<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 March 31, 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 May 9, 1996
1
<PAGE>
RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
March 31, 1996
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets:
March 31, 1996 and December 31, 1995 3-4
Consolidated Statements of Operations
and Retained Earnings:
Three Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable. 14
Item 6. Exhibits and Reports on Form 8-K. 14
Signatures 15
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
March 31, December 31,
1996 1995
(unaudited)
Current assets:
Cash and cash equivalents $ 1,529 $ 1,552
Accounts receivable 5,243 8,489
Inventories (Note 1) 6,039 3,918
Deferred tax assets 478 478
Other current assets 298 311
------- -------
Total current assets 13,587 14,748
Property, plant and equipment at cost:
Machinery and equipment 13,409 13,218
Building and improvements 8,386 8,070
Land 792 792
------- -------
22,587 22,080
Less accumulated depreciation 13,407 13,101
------- -------
9,180 8,979
------- -------
$22,767 $23,727
======= =======
See accompanying notes
3
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
March 31, December 31,
1996 1995
(unaudited)
Current liabilities:
Accounts payable $ 1,139 $ 1,375
Accrued liabilities 2,988 4,090
Current maturities on long-term debt (Note 2) 224 93
Income taxes payable 424 686
------- -------
Total current liabilities 4,775 6,244
Long-term debt (Note 2) 2,309 2,482
Deferred tax liabilities 170 179
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 9,587 8,896
------- -------
Total stockholders' equity 15,513 14,822
------- -------
$22,767 $23,727
======= =======
See accompanying notes
4
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended March 31,
(In thousands, except per share data)
1996 1995
(unaudited)
Revenues $6,758 $4,093
Costs and expenses:
Cost of revenues 3,039 2,449
Marketing, general and administrative 2,163 1,696
Research and development 512 526
------ ------
5,714 4,671
------ ------
Operating income (loss) 1,044 (578)
Interest expense (income), net (Note 2) 20 (1)
------ ------
Income (loss) before income taxes 1,024 (577)
------ ------
Provision (benefit) for income taxes (Note 1):
Current 342 (95)
Deferred (9) (10)
------ ------
333 (105)
------ ------
Net income (loss) 691 (472)
Retained earnings beginning of period 8,896 4,833
------ ------
Retained earnings end of period $9,587 $4,361
====== ======
Net income (loss) per share $ .16 $ (.11)
====== ======
See accompanying notes
5
<PAGE>
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(In thousands)
1996 1995
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 691 $(472)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization 334 326
Change in deferred tax assets and
liabilities (9) (10)
Provision for inventory obsolescence 3 17
Increase (decrease) in operating cash flows:
Accounts receivable 3,246 318
Inventories (2,124) (124)
Refundable income taxes - (132)
Other current assets 13 136
Accounts payable (236) 261
Accrued liabilities (1,102) (555)
Income taxes payable (262) (1)
------ ------
Total adjustments (137) 236
------ ------
Net cash provided (used) by
operating activities 554 (236)
------ ------
Cash flows from investing activities:
Expenditures for property, plant
and equipment, net (535) (3,602)
------ ------
Net cash (used) by investing activities (535) (3,602)
------ ------
Cash flows from financing activities:
Issuance of mortgage payable - 2,640
Payments on mortgage payable (42) -
------ ------
Net cash (used) provided by
financing activities (42) 2,640
------ ------
Net (decrease) in cash (23) (1,198)
Cash at beginning of period 1,552 6,019
------ ------
Cash at end of period $1,529 $4,821
====== ======
Supplemental disclosures:
Interest paid $ 58 $ 69
====== ======
Income taxes paid $ 602 $ 38
====== ======
See accompanying notes
6
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 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 March 31, 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.
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.
