SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number 0-7092
RELIABILITY INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0868913
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16400 Park Row
Post Office Box 218370
Houston, Texas 77218-8370
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(281) 492-0550
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve 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 ninety days.
YES X NO
----------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,631,765 -- Common Stock -- No Par Value
as of August 6, 1999
1
RELIABILITY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
June 30, 1999
PART I - FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets:
June 30, 1999 and December 31, 1998 3-4
Consolidated Statements of Operations:
Six Months Ended June 30, 1999 and 1998 5
Three Months Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosure of Market Risk 21
PART II - OTHER INFORMATION
Item 1.
through
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. 22
Signatures 23
The information furnished in this report reflects all adjustments (none of
which were other than normal recurring accruals) which are, in the opinion of
management, necessary to a fair statement of the results of the interim periods
presented.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
June 30, December 31,
1999 1998
(unaudited)
Current assets:
Cash and cash equivalents $13,270 $15,702
Accounts receivable 2,836 2,178
Inventories 1,328 1,301
Deferred tax assets 492 572
Other current assets 626 441
------ ------
Total current assets 18,552 20,194
------ ------
Property, plant and equipment at cost:
Machinery and equipment 14,652 14,390
Building and improvements 4,980 5,023
Land 530 530
------ ------
20,162 19,943
Less accumulated depreciation 11,280 10,407
------ ------
8,882 9,536
------ ------
Assets held for sale 2,135 2,193
Other assets, net of accumulated amortization 1,274 1,323
------ ------
$30,843 $33,246
====== ======
See accompanying notes
3
RELIABILITY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1999 1998
(unaudited)
Current liabilities:
Accounts payable $ 637 $ 547
Accrued liabilities 1,612 3,045
Income taxes payable 275 335
Note payable to shareholder - 534
Current maturities on long-term debt - 274
Accrued restructuring costs 63 300
------ ------
Total current liabilities 2,587 5,035
------ ------
Deferred tax liabilities 636 634
Commitments and contingencies - -
Stockholders' equity:
Common stock, without par value;
20,000,000 shares authorized; 7,838,527
and 7,811,278 shares issued in 1999 and
1998, respectively 9,461 9,340
Retained earnings 26,003 26,081
------ ------
35,464 35,421
Less treasury stock, at cost, 1,206,762
shares in 1999 and 1998 7,844 7,844
------ ------
Total stockholders' equity 27,620 27,577
------ ------
$30,843 $33,246
====== ======
See accompanying notes
4
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six Months Ended June 30,
1999 1998
(unaudited)
Revenues $9,281 $20,623
Costs and expenses:
Cost of revenues 5,650 9,713
Marketing, general and administrative 3,042 4,378
Research and development 872 1,103
Provision for restructuring - 100
----- ------
9,564 15,294
----- ------
Operating income (loss) (283 ) 5,329
Interest income, net 324 145
----- ------
Income before income taxes 41 5,474
----- ------
Provision for income taxes:
Current 37 1,703
Deferred 82 137
----- ------
119 1,840
----- ------
Net income (loss) $ (78 ) $ 3,634
===== ======
Earnings (loss) per share:
Diluted $ (.01 ) $ .58
===== ======
Basic $ (.01 ) $ .60
===== ======
Weighted average shares:
Diluted 6,624 6,217
===== ======
Basic 6,624 6,076
===== ======
See accompanying notes
5
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended June 30,
1999 1998
(unaudited)
Revenues $4,961 $9,143
Costs and expenses:
Cost of revenues 2,891 3,850
Marketing, general and administrative 1,539 1,979
Research and development 396 489
----- -----
4,826 6,318
----- -----
Operating income 135 2,825
Interest income, net 166 101
----- -----
Income before income taxes 301 2,926
----- -----
Provision (benefit) for income taxes:
Current 155 1,005
Deferred (38 ) 74
----- -----
117 1,079
----- -----
Net income $ 184 $1,847
===== =====
Earnings per share:
Diluted $ .03 $ .30
===== =====
Basic $ .03 $ .30
===== =====
Weighted average shares:
Diluted 6,659 6,224
===== =====
Basic 6,632 6,091
===== =====
See accompanying notes
6
RELIABILITY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
1999 1998
(unaudited)
Cash flows from operating activities:
Net (loss) income $ (78 ) $ 3,634
Adjustments to reconcile net (loss) income to
cash (used) provided by operating activities:
Depreciation and amortization 1,307 943
