<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 SEPTEMBER 30, 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 September 30, 2000, the Registrant had 5,571,640 shares outstanding of
common stock, all of which was held by affiliates of the Registrant.
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FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands, except shares and per share data)
September 30, December 31,
2000 1999
-------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,731 $ 10,978
Accounts receivable (net of allowance for
doubtful accounts of $871 in 2000 and
$830 in 1999) 52,532 65,481
Inventories 33,775 31,117
Income tax receivable 5,548 3,594
Deferred income taxes 3,781 3,879
Prepaid expenses and other current assets 1,721 2,428
-------- --------
Total current assets 102,088 117,477
Property, plant and equipment, net 20,943 23,143
Goodwill 9,755 10,879
Deferred income taxes 1,059 832
Other assets 4,349 5,551
Deferred financing costs, net 7,960 8,793
-------- --------
Total assets $146,154 $166,675
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short term borrowings and current portion of $ 5,049 $ 5,815
long-term debt
Accounts payable 9,492 11,947
Accrued liabilities 22,718 27,129
Accrued employee compensation and benefits 5,024 5,280
Advance payments received on contracts 10,362 6,907
-------- --------
Total current liabilities 52,645 57,078
Long-term debt - revolver 23,314 28,818
Senior debt - term loan 24,000 27,000
13-1/4% senior subordinated notes due 2009 60,000 60,000
-------- --------
Total long-term debt 107,314 115,818
Pension and other long-term liabilities 10,609 9,532
-------- --------
Total liabilities 170,568 182,428
-------- --------
Stockholders' deficit:
Common stock, $0.001 par value; 10,000,000
shares authorized; 5,571,640 shares issued
and outstanding 6 6
Additional paid in capital 50,432 50,432
Accumulated deficit (65,430) (59,043)
Accumulated other comprehensive loss (9,422) (7,148)
-------- --------
Total stockholders' deficit (24,414) (15,753)
-------- --------
Total liabilities and stockholders'
deficit $146,154 $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 NINE MONTHS ENDED
--------------------------- --------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Revenue:
Sales $ 34,728 $ 41,992 $ 109,020 $ 125,431
Service 7,436 7,956 23,098 25,522
--------- --------- --------- ---------
Total revenue 42,164 49,948 132,118 150,953
--------- --------- --------- ---------
Cost of revenue:
Sales 19,480 25,491 64,978 75,117
Service 5,611 5,740 17,056 17,587
--------- --------- --------- ---------
Total cost of revenue 25,091 31,231 82,034 92,704
--------- --------- --------- ---------
Gross profit 17,073 18,717 50,084 58,249
--------- --------- --------- ---------
Operating expenses:
Selling and administrative 12,973 12,941 39,634 41,558
Research and development 1,981 2,938 6,934 8,239
Recapitalization compensation expense -- 12,606 -- 12,606
Restructuring costs -- -- 1,769 --
--------- --------- --------- ---------
Total operating expenses 14,954 28,485 48,337 62,403
--------- --------- --------- ---------
Income (loss) from operations 2,119 (9,768) 1,747 (4,154)
--------- --------- --------- ---------
Other expenses:
Interest expense, net 3,557 114 10,751 367
Foreign exchange losses 133 238 185 26
--------- --------- --------- ---------
Total other expense 3,690 352 10,936 393
--------- --------- --------- ---------
Loss before income taxes (1,571) (10,120) (9,189) (4,547)
Benefit for income taxes (212) (2,307) (2,802) (190)
--------- --------- --------- ---------
Net loss $ (1,359) $ (7,813) $ (6,387) $ (4,357)
========= ========= ========= =========
Weighted average number of basic and diluted
common shares 5,571 67,967 5,571 67,797
========= ========= ========= =========
Loss per share - basic and diluted $ (0.24) $ (0.12) $ (1.15) $ (0.06)
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 4
FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
September 30, October 2,
2000 1999
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,387) $ (4,357)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 6,933 6,446
Non-cash recapitalization related costs 3,874
Provision for losses on accounts receivable 187 103
Deferred taxes (164) (962)
Changes in assets and liabilities, excluding the effects
from purchase of business:
(Increase) decrease in accounts receivable 10,743 5,015
(Increase) decrease in inventories (3,829) (1,739)
(Increase) decrease in income tax receivable (2,103) (3,684)
(Increase) decrease in prepaid expenses and other 644 (799)
current assets
Increase (decrease) in accounts payable, accrued
expenses and advance payments (2,351) 6,412
Other, net 588 5,913
--------- ---------
Net cash provided by operating activities 4,261 16,222
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment 131
Capital expenditures (2,285) (4,116)
Capitalized software costs (737) (1,698)