7
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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):
March 31, December 31,
1996 1995
Raw materials $2,453 $1,977
Work-in-progress 3,243 1,816
Finished goods 343 125
------ ------
$6,039 $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
(benefit) for income taxes on income (loss) before income taxes and the
amounts determined by applying the statutory U.S. tax rate of 34% are
analyzed below (in thousands):
March 31,
1996 1995
Provision at statutory rate $348 $(196)
State income taxes 10 3
Foreign tax benefit from an export
processing exemption (19) -
Foreign expenses for which a benefit
(is available) is not available - 77
Other (6) 11
---- -----
Provision (benefit) for income taxes $333 $(105)
==== =====
8
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
Advanced Payments
- -----------------
Advanced payments from customers included in accrued liabilities total
$706,000 at March 31, 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 First Interstate Bank of 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
March 31, 1996). There were no balances outstanding at March 31, 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 is in compliance with the financial requirements of the agreement
at March 31, 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
March 31, 1996). There were no balances outstanding at March 31, 1996, but
amounts utilized under credit commitments totalled $139,000, resulting in
credit availability of $216,000 at March 31, 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):
March 31, December 31,
1996 1995
Mortgage payable; due in monthly install-
ments of $26,777, including interest at 9% $2,533 $2,575
Less current maturities 224 93
------ ------
Long-term debt due after one year $2,309 $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 is payable in 180 equal monthly
9
<PAGE>
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 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 March 31, is presented
net as follows (in thousands):
1996 1995
Interest expense $ 59 $ 69
Interest (income) (39) (70)
---- ----
Interest expense (income), net $ 20 $ (1)
==== ====
3. COMMITMENTS
The Company leases certain facilities under non-cancellable operating
lease agreements, expiring through 1998.
Future minimum rental payments under leases in effect at March 31, 1996
are: 1996 - $344,000; 1997 - $321,000; 1998 - $18,000; 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 - $182,000; 1997 - $180,000; 1998 - $179,000;
1999 - $179,000; 2000 - $179,000; subsequent to 2000 - $15,000.
10
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 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 has, until recently,
leased most of its facilities, reducing the need to expend capital on such
items. Changes in the Company's financial condition and liquidity since
March 31, 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 three 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:
March 31, December 31, March 31,
1996 1995 1995
Working capital:
Working capital (in thousands) $8,812 $8,504 $7,771
Current ratio 2.8 to 1 2.4 to 1 4.6 to 1
Equity ratios:
Total liabilities to equity 0.5 0.6 0.5
Assets to equity 1.5 1.6 1.5
Profitability ratios:
Gross profit 55 % 50 % 40 %
Return on revenues 10 % 12 % (12)%
Return on assets (annualized) 12 % 17 % (12)%
Return on equity (annualized) 18 % 27 % (18)%
The Company's financial condition improved throughout 1995, and has
remained strong during 1996. Working capital increased to $8.8 million at
March 31, 1996, from $7.8 million at March 31, 1995. The ratio of current
assets to current liabilities has declined in comparison to the March 31,
1995 ratio, but was a very strong 2.8 at March 31, 1996. The Company's
current ratio was unusually high at March 31, 1995 due to the Company having
approximately $4.8 million in cash which was generated by operations during
a period of declining production. The March 31, 1995 cash balance and cash
provided by operations in 1995 were used to purchase $8.3 million of capital
assets ($4.7 million in 1995 subsequent to March 31, 1995). Increases in
demand for the Company's products and services during the entire year of
1995 and the first three months of 1996 caused 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. The operating effects of these increases in
backlog have affected various elements of cash provided by operations.
11
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1996
Net cash provided by operating activities for the three months ended
March 31, 1996 was $554,000, compared with $236,000 used by operations in
the first three months of 1995. The principal items contributing to the
cash provided by operations in 1996 were a decrease in accounts receivable
of $3.2 million and net income plus depreciation of $1.0 million. Cash
provided by operations was reduced by decreases in accounts payable, accrued
liabilities and income taxes payable totalling $1.6 million and an increase
in inventories of $2.1 million in the first quarter of 1996, reflecting
increases in production of testing products which are included in the
Company's backlog. These products are scheduled for shipment in the second
quarter of 1996. The decrease in accounts receivable resulted from a
reduction in the level of revenues in the first quarter of 1996 compared to
the fourth quarter of 1995. Accrued liabilities decreased $1.1 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 quarter 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.
