<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 APRIL 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 April 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
INSTRON CORPORATION FORM 10-Q
Consolidated Balance Sheets PART I
(In thousands, except shares and per share data) ITEM I
<TABLE>
<CAPTION>
April 1, December 31,
2000 1999
--------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,403 $ 10,978
Accounts receivable (net of allowance for doubtful accounts
of $830 in 2000 and 1999) 56,107 65,481
Inventories 33,570 31,117
Income tax receivable 5,861 3,594
Deferred income taxes 3,847 3,879
Prepaid expenses and other current assets 2,388 2,428
--------- ---------
Total current assets 107,176 117,477
--------- ---------
Property, plant and equipment, net 22,610 23,143
Goodwill 10,506 10,879
Deferred income taxes 958 832
Other assets 5,337 5,551
Deferred financing costs, net 8,515 8,793
--------- ---------
Total assets $ 155,102 $ 166,675
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short term borrowings and current portion of long-term debt $ 4,766 $ 5,815
Accounts payable 10,566 11,947
Accrued liabilities 22,765 27,129
Accrued employee compensation and benefits 5,352 5,280
Advance payments received on contracts 10,196 6,907
--------- ---------
Total current liabilities 53,645 57,078
--------- ---------
Long-term debt - revolver 24,507 28,818
Senior debt - term loan 26,250 27,000
13-1/4% senior subordinated notes due 2009 60,000 60,000
--------- ---------
Total long-term debt 110,757 115,818
Pension and other long-term liabilities 9,976 9,532
--------- ---------
Total liabilities 174,378 182,428
--------- ---------
Stockholders' deficit:
Recapitalized 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 (61,795) (59,043)
Accumulated other comprehensive loss (7,919) (7,148)
--------- ---------
Total stockholders' deficit (19,276) (15,753)
--------- ---------
Total liabilities and stockholders' deficit $ 155,102 $ 166,675
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE> 3
INSTRON CORPORATION FORM 10-Q
Consolidated Statements of Operations PART I
(Unaudited) ITEM I
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Sales $ 33,127 $ 40,377
Service 7,612 8,368
-------- --------
Total revenue 40,739 48,745
-------- --------
Cost of revenue:
Sales 20,277 23,026
Service 5,649 5,828
-------- --------
Total cost of revenue 25,926 28,854
-------- --------
Gross profit 14,813 19,891
-------- --------
Operating expenses:
Selling and administrative 13,632 14,489
Research and development 2,411 2,708
-------- --------
Total operating expenses 16,043 17,197
-------- --------
Income (loss) from operations (1,230) 2,694
-------- --------
Other (income) expenses:
Interest expense, net 3,515 144
Foreign exchange (gains) losses 34 (19)
-------- --------
Total other expense 3,549 125
-------- --------
Income (loss) before income taxes (4,779) 2,569
Provision (benefit) for income taxes (2,027) 976
-------- --------
Net income (loss) $ (2,752) $ 1,593
======== ========
Weighted average number of basic common shares 557 6,745
======== ========
Earnings (loss) per share - basic $ (4.94) $ 0.24
======== ========
Weighted average number of diluted common shares 557 7,096
======== ========
Earnings (loss) per share - diluted $ (4.94) $ 0.22
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
INSTRON CORPORATION FORM 10-Q
Consolidated Statements of Cash Flows PART I
(Unaudited) ITEM I
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,752) $ 1,593
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on the sale of property, plant and equipment -- (11)
Depreciation and amortization 2,364 2,152
Provision for losses on accounts receivable 63 11
Deferred taxes (96) 28
Changes in assets and liabilities, excluding the effects from
purchase of business:
(Increase) decrease in accounts receivable 8,921 10,717
(Increase) decrease in inventories (2,287) (3,957)
(Increase) decrease in income tax receivable (2,291) --
(Increase) decrease in prepaid expenses and other current assets 29 (775)
Increase (decrease) in accounts payable, accrued expenses
and advance payments (2,171) 481
Increase in other long-term liabilities 474 --
Other, net (931) 240
-------- --------
Net cash by operating activities 1,323 10,479
-------- --------
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment -- 20
Capital expenditures (851) (1,475)
Capitalized software costs (287) (587)
Other, net 59 99
-------- --------