Other, net 245 274
--------- ---------
Net cash used in investing activities (2,777) (5,409)
Cash flows from financing activities:
Net payments of line of credit and borrowing
arrangements prior to recapitalization (16,488)
Net payments under short-term lines of credit (1,498) --
Net borrowings (payments) under revolving line of credit (3,757) 16,500
Issuance of senior subordinated notes 60,000
Issuance of senior term loan 30,000
Debt financing fees (6,391)
Recapitalization related fees (3,760)
Issuance of recapitalized common stock 54,173
Payments under Senior Term Loan (2,250) --
Purchase of treasury stock, common stock and options
outstanding (143,041)
Cash dividends paid (268)
Proceeds from exercise of stock options 386
--------- ---------
Net cash used in financing activities (7,505) (8,889)
--------- ---------
Effect of exchange rate changes on cash (226) (15)
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,247) 1,909
Cash and cash equivalents at beginning of year 10,978 7,209
--------- ---------
Cash and cash equivalents at end of period $ 4,731 $ 9,118
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 11,469 $ 778
Income taxes 396 3,024
Conversion of common stock to preferred stock 325
Conversion of preferred stock to common stock 325
Issuance of common stock warrants 2,250
Retirement of treasury stock 1,330
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
<PAGE> 5
FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- --------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net loss $ (1,359) $(7,813) $ (6,387) $ (4,357)
Other comprehensive income (loss):
Foreign currency translation
adjustments (985) 1,083 (2,274) (1,460)
-------- ------- -------- --------
Comprehensive loss $ (2,344) $(6,730) $ (8,661) $ (5,817)
======== ======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE> 6
FORM 10-Q
PART I
ITEM I
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 nine month periods
ended September 30, 2000 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2000.
On September 8, 2000, the Company effected a 10-for-1 stock split in the
form of a stock dividend. Shareholders of record on September 8, 2000,
received 9 additional shares of common stock for every share they owned on
September 8, 2000. The total number of shares of common stock authorized
increased from one million shares (par value $.01) to ten million (par
value $.001). Share data for all periods presented herein has been
adjusted to give effect to the stock split.
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 $12.6 million as a result of the Recapitalization. In addition,
the Company incurred costs of $12.4 million directly related to the
Recapitalization. Of these transaction costs, $8.6 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 $3.8 million was
charged to stockholders' equity.
6
<PAGE> 7
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 5.109 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". 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 third
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 September 30, 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.
In September 2000, the Emerging Issues Task Force (EITF) of the FASB
reached a consensus on EITF Issue 00-10, "Accounting for Shipping and
Handling Fees and Costs." This consensus requires that all shipping and
handling amounts billed to a customer in a sale transaction represent
revenues earned for the goods provided and should be classified as revenue.
Adoption of the consensus reached on EITF Issue 00-10 is required no later
than the required implementation date for SAB 101. The Company is in the
process of assessing the impact of the consensus reached on EITF Issue
00-10 and anticipates a retroactive reclassification for all historical
statements of operations related to these revenues from cost of revenues to
revenues.
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 nine months ended September 30, 2000, outstanding options and
warrants totaling 742,700 and 306,540 shares, respectively, have been
excluded from the diluted earnings per share computation as their
inclusion would be antidilutive.
7
<PAGE> 8
The following is a reconciliation of the basic and diluted EPS
calculations: (in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- --------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net loss $ (1,359) $ (7,813) $ (6,387) $ (4,357)
Weighted average number of basic common
shares outstanding 5,571 67,967 5,571 67,797
Dilutive effect of common stock
equivalents outstanding -- -- -- --
-------- --------- -------- --------
Weighted average of common and dilutive
shares 5,571 67,967 5,571 67,797
======== ========= ======== ========
Basic and diluted loss per share $ (0.24) $ (0.12) $ (1.15) $ (0.06)
======== ========= ======== ========
</TABLE>
Share data for all periods presented herein have been adjusted to effect to the
10 for 1 stock split.
