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, 2003
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
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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
----- ------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
The number of shares outstanding of the Registrant's common stock, no par
value, on January 31, 2004 was 4,868,139 shares.
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed unaudited consolidated balance sheets, December 31, 2003
and September 30, 2003......................................................................3
Condensed unaudited consolidated statements of operations for the
three months ended December 31, 2003 and 2002...............................................4
Condensed unaudited consolidated statements of cash flows for
the three months ended December 31, 2003 and 2002..........................................5
Notes to condensed unaudited consolidated financial statements..................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................16
Item 4. Controls and Procedures........................................................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................17
SIGNATURES.......................................................................................................18
EXHIBIT INDEX....................................................................................................19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
December 31, September 30,
2003 2003
------------ -------------
(in thousands)
Assets
- ----------------------------------------
Current assets:
Cash and cash equivalents $ 7,398 $ 6,442
Trade accounts receivable, net 9,210 9,479
Inventories:
Raw materials 7,002 6,746
Work-in-process and sub-assemblies 4,983 5,383
Finished goods 1,695 1,839
----------- -----------
Total inventories 13,680 13,968
Other current assets 3,040 2,997
----------- -----------
Total current assets 33,328 32,886
Property, plant and equipment, net 5,362 5,503
Deferred income taxes 735 768
Intangibles and other assets, net 11,633 12,058
----------- -----------
Total $ 51,058 $ 51,215
=========== ===========
Liabilities and Shareholders' Equity
- ----------------------------------------
Current liabilities:
Accounts payable 1,933 1,587
Accrued payroll liabilities and
commissions 2,990 4,547
Accrued customer support and warranty
costs 1,122 1,058
Other accrued liabilities 2,584 2,604
Customers' deposits 4,542 4,798
Current portion of long-term debt 1,097 1,066
----------- -----------
Total current liabilities 14,268 15,660
Long-term debt 3,038 3,249
Mandatorily redeemable preferred stock
and warrants 1,836 1,882
Deferred income taxes 200 205
Total shareholders' equity 31,716 30,219
----------- -----------
Total $ 51,058 $ 51,215
=========== ===========
See notes to condensed unaudited consolidated financial statements.
3
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
--------------- ---------------
(in thousands, except per share data)
Net sales $ 18,743 $ 15,395
Cost of sales 11,687 9,090
-------------- --------------
Gross profit 7,056 6,305
Operating expenses:
Selling 3,321 2,681
Research and development 1,137 1,209
General and administrative 1,571 1,586
Amortization of intangibles 331 331
-------------- --------------
Total operating expenses 6,360 5,807
Earnings from operations 696 498
Other income (expense) 74 (163)
-------------- --------------
Earnings before income taxes 770 335
Income tax expense 265 114
-------------- --------------
Net earnings $ 505 $ 221
============== ==============
Earnings per share
- - basic $ 0.10 $ 0.05
============== ==============
- - diluted $ 0.10 $ 0.04
============== ==============
Shares used in per share
calculations - basic 4,816 4,767
Shares used in per share
calculations - diluted 5,188 4,983
See notes to condensed unaudited consolidated financial statements.
4
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
(in thousands)
Net cash provided by operating activities $ 718 $ 3,004
Cash flows from investing activities:
Additions to property, plant and equipment (153) (95)
---------- ----------
Net cash used in investing activities (153) (95)
---------- ----------
Cash flows from financing activities:
Repayment of short-term borrowings - (3,127)
Additions to long-term debt - 500
Repayment of long-term debt (243) (782)
Redemption of preferred stock (39) (910)
Redemption of warrants (7) (48)
Proceeds from issuance of common stock 617 11
---------- ----------
Net cash provided by (used in) financing
activities 328 (4,356)
---------- ----------
Effect of exchange rates on cash 63 167
Net increase (decrease) in cash and cash
equivalents 956 (1,280)
Cash and cash equivalents, beginning of the
period 6,442 1,707
---------- ----------
Cash and cash equivalents, end of the
period $ 7,398 $ 427
========== ==========
Supplemental information:
Cash paid during the period for interest $ 54 $ 170
Cash paid (refunded) during the period for
income taxes $ 48 $ (37)
See notes to condensed unaudited consolidated financial statements.
