 309,139
Long-term debt --- 953,200 102,862 --- 1,056,062
Deferred income taxes --- 15,739 1,842 --- 17,581
Other long-term liabilities --- 11,386 57,163 --- 68,549
Stockholders' deficit
Common stock 1,922 (16,200) 17,214 (1,014) 1,922
Additional paid-in capital 786,537 (13,784) 203,097 (189,313) 786,537
Accumulated deficit (1,164,626) (1,020,520) (380,383) 1,394,890 (1,170,639)
Unearned compensation (53,925) (53,925) --- 53,925 (53,925)
Accumulated other comprehensive loss (670) (505) (165) 670 (670)
---------- ----------- ----------- ----------- ------------
Total stockholders' deficit (430,762) (1,104,934) (160,237) 1,259,158 (436,775)
---------- ---------- ----------- ----------- ------------
$ (430,762) $ 13,287 $ 172,873 $1,259,158 $1,014,556
=========== ========== =========== ========== ===========
17
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Three Months Ended June 30, 2002
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
------- ------- ------------- -------- ------------
Operating Activities: (In thousands)
Net Loss: $(39,911) $(39,911) $ (8,210) $ 48,121 $ (39,911)
Adjustments for non-cash items included in
Net loss:
Depreciation expense --- 3,129 4,504 --- 7,633
Amortization of intangibles --- --- 326 --- 326
Amortization of unearned compensation --- 3,761 1,098 --- 4,859
Amortization of deferred debt issuance costs --- 1,289 --- --- 1,289
Change in deferred income taxes --- (34) --- --- (34)
Changes in intercompany 39,911 (13,742) 21,952 (48,121) ---
Change in operating assets and liabilities --- 54,935 (15,888) --- 39,047
---------- ---------- ---------- --------- ----------
Net cash flows provided by operating activities --- 9,427 3,782 --- 13,209
Investing activities:
Purchases of property and equipment --- (8,288) (1,802) --- (10,090)
---------- ---------- ---------- --------- ----------
Net cash flows used in investing activities --- (8,288) (1,802) --- (10,090)
Financing activities:
Net borrowings (repayments) under revolving
facility and term loan debt --- 4,250 (1,283) --- 2,967
Repayment of notes payable and other debt --- --- (1,790) --- (1,790)
---------- ---------- ---------- --------- ----------
Net cash flows provided by (used in) financing activities --- 4,250 (3,073) --- 1,177
Effect of exchange rate on cash --- (224) 2,897 --- 2,673
Increase in cash and cash equivalents --- 5,165 1,804 --- 6,969
Cash and cash equivalents at beginning of period --- 14,969 27,770 --- 42,739
Cash and cash equivalents of discontinued operations --- --- (618) --- (618)
---------- ---------- ---------- --------- ----------
Cash and cash equivalents at end of period $ --- $20,134 $28,956 $ --- $49,090
========== ========== ========== ========= ==========
18
ACTERNA CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For The Three Months Ended June 30, 2001
(Unaudited)
Acterna Acterna Non-Guarantor Total
Corp LLC Subsidiaries Elimination Consolidated
-------- -------- ------------- ----------- ------------
(In thousands)
Operating activities:
Net income (loss) from operations $(6,150) $(6,150) $21,005 $(14,855) $(6,150)
Adjustment for noncash items included
in net income (loss):
Depreciation expense --- 2,813 4,563 --- 7,376
Amortization of intangibles --- 3,472 8,051 --- 11,523
Amortization of unearned compensation --- 4,715 1,827 --- 6,542
Amortization of deferred debt issuance
costs --- 1,031 --- --- 1,031
Tax benefit from stock option exercise --- 994 --- --- 994
Other --- 2,047 197 --- 2,244
Change in deferred income taxes --- 996 --- --- 996
Change in operating assets and liabilities --- (18,053) (46,214) --- (64,267)
Changes in intercompany 6,150 (31,908) 10,903 14,855 ---
------- --------- -------- --------- ---------
Net cash flows provided by (used in)
operating activities --- (40,043) 332 --- (39,711)
Investing activities:
Purchases of property and equipment --- (7,445) (8,186) --- (15,631)
Other --- --- (2,258) --- (2,258)
------- -------- --------- --------- ----------
Net cash flows used in investing activities --- (7,445) (10,444) --- (17,889)
Financing activities:
Net borrowings under revolving facility and
term loan debt --- 39,000 2,972 --- 41,972
Net repayments of notes payable and other
debt --- --- (18) --- (18)
Proceeds from issuance of common stock, net
of expenses --- 1,080 --- --- 1,080
------- -------- -------- --------- ---------
Net cash flows provided by financing
activities --- 40,080 2,954 --- 43,034
Effect of exchange rate on cash --- 434 (3,525) --- (3,091)
