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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 3, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5641
INSTRON CORPORATION
(Exact name of registrant as specified in its Charter)
Massachusetts 04-2057203
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
100 Royall Street
Canton, Massachusetts 02021
(Address of Principal executive offices) (Zip Code)
(781) 828-2500
(Registrant's telephone number, including area code)
PORTIONS AMENDED
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Part I, Item 2 of the registrant's Quarterly Report on Form 10-Q is amended
by deleting Item 2 in its entirety and replacing it with Item 2 set forth
herein.
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FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
APRIL 3, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
QUARTER ENDED APRIL 3, 1999 VS. QUARTER ENDED MARCH 28, 1998
Revenues for the first quarter of 1999 were $48,745,000 an increase of 43.9%
over the same period last year, due primarily to the inclusion of Satec and IST
products and services. Satec was acquired in August 1998 and the buyout of the
remaining 49% of the IST joint venture was completed in September 1998. If
revenues attributable to Satec and IST were excluded for both the first quarter
of 1999 and the first quarter of 1998, total revenues for the first quarter of
1999 would have been $33,958,000 compared to $31,303,000 in 1998, an increase of
8.5%. This increase is due primarily to higher electromechanical shipments in
North America and Europe. Foreign sales accounted for approximately 57% of
consolidated first quarter revenues compared with 61% for the first quarter of
1998.
The consolidated gross margin as a percentage of revenue increased slightly to
40.8% for the first quarter of 1999 compared to 40.6% for the first quarter of
1998.
Total selling and administrative expenses increased by 44.0% over the first
quarter of 1998 due primarily to the inclusion of Satec and IST in 1999. As a
percentage of revenue, selling and administrative expenses were unchanged year
over year at 29.7%.
Research and development expenses increased by 86.9% for the first quarter of
1999 compared with the first quarter of 1998. This increase is primarily due to
the inclusion of Satec and IST in 1999. In addition, software development costs
of $587,000 were capitalized during the first quarter of 1999 compared with
$275,000 in the first quarter of last year. On a pro forma basis, as if Satec
and IST were wholly owned in 1998, and software development costs were reported
as period expenses, research and development expenses would have increased by
20.0% in 1999.
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, asset
impairments and other related costs. The Company has shut down a manufacturing
plant in Germany and moved the manufacturing operation to the United Kingdom.
During fiscal year 1998 and the first quarter of 1999, the Company has paid $1.4
million for termination benefits and related costs and $1.7 million for the
costs to shut down and exit a manufacturing facility in Germany. In addition,
the Company wrote-off $1.0 million of non-performing assets in 1998, primarily
relating to its interest in Lightspeed Simulation Systems. The balance of the
Special Items reserve relates primarily to the Company's obligation under a
long-term lease agreement in Germany expected to be paid through September 2001,
partially offset by estimated income under a sublease agreement.
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FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
APRIL 3, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS (CONTINUED)
Net interest expense increased to $144,000 compared to $74,000 in the first
quarter of 1998. The net increase was due to an increase in interest expense
resulting from higher average borrowings (related to the purchase of Satec and
IST) and to lower 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 1999 was $1,593,000, or 22 cents per diluted
share, compared to net income of $3,911,000, or 55 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 38% for the first quarter of 1999
compared to 52% in 1998. The higher tax rate in 1998 was due to certain
non-deductible 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 1999, the Company generated cash flows from operating
activities of $10.5 million due substantially to a $10.7 million decrease in
accounts receivable. These funds were used to pay down bank borrowings of $4.8
million, fund capital expenditures of $1.5 million and software development
costs of $0.6 million.
At April 3, 1999, the Company had $28.1 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 $32.0 million of which $7.5 million were outstanding at April 3,
1999. The ratio of total debt to debt plus equity at April 3, 1999, decreased to
15.4% from 19.8% at year-end 1998.
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FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
APRIL 3, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION (CONTINUED)
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 1999 increased by 23.8% over the same period
last year. This increase is due primarily to the inclusion of IST and Satec,
partially offset by lower bookings of the Company's core business in North
America and certain European countries.
