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, 2000
Commission File Number 0-7092
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)
(281) 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.
6,645,765 -- Common Stock -- No Par Value
as of August 3, 2000
1
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RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
June 30, 2000
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets:
June 30, 2000 and December 31, 1999 3-4
Consolidated Statements of Operations:
Six Months Ended June 30, 2000 and 1999 5
Three Months Ended June 30, 2000 and 1999 6
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-21
Item 3. Quantitative and Qualitative Disclosure of Market Risk 21
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. 22
Signatures 23
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
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
June 30, December 31,
2000 1999
(unaudited) (Note 1)
Current assets:
Cash and cash equivalents $13,747 $13,573
Accounts receivable 3,269 1,267
Inventories 1,577 1,616
Deferred tax assets 287 351
Refundable income taxes - 551
Other current assets 590 580
------ ------
Total current assets 19,470 17,938
------ ------
Property, plant and equipment at cost:
Machinery and equipment 14,443 13,981
Building and improvements 4,955 5,021
Land 530 530
------ ------
19,928 19,532
Less accumulated depreciation 12,958 11,937
------ ------
6,970 7,595
------ ------
Assets held for sale 2,035 2,135
Investments and other assets 1,057 647
Goodwill, net of accumulated
amortization of $89 ($61 in 1999) 306 334
------ ------
$29,838 $28,649
====== ======
See accompanying notes
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RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2000 1999
(unaudited) (Note 1)
Current liabilities:
Accounts payable $ 818 $ 291
Accrued liabilities 1,448 1,029
Income taxes payable 460 145
Accrued shut-down and restructuring costs 25 72
------ ------
Total current liabilities 2,751 1,537
------ ------
Deferred tax liabilities 574 718
Stockholders' equity:
Common stock, without par value;
20,000,000 shares authorized; 6,664,665
and 6,631,765 shares issued in 2000 and
1999, respectively 9,597 9,389
Retained earnings, net of $7,772 in
treasury stock retired during 1999 16,949 17,053
Accumulated other comprehensive income (loss) 48 (48 )
Less treasury stock, at cost,
19,600 shares in 2000 (81 ) -
------ ------
Total stockholders' equity 26,513 26,394
------ ------
$29,838 $28,649
====== ======
See accompanying notes
4
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six Months Ended June 30,
2000 1999
(unaudited)
Revenues $9,156 $9,281
Costs and expenses:
Cost of revenues 5,870 5,650
Marketing, general and administrative 2,874 3,042
Research and development 726 872
Provision for asset impairment 100 -
----- ------
9,570 9,564
----- ------
Operating (loss) (414 ) (283 )
Interest income, net 461 324
----- ------
Income before income taxes 47 41
----- ------
Provision (benefit) for income taxes:
Current 279 37
Deferred (128 ) 82
----- ------
151 119
----- ------
Net (loss) $ (104 ) $ (78 )
===== ======
Earnings (loss) per share:
Basic $ (.01 ) $ (.01 )
===== ======
Diluted $ (.01 ) $ (.01 )
===== ======
Weighted average shares:
Basic 6,657 6,624
===== ======
Diluted 6,657 6,624
===== ======
See accompanying notes
5
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended June 30,
2000 1999
(unaudited)
Revenues $4,554 $4,961
Costs and expenses:
Cost of revenues 2,973 2,891
Marketing, general and administrative 1,489 1,539
Research and development 333 396
Provision for asset impairment 100 -
----- -----
4,895 4,826
----- -----
Operating income (loss) (341 ) 135
Interest income, net 237 166
----- -----
Income (loss) before income taxes (104 ) 301
----- -----
Provision (benefit) for income taxes:
Current 134 155
Deferred (88 ) (38 )
----- -----
46 117
----- -----
Net income (loss) $ (150 ) $ 184
===== =====
Earnings (loss) per share:
Basic $ (.02 ) $ .03
===== =====
Diluted $ (.02 ) $ .03
===== =====
Weighted average shares:
Basic 6,668 6,632
===== =====
Diluted 6,668 6,659
===== =====
See accompanying notes
6
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RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
2000 1999
(unaudited)
Cash flows from operating activities:
Net (loss) $ (104 ) $ (78 )
Adjustments to reconcile net (loss) to
cash provided (used) by operating activities:
Depreciation and amortization 1,119 1,307
Provision (benefit) for deferred income taxes (128 ) 82
Provision for inventory obsolescence 53 16
Provision for asset impairment 100 -
(Gain) on disposal of fixed assets (37 ) (31 )
Changes in operating assets and liabilities:
Accounts receivable (2,002 ) (658 )
Inventories (14 ) (43 )
Refundable income taxes 551 -
Other current assets 46 (185 )
Other long-term assets (343 ) -
Accounts payable 527 90
Accrued liabilities 419 (1,433 )
Income taxes payable 315 (60 )
Cash payments charged to shut-down
and restructuring reserve (47 ) (100 )
------ ------
Total adjustments 559 (1,015 )
------ ------
Net cash provided (used) by
operating activities 455 (1,093 )
------ ------
Cash flows from investing activities:
Expenditures for property and equipment (466 ) (690 )
Proceeds from sale of equipment 37 31
Increase in other long-term assets - 7
------ ------
Net cash (used) in investing activities (429 ) (652 )
------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock
pursuant to stock option plan 262 128
Borrowings under revolving credit facility 591 -
Payments under revolving credit facility (591 ) -
Payments on long-term debt - (274 )
Payment on note payable to shareholder - (534 )
Purchase of treasury stock (81 ) -
Other (54 ) (7 )
------ ------
Net cash provided (used) by financing activities 127 (687 )
------ ------
Effect of exchange rate changes on cash 21 -
------ ------
Net increase (decrease) in cash 174 (2,432 )
Cash and cash equivalents:
Beginning of period 13,573 15,702
------ ------
End of period $13,747 $13,270
====== ======
See accompanying notes
7
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
-----------------------
Reliability Incorporated ("Reliability" or the "Company") 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. In addition, a subsidiary of the Company operates a service facility
which conditions and tests integrated circuits as a service to others. 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. Services, as of June 30, 2000, are provided principally to two
customers in Singapore. The Company acquired, in December 1998, assets of a
company that provided services to customers in Austin, Texas and Singapore. The
Company closed the Austin facility in September 1999. Another subsidiary
manufactures and sells power sources, primarily a line of DC to DC power
converters. 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
December 31, 1999 have been reclassified to conform to the 2000 presentation.
The accompanying unaudited consolidated 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
Article 10 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, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
period ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does 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, 1999.
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
8
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
Recent Accounting Pronouncements
--------------------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. The Company is
required to adopt SAB 101 in the fourth quarter of 2000. The Company has
reviewed the release and does not currently believe that any changes will be
required in its current revenue recognition policies, practices or procedures.
The Company will complete evaluation of the provisions of SAB 101 during the
third quarter of 2000.
Income Taxes
------------
Deferred income taxes are provided under the liability method and reflect
the net tax effects of temporary differences between the tax basis of assets
and liabilities and their reported amounts in the consolidated financial
statements.
The differences between the effective rate reflected in the provision for
income taxes and the amounts determined by applying the statutory U.S. tax rate
of 34% to income (loss) before income taxes are analyzed below (in thousands)
for the six month periods ended:
June 30,
2000 1999
Provision at statutory rate $ 16 $ 14
Tax effects of:
Foreign losses for which a tax benefit is
not available 160 135
Lower effective income tax rates related
to undistributed foreign earnings (38 ) (44 )
Other 13 14
--- ---
Provision for income taxes $151 $119
=== ===
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,
2000 1999
Raw materials $ 842 $ 966
Work-in-progress 495 149
Finished goods 240 501
----- -----
$1,577 $1,616
===== =====
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
Inventories are presented net of reserves for excess and obsolete
inventories of $478,000 and $428,000 at June 30, 2000 and December 31, 1999,
respectively.
Investments in Marketable Equity and Debt Securities
----------------------------------------------------
Investments are classified as held to maturity or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Management determines the appropriate classification of its investments in
equity and debt securities at the time of purchase and reevaluates such
determinations at each balance sheet date.
Marketable equity securities are classified as available-for-sale and are
carried at their fair value on the balance sheet, with unrealized gains and
losses (net of applicable income taxes (benefit) of $24,000 and $(24,000) at
June 30, 2000 and December 31, 1999) reported as a separate component of
stockholders' equity. Equity securities are stated at market value, as
determined by the most recently published trade price of the securities at the
balance sheet date.
The investment in preferred stock at June 30, 2000 is classified as an
available-for-sale security. The preferred stock represents a convertible bond
that was converted into 562,000 shares of preferred stock of the issuer in
January 2000 and is stated at cost. It is not practicable to estimate the fair
value of the preferred stock, as the issuer is in the early stages of product
development. The following table summarizes the Company's investment in
securities (in thousands) at the dates indicated.