------- -------- --------- --------- ----------
Decrease in cash and cash equivalents --- (6,974) (10,683) --- (17,657)
Cash and cash equivalents at beginning of period --- 22,179 40,874 --- 63,053
------- -------- -------- --------- ---------
Cash and cash equivalents at end of period $ --- $15,205 $30,191 $ --- $ 45,396
========= ========= ========= ========== ==========
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements that 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 effect 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
headcount reductions and their corresponding impact on the Company's operations,
the effect of the Company's accounting policies, and other risks detailed in the
Company's Annual Report on Form 10-K/A for the fiscal year ended March 31, 2002
and below.
Critical Accounting Policies, Commitments and Certain Other Matters
In the Company's Annual Report on Form 10-K/A for the fiscal year ended March
31, 2002, the Company's most critical accounting policies and estimates upon
which its financial status depends were identified as those relating to revenue
recognition, loss provisions on accounts receivable and inventory, long-lived
assets, intangible assets and goodwill, income taxes, pension plans and warranty
reserves. The Company considered the disclosure requirements of Financial
Release 60 ("FR-60") regarding critical accounting policies and FR-61 regarding
liquidity and capital resources, certain trading activities and related party
and certain other disclosures, and concluded that nothing materially changed
during the quarter ended June 30, 2002 that would warrant further disclosure
under these releases.
OVERVIEW
The Company's continuing operations are managed in three business segments:
communications test, industrial computing and communications and da Vinci. The
Company also has another segment, Airshow, which is classified as a discontinued
operation and is therefore excluded from results of continuing operations for
all periods presented.
The global economic downturn has exacerbated the severe downturn in the
Company's communications test segment and its other businesses. As a result, the
Company continues to experience diminished product demand, excess manufacturing
capacity and erosion of average selling prices. The downturn in the
communications test segment results from, among other things, a significant
decrease in network expansion activity and capital spending generally by the
Company's telecommunications customers.
In response to the continuing decline in product demand, the Company continues
to implement cost reduction programs aimed at aligning its ongoing operating
costs with its expected revenues and enabling the Company to remain compliant
with the liquidity and earnings covenants under the Senior Secured Credit
Facility. Given the severity of current market conditions, however, the Company
cannot provide any assurance that these cost reduction programs will actually
align the Company's operating expenses and revenues and enable the Company to
comply with such covenants or be sufficient to avoid operating losses. As a
result the Company plans to take additional and significant reductions to remain
in compliance with its financial covenant requirements under its Senior Secured
Credit Facility.
During the three months ended June 30, 2002, the Company paid approximately
$10.0 million in severance and other related costs. At June 30, 2002,
approximately $10.4 million was left to be paid for this restructuring; the
Company anticipates that this amount will be paid primarily during the remainder
of fiscal 2003.
The Company's cash requirements for debt services and ongoing operations are
substantial. During July 2002, the Company's lenders agreed to modify its EBITDA
covenants. The related amendments to
20
the Senior Secured Credit Facility became effective on August 7, 2002. Based on
current forecasts of revenues and results of operations, assuming timely
completion and execution of the cost reduction programs, and based on the
increasing and significant debt repayment obligations beginning in 2003, the
Company believes that its current capital structure may need to be renegotiated,
extended or refinanced. There can be no assurance that, in the event the Company
is required to extend, refinance or repay its debt, new or additional sources of
financing will be available, or will be available on terms acceptable to the
Company.
