<PAGE> 1
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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 JULY 1, 2000
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)
MASSACHUSETTS 04-2057203
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 ROYALL STREET 02021
CANTON, MASSACHUSETTS (Zip Code)
(Address of Principal executive offices)
(781) 828-2500
(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 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 [X] No [ ]
As of July 1, 2000, the Registrant had 557,164 shares outstanding of common
stock, all of which was held by affiliates of the Registrant.
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<PAGE> 2
FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Balance Sheets
(In thousands, except shares and per share data)
July 1, December 31,
2000 1999
---------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,636 $ 10,978
Accounts receivable (net of allowance for
doubtful accounts of $855 in 2000 and
$830 in 1999) 55,591 65,481
Inventories 32,860 31,117
Income tax receivable 5,158 3,594
Deferred income taxes 3,888 3,879
Prepaid expenses and other current assets 1,885 2,428
-------- --------
Total current assets 103,018 117,477
Property, plant and equipment, net 21,775 23,143
Goodwill 10,130 10,879
Deferred income taxes 988 832
Other assets 4,725 5,551
Deferred financing costs, net 8,237 8,793
-------- --------
Total assets $148,873 $166,675
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short term borrowings and current portion of $ 51,063 $ 5,815
long-term debt
Accounts payable 8,321 11,947
Accrued liabilities 26,812 27,129
Accrued employee compensation and benefits 4,634 5,280
Advance payments received on contracts 9,750 6,907
-------- --------
Total current liabilities 100,580 57,078
Long-term debt - revolver 0 28,818
Senior debt - term loan 0 27,000
13-1/4% senior subordinated notes due 2009 60,000 60,000
-------- --------
Total long-term debt 60,000 115,818
Pension and other long-term liabilities 10,363 9,532
-------- --------
Total liabilities 170,943 182,428
-------- --------
Stockholders' deficit:
Common stock, $0.01 par value; 1,000,000 shares
authorized; 557,164 shares issued and
outstanding 557 557
Additional paid in capital 49,881 49,881
Accumulated deficit (64,071) (59,043)
Accumulated other comprehensive loss (8,437) (7,148)
-------- --------
Total stockholders' deficit (22,070) (15,753)
-------- --------
Total liabilities and stockholders' deficit $148,873 $166,675
======== ========
See accompanying Notes to Consolidated Financial Statements
2
<PAGE> 3
FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 41,165 $ 43,034 $ 74,292 $ 83,411
Service 8,050 9,226 15,662 17,594
--------- --------- --------- ---------
Total revenue 49,215 52,260 89,954 101,005
Cost of revenue:
Sales 25,221 26,600 45,498 49,626
Service 5,796 6,019 11,445 11,847
--------- --------- --------- ---------
Total cost of revenue 31,017 32,619 56,943 61,473
--------- --------- --------- ---------
Gross profit 18,198 19,641 33,011 39,532
Operating expenses:
Selling and administrative 13,333 14,128 26,661 28,617
Research and development 2,542 2,593 4,953 5,301
Restructuring costs 1,465 -- 1,769 --
--------- --------- --------- ---------
Total operating expenses 17,340 16,721 33,383 33,918
--------- --------- --------- ---------
Income (loss) from operations 858 2,920 (372) 5,614
Other (income) expenses:
Interest expense, net 3,679 109 7,194 253
Foreign exchange (gains) losses 18 (193) 52 (212)
--------- --------- --------- ---------
Total other (income) expense 3,697 (84) 7,246 41
--------- --------- --------- ---------
Income (loss) before income taxes (2,839) 3,004 (7,618) 5,573
Provision (benefit) for income taxes (563) 1,141 (2,590) 2,117
--------- --------- --------- ---------
Net income (loss) $ (2,276) $ 1,863 $ (5,028) $ 3,456
========= ========= ========= =========
Weighted average number of basic common shares 557 6,769 557 6,762
========= ========= ========= =========
Earnings (loss) per share - basic $ (4.09) $ 0.28 $ (9.03) $ 0.51
========= ========= ========= =========
Weighted average number of diluted common shares 557 7,146 557 7,112
========= ========= ========= =========
Earnings (loss) per share - diluted $ (4.09) $ 0.26 $ (9.03) $ 0.49
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
--------------------
July 1, July 3,