5. INVENTORIES
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials $ 12,636 $ 13,346
Work-in-process 13,441 9,823
Finished goods 7,698 7,948
-------- --------
$ 33,775 $ 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 $8,019,000 and
$7,845,000 at September 30, 2000 and December 31, 1999, respectively. The
excess of current cost over stated LIFO value was $5,348,000 at September
30, 2000 and $5,588,000 at December 31, 1999.
6. DEBT
<TABLE>
<CAPTION>
(IN THOUSANDS) September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Short-term borrowings $ 1,299 $ 2,815
Long-term debt - revolver 23,314 28,818
Senior debt - term loan 27,750 30,000
13-1/4% senior
subordinated notes
due 2009 60,000 60,000
-------- --------
Total debt 112,363 121,633
Less: current portion (5,049) (5,815)
-------- --------
Long-term debt $107,314 $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
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 5.109 of a fully paid and non-assessable
share of common stock, par value $0.001 per share, at an exercise price of
$0.001 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 to
interest expense over 10 years.
8
<PAGE> 9
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 paid an administrative fee of $80,000 to the lenders. The Company
did not obtain waivers of covenants of the Senior Credit Facility that
extended over the twelve month period following July 1, 2000 and did not
believe it would be able to achieve compliance with future covenants of the
Senior Credit Facility that existed as July 1, 2000. Accordingly, as of
July 1, 2000, the amounts outstanding under the Senior Credit Facility were
reclassified from long term liabilities to current liabilities.
During the third quarter of 2000, the Company renegotiated and obtained
more lenient debt covenants for the Senior Credit Facility. As of September
30, 2000, the Company was in compliance with the amended Senior Credit
Facility covenants. The Company is confident that it will be able to meet
the new covenants over the next twelve months. Accordingly, as of September
30, 2000, the amounts outstanding under the Senior Credit Facility have
been reclassified back to long term liabilities.
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 September 30, 2000
and for the nine 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 September 30, 2000
Current Assets 46,575 55,513 102,088
Total Assets 80,984 65,170 146,154
Total Liabilities 124,773 45,795 170,568
Stockholders' Equity (Deficit) (43,789) 19,375 (24,414)
Statement of Operations Data for the
Nine Months ended September 30, 2000
Total Revenue 77,580 54,538 132,118
Loss before income taxes (5,555) (3,634) (9,189)
Net Loss (4,679) (1,708) (6,387)
</TABLE>
9
<PAGE> 10
8. RESTRUCTURING
During 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 cost associated with the workforce reductions was $1.8 million
during the first six months of 2000. As of September 30, 2000, the
liability remaining related to the workforce reduction was approximately
$0.8 million, consisting entirely of severance costs. Remaining severance
costs are expected to be paid through the second quarter of 2001.
10
<PAGE> 11
FORM 10-Q
PART I
ITEM I
INSTRON CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 2000 VS. THIRD QUARTER ENDED OCTOBER 2, 1999
Revenues for the third quarter of 2000 were $42.2 million, compared to $49.9
million for the third quarter of last year, a decrease of 15.6%. The decrease
in revenues was primarily due to a decline in Structures and European sales. A
significant portion of the decline in European sales was due to the weakness of
the Euro and Pound compared to prior year. Foreign sales were 55% of revenues
in the third quarter of 2000 and 1999.
Gross margin, as a percentage of revenue, was 40.5% for the third quarter of
2000, compared to 37.5% for the third quarter of 1999. The higher gross margin
was primarily due to the improved margins in the Structures business.
Selling and administrative expenses for the third quarter of 2000 were $13.0
million, or 30.8% of revenues, compared to $12.9 million, or 25.9% of revenues,
in the third quarter of last year. The higher percentage of selling and
administrative expenses to revenue was a result of a decrease in Structures and
European sales.
Research and development expenses were $2.0 million, or 4.7% of revenues, in the
third quarter of 2000, compared to $2.9 million, or 5.9% of revenues, in the
third quarter of last year. Software development costs of $0.4 million were
capitalized during the third quarter of 2000, compared to $0.5 million in the
third quarter of last year.