The Company previously reported the industrial computing and communications
segment as discontinued operations. This segment was comprised of two
subsidiaries: ICS Advent and Itronix Corporation. In October 2001, the Company
divested its ICS Advent subsidiary and decided to retain Itronix based on
current market conditions. The decision to retain Itronix required the Company
to make certain reclassifications to its Statement of Operations for the three
months ended June 30, 2001. The Statement of Operations was reclassified to
include the results of operations of ICS Advent and Itronix in continuing
operations.
RESULTS OF OPERATIONS
For the Three Months Ended June 30, 2002, as Compared to Three Months Ended June
30, 2001 on a Consolidated Basis from Continuing Operations.
Net sales. For the three months ended June 30, 2002, consolidated net sales
decreased $168.6 million or 49.7% to $170.3 as compared to $338.9 million for
the three months ended June 30, 2001. The decrease is primarily attributable to
reduced demand for the Company's communications tests products and to a lesser
extent, due to the sale of ICS Advent during October 2001. Excluding the impact
of ICS Advent, sales decreased $150.8 million or 47.0% to $170.3 million for the
three months ended June 30, 2002, as compared to $321.1 million for the three
months ended June 30, 2001.
Gross profit. Consolidated gross profit decreased $107.5 million to $83.9
million or 49.3% of consolidated net sales for the three months ended June 30,
2002, as compared to $191.4 million or 56.5% of consolidated net sales for the
three months ended June 30, 2001. The reduction in gross profit is due to the
reduction in net sales. The reduction in gross profit as a percentage of net
sales is due to pricing pressures and a shift toward lower margin products,
primarily in the communications test segment.
Operating expenses. Operating expenses consist of selling, general and
administrative expense; product development expense; restructuring; and
amortization of intangibles. Total operating expenses were $118.2 million or
69.4% of consolidated net sales for the three months ended June 30, 2002, as
compared to $177.7 million or 52.4% of consolidated net sales for the three
months ended June 30, 2001. Excluding the impact of a $6.2 million restructuring
charge, $0.3 million amortization of intangibles and $0.4 million of bank fees,
total operating expenses were $111.3 million or 65.3% of consolidated net sales
for the three months ended June 30, 2002. For the three months ended June 30,
2001 operating expenses, taking into account a $4.7 non-recurring cost reduction
charge and $11.6 million amortization of intangibles were $161.4 million or
47.6% of consolidated net sales. The decrease in operating expenses during the
current quarter is a result of restructuring efforts to reduce employee and
other expenses as described above. As a percentage of sales, operating expenses
have increased as the decrease in costs is more than offset by the decrease in
net sales.
Included in both cost of sales ($0.4 million and $0.4 million) and operating
expenses ($4.3 million and $6.1 million) for the three months ending June 30,
2002 and 2001, respectively, is the amortization of unearned compensation which
relates to the issuance of non-qualified stock options to employees and
non-employee directors at a grant price lower than fair market value (defined as
the closing price of the Company's common stock on the open market at the date
of issuance).
Selling, general and administrative expense was $81.1 million or 47.6% of
consolidated sales for the three months ended June 30, 2002, as compared to
$124.8 million or 36.8% of consolidated net sales for the three months ended
June 30, 2001. The decrease in these expenses is a result of the Company's
restructuring efforts to reduce operating costs of the business and, to a lesser
extent, a
21
result of the sale of ICS Advent. The increase in selling general and
administrative expenses as a percentage of sales is due to the decline of sales
as mentioned above.
Product development expense was $30.6 million or 18.0% of consolidated net sales
for the three months ended June 30, 2002, as compared to $41.3 million or 12.2%
of consolidated sales for the same period a year ago. The increase in product
development expense as a percentage of sales reflects the Company's continued
efforts in connection with new product development and innovation, as well as
the decrease in revenues, primarily within the communications test segment.