2000 1999
-------- --------
Cash flows from operating activities:
Net income (loss) $ (5,028) $ 3,456
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities:
Depreciation and amortization 4,669 4,213
Provision for bad debts 141 44
Deferred taxes (176) (300)
Changes in assets and liabilities,
excluding the effects from
purchase of business:
(Increase) decrease in accounts receivable 8,354 8,027
(Increase) decrease in inventories (2,538) (2,842)
(Increase) decrease in income tax receivable (1,666) --
(Increase) decrease in prepaid expenses and
other current assets 503 208
Increase (decrease) in accounts payable, accrued
expenses and advance payments (840) (3,871)
Other, net 611 (1,631)
-------- --------
Net cash provided by operating activities 4,030 7,304
-------- --------
Cash flows from investing activities:
Proceeds from the sale of property, plant and
equipment -- 25
Capital expenditures (1,669) (2,699)
Capitalized software costs (340) (1,247)
Other, net 140 206
-------- --------
Net cash used in investing activities (1,869) (3,715)
-------- --------
Cash flows from financing activities:
Net borrowings (payments) under short-term
lines of credit (1,448) 4,115
Net borrowings (payments) under revolving
line of credit (6,391) (6,252)
Payments under Senior Term Loan (1,500) --
Cash dividends paid -- (268)
Proceeds from exercise of stock options -- 386
-------- --------
Net cash used in financing activities (9,339) (2,019)
-------- --------
Effect of exchange rate changes on cash (164) (296)
-------- --------
Net increase (decrease) in cash and cash
equivalents (7,342) 1,274
Cash and cash equivalents at beginning of year 10,978 7,209
-------- --------
Cash and cash equivalents at end of period $ 3,636 $ 8,483
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $5,958 $ 847
Income taxes 306 3,156
See accompanying Notes to Consolidated Financial Statements
4
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FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Statements of Comprehensive Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $(2,276) $1,863 $(5,028) $3,456
Other comprehensive income (loss):
Foreign currency translation
adjustments (518) (730) (1,289) (2,543)
------- ------ ------- ------
Comprehensive income (loss) $(2,794) $1,133 $(6,317) $ 913
======= ====== ======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
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FORM 10-Q
PART I
ITEM 1
INSTRON CORPORATION
Notes to Consolidated Financial Statements
(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, 1999.
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 and six month periods
ended July 1, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000.
Certain prior year amounts have been reclassified to conform with the
fiscal 2000 presentation.
2. MERGER AGREEMENT AND RECAPITALIZATION
On May 6, 1999, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Kirtland Capital Partners III L.P.
("Kirtland") and ISN Acquisition Corporation, a corporation newly formed by
Kirtland ("MergerCo"), pursuant to which Kirtland and certain affiliates,
together with members of Instron's management and certain members of
Instron's Board of Directors who are also stockholders (collectively, the
"Rollover Stockholders"), agreed to acquire the Company.
On September 3, 1999, the Company's stockholders approved the Agreement and
Plan of merger dated as of May 6, 1999, as amended. The Company completed
its merger by and among Instron Corporation, ISN Acquisition Corporation
and Kirtland Capital Partners III L.P. on September 29, 1999. The merger
and related transactions were treated as a Recapitalization (the
"Recapitalization") for financial reporting purposes. Accordingly, the
historical basis of the Company's assets and liabilities was not affected
by these transactions.
Under the Merger Agreement, the MergerCo merged with and into the Company
with the Company continuing as the surviving corporation (the "Merger").
Pursuant to the Merger, each outstanding share of the Company's common
stock (except for shares held by the Company, its subsidiaries and
MergerCo), was converted into the right to receive a cash payment of
$22.00, without interest. Certain shares of the Company's Series B
Preferred Stock held by the Rollover Stockholders were converted into
shares of common stock of the surviving corporation.