Net cash used in investing activities (1,079) (1,943)
-------- --------
Cash flows from financing activities:
Payments under short-term lines of credit (1,040) (4,800)
Payments under revolving line of credit (4,001) --
Payments under Senior Term Loan (750) --
Cash dividends paid -- (268)
Proceeds from exercise of stock options -- 140
-------- --------
Net cash used in financing activities (5,791) (4,928)
-------- --------
Effect of exchange rate changes on cash (28) (263)
-------- --------
Net increase (decrease) in cash and cash equivalents (5,575) 3,345
Cash and cash equivalents at beginning of year 10,978 7,209
-------- --------
Cash and cash equivalents at end of period $ 5,403 $ 10,554
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 4,318 $ 332
Income taxes 55 464
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
INSTRON CORPORATION FORM 10-Q
Consolidated Statement of Comprehensive Operations PART I
(Unaudited) ITEM I
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Net income (loss) $(2,752) $ 1,593
Other comprehensive income (loss):
Foreign currency translation adjustments (771) (1,813)
------- -------
Comprehensive income (loss) $(3,523) $ (220)
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
INSTRON CORPORATION FORM 10-Q
Notes to Consolidated Financial Statements PART I
(Unaudited) ITEM 1
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 period ended April 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.
6
<PAGE> 7
INSTRON CORPORATION FORM 10-Q
Notes to Consolidated Financial Statements PART I
(Unaudited) ITEM 1
In 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.
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". 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. The Company is
currently in the process of assessing the impact, if any, 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 Company is assessing the impact, if any,
that the adoption of FIN 44 will have 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 ended April 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
----------------------
April 1, April 3,
2000 1999
-------- --------
<S> <C> <C>
Net income (loss) $(2,752) $ 1,593
======= =========
Weighted average number of basic common
shares outstanding 557 6,745
Dilutive effect of common stock
equivalents oustanding -- 351
------- ---------
Weighted average of common and dilutive shares 557 7,096
======= =========
Basic earnings (loss) per share $ (4.94) $ 0.24
======= =========
Diluted earnings (loss) per share $ (4.94) $ 0.22
======= =========
</TABLE>
7
<PAGE> 8
INSTRON CORPORATION FORM 10-Q
Notes to Consolidated Financial Statements PART I
(Unaudited) ITEM 1
5. INVENTORIES
<TABLE>
<CAPTION>
(In thousands) April 1, December 31,
2000 1999
------- -----------
<S> <C> <C>
Raw materials $13,825 $13,346
Work-in-process 11,445 9,823
Finished goods 8,300 7,948
------- -------
$33,570 $31,117
======= =======
</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 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 $10,262,000 and
$7,845,000 at April 1, 2000 and December 31, 1999, respectively. The excess
of current cost over stated LIFO value was $5,589,000 at April 1, 2000 and
$5,588,000 at December 31, 1999.
6. DEBT
<TABLE>
<CAPTION>
(In thousands) April 1, December 31,
2000 1999
------- -----------
<S> <C> <C>
Short-term borrowings $ 1,766 $ 2,815
Long-term debt - revolver 24,507 28,818
Senior debt - term loan 29,250 30,000
13-1/4% senior subordinated notes due 2009 60,000 60,000
-------- --------
Total debt 115,523 121,633
Less: current portion (4,766) (5,815)
-------- --------
Long-term debt $110,757 $115,818
======== ========
</TABLE>
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
will bear interest, at our option, at either the higher of the federal
funds rate plus 0.5% or the prime rate plus 1.25%, or a LIBOR rate plus
2.75%.
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.
8
<PAGE> 9
INSTRON CORPORATION FORM 10-Q
Notes to Consolidated Financial Statements PART I
(Unaudited) ITEM I
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. The rate of 0.50% is an annual rate, 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 EBITDA, consolidated interest coverage ratio,
consolidated fixed charge coverage ratio, maximum consolidated leverage
ratio and senior leverage ratio. The Senior Credit Facility contains
customary events of default with respect to the Company and its operating
subsidiaries, including defaults with respect to other indebtedness.
