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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
-----------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-5641
INSTRON CORPORATION
(Exact name of registrant as specified in its Charter)
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<S> <C>
Massachusetts 04-2057203
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
100 Royall Street 02021
Canton, Massachusetts (Zip Code)
(Address of Principal executive offices)
</TABLE>
(781) 828-2500
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
The number of shares outstanding of each of the issuer's classes of common stock
as of May 7, 1998.
Common Stock, $1 par value -- 6,904,281 shares
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<CAPTION>
INSTRON CORPORATION FORM 10-Q
Consolidated Statement of Income PART I
(Unaudited) ITEM I
(In thousands, except share data)
Three Months Ended
-------------------------------
March 28, 1998 March 29, 1997
-------------------------------
<S> <C> <C>
Revenue:
Sales $ 27,504 $ 29,844
Service 6,365 6,179
---------- ----------
Total revenue 33,869 36,023
---------- ----------
Cost of revenue:
Sales 15,603 17,059
Service 4,524 4,258
---------- ----------
Total cost of revenue 20,127 21,317
---------- ----------
Gross Profit 13,742 14,706
---------- ----------
Operating expenses:
Selling and Administrative 10,061 10,859
Research and Development 1,449 1,908
Special items charge 4,975 0
---------- ----------
Total operating expenses 16,485 12,767
---------- ----------
Income (loss) from operations (2,743) 1,939
---------- ----------
Other (income) expense:
Interest, net 74 329
Foreign exchange losses 100 128
Gain on sale of land (11,076) 0
---------- ----------
Total other (income) expense (10,902) 457
---------- ----------
Income before income taxes 8,159 1,482
Provision for income taxes 4,248 563
---------- ----------
Net income $ 3,911 $ 919
========== ==========
Weighted average number of basic common shares 6,482,371 6,444,735
========== ==========
Earnings per share - basic $ .60 $ .14
========== ==========
Weighted average number of diluted common shares 7,060,171 6,542,578
========== ==========
Earnings per share - diluted $ 0.55 $ 0.14
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
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INSTRON CORPORATION FORM 10-Q
Consolidated Balance Sheet PART I
(In thousands, except share data) ITEM I
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<CAPTION>
March 28, 1998 December 31,1997
-------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,474 $ 2,566
Accounts receivable (net of allowance for
doubtful accounts of $1,058 in 1998 and
$1,071 in 1997) 46,996 48,226
Inventories 30,500 24,024
Deferred income taxes 3,258 3,314
Prepaid expenses and other current assets 3,498 3,767
-------- ---------
Total current assets 86,726 81,897
Property, plant and equipment, net 21,221 21,207
Deferred income taxes 897 806
Other assets 14,175 15,075
-------- ---------
Total assets $123,019 $ 118,985
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Short term borrowings $ 4,576 $ 6,059
Accounts payable 10,063 11,095
Accrued liabilities 21,082 14,083
Accrued employee compensation and benefits 3,631 6,220
Accrued income taxes 4,651 957
Advance payments received on contracts 2,140 1,541
-------- ---------
Total current liabilities 46,143 39,955
Long-term debt 600 7,600
Pension and other long-term liabilities 5,227 5,176
-------- ---------
Total liabilities 51,970 52,731
-------- ---------
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000
shares authorized, none issued
Common stock, $1 par value; 10,000,000 shares
authorized; 6,851,199 and 6,823,698 shares
issued, respectively 6,851 6,824
Additional paid in capital 7,257 6,972
Deferred compensation (3,090) (3,235)
Retained earnings 65,747 62,097
Cumulative translation adjustment (5,002) (5,690)
-------- ---------
71,763 66,968
Less: Treasury stock of 74,952 shares at cost 714 714
-------- ---------
Total stockholders' equity 71,049 66,254
-------- ---------
Total liabilities and stockholders' equity $123,019 $ 118,985
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
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<TABLE>
<CAPTION>
INSTRON CORPORATION FORM 10-Q
Consolidated Statement of Cash Flows PART I
(Unaudited) ITEM I
(In Thousands)
Three Months Ended
-------------------------------
March 28, 1998 March 29, 1997
-------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,911 $ 919
Adjustments to reconcile net income to
net cash provided by operating activities:
(Gain) loss on the sale of property, plant and
equipment (6,870) 2
Depreciation and amortization 1,649 1,702
Provision for losses on accounts receivable 8 92
Deferred taxes (36) 93
Decrease in accounts receivable 654 1,849
Increase in inventories (6,211) (675)
(Increase) decrease in prepaid expenses and other
current assets 281 (385)
Increase (decrease) in accounts payable and
accrued expenses 1,410 (436)
Increase in other long-term liabilities 424 311
Other 1,832 (454)
-------- -------