In the third quarter of fiscal 1999, the Company incurred compensation
expenses of $13.0 million as a result of the Recapitalization. In addition,
the Company incurred costs of $13.1 million directly related to the
Recapitalization. Of these transaction costs, $9.0 million was capitalized
and is being amortized over the life of the 13 1/4% Senior Subordinated
Notes (the "Notes") and the Senior Credit Facility, and $4.1 million was
charged to stockholders' equity.
The Notes were originally issued as part of a unit offering. Each unit
("Unit") consisted of a $1,000 principal amount Note and one warrant to
purchase 0.5109 shares of Instron's recapitalized common stock (the
"Warrants"). On February 14, 2000, the Notes were registered with the
Securities and Exchange Commission, at which time the Units separated into
their component Notes and Warrants. The Notes and Warrants may now be
traded separately and the Units have ceased to exist.
6
<PAGE> 7
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was amended on
July 7, 1999 by the issuance of Statement of Accounting Standards No. 137
("SFAS 137"), "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of SFAS No. 133". In June 2000, the FASB
issued SFAS No. 138 ("SFAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an amendment of FASB Statement
No. 133. SFAS No. 133, as amended, is effective for fiscal quarters
beginning after January 1, 2001 for Instron, and we do not expect its
adoption to have a material impact on our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulleting No. 101, "Revenue Recognition in Financial Statement"
("SAB 101"). This bulletin provides guidance from the staff on applying
generally accepted accounting principles to revenue recognition in
financial statements. SAB 101A was subsequently issued in March 2000,
deferring the requirement to adopt the revised guidance until the second
quarter of 2000, retroactive to the first quarter of 2000. In June 2000,
the SEC issued SAB101B which further defers the effective date for calender
year companies to the fourth quarter of 2000, still retroactive to the
first quarter of 2000. The Company is currently in the process of assessing
the impact that SAB 101 may have on the financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the
definition of employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a stock option plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15,
1998, or January 12, 2000. The adoption of FIN 44, effective July 1, 2000,
did not have a material impact on the financial position or results of
operations of the Company.
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares, plus the dilutive effect of common share
equivalents outstanding using the "treasury stock method." For the three
months and six months ended July 1, 2000, outstanding options and warrants
totaling 76,559 shares have been excluded from the diluted earnings per
share computation as their inclusion would be antidilutive.
The following is a reconciliation of the basic and diluted EPS
calculations: (in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $(2,276) 1,863 (5,028) 3,456
Weighted average number of basic common
shares outstanding 557 6,769 557 6,762
Dilutive effect of common stock
equivalents oustanding -- 377 -- 350
------- ------- ------- -------
Weighted average of common and dilutive
shares 557 7,146 557 7,112
======= ======= ======= =======
Basic earnings (loss) per share $ (4.09) $ 0.28 $ (9.03) $ 0.51
======= ======= ======= =======
Diluted earnings (loss) per share $ (4.09) $ 0.26 $ (9.03) $ 0.49
======= ======= ======= =======
</TABLE>
5. INVENTORIES
(IN THOUSANDS) July 1, December 31,
2000 1999
------- ------------
Raw materials $13,046 $13,346
Work-in-process 12,409 9,823
Finished goods 7,405 7,948
------- ------------
$32,860 $31,117
======= ============
Inventories are valued at the lower of cost or market (net realizable
value). The last-in, first-out (LIFO) method of determining cost is used
for certain 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 $8,062,000 and
$7,845,000 at July 1, 2000 and December 31, 1999, respectively. The excess
of current cost over stated LIFO value was $5,635,000 at July 1, 2000 and
$5,588,000 at December 31, 1999.