June 30, December 31,
2000 1999
Preferred stock, at cost $500 $ -
Convertible bond, at amortized cost - 500
Marketable equity securities, at cost 422 422
Unrealized net gains (losses) on
marketable securities 72 (72)
--- ---
994 850
Amount classified as current 280 203
--- ---
$714 $647
=== ===
Supplemental Cash Flow Information
----------------------------------
Interest and income taxes paid during the six month periods ended June 30,
are presented below (in thousands):
2000 1999
Interest paid $ 1 $ 18
=== ===
Income taxes paid $104 $ 94
=== ===
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
Stock option plan
-----------------
Shareholders approved, in April 2000, an amendment to the Company's 1997
Stock Option Plan to increase the number of shares of Common Stock reserved for
issuance under the Plan from 1,000,000 to 1,500,000.
2. CREDIT AGREEMENTS
Reliability maintains a line of credit with Wells Fargo Bank Texas, N.A.
which permits the Company to borrow up to $1 million until April 1, 2001.
Interest is payable at the bank's prime rate minus 1/4% (9.25% at June 30,
2000). Any unpaid principal of the note is due April 1, 2001. The loan
agreement provides for a revolving line of credit, secured by substantially all
assets of the Company which are located in the U.S., except for land and
buildings. The credit facility requires compliance with certain financial
covenants related to the Company's current ratio, debt service coverage and
funded debt to net income (as defined) and total liabilities to total net
worth. The agreement prohibits the payment of cash dividends by the Company
unless otherwise agreed to by the bank. The Company was in compliance with the
financial requirements of the agreement at June 30, 2000, and there were no
balances outstanding under the agreement at June 30, 2000 or December 31, 1999.
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. $289,000) at the bank's prime rate plus 2% (7.5% at June 30,
2000). There were no balances outstanding at June 30, 2000, but amounts
utilized under letter of credit commitments totaled $239,000, resulting in
credit availability of $50,000 at June 30, 2000. 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.
Interest income (expense) for the six month periods ended June 30, is
presented net as follows (in thousands):
2000 1999
Interest income $462 $339
Interest (expense) (1 ) (15 )
--- ---
Interest income, net $461 $324
=== ===
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
3. SEGMENT INFORMATION
The following table sets forth reportable segment information (in
thousands) for the periods indicated:
Six Months Three Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Revenues from external
customers:
Testing Products $4,062 $2,344 $1,956 $1,379
Services 4,298 5,870 2,297 3,038
Power Sources 796 1,067 301 544
Intersegment revenues:
Testing Products 77 80 55 25
Services 6 6 6 -
Eliminations (83 ) (86 ) (61 ) (25 )
----- ------ ----- -----
$9,156 $9,281 $4,554 $4,961
===== ====== ===== =====
Operating income (loss):
Testing Products $ (257 ) $ (779 ) $ (213 ) $ (102 )
Services 566 909 328 441
Power Sources (417 ) (207 ) (249 ) (92 )
Provision for asset
impairment (100 ) - (100 ) -
General corporate expenses (206 ) (206 ) (107 ) (112 )
----- ------ ----- -----
Operating income (loss) $ (414 ) $ (283 ) $ (341 ) $ 135
===== ====== ===== =====
Total assets by reportable segment as of the dates indicated are as follows
(in thousands):
June 30, December 31,
2000 1999
Testing Products $ 7,805 $ 6,687
Services 5,249 5,783
Power Sources 1,596 1,647
General corporate assets 15,188 14,532
------ ------
$29,838 $28,649
====== ======
For the periods indicated above, there were no material changes in the
accounting policies and procedures used to determine segment income or loss.
12
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Six Months Three Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Net income (loss) $ (104 ) $ (78 ) $ (150 ) $ 184
===== ===== ===== =====
Weighted average shares
outstanding 6,657 6,624 6,668 6,632
Net effect of dilutive stock
options based on the
treasury stock method - - - 27
----- ----- ----- -----
Weighted average shares and
assumed conversions 6,657 6,624 6,668 6,659
===== ===== ===== =====
Earnings (loss) per share:
Basic $ (.01 ) $ (.01 ) $ (.02 ) $ .03
===== ===== ===== =====
Diluted $ (.01 ) $ (.01 ) $ (.02 ) $ .03
===== ===== ===== =====
Options to purchase 265,000, 598,000 and 339,000 shares of common stock of
the Company were excluded from the computation of the diluted (loss) per share
during the first half of 2000, first half of 1999 and the quarter ended June
30, 2000, respectively, as inclusion of these options in the calculations would
have been anti-dilutive.