During the first quarter of fiscal 2003, the Company incurred a charge of $6.2
million related to the additional restructuring of the business. This charge is
primarily related to severance and other related costs.
Amortization of intangibles was $0.3 million for the three months ended June 30,
2002, as compared to $11.6 million for the amortization of intangibles in the
same period a year ago. The decrease was primarily attributable to the
impairment and resulting write-down of the Company's intangible assets during
the fourth quarter of fiscal 2002.
Interest. Interest expense, net of interest income, was $22.2 million for the
three months ended June 30, 2002, as compared to $25.8 million for the same
period a year ago. The decrease in interest expense was primarily attributable
to lower interest rates on borrowings during the first quarter of fiscal 2003 as
compared to the same period last year.
Taxes. During the first quarter of fiscal 2003 the Company recorded a tax
benefit of $16.9 million. The effective tax rate for the three months ended June
30, 2002 was 29.2% as compared to 33.9% for the same period a year ago. The
principal reason for the decrease in the effective tax rate is non-deductible
interest expense related to the Convertible Notes during the current fiscal
year. A tax benefit was recorded during the three months ended June 30, 2002.
Although a valuation allowance remains on the U.S. and certain foreign deferred
tax assets generated in prior years, it was projected that the gain on the sale
of Airshow will generate sufficient taxable income to offset the taxable losses
projected for the year. As a result, a tax benefit was recognized on the losses
incurred during the quarter.
Segment Disclosure
The Company measures the performance of its subsidiaries by their respective new
orders received ("bookings"), net sales and earnings before interest, taxes and
amortization ("EBITA"), which excludes non-recurring and one-time charges.
Included in each segment's EBITA is an allocation of corporate expenses. The
information below includes bookings, net sales and EBITA for the three segments
the Company operates. The Airshow business is excluded from these results as the
Company has classified this business as a discontinued operation.
22
Three Months Ended
June 30,
SEGMENT 2002 2001
---------- ----------
(In thousands)
Communications test segment:
Bookings $ 119,448 $ 212,727
Net sales 136,212 276,583
EBITA (24,874) 34,925
Industrial computing and
Communications segment:
Bookings $ 32,583 $39,958
Net sales 28,156 54,350
EBITA 70 (553)
da Vinci:
Bookings $ 5,942 $ 9,403
Net sales 5,977 7,987
EBITA 1,998 2,029
Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001 -
Communications Test Products
Bookings for communications test products decreased $93.3 million or 43.8% to
$119.4 million for the three months ended June 30, 2002, as compared to $212.7
million for the same period a year ago. The decrease is a result of the global
economic slowdown and capital spending cutbacks in the communications industry
within the last year.
Net sales of communications test products decreased $140.4 million or 50.8% to
$136.2 million for the three months ended June 30, 2002, as compared to $276.6
million for the same period a year ago. The decreased sales occurred within all
product areas of the communications test businesses, with the most significant
decline for optical transport products.
EBITA for the communications test products decreased $59.8 million to a loss of
$24.9 million for the three months ended June 30, 2002, as compared to income of
$34.9 million for the same period a year ago. The decrease primarily results
from the $140.4 million decrease in sales and erosion in gross profit margins,
which were partially offset by restructuring and other cost reduction strategies
implemented within the last year.
Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001 -
Industrial Computing and Communications Products
Bookings for industrial computing and communications products decreased $7.4
million to $32.6 million for the three months ended June 30, 2002, as compared
to $40.0 million for the same period a year ago. The decrease is primarily due
to the inclusion of ICS Advent prior to its sale during October 2001. Excluding
the impact of ICS Advent, bookings of the Itronix business increased by $2.9
million to $32.6 million for the quarter ended June 30, 2002, as compared to
$29.7 million for the same period a year ago. Increased bookings in the Itronix
business are due to large European orders for its GO BOOK durable notebook
product.
