<PAGE>
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 September 30, 1995 Commission File Number 1-7378
RELIABILITY INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0868913
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16400 Park Row
Post Office Box 218370
Houston, Texas 77218-8370
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(713) 492-0550
----------------------------------------------------
(Registrant's telephone number, including area code)
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 twelve 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 ninety days.
YES X NO
----------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
4,242,848 -- Common Stock -- No Par Value
as of October 25, 1995
1
<PAGE>
RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
September 30, 1995
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Page No.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets:
September 30, 1995 and December 31, 1994 3-4
Consolidated Statements of Operations
and Retained Earnings:
Nine Months Ended September 30, 1995 and 1994 5
Three Months Ended September 30, 1995 and 1994 6
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1995 and 1994 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1.
through
Item 5. Not applicable. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 19
</TABLE>
The information furnished in this report reflects all adjustments (none of which
were other than normal recurring accruals) which are, in the opinion of
management, necessary to a fair statement of the results of the interim periods
presented.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 1,879 $ 6,019
Accounts Receivable 7,116 2,502
Inventories (Note 1) 5,525 2,099
Deferred Tax Assets 487 221
Other Current Assets 381 398
------- -------
Total Current Assets 15,388 11,239
Property, Plant and Equipment at Cost:
Machinery and Equipment 12,372 11,247
Building and Improvements 5,740 2,596
Land 230 -
------- -------
18,342 13,843
Less Accumulated Depreciation 12,868 11,918
------- -------
5,474 1,925
Other Assets 69 120
------- -------
$20,931 $13,284
======= =======
</TABLE>
See accompanying notes
(unaudited)
3
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Current Liabilities:
Accounts Payable $ 1,914 $ 369
Accrued Liabilities 2,865 1,999
Current Maturities on Long-Term Debt (Note 2) 91 -
Income Taxes Payable 685 17
------- -------
Total Current Liabilities 5,555 2,385
Long-Term Debt (Note 2) 2,506 -
Deferred Tax Liabilities 140 140
Commitments and Contingencies (Note 4) - -
Stockholders' Equity:
Common Stock, Without Par Value;
20,000,000 Shares Authorized,
4,242,848 Shares Issued 5,926 5,926
Retained Earnings 6,804 4,833
------- -------
Total Stockholders' Equity 12,730 10,759
------- -------
$20,931 $13,284
======= =======
</TABLE>
See accompanying notes
(unaudited)
4
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Nine Months Ended September 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenues $21,146 $19,046
Costs and Expenses:
Cost of Revenues 10,628 10,141
Marketing, General and Administrative 5,876 5,504
Research and Development 1,725 755
------- -------
18,229 16,400
------- -------
Operating Income 2,917 2,646
Interest (Income) Expense, Net (Note 2) 37 (75)
------- -------
Income Before Income Taxes 2,880 2,721
------- -------
Provision (Benefit) for Income Taxes (Note 1):
Current 1,175 287
Deferred (266) (194)
------- -------
909 93
------- -------
Net Income 1,971 2,628
Retained Earnings Beginning of Period 4,833 2,188
------- -------
Retained Earnings End of Period $ 6,804 $ 4,816
======= =======
Net Income Per Share $.46 $.62
======= =======
</TABLE>
See accompanying notes
(unaudited)
5
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended September 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Revenues $11,286 $7,141
Costs and Expenses:
Cost of Revenues 5,357 4,088
Marketing, General and Administrative 2,486 1,701
Research and Development 635 383
------- ------
8,478 6,172
------- ------
Operating Income 2,808 969
Interest (Income) Expense, Net (Note 2) 35 (41)
------- ------
Income Before Income Taxes 2,773 1,010
------- ------
Provision (Benefit) for Income Taxes (Note 1):
Current 994 180
Deferred (137) (161)
------- ------
857 19
------- ------
Net Income 1,916 991
Retained Earnings Beginning of Period 4,888 3,825
------- ------