5
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 accounting principles generally
accepted in the United States of America (GAAP) 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, 2003. The
results of operations for the three-month period ended December 31, 2003
are not necessarily indicative of the operating results 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, 2003 and the results of its operations
and its cash flows for the three-month periods ended December 31, 2003 and
2002.
2. Stock Compensation
The Company has elected to account for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25 ("APB 25"). If the Company
had accounted for its stock-based compensation plans under Statement of
Financial Accounting Standards ("SFAS") No. 123, the Company's net earnings
and earnings per share would approximate the pro forma disclosures below
(in thousands, except per share amounts):
Three months ended
-----------------------------------------------
December 31, 2003 December 31, 2002
---------------------- -----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ----------
Net earnings $ 505 $ 414 $ 221 $ 122
Earnings per share
- basic $ 0.10 $ 0.09 $ 0.05 $ 0.03
- diluted $ 0.10 $ 0.08 $ 0.04 $ 0.02
3. Earnings per share
The calculation of the weighted average outstanding shares used in earnings
per share ("EPS") calculations is as follows (in thousands):
6
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Three months ended
------------------------------------
December 31, 2003 December 31, 2002
------------------ -----------------
Weighted average shares
outstanding:
- basic 4,816 4,767
Assumed conversion of:
Common stock options 271 74
Mandatorily redeemable
preferred stock 101 142
------------------ -----------------
- diluted 5,188 4,983
The weighted average diluted shares includes only common stock equivalents
that are not anti-dilutive to reported EPS. Options to purchase 160,300
shares of common stock and 34,882 common shares from assumed conversion of
warrants for the quarter ended December 31, 2003, and 641,433 and 60,285,
respectively, for the quarter ended December 31, 2002 were not included in
the computation of diluted EPS because the options were anti-dilutive under
the treasury-stock method.
4. Income taxes
The provision for income taxes is based on the estimated effective income
tax rate for the year.
5. Comprehensive income
The Company's consolidated comprehensive income was $762,000 and $577,000
for the three months ended December 31, 2003 and 2002, respectively. The
differences between the net earnings reported in the condensed unaudited
consolidated statements of operations and the consolidated comprehensive
net income for the periods consisted of changes in foreign currency
translation adjustments.
6. Product warranties
As described in the Company's "Application of Critical Accounting Policies"
section of its Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Company's products are covered by warranty
plans that extend between 90 days and 2 years, depending upon the product
and contractual terms of sale. The Company establishes allowances for
warranties on an aggregate basis for specifically identified, as well as
anticipated, warranty claims based on contractual terms, product conditions
and actual warranty experience by product line.
A reconciliation of the changes in the Company's allowances for warranties
for the three months ended December 31, 2003 and 2002 (in thousands) is as
follows:
7
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Three months ended
-----------------------------------
December 31, 2003 December 31, 2002
------------------ -----------------
Beginning balance $ 837 $ 869
Warranty costs incurred (523) (460)
Warranty expense accrued 487 371
Translation adjustments 17 10
----------------- ----------------
Ending balance $ 818 $ 790
================= ================
7. Future accounting changes
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which is effective for fiscal years ending after December 31,
2002. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company has adopted the
disclosure requirements. The Company has elected not to implement any
transitional method of accounting for stock-based compensation. The Company
will defer action until the FASB issues its final definitive pronouncement
on this issue, which is expected sometime in 2004. Until then, the Company
will continue to account for stock-based compensation in accordance with
APB 25.