The Company's order backlog was $65.4 million at the end of the first quarter of
1999, compared to $32.0 million for the first quarter of 1998 and compared to
$74.5 million at year-end 1998. If order backlog attributable to Satec and IST
was excluded from both the first quarter of 1999 and 1998, order backlog would
have been $24.3 million at the end of the first quarter of 1999, compared to
$32.0 million for the first quarter of 1998 and compared to $29.5 million at
year end 1998. This decline in backlog was due to lower bookings in North
America and Europe in the first quarter of 1999.
On February 24, 1999, the Board of Directors declared a regular quarterly
dividend of 4 cents per share on the Company's Common Stock, payable April 5,
1999, to shareholders of record on March 19, 1999.
On May 7, 1999, the Company announced the signing of a definitive merger
agreement with Kirtland Capital Partners (KCP), which would give effect to a
recapitalization of the Company. This recapitalization would be accomplished
through the merger of ISN Acquisition Corporation, a wholly owned subsidiary
organized by Kirtland Capital Partners III LP, with and into the Company, with
the Company continuing as the surviving corporation. Each share of the Company's
common stock outstanding at the effective time of the merger will be converted
into the right to receive $22 per share payable in cash. In addition, certain
members of management of the Company, as well as the Company's two founding
shareholders, will maintain an equity interest in the Company following the
closing.
Under the terms of the Merger Agreement, the Company has agreed not to pay any
dividends on its common stock prior to the closing of the transaction. The
closing of the transaction is subject to the satisfaction of various conditions,
including approval by the Company's shareholders and the receipt of certain
regulatory approvals. The transaction is expected to close during the third
quarter of 1999.
Euro Currency Issue. On January 1, 1999, eleven of the fifteen member countries
of the European Union established fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency - the euro. The euro
now trades on currency exchanges and may be used in business transactions.
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legacy currencies will be withdrawn from circulation. The Company's
operating subsidiaries affected by the euro conversion have established plans to
address the systems and business issues raised by the euro currency conversion.
These issues include, among others, (1) the need to adapt computer and other
business systems and equipment to accommodate euro-denominated transactions; and
(2) the competitive impact of cross-border price transparency, which may make it
more difficult for businesses to charge different prices for the same products
on a country-by-country basis, particularly once the euro currency is issued in
2002. The Company anticipates that the euro conversion will not have a material
adverse impact on its financial condition or results of operations.
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FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
APRIL 3, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION (CONTINUED)
Year 2000 Information and Readiness Disclosure Act. Instron supports the
exchange of information relating to the Year 2000 issue and designates the
information following below as the Year 2000 Readiness Disclosure within the
meaning of the Year 2000 Information and Readiness Disclosure Act. Information
set forth herein regarding the Year 2000 compliance of non-Instron products and
services are "republications" under the Year 2000 Information and Readiness
Disclosure Act and are based on information supplied by other companies about
the products and services they offer. Instron has not independently verified the
contents of these republications and takes no responsibility for the accuracy or
completeness of information contained in such republications.
Year 2000 Issue Readiness Disclosure. The term "Year 2000 issue" is a general
term used to describe various business-related problems that may result from the
improper processing by computer systems of dates after 1999. The Year 2000 issue
affects virtually all companies and all organizations. The Company has
identified its Year 2000 non-compliance risks in four categories: (i) internal
business systems, (ii) internal electronic equipment and embedded chip
technology, (iii) external non-compliance by the Company's suppliers, and (iv)
software systems products supplied by the Company to its customers.
Internal Business Systems: - The Company has an active, ongoing program to
insure that its business systems will be Year 2000 compliant. Instron began this
program to identify and correct Year 2000 issues in 1996. In accordance with
this program, the Company is following a four step process to address the Year
2000 Issue. The first stage consisted of auditing the major business systems and
telecommunication switches. This stage identified a couple of minor issues but
due to the installation of a new ERP system in 1996 at our two primary
manufacturing sites, the exposure is minimal and is expected to be corrected by
July 1999. The second stage, begun in September 1997, is an audit
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FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
APRIL 3, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION (CONTINUED)
of all departmental systems and network operating systems. This audit has been
completed and formed the basis for the third stage which identifies the
corrective actions required and outlines the necessary plan of action. The final
stage, which has started, will include the implementation and testing of all
required modifications.