Income from operations for the third quarter of 2000 was $2.1 million compared
to a $9.8 million loss in the third quarter of 1999. During the third quarter of
1999, the Company recorded recapitalization compensation expense of $12.6
million arising from the Merger Agreement between Instron Corporation and
Kirtland. Without this one-time charge, income from operations was $2.8 million.
Net interest expense was $3.6 million in the third quarter of 2000, compared to
$0.1 million in the third 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 tax benefit of $0.2 million, or 13.5% of the pre-tax loss, for the third
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 benefit for the third
quarter of 1999 was 22.8% of pre-tax income.
Net loss for the third quarter of 2000 was $1.4 million, or $0.24 loss per basic
and diluted share compared to net loss of $7.8 million, or $0.12 loss per basic
and diluted share for the third quarter of last year.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED OCTOBER 2, 1999
Revenues for the nine months of 2000 were $132.1 million compared to $151.0
million for the first nine months of 1999, a decrease of 12.5%. The lower
revenues were largely due to a $16.5 million decline in Structures revenue,
lower European and Japanese revenues, offset by an increase in Asian revenues.
Foreign sales were 57% of total revenues for the first nine months of 2000
compared to 56% for the first nine months of 1999.
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Gross margin as a percentage of revenues was 37.9% for the first nine months of
2000 compared to 38.6% for the first nine months 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. Gross margin improved in the third quarter
of 2000, as noted above.
Selling and administrative expenses were $39.6 million, or 30.0% of revenues,
for the first nine months of 2000, compared to $41.5 million, or 27.5% of
revenues, for the first nine months of 1999, a decrease of 4.6%. The higher
percentage of selling and administrative expenses to revenue was a result of a
decrease in structures and European sales.
Research and development expenses were $6.9 million, or 5.2% of revenues, for
the first nine months of 2000, compared to $8.2 million, or 5.5% of revenues,
for the first nine months of 1999. Software development costs of $0.7 million
were capitalized during the first nine months of 2000, compared to $1.7 million
during the first nine months of 1999. If software development costs were
reported as period expenses, research and development expenses would have
declined 2.3 million, or 23.2%, from 1999. The higher 1999 expense levels are
due primarily to the capitalization of costs associated with an integrated
software suite for the Structures business. In addition, the lower 2000 expenses
reflect the benefit from integrating the development processes of our past
acquisitions.
During the third quarter of 1999, the Company recorded recapitalization
compensation expense of $12.6 million arising from the Merger Agreement between
Instron Corporation and Kirtland.
During 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 six months of 2000 related to this workforce reduction was
$1.8 million. As of September 30, 2000, the liability remaining related to the
workforce reduction was approximately $0.8 million, consisting entirely of
severance costs. Remaining severance costs are expected to be paid through the
second quarter of 2001.
Income from operations for the first nine months was $1.7 million in 2000
compared to a loss of $4.2 million in 1999. Excluding one-time charges, the
first nine months income from operations was $3.5 million in 2000 and $8.4
million in 1999.
Net interest expense was $10.8 million for the first nine months of 2000,
compared to $0.4 million for the first nine months 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 $2.8 million, or 30.5% of the pre-tax loss, for the first
nine months 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 benefit for the first
nine months of 1999 was $0.2 million or 4.2% of pre-tax loss.
The net loss for the first nine months of 2000 was $6.4 million, or $1.15 loss
per basic and diluted share compared to net loss of $4.4 million, or $0.06 loss
per basic and diluted share for the first nine months of 1999.
FINANCIAL CONDITION
During the first nine months of 2000, the Company generated $4.3 million of cash
from operating activities, compared $16.2 million for the same period in the
prior year, a $11.9 million decrease. The decrease on a year to year basis was
primarily due to an increase in net loss and a decrease in accrued expenses
offset by a decrease in accounts receivable. The net loss increase in 2000 was
mostly due to a decrease in revenue of $18.9 million, an increase in net
interest expense of roughly $10.4 million (related to the debt financing
obtained on September 29, 1999, as part of the recapitalization), and a
restructuring charge of $1.8 million offset by the recapitalization charge of
$12.6 million in 1999. The cash generated from operating activities during the
first nine months 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 $52.5 million at September 30, 2000. The lower level of
accounts receivable was primarily due to the lower level of revenues in the
three months ended September 30, 2000, as compared to the three months ended
December 31, 1999.
