<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 June 30, 1996 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 August 9, 1996
1
<PAGE>
RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
June 30, 1996
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets:
June 30, 1996 and December 31, 1995 3-4
Consolidated Statements of Income
and Retained Earnings:
Six Months Ended June 30, 1996 and 1995 5
Three Months Ended June 30, 1996 and 1995 6
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-16
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable. 17
Item 6. Exhibits and Reports on Form 8-K. 17
Signatures 18
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
June 30, December 31,
1996 1995
(unaudited)
Current assets:
Cash and cash equivalents $ 1,515 $ 1,552
Accounts receivable 6,192 8,489
Inventories (Note 1) 5,741 3,918
Deferred tax assets 612 478
Other current assets 247 311
------- -------
Total current assets 14,307 14,748
Property, plant and equipment at cost:
Machinery and equipment 13,451 13,218
Buildings and improvements 8,785 8,070
Land 792 792
------- -------
23,028 22,080
Less accumulated depreciation 13,703 13,101
------- -------
9,325 8,979
------- -------
$23,632 $23,727
======= =======
See accompanying notes
3
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1996 1995
(unaudited)
Current liabilities:
Accounts payable $ 720 $ 1,375
Accrued liabilities 3,103 4,090
Current maturities on long-term debt (Note 2) 228 93
Income taxes payable 352 686
------- -------
Total current liabilities 4,403 6,244
Long-term debt (Note 2) 2,251 2,482
Deferred tax liabilities 180 179
Commitments and contingencies (Note 3) - -
Stockholders' equity:
Common stock, without par value;
20,000,000 shares authorized,
4,242,848 shares issued 5,926 5,926
Retained earnings 10,872 8,896
------- -------
Total stockholders' equity 16,798 14,822
------- -------
$23,632 $23,727
======= =======
See accompanying notes
4
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands, except per share data)
Six Months Ended June 30,
1996 1995
(unaudited)
Revenues $16,167 $9,860
Costs and expenses:
Cost of revenues 7,789 5,271
Marketing, general and administrative 4,307 3,390
Research and development 1,033 1,090
------ ------
13,129 9,751
------ ------
Operating income 3,038 109
Interest expense, net (Note 2) 58 2
------ ------
Income before income taxes 2,980 107
------ ------
Provision (benefit) for income taxes (Note 1):
Current 1,137 181
Deferred (133) (129)
------ ------
1,004 52
------ ------
Net income 1,976 55
Retained earnings beginning of period 8,896 4,833
------ ------
Retained earnings end of period $10,872 $4,888
====== ======
Net income per share $ .47 $ .01
====== ======
See accompanying notes
5
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands, except per share data)
Three Months Ended June 30,
1996 1995
(unaudited)
Revenues $ 9,409 $5,767
Costs and expenses:
Cost of revenues 4,750 2,822
Marketing, general and administrative 2,144 1,694
Research and development 521 564
------- ------
7,415 5,080
------- ------
Operating income 1,994 687
Interest expense, net (Note 2) 38 3
------- ------
Income before income taxes 1,956 684
------- ------
Provision (benefit) for income taxes (Note 1):
Current 795 276
Deferred (124) (119)
------- ------
671 157
------- ------
Net income 1,285 527
Retained earnings beginning of period 9,587 4,361
------- ------
Retained earnings end of period $10,872 $4,888
======= ======
Net income per share $ .31 $ .12
======= ======
See accompanying notes
6
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
1996 1995
(unaudited)
Cash flows from operating activities:
Net income $1,976 $ 55
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Depreciation and amortization 673 595
Change in deferred tax assets
and liabilities (133) (129)
Provision for inventory obsolescence 372 144
Increase (decrease) in operating cash flows:
Accounts receivable 2,297 (1,860)
Inventories (2,195) (2,232)
Other assets 64 288
Accounts payable (655) 709
Accrued liabilities (987) (105)
Income taxes payable (334) 100
------ ------
Total adjustments (898) (2,490)
------ ------
Net cash provided (used) by
operating activities 1,078 (2,435)
------ ------
Cash flows from investing activities:
Expenditures for property, plant and equipment (1,019) (3,950)
------ ------
Net cash (used) by investing activities (1,019) (3,950)
------ ------
Cash flows from financing activities:
Issuance of mortgage payable - 2,640
Payments on long-term debt (96) (21)
------ ------
Net cash provided (used) by
financing activities (96) 2,619
------ ------
Net (decrease) in cash (37) (3,766)
Cash at beginning of period 1,552 6,019
------ ------
Cash at end of period $1,515 $2,253
====== ======
Supplemental disclosures:
Interest paid $ 114 $ 128
====== ======
Income taxes paid $1,469 $ 81
====== ======
See accompanying notes
7
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
- -----------------------
Reliability Incorporated is a United States based corporation with
operations in the United States, Singapore and Costa Rica. The Company and
its subsidiaries are principally engaged in the design, manufacture and sale
of equipment used to test and condition integrated circuits. The Company
and its subsidiaries also operate service facilities which condition and
test integrated circuits as a service to others and manufacture and sell
power sources, primarily a line of DC to DC power converters. The Company's
testing products are sold to companies that manufacture semiconductor
products and are shipped to locations in the U.S., Europe, Asia and Pacific
Rim countries. Currently, services are provided principally to only two
customers, one in the U.S. and one in Singapore. Power sources are sold to
U.S., European and Asian based companies that design and sell electronic
equipment.