Change in deferred tax assets and liabilities 82 137
Provision for inventory obsolescence 16 (18 )
(Gain) loss on disposal of fixed assets (31 ) 1
Provision for restructuring, net of
cash payments - 100
Increase (decrease) in operating cash flows:
Accounts receivable (658 ) 1,916
Inventories (43 ) (77 )
Other current assets (185 ) 158
Accounts payable 90 (628 )
Accrued liabilities (1,433 ) (1,496 )
Income taxes payable (60 ) 168
Cash payments charged to restructuring
reserve (100 ) -
------ ------
Total adjustments (1,015 ) 1,204
------ ------
Net cash (used) provided by
operating activities (1,093 ) 4,838
------ ------
Cash flows from investing activities:
Expenditures for property and equipment (690 ) (662 )
Proceeds from sale of equipment 31 446
Increase in other long-term assets 7 -
------ ------
Net cash (used) in investing activities (652 ) (216 )
------ ------
Cash flows from financing activities:
Payments on long-term debt (274 ) (550 )
Payment on note payable to shareholder (534 ) -
Proceeds from issuance of common and treasury
stock pursuant to stock option and employee
stock savings plans 128 397
Other (7 ) 26
------ ------
Net cash (used) by financing activities (687 ) (127 )
------ ------
Net (decrease) increase in cash (2,432 ) 4,495
Cash and cash equivalents:
Beginning of period 15,702 7,108
------ ------
End of period $13,270 $11,603
====== ======
See accompanying notes
7
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
- -----------------------
Reliability Incorporated is a United States based corporation with
operations in the United States, Singapore and Costa Rica. The Company and its
subsidiaries are principally engaged in the design, manufacture and sale of
equipment used to test and condition integrated circuits. In addition, the
Company and a subsidiary operate service facilities which condition and test
integrated circuits as a service to others. The Company's testing products are
sold to companies that manufacture semiconductor products and are shipped to
locations in the U.S., Europe, Asia and Pacific Rim countries. Services, as of
June 30, 1999, are provided principally to two customers; one in the U.S. and
one in Singapore. The Company closed a U.S. services facility in April 1998 and
acquired, in December 1998, assets of a company that provides services to
customers in Austin, Texas and Singapore. The Company currently anticipates
closing the Austin facility during the last half of 1999. Another subsidiary
manufactures and sells power sources, primarily a line of DC to DC power
converters. Power sources are sold to U.S., European and Asian based companies
that design and sell electronic equipment.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts in the consolidated financial statements for the period ended
December 31, 1998 have been reclassified to conform to the 1999 presentation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
period ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1998.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
8
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Comprehensive Income
- --------------------
The Company does not have any items of Other Comprehensive Income; thus
during the six month periods and second quarters of 1999 and 1998, total
comprehensive income (loss) amounts were the same as net income (loss).
Income Taxes
- ------------
Deferred income taxes are provided under the liability method and reflect
the net tax effects of temporary differences between the tax basis of assets
and liabilities and their reported amounts in the consolidated financial
statements.
The differences between the effective rate reflected in the provision
(benefit) for income taxes and the amounts determined by applying the statutory
U.S. tax rate of 34% to income (loss) before income taxes are analyzed below
(in thousands) for the six month periods ended:
June 30,
1999 1998
Provision at statutory rate $ 14 $1,861
Tax effects of:
Lower effective income tax rates related
to undistributed foreign earnings (44 ) (149 )
Foreign losses for which a tax benefit is
not available 135 87
State income taxes, net - 34
Other 14 7
---- -----
Provision for income taxes $ 119 $1,840
==== =====
Inventories
- -----------
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market (replacement cost or net realizable value) and
include (in thousands):
June 30, December 31,
1999 1998
Raw materials $ 791 $1,071
Work-in-progress 491 180
Finished goods 46 50
----- -----
$1,328 $1,301
===== =====
9
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Inventories are presented net of reserves for excess and obsolete
inventories of $801,000 and $775,000 at June 30, 1999 and December 31, 1998,
respectively.