7
<PAGE> 8
6. DEBT
(IN THOUSANDS) July 1, December 31,
2000 1999
-------- ------------
Short-term borrowings $ 1,349 $ 2,815
Long-term debt - revolver 21,214 28,818
Senior debt - term loan 28,500 30,000
13-1/4% senior subordinated notes
due 2009 60,000 60,000
-------- ------------
Total debt 111,063 121,633
Less: current portion (51,063) (5,815)
-------- ------------
Long-term debt $ 60,000 $115,818
======== ============
As part of the Recapitalization, the Company entered into a Senior Credit
Facility providing for a Revolving Credit Facility of up to $50.0 million
(subject to an available borrowing base) and a Term Loan Facility of $30.0
million, maturing in five and one-half years, unless terminated sooner upon
certain events of default. If terminated upon an event of default, all
outstanding advances under the credit facility may be required to be
immediately repaid. The revolving portion of the Senior Credit Facility can
be used to complete permitted acquisitions or for working capital and other
general corporate purposes. Borrowings under the Senior Credit Facility
currently bear interest, at our option, at either the higher of the federal
funds rate plus 1.0% or the prime rate plus 1.75%, or a LIBOR rate plus
3.25%.
In addition, as part of the Recapitalization, the Company issued $60
million of 13 1/4% Senior Subordinated Notes due 2009 and Warrants (the
"Senior Subordinated Notes"). The Warrants, when exercised, will entitle
the holder thereof to receive 0.5109 of a fully paid and non-assessable
share of common stock, par value $0.01 per share, at an exercise price of
$0.01 per share, subject to adjustment. The Warrants will be exercisable on
or prior to September 15, 2009. The value of the Warrants on the date of
the Recapitalization was $2.3 million and this value is being amortized
over 10 years.
Under the Term Loan Facility, the Company is required to make scheduled
repayments in twenty-two quarterly installments of principal and interest
on the first day of each January, April, July and October, commencing
January 1, 2000. The Senior Subordinated Notes, which mature in 2009,
require interest to be paid semi-annually in arrears each March 15 and
September 15. The interest on the Revolving Credit Facility is due
quarterly in arrears.
The Company is also required, under the Terms of the Senior Credit
Facility, to pay a commitment fee based on the unused amount of the
Revolving Credit Facility at an annual rate of 0.50%, paid quarterly in
arrears.
All of our obligations under the Senior Credit Facility are and will be
secured by a first priority lien on substantially all of the properties and
assets of the Company and our existing and future domestic subsidiaries. In
addition, our obligations under the Senior Credit Facility are and will be
secured by a first priority pledge of and security interest in all of the
outstanding capital stock of our existing domestic subsidiaries and future
domestic subsidiaries and a pledge of 65% of the outstanding capital stock
of some foreign subsidiaries. Certain of our foreign subsidiaries have also
granted a lien on substantially all of their properties and assets.
The Senior Credit Facility requires that the Company meet and maintain
certain financial ratios and tests, which include minimum consolidated net
worth, consolidated adjusted EBITDA, consolidated capital expenditure,
consolidated interest coverage ratio, consolidated fixed charge coverage
ratio, maximum consolidated leverage ratio and senior leverage ratio. The
Senior Subordinated Notes are governed by negative covenants that are less
restrictive than those of the Senior Credit Facility. In addition, the
Senior Subordinated Notes contain a provision whereby the Notes are in
default if there is an acceleration of payment under the terms of the
Senior Credit Facility.
The Senior Credit Facility also contains covenants that limit the ability
of the Company and its operating subsidiaries to take various actions
without the consent of the Senior Lenders, including incurring additional
indebtedness and liens and entering into some leases, fundamentally
changing corporate structure, including mergers, consolidations and
liquidations, acquiring and disposing of property, making principal
payments on indebtedness prior to maturity, dividends and capital stock
purchases, investments, capital expenditures, some modifications to
organizational documents, changing fiscal periods, entering into sale and
leaseback transactions, entering into affiliate transactions, entering into
agreements restricting distributions, amending the acquisition documents,
granting negative pledges and making a material change in the nature of the
Company's business.