The Company used $2.8 million in cash in investing activities during the first
nine months of 2000, compared to $5.4 in cash during the first nine months of
1999. Capital expenditures during the first nine months of 2000 were $2.3
million, compared to $4.1 million in the first nine months 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
$3.0 million during the current fiscal year. In addition, the Company plans to
continue to develop and
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enhance its software products and pursue its strategy of acquisitions.
During the first nine months of 2000, the Company used $7.5 million of cash to
repay bank borrowings. During the first nine months of 1999, the Company used
cash of $0.3 million to pay dividends and received cash of $0.4 million from
stock option exercises.
During the first nine months of 1999, in connection with the Merger, the Company
entered into a Credit and Security Agreement (the "Senior Credit Facility")
consisting of a $30 million term loan facility (the "Term Loan Facility") and a
$50 million revolving credit facility, (the "Revolving Credit Facility"). The
Company borrowed $16.5 million against the revolving credit facility. In
addition, the Company incurred $60 million of debt through the sale of its
13 1/4% Senior Subordinated Notes and Warrants (the "Senior Subordinated
Notes"). Also during the first nine months of 1999, the Company used cash of
$143.0 million to purchase all of the treasury stock, common stock and options
outstanding, and used cash of $16.5 million to pay off bank debt. The Company
received cash of $54.2 million from the sales of recapitalized stock. As part of
the Merger and recapitalization, the Company paid $6.4 million for fees to
finance the debt and $3.8 million in fees related to the recapitalization.
At September 30, 2000, the Company had borrowings of $23.3 million, and
additional borrowing availability of $18.1 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 $27.8 million outstanding under
its term loan at September 30, 2000, compared to $30.0 million outstanding at
December 31, 1999. At September 30, 2000 and December 31, 1999, the Company also
had $60.0 million of 13 1/4% Senior Subordinated Notes Due 2009 outstanding.
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 and was granted waivers of these covenants as of
and for the period ended July 1, 2000, for which the Company paid an
administrative fee of $80,000 to the lenders. The Company did not obtain waivers
of covenants of the Senior Credit Facility that extended over the twelve month
period following July 1, 2000 and did not believe it would be able to achieve
compliance with future covenants of the Senior Credit Facility that existed as
July 1, 2000. Accordingly as of July 1, 2000, the amounts outstanding under the
Senior Credit Facility were reclassified from long term liabilities to current
liabilities.
During the third quarter of 2000, the Company renegotiated and obtained more
lenient debt covenants for the Senior Credit Facility. As of September 30, 2000,
the Company was in compliance with the amended Senior Credit Facility covenants.
The Company is confident that it will be able to meet the new covenants over the
next twelve months. Accordingly, as of September 30, 2000, the amounts
outstanding under the Senior Credit Facility have been reclassified back to long
term liabilities.
The Company's subsidiaries have other overdraft and borrowing facilities
allowing advances up to approximately $2.6 million. Short-term borrowings under
these facilities were $0 million and $2.8 million at September 30, 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 third quarter of 2000 were $47.2 million compared to $59.3
million in the third quarter of last year. For the first nine months of 2000,
bookings were $144.9 million, a decrease of 5.9% from the first nine months of
last year. The year-to-year decrease in bookings was primarily for Structures
products.
At September 30, 2000, the Company's order backlog was $75.7 million, compared
to $73.5 million at July 1, 2000, $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.
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.
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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 third quarter of 2000, retroactive to the
first quarter of 2000. In June 2000, the SEC issued SAB 101B 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 September 30,
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.
In September 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all shipping and handling amounts billed to
a customer in a sale transaction represent revenues earned for the goods
provided and should be classified as revenue. Adoption of the consensus reached
on EITF Issue 00-10 is required no later than the required implementation date
for SAB 101. The Company is in the process of assessing the impact of the
consensus reached on EITF Issue 00-10 and anticipates a retroactive
reclassification for all historical statements of operations related to these
revenues from cost of revenues to revenues.
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 I
ITEM I
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: November 14, 2000 By /s/ James M. McConnell
-------------------------------------
James M. McConnell
President and Chief Executive Officer
Date: November 14, 2000 By /s/ Linton A. Moulding
-------------------------------------
Linton A. Moulding
Chief Financial Officer
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