Net cash provided (used) by operating activities (2,948) 3,018
-------- -------
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment 13,620 81
Capital expenditures (2,039) (613)
Capitalized software costs (275) (106)
Other 24 64
-------- -------
Net cash provided (used) by investing activities 11,330 (574)
-------- -------
Cash flows from financing activities:
Net payments under revolving credit and
term loan facility (7,000) (2,698)
Net short-term payments (1,502) (115)
Cash dividends paid (261) (258)
Other 280 0
-------- -------
Net cash used by financing activities (8,483) (3,071)
-------- -------
Effect of exchange rate changes on cash 9 (53)
-------- -------
Net decrease in cash and cash equivalents (92) (680)
Cash and cash equivalents at beginning of year 2,566 2,541
-------- -------
Cash and cash equivalents at end of period $ 2,474 $ 1,861
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 320 $ 413
Income taxes 110 1,518
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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<CAPTION>
INSTRON CORPORATION FORM 10-Q
Statement of Comprehensive Income PART I
(Unaudited) ITEM I
(In Thousands)
Three Months Ended
---------------------------------
March 28, 1998 March 29, 1997
---------------------------------
<S> <C> <C>
Net income $ 3,911 $ 919
Other comprehensive income, net of tax:
Foreign currency translation adjustments 442 (1,067)
------- -------
Comprehensive income $ 4,353 $ (148)
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
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INSTRON CORPORATION FORM 10-Q
MARCH 28, 1998 PART I
Notes to Consolidated Financial Statements ITEM 2
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that effect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reported periods. Actual
results could differ from those estimates.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 28,
1998 are not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
2. EARNINGS PER SHARE
Under the new requirements of FAS No. 128, primary and fully diluted
earnings per share are replaced by basic and diluted earnings per share.
Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period and the diluted
effect of stock options is excluded. Diluted earnings per share is based on
the weighted average number of common shares and common share equivalents
outstanding.
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INSTRON CORPORATION FORM 10-Q
PART I
Notes to Consolidated Financial Statements ITEM 2
March 28, 1998
(unaudited)
The following is a reconciliation of the basic and diluted EPS calculations:
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<CAPTION>
March 28, 1998 March 29, 1997
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<S> <C> <C>
Net income $3,911,000 $ 919,000
========== ==========
Weighted average number of basic
common shares outstanding 6,482,371 6,444,735
Dilutive effect of common stock
equivalents oustanding 577,800 97,843
---------- ----------
Weighted average of common and
dilutive shares 7,060,171 6,542,578
========== ==========
Basic earnings per share $ .60 $ .14
========== ==========
Diluted earnings per share $ .55 $ .14
========== ==========
</TABLE>
3. INVENTORIES
-----------
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<CAPTION>
(In thousands) March 28, 1998 December 31, 1997
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<S> <C> <C>
Raw Materials $15,755 $12,742
Work-in-process 7,615 5,156
Finished goods 7,130 6,126
------- -------
$30,500 $24,024
======= =======
</TABLE>
Inventories are valued at the lower of cost or market (net realizable
value). The last-in, first-out (LIFO) method of determining cost is
principally used for inventories in the United States and certain Asian
branches. The Company uses the first-in, first-out (FIFO) method for all
other inventories. Inventories valued at LIFO amounted to $15,779,000 and
$9,395,000 at March 28, 1998 and December 31, 1997, respectively. The
excess of current cost over stated LIFO value was $5,378,000 at March 28,
1998 and $5,247,000 at December 31, 1997.
7
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INSTRON CORPORATION FORM 10-Q
PART I
Notes to Consolidated Financial Statements ITEM 2
March 28, 1998
(unaudited)
4. SPECIAL ITEMS CHARGE
During the first quarter of 1998, the Company recorded a special items
charge to operations to undertake a consolidation of its European
operations and write-down the value of certain non-performing assets. A
pre-tax charge of $5.0 million was taken in the quarter ended March 28,
1998 to cover these actions. The special items charge includes termination
benefits, the costs to exit a manufacturing facility, other asset
impairments and other related costs. The Company plans to shut down a
manufacturing plant in Germany and move the manufacturing operations to the
United Kingdom. These actions are expected to be completed and paid for by
the end of the first quarter of 1999. The Company does not anticipate any
significant benefits in 1998 from these actions, however, operating margins
are expected to improve in 1999.