Retained Earnings End of Period $ 6,804 $4,816
======= ======
Net Income Per Share $.45 $.23
======= ======
</TABLE>
See accompanying notes
(unaudited)
6
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,971 $2,628
Adjustments to Reconcile Net Income to Cash
(Used) Provided by Operating Activities:
Depreciation and Amortization 875 809
Change in deferred tax assets and
liabilities (266) (194)
Provision for Inventory Obsolescence 155 112
(Gain) on Disposal of Fixed Assets (21) (2)
Increase (Decrease) in Operating Cash Flows:
Accounts Receivable (4,614) 777
Inventories (3,581) 58
Other Assets 59 (171)
Accounts Payable 1,545 (157)
Accrued Liabilities 866 233
Income Taxes Payable 668 3
Liability for Restructuring - (164)
------- ------
Total Adjustments (4,314) 1,304
------- ------
Net Cash (Used) Provided by
Operating Activities (2,343) 3,932
------- ------
Cash Flows from Investing Activities:
Expenditures for Property, Plant
and Equipment (4,464) (538)
Proceeds from Sale of Equipment 71 63
------- ------
Net Cash (Used) by Investing Activities (4,393) (475)
------- ------
Cash Flows from Financing Activities:
Issuance of Mortgage Payable 2,640 -
Payments on Long-Term Debt (43) (58)
------- ------
Net Cash Provided (Used) by
Financing Activities 2,597 (58)
------- ------
Effect of Exchange Rate Changes on Cash (1) 11
------- ------
Net (Decrease) Increase in Cash (4,140) 3,410
Cash at Beginning of Period 6,019 2,882
------- ------
Cash at End of Period $ 1,879 $6,292
======= ======
</TABLE>
See accompanying notes
(unaudited)
7
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1994.
Cash Equivalents
- ----------------
For the purposes of the statements of cash flows, the Company considers all
highly liquid cash investments with maturities of three months or less, when
purchased, to be cash equivalents.
Inventories
- -----------
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (replacement cost or net realizable value) and
include:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
(In thousands)
Raw materials $2,404 $1,299
Work-in-progress 2,720 726
Finished goods 401 74
------ ------
$5,525 $2,099
====== ======
</TABLE>
8
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
Income Taxes
- ------------
The provision for income taxes includes federal, foreign, and state income
taxes. The Company accounts for income taxes under the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial reporting amounts and tax basis of assets or liabilities. Deferred
tax assets are recognized, net of any valuation allowance, for deductible
temporary differences and net operating loss and tax credit carryforwards.
Deferred tax expense represents the change in the deferred tax asset or
liability balances.
The differences between the effective rate reflected in the provision for
income taxes on income before income taxes and the amounts determined by
applying the statutory U.S. tax rate of 34% are analyzed below:
<TABLE>
<CAPTION>
September 30,
1995 1994
(In thousands)
<S> <C> <C>
Provision at statutory rate $ 979 $ 925
Change in valuation allowance (238) (381)
Tax benefit of net operating loss
carryforward - (355)
Tax effects of:
Foreign expenses for which a benefit
(is available) is not available 58 (37)
Foreign tax benefit of export
processing exemption - (96)
Other 110 37
----- -----
Provision for income taxes $ 909 $ 93
===== =====
</TABLE>
9
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
2. LONG-TERM DEBT AND SHORT TERM BORROWINGS
On July 1, 1995, the Company entered into a revolving credit agreement with
First Interstate Bank of Texas, N.A. The facility allows borrowings through
July 1, 1997 of up to $2,000,000 at the bank's base rate (8.75% at September 30,
1995). Credit availability is limited to 80% of eligible accounts receivable,
as defined, of the U.S. Company and its Costa Rica subsidiary, plus 30% of U.S.
inventories, limited to $750,000. The credit facility requires compliance with
certain financial loan covenants related to tangible net worth, current ratio,
debt to tangible net worth and fiscal year-end losses. The loan is unsecured
except that if the Company is not in compliance with certain financial covenants
accounts receivable, inventories and certain other assets of the U.S. Company
will become collateral for the loan. The Company is in compliance with the
financial requirements of the agreement.