Net sales of industrial computing and communications products decreased $26.2
million to $28.2 million for the three months ended June 30, 2002, as compared
to $54.4 million for the same period a year ago. The decrease in sales is due to
the sale of ICS Advent and to a lesser extent, a decline
23
in sales from the Itronix business. Exclusive of ICS Advent, sales of Itronix
decreased $8.4 million to $28.2 million for the first quarter of fiscal 2003, as
compared to $36.6 million the same period a year ago. The decrease in sales from
Itronix is due to the introduction of GO BOOK during the first quarter of fiscal
2002 and due to the fulfillment of backlog in the first quarter of fiscal 2002
resulting from strong bookings during the fourth quarter of fiscal 2001.
EBITA for the industrial computing and communications segment was $0.1 million
for the three months ended June 30, 2002, as compared to a loss of $0.6 million
for the same period a year ago. Exclusive of ICS Advent, EBITA decreased by $2.1
million to $0.1 million for the quarter ended June 30, 2002, as compared to $2.2
million for the same period a year ago. The decrease in EBITA from the Itronix
business is due to decreased sales and was partially offset by restructuring and
other cost reduction strategies.
Three Months Ended June 30, 2002, Compared to Three Months Ended June 30, 2001 -
da Vinci
Bookings for da Vinci products decreased $3.5 million or 36.8% to $5.9 million
for the three months ended June 30, 2002, as compared to $9.4 million for the
same period a year ago. The decrease is primarily related to industry cutbacks
of advertising budgets, which indirectly drives capital expenditures within post
production video houses. This decrease was most pronounced in the second half of
fiscal 2002. As compared to the fourth quarter of fiscal 2002, bookings have
increased by $1.2 million from $4.7 million to $5.9 million in the first quarter
of fiscal 2003.
Net sales of the da Vinci business decreased $2.0 million or 25.2% to $6.0
million for the three months ended June 30, 2002, as compared to $8.0 million
for the same period a year ago. The decreased sales is due to the industry
cutbacks, as discussed above. As compared to the fourth quarter of fiscal 2002,
net sales increased by $1.3 million during the first quarter of fiscal 2003.
EBITA for the da Vinci business of $2.0 million for the three months ended June
30, 2002 is consistent with the $2.0 million EBITDA during the same period a
year ago. The constant EBITDA on a reduced level of sales reflects successful
implementation of cost reduction actions taken to align the business costs with
the reduced sales.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's liquidity needs arise primarily from debt service on the
substantial indebtedness incurred in connection with the acquisition of Wavetek
Wandel Golterman, Inc. in May 2000 and of Superior Electronics Group, Inc.
(D.B.A. Cheetah Technologies), in August 2000, the recent and substantial
operating losses recorded, and from the funding of working capital and capital
expenditures. As of June 30, 2002, the Company had $1.1 billion of indebtedness,
primarily consisting of $275 million principal amount of senior subordinated
notes, $726 million in borrowings under the Company's senior secured credit
facility and $100 million under other debt obligations.
The Company has recorded significant losses from operations and seen a
substantial reduction in revenues and operations as a result of the economic
downturn and, in particular, the downturn within the telecommunications sector
and related industries. Consequently the Company has undertaken several
restructurings to align its cost structures and its revenues for the three
months ended June 30, 2002. Due to the severity of the continuing downturn, the
Company has identified the need to make further cost reductions during the
remainder of fiscal 2003. These cost reduction plans are designed to align the
cost base of the Company with the reduced forecast revenues and to enable the
Company to remain compliant with the liquidity and earnings covenants required
under the Senior Secured Credit Facility during the course of fiscal 2003.
Continuing compliance with these covenant requirements during fiscal 2003 is
dependent upon the timely execution of the cost cutting plans identified and
being implemented. The Company's cash requirements for debt service, including
repayment of debt, and on-going operations are substantial. Debt repayment
obligations are significant and increase through 2007.