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. Certain amounts in the consolidated financial statements for
the period ended June 30, 1995 have been reclassified to conform to the 1996
presentation.
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. In the opinion of management, adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim period
ended June 30, 1996 are not necessarily indicative of the results that may
be expected for the year. 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, 1995.
Use of Estimates
- ----------------
The use of estimates that affect amounts recorded in financial
statements is inherent in the preparation of financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
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.
8
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
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 (in thousands):
June 30, December 31,
1996 1995
Raw materials $1,891 $1,977
Work-in-progress 3,313 1,816
Finished goods 537 125
------ ------
$5,741 $3,918
====== ======
Income Taxes
- ------------
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 is an asset and liability approach that requires recognition of
deferred tax liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and the tax bases of
assets and liabilities. The provision for income taxes includes federal,
foreign, and state income taxes. 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 (in
thousands) for the six month periods ended:
June 30,
1996 1995
Provision at statutory rate $1,013 $ 36
State income taxes 53 8
Change in valuation allowance - (66)
Foreign tax benefit from an export
processing exemption (63) -
Foreign expenses for which a benefit
(is available) is not available - 47
Other 1 27
------ ----
Provision for income taxes $1,004 $ 52
====== ====
9
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Advanced Payments
- -----------------
Advanced payments from customers included in accrued liabilities total
$179,000 at June 30, 1996 and $633,000 at December 31, 1995. The advanced
payments relate principally to payments for testing products which are
included in the Company's backlog and are refundable if the Company does not
meet the terms of the order. Revenues related to advanced payments are
recognized when the products are shipped.
2. BORROWING ARRANGEMENTS AND LONG-TERM DEBT
On July 1, 1995, the Company entered into a revolving credit agreement
with Wells Fargo Bank Texas, N.A. The facility allows borrowings through
July 1, 1997 up to $2,000,000 at the bank's base rate (8.25% at June 30,
1996). There were no balances outstanding at June 30, 1996, and the Company
did not draw any funds under the agreement during 1995 or 1996. 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 results. The loan is
unsecured, but if the Company fails to comply with financial covenants
listed in the agreement, then accounts receivable, inventories and certain
other assets of the U.S. Company will become collateral for the loan. The
Company was in compliance with the financial requirements of the agreement
at June 30, 1996.
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. $355,000) at the bank's prime rate plus 1% (7% at
June 30, 1996). There were no balances outstanding at June 30, 1996, but
amounts utilized under credit commitments totalled $139,000, resulting in
credit availability of $216,000 at June 30, 1996. 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 consisted of the following (in thousands):
June 30, December 31,
1996 1995
Mortgage payable; due in monthly install-
ments of $26,777, including interest at 9% $2,479 $2,575
Less current maturities 228 93
------ ------
Long-term debt due after one year $2,251 $2,482
====== ======
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 was payable in 180 equal monthly
10
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
installments beginning May 1, 1995, including interest at 9%, under a
promissory note which is payable to the seller. The Company began paying
an additional principal payment of $10,000 each month effective March 1,
1996. Current maturities as of June 30, 1996 assume the Company will
continue making the additional $10,000 principal payment, resulting in the
note being paid in full in 110 payments. The note is collateralized by the
land and building.