5. SALE OF LAND
On March 27, 1998, the Company completed the sale of 42 acres of its 66
acre site off Route 128 in Canton, Massachusetts for $13.5 million. As a
result of this transaction, a non-operating pre-tax gain of $11.1 million
was recorded in the first quarter of 1998.
6. SALE OF LMS
On April 14, 1997, the Company sold its Laboratory MicroSystems division,
known as LMS, to Axiom Systems. The net assets associated with LMS at the
time of the sale were approximately $2.9 million,and there was no
significant gain or loss recorded as a result of this disposition. The
proforma results of this transaction is not disclosed as the results were
immaterial.
7. NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, ("SFAS 131") "Disclosure about
Segments of an Enterprise and Related Information." SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. SFAS 131 will become effective for fiscal
years beginning after December 15, 1997. The Company will adopt the new
standard for the fiscal year ending December 31, 1998, and is in the
process of evaluating the impact of the new standard on the presentation of
its financial statements and the disclosures therein.
8
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INSTRON CORPORATION FORM 10-Q
MARCH 28, 1998 PART I
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 28, 1998 VS. QUARTER ENDED MARCH 29, 1997
Revenues for the first quarter of 1998 were $33,869,000, a decrease of 6.0% over
the same period last year, due to lower revenues of the Company's Asian markets
and delays of certain customer shipments in North America. Foreign sales
accounted for approximately 61% of consolidated first quarter revenues compared
with 60% for the first quarter of 1997.
The consolidated gross margin as a percentage of revenue declined slightly to
40.6% for the first quarter of 1998 compared to 40.8% for the first quarter of
1997, due to the impact of supplying IST with structures systems at lower than
normal margins under the Company's joint venture arrangement. The Company has a
51% interest in the IST joint venture and has certain rights to acquire the
co-joint venturer's interest in IST.
Total selling and administrative expenses decreased 7.3% from the first quarter
of 1997 due primarily to the exclusion of LMS expenses in 1998 (the business
was sold in the second quarter of last year). As a percentage of revenue,
selling and administrative expenses were 29.7% in the first quarter of 1998
compared to 30.1% for the comparable period last year.
Research and development expenses decreased by 24.1% for the first quarter of
1998 compared with the first quarter of 1997. This decrease is the result of
certain Instron engineering resources being utilized to develop new products for
IST in accordance with the joint venture agreement which are reimbursed by IST
and the disposition of LMS. In addition, software development costs of $275,000
were capitalized during the first quarter of 1998 compared with $106,000 in the
first quarter of last year. If research and development expenses were restated
for comparison purposes by including software development costs as period
expenses and by adjusting engineering expenses for the effect of IST and the
disposition of LMS, research and development expenses of the ongoing business
would have increased by 1.7% in 1998.
9
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INSTRON CORPORATION FORM 10-Q
MARCH 28, 1998 PART I
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (CONTINUED)
Operating expenses in the first quarter of 1998 included a special items charge
of $4,975,000, for the cost of consolidating European operations and to
write-down the value of certain non-performing assets. The special items charge
includes termination benefits, the costs to exit a manufacturing facility, other
asset impairments and other related costs. The Company plans to shut down a
manufacturing plant in Germany and move the manufacturing operations to the
United Kingdom. These actions are expected to be completed and paid for by the
end of the first quarter of 1999. The Company does not anticipate any
significant benefits in 1998 from these actions, however, operating margins are
expected to improve in 1999.
Net interest expense decreased to $74,000 compared to $329,000 in the first
quarter of 1997. The net decrease was due to reduced interest expense resulting
from lower average borrowings and by interest income received on notes
receivable and temporary bank deposits.
A non-operating gain of $11,076,000 was recorded in the first quarter of 1998 on
the sale of excess land in Canton, Massachusetts.
Net income for the first quarter of 1998 was $3,911,000, or 55 cents per diluted
share, compared to net income of $919,000, or 14 cents per diluted share, for
the same period last year. For comparison purposes, when the after-tax effect of
the gain on sale of land and the special items charge are excluded, net income
of the ongoing business was $1,276,000 or 18 cents per diluted share in the
first quarter of 1998.
The consolidated effective tax rate was 52% for the first quarter of 1998
compared to 38% in 1997. The higher tax rate this quarter is due to certain
non-deductable expenses relating to the special items charge. Excluding the
effect of the special items charge, the ongoing effective tax rate was 38% for
the first quarter of 1998.