Based on current forecasts of revenues and results of operations, assuming
timely completion and execution of the cost reduction programs, and based on the
increasing and significant debt repayment
24
obligations beginning in 2003, the Company believes that its current capital
structure may need to be further renegotiated, extended or refinanced. There can
be no assurance that in the event the Company is required to extend, refinance
or repay its debt, new or additional sources of financing will be available or
will be available on terms acceptable to the Company.
During July 2002, the Company's lenders agreed to modify its EBITDA and certain
other covenants. The related amendments to the Senior Secured Credit Facility
became effective on August 7, 2002. Notwithstanding these amendments, the
Company may also be required to obtain further amendments to the Senior Secured
Credit Facility in the future in order to continue to comply with its financial
covenant requirements; however, it cannot provide any assurance that it will be
able to reach agreement with its lenders with respect to such future amendments
on reasonable terms. Inability to further modify the covenants, as necessary,
could result in an event of default and cause the lenders to require immediate
repayment of all debt under the Senior Secured Credit Facility and limit or
cancel the availability of borrowings under the Company's Revolving Credit
Facility. The Company may be required to find other sources of capital and
further substantially reduce its cost of operations. In addition, the Company
may need to raise additional capital to meet its needs after 2003, to develop
new products and to enhance existing products in response to competitive
pressures, and to acquire complementary products, businesses or technologies.
Inability to repay the debt obligations or arrange for alternative financing
would have a material negative impact on the business, financial position and
results of operations of the Company.
The Company's future operating performance and ability to repay, extend or
refinance the Senior Secured Credit Facility (including the Revolving Credit
Facility) or any new borrowings, and to service and repay or refinance the
Convertible Notes and the Senior Subordinated Notes, will be subject to future
economic, financial and business conditions and other factors, including demand
for communications test equipment, many of which are beyond the Company's
control.
On June 13, 2002, the Company signed a definitive agreement to sell its Airshow
business to Rockwell Collins, Inc. for approximately $160 million in cash,
subject to adjustment. The consummation of this transaction occurred on August
9, 2002. In connection with the agreement to sell Airshow, the Company reached
agreement with its lenders for an amendment to its Senior Secured Credit
Facility. Under the amendment, which became effective August 7, 2002, the
lenders, among other things, approved the sale of Airshow to Rockwell Collins,
Inc., and consented to modifying certain financial covenants in the Senior
Secured Credit Facility upon consummation of the Airshow sale. Acterna's
agreement with its lender group will also permit the Company to use $24 million
to purchase a portion of Acterna LLC's 9 3/4 percent Senior Subordinated Notes
due 2008 pursuant to tender offers announced on June 24, 2002.
Cash Flows. The Company's cash and cash equivalents increased $6.4 million
during the three months ended June 30, 2002.
Working Capital. For the three months ended June 30, 2002, the Company's working
capital decreased as its operating assets and liabilities provided $39.0 million
of cash. Accounts receivable decreased, creating a source of cash of $7.0
million, primarily due to the decrease in sales. Inventory levels increased,
creating a use of cash of $1.0 million. Accounts payable decreased, creating a
use of cash of $15.6 million, primarily as a result of the Company paying
accounts payable outstanding at March 31, 2002. Other liabilities decreased,
creating a use of cash of $5.9 million related primarily to restructuring
payments and other assets decreased creating a source of cash of $54.6 million,
primarily due to collection of the income tax refund received during the
quarter.
Investing activities. The Company's net investing activities used $10.1 million
for the three months ended June 30, 2002, due primarily to capital expenditures.
Financing Activities. The Company's financing activities provided $1.2 million
in net cash during the first three months of fiscal 2003, primarily due to
additional borrowings of cash under the Company's revolving and other credit
facilities.