Supplemental Cash Flow Information
- ----------------------------------
Interest and income taxes paid during the six month periods ended June 30,
are presented below (in thousands):
1999 1998
Interest paid $ 18 $ 81
===== =====
Income taxes paid $ 94 $1,427
===== =====
2. CREDIT AGREEMENTS AND NOTE PAYABLE TO SHAREHOLDER
Reliability maintains a line of credit with Wells Fargo Bank Texas, N.A.
which permits the Company to borrow up to $1 million until December 31, 1999.
(The Company reduced the amount available under the line of credit from $4.0
million to $1.0 million during the second quarter of 1999.) Interest is payable
at the bank's prime rate minus 1/4% (7.75% at June 30, 1999). The unpaid
principal of the note is due December 31, 1999. The loan agreement provides for
a revolving line of credit, secured by substantially all assets of the Company
which are located in the U.S., except for land and buildings. The credit
facility requires compliance with certain financial covenants related to the
Company's current ratio, debt service coverage and funded debt to net income
before income taxes plus non-cash items and interest expense. The agreement
prohibits the payment of cash dividends by the Company unless otherwise agreed
to by the bank. The Company was in compliance with the financial requirements
of the agreement at June 30, 1999, and there were no balances outstanding under
the agreement at June 30, 1999 or December 31, 1998.
The Company's Singapore subsidiary maintains an agreement with a Singapore
bank to provide an overdraft facility to the subsidiary of 500,000 Singapore
dollars (U.S. $294,000) at the bank's prime rate plus 2% (7.5% at June 30,
1999). There were no balances outstanding at June 30, 1999, but amounts
utilized under letter of credit commitments totaled $268,000, resulting in
credit availability of $26,000 at June 30, 1999. The loan is collateralized by
all assets of the subsidiary and requires maintenance of a minimum net worth of
the Singapore subsidiary. Payment of dividends requires written consent from
the bank, and continuation of the credit facility is at the discretion of the
bank.
The note payable to shareholder at December 31, 1998 represented the
balance due to Basic Engineering Services and Technology Labs, Inc. ("BEST")
related to the acquisition of assets that was completed in December 1998 (see
Note 6). The note was paid in full in June 1999 and bore interest at 6%.
10
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Interest income (expense) for the six month periods ended June 30, is
presented net as follows (in thousands):
1999 1998
Interest income $339 $226
Interest (expense) (15 ) (81 )
--- ---
Interest income, net $324 $145
=== ===
3. SEGMENT INFORMATION
The following table sets forth reportable segment information (in
thousands) for the periods indicated:
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Revenues from external
customers:
Testing Products $2,344 $12,304 $1,379 $6,654
Services 5,870 6,615 3,038 1,840
Power Sources 1,067 1,704 544 649
Intersegment revenues:
Testing Products 80 136 25 89
Services 6 254 - 119
Eliminations (86 ) (390 ) (25 ) (208 )
----- ------ ----- -----
$9,281 $20,623 $4,961 $9,143
===== ====== ===== =====
Operating income (loss):
Testing Products $ (779 ) $ 3,686 $ (102 ) $2,527
Services 909 1,897 441 575
Power Sources (207 ) (120 ) (92 ) (240 )
General corporate expenses (206 ) (134 ) (112 ) (37 )
----- ------ ----- -----
Operating income (loss) $ (283 ) $ 5,329 $ 135 $2,825
===== ====== ===== =====
Total assets by reportable segment as of the dates indicated are as follows
(in thousands):
June 30, December 31,
1999 1998
Testing Products $ 6,417 $ 6,702
Services 8,135 9,584
Power Sources 1,714 1,651
General corporate assets 14,577 15,309
------ ------
$30,843 $33,246
====== ======
For the periods indicated above, there were no material changes in the
accounting policies and procedures used to determine segment income or loss.
11
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
Net income (loss) $ (78 ) $3,634 $ 184 $1,847
===== ===== ===== =====
Weighted average shares
outstanding 6,624 6,076 6,632 6,091
Net effect of dilutive stock
options based on the
treasury stock method - 141 27 133
----- ----- ----- -----
Weighted average shares and
assumed conversions 6,624 6,217 6,659 6,224
====== ===== ===== =====
Earnings per share:
Diluted $ (.01 ) $ .58 $ .03 $ .30
====== ===== ===== =====
Basic $ (.01 ) $ .60 $ .03 $ .30
====== ===== ===== =====
There were 253,000, 608,000 and 587,000 options to purchase shares of
common stock that were outstanding during the first two quarters of 1998, the
first quarter of 1999 and the second quarter of 1999, respectively, that were
not included in the computation of diluted earnings per share because including
the options in the calculations would have been anti-dilutive.