The Company's Singapore subsidiary maintains an agreement with a Singapore
bank to provide an overdraft facility to the subsidiary of 500,000 Singapore
dollars (U.S. $352,000) at the bank's prime rate plus 1% (7% at September 30,
1995). There were no balances outstanding at September 30, 1995, but amounts
utilized under credit commitments totalled $138,000, resulting in credit
availability of $214,000 at September 30, 1995. The loan is collateralized by
all assets of the subsidiary and requires maintenance of a minimum net worth of
the Singapore subsidiary. Payment of dividends requires written consent from
the bank and continuation of the credit facility is at the discretion of the
bank.
Long-term debt at September 30, consisted of the following:
<TABLE>
<CAPTION>
1995
(In thousands)
<S> <C>
Mortgage payable; due in monthly installments
of $26,777, including interest at 9%, beginning
May 1, 1995 $2,597
Less current maturities 91
------
Long-term debt due after one year $2,506
======
</TABLE>
A lease on the Company's headquarters and manufacturing facility located in
Houston, Texas was scheduled to expire in May 1995. In March 1995, the Company
purchased the land and building for $3,300,000, of which $660,000 was paid in
cash. The $2,640,000 balance is payable in 180 equal monthly installments,
including interest at 9%, under a promissory note which is payable to the
seller. The note is collateralized by the land and building.
The aggregate maturities of the note for the next five years are: 1995 -
$15,000; 1996 - $93,000; 1997 - $101,000; 1998 - $111,000; and 1999 -$121,000.
10
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
Interest (income) expense, for the periods ended September 30, is presented
net as follows:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Interest expense $ 188 $ 4
Interest (income) (151) (79)
----- -----
Interest (income) expense, net $ 37 $ (75)
===== =====
</TABLE>
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the periods ended September
30, are as follows:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
Interest $ 187 $ 1
Income taxes $ 526 $ 248
</TABLE>
4. COMMITMENTS
The Company leases manufacturing and office facilities under non-cancellable
operating lease agreements, expiring through 1998.
Future minimum rental payments under leases in effect at September 30, 1995
are: 1995 - $141,000; 1996 - $570,000; 1997 - $319,000; 1998 -$18,000;
subsequent to 1998 - None. (See Note 5 - Subsequent Events, for information
related to a change in future minimum rental payments.)
The Company leased manufacturing and office space in its U.S. facility to a
third party under an agreement that expired in May 1995. In May 1995, the
Company entered into a letter agreement which converted the lease to a month-to-
month lease, expiring October 31, 1995, at a monthly rental of $11,000.
5. SUBSEQUENT EVENTS
A subsidiary of the Company leased a manufacturing facility in San Jose, Costa
Rica. In October 1995, the subsidiary purchased the land and building for a
cash price of $810,000. The transaction reduced minimum rental payments under
leases as of September 30, 1995 to: 1995 - $114,000 and 1996 - $457,000.
The Company entered into an agreement on October 10, 1995 to purchase land and
a building in North Carolina. The purchase price is $1,850,000 payable in cash,
and the Company projects that improvements totaling $800,000 will be made to the
facility. The Durham, North Carolina services facility will occupy the new
facility when the improvements are completed.
11
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL CONDITION
Management considers cash provided by operations and retained earnings to be
the primary sources of capital. The Company maintains lines of credit to
supplement these primary sources of capital and has, until recently, leased most
of its facilities, reducing the need to expend capital on such items. The
Company is making an offering of one million shares of its common stock during
the fourth quarter. Changes in the Company's financial condition and liquidity
since September 30, 1994, are generally attributable to changes in cash flows
from operating activities and changes in levels of capital expenditures.