Accordingly, the Company is confident that its major internal business systems
will be made Year 2000 compliant in a timely manner and in any event no later
than July 1999. The Company anticipates making capital expenditures of
approximately $500,000 in 1999 to upgrade computing, networking and
telecommunications systems as part of the plan to address the Year 2000 issue.
Although the costs associated with identifying and implementing the necessary
plan of action are not expected to be material to the Company's financial
position, there can be no assurance to this effect.
The Company has initiated an audit of the business systems of the two recent
acquisitions, Satec and IST. So far, there has been no indication of any major
Year 2000 issue that cannot be resolved in a timely manner.
Internal Electronic Equipment and Embedded Chip Technology: - The audit process
has identified certain telecommunication equipment that needs to be upgraded to
address the Year 2000 issue. The Company plans to replace this equipment by
August 1999 and is currently reviewing such office and facilities equipment as
machine tools, photocopiers, security systems and other systems which may be
impacted by the Year 2000 issue. The Company estimates that the total cost of
completing any modifications, upgrades or replacements of this equipment will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
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FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
APRIL 3, 1999
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION (CONTINUED)
Suppliers: - The Company has started a communication program with key suppliers
of computers, equipment, parts and material used, operated and maintained by the
Company. This program is intended to identify and, to the extent possible, to
resolve issues with suppliers involving the Year 2000 problem. However, the
Company has limited or no control over the actions of these third party
suppliers. Any failure of these suppliers to resolve Year 2000 issues with their
systems in a timely manner could have a material adverse effect upon the
Company's business, financial condition and results of operation.
Company Supplied Systems and Software to Customers: - The Company believes that
it has substantially identified and resolved all potential Year 2000 Issues with
all of the software products that it is currently developing and marketing.
Existing software on installed machines may not be Year 2000 compliant and
communication programs have been initiated to advise customers on how to upgrade
or replace their existing systems. Management believes that it is not possible
to determine with complete certainty that all Year 2000 issues affecting the
Company's products have been identified due to the complexity of these systems
and the fact that these products interact with other third party vendor products
and operate on computer systems which are not under the Company's control. Any
such failures to identify or remediate Year 2000 problems affecting the
Company's systems and software products could have a material adverse effect
upon the Company's business, financial conditions and results of operations.
The information presented above sets forth the key steps taken by the Company to
address the Year 2000 Issue. There can be no absolute assurance that the Company
has identified all the issues, can resolve them in a timely manner and that
there will be no failures or disruptions to operations which could result in a
material adverse effect upon the company's business, financial condition,
results of operations, and business prospects.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION (CONTINUED)
Contingency Plans. The Company intends to develop contingency plans for
significant business risks identified by the Company that might result from Year
2000 related events. Because the Company has not yet identified any specific
business function that will be materially at risk of significant Year 2000
related disruptions, and because a full assessment of the Company's risk from
potential Year 2000 failures is still in process, the Company has not yet
developed detailed contingency plans specific to Year 2000 problems. In the
event that the Company concludes that one or more contingency plans are
required, development of such contingency plans is currently scheduled to occur
no later than September 1999, or as otherwise appropriate.
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 closing
and timing of the proposed merger with an affiliate of Kirtland Capital
Partners; the level of bookings worldwide for Instron including the structures
business of IST; the operating results of IST; the impact of fluctuations in the
exchange rates; the uncertainties of operating in a global economy, particularly
in Asia, 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 Satec; the impact of the Year 2000
issue; 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, 1998 and its other recent SEC filings.
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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: July 22, 1999 By /s/ LINTON A. MOULDING
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Linton A. Moulding
Chief Financial Officer
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