The Company, in December 1998, issued 475,000 shares of common stock
related to the acquisition of assets from BEST (see Note 6).
5. SHUT-DOWN AND RESTRUCTURING OF FACILITIES AND ASSETS HELD FOR SALE
The Company's Austin, Texas facility provides services principally to one
customer and accounted for 17% of consolidated revenues for the six months
ended June 30, 1999. The facility will be closed during the last half of 1999
because the customer has notified the Company that it will stop sending product
to the facility. Assets and obligations related to the facility totaled
approximately $1.6 million as of June 30, 1999. The financial impact, related
to the closing, is dependent on completing various negotiations. The Company
believes that a substantial portion of assets and obligations related to the
facility should be recovered, but is unable to determine whether a reserve for
closure will be required because the future cash flow related to the closing
cannot be determined at this time.
12
RELIABILITY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
The Company's North Carolina Services facility accounted for approximately
4% and 10% of consolidated revenues in 1998 and 1997, respectively, and
provided services to one customer. The customer notified the Company in January
1998 that it was necessary to reduce the output of DRAMs burned-in and tested
by the Company's Durham facility. The customer ceased sending product, and the
Company shut down the facility in April 1998. The Company recorded a $100,000
impairment reserve related to the land and building located at the Durham
facility in 1998 in order to state these assets at the lower of carrying amount
or fair value, less cost to sell. The land and a building located in Durham are
presented as assets held for sale in the accompanying consolidated balance
sheet. The assets held for sale are being actively marketed, although no
assurances can be given that they will be sold during 1999.
Services provided to Texas Instruments Incorporated accounted for
substantially all of the revenues of the Company's Singapore Services facility.
On October 1, 1998, Micron Technology acquired the Texas Instruments facility
in Singapore and informed the Company that it would continue to utilize the
Company's burn-in services, but at a significantly reduced level. Texas
Instruments revenues at the Singapore facility accounted for 21% and 32% of
consolidated revenues for the years ended December 31, 1998 and 1997,
respectively. In connection with the decrease in volumes at the Singapore
facility, a $507,000 provision for restructuring was recorded in the fourth
quarter of 1998. The restructuring provision included $207,000 for severance
costs paid to employees who were terminated during 1998, and costs related to
disposal of excess equipment, employee termination costs and to costs
associated with excess leased facilities. Fixed asset disposals totaling
$137,000 and severance and lease costs totaling $100,000 were charged to the
accrued restructuring reserve during 1999.
6. ACQUISITION
On December 3, 1998, the Company acquired certain assets and assumed
certain liabilities from BEST. The assets acquired included equipment,
furniture and fixtures, contracts, work-in-progress, backlog, proprietary
rights, books and records, customer lists and goodwill. The liabilities assumed
consisted of employee-related obligations. The operations acquired are located
in Austin, Texas and Singapore and are used to operate burn-in and test
services laboratories, providing such services to integrated circuit
manufacturers. The results of operations related to this acquisition have been
included in the Company's consolidated financial statements since December 3,
1998.
13
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this document contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth elsewhere in this
document.
FINANCIAL CONDITION
The primary sources of Reliability's liquidity are cash provided by
operations and working capital. The parent Company and its Singapore subsidiary
have substantial cash available to support anticipated liquidity requirements.
The Company maintains lines of credit to supplement the primary sources of
capital. Changes in the Company's financial condition since December 31, 1998
and June 30, 1998 are generally attributable to changes in cash flows from
operating activities, acquiring certain assets from BEST during 1998 and
accelerating payments on a mortgage during 1998 and 1999. In addition, the
shut-down, in 1998, of the Company's North Carolina Services facility and
changes in operations at the Company's Singapore subsidiary did, during late
1998, and will in 1999, affect the Company's financial condition. The Company
will close its Austin, Texas Services facility during 1999. The closing will
impact the Company's future financial condition.