At July 1, 2000, the Company was not in compliance with three of the Senior
Credit Facility covenants: the minimum consolidated net worth covenant, the
minimum consolidated adjusted EBITDA covenant and the maximum consolidated
leverage ratio covenant. The Company requested and was granted waivers of
these covenants as of and for the period ended July 1, 2000, for which the
Company will pay an administrative fee of $80,000 to the lenders. The
Company did not obtain waivers of covenants of the Senior Credit Facility
that extend over the next twelve months and does not believe it will be
able to achieve compliance with the current covenants of the Senior Credit
Facility. Accordingly, the amounts outstanding under the Senior Credit
Facility have been reclassified from long term liabilities to current
liabilities. The Company and its lenders are currently discussing amending
and restating the covenants which would bring the Company back into
compliance.
As the Company has obtained waivers of the covenants under the Senior
Credit Facility as of and for the period ended July 1, 2000, the Company
continues to be in compliance with the covenants of the Senior Subordinated
Notes. Therefore, the amounts outstanding under the Senior Subordinated
Notes continue to be classified as long term liabilities.
8
<PAGE> 9
7. GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
Some of our wholly owned subsidiaries are not guarantors of our Senior
Subordinated Notes. In the event of a bankruptcy, liquidation or
reorganization of any of these non-guarantor subsidiaries, these
non-guarantor subsidiaries will pay the holders of their debts and their
trade creditors before they will be able to distribute any of their assets
to us. Summarized below is selected financial information for the guarantor
subsidiaries and the non-guarantor subsidiaries as of July 1, 2000 and for
the six month period then ended:
<TABLE>
<CAPTION>
Combined
Company Combined
(IN THOUSANDS) And Guarantor Non-Guarantor
Subsidiaries Subsidiaries Total
------------- ------------- -----
<S> <C> <C> <C>
Balance Sheet Data as of July 1, 2000
Current Assets $ 44,896 $58,122 $103,018
Total Assets 80,567 68,306 148,873
Total Liabilities 123,543 47,400 170,943
Stockholders' Equity (Deficit) (42,976) 20,906 (22,070)
Statement of Operations Data for the
Six Months ended July 1, 2000
Total Revenue $ 52,851 $37,103 89,954
Loss before income taxes (3,565) (4,053) (7,618)
Net Loss (2,822) (2,206) (5,028)
</TABLE>
8. RESTRUCTURING
During the first and second quarters of 2000, the Company completed a
workforce reduction of 84 people, of which 24 were in the U.S. and 60 were
in Germany and the UK. The personnel reductions were primarily in
engineering, manufacturing and administration. Severance costs associated
with the workforce reductions were $0.3 million and $1.5 million during the
first and second quarter of 2000, respectively. As of July 1, 2000, the
liability remaining related to the workforce reduction was approximately
$1.2 million, consisting entirely of severance costs. Remaining severance
costs are expected to be paid through the second quarter of 2001.
9
<PAGE> 10
FORM 10-Q
PART I
ITEM 2
INSTRON CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Second Quarter Ended July 1, 2000 vs. Second Quarter Ended July 3, 1999
Revenues for the second quarter of 2000 were $49.2 million, compared to $52.3
million for the second quarter of last year, a decrease of 5.8%. The decrease in
revenues was primarily due to lower Structures shipments. Foreign sales were 58%
of revenues in the second quarter of 2000, compared with 56% for the second
quarter of 1999.
Gross margin, as a percentage of revenue, was 37.0% for the second quarter of
2000, compared to 37.6% for the second quarter of 1999. The lower gross margin
was primarily due to continued higher costs of major Structures orders.
Selling and administrative expenses for the second quarter of 2000 were $13.3
million, or 27.1% of revenues, compared to $14.1 million, or 27.0% of revenues,
in the second quarter of last year, a decrease of 5.6%. The lower expenses are a
result of reduced selling and administrative costs at our IST operations, as
well as the benefit of integrating the sales and support functions of our Satec
acquisition with our North America operations.
Research and development expenses were $2.5 million, or 5.3% of revenues, in the
second quarter of 2000, compared to $2.6 million, or 5.0% of revenues, in the
second quarter of last year. Software development costs of $0.1 million were
capitalized during the second quarter of 2000, compared to $0.7 million in the
second quarter of last year. If software development costs were reported as
period expenses, research and development expenses would have decreased by 20.3%
in 2000. The higher 1999 expenses reflect the investment we made in certain key
product development programs. In addition, the lower expense levels in 2000
reflect the benefit of integrating the development processes of our past
acquisitions.