8. Use of estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements set forth below may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to differ from those expressed or implied by the forward-looking
statements. With respect to the Company, the following factors, among others,
could cause actual results or outcomes to differ materially from current
expectations:
o the effect of adverse economic conditions in markets served by the Company
and their impact on the financial capacity of customers to purchase capital
equipment;
o competition and advances in technology which may adversely affect sales and
prices;
o the inability to maintain or expand international operations, which may
adversely affect the Company's sales;
o fluctuations in foreign currency exchange rates, which may affect results
of operations;
o the limited availability and possible cost fluctuations of materials used
in the Company's products;
o the inability to protect the Company's intellectual property, which may
adversely affect the Company's competitive advantage;
o intellectual property-related litigation expenses and other costs resulting
from infringement claims asserted against the Company or its customers by
third parties, which may adversely affect the Company's results of
operations and its customer relations; and
o the other factors discussed in Exhibit 99.1 to the Company's Annual Report
on Form 10-K electronically filed with the SEC in December 2003, which
exhibit is hereby incorporated by reference.
Given these uncertainties, readers are cautioned not to place undue reliance on
the forward-looking statements. The Company disclaims any obligation
subsequently to revise or update forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Overview
- --------
The Company's results for the three-month period ending December 31, 2003 were
favorable compared to the corresponding quarter last year in both revenue and
net income. Net sales for the first quarter of fiscal 2004 totaled $18.7
million, compared to $15.4 million recorded in the same quarter last year, and
net earnings for the quarter increased to $505,000 compared with net earnings of
$221,000 in the same period one year ago. Orders from international customers
during the first quarter were strong and totaled approximately 49% of the total
orders for the December 2003 quarter compared with 35% for the prior year
quarter.
The October through December period is typically when the Company's customers in
the food industry, particularly seasonal processors located in the northern
hemisphere, are between processing seasons and are planning for capital projects
for the upcoming year. New orders from these customers normally occur during the
Company's second and third fiscal quarters resulting in strong shipments for
those quarters. The Company's business in the first fiscal quarter of 2004
reflected a seasonal pattern of lower net sales and orders consistent with past
years.
The Company's customer base is continuing to invest in capital equipment as it
has done for the last several quarters. The widely publicized shift in the food
industry away from french fries has not materially affected the Company's
business to date.
9
The balance sheet reflects growth in the Company's cash position, control over
credit and accounts receivable, emphasis on inventory management, and a further
reduction of debt. The Company is in compliance with all bank covenants. The
Company expects that cash flows from operations plus currently available
operating credit lines will be sufficient to fund the current year's cash needs.
Application of Critical Accounting Policies
- -------------------------------------------
The Company has identified its critical accounting policies, the application of
which may materially affect the financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require management judgment to make estimates and assumptions in measuring,
at a specific point in time, events which will be settled in the future. The
critical accounting policies, judgments and estimates, which management believes
have the most significant effect on the financial statements are set forth
below:
o Revenue recognition
o Allowances for doubtful accounts
o Valuation of inventories
o Long-lived assets
o Allowances for warranties
o Accounting for income taxes
Management has discussed the development, selection and related disclosures of
these critical accounting estimates with the audit committee of the Company's
board of directors.
Revenue Recognition. The Company recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred or services have been provided, the
sale price is fixed or determinable, and collectibility is reasonably assured.
Additionally, the Company sells its goods on terms which transfer title and risk
of loss at a specified location, typically shipping point, port of loading or
port of discharge, depending on the final destination of the goods. Accordingly,
revenue recognition from product sales occurs when all factors are met,
including transfer of title and risk of loss, which occurs either upon shipment
by the Company or upon receipt by customers at the location specified in the
terms of sale. Revenue earned from services is recognized ratably over the
contractual period or as the services are performed. If all conditions of
revenue recognition are not met, the Company defers revenue recognition. In the
event of revenue deferral, the sale value is not recorded as revenue to the
Company, accounts receivable are reduced by any amounts owed by the customer,
and the cost of the goods or services deferred is carried in inventory. The
Company believes that revenue recognition is a "critical accounting estimate"
because the Company's terms of sale vary significantly, and management exercises
judgment in determining whether to defer revenue recognition. Such judgments may
materially affect net sales for any period. Management exercises judgment within
the parameters of accounting principles generally accepted in the United States
of America (GAAP) in determining when contractual obligations are met, title and
risk of loss are transferred, the sales price is fixed or determinable and
collectibility is reasonably assured. At December 31, 2003, the Company had
deferred $0.7 million of revenue compared to $1.1 million at September 30, 2003.