13
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
5. SHUT-DOWN AND RESTRUCTURING OF FACILITIES
The following table reports activity in the accrued shut-down and
restructuring accounts during the six month period ended June 30, 2000 and year
ended December 31, 1999 (in thousands):
2000 1999
Accrued costs at beginning of period $ 72 $ 300
Provision for shut-down and restructuring:
Employee severance - 30
Other expenses - 80
---- ----
- 110
---- ----
Cash payments charged to accounts:
Employee severance - (72 )
Lease payments (20 ) (101 )
Other payments (27 ) (27 )
---- ----
(47 ) (200 )
---- ----
Disposal of Singapore assets - (138 )
---- ----
Accrued costs at end of period $ 25 $ 72
==== ====
The Company's Austin, Texas facility (which was part of the Services
segment) provided services principally to one customer. The facility was closed
on September 30, 1999 because the customer notified the Company that it would
cease sending product to the facility. The Company recorded an $800,000
provision for shut-down in September 1999 related to the closing of this
facility. The Company did not include an accrual for future rent obligations
related to the leased facility in Austin because it has entered into a sublease
agreement with a third party equal to the Company's remaining obligation under
the lease agreement.
Services provided to Texas Instruments Incorporated accounted for
substantially all of the revenues of the Company's Singapore Services facility
prior to the Company's acquisition of certain assets and operations from Basic
Engineering Services and Technology Labs, Inc., in December 1998. On October 1,
1998, Micron Technology acquired the Texas Instruments facility in Singapore
and informed the Company that it would continue to utilize the Company's burn-
in services, but at a significantly reduced level. Micron accounted for 8% of
1999 fiscal year consolidated revenues and completely discontinued utilizing
the Company's services during the fourth quarter of 1999. In connection with
the decrease in volumes at the Singapore facility, a $507,000 provision for
restructuring was recorded in the fourth quarter of 1998.
During the second quarter 2000, the Company recorded a $100,000 provision
for asset impairment related to assets-held-for sale resulting from the 1998
shut-down of the Company's North Carolina facility.
14
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RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
6. COMPREHENSIVE INCOME
The only difference between total comprehensive income (loss) and net
income (loss) that is reported on the Consolidated Statements of Operations
arises from unrealized gains and losses on available-for-sale securities. The
Company's total comprehensive income (loss) (in thousands) for the periods
indicated, are as follows:
Six Months Three Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Net income (loss) $(104 ) $(78 ) $(150 ) $184
Unrealized net gains (losses) on
marketable equity securities 96 - (190 ) -
---- --- ---- ---
Total comprehensive income (loss) $ (8 ) $(78 ) $(340 ) $184
==== === ==== ===
7. RELOCATION OF SINGAPORE FACILITIES
The Company is in the process of finalizing plans to combine two
Singapore facilities into a new facility in order to provide additional
capacity and to reduce operating costs. Costs related to this relocation, net
of income tax benefits, are estimated to be $400,000 and $130,000 in the third
and fourth quarters of 2000, respectively. In addition to the cost that will be
recorded as expense, additional expenditures for leasehold improvements and
other plant and equipment costs will be capitalized.
15
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this document contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth elsewhere in this
document.
FINANCIAL CONDITION
The primary sources of Reliability's liquidity are cash provided by
operations and working capital. The parent Company and its Singapore subsidiary
have substantial cash available to support anticipated liquidity requirements.
The Company maintains lines of credit to supplement the primary sources of
capital. Changes in the Company's financial condition since December 31, 1999
and June 30, 1999 are generally attributable to changes in cash flows from
operating activities, including the effect of operating at revenue levels below
historical levels, the effects of changes in operations related to the
acquisition of certain assets in the Services segment in December 1998 and
accelerating payments on and payment in full of a mortgage during 1999. In
addition, significant changes in demand for products and services sold by the
Company, the shut-down of the Company's Austin, Texas Services facility in 1999
and changes in operations at the Company's Singapore subsidiary throughout 1999
and 2000 did, and will in the future, affect the Company's financial condition.
