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, 1998
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, 1999 was 4,705,054 shares.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial statements
Condensed consolidated balance sheets, December 31, 1998
(unaudited) and September 30, 1998.........................................................3
Condensed unaudited consolidated statements of earnings for the
three months ended December 31, 1998 and 1997 .............................................4
Condensed unaudited consolidated statements of cash flows for
the three months ended December 31, 1998 and 1997.........................................5
Notes to condensed unaudited consolidated financial statements.................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................11
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K..............................................................11
SIGNATURES..............................................................................................12
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
1998 1998
---------------------- ----------------------
(in thousands)
Assets
- ----------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,013 $ 6,333
Trade accounts receivable, net 9,934 7,051
Inventories:
Raw materials 4,341 4,726
Work-in-process and sub-assemblies 5,939 5,353
Finished goods 2,548 2,604
--------- ---------
Total inventories 12,828 12,683
Other current assets 1,849 1,821
--------- ---------
Total current assets 28,624 27,888
Property, plant and equipment, net 9,344 9,584
Other assets 1,808 1,885
--------- ---------
Total $39,776 $39,357
======== =========
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------
Current liabilities:
Accounts payable $2,457 $ 2,471
Accrued payroll liabilities and commissions 2,182 2,146
Income tax payable 286 279
Other accrued liabilities 2,182 2,072
Customers' deposits 1,317 1,392
Short-term borrowings and debt 557 579
--------- ---------
Total current liabilities 8,981 8,939
Long-term debt 1,024 1,103
Total shareholders' equity 29,771 29,315
--------- ---------
Total $39,776 $39,357
========= =========
See notes to condensed unaudited consolidated financial statements.
3
</TABLE>
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------- ----------------
(in thousands, except per share data)
<S> <C> <C>
Net sales $14,819 $12,758
Cost of sales 9,429 8,202
--------- --------
Gross profit 5,390 4,556
Operating expenses:
Selling 2,363 1,945
Research and development 835 1,155
General and administrative 1,575 1,208
--------- --------
Total operating expenses 4,773 4,308
--------- --------
Income from operations 617 248
Other income 26 21
--------- --------
Earnings before income taxes 643 269
Income tax expense (219) (95)
--------- --------
Net earnings $ 424 $ 174
========= ========
Net earnings per common share - basic $ .09 $ .04
========= ========
Net earnings per common share - diluted $ .09 $ .04
========= ========
Shares used in per share calculation - basic 4,702 4,687
========= ========
Shares used in per share calculation - diluted 4,702 4,737
========= ========
See notes to condensed unaudited consolidated financial statements.
4
</TABLE>
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
--------------- --------------
(in thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities ($1,955) $ 1,830
Cash flows from investing activities:
Additions to property, plant and equipment, net (285) (164)
--------- ---------
Net cash used in investing activities (285) (164)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 408
Repayment of long-term debt (101) (73)
Proceeds from issuance of common stock 21 48
--------- ---------
Net cash provided by (used in) financing activities (80) 383
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,320) 2,049
Cash and cash equivalents, beginning of the year 6,333 2,896
--------- ---------
Cash and cash equivalents, end of period $4,013 $4,945
========= =========
Supplemental information:
Cash paid during the period for interest $ 30 $ 181
Cash paid during the period for income taxes $ 206 $ 522
See notes to condensed unaudited consolidated financial statements.
</TABLE>
5
<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, 1998. The results of operations for the three-month period
ended December 31, 1998 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, 1998 and the results of its operations
and its cash flows for the three-month periods ended December 31, 1998 and
1997.
The balance sheet at September 30, 1998 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. Comprehensive Income
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The Company's
consolidated comprehensive income was $435,000 and $237,000 for the three
months ended December 31, 1998 and 1997, respectively. The differences
between the net earnings reported in the consolidated statement of earnings
and the consolidated comprehensive net income for the periods consisted of
changes in foreign currency translation adjustments.
4. Segment Information
On October 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's business
units serve customers in its primary market - the food processing and
agricultural products industry - through common sales and distribution
channels. Therefore, the Company will report on one segment.
6
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. 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. THESE STATEMENTS AS TO
ANTICIPATED FUTURE RESULTS ARE BASED ON CURRENT EXPECTATIONS AND ARE SUBJECT TO
A NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED OR DISCUSSED HERE. SUCH RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO: THE IMPACT ON QUARTERLY REVENUES OF BEGINNING
BACKLOG LEVELS AND ORDER-TO-SHIPMENT LEAD TIME INTERVALS IN CERTAIN PRODUCT
LINES, THE MIX OF PRODUCTS INCLUDED IN THOSE REVENUES AND THE RESULTING EFFECT
UPON GROSS MARGINS; AND RECEIPT OF LARGE ORDERS THAT MAY NOT BE REPEATED IN
SUBSEQUENT PERIODS. ADDITIONAL RISKS AND UNCERTAINTIES ARE DETAILED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SEC IN DECEMBER 1998 AND ARE
INCORPORATED HEREIN BY REFERENCE. THE COMPANY CAUTIONS READERS NOT TO PLACE
UNDUE RELIANCE UPON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY DISCLAIMS ANY OBLIGATION SUBSEQUENTLY TO REVISE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
SUCH STATEMENTS OR TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED
EVENTS.