At April 1, 2000, the Company was not in compliance with two of these
covenants: the minimum consolidated net worth and EBITDA covenants as set
forth in the revolving term loan and revolving credit facility. The Company
requested and was granted waivers of these covenants as of and for the
period ended April 1, 2000. In exchange for receiving these waivers, the
Company agreed to an increase in the interest rate of the revolving term
loan and revolving credit facility of 50 basis points.
The Senior Credit Facility also contains covenants that limit the ability
of the Company and its operating subsidiaries to take various actions,
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. The Senior Subordinated
Notes are governed by negative covenants that are substantially similar or
less restrictive than those of the Senior Credit Facility.
9
<PAGE> 10
INSTRON CORPORATION FORM 10-Q
Notes to Consolidated Financial Statements PART I
(Unaudited) ITEM I
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 April 1, 2000 and for
the three month period then ended:
<TABLE>
<CAPTION>
Combined Company Combined
And Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Total
---------------- ------------ -----
<S> <C> <C> <C>
Balance Sheet Data as of April 1, 2000
Current Assets $ 65,087 $42,089 $107,176
Total Assets 101,264 53,838 155,102
Total Liabilities 146,659 27,719 174,378
Stockholders' Equity (Deficit) (45,494) 25,768 (19,726)
Statement of Operations Data for the three
Months ended April 1, 2000
Total Revenue $ 24,484 $16,255 $ 40,739
Loss before income taxes (2,786) (1,993) (4,779)
Net Loss (1,703) (1,049) (2,752)
</TABLE>
10
<PAGE> 11
INSTRON CORPORATION FORM 10-Q
Management's Discussion and Analysis of PART I
Financial Condition and Results of Operations ITEM 2
RESULTS OF OPERATIONS
Quarter Ended April 1, 2000 vs. Quarter Ended April 3, 1999
Revenues for the first quarter of 2000 were $40,739,000, a decrease of 16.4%
from the same period last year, due primarily to a decrease in IST shipments of
$6.3 million, as well as the translation impact of the weaker Euro. Foreign
sales accounted for approximately 59% of consolidated first quarter revenues
compared with 57% for the first quarter of 1999.
The consolidated gross margin as a percentage of revenue declined to 36.4% for
the first quarter of 2000 compared to 40.8% for the first quarter of 1999, due
to higher costs associated with major IST orders.
Total selling and administrative expenses decreased by 5.9% from the first
quarter of 1999 due in part to the rationalization benefits of integrating the
sales and support functions of Satec with Instron. As a percentage of revenue,
selling and administrative expenses were 33.5% compared to 29.7% for the same
period last year.
Research and development expenses decreased by 11.0% for the first quarter of
2000 compared with the first quarter of 1999. This decrease reflects not only
the high investment that Instron made in 1999 in certain key product development
areas, but also the benefit of integrating the development processes of our
acquisitions. In addition, software development costs of $287,000 were
capitalized during the first quarter of 2000 compared with $587,000 in the first
quarter of last year. If software development costs were reported as period
expenses, research and development expenses would have decreased by 18.1% in
2000.
Net interest expense increased to $3,515,000 compared to $144,000 in the first
quarter of 1999. This increase in 2000 is due to the significant debt assumed
by the Company as a result of the Recapitalization of Instron on September 29,
1999.
Loss before taxes for the first quarter of 2000 was $4,779,000 compared to
profit before taxes of $2,569,000 for the same period last year. This decline in
profitability is due to the higher interest expense related to the
Recapitalization and lower shipment volume, partially offset by lower operating
expenses.
The consolidated effective tax rate was 42% for the first quarter of 2000
compared to 38% in the first quarter of 1999. The higher tax rate in 2000
reflects the likelihood that we will be unable to utilize all of our foreign tax
credits due to lower U.S. income as a result of the higher interest charges.