Also, purchasing marketable equity securities, changes in the levels of capital
expenditures and consolidating the Company's Singapore operations into one
facility during the second half of 2000 have affected and will affect the
Company's financial condition.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart. The periods presented related to the profitability ratios are for the
six months ended June 30, and twelve months ended December 31:
June 30, December 31, June 30,
2000 1999 1999
Working capital:
Working capital (in thousands) $16,719 $16,401 $15,965
Current ratio 7.1 to 1 11.7 to 1 7.2 to 1
Equity ratios:
Total liabilities to equity 0.1 0.1 0.1
Assets to equity 1.1 1.1 1.1
Profitability ratios:
Gross profit 36 % 35 % 39 %
Return on revenues (1)% (8)% (1)%
Return on assets (annualized) (1)% (4)% (1)%
Return on equity (annualized) (1)% (5)% (1)%
16
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RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
The Company's financial condition has remained strong during 2000. Working
capital increased to $16.7 million at June 30, 2000, from $16.4 million at
December 31, 1999, and the ratio of current assets to current liabilities was a
very healthy 7.1 to 1 at June 30, 2000. During 2000, the Company has maintained
a strong current ratio and working capital. This is due to a decline in the
level of operations during 1999 and 2000 compared to 1998, resulting in current
liabilities declining at a faster rate than the decline in current assets.
Beginning in the fourth quarter of 1998, the Company's revenues and level of
operations, compared to the corresponding prior year periods, declined. Assets
such as accounts receivable and inventories decreased during the period of
declining production and were converted to cash. Cash provided by certain
components of cash flows from operations in 1999 were used to reduce and pay
off a mortgage, acquire assets in the Services segment, purchase fixed assets
and maintain the amount of short-term interest-bearing cash investments Also in
1999, cash was used to reduce accrued liabilities, pay off a note and purchase
certain equity securities. The current ratio of 11.7 to 1 at December 31, 1999
was unusually high due to the low level of operations during the latter part of
1999; thus, items such as accounts payable and accrued liabilities were very
low. The Company continues to maintain stringent expense control measures, thus
minimizing the negative impact on the Company's financial condition while the
Company is operating at reduced revenue and profit levels.
The Company maintains a credit facility with a financial institution to
provide credit availability to supplement cash provided by operations, if
required. Credit availability provided by the facility was reduced by the
Company from $4.0 million to $1.0 million in 1999. The Company's Singapore
subsidiary maintains a small overdraft facility to support the subsidiary's
credit commitments.
Net cash provided by operating activities for the six months ended June 30,
2000 was $0.5 million, contrasted with $1.0 million used by operations in the
first six months of 1999. The principal item affecting cash provided by
operations in 2000 was a $2.0 million increase in accounts receivable. Cash
provided by operations in 2000 was increased by $1.1 million of depreciation
and amortization and a $0.6 million decrease in refundable income taxes.
Accounts payable and accrued liabilities increased $0.9 million in 2000,
resulting from a general increase in most items included in accrued liabilities
due to accrual throughout the year of various items, such as property taxes,
that will be paid in the following year and an increase in revenues in 2000
compared to the latter part of 1999. A $0.3 million increase in income taxes
payable resulted from an increase in taxes on profits of a foreign subsidiary.
A significant portion of the increase in accounts receivable and the $0.3
million increase in other long-term assets resulted from the fact that the
Company sold $2.0 million of testing products in January 2000 and the accounts
receivable related to that sale will be collected in 23 monthly installments.
Backlog totaled $2.5 million at June 30, 2000 compared to $2.4 million at
December 31, 1999. The current forward-looking forecast indicates revenues for
the third quarter of 2000 will be between $4.6 and $5.0 million, compared to
revenues of $2.3 million for the fourth quarter of 1999, $4.6 million for the
first quarter of 2000 and $4.6 million for the
17
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
second quarter of 2000. Operations for the third quarter of 2000 are forecast
to result in a loss of $0.5 per diluted share, including relocation expenses
related to the Singapore operation. The Company is continuing to see some signs
that new orders may increase in the near future. Some of these signs are
increases in demand for products sold by the semiconductor industry, increases
in inquiries by certain customers and forecasts by certain customers needing
new or retrofit capacity. In general, these signs provide some visibility that
demand for the Company's products may increase, but actual timing of any
increase is still difficult to forecast. In addition, changes in product mix
and increases in demand for ICs that are sold by customers of the Singapore
Services facility have resulted in increased demand for services provided by
the facility in 2000, compared to the latter part of 1999. The Company is
finalizing plans to relocate the existing two facilities into one facility
during the second half of 2000.