RESULTS OF OPERATIONS
For the three-month period ended December 31, 1998, net earnings were $424,000
or $.09 per share on net sales of $14.8 million compared to $174,000 or $.04 per
share on net sales of $12.8 million for the corresponding period in fiscal 1998.
Net sales increased approximately 16% due principally to increased domestic and
international sales of products in the specialized conveying systems and
processing equipment product lines partially offset by decreased sales of spare
parts and maintenance services. Sales of automated inspection systems in the
first quarter of fiscal 1999 were comparable to the same period last year. Sales
to European and other international customers, principally for specialized
conveying systems and automated inspection systems, increased by approximately
84% in the first quarter of fiscal 1999 over the same period last year. Sales of
specialized conveying systems to European customers by the Company's Dutch
subsidiary, KEY/Superior B.V., was a significant factor contributing to this
increase. Based upon the results of the most recent quarterly period and current
market expectations, the Company's objective for growth in net sales for fiscal
1999 over fiscal 1998 is 15% to 20%.
Backlog was $7.6 million at the ends of both the most recent quarter and the
first quarter of fiscal 1998. However, the product mix of orders in backlog at
the end of the most recent quarter shifted to a higher proportion of specialized
conveying systems and processing equipment, which typically carry lower margins
than automated inspection systems.
Gross profit increased by $834,000 or 18% to $5.4 million in the three months
ended December 31, 1998 compared to $4.6 million for the first quarter in fiscal
1998. Gross profit contribution also improved to 36.4% of sales during the
quarter compared to 35.7% in the corresponding period last year. Compared to the
first quarter of fiscal 1998, the increases in gross margin in the more recent
period resulted principally from decreased manufacturing and product costs as
7
<PAGE>
percentages of sales for the Company's European manufactured specialized
conveying systems and for its domestically produced automated inspection
systems. These margin improvements were generally due to increased production
volumes and the resulting favorable leverage effect upon manufacturing overhead
expenses. Due to these increased volumes, increased gross margins were achieved
in spite of a shift in the mix of shipments between the corresponding periods
toward product lines that typically have lower margins. Additionally, the
improved gross margin benefited from decreased warranty and product
installation/startup expenses during the most recent quarter. For fiscal 1999,
the Company's objective is to improve gross margins to a range of between 38%
and 41% of net sales compared to 36% in fiscal 1998.
Operating expenses were $4.8 million and $4.3 million for the three-month
periods ended December 31, 1998 and 1997, respectively. Selling and marketing
expenses increased by 22% to $2.4 million principally due to increased product
promotion expenses, employee benefit costs, staffing expenses and increased
travel expenses. General and administrative expenses increased by 30% to $1.6
million and principally reflected the effect of increased outside consulting
services and professional fees, increased administrative expenses related to the
Company's European operations and Year 2000 remediation expenses. The expense
levels in research and development decreased by 28% between the corresponding
periods to $835,000. This decrease in research and development expenses resulted
principally from an increased level of engineering labor and related expenses
charged to cost of sales in support of the increased production volumes of sold
systems. Management expects that, during the second quarter of fiscal 1999,
research and development expenses will increase to more typical levels; selling
and marketing expenses will continue to increase moderately over prior quarterly
levels; and general and administrative expenses will decrease from the level
incurred in the first quarter of fiscal 1999 but remain above the spending level
of the second quarter of the last fiscal year. Based upon the above, the
Company's objective for fiscal 1999 is to invest approximately 29% to 32% of net
sales in operating expenses compared to 34% invested in such expenses last year.
As a result of the increase in gross profit margins and the increase in
operating expenses, the results of operations for the three months ended
December 31, 1998 was net earnings of $424,000 compared to $174,000 for the
three months ended December 31, 1997. Net earnings were 2.9% and 1.4% of net
sales in the two periods, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended December 31, 1998, net cash used in operating
activities totaled $2.0 million compared to net cash provided by operating
activities totaling $1.8 million in the corresponding period in fiscal 1998. An
increase of $2.9 million in trade accounts receivable balances resulting from
the increase in revenues in the most recent period was the primary contributor
to the increase in net cash used by operating activities during the first
quarter of fiscal 1999 compared to the corresponding 1998 period. Net cash
resources totaling $285,000 were also used to fund the acquisition of capital
8
<PAGE>
equipment in the most recent quarter compared to $164,000 in the corresponding
quarter last year. At December 31, 1998, the Company had no material commitments
for capital expenditures.
The Company's cash flows from financing activities for the three months ended
December 31, 1998 were principally affected by the repayments of long-term debt
totaling $101,000, compared to a net increase of $335,000 in consolidated
long-term debt in the corresponding quarter in fiscal 1998. Proceeds from the
issuance of common stock during the three-month period in fiscal 1999 under the
Company's employee stock option and stock purchase plans totaled $21,000
compared to $48,000 in the corresponding quarter last year.