Factors discussed in the management's discussion included in the Company's 1994
Form 10-K are also applicable to operations for the nine months of 1995 and
should be read in conjunction with this discussion.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
<S> <C> <C> <C>
Working Capital:
Working Capital (in thousands) $9,833 $8,854 $8,753
Current Ratio 2.8 to 1 4.7 to 1 4.3 to 1
Equity Ratios:
Total Liabilities to Equity 0.6 0.2 0.3
Assets to Equity 1.6 1.2 1.3
Profitability Ratios:
Gross Profit 50 % 46 % 47 %
Return on Revenues 9 % 11 % 14 %
Return on Assets (Annualized) 13 % 20 % 26 %
Return on Equity (Annualized) 21 % 25 % 33 %
</TABLE>
The Company's financial condition improved significantly during 1994 and has
remained strong during 1995. Working capital increased to $9.8 million at
September 30, 1995, from $8.8 million at September 30, 1994. The ratio of
current assets to current liabilities has declined, but was a very strong 2.8 at
September 30, 1995. The Company's current ratio was unusually high at December
31, 1994, due to the Company having approximately $6.0 million in cash which was
generated by operations during a period of declining production. Increases in
demand for the Company's products and services during the first nine months of
1995 caused a significant increase in the Company's backlog at September 30,
1995, compared to December 31, 1994.
12
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
The operating effects of this increase in backlog have affected various elements
of cash provided by operations. The potential negative impact of the low
revenues levels during the first six months of 1995 were partially offset by
expense controls.
Net cash used by operating activities for the nine months ended September 30,
1995, was $2.3 million, compared with $3.9 million provided in the first nine
months of 1994. The principal items contributing to the cash used in operations
in 1995 were increases in accounts receivable and inventories of $4.6 and $3.6
million, respectively, reduced by net income plus depreciation of $2.8 million
and increases in accounts payable, accrued expenses and income taxes payable
totalling $3.1 million. The changes are attributable to the increased level of
operations by the Company during 1995, resulting from increased demand for
products and services sold by the Company. The backlog increase has resulted in
an increase in revenues during the third quarter of 1995 and a forecasted
increase in revenues in the fourth quarter of 1995.
In the latter part of 1993, the Company used cash flow from operations to pay
off all then-existing bank debt. The Company did not need to utilize its
principal line of credit during 1994 and allowed this line of credit to expire
in November 1994. In July 1995, the Company established a credit facility with
a financial institution to provide credit availability of $2.0 million to
supplement cash provided by operations, if required. To date, this credit
facility has not been utilized. The Company's Singapore subsidiary maintains a
small overdraft facility to support the subsidiary's credit commitments. The
subsidiary could borrow $214,000 under the facility at September 30, 1995.
Capital expenditures during the first nine months of 1995 and 1994 were $4.5
million and $538,000, respectively. Expenditures for 1995 include the purchase
of the Company's Houston, Texas facility for $3.3 million, resulting in a
reduction in the Company's occupancy expenses. Management currently anticipates
that 1995 capital expenditures may exceed $9.0 million, and will include fourth
quarter 1995 purchases of land and build ings in Costa Rica and North Carolina
for approximately $810,000 and $2,650,000, respectively. The 1995 capital
expenditures are budgeted to include $6.8 million for land and buildings and
$2.2 million for equipment. A significant portion of the equipment is required
by the Company's services facilities to process increasing volumes of ICs. The
land and building purchases will reduce the Costa Rica subsidiary's operating
costs and will provide a facility for expansion for the North Carolina services
operation.
The Company believes its cash and cash equivalent balances, future cash
generated from operations, available lines of credit and the proceeds of the
1995 stock offering will be sufficient to meet the cash requirements of the
Company, including capital expenditures, for the remainder of 1995 and 1996.
13
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
RESULTS OF OPERATIONS
Nine months ended September 30, 1995 compared to nine months ended September
30, 1994.
Revenues. Revenues for the first nine months of 1995 were $21.1 million,
compared to $19.0 million for the same period in 1994. Conditioning Products and
Services revenues for the 1995 period increased $1.4 million and $1.5 million,
respectively, while Power Sources revenues decreased $780,000.