Certain ratios and amounts monitored by management in evaluating the
Company's financial resources and performance are presented in the following
chart. The periods presented related to the profitability ratios are for the
six months ended June 30, and twelve months ended December 31:
June 30, December 31, June 30,
1999 1998 1998
Working capital:
Working capital (in thousands) $15,965 $15,159 $15,327
Current ratio 7.2 to 1 4.0 to 1 3.5 to 1
Equity ratios:
Total liabilities to equity 0.1 0.2 0.3
Assets to equity 1.1 1.2 1.8
Profitability ratios:
Gross profit 39 % 51 % 53 %
Return on revenues (1)% 13 % 18 %
Return on assets (annualized) (1)% 13 % 23 %
Return on equity (annualized) (1)% 15 % 29 %
The Company's financial condition improved throughout 1998 and has remained
strong during 1999. Working capital increased to $16.0 million at June 30,
1999, from $15.3 million at June 30, 1998, and the ratio of current assets to
current liabilities increased from 3.5 to 1 at June 30,
14
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
1998, to 7.2 to 1 at June 30, 1999. Beginning in the fourth quarter of 1998,
the Company's revenues and level of operations, compared to the corresponding
prior year periods, declined. Assets such as accounts receivable and
inventories decreased during the 1998 periods of declining production and were
converted to cash. Cash provided by certain components of cash flows from
operations in 1998 and in 1999 were used to reduce and pay off a mortgage
payable, acquire assets from BEST, purchase fixed assets, increase the amount
of short-term interest-bearing cash investments and, in 1999, reduce accrued
liabilities and pay off the note related to the BEST transaction.
The Company maintains a credit facility with a financial institution to
provide credit availability to supplement cash provided by operations, if
required. Projections indicated that the Company would not need to use the
credit facility in the foreseeable future; thus the line of credit was reduced
from $4.0 million to $1.0 million during the second quarter of 1999. Credit
availability provided by the facility was $1.0 million at June 30, 1999. The
Company's Singapore subsidiary maintains a small overdraft facility to support
the subsidiary's credit commitments.
Decreased demand for the Company's products and services, starting in the
latter half of 1998 and continuing into 1999, resulted in a decline in backlog
from $10.8 million at June 30, 1998 to $1.8 million at December 31, 1998.
Backlog increased slightly to $2.1 million at June 30, 1999. The operating
effects resulting from the changes in backlog and the corresponding changes in
operations, during 1998 and 1999, affected various elements of cash provided by
operations, as reflected in the Consolidated Statements of Cash Flows.
Net cash used by operating activities for the six months ended June 30,
1999 was $1.1 million, contrasted with $4.8 million provided by operations in
the first six months of 1998. The principal items contributing to the cash used
by operations in 1999 were the net loss of $0.1 million, a $1.4 million
decrease in accrued liabilities and a $0.7 million increase in accounts
receivable. Cash used by operations in 1999 was reduced by $1.3 million of
depreciation and amortization. Accrued liabilities decreased $1.4 million due
to payment, in the first quarter of 1999, of performance bonuses related to
1998 profits and a general reduction in most items included in accrued
liabilities due to payment of year-end accruals. The increase in accounts
receivable resulted from the fact that certain accounts receivable were not due
as of June 30, 1999 for products that were shipped late in the second quarter
of 1999 and an increase in revenues in the Services segment. The increase in
other current assets is attributable to an increase in investments in
marketable securities.
Demand for Testing Products sold by the Company remains very weak during
1999 and indications are that the weak demand may continue for several more
quarters. The acquisition of services activities from BEST in December 1998 and
a general increase in demand, beginning in late 1998, for Services provided by
the BEST operations at the Company's Singapore subsidiary indicates, at this
time, that revenues at the Singapore Services operation could remain strong
throughout 1999. The Company's Austin, Texas Services division provides
services principally to one
15
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
customer and accounted for 17% of consolidated revenues for the six months
ended June 30, 1999. The facility will be closed during the last half of 1999
because the customer has notified the Company that it will stop sending product
to the facility. Assets and obligations related to the division totaled
approximately $1.6 million as of June 30, 1999. The financial impact, related
to the closing, is dependent on completing various negotiations. The Company
believes that a substantial portion of assets and obligations related to the
facility should be recovered, but is unable to determine whether a reserve for
closure will be required because the future cash flow related to the closing
cannot be determined at this time. Based on the Company's current low backlog
level and the uncertainty concerning demand for the Company's products during
1999, Reliability is not currently providing a revenue forecast for the year
ending December 31, 1999. The current forward-looking forecast indicates
revenues for the third quarter of 1999 will be approximately $4.4 to $5.2
million, compared to second quarter 1999 revenues of $5.0 million.