25
Future Financing Sources and Cash Flows. As of June 30, 2002, the Company had
$73 million of borrowings and $22 million of letters of credit outstanding under
its revolving credit facility and $80 million of additional availability under
the facility.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This statement is effective for fiscal years beginning
after June 15, 2002. The Company does not expect the application of SFAS No. 143
to have a material impact on its financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
No. 145"), which rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt. This rule amends APB Opinion No. 30, which required all
gains and losses from the extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
As a result, the criteria set forth by the amended APB Opinion No. 30 will now
be used to classify those gains and losses. SFAS No. 145 also amends SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002, with early adoption encouraged. The company does not anticipate a
material impact to its financial results as a result of adopting this standard.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses accounting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity". This statement is
effective for exit disposal activities that are initiated after December 31,
2002, with early adoption encouraged. The Company is currently assessing the
impact of SFAS 146 on its financial position and results of operations.
Quantitative and Qualitative Disclosures about Market Risk
The Company operates manufacturing facilities and sales offices in over 80
countries. The Company is subject to business risks inherent in non-U.S.
activities, including political and economic uncertainty, import and export
limitations, and market risk related to changes in interest rates and foreign
currency exchange rates. The Company believes the political and economic risks
related to its foreign operations are mitigated due to the stability of the
countries in which its facilities are located. The Company's principal currency
exposures against the U.S. dollar are in the Euro and in Canadian currency. The
Company does use foreign currency forward exchange contracts to mitigate
fluctuations in currency. The Company's market risk exposure to currency rate
fluctuations is not material. The Company does not hold derivatives for trading
purposes.
The Company uses derivative financial instruments consisting primarily of
interest rate hedge agreements to manage exposures to interest rate changes. The
Company's objective in managing its exposure to changes in interest rates (on
its variable rate debt) is to limit the impact of such changes on earnings and
cash flow and to lower its overall borrowing costs.
At June 30, 2002, the Company had $624 million of variable rate debt
outstanding, which represents approximately 56% of the Company's total
outstanding debt. The Company currently has one interest rate swap contract with
notional amounts totaling $130 million which fixed its variable rate debt to a
fixed interest rate for periods of two years in which the Company pays a fixed
interest rate on a portion of its outstanding debt and receives interest at the
three-month LIBOR rate.
At June 30, 2002, the swap contract currently outstanding and the swap contract
that expired had fixed interest rates higher than the three-month LIBOR quoted
by its financial institutions. The
26
Company therefore recognized an increase in interest expense (calculated as the
difference between the interest rate in the swap contracts and the three-month
LIBOR rate) for the first three months of fiscal 2003 of $1.2 million. The
Company performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in the floating interest rate on the interest rate sensitive
instruments described above. The Company believes that such a movement is
reasonably possible in the near term. As of June 30, 2002, the analysis
demonstrated that such movement would cause the Company to recognize additional
interest expense of approximately $1.5 million annually, and accordingly, would
cause a hypothetical loss in cash flows of approximately $1.5 million on an
annual basis.
The Company has significant debt and resulting debt service obligations. A
substantial portion of the debt is subject to variable rate interest expense.
The weighted average interest rate for the three months ended June 30, 2002, was
7.0%. Interest rates are at historically low rates and an increase in interest
rates in the future could have a material impact on the results of operations
and financial position of the Company. An increase of 100 basis points in
interest rates would increase interest expense by approximately $6.2 million on
an annual basis.
27
PART II. Other Information
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Item 1. Legal Proceedings
The Company is a party to several pending legal proceedings and claims. Although
the outcome of such proceedings and claims cannot be determined with certainty,
the Company believes that the final outcome should not have a material adverse
effect on the Company's operations or financial position.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K dated June 14, 2002,
relating to the sale of the Airshow business to Rockwell Collins, Inc.
2. The Company filed a Current Report on Form 8-K dated June 24, 2002,
relating to the commencement of cash tender offers for up to $155
million of the outstanding 9 3/4% Senior Subordinated Notes Due 2008
of Acterna LLC.
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SIGNATURES
Pursuant to the requirements 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.
ACTERNA CORPORATION
- - - - - - - - - - - - - - - -
Date August 14, 2002 /s/ JOHN D. RATLIFF
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
John D. Ratliff
Corporate Vice President and
Chief Financial Officer
29