Interest expense (income), for the periods ended June 30, is presented
net as follows (in thousands):
1996 1995
Interest expense $117 $ 128
Interest (income) (59) (126)
---- -----
Interest expense, net $ 58 $ 2
==== =====
3. COMMITMENTS
The Company leases certain facilities under non-cancelable operating
lease agreements, expiring through 1998.
Future minimum rental payments under leases in effect at June 30, 1996
are: 1996 - $232,000; 1997 - $326,000; 1998 - $19,000; subsequent to 1998 -
None.
The Company leases manufacturing and office space in its U.S. facility
to a third party under an agreement expiring in January 2001. Future income
under the lease will be: 1996 - $99,000; 1997 - $180,000; 1998 - $179,000;
1999 - $179,000; 2000 - $179,000; subsequent to 2000 - $15,000.
11
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1996
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 had, until 1995, leased
most of its facilities, reducing the need to expend capital on such items.
Changes in the Company's financial condition and liquidity since June 30,
1995 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 1995 Form 10-K are
also applicable to operations for the six months of 1996 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 (six months ended June 30, and twelve months ended December 31,):
June 30, December 31, June 30,
1996 1995 1995
Working Capital:
Working Capital (in thousands) $9,904 $8,504 $8,121
Current Ratio 3.2 to 1 2.4 to 1 3.6 to 1
Equity Ratios:
Total Liabilities to Equity 0.4 0.6 0.5
Assets to Equity 1.4 1.6 1.5
Profitability Ratios:
Gross Profit 52 % 50 % 47 %
Return on Revenues 12 % 12 % 1 %
Return on Assets (Annualized) 17 % 17 % 1 %
Return on Equity (Annualized) 24 % 27 % 1 %
The Company's financial condition improved throughout 1995 and has
remained very strong during 1996. Working capital increased to $9.9 million
at June 30, 1996, from $8.1 million at June 30, 1995, and the ratio of
current assets to current liabilities declined from 3.6 to 1 at June 30,
1995 to a very healthy 3.2 at June 30, 1996. The Company's current ratio was
unusually high at June 30, 1995 due to the Company having approximately $2.3
million in cash which was generated by operations during a period of
moderately low production. The June 30, 1995 cash balance and cash provided
by operations in 1995 were used to purchase $8.3 million of capital assets
($4.3 million in 1995 subsequent to June 30, 1995) in 1995. Increases in
demand for the Company's products and services during the entire year of
1995 and the first quarter of 1996 resulted in a significant increase in the
Company's backlog during 1995 and an increase during the first quarter of
1996. Backlog was $15.3 million at March 31, 1996, compared to $14.1
million at December 31, 1995. Worldwide demand for semiconductors has
slowed in recent months, resulting in a decrease in new orders for testing
and conditioning equipment and a decline in demand for conditioning
services, resulting in a decrease in backlog to $11.9 million at June 30,
1996. The effects of operating at this increased level have affected
various elements of cash provided by operations.
12
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1996
Net cash provided by operating activities for the six months ended June
30, 1996 was $1.1 million, contrasted with $2.4 million used in the first
six months of 1995. The principal items contributing to the cash provided
by operations in 1996 were net income plus depreciation of $2.6 million, a
decrease in accounts receivable of $2.3 million and a $372,000 increase in
the provision for inventory obsolescence. Cash provided by operations was
reduced by decreases in accounts payable, accrued liabilities and income
taxes payable totalling $2.0 million and an increase in inventories of $2.2
million in the first half of 1996. The increase in inventories results from
increases in production of testing products which are included in the
Company's backlog. These products are scheduled for shipment in the second
half of 1996. The decrease in accounts receivable resulted from a reduction
in the level of revenues in the second quarter of 1996 compared to the
fourth quarter of 1995 and the increase in the provision for inventory
obsolescence relates to excess inventory associated with a specific
INTERSECT model. The excess inventory resulted from a decrease in demand
for the product. Accrued liabilities decreased $1.0 million due to payment
of performance bonuses related to 1995 profitability and a general reduction
in most items included in accrued liabilities due to payment of year-end
accruals in the first quarter of 1996. In addition, a reduction in the
level of revenues during the first and second quarters of 1996 compared to
the fourth quarter of 1995 contributed to the decrease in accrued
liabilities. Income taxes payable decreased due to payment of the balance
of 1995 income taxes in the first quarter of 1996.