During the first and second quarters of 2000, the Company completed a workforce
reduction of 84 people, of which 24 were in the U.S. and 60 were in Germany and
the UK. The personnel reductions were primarily in engineering, manufacturing
and administration. Severance costs associated with the workforce reductions
were $0.3 million and $1.5 million during the first and second quarter of 2000,
respectively. As of July 1, 2000, the liability remaining related to the
workforce reduction was approximately $1.2 million, consisting entirely of
severance costs. Remaining severance costs are expected to be paid through the
second quarter of 2001.
Net interest expense was $3.7 million in the second quarter of 2000, compared to
$0.1 million in the second quarter of 1999. The significantly higher interest
costs reflect the debt assumed by the Company as a result of its
recapitalization in September 1999.
The loss before taxes for the second quarter of 2000 was $2.8 million, compared
to income before taxes of $3.0 million for the second quarter last year. The
decline in profitability is due to a combination of higher interest costs, lower
revenues and severance costs related to the workforce reduction.
The tax benefit of $0.6 million, or 20% of the pre-tax loss, for the second
quarter of 2000 reflects the expected recovery of income taxes paid in prior
years from loss carry-back availability. Each quarter, the Company estimates its
annual effective tax rate and adjusts the provision or benefit for the
cumulative effect of the change in the estimate. The tax provision for the
second quarter of 1999 was 38% of pre-tax income.
Net loss for the second quarter of 2000 was $2.3 million, or $4.09 per diluted
share compared to net income of $1.9 million, $0.26 per diluted share for the
second quarter of last year.
Six Months Ended July 1, 2000 vs. Six Months Ended July 3, 1999
Revenues for the first half of 2000 were $90.0 million compared to $101.0
million for the first half of 1999, a decrease of 10.9%. The lower revenues were
largely due to a $9.7 million decline in Structures shipments and lower European
revenues. Foreign sales were 58% of total revenues for the first half of 2000
compared to 56% for the first half of 1999.
10
<PAGE> 11
Gross margin as a percentage of revenues was 36.7% for the first half of 2000
compared to 39.1% for the first half of 1999. The lower gross margin is
primarily a result of the higher costs associated with major Structures orders
during the first half of 2000.
Selling and administrative expenses were $26.7 million, or 29.6% of revenues,
for the first half of 2000, compared to $28.6 million, or 28.3% of revenues, for
the first half of 1999, a decrease of 6.8%. The lower expenses are largely a
result of lower expenses at our IST operations, as well as the benefit from
integrating the sales and support functions of our Satec acquisition with our
North America operations.
Research and development expenses were $5.0 million, or 5.5% of revenues, for
the first half of 2000, compared to $5.3 million, or 5.3% of revenues, for the
first half of 1999. Software development costs of $0.3 million were capitalized
during the first half of 2000, compared to $1.2 million during the first half of
1999. If software development costs were reported as period expenses, research
and development expenses would have declined $1.2 million, or 19.2%, from 1999.
The higher 1999 expense levels reflect the investment we made in certain key
product development programs. In addition, the lower 2000 expenses reflect the
benefit from integrating the development processes of our past acquisitions.
During the first half of 2000, the Company completed a workforce reduction of 84
people, of which 24 were in the U.S. and 60 were overseas. The personnel
reductions were primarily in engineering, manufacturing and administration.
Total severance costs in the first half of 2000 related to this workforce
reduction was $1.8 million. As of July 1, 2000, the liability remaining related
to the workforce reduction was approximately $1.2 million, consisting entirely
of severance costs. Remaining severance costs are expected to be paid through
the second quarter of 2001.
Net interest expense was $7.2 million for the first half of 2000, compared to
$0.3 million for the first half of 1999. The significantly higher interest costs
reflect the debt assumed by the Company as a result of its recapitalization in
September 1999.