Capital expenditures during the first six months of 1999 and 1998 were $0.7
million and $0.7 million, respectively. A significant portion of expenditures
in both years include equipment required by the Singapore Services subsidiary
to support services provided by the subsidiary.
Current projections indicate that the Company's cash and cash equivalent
balances, future cash generated from operations and available lines of credit
will be sufficient to meet the projected cash requirements of the Company for
the remainder of 1999.
RESULTS OF OPERATIONS
Six months ended June 30, 1999 compared to six months ended June 30, 1998.
Revenues. Revenues for the 1999 six-month period were $9.3 million compared to
$20.6 million for the 1998 period. Revenues in the Testing Products, Services
and Power Sources segments decreased $10.0, $0.7 and $0.6 million,
respectively.
Revenues in the Testing Products segment were $2.3 million for the first
six months of 1999, which is a decrease of 81% over the same period in 1998.
The revenue decrease reflects the fact that the semiconductor industry is
highly cyclical and experiences periods of oversupply and excess production
capacity. Beginning in mid 1998, the oversupply and excess production capacity
began to affect demand for Testing Products sold by the Company, resulting in a
significant decrease in new orders for Testing Products. In addition, price
competition and the need to develop new products that will be purchased by the
semiconductor industry have begun to affect new orders for Testing Products.
Volume decreases resulted in revenues from the sale of CRITERIA products
decreasing $6.2 million and revenues from the sale of INTERSECT products
decreasing $3.8 million.
Revenues in the Services segment for the 1999 period were $5.9 million, a
decrease of 11% compared to the corresponding 1998 period. The
16
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
decrease in revenues in this segment is related to the shut-down of the
Company's North Carolina Services facility in April 1998 and a decrease in
revenues at the Company's Singapore facility, beginning in October 1998,
resulting from the Micron Technology purchase of the Singapore facility's
principal customer, Texas Instruments. The overall decrease was reduced by an
increase in revenues, in Austin, Texas and Singapore, resulting from the
acquisition, in December 1998, of certain services activities of BEST.
Revenues in the Power Sources segment were $1.1 million for the first six
months of 1999, reflecting a 37% decrease from the 1998 period. Revenues were
affected, in 1999, by changes in demand, an aging product line, price
competition and a decline in market penetration resulting in volume decreases.
Costs and Expenses. Total costs and expenses for the 1999 period decreased
$5.7 million or 37% compared to the 55% revenue decrease. Cost of revenues
decreased $4.1 million, marketing, general and administrative expenses
decreased $1.3 million and research and development expenses decreased $0.2
million. A provision for asset impairment of $0.1 million, related to the
closing of the North Carolina Services facility, was included in 1998
operations.
The decrease in the gross profit from 53% in the 1998 period to 39% in 1999
is attributable, in general, to revenue decreases in all business segments and
to the fact that the Services segment accounted for a significantly higher
percentage of total consolidated revenues in the 1999 period than in the 1998
period. This resulted in the overall decrease in gross profit in 1999, compared
to 1998, because the gross profit in the Services segment is fundamentally
lower than the gross profit in the other two segments.
Marketing, general and administrative expenses for the 1999 period
decreased $1.3 million. The decrease in expenses is primarily related to a
decrease in Testing Products revenues which resulted in a decrease in volume
related expenses, such as commissions, warranty and similar expenses and, in
all business segments, a decrease in incentive compensation expense accruals
which are directly related to the decrease in profitability. The Company
maintains a stringent expense control program to monitor and decrease expenses
where possible. The shut-down of the Company's North Carolina facility and a
modest reduction in volume related expenses in the Power Products segment also
contributed to the decrease. The overall decrease was reduced, in 1999, by
expenses associated with the operations acquired from BEST in December 1998.