The Company did not need to utilize its principal line of credit during
1994 and allowed the 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 March 31, 1996.
Capital expenditures during the first three months of 1996 and 1995 were
$0.5 and $3.6 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. Expenditures for 1995 also included the purchase of the
Company's Houston, Texas facility for $3.3 million and a facility in Costa
Rica for $810,000, resulting in a reduction in the Company's occupancy
expenses.
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 quarter of 1997.
RESULTS OF OPERATIONS
Three months ended March 31, 1996, compared to three months ended March
31, 1995.
Revenues. Revenues for the 1996 three-month period were $6.8 million
compared to $4.1 million for the 1995 quarter. Revenues in the Testing
Products and Services segments increased $1.6 and $0.8 million,
respectively. Power Sources revenues increased $0.3 million.
12
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1996
RESULTS OF OPERATIONS - continued
Revenues in the Testing Products segment were $2.8 million for the first
quarter of 1996, which is an increase of 133% over the first quarter of 1995
and is related to increased demand resulting in volume increases and higher
unit prices due to product mix changes. Revenues from the sale of CRITERIA
and loader and unloader products increased $1.0 million while revenues from
the sale of INTERSECT products increased $0.6 million.
Revenues in the Services segment for the 1996 quarter were $2.7 million,
an increase of 39% compared to the corresponding 1995 quarter. The increase
is related to both of the Company's services facilities and was caused by
volume increases resulting from increased demand.
Revenues in the Power Sources segment were $1.3 million for the first
quarter of 1996, reflecting a 35% increase from the 1995 quarter. Revenues
were affected by general increases in demand, beginning in the fourth
quarter of 1995, resulting in volume increases during the first quarter of
1996.
Costs and Expenses. Total costs and expenses for the 1996 quarter increased
$1.0 million or 22% compared to the 65% revenue increase of $2.7 million.
Cost of revenues increased $590,000, marketing, general and administrative
expenses increased $467,000 and research and development expenses decreased
$14,000.
The increase in the gross profit from 40% in the 1995 quarter to 55% in
1996 is attributable primarily to the Testing Products segment and, to a
lesser extent, the Services and Power Sources business segments. The gross
profit in the Testing Products and Services segments increased due to volume
increases and production efficiencies related to the volume increases. An
increase in the gross profit in the Power Sources segment is attributable
to revenue increases.
Marketing, general and administrative expenses for the 1996 quarter
increased $467,000. The increase in expenses is related to an increase in
volume related expenses in the Testing Products segment and, to lesser
degrees, in the Power Sources and Services segments due to the increase in
revenues.
The Company's effective tax rate was 33% for the quarter ended March 31,
1996, compared to a tax benefit rate of 18% for the 1995 quarter. The
effective tax rate in 1996 was slightly less than the U.S. statutory rate
due to the availability of a tax benefit from an export processing exemption
in Costa Rica. The principal reason the Company's effective benefit rate
varied from the U.S. statutory rate in 1995 was that tax benefits were not
available to a foreign subsidiary due to net operating loss limitations.
13
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
March 31, 1996
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 March 31, 1996.
14
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
March 31, 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: May 9, 1996 Larry Edwards
President and
Chief Executive Officer
BY /s/ Max T. Langley
DATE: May 9, 1996 Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
15
<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>
<CIK> 0000034285
<NAME> RELIABILITY INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,529
<SECURITIES> 0
<RECEIVABLES> 5,243
<ALLOWANCES> 0
<INVENTORY> 6,039
<CURRENT-ASSETS> 13,587
<PP&E> 22,587
<DEPRECIATION> 13,407
<TOTAL-ASSETS> 22,767
<CURRENT-LIABILITIES> 4,775
<BONDS> 0
0
0
<COMMON> 5,926
<OTHER-SE> 9,587
<TOTAL-LIABILITY-AND-EQUITY> 22,767
<SALES> 6,758
<TOTAL-REVENUES> 6,758
<CGS> 3,039
<TOTAL-COSTS> 3,039
<OTHER-EXPENSES> 2,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 1,024
<INCOME-TAX> 333
<INCOME-CONTINUING> 691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