During January 2000, the Company's common stock traded between $3.00 and
$4.00 per share. The Company announced, on February 1, 2000, a plan to
repurchase for cash up to 1.5 million shares of its common stock. Shares that
are repurchased would be used to issue stock when stock options are exercised,
make contributions to the Company's 401(k) plan, or for acquisitions. The stock
has traded above the January 2000 price range during most of the time since the
announcement was made. The stock has traded in the $4.00 range during recent
periods of 2000 and the Company has repurchased a total of 39,000 shares as of
August 3, 2000. The Company has limited purchases at higher share prices and
the purchases are also subject to regulatory daily volume limitations.
Capital expenditures during the first six months of 2000 and 1999 were
$466,000 and $690,000, respectively. A significant portion of expenditures in
both years included equipment required by the Singapore subsidiary to support
services provided by the subsidiary. Current projections indicate that capital
expenditures for 2000 may be between $2.0 and $3.0 million. A significant
portion of the expenditures will be for equipment required by the Singapore
subsidiary to support changes and increases in customers' requirements and to
consolidate the current two facilities into one new location, as noted earlier
in this discussion. Consolidation of two facilities into one facility is
projected to reduce future operating expense.
Current projections indicate that the Company's cash and cash equivalent
balances and available lines of credit will be sufficient to meet the projected
cash requirements of the Company for the remainder of 2000.
RESULTS OF OPERATIONS
Six months ended June 30, 2000 compared to six months ended June 30, 1999.
Revenues. Revenues for the 2000 six-month period were $9.2 million compared to
$9.3 million for the 1999 period. Revenues in the Testing Products segment
increased $1.7 million while revenues in the Services and Power Sources
segments decreased $1.5, and $0.3 million, respectively.
18
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
Revenues in the Testing Products segment were $4.1 million for the first
half of 2000, which is an increase of 73% from the first half of 1999. Revenues
from the sale of CRITERIA products decreased $0.3 million or 21%, while
revenues from the sale of INTERSECT products increased $2.0 million or 216%.
Changes in demand during the 2000 period for IC products sold by customers of
the Company's Testing Products segment resulted in changes in the number of
CRITERIA systems upgraded and the sale of refurbished and upgraded INTERSECT
systems to customers.
Revenues in the Services segment for the 2000 period were $4.3 million, a
decrease of 27% compared to the corresponding 1999 period. The decrease
resulted from the closing of the Company's Austin, Texas Services facility at
the end of the third quarter of 1999. Revenues at the Singapore Services
facility were basically flat in the 2000 period compared to the 1999 period,
but were up 15% in the second quarter of 2000 compared to the first quarter of
2000. The increase at the Singapore facility resulted from product mix changes
and increased demand for products sold by the two principal customers of the
subsidiary and from one of the customers introducing a new generation of
microprocessors.
Revenues in the Power Sources segment were $0.8 million for the first half
of 2000, reflecting a 25% decrease from the 1999 period. Revenues were affected
by general reductions in demand, price competition, an aging product line, a
decline in market penetration and cancellation of a distribution contract by a
distributor.
Costs and Expenses. Total costs and expenses for the first half of 2000
increased slightly compared to the 1% revenue decrease of $125,000. Cost of
revenues increased $220,000; marketing, general and administrative expenses
decreased $168,000; research and development expenses decreased $146,000; and a
provision for asset impairment of $100,000 was recorded in the 2000 period.
The decrease in gross profit from 39% in the 1999 period to 36% in the 2000
period is attributable to all segments. The decrease relates to volume and
product mix changes at the Singapore facility, closing of the Austin Services
facility, volume decreases in the Power Sources segment and a lower gross
profits on products sold in the Testing Products segment in 2000 resulting from
product mix changes. In addition, there was a decrease in the Services segment
related to an increase in depreciation expense resulting from a faster write-
off of certain IC testers, due to an anticipated shorter product life of the
ICs that are processed on the testers.
Marketing, general and administrative expenses for the 2000 period
decreased $168,000. The decrease was primarily related to a $292,000 decrease
in expenses related to the closing of the Austin Services facility in September
1999. The overall decrease, was affected by stringent expense controls and an
increase in Testing Products revenues which contributed to an increase in
volume related expenses, such as commissions, warranty and similar expenses.
