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, 1999
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, 2000 was 4,720,460 shares.
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed consolidated balance sheets, December 31, 1999
(unaudited) and September 30, 1999...............................3
Condensed unaudited consolidated statements of earnings for the
three months ended December 31, 1999 and 1998 ...................4
Condensed unaudited consolidated statements of cash flows for
the three months ended December 31, 1999 and 1998................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..........12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................12
SIGNATURES....................................................................13
2
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 (UNAUDITED) AND SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
1999 1999
---------------------- ----------------------
(in thousands)
<S> <C> <C>
Assets
- ----------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 7,733 $ 5,419
Short-term investments 1,496 984
Trade accounts receivable, net 9,266 10,762
Inventories:
Raw materials 5,139 6,202
Work-in-process and sub-assemblies 5,688 5,332
Finished goods 3,148 3,084
-------- --------
Total inventories 13,975 14,618
Other current assets 1,949 2,231
-------- --------
Total current assets 34,419 34,014
Property, plant and equipment, net 8,180 8,582
Other assets 1,887 1,824
-------- --------
Total $44,486 $44,420
======== ========
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------
Current liabilities:
Accounts payable $ 3,325 $ 2,753
Accrued payroll liabilities and commissions 2,518 3,801
Income tax payable 667 507
Other accrued liabilities 2,426 2,141
Customers' deposits 2,075 1,535
Short-term borrowings and debt 297 304
-------- --------
Total current liabilities 11,308 11,041
Long-term debt 611 722
Total shareholders' equity 32,567 32,657
-------- --------
Total $44,486 $44,420
======== ========
See notes to condensed unaudited consolidated financial statements.
</TABLE>
3
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
---------------- ----------------
(in thousands, except per share data)
<S> <C> <C>
Net sales $15,079 $14,819
Cost of sales 9,648 9,429
-------- --------
Gross profit 5,431 5,390
Operating expenses:
Selling 2,948 2,363
Research and development 1,205 835
General and administrative 1,279 1,575
-------- --------
Total operating expenses 5,432 4,773
-------- --------
Income (loss) from operations (1) 617
Other income 135 26
-------- --------
Earnings before income taxes 134 643
Income tax expense 44 219
-------- --------
Net earnings $ 90 $ 424
======== ========
Net earnings per common share - basic $ .02 $ .09
======== ========
Net earnings per common share - diluted $ .02 $ .09
======== ========
Shares used in per share calculation - basic 4,714 4,702
======== ========
Shares used in per share calculation - diluted 4,717 4,702
======== ========
See notes to condensed unaudited consolidated financial statements.
</TABLE>
4
<PAGE>
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
--------------- --------------
(in thousands)
<S> <C> <C>
Net cash provided by (used in) operating activities $3,177 ($1,955)
Cash flows from investing activities:
Purchase of short-term investments (512) -
Additions to property, plant and equipment (297) (285)
-------- --------
Net cash used in investing activities (809) (285)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (73) (101)
Proceeds from issuance of common stock 19 21
-------- --------
Net cash used in financing activities (54) (80)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,314 (2,320)
Cash and cash equivalents, beginning of the year 5,419 6,333
-------- --------
Cash and cash equivalents, end of period $7,733 $4,013
======== ========
Supplemental information:
Cash paid during the period for interest $ 18 $ 30
Cash paid (refunded) during the period for income taxes $ (84) $ 206
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, 1999. The results of operations for the three-month period
ended December 31, 1999 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, 1999 and the results of its operations
and its cash flows for the three-month periods ended December 31, 1999 and
1998.
The balance sheet at September 30, 1999 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
The Company's consolidated comprehensive income (loss) was ($108,000) and
$435,000 for the three months ended December 31, 1999 and 1998,
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.
6
<PAGE>
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
ARE DETAILED IN EXHIBIT 99.1 TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED
WITH THE SEC IN DECEMBER 1999 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, 1999, net earnings were $90,000 or
$.02 per share on net sales of $15.1 million compared $424,000 or $.09 per share
on net sales of $14.8 million for the corresponding period in fiscal 1999. Net
sales increased approximately 2% due principally to increased sales of spare
parts and maintenance services. This increase was partially offset by decreased
sales of products in the specialized conveying systems product group to European
customers, which had been particularly strong in the corresponding period in
fiscal 1999. Sales of automated inspection systems in the first quarter of
fiscal 2000 were comparable to the same period last year. Sales to non-European
international customers increased by approximately 57% in the first quarter of
fiscal 2000 over the same period last year. Automated inspection systems
provided a significant contribution to this increase. The Company's current
expectation for fiscal 2000 sales growth is in the range of 10% to 15% for its
existing products and markets. The Company is actively pursuing an acquisition
strategy to augment its expected internal growth rate.