Research and development costs decreased to $0.9 million in 1999, compared
to $1.1 million in the 1998 period. The decrease relates primarily to the fact
that first half 1998 costs were somewhat higher than normal. Reliability is
committed to a significant research and development program and development
costs are projected to remain at current levels or increase during the
remainder of the year.
The change in net interest during the 1999 period reflects an increase in
interest income and a decrease in interest expense. Interest income increased
due to significant increases in investable cash, and interest expense decreased
due to the fact the Company accelerated payments on, and paid off, in 1999, the
mortgage related to the Houston facility.
17
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
The Company's effective tax rate was 34% for the six months ended June 30,
1998, compared to a $119,000 provision related to the $41,000 income before
income taxes for the 1999 period. The principal reason the Company recorded
income tax expense that exceed the income amount in 1999 was that tax benefits
related to the loss of a foreign subsidiary were not available due to net
operating loss limitations. In general, items affecting the tax rate in the
1998 six-month period are the same as those noted in the three month discussion
below.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to three months ended June 30,
1998.
Revenues. Revenues for the 1999 three-month period were $5.0 million compared
to $9.1 million for the 1998 period. Revenues in the Testing Products segment
decreased $5.2 million, Power Sources revenues decreased $0.1 million and
Services revenues increased $1.2 million.
Revenues in the Testing Products segment were $1.4 million for the second
quarter of 1999, which is a decrease of 79% from the second quarter of 1998.
The decrease is related to decreased demand resulting in volume decreases and
other factors described in the six-month discussion above. Revenues from the
sale of CRITERIA products decreased $2.4 million and revenues from the sale of
INTERSECT products decreased $2.8 million.
Revenues in the Services segment for the 1999 period were $3.0 million, an
increase of 65% compared to the corresponding 1998 period. The increase is
related to, in general, the items discussed in the above six-months discussion
and specifically to revenues resulting from the December 1998 BEST transaction.
Revenues in the Power Sources segment were $0.6 million for the second
quarter of 1999, reflecting a 16% decrease from the 1998 period. Revenues were
affected by general reductions in demand, an aging product line and a decline
in market penetration resulting in volume decreases.
Costs and Expenses. Total costs and expenses for the second quarter of 1999
decreased $1.5 million or 24% compared to the 46% revenue decrease of $4.2
million. Cost of revenues decreased $1.0 million; marketing, general and
administrative expenses decreased $0.4 million and research and development
expenses decreased $0.1 million.
The decrease in gross profit from 58% in the 1998 period to 42% in the 1999
period is attributable to the Services segment. The typical gross profit in the
Services segment is lower than the gross profit in the other two segments.
Revenues in the Services segment accounted for a significantly higher percent
of total consolidated revenues in the 1999 three-month period resulting in the
decrease in overall gross profit in 1999 compared to 1998.
18
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
Marketing, general and administrative expenses for the 1999 period
decreased $0.4 million. The decrease in expenses is related to a decrease in
Testing Products and Power Sources revenues which resulted in a decrease in
volume related expenses, such as commissions, warranty and similar expenses and
a decrease in incentive compensation expense accruals in all segments, which
are directly related to the decrease in profitability. Expenses in the Services
segment increased $0.4 million. The increase relates to increases related to
the BEST transaction, reduced by decreases related to closing of the Company's
North Carolina facility in April 1998.
Research and development expenses for the 1999 period decreased $0.1
million. Reliability is committed to a significant research and development
program and development costs are projected to remain at current levels or
increase somewhat during the remainder of the year.
The change in net interest reflects an increase in interest income and a
decrease in interest expense, as explained in the above six-month discussion.
The Company's effective tax rate was 39% for the three-month periods ended
June 30, 1999, compared to 37% for the three month period ended June 30, 1998.
The principal items affecting the Company's tax rate in 1999 and 1998 were tax
benefits not available to a foreign subsidiary due to net operating loss
limitations, state income tax expense in 1998 and a lower effective tax rate
related to earnings of the Singapore subsidiary.
IMPACT OF YEAR 2000
The Company disclosed information related to the impact of year 2000 in
Form 10-K for the year ended December 31, 1998. There have been no significant
changes in matters related to the impact of the year 2000 on the Company, and
readers are referred to the Form 10-K for further information.