The increase in interest income during the 2000 period relates primarily to
interest earned on an accounts receivable amount that is being collected over a
two-year period and a general increase in interest rates paid on investments.
19
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
The Company, in April 1998, closed a Services facility in North Carolina.
Land and a building previously occupied by a services operation have been
carried as assets held for sale. The impairment reserve related to the assets
was increased by $100,000 to $200,000 during the second quarter of 2000. The
increase in the reserve was based on updated information applicable to the
assets' fair value, less cost to sell.
Research and development expenses for the 2000 period decreased slightly.
Reliability is committed to a significant research and development program and
development costs are projected to remain at current levels or increase
somewhat during the remainder of the year.
The Company's operations reflected net tax benefits for the six-month
periods ended June 30, 2000 and 1999. The principal items affecting the
Company's tax benefit rates in both years were tax benefits not available to a
foreign subsidiary due to limitations on net operating loss deductions and a
lower effective tax rate related to earnings of the Singapore subsidiary.
Three months ended June 30, 2000 compared to three months ended June 30,
1999.
Revenues. Revenues for the 2000 three-month period were $4.6 million compared
to $5.0 million for the 1999 period. Revenues in the Testing Products segment
increased $0.6 million, Power Sources revenues decreased $0.3 million and
Services revenues decreased $0.7 million.
Revenues in the Testing Products segment were $2.0 million for the second
quarter of 2000, which is an increase of 42% from the second quarter of 1999.
The increase is related to changes in demand relating to factors described in
the six-month discussion above. Revenues from the sale of CRITERIA products
decreased $0.5 million and revenues from the sale of INTERSECT products
increased $1.1 million.
Revenues in the Services segment for the 2000 period were $2.3 million, a
decrease of 24% compared to the corresponding 1999 period. Eighty-five percent
(85%) of the decrease is related to the shutdown of the Austin Services
facility and the remaining 15% relates to the timing of product mix changes.
Revenues in the Power Sources segment were $0.3 million for the second
quarter of 2000, reflecting a 45% decrease from the 1999 period. Revenues were
affected by general reductions in demand, an aging product line, a decline in
market penetration resulting in volume decreases and the cancellation of a
distribution contract, as noted above in the six month discussion.
Costs and Expenses. Total costs and expenses for the second quarter of 2000
increased $69,000 or 1% compared to the 8% revenue decrease of $0.4 million. A
$100,000 provision for asset impairment, as discussed in the above six-month
discussion, was recorded in the 2000 quarter.
The decrease in gross profit from 42% in the 1999 period to 35% in the 2000
period is attributable primarily to a decrease in the gross profit in the
Testing Products and Power Sources segments resulting from product mix
20
<PAGE>
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 2000
changes in the Testing Products segment and volume decreases in the Power
Sources segment. In addition, the decrease relates to volume and product mix
changes at the Singapore facility, closing of the Austin Services facility,
volume decreases in the Power Sources segment and the effect of an increase in
depreciation expense at the Singapore facility, as discussed in the above six-
month discussion.
Marketing, general and administrative expenses for the 2000 period
decreased slightly. The decrease is related to a decrease in expenses due to
closing of the Austin Services facility and the effect of stringent expense
controls. The decrease is affected by increases in volume related expenses,
such as commissions, warranty and similar expenses resulting from the increase
in revenues in the Testing Products segment
The change in net interest reflects an increase in interest income and a
decrease in interest expense, as explained in the above six-month discussion.
A $46,000 tax provision was recorded related to the $104,000 loss before
income taxes for the three-month period ended June 30, 2000, compared to a 39%
tax rate for the three month period ended June 30, 1999. The principal items
affecting the Company's tax rate in 2000 and 1999 were tax benefits not
available to a foreign subsidiary due to net operating loss limitations and a
lower effective tax rate related to earnings of the Singapore subsidiary.
SAFE HARBOR STATEMENT
"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, future results related to acquisitions and supply and
demand changes for Company products and services and its customers' products
and services. Actual results may materially differ from projections.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
There have been no material changes in the market risk disclosures
reported in the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1999.
21
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RELIABILITY INCORPORATED
OTHER INFORMATION
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the quarter ended June 30, 2000
22
<PAGE>
RELIABILITY INCORPORATED
SIGNATURES
June 30, 2000
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)
August 11, 2000 /s/Larry Edwards
President and
Chief Executive Officer
August 11,2000 /s/Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
23