Backlog at December 31, 1999 increased 47% to $11.2 million compared to $7.6
million at the end of the first quarter of fiscal 1999. All product groups,
other than spare parts, contributed to the increase in backlog at the end of the
most recent quarter. While backlog for the automated inspection systems product
group had the largest increase in the more recent period compared to the end of
the first quarter of last year, backlog for third party supplied equipment,
which typically carries lower margins, also increased significantly.
Gross profit increased by $41,000, or slightly less than 1%, to $5.43 million in
the three months ended December 31, 1999 compared to $5.39 million for the first
quarter in fiscal 1999. Gross profit contribution decreased to 36.0% of sales
during the quarter compared to 36.4% in the corresponding period last year.
Compared to the first quarter of fiscal 1999, the modest decrease in gross
profit contribution resulted principally from lower margins, as a percentage of
sales, for automated inspection systems and spare parts partially offset by
improved margins in the specialized conveying systems product line. While total
sales of automated inspection systems increased only slightly between the
corresponding periods, the mix of Tegra systems sold in the more recent fiscal
quarter included an increased volume of monochromatic systems compared to
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
the corresponding period last year. Monochromatic systems typically have lower
selling prices and gross margins than do color or multi-spectral systems. Gross
margins on automated inspection systems and spare parts sold to European
customers were also unfavorably affected by a stronger exchange rate for the
U.S. dollar relative to the euro, which added price pressures to an increasingly
competitive European market. Additionally, gross profit benefited from decreased
warranty expenses during the most recent quarter. For fiscal 2000, the Company's
objective is to maintain or improve gross margins compared to 38% in fiscal
1999.
Operating expenses were $5.4 million and $4.8 million for the three-month
periods ended December 31, 1999 and 1998, respectively. Selling and marketing
expenses increased by $585,000 or 25% to $2.9 million principally due to
increased product promotion and advertising expenses, staffing expenses and
employee benefit costs. The expense levels in research and development increased
by 44% between the corresponding periods to $1.2 million. This increase in
research and development resulted principally from an increased level of
expenses related to the introduction of three new specialized conveying systems
and the upcoming introduction of a new optical inspection product for the french
fry industry. General and administrative expenses decreased by 19% to $1.3
million and principally reflected the effect of decreased outside consulting
services and other expenses related to the Company's European operations and
decreased Year 2000 remediation expenses compared to the corresponding period
last year. The Company's expectation for fiscal 2000 is that it will invest
approximately 29% to 32% of net sales in operating expenses compared to 31%
invested in such expenses last year.
As a result of the modest increase in gross profits, offset by the larger
increase in operating expenses, the results for the three months ended December
31, 1999 were a loss from operations of $1,000 compared to earnings from
operations of $617,000 for the three months ended December 31, 1998. Other
income for the most recent quarter increased to $135,000 compared to $26,000 for
the same period last year. As a result, the Company realized net earnings of
$90,000 compared to net earnings of $424,000 for the three months ended December
31, 1998. Net earnings were 0.6% and 2.9% of net sales in the two periods,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended December 31, 1999, net cash provided by
operating activities totaled $3.2 million compared to net cash used in operating
activities totaling $2.0 million in the corresponding period of the prior fiscal
year. Decreases of $1.4 million and $516,000 in trade accounts receivable and
inventories balances, respectively, were primary contributors to the increase in
net cash provided by operating activities during the first quarter of fiscal
2000 compared to the corresponding fiscal 1999 period.
Cash flows from investing activities included $512,000 used to purchase
short-term investments during the quarter ended December 31, 1999. No purchases
of such short-term investments occurred in the corresponding period in fiscal
1999. Net cash resources totaling $297,000 were also used to fund the
acquisition of capital equipment in the most recent quarter compared to
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
$285,000 in the corresponding quarter last year. At December 31, 1999, the
Company had no material commitments for capital expenditures.
The Company's cash flows from financing activities for the three months ended
December 31, 1999 were principally affected by the repayment of long-term debt
totaling $73,000 compared to repayment of $101,000 in the corresponding quarter
in fiscal 1999. Proceeds from the issuance of common stock during the
three-month period in fiscal 2000 under the Company's employee stock option and
stock purchase plans totaled $19,000 compared to $21,000 in the corresponding
quarter last year.
During the three-month period ended December 31, 1999, working capital increased
by $138,000 to $23.1 million from the amount at September 30, 1999. Trade
accounts receivable decreased by $1.5 million principally as a result of the
collection during the first quarter of fiscal 2000 of the receivables resulting
from the record level of shipments experienced in the fourth quarter of fiscal
1999. Inventories decreased by $643,000 principally as a result of decreases in
raw material inventories. Current liabilities increased by the net amount of
$267,000 during the quarter, including increases of $572,000 in accounts
payable, $540,000 in customers' deposits and $445,000 in income taxes payable
and other accrued liabilities. The increases in these current liabilities were
partially offset by a decrease of $1.3 million in accrued payroll and commission
liabilities resulting principally from the payment of profit sharing, management
incentive bonuses and commissions incurred in fiscal 1999.