The Company classified its Year 2000 ("Y2K") program into four projects:
1. assessment of products that are currently manufactured and
supported by the Company;
2. assessment of the Company's internal business and operating
systems;
3. assessment of the impact on the Company of non-compliance by third
party companies that supply material and services to the Company
and obtaining confirmation that the third parties will correct
known non-compliance in a timely manner; and
4. conversion of BEST internal business and operating systems to the
Company's compliant systems.
The following is the current status of the four projects:
1. Evaluation of the Y2K impact on products that are currently sold
and supported by the Company is substantially complete. The Company
has provided Y2K solutions to customers of currently supported
products. It is estimated that the Company and its customers have
completed the planned testing
19
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
of Y2K solutions related to Company supported products. The Company
does not provide Y2K solutions for products that are no longer in
production. The Company will quote to customers the cost to provide
Y2K solutions for products that are no longer in production. It is
projected that there will be a limited number, if any, of future
requests for Y2K solutions related to items that are not current
products. The Company believes that products that are being shipped
currently and that will be shipped in the future are Y2K compliant.
The Company's Y2K solutions are subject to typical uncertainties,
such as future identification of currently unknown problems and
that products will only be used for a reasonable number of years
related to the technology that the product is designed to process.
2. Internal business and operating systems located at the Company's
three facilities have been evaluated and the hardware and software
changes have been identified.
(a) The hardware and software changes identified by the Houston Y2K
compliance program are 100% complete. Additional testing will
continue throughout the balance of the year.
(b) The hardware and software changes identified by the Costa Rica
Y2K compliance program are 100% complete. Additional testing will
continue throughout the balance of the year.
(c) The hardware and software changes identified by the Singapore
compliance program is approximately 95% complete and it is
projected that the remaining changes will be completed by September
30, 1999. Additional testing will continue throughout the balance
of the year.
3. The Company has communicated with key third party suppliers and has
received responses from approximately 80% of the suppliers.
(a) This project is estimated to be only 65% complete because
certain suppliers have indicated that compliance will not be
completed until the third or fourth quarter of 1999.
(b) The Company has and will continue to follow up with suppliers
that have not responded or that are not Y2K compliant.
(c) The status of this project will be updated quarterly and
specific action steps will be determined each quarter. The Company
and the public in general will be subject to uncertainties related
to continuation of public utility services, availability of major
freight carriers and availability of services from similar
suppliers. The Company will attempt to obtain written assurance
from as many key suppliers as possible and will, throughout 1999,
identify problem areas and develop and implement contingency plans,
if necessary.
20
RELIABILITY INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
June 30, 1999
The Company is currently developing contingency plans and/or is
evaluating the possible worst case scenario. In general, it appears that the
worst case scenario may be that some suppliers may not be able to supply
critical products or services. The Company will seek new vendors where
necessary. The development of the worst case scenario and contingency plans is
expected to be completed by September 30, 1999.
The Company's Y2K compliance project is being implemented based on
information that is generally available concerning identified Y2K problems.
Additional information is continually emerging concerning Y2K problems and
solutions, and the Company believes it is using reasonable efforts to assess
and correct Y2K problems and will, as necessary, update the assessment.
The dates by which the Company believes it will complete its Y2K projects
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
materially differ from those anticipated.
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Statements in this Form 10-Q regarding Reliability's business which
are not historical facts are "forward looking statements" that involve risk and
uncertainties, including, but not limited to, market acceptance of Company
products and services, the effects of general economic conditions, the impact
of competition, product development schedules, problems with technology,
delivery schedules, Y2K compliance, future results related to acquisitions and
supply and demand changes for Company products and services and its customers'
products and services. Actual results may materially differ from projections.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
There have been no material changes in the market risk disclosures
reported in the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1998.
21
RELIABILITY INCORPORATED
OTHER INFORMATION
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K. There were no reports on Form 8-K filed by the
Company during the quarter ended June 30, 1999
22
RELIABILITY INCORPORATED
SIGNATURES
June 30, 1999
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.
RELIABILITY INCORPORATED
(Registrant)
August 9, 1999 /s/Larry Edwards
President and
Chief Executive Officer
August 9, 1999 /s/Max T. Langley
Sr. Vice President - Finance
and Chief Financial Officer
23