Demand for conditioning products increased significantly during the first nine
months of 1995, resulting in an increase in backlog in this segment from $2.6
million at December 31, 1994, to $13.2 million at September 30, 1995. Revenues
from the sale of loader and unloader products increased 113% due to volume
increases, while INTERSECT(tm) revenues increased 19% and CRITERIA(r) revenues
increased 2%. Demand for conditioning products decreased during 1994, resulting
in a significant decrease in backlog. Due to the lag time between order entry
and shipment, the 1994 decrease in backlog contributed to a significant decline
in revenues from the sale of INTERSECT products and a small decrease in revenues
from the sale of burn-in products during the first half of 1995. However, the
increase in backlog in 1995 resulted in a sharp increase in revenues in the
third quarter. Revenues for the 1995 nine-month period increased for all product
lines in this segment as a result of customer orders for equipment to process
new generations of memory and micrologic devices.
Revenues in the Services segment for the first nine months of 1995 were $7.4
million, an increase of 25% over the same period in 1994. Revenues increased at
both of the Company's services facilities. Revenue increases for this segment
were caused by the processing of increased volumes of 4 Meg and 16 Meg DRAMs and
by the sale of burn-in boards to support product mix changes.
Revenues in the Power Sources segment were $3.5 million for the first nine
months of 1995, reflecting an 18% decrease from the same period of 1994. This
decrease was the result of a low backlog at December 31, 1994, caused by reduced
unit volumes and unit prices of the Company's LAN-PAC(tm) products.
Costs and Expenses. Total costs and expenses for the first nine months of 1995
increased to $18.2 million, up $1.8 million from the same period in 1994, while
revenues increased $2.1 million.
14
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
The increase in gross profit percentage from 47% in the 1994 period to 50% in
the 1995 period was attributable to the Conditioning Products segment and was
caused by volume increases, costs increasing at a rate lower than the revenue
increase, product mix changes and stringent expense controls. The gross profit
percentage in the Services segment decreased slightly while the gross profit
percentage in the Power Sources segment decreased because of volume and unit
price reductions, without a corresponding reduction in manufacturing overhead.
Marketing, general and administrative expenses for the first nine months of
1995 increased only $372,000 over the 1994 period. This increase is primarily
related to the Conditioning Products segment and to a lesser extent to the
Services segment and was caused by increases in variable expenses, such as sales
commissions, royalties and warranty expenses, and an increase in incentive bonus
accruals which are directly related to profitability. This increase in expenses
was minimized by strong expense controls, reduced occupancy expense due to the
purchase of the Company's Houston facility and a decrease in expenses in the
Power Sources segment related to revenue decreases.
Research and development expenses more than doubled from $755,000 to $1.7
million in the first nine months of 1995. The increase related to development
costs associated with orders for new models of INTERSECT products and, to a
lesser degree, CRITERIA products, orders for which are included in the Company's
backlog at September 30, 1995. Delivery of these new products began in 1995.
The change in net interest reflects significant increases in interest expense
and interest income. Interest expense increased due to the incurrence of debt
associated with the purchase of the Company's Houston, Texas facility. The
purchase was consummated in March 1995, but interest on the debt accrued from
December 15, 1994. Interest income increased due to an increase in cash
available for investment and, to a lesser degree, an increase in interest rates.
The Company's effective tax rate increased from 3% for the first nine months
of 1994 to 32% for the nine months ended September 30, 1995. The significantly
lower 1994 rate was principally the result of a $0.4 million tax benefit of a
net operating loss carryforward and a higher change in the valuation allowance
in 1995.
Net Income. Income before income taxes was $2.9 million for the nine months
ended September 30, 1995, compared to $2.7 million for the 1994 nine-month
period. Net income was $2.0 and $2.6 million for the respective periods. As
explained above, the 1995 higher tax rate contributed significantly to the
decrease in net income.