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, 1999, 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 $685,000, to the Company's
subsidiaries in The Netherlands. At December 31, 1999, the Company had no
borrowings under this credit facility.
The Company's operating, investing and financing activities resulted in a $2.3
million increase in cash and cash equivalents during the three-month period
ended December 31, 1999. At the end of the period, the balance of cash and cash
equivalents totaled $7.7 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 successfully completed an enterprise-wide program to prepare its
computer systems, applications and products for the year 2000 date conversion
with no effect on customers or disruption to business operations. The Company
incurred internal staff costs as well as consulting expenses, investments in
capital equipment and other remediation expenditures related to enhancements
necessary to achieve the year 2000 date conversion totaling
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
approximately $190,000 as of December 31, 1999. Subsequent to the rollover to
the year 2000, the Company has experienced a small number of minor year 2000
related issues in a portion of its business computer systems and applications.
Management expects that these issues will be successfully remediated with no
disruption to business operations, although there can be no assurance that
presently undetected year 2000 problems will not arise. Management currently
believes that total expenditures for the Company's year 2000 compliance program
will range between $200,000 and $210,000, including both capital equipment and
operating expense.
During the course of its year 2000 assessment program, the Company identified
its supplier base as a primary third-party risk element. In that regard,
management assessed the year 2000 compliance status of the sources of supply for
its raw material and purchased component inventories. This assessment indicated
that the Company should purchase and stockpile selected inventory components, as
a contingency measure, in advance of their typical delivery lead times.
Consequently, the Company placed orders with its vendors for inventory valued at
approximately $750,000. Of this amount, approximately $625,000 had been
delivered to the Company as of December 31, 1999. The Company also issued
purchase orders for additional inventory in the approximate amount of $350,000
which was to be stocked and maintained by selected key vendors as buffer
contingency stock. As of the date of the filing of this document, the Company
has experienced no delays or interruptions in deliveries from its supplier base
attributable to year 2000 issues.
The Company's year 2000 assessment program included thorough testing of all
equipment manufactured by Key Technology that was identified as being
potentially affected by the year 2000 rollover. As of the filing date of this
document, the Company has received no reports from customers of any year 2000
related problems with Key Technology equipment.
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
continues its assessment of 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 have typically been
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, other than those in Europe, will continue substantially in their
present form. However, the Company does expect to increasingly price and
denominate its products sold to European customers in euros. For 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 currency hedging
transactions to minimize such risk. At December 31, 1999, the Company was not a
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
party to any currency hedging transaction. The Company does not believe that it
should experience a material effect on its business as a result of the euro
conversion that would be inherently different than the risks that currently
exist.
The terms of sales to European customers by KEY/Superior, the Company's European
subsidiary, 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 began implementing a conversion of its business
systems to the euro concurrent with the start of the Company's fiscal year 2000,
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. It is the Company's current understanding that no modifications to
these agreements will be required since the guilder to euro conversion rate has
been fixed and no other changes are expected in the other terms of the
respective agreements.
11
<PAGE>
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 exposure to such risks is not material.
Part II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(27.1)Financial Data Schedule for the three-month period ended
December 31, 1999.
(b) Report on Form 8-K
No Current Reports on Form 8-K were filed during the three
months ended December 31, 1999.
12
<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, 2000 /s/ THOMAS C. MADSEN
-------------------------------------
Thomas C. Madsen,
President and Chief Executive Officer
Date: February 11, 2000 /s/ TED R. SHARP
--------------------------------
Ted R. Sharp,
Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<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, 1999 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-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,733
<SECURITIES> 1,496
<RECEIVABLES> 9,596
<ALLOWANCES> (330)
<INVENTORY> 13,975
<CURRENT-ASSETS> 34,419
<PP&E> 20,924
<DEPRECIATION> (12,744)
<TOTAL-ASSETS> 44,486
<CURRENT-LIABILITIES> 11,308
<BONDS> 611
0
0
<COMMON> 9,202
<OTHER-SE> 23,365
<TOTAL-LIABILITY-AND-EQUITY> 44,486
<SALES> 15,079
<TOTAL-REVENUES> 15,232
<CGS> 9,648
<TOTAL-COSTS> 9,648
<OTHER-EXPENSES> 5,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18
<INCOME-PRETAX> 134
<INCOME-TAX> 44
<INCOME-CONTINUING> 90
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
