UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
---------------------------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended December 31, 1997
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 No. 0-21820
--------------------------------------------
KEY TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
Oregon 93-0822509
(State of Incorporation) (I.R.S. Employer Identification No.)
150 Avery Street, Walla Walla, Washington 99362
(Address of principal executive offices) (Zip Code)
(509) 529-2161
(Registrant's telephone number, including area code)
---------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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 / /
The number of shares outstanding of the Registrant's common stock, no
par value, on January 31, 1998 was 4,690,175 shares.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets, December 31, 1997
(unaudited) and September 30, 1997............................3
Condensed unaudited consolidated statements of earnings
for the three months ended December 31, 1997 and 1996 ........4
Condensed unaudited consolidated statements of cash flows
for the three months ended December 31, 1997 and 1996.........5
Notes to condensed unaudited consolidated financial
statements....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....... .............................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................11
SIGNATURES....................................................................12
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 (UNAUDITED) AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
December 31, September 30,
1997 1997
---------------------- ----------------------
. (in thousands)
<S> <C> <C>
Assets
- ---------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,945 $ 2,896
Trade accounts receivable, net 8,476 8,716
Inventories:
Raw materials 5,241 5,393
Work-in-process and sub-assemblies 4,627 5,357
Finished goods 3,316 3,096
----- -----
Total inventories 13,184 13,846
Other current assets 1,724 1,851
----- -----
Total current assets 28,329 27,309
Property, plant and equipment, net 9,067 9,380
Other assets 2,684 2,752
----- -----
Total $40,080 $39,441
======= =======
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------
Current liabilities:
Accounts payable $ 1,775 $ 2,496
Accrued payroll liabilities and commissions 2,622 2,332
Income tax payable 157 738
Other accrued liabilities 2,068 2,239
Customers' deposits 2,525 1,344
Short-term borrowings and debt 956 852
--- ---
Total current liabilities 10,103 10,001
Long-term debt 1,525 1,293
Other long-term liabilities 136 116
Total shareholders' equity 28,316 28,031
------ ------
Total $40,080 $39,441
======= =======
- ---------------------------------------------------------------
See notes to condensed unaudited consolidated financial statements.
</TABLE>
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996
----------------- ----------------
(in thousands, except per share data)
<S> <C> <C>
Net sales $12,758 $13,416
Cost of sales 8,202 9,878
----- -------
Gross profit 4,556 3,538
Operating expenses:
Selling 1,945 2,272
Research and development 1,155 1,140
General and administrative 1,208 1,338
----- -------
Total operating expenses 4,308 4,750
----- -------
Income (loss) from operations 248 (1,212)
Other income 21 21
----- -------
Earnings (loss) before income taxes 269 (1,191)
Income tax benefit (expense) (95) 409
------ -------
Net earnings (loss) $ 174 ($ 782)
====== =======
Net earnings (loss) per common share - basic $ .04 ($ .17)
====== =======
Net earnings (loss) per common share - diluted $ .04 ($ .17)
====== =======
============================================================================
See notes to condensed unaudited consolidated financial statements.
</TABLE>
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996
--------------- --------------
(in thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities $1,830 $(5,490)
Cash flows from investing activities:
Proceeds from short-term investments - 1,079
Additions to property, plant and equipment, net (164) (1,179)
------- -------
Net cash used in investing activities (164) (100)
------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings - 2,111
Proceeds from issuance of long-term debt 408 1,500
Repayment of long-term debt (73) (549)
Proceeds from issuance of common stock 48 109
------- --------
Net cash provided by financing activities 383 3,171
------- --------
Net increase (decrease) in cash and cash equivalents 2,049 (2,419)
Cash and cash equivalents, beginning of the year 2,896 3,458
------- --------
Cash and cash equivalents, end of period $4,945 $ 1,039
======= ========
Supplemental information:
Cash paid during the period for interest $ 181 $ 77
Cash paid during the period for income taxes $ 522 $ 1,020
=================================================================================
See notes to condensed unaudited consolidated financial statements.
</TABLE>
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Condensed unaudited consolidated financial statements
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted from these condensed unaudited consolidated
financial statements. These condensed unaudited consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K for the fiscal year ended
September 30, 1997. The results of operations for the three-month period
ended December 31, 1997 are not necessarily indicative of operating results
expected for the full year.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, have been made to present fairly the Company's
financial position at December 31, 1997 and the results of its operations
and its cash flows for the three-month periods ended December 31, 1997 and
1996.
The balance sheet at September 30, 1997 has been condensed from the audited
balance sheet as of that date.
2. Income taxes
The provision for income taxes is based on the estimated effective income
tax rate for the year.
3. Earnings per share
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, requires all companies whose capital structures include convertible
securities to make a dual presentation of basic and diluted earnings per
share ("EPS"). This accounting standard became effective for the Company's
fiscal quarter ended December 31, 1997. Basic earnings per share are
computed on the basis of the weighted average number of common shares
outstanding during the period. Diluted earnings per share are calculated
after adjusting the weighted average number of common shares outstanding
for any dilutive effect of outstanding stock options using the treasury
stock method. During periods of net loss, the effect of outstanding stock
options is anti-dilutive and excluded from the calculation of loss per
share.