Based on currently available information, principally a decrease in
demand for semiconductors, the Company's forward-looking projections
indicate that revenues and net income for 1996 will be approximately equal
to 1995 net income and revenues. Calendar year 1995 was one of the best
years in the Company's history.
The Company did not utilize its principal line of credit during 1994 and
allowed the U.S. 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 $216,000 under the facility at June 30, 1996.
Capital expenditures during the first half of 1996 and 1995 were $1.0
million and $4.0 million, respectively. Expenditures for 1996 include
improvements to the testing services facility in North Carolina, which was
purchased in the fourth quarter of 1995, and equipment for the Singapore
services facility. A significant portion of the expenditures during the
first half of 1995 related to the purchase of the Company's headquarters
facility for $3.3 million. The purchase has significantly reduced the
Company's occupancy expenses. Management currently projects that
expenditures for the last six months of 1996 will be between $1.5 and $2.0
million.
The Company believes its cash and cash equivalent balances, future cash
generated from operations and available lines of credit will be sufficient
to meet the cash requirements of the Company for the remainder of 1996 and
the first half of 1997.
13
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1996
RESULTS OF OPERATIONS
Six months ended June 30, 1996 compared to six months ended June 30,
1995.
Revenues. Revenues for the 1996 six-month period were $16.2 million
compared to $9.9 million for the 1995 period. Revenues in the Testing
Products and Services segments increased $4.5 and $1.4 million,
respectively. Power Sources revenues increased $0.4 million.
Revenues in the Testing Products segment were $8.0 million for the first
half of 1996, which is an increase of 127% over the first half of 1995. The
increase is related to increased demand resulting in volume increases and
higher unit prices due to product mix changes. Revenues from the sale of
INTERSECT products increased $4.4 million, while revenues from the sale of
CRITERIA and loader and unloader products increased $0.1 million.
Revenues in the Services segment for the 1996 period were $5.6 million,
an increase of 35% compared to the corresponding 1995 period. The increase
is related primarily to the Company's Singapore services facility and was
caused by volume increases resulting from increased demand, unit price
increases resulting from product mix changes and by the sale of burn-in
boards to support product mix changes.
Revenues in the Power Sources segment were $2.6 million for the first
half of 1996, reflecting an 18% increase from the 1995 period. Revenues
were affected by general increases in demand, beginning in the fourth
quarter of 1995, resulting in small volume increases and price increases
resulting from product mix changes during the first half of 1996.
Costs and Expenses. Total costs and expenses for the 1996 period increased
$3.4 million or 35% compared to the 64% revenue increase of $6.3 million.
Cost of revenues increased $2.5 million, marketing, general and
administrative expenses increased $0.9 million and research and development
expenses decreased slightly.
The increase in the gross profit from 47% in the 1995 period to 52% in
the 1996 period is attributable primarily to the Testing Products segment
and, to a lesser extent, the Power Sources business segment. The gross
profit in the Testing Products segment increased due to volume increases and
production efficiencies related to the volume increases. The increase was
reduced somewhat by a $360,000 provision for inventory obsolescence related
to excess inventory, resulting from reduced demand for a specific INTERSECT
model. An increase in the gross profit in the Power Sources segment is
attributable to revenue increases resulting from product mix changes. The
gross profit in the Services segment declined due to higher costs associated
with maintaining two facilities during the first quarter of 1996 while
operations in North Carolina were moved to a new facility, and an increase
in revenues from the sale of burn-in boards to Services customers. Gross
profit on burn-in boards is traditionally lower because of price
competition.
14
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1996
RESULTS OF OPERATIONS - continued
Marketing, general and administrative expenses for the 1996 period
increased $0.9 million. The increase in expenses is related to an increase
in volume related expenses in the Testing Products segment and, to lesser
degrees, in the Services and Power Sources segments, and an increase in
incentive bonus accruals, which are directly related to the increase in
profitability in 1996.