During the three-month period ended December 31, 1998, working capital increased
by $694,000 to $19.6 million from the amount at September 30, 1998. Trade
accounts receivable increased by $2.9 million principally as a result of an
increased level of shipments during the first quarter of fiscal 1999 compared to
the fourth quarter of the fiscal 1998. Inventory increased slightly by $145,000.
Current liabilities remained substantially unchanged during the quarter.
The Company's credit facility with a domestic commercial bank provides for an
operating line of credit up to $4.0 million. At December 31, 1998, 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 $800,000, to the Company's
subsidiaries in The Netherlands. At December 31, 1998, the Company had no
borrowings under this credit facility.
The Company's operating, investing and financing activities resulted in a $2.3
million decrease in cash and cash equivalents during the three-month period. At
the end of the period, the balance of cash and cash equivalents totaled $4.0
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.
YEAR 2000 CONVERSION
The Company has initiated an enterprise-wide program to prepare its computer
systems, applications and products for the year 2000 date conversion. The
Company expects to incur internal staff costs as well as consulting expenses,
investments in capital equipment and other remediation expenditures related to
enhancements necessary to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations. The total cost of compliance and
its effect on the Company's future results of operations continues to be
determined as a part of the detailed and on-going compliance-planning program.
Management currently believes that total expenditures for the Company's year
2000 compliance program will range between $250,000 and $350,000, including both
capital equipment and operating expense. Expenditures through December 31, 1998
totaled approximately $142,000.
9
<PAGE>
The Company expects that the portion of its year 2000 compliance program that
addresses internal issues should be substantially completed by January 1999 and
contains only a moderate to low level of risk. The Company also expects to
continue its assessment of external issues related to suppliers, customers,
utilities and other third parties. These activities are expected to continue
throughout 1999 and beyond, as applicable. The Company assigns a higher level of
risk to such issues since they are outside of its immediate control. The Company
expects to implement contingency plans as the requirements for such plans are
identified. The costs, if any, for such contingency plans are expected to be
incremental to the Company's estimated year 2000 compliance program
expenditures.
THE EURO CONVERSION
On January 1, 1999, certain member countries of the European Union, including
the Netherlands, established fixed conversion rates between their existing
sovereign (legacy) currencies and the euro, leading to the adoption of the euro
by these countries as their common legal currency. The legacy currencies are
scheduled to remain legal tender in the participating countries as denominations
of the euro from the date of adoption until January 1, 2002. The Company is
currently in the early stages of assessing the effect, if any, that the adoption
of the euro by these countries will have upon its business.
The terms of sales to European and other international customers of products
manufactured by the Company's domestic operations are typically denominated in
U.S. dollars, although exceptions do occur on an individual case basis. The
Company expects that its standard terms of sales to international customers will
continue substantially in their present form. For the infrequent sales
transactions between international customers and the Company's domestic
operations which are denominated in currencies other than U.S. dollars, the
Company assesses its currency exchange risk and may enter into a currency
hedging transaction to minimize such risk. Therefore, the Company does not
believe that it should experience a material effect on its business which would
be inherently different than risks which currently exist.
The terms of sales to European customers by KEY/Superior are typically
denominated in either Dutch guilders or the respective legacy currencies of its
customers. KEY/Superior's information systems software currently accommodates
such multiple currency transactions and is expected to integrate euro
denominated transactions with relatively minor difficulty. The Company's
European subsidiary expects to implement a complete conversion to the euro in
calendar 1999, well before the January 1, 2002 deadline.
The Company's European subsidiaries maintain long-term credit facilities with a
Dutch bank and also long-term facility and equipment leases, all of which
currently specify periodic debt service or lease payments denominated in Dutch
guilders. Although the Company expects modifications to such agreements will
occur within calendar 1999, there can be no assurance that such modifications
will be accomplished within such time frame or that the interest rates or other
terms of such agreements will be unaffected.
10
<PAGE>
PART I. FINANCIAL INFORMATION
Item 3. Quantitative And Qualitative Disclosure About Market Risk
The Company has assessed its exposure to market risks for its financial
instruments and has determined that its exposures to such risks are not
material.
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, 1998.
11
<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 11, 1999 /s/ THOMAS C. MADSEN
------------------------------------
Thomas C. Madsen,
President and Chief Executive Officer
Date: February 11, 1999 /s/ STEVEN D. EVANS
------------------------------------
Steven D. Evans,
Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<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, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,013
<SECURITIES> 0
<RECEIVABLES> 10,540
<ALLOWANCES> (606)
<INVENTORY> 12,828
<CURRENT-ASSETS> 28,624
<PP&E> 20,137
<DEPRECIATION> (10,793)
<TOTAL-ASSETS> 39,776
<CURRENT-LIABILITIES> 8,981
<BONDS> 1,024
0
0
<COMMON> 9,128
<OTHER-SE> 20,643
<TOTAL-LIABILITY-AND-EQUITY> 39,776
<SALES> 14,819
<TOTAL-REVENUES> 14,876
<CGS> 9,429
<TOTAL-COSTS> 9,429
<OTHER-EXPENSES> 4,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 643
<INCOME-TAX> 219
<INCOME-CONTINUING> 424
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 424
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