A table reconciling basic earnings per share and earnings per share
assuming dilution follows:
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Reconciliation of Basic EPS to Diluted EPS (in thousands, except per share data):
For the Three Months Ended December 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
- ----------
Income available to common
shareholders $174 4,687 $ .04 ($782) 4,660 ($ .17)
===== =======
Effect of Dilutive Securities:
- ------------------------------
Stock Options - 50 - -
--------- ---------- ---------- ----------
Diluted EPS:
- ------------
Income available to common
shareholders plus assumed stock
options $174 4,737 $ .04 ($782) 4,660 ($ .17)
========= ========== ===== ========= ========= ========
</TABLE>
Options to purchase 317,050 shares of common stock at prices ranging from $16.25
to $23.25 per share were outstanding as of December 31, 1997, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common stock. These options
expire on dates beginning February 6, 2006 through May 6, 2007.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Comments included in this document may include "forward-looking statements"
within the meaning of the federal securities laws, including statements as to
anticipated future results that are based on current expectations and subject to
a number of risks and uncertainties. The following factors, among others, could
cause actual results or outcomes to differ materially from current expectations:
the ability of the Tegra product line to sustain an improved level of customer
acceptance; achievement of product performance specifications and reduction of
related product upgrade or warranty expenses; the ability of new products to
compete successfully in either existing or new markets; product development
activities; future costs of materials and other operating expenses; competitive
factors; the effect of fluctuations in foreign currency exchange rates upon the
revenues and operating results generated from international markets; the
performance and needs of industries served by the Company and the financial
capacity of customers in these industries to purchase capital equipment.
Results of Operations
- ---------------------
For the three-month period ended December 31, 1997, net earnings were $174,000
or $.04 per share on net sales of $12.8 million compared to a net loss of
$782,000 or $.17 per share on net sales of $13.4 million for the corresponding
period in fiscal 1997. Net sales decreased approximately 5% due principally to
decreased sales of products in the automated inspection systems group and, to a
lesser extent, to decreased shipments of processing equipment products. The
decreased sales of automated inspection systems resulted principally from a
significant decrease in shipments of Tegra(TM) sorting systems to European and
other international customers in the first quarter of fiscal 1998 compared to
the same period last year. Historically, the Company's typical terms of sale for
such systems sold to international customers have been denominated in U.S.
dollars. The Company believes the relative strengthening of the dollar against
other foreign currencies since the comparable period a year ago has placed the
Company's automated inspection systems at a competitive pricing disadvantage.
Accordingly, the Company is currently reviewing its sales strategies for such
systems.
Backlog at the end of the most recent quarter was $7.6 million compared to $16.0
million at December 31, 1996. The decrease in backlog between these comparable
periods was generally spread across the Company's primary product groups.
However, the backlog for automated inspection systems increased during the first
quarter of fiscal 1998 compared to the backlog level at September 30, 1997 due
principally to increased orders for such systems. Additionally, the order level
and resulting backlog for products sold by the Company's Dutch subsidiary,
Superior B.V., increased in the first quarter of fiscal 1998 compared to the
same period last year. During the corresponding first quarter of fiscal 1997,
the Company had experienced a strong customer demand for its specialized
conveying systems and other processing equipment products, which was seasonally
atypical and which had resulted in increased backlog levels at that time for
those product groups.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Gross profit increased by $1.1 million or 29% to $4.6 million in the three
months ended December 31, 1997 compared to $3.5 million for the corresponding
period in fiscal 1997. Gross profit contribution also improved to 35.7% of sales
during the quarter compared to 26.4% in the corresponding period last year.
Compared to the first quarter of fiscal 1997, these increases in gross margin
resulted principally from improvements in manufacturing processes and decreased
manufacturing costs as a percentage of sales for all three of the Company's
manufacturing facilities. These gross margin improvements also offset a shift in
the mix of shipments between the corresponding periods toward products which
typically produce lower margins. Additionally, warranty expenses during the most
recent quarter decreased significantly, principally for the Tegra line of
sorters. During the comparable fiscal 1997 quarter, gross profit had also been
unfavorably affected by one-time costs associated with the relocation and
startup of the new Specialized Conveying Systems manufacturing facility in Walla
Walla and the reconfiguration of certain manufacturing processes for the Tegra
product line. Those relocation, startup and reconfiguration activities also
resulted in decreases in production efficiency and increases to manufacturing
variances and overhead expenses during the prior period.
Operating expenses were $4.3 million and $4.7 million for the three-month
periods ended December 31, 1997 and 1996, respectively. Selling and marketing
expenses decreased by 14% to $1.9 million principally due to decreased product
promotion and trade show expenses, decreased commission expense resulting from
both a lower mix of products sold through independent sales representatives
compared to the Company's direct sales force and the decreased sales levels
between the corresponding periods, and decreased consulting expenses. General
and administrative expenses decreased by 10% to $1.2 million and principally
reflected the effect of decreased payroll costs, employee recruitment expenses,
and outside services. The expense levels in research and development remained
essentially unchanged between the corresponding periods.