Allowances for doubtful accounts. The Company establishes allowances for
doubtful accounts for specifically identified, as well as anticipated, doubtful
accounts based on credit profiles of customers, current economic trends,
contractual terms and conditions, and customers' historical payment patterns.
Factors that affect collectibility of receivables include customer satisfaction
and general economic or political factors in certain countries that affect the
ability of customers to meet current obligations. The Company actively manages
its credit risk by utilizing an independent credit rating and reporting service,
by requiring certain percentages of down payment and progress payments on
significant customer projects, and by requiring secured forms of payment for
customers with uncertain credit profiles or located in certain countries. Forms
of secured payment could include irrevocable letters of credit, bank guarantees,
third-party leasing arrangements or EX-IM Bank guarantees, each utilizing
Uniform Commercial Code filings, or the like, with governmental entities where
possible. The Company believes that the accounting estimate related to
allowances for doubtful accounts is a "critical accounting estimate" because it
requires management judgment in making assumptions relative to customer or
general economic factors that are outside the Company's control. As of December
31, 2003, the balance sheet included allowances for doubtful accounts of
$579,000. Actual charges to the allowance for doubtful accounts for the
three-month periods ended December 31, 2003 and 2002 were $17,000 and net
recoveries of $9,000, respectively. Accruals for bad debt expense (increases in
the allowance) for the three-month period ended December 31, 2003 and 2002 were
$30,000 and $10,000, respectively. If the Company experiences actual bad debt
expense in excess of estimates, or if estimates are adversely adjusted in future
periods, the carrying value of accounts receivable would decrease and charges
for bad debts would increase, resulting in decreased net earnings.
10
Valuation of inventories. Inventories are stated at the lower of cost or market.
The Company's inventory includes purchased raw materials, manufactured
components, purchased components, work in process, finished goods and
demonstration equipment. Provisions for excess and obsolete inventories are made
after periodic evaluation of historical sales, current economic trends,
forecasted sales, estimated product lifecycles and estimated inventory levels.
The factors that contribute to inventory valuation risks are the Company's
purchasing practices, electronic component obsolescence, accuracy of sales and
production forecasts, introduction of new products, product lifecycles and the
associated product support. The Company actively manages its exposure to
inventory valuation risks by maintaining low safety stocks and minimum purchase
lots, utilizing just in time purchasing practices, managing product end-of-life
issues brought on by aging components or new product introductions, and by
utilizing such inventory minimization strategies as vendor-managed inventories.
The Company believes that the accounting estimate related to valuation of
inventories is a "critical accounting estimate" because it is susceptible to
changes from period to period due to the requirement for management to make
estimates relative to each of the underlying factors ranging from purchasing to
sales to production to after-sale support. At December 31, 2003, cumulative
inventory adjustments to lower of cost or market totaled $2.6 million compared
to $2.5 million for the year ended September 30, 2003. If actual demand, market
conditions or product lifecycles are adversely different from those estimated by
management, inventory adjustments to lower market values would result in a
reduction to the carrying value of inventory, an increase in inventory
write-offs, a decrease to gross margins and may adversely affect the borrowing
base available under the Company's credit facilities.
Long-lived assets. The Company regularly reviews all of its long-lived assets,
including property, plant and equipment, goodwill and other intangible assets,
for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. If the total of future undiscounted cash
flows is less than the carrying amount of assets, an impairment loss, if any,
based on the excess of the carrying amount over the fair value of the assets, is
recorded. As of December 31, 2003, the Company held $16.3 million of property,
plant and equipment, goodwill and other intangible assets, net of depreciation
and amortization. There were no changes in the Company's long-lived assets that
would result in an adjustment of the carrying value for these assets. Estimates
of future cash flows arising from the utilization of these long-lived assets and
estimated useful lives associated with the assets are critical to the assessment
of fair values. The Company believes that the accounting estimate related to
long-lived assets is a "critical accounting estimate" because: (1) it is
susceptible to change from period to period due to the requirement for
management to make assumptions about future sales and cost of sales generated
throughout the lives of several product lines over extended periods of time; and
(2) the potential effect that recognizing an impairment could have on the assets
reported on the Company's balance sheet and the potential material adverse
effect on reported earnings or loss. Changes in these estimates could result in
a determination of asset impairment, which would result in a reduction to the
carrying value, a charge to income from continuing operations and a reduction to
net earnings in the affected period, and may affect the Company's ability to
meet the tangible net worth covenant of its credit facilities.