Net loss for the first quarter of 2000 was $2,752,000 or $4.94 per diluted share
compared to net income of $1,593,000 or $0.22 per diluted share for the first
quarter of 1999.
FINANCIAL CONDITION
During the first quarter of 2000, the Company generated $1.3 million of cash
from operating activities compared to $10.5 million for the same period in the
prior year. The Company used $1.1 million of cash for investing activities
during the first quarter of 2000, compared to $1.9 million of cash used during
the same period in the prior year. The Company used $5.8 million of cash for
financing activities, compared to $4.9 million of cash used during the same
period in the prior year.
11
<PAGE> 12
INSTRON CORPORATION FORM 10-Q
Management's Discussion and Analysis of PART I
Financial Condition and Results of Operations ITEM 2
The cash generated from operating activities during the first quarter of 2000
was largely a result of the reduction in accounts receivable during the period.
Accounts receivable declined from $65.5 million at December 31, 1999 to $56.1
million at April 1, 2000. The lower level of accounts receivable was primarily
due to the lower level of revenues in the first quarter as compared to the
preceding three months ended December 31, 1999. In addition, when compared to
the first quarter of 1999, cash generated from operating activities during the
first quarter of 2000 declined $9.2 million. This decline in operating cash flow
was largely a result of the higher interest costs and net loss for the period,
income tax receivable and reduction in accounts payable, accrued expenses and
advance payments.
Capital expenditures during the first quarter of 2000 were $0.9 million,
compared to $1.5 million in the first quarter of 1999. The lower level of
capital expenditures reflects the lower fiscal 2000 capital requirements. The
Company plans to make capital expenditures of approximately $3.5 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 April 1, 2000, the Company had borrowings of $24.5 million, and additional
borrowing availability of $23.3 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 $29.2 million outstanding under its term loan at April
1, 2000, after its initial quarterly principal payment of $0.8 million, compared
to $30.0 million outstanding at December 31, 1999. At April 1, 2000, the Company
also had $60.0 million of 13 1/4% Senior Subordinated Notes Due 2009
outstanding.
In addition, the Company's revolving term loan and revolving credit facility
contains seven restrictive financial covenants. At April 1, 2000, the Company
was not in compliance with two of these covenants: the minimum consolidated
net worth, EBITDA covenants as set forth in the revolving term loan and
revolving credit facility. The Company requested and was granted waivers of
these covenants as of and for the period ended April 1, 2000. In exchange for
receiving these waivers, the Company agreed to an increase in the interest rate
of the revolving term loan and revolving credit facility of 50 basis points. The
Company anticipates that it will be in compliance with the financial covenants
contained in its revolving term loan and revolving credit facility as of
December 31, 2000. In the event that the Company is not in compliance with such
covenants at any time in the future, the Company anticipates that it would
initiate discussions with its lender seeking additional noncompliance waivers or
seeking to amend such covenants to provide the Company with greater flexibility.
No assurances can be given that the Company will obtain any such amendments or
noncompliance waivers from its lender in the future or that the proposed terms
applicable to such amendments or waivers will be satisfactory to the Company.
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 $1.8 million and $2.8 million at April 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 first quarter of 2000 were $45.5 million, an increase of 8%
over the same period last year. The increase in bookings were primarily in North
America and Asia.
The Company's order backlog was $71.6 million at the end of the first quarter of
2000, compared to $65.4 million at the end of the first quarter of 1999 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.
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
12
<PAGE> 13
INSTRON CORPORATION FORM 10-Q
Management's Discussion and Analysis of PART I
Financial Condition and Results of Operations ITEM 2
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. The Company is currently in the process of assessing the
impact, if any, 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 Company is assessing the
impact, if any, that the adoption of FIN 44 will have 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 has 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.
13
<PAGE> 14
INSTRON CORPORATION FORM 10-Q
PART II
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
14
<PAGE> 15
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 16, 2000 By /s/ James M. McConnell
-------------------------------------
James M. McConnell
President and Chief Executive Officer
Date: May 16, 2000 By /s/ Linton A. Moulding
-------------------------------------
Linton A. Moulding
Chief Financial Officer
15
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