As a result of the increase in gross profit margins and the decrease in
operating expenses, the results of operations for the three months ended
December 31, 1997 was net earnings of $174,000 compared to a net loss of
$782,000 for the three months ended December 31, 1996. Net earnings (loss) were
1.4% and (5.8%) of net sales in the two periods, respectively.
The Company expects that revenues and earnings for the second fiscal quarter of
fiscal 1998 may decrease compared to the corresponding quarter in fiscal 1997 as
a result of the relatively low backlog level at the end of the first fiscal
quarter; the unfavorable effect upon foreign sales and international operations
of the stronger U.S. dollar relative to certain foreign currencies and foreign
competitors; and the Company's continued investment in product and market
development activities. While the Company expects that fiscal 1998 revenues may
not increase significantly compared to fiscal 1997 as a result of these factors,
it also expects, however, that fiscal 1998 earnings will benefit from improved
gross margins and decreased total operating expenses compared to the prior year,
as was the case in the first quarter.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
For the three-month period ended December 31, 1997, net cash provided by
operating activities totaled $1.8 million compared to net cash used in operating
activities totaling $5.5 million in the corresponding period in fiscal 1997.
Increased customer deposits provided $1.2 million in cash and decreases in
inventories and accounts receivable provided an additional $949,000 in the more
recent period. The Company used $1.3 million in cash to decrease trade accounts
payable balances and pay accrued income taxes from the previous fiscal year. Net
cash resources totaling $164,000 were also used to fund the acquisition of
capital equipment. At December 31, 1997, the Company had no material commitments
for capital expenditures.
The Company's cash flows from financing activities for the three months ended
December 31, 1997 was principally affected by the receipt of $408,000 from a
third-party leasing company, the result of an assignment of the future proceeds
of a customer's operating lease of the Company's products. This transaction was
treated as an addition to long-term debt and will be taken into income over the
expected remaining term of the lease. The proceeds from this transaction, offset
by $73,000 in repayments of long-term debt principally by the Company's Dutch
subsidiary, resulted in an increase of $335,000 to total consolidated long-term
debt for the three months ended December 31, 1997. Proceeds from the issuance of
common stock during the three-month period under the Company's employee stock
option and stock purchase plans totaled $48,000.
During the three-month period ended December 31, 1997, working capital increased
by $918,000 to $18.2 million from the amount at September 30, 1997. Trade
accounts receivable decreased by $240,000 as a result of a lower level of
shipments during the first quarter of fiscal 1998 compared to the fourth quarter
of the fiscal 1997. Inventory decreased by $662,000 principally as a result of
the Company's efforts to achieve a better balance of its inventory to sales
ratio. The Company expects its investment in inventories to continue to decrease
in the second quarter of fiscal 1998. Accounts payable decreased $721,000 as a
result of reduced operating expenses and decreased investment in inventory.
Customer deposits increased by $1.2 million and short-term borrowings and debt
increased moderately by $104,000.
The Company's facility with a domestic commercial bank provides for an operating
line of credit up to $4.0 million. At December 31, 1997, the Company had no
borrowings under this credit facility. The Company also maintains a credit
facility with a Dutch bank which provides for operating lines of credit totaling
1.5 million guilders, or approximately $740,000, to the Company's subsidiaries
in The Netherlands. At December 31, 1997, the Company had no borrowings under
this credit facility.
The Company's operating, investing and financing activities resulted in a $2.0
million increase in cash and cash equivalents during the three-month period. At
the end of the period, the balance of cash and cash equivalents totaled $4.9
million. The Company believes that its cash and cash equivalents, cash generated
from operations and available borrowings under its operating lines of credit
will be sufficient to provide for its working capital needs and to fund future
growth.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Report on Form 8-K
No Current Reports on Form 8-K were filed during the three
months ended December 31, 1997.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
SIGNATURES
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY TECHNOLOGY, INC.
(Registrant)
Date: February 13, 1998 /s/ THOMAS C. MADSEN
--------------------
Thomas C. Madsen,
President and Chief Executive
Officer
Date: February 13, 1998 /s/ STEVEN D. EVANS
-------------------
Steven D. Evans,
Vice President of Finance and
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KEY
TECHNOLOGY, INC.'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN ITS QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,945
<SECURITIES> 0
<RECEIVABLES> 8,948
<ALLOWANCES> (472)
<INVENTORY> 13,184
<CURRENT-ASSETS> 28,329
<PP&E> 17,917
<DEPRECIATION> (8,850)
<TOTAL-ASSETS> 40,080
<CURRENT-LIABILITIES> 10,103
<BONDS> 1,525
0
0
<COMMON> 9,017
<OTHER-SE> 19,299
<TOTAL-LIABILITY-AND-EQUITY> 40,080
<SALES> 12,758
<TOTAL-REVENUES> 12,824
<CGS> 8,202
<TOTAL-COSTS> 8,202
<OTHER-EXPENSES> 4,274
<LOSS-PROVISION> 34
<INTEREST-EXPENSE> 45
<INCOME-PRETAX> 269
<INCOME-TAX> 95
<INCOME-CONTINUING> 174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