11
Allowances for warranties. The Company's products are covered by warranty plans
that extend between 90 days and 2 years, depending upon the product and
contractual terms of sale. The Company establishes allowances for warranties for
specifically identified, as well as anticipated, warranty claims based on
contractual terms, product conditions and actual warranty experience by product
line. Company products include both manufactured and purchased components, and
therefore warranty plans include third-party sourced parts which may not be
covered by the third-party manufacturer's warranty. Ultimately, the warranty
experience of the Company is directly attributable to the quality of its
products. The Company actively manages its quality program by using a structured
product introduction plan, process monitoring techniques utilizing statistical
process controls, vendor quality metrics, a quality training curriculum for
every employee and feedback loops to communicate warranty claims to designers
and engineers for remediation in future production. Warranty expense has varied
widely in the past due to such factors as significant new product introductions
containing defects and design errors on individual projects. The Company
believes that the accounting estimate related to allowances for warranties is a
"critical accounting estimate" because: (1) it is susceptible to significant
fluctuation period to period due to the requirement for management to make
assumptions about future warranty claims relative to potential unknown issues
arising in both existing and new products, which assumptions are derived from
historical trends of known or resolved issues; and (2) risks associated with
third-party supplied components being manufactured using processes that the
Company does not control. As of December 31, 2003, the balance sheet included
warranty reserves of $818,000, while $523,000 of warranty charges were incurred
during the three-month period then ended, compared to warranty reserves of
$790,000 as of December 31, 2002 and warranty charges of $460,000 for the
three-month period ended December 31, 2002. If the Company's actual warranty
costs are higher than estimates, warranty plan coverages are adversely varied,
or estimates are adversely adjusted in future periods, reserves for warranty
would decrease, warranty expense would increase and gross margins would
decrease.
Accounting for income taxes. The Company's provision for income taxes and the
determination of the resulting deferred tax assets and liabilities involves a
significant amount of management judgment. The quarterly provision for income
taxes is based partially upon estimates of pre-tax financial accounting income
for the full year and is affected by various differences between financial
accounting income and taxable income. Judgment is also applied in determining
whether the deferred tax assets will be realized in full or in part. In
management's judgment, when it is more likely than not that all or some portion
of specific deferred tax assets such as foreign tax credit carryovers will not
be realized, a valuation allowance must be established for the amount of the
deferred tax assets that are determined not to be realizable. There was no
valuation allowance at December 31, 2003, due to anticipated utilization of all
the deferred tax assets. The Company believes that the accounting estimate
related to income taxes is a "critical accounting estimate" because it relies on
significant management judgment in making assumptions relative to temporary and
permanent timing differences of tax effects, estimates of future earnings,
prospective application of changing tax laws in multiple jurisdictions, and the
resulting ability to utilize tax assets at those future dates. If the Company's
operating results were to fall short of expectations, thereby affecting the
likelihood of realizing the deferred tax assets, judgment would have to be
applied to determine the amount of the valuation allowance required to be
included in the financial statements established in any given period.
Establishing or increasing a valuation allowance would reduce the carrying value
of the deferred tax asset, increase tax expense and reduce net earnings.
Currently, Congress is deliberating legislative action to replace the current
Extra Territorial Income Exclusion Act of 2000 ("ETI"), due to rulings by the
World Trade Organization that it was an illegal export subsidy. Potential
legislation could adversely affect the Company by eliminating or reducing the
ETI exclusions, thereby increasing its effective tax rate or changing corporate
tax rates which could require revaluation of the Company's deferred tax
benefits. Tax benefits to the Company as part of this legislation could
potentially offset some, if not all, of these adverse consequences, although not
necessarily in the same fiscal year.