The Company's effective tax rate was 34% for the six months ended June
30, 1996, compared to an effective tax rate of 49% for the 1995 period. The
effective tax rate in 1996 was affected by a tax benefit from an export
processing exemption in Costa Rica and state income tax expense. The
principal reasons the Company's effective tax rate varied from the U.S.
statutory rate in 1995 were that tax benefits were not available to a
foreign subsidiary due to net operating loss limitations and the U.S.
Company utilized deferred tax asset carryforwards to reduce income tax
expense in 1995.
Three months ended June 30, 1996, compared to three months ended June
30, 1995.
Revenues. Revenues for the 1996 three-month period increased $3.6
million to $9.4 million. Revenues in the Testing Products segment were $5.3
million for the second quarter of 1996 which is an increase of $2.9 million
over the second quarter of 1995 and is related to changes in demand and
product mix changes. Revenues from the sale of loader and unloader products
and burn-in products decreased 38%, while revenues from the sale of
INTERSECT products increased $3.8 million.
Revenues in the Services segment for the 1996 quarter were $2.8 million,
an increase of 31% compared to the corresponding 1995 quarter. The increase
is related to the Company's Singapore services facility, as noted in the
above discussion related to the six month period ended June 30, 1996.
Revenues in the Power Sources segment were $1.3 million for the second
quarter of 1996, reflecting a 4% increase from the 1995 quarter. Revenues
were affected by general increases in demand and product mix changes.
Costs and expenses. Total costs and expenses increased $2.3 million to
$7.4 million in comparison to the revenue increase of $3.6 million. Cost
of revenues increased $1.9 million; marketing, general and administrative
expenses increased $0.4 million and research and development expenses
decreased $43,000.
The decrease in the gross profit from 51% in the 1995 quarter to 50% in
1996 is attributable primarily to the Testing Products segment and, to a
lesser extent, the Services business segment. The gross profit in the
Testing Products segment decreased due to product mix changes and the
$360,000 provision for inventory obsolescence that was recorded in the
second quarter of 1996. An increase in the gross profit in the Power
Sources segment is attributable to revenue increases, as discussed in the
15
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1996
RESULTS OF OPERATIONS - continued
above six months discussion. The reasons for the decrease in the gross
profit in the Services segment are explained in the above discussion related
to the six months period ended June 30, 1996.
Marketing, general and administrative expenses for the 1996 quarter
increased $450,000. The increase in expenses is primarily related to an
increase in volume related expenses in the Testing Products and Services
segments due to the increase in revenues and an increase in incentive bonus
accruals as explained in the above discussion related to the six months
period ended June 30, 1996.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34% for the quarter ended June 30,
1996, compared to a tax rate of 23% for the 1995 quarter. The factors
affecting income taxes for the quarters ended June 30, 1996 and 1995 are the
same as those discussed in the above narrative related to income taxes for
the six months ended June 30, 1996.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: Statements in this Form 10-Q regarding Reliability's business
which are not historical facts are "forward looking statements" that involve
risk and uncertainties, including, but not limited to, market acceptance of
Company products and services, the effects of general economic conditions,
the impact of competition, product development schedules, problems with
technology, delivery schedules, and supply and demand changes for Company
products and services and its customers' products and services. Actual
results may materially differ from projections.
16
<PAGE>
RELIABILITY INCORPORATED
OTHER INFORMATION
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 June 30, 1996.
17
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
June 30, 1996
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
DATE: August 9, 1996 Larry Edwards
President and
Chief Executive Officer
BY /s/ Max T. Langley
DATE: August 9, 1996 Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the applicable SEC Form and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,515
<SECURITIES> 0
<RECEIVABLES> 6,192
<ALLOWANCES> 0
<INVENTORY> 5,741
<CURRENT-ASSETS> 14,307
<PP&E> 23,028
<DEPRECIATION> 13,703
<TOTAL-ASSETS> 23,632
<CURRENT-LIABILITIES> 4,403
<BONDS> 0
0
0
<COMMON> 5,926
<OTHER-SE> 10,872
<TOTAL-LIABILITY-AND-EQUITY> 23,632
<SALES> 16,167
<TOTAL-REVENUES> 16,167
<CGS> 7,789
<TOTAL-COSTS> 7,789
<OTHER-EXPENSES> 5,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 2,980
<INCOME-TAX> 1,004
<INCOME-CONTINUING> 1,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,976
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