15
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
Three months ended September 30, 1995, compared to three months ended
September 30, 1994.
Revenues. Revenues for the 1995 three-month period increased $4.1 million to
$11.3 million. Revenues in the Conditioning Products and Services segments
increased $3.0 million and $1.1 million, respectively. Power Sources revenues
reflected a small increase of $29,000.
Revenues in the Conditioning Products segment were $6.7 million for the third
quarter of 1995, which is an increase of $3.0 million over the third quarter of
1994 and is related to increased demand and unit price increases due to product
mix changes. Revenues from the sale of loader and unloader and CRITERIA
products increased $768,000, while revenues from the sale of INTERSECT products
increased $2.3 million.
Revenues in the Services segment for the 1995 quarter were $3.3 million, an
increase of 49% compared to the corresponding 1994 quarter. The increase is
related to both of the Company's services facilities, as noted in the above
discussion related to the nine month period ended September 30, 1995. The 1995
quarter increase included a $632,000 increase in revenues from the sale of burn-
in products to Services customers.
Revenues in the Power Sources segment were $1.3 million for the third quarter
of 1995, reflecting a 2% increase from the 1994 quarter. Revenues were affected
by volume increases which offset price decreases resulting from price
competition and product mix changes.
Costs and Expenses. Total costs and expenses increased $2.3 million to $8.5
million in comparison to the revenue increase of $4.1 million. Cost of revenues
increased $1.3 million, marketing, general and administrative expenses increased
$785,000 and research and development expenses increased $252,000.
The increase in the gross profit from 43% in the 1994 quarter to 53% in 1995
is attributable primarily to the Conditioning Products segment and, to a lesser
extent, the Services business segment. The gross profit in the Conditioning
Products segment increased due to changes in product mix and production
efficients related to volume increases. A decrease in the gross profit in the
Power Sources segment is attributable to revenue changes, as discussed in the
above nine months discussion. The principal reason for the increase in the
gross profit in the Services segment is production efficiencies related to
volume increases.
Marketing, general and administrative expenses for the 1995 quarter increased
$785,000. The increase in expenses is related to an increase in
16
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
volume related expenses in the Conditioning Products and Services segments due
to the increase in revenues. The increases were minimized by stringent expense
controls which were maintained during 1994 and 1995.
Research and development costs increased from $383,000 in 1994 to $635,000 in
1995, as explained in the above discussion of the nine month period.
The Company's effective tax rate was 31% for the quarter ended September 30,
1995, compared to a tax rate of 2% for the 1994 quarter. The factors affecting
income taxes for the quarters ended September 30, 1995 and 1994 are the same as
those discussed in the above narrative related to income taxes for the nine
months ended September 30, 1995.
17
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 1995
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Not applicable.
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the quarter ended September 30, 1995.
18
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
September 30, 1995
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.
RELIABILITY INCORPORATED
(Registrant)
BY /s/ Larry Edwards
Larry Edwards DATE: October 25, 1995
President and
Chief Executive Officer
BY /s/ Max T. Langley
Max T. Langley DATE: October 25, 1995
Sr. Vice President - Finance
and Chief Financial Officer
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3RD QUARTER
1995 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,879
<SECURITIES> 0
<RECEIVABLES> 7,116
<ALLOWANCES> 0
<INVENTORY> 5,525
<CURRENT-ASSETS> 15,388
<PP&E> 18,342
<DEPRECIATION> 12,868
<TOTAL-ASSETS> 20,931
<CURRENT-LIABILITIES> 5,555
<BONDS> 0
<COMMON> 5,926
0
0
<OTHER-SE> 6,804
<TOTAL-LIABILITY-AND-EQUITY> 20,931
<SALES> 21,146
<TOTAL-REVENUES> 21,146
<CGS> 10,628
<TOTAL-COSTS> 10,628
<OTHER-EXPENSES> 7,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 2,880
<INCOME-TAX> 909
<INCOME-CONTINUING> 1,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,971
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