12
Results of Operations
- ---------------------
For the three months ended December 31, 2003 and 2002
Net sales increased 21.7% to $18.7 million for the three-month period ended
December 31, 2003, up $3.3 million from $15.4 million recorded in the same
quarter last year. The sales mix for the first quarter contained fewer automated
inspection systems, but showed growth in process systems as well as stronger
sales from the Company's European location. Sales of tobacco sorters into Asia
along with increased parts and service business contributed to the quarter's
sales growth.
New orders received during the first quarter of fiscal 2004 totaled $18.0
million, a decrease of 4.0% from $18.8 million for the corresponding period in
fiscal 2003. A comparison of the year-over-year orders mix shows a decrease in
orders for automated inspection systems, particularly the Tegra and Optyx lines,
offset somewhat by an increase in orders for tobacco sorters. Process systems
showed a slight decrease in orders, and the parts and service business reflected
a gain over the prior year quarter.
The Company's backlog at the close of the December 31, 2003 quarter totaled
$19.5 million, a 4.9% increase from a backlog of $18.6 million at the same time
last year. Automated inspection systems represented 59% of the total backlog at
the more recent quarter-end compared to 45% one year ago, resulting in a more
favorable product mix in backlog going into the Company's second quarter.
Gross profit for the first quarter of fiscal 2004 was $7.1 million compared to
$6.3 million in the corresponding quarter last year, or 37.6% and 41.0% of net
sales, respectively. While gross profit dollars were up due to sales volume, the
weighting of sales mix toward process systems resulted in the 3.4% decrease in
gross profit.
Operating expenses were $6.4 million in the quarter ended December 31, 2003, or
33.9% of net sales, compared to $5.8 million, or 37.7% of net sales, for the
previous year quarter. Increased sales volume in the current quarter accounted
for some of the increase in dollar amount of operating expenses, plus the amount
of equipment sold through independent sales representatives caused higher
commission expense for the quarter. Additionally, the Company has increased its
investment in marketing and product management as part of a strategy to grow
revenues and expand into new market segments, contributing to higher sales and
marketing expenses for the quarter. As a percent of net sales, operating
expenses for the quarter improved 3.8% over the same quarter a year ago.
For the quarter ended December 31, 2003, other income totaled $74,000 compared
to other expense of $163,000 for the corresponding period in fiscal 2002, due
principally to reduced interest expense related to reductions of
interest-bearing debt and gains recognized in foreign currency exchange.
The Company reported net earnings of $505,000, or $0.10 per diluted share, for
the most recent quarter compared to net earnings of $221,000, or $0.04 per
diluted share, in the corresponding quarter last year.
Liquidity and Capital Resources
- -------------------------------
For the quarter ended December 31, 2003, net cash provided by operating
activities totaled $0.7 million compared with cash provided by operating
activities of $3.0 million in the corresponding period of the prior fiscal year.
The prior year's cash provided by operations contained advances from customers
of $1.6 million and growth of accounts payable of $1.9 million not repeated in
the current year quarter. During the most recent quarter, net earnings, after
adding back non-cash charges, contributed cash of $1.2 million from operating
activities. Non-cash charges consisted primarily of depreciation, amortization,
and miscellaneous accruals. Cash from operations was also provided by reductions
in trade accounts receivable and inventories of $1.1 million, plus an increase
in accounts payable and income taxes payable of $0.5 million. These
contributions to cash were partially offset by a reduction in accrued payroll
expenses of $1.6 million, advances from customers of $0.3 million, and a
reduction in other accrued liabilities totaling $0.2 million.
13
Working capital at December 31, 2003 was $19.1 million, an increase of $1.8
million since September 30, 2003, primarily due to reductions in current
liabilities during the quarter plus increases in cash and cash equivalents.
Net cash resources used in investing activities was $0.2 million in the quarter
ended December 31, 2003 compared to $0.1 million used in the comparable period a
year ago. The entire expenditures for both years' first quarters funded the
acquisition of capital goods. At December 31, 2003, the Company had no
significant commitments for capital expenditures.