FINANCIAL CONDITION
In the first quarter of 1998, the Company had negative cash flows from operating
activities of $2.9 million. The negative cash flows resulted primarily from an
increase in inventories due to delays in certain customer shipments. These
orders are expected to be fulfilled in the second quarter of 1998.
10
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INSTRON CORPORATION FORM 10-Q
MARCH 28, 1998 PART I
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION (CONTINUED)
The Company generated cash flows of $13.6 million from the sale of property,
plant and equipment of which $13.5 million represented proceeds from the sale of
excess land in Canton, Massachusetts. The $13.5 million was used to pay down
debt.
At March 28, 1998, the Company had $34.4 million of available credit under its
$35.0 million multicurrency revolving credit and term loan facility. The
Company's subsidiaries have other overdraft and borrowing facilities totaling
approximately $26.0 million of which $4.6 million were outstanding at March 28,
1998. The ratio of total debt to debt plus equity at March 28, 1998, decreased
to 6.8% from 17.1% at year-end 1997.
The Company believes its present capital resources and anticipated operating
cash flows are sufficient to meet its current and future cash requirements to
finance operations, capital expenditures and acquisitions.
Bookings for the first quarter of 1998 increased by 3.1% over the same period
last year. This increase is due primarily to strong order bookings in Europe and
North America partially offset by lower bookings in the Company's Asian
territories.
The Company's order backlog was $32.0 million at the end of the first quarter of
1998, an increase of 5.4% from the first quarter of 1997.
On February 25, 1998, the Board of Directors declared a regular quarterly
dividend of 4 cents per share on the Company's Common Stock, payable April 4,
1998, to shareholders of record on March 20, 1998.
11
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INSTRON CORPORATION FORM 10-Q
MARCH 28, 1998 PART I
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION (CONTINUED)
This Form 10-Q Report contains certain "forward-looking" statements within the
meaning of the federal securities laws and are made in reliance upon the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such statements are only predictions and speak only
as of the date of this report. No assurances can be given that actual results
will not differ materially from those projected in the forward-looking
statements contained in this Form 10-Q report.
Certain factors that might cause such a difference include: the level of
bookings worldwide for Instron and its joint venture IST, particularly in Asia;
the operating results of the IST joint venture; the impact of fluctuations in
the exchange rates; the uncertainties of operating in a global economy,
including fluctuations in the economic conditions of the foreign and domestic
markets served by the Company; the Company's ability to successfully integrate
the products and operations of businesses acquired; and the Company's ability to
identify and successfully consummate strategic acquisitions. For further
discussion of the factors, investors are encouraged to review the Company's Form
10-K for the fiscal year ended December 31, 1997 and its other recent SEC
filings.
12
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INSTRON CORPORATION FORM 10-Q
March 28, 1998 PART II
ITEM 2
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
Neither the Registrant nor any of its subsidiaries is a party to, nor is any of
their property the subject of, any material pending legal proceedings.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
None
b. REPORTS ON FORM 8-K
On April 3, 1998, the Registrant filed a Form 8-K disclosing (i)
the Purchase and Sale Agreement, dated as of August 20, 1996 and
(ii) the Amendment to Purchase and Sale Agreement, dated as of
March 27, 1998, between Instron Realty Trust, a Massachusetts
business trust, and Reebok International Ltd.
13
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FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSTRON CORPORATION
Date: May 11, 1998 By /s/ James M. McConnell
------------------------------------------
James M. McConnell
President and Chief Executive Officer
Date: May 11, 1998 By /s/ Linton A. Moulding
------------------------------------------
Linton A. Moulding
Chief Financial Officer
14
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME, CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH
FORM 10-Q FOR THE PERIOD ENDED MARCH 28, 1998.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1
<CASH> 2,474
<SECURITIES> 0
<RECEIVABLES> 46,996
<ALLOWANCES> 1,058
<INVENTORY> 30,500
<CURRENT-ASSETS> 86,726
<PP&E> 60,714
<DEPRECIATION> 39,493
<TOTAL-ASSETS> 123,019
<CURRENT-LIABILITIES> 46,143
<BONDS> 0
0
0
<COMMON> 6,851
<OTHER-SE> 64,198
<TOTAL-LIABILITY-AND-EQUITY> 123,019
<SALES> 27,504
<TOTAL-REVENUES> 33,869
<CGS> 15,603
<TOTAL-COSTS> 20,127
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 74
<INCOME-PRETAX> 8,159
<INCOME-TAX> 4,258
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,911
<EPS-PRIMARY> .60
<EPS-DILUTED> .55
</TABLE>