The tax benefit of $2.6 million, or 34% of the pre-tax loss, for the first half
of 2000 reflects the expected recovery of income taxes paid in prior years from
loss carry-back availability. Each quarter, the Company estimates its annual
effective tax rate and adjusts the provision or benefit for the cumulative
effect of the change in the estimate. The tax provision for the first half of
1999 was 38% of pre-tax income.
The net loss for the first half of 2000 was $5.0 million, or $9.03 per diluted
share compared to net income of $3.5 million, or $0.49 per diluted share for the
first half of 1999.
FINANCIAL CONDITION
During the first half of 2000, the Company generated $4.0 million of cash from
operating activities, compared to $7.3 million for the same period in the prior
year. The Company used $2.0 million of cash for capital expenditures and
capitalized software development costs during the first half of 2000, compared
to $3.9 million of cash used for similar purposes during the same period in the
prior year. The Company used $9.3 million of cash to repay bank borrowings
during the first half of 2000, compared to $2.1 million of cash used to repay
bank borrowings, $0.3 million of cash used to pay dividends and $0.4 million of
cash proceeds from stock option exercises during the same period in the prior
year.
The cash generated from operating activities during the first half of 2000 was
largely a result of the reduction in accounts receivable during the period,
partially offset by an increase in inventories and income tax receivable.
Accounts receivable declined from $65.5 million at December 31, 1999 to $55.6
million at July 1, 2000. The lower level of accounts receivable was primarily
due to the lower level of revenues in the three months ended July 1, 2000, as
compared to the three months ended December 31, 1999. When compared to the first
half of 1999, cash generated from operating activities during the first half of
2000 was lower by $3.3 million. The year-to-year reduction was largely a result
of the higher interest costs during the first half of 2000, partially offset by
a higher level of advance payments.
Capital expenditures during the first half of 2000 were $1.7 million, compared
to $2.7 million in the first half of 1999. The lower level of capital
expenditures reflects the Company's lower fiscal 2000 capital requirements,
including the absence of equipment purchases relating to Y2K compliance. The
Company plans to make capital expenditures of approximately $2.75 million during
the current fiscal year. In addition, the Company plans to continue to develop
and enhance its software products and pursue its strategy of acquisitions.
At July 1, 2000, the Company had borrowings of $21.2 million, and additional
borrowing availability of $21.4 million, under its $50.0 million multi-currency
revolving credit facility, compared to $28.8 million in borrowings at December
31, 1999. The Company had $28.5 million outstanding under its term loan at July
1, 2000, compared to $30.0 million outstanding at December 31, 1999. At July 1,
2000 and December 31, 1999, the Company also had $60.0 million of 13 1/4% Senior
Subordinated Notes Due 2009 outstanding.
The Company's Senior Credit Facility, which includes the Term Loan Facility and
Revolving Credit Facility, contains seven restrictive financial covenants. At
July 1, 2000, the Company was not in compliance with three of the Senior Credit
Facility covenants: the minimum consolidated net worth covenant, the minimum
consolidated adjusted EBITDA covenant and the maximum consolidated leverage
ratio covenant. The Company requested and was granted waivers of these covenants
as of and for the period ended July 1, 2000, for which the Company will pay an
administrative fee of $80,000 to the lenders. The Company did not obtain waivers
of covenants of the Senior Credit Facility that extend over the next twelve
months and does not believe it will be able to achieve compliance with the
current covenants of the Senior Credit Facility. Accordingly, the amounts
outstanding under the Senior Credit Facility have been reclassified from long
term liabilities to current liabilities. The Company and its lenders are
currently discussing amending and restating the covenants which would bring the
Company back into compliance. To this end and in connection with the granting of
the waivers, the Company has committed to hold a meeting with its lenders to
discuss certain financial projections by September 6, 2000 and the failure to
meet this commitment will result in an automatic increase of the lending rate of
0.5%. No assurances can be given that the Company will obtain any such
amendments or future noncompliance waivers from its lenders in the future or
that the proposed terms applicable to such amendments or waivers will be
satisfactory to the Company.