Net cash provided in financing activities during the first quarter ended
December 31, 2003 totaled $0.3 million, reflecting proceeds from issuance of
common stock, as a result of stock option exercises and purchases under the
Employee Stock Purchase Plan, of $0.6 million. These proceeds were offset by
repayments of long-term debt plus redemption of preferred stock and warrants
totaling $0.3 million. This compares to net cash flows used in financing
activities of $4.4 million for the same quarter in the prior year, consisting of
repayments of short-term debt of $3.1 million, repayments of long term debt of
$0.8 million, and redemption of preferred stock and warrants of $1.0 million.
These uses of cash in financing activities were partially offset by additions to
long-term debt of $0.5 million in the quarter ended December 31, 2002.
The Company's domestic credit facility provides a credit accommodation totaling
$13.0 million, consisting of a term loan of $3.0 million, and a revolving credit
facility of up to the lesser of $10.0 million or the available borrowing base,
which is based on varying percentages of eligible accounts receivable and
inventories. The revolving credit facility matures on July 31, 2004 and the
Company expects to be able to renew the revolving credit facility at that time.
The term loan requires quarterly payments of principal of $200,000 and matures
on July 31, 2007. The term loan and revolving credit facility bear interest at
the Wall Street Journal prime rate, which was 4.00% at December 31, 2003. The
credit facility is secured by all of the United States personal property,
including patents and other intangibles, of the Company and its subsidiaries,
and contains covenants which require the maintenance of a defined debt service
ratio, a defined debt ratio, minimum working capital and current ratio, and
minimum profitability. At December 31, 2003, the Company was in compliance with
all loan covenants and had an available borrowing base of approximately $7.1
million under the revolving credit facility. At December 31, 2003, borrowings
under the term loan were $3.0 million. There were no borrowings under the
revolving credit facility.
Additionally, the Company's credit accommodation with a commercial bank in The
Netherlands provides a credit facility for its European subsidiary. This credit
accommodation totals $4.0 million and includes a term loan of $841,000, an
operating line of the lesser of $1.9 million or the available borrowing base,
which is based on varying percentages of eligible accounts receivable and
inventories, and a bank guarantee facility of $1.3 million. Unused portions of
the operating line may be used to provide an increase in the guarantee facility.
The term loan facility requires quarterly payments of principal and matures in
August 2012. It is secured by real property of the Company's European
subsidiary, while the operating line and bank guarantee facility is secured by
all of the subsidiary's personal property. The credit facility bears interest at
the bank's prime rate plus 1.75%, which at December 31, 2003 totaled 4.50%. At
December 31, 2003, the Company had borrowings under this facility of $841,000 in
term loans. Additionally, the Company had secured bank guarantees of $1.6
million under the agreement.
14
Outstanding Series B Convertible Preferred stock totaled 148,750 shares as of
December 31, 2003, and outstanding warrants totaled 34,882. Preferred stock and
warrants are redeemable upon demand and will require $1.8 million from cash flow
when presented. Presentments for preferred stock and warrants redemption have
slowed considerably, and therefore the Company expects to fund future
redemptions from operating cash flows.
The Company anticipates that the future cash flows from operations along with
currently available operating credit lines will be sufficient to fund the
current year's cash needs.
The Company's continuing contractual obligations and commercial commitments
existing on December 31, 2003 are as follows:
Payments due by period (in Thousands)
Contractual Obligations Less than 1 After 5
Total year 1-3 years 4-5 years years
- ----------------------------------------------------------------------------------------
Long-term debt * $ 3,841 $ 954 $ 1,909 $ 726 $ 252
Capital lease obligations 294 143 150 1 -
Operating leases 12,094 1,442 2,976 2,467 5,209
Warrant redemption obligations 349 349 - - -
Series B redemption obligations 1,487 1,487 - - -
-----------------------------------------------------
Total contractual cash obligations $ 18,065 $ 4,375 $ 5,035 $ 3,194 $ 5,461
=====================================================
* Includes the revolving credit line, term loan and mortgage payments on the
Company's owned facility in Europe.