As the Company has obtained waivers of the covenants under the Senior Credit
Facility as of and for the period ended July 1, 2000, the Company continues to
be in compliance with the covenants of the Senior Subordinated Notes. Therefore,
the amounts outstanding under the Senior Subordinated Notes continue to be
classified as long term liabilities.
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The Company's subsidiaries have other overdraft and borrowing facilities
allowing advances up to approximately $3.9 million. Short-term borrowings under
these facilities were $1.3 million and $2.8 million at July 1, 2000 and December
31, 1999, respectively.
The Company believes its present capital resources and anticipated operating
cash flows are sufficient to finance its planned operations and investing
activities for the next eighteen months. If the Company were to consider a
significant acquisition, it would have to seek alternative sources of equity
funds and or additional debt.
Bookings for the second quarter of 2000 were $52.2 million and were
approximately the same level as the second quarter of last year. For the first
half of 2000, bookings were $97.7 million, an increase of 3% over the first half
of last year. The year-to-year increase in bookings was primarily for Structures
products.
At July 1, 2000, the Company's order backlog was $73.5 million, compared to
$71.6 million at April 1, 2000 and $68.9 million at December 31, 1999.
YEAR 2000
To date, the Company has not incurred significant incremental costs in order to
comply with Year 2000 requirements and does not believe it will incur
significant incremental costs in the foreseeable future. However, there can be
no assurance that Year 2000 errors or defects will not be discovered in the
Company's products or internal software systems and, if such errors or defects
are discovered, there can be no assurance that the costs of making such products
or internal systems Year 2000 compliant will not have a material adverse effect
on the Company's business, operating results and financial condition.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was amended on July
7, 1999 by the issuance of Statement of Accounting Standards No. 137 ("SFAS
137"), "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of SFAS No. 133". In June 2000, the FASB issued SFAS No.
138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133. SFAS 138 amends the
accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. SFAS No. 133, as amended, is
effective for fiscal quarters beginning after January 1, 2001 for Instron, and
we do not expect its adoption to have a material impact on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulleting No. 101, "Revenue Recognition in Financial Statement" ("SAB
101"). This bulletin provides guidance from the staff on applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101A was subsequently issued in March 2000, deferring the requirement to
adopt the revised guidance until the second quarter of 2000, retroactive to the
first quarter of 2000. In June 2000, the SEC issued SAB101B that further defers
the effective date for calendar year companies to the fourth quarter of 2000,
still retroactive to the first quarter of 2000. The Company is currently in the
process of assessing the impact that SAB 101 may have on the financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44
clarifies the application of APB Opinion No. 25 regarding (a) the definition of
employee for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a stock option plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either December
15, 1998, or January 12, 2000. The adoption of FIN 44, effective July 1, 2000,
did not have a material impact on the financial position or results of
operations of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
The Company is exposed to market risk related to changes in foreign currency
exchange rates. The Company enters into foreign exchange contracts to manage and
reduce the impact of changes in foreign currency exchange rates. The Company
does not enter into derivatives or other financial instruments for trading or
speculative purposes. The exposures are associated with certain accounts
receivable denominated in local currencies and certain foreign revenue
transactions. There have been no material changes related to the quantitative or
qualitative aspects of market risk since December 31, 1999.
FORWARD LOOKING STATEMENTS
This Form 10-Q 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. 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 fluctuations in
interest rates; the stability of financial markets; the level of bookings
worldwide for Instron and IST, particularly for Asia; the success of the
automobile industry which is the major purchaser of IST products; the impact of
fluctuations in exchange rates and the uncertainties of operating in a global
economy, including fluctuations in the economic conditions of the foreign and
domestic markets served by the Company which can effect demand for its products
and services; the Company's ability to identify and successfully consummate
strategic acquisitions; the Company's ability to meet the covenants and
repayment schedules of its loan and debt facilities.
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FORM 10-Q
PART II
INSTRON CORPORATION
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
None
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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: August 14, 2000 By /s/ James M. McConnell
-------------------------------------
James M. McConnell
President and Chief Executive Officer
Date: August 14, 2000 By /s/ Linton A. Moulding
-------------------------------------
Linton A. Moulding
Chief Financial Officer
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