At December 31, 2003 the Company had standby letters of credit totaling $2.1
million, which includes secured letters of credit under the Company's credit
facility in Europe and letters of credit securing certain self-insurance
contracts and lease commitments. The Company has no off-balance sheet
arrangements or transactions, arrangements or relationships with "special
purpose entities."
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 generally
limited to those affected by the strength of the Euro against the U.S. dollar
and to a lesser extent the Australian dollar.
The terms of sales to European customers are typically denominated in either
Euros, U.S. dollars, or to a far lesser extent, the respective legacy currencies
of its European customers. The terms of sales to customers in Australia are
typically denominated in their local currency. The Company expects that its
standard terms of sale to international customers, other than those in Europe
and Australia, will continue to be denominated in U.S. dollars. For sales
transactions between international customers, including European 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. At December 31, 2003,
the Company was not a party to any currency hedging transactions. As of December
31, 2003, management estimates that a 10% change in foreign exchange rates would
affect net income before taxes by approximately $188,000 on an annual basis as a
result of converted cash, accounts receivable and sales or other contracts
denominated in foreign currencies.
During the three-month period ended December 31, 2003, the Euro gained a net of
7% in value against the U.S. dollar. The effect of the weaker dollar on the
operations and financial results of the Company were:
o Translation adjustments of $257,000, net of income tax, were recognized as
a component of comprehensive income as a result of converting the Euro
denominated balance sheet of Key Technology B.V. into U.S. dollars.
o Foreign exchange gains of $98,000 were recognized in the other income and
expense section of the consolidated statement of operations as a result of
conversion of Euro and other foreign currency denominated receivables and
cash carried on the balance sheet of the U.S. operations, as well as the
result of the conversion of other non-functional currency receivables,
payables and cash carried on the balance sheet of the European operations.
A relatively weaker U.S. dollar on the world markets makes the Company's
U.S.-manufactured goods relatively less expensive to international customers
when denominated in U.S. dollars or potentially more profitable to the Company
when denominated in a foreign currency. A relatively weaker U.S. dollar on the
world markets, especially as measured against the Euro, may favorably affect the
Company's market and economic outlook for international sales.
Under the Company's current credit facilities, the Company may borrow at the
lender's prime rate plus between 0 and 175 basis points. At December 31, 2003,
the Company had $3.0 million of borrowings that had variable interest rates.
During the quarter then ended, the interest rate on its various credit
facilities ranged from 4.00% to 4.50%. At December 31, 2003, the interest rate
was 4.00% on its domestic credit facility and 4.50% on its European credit
facility. As of December 31, 2003, management estimated that a 100 basis point
change in the interest rate would affect net income before taxes by
approximately $30,000 on an annual basis.
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ITEM 4. CONTROLS AND PROCEDURES.
The Company's President and Chief Executive Officer and the Chief Financial
Officer have reviewed the disclosure controls and procedures relating to the
Company at December 31, 2003 and concluded that such controls and procedures
were effective to provide reasonable assurance that all material information
about the financial and operational activities of the Company was made known to
them. There were no changes in the Company's internal controls over financial
reporting during the quarter ended December 31, 2003 that materially affected,
or are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
1. Registrant's Form 8-K dated October 2, 2003 and filed with
the Securities and Exchange Commission on October 2, 2003
related to a press release announcing the receipt of
multiple orders totaling over $6.0 million.
2. Registrant's Form 8-K dated November 6, 2003 and filed with
the Securities and Exchange Commission on November 6, 2003
related to a press release regarding Key's financial results
for its fourth fiscal quarter and year ended September 30,
2003.
17
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, 2004 By /s/ Kirk W. Morton
---------------------------------------------
Kirk W. Morton,
President and Chief Executive Officer
Date: February 13, 2004 By /s/ Phyllis C. Best
---------------------------------------------
Phyllis C. Best,
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q FOR THE NINE MONTHS ENDED JUNE 30, 2003
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
- -------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
19