================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 0-10095 UNIT INSTRUMENTS, INC. (Exact name of registrant as specified in its charter) California 33-0077406 (State or other jurisdiction (I.R.S. Employer of Incorporation) Identification Number) 22600 Savi Ranch Parkway, Yorba Linda, California 92887 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (714) 921-2640 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 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 XXX No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Classes Outstanding at March 20, 1997: --------------------------- ------------------------------ Common Stock $.15 Par Value 4,372,103 ================================================================================ UNIT INSTRUMENTS, INC. INDEX Page No. -------- Part I. Financial Information Condensed Consolidated Balance Sheets............................ 3-4 March 1, 1997 and May 31, 1996 Condensed Consolidated Statements of Operations.................. 5 Three months and nine months ended March 1, 1997 and March 2, 1996 Condensed Consolidated Statements of Cash Flows.................. 6 Nine months ended March 1, 1997 and March 2, 1996 Notes to Condensed Consolidated Financial Statements............ 7-8 Management's Discussion and Analysis of.......................... 9-12 Financial Condition and Results of Operations Part II. Other Information Item 6 Exhibits and Reports on Form 8-K..................... 13-15 PART I. FINANCIAL INFORMATION UNIT INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of March 1, 1997 and May 31, 1996 (amounts in thousands) (unaudited) March 1, 1997 May 31, 1996 ------------- ------------ ASSETS: Current Assets: Cash and cash equivalents $12,868 $14,572 Accounts and notes receivable 6,866 10,179 Inventories 9,672 9,709 Income taxes refundable 713 -0- Deferred taxes 1,042 1,042 Prepaid expenses and other 449 191 ------- ------- Total current assets 31,610 35,693 Property, plant and equipment, at cost: Buildings and improvements 5,287 5,096 Machinery and equipment 14,135 11,732 ------- ------- 19,422 16,828 Accumulated depreciation and amortization 9,120 7,267 ------- ------- 10,302 9,561 Construction in progress 41 662 ------- ------- Net property, plant and equipment 10,343 10,223 Goodwill, net of accumulated amortization of $2,137 and $1,723, respectively 8,715 4,338 Deferred taxes 249 249 Other assets 1,136 2,277 ------- ------- $52,053 $52,780 ======= ======= See accompanying notes to condensed consolidated financial statements. 3 UNIT INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS as of March 1, 1997 and May 31, 1996 (amounts in thousands) (unaudited) March 1, 1997 May 31, 1996 -------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,008 $ 1,969 Accrued compensation and benefits 1,375 1,786 Income taxes -0- 1,141 Current installments on term debt 1,691 1,845 Other current liabilities 2,432 2,228 ------- ------- Total current liabilities 7,506 8,969 Deferred income taxes 343 -0- Other long-term liabilities and deferred credits 709 587 ------- ------- Total liabilities 8,558 9,556 Shareholders' equity: Common stock, $.15 par value; authorized shares: 656 613 12,000,000; issued shares: 4,372,103 as of March 1, 1997 and 4,090,146 as of May 31, 1996 Additional paid-in capital 23,047 19,247 Retained earnings 20,216 23,673 Foreign currency translation (424) (309) adjustment ------- ------- Total shareholders' equity 43,495 43,224 $52,053 $52,780 ======= ======= See accompanying notes to condensed consolidated financial statements. 4 UNIT INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS March 1, 1997 and March 2, 1996 (amounts in thousands, except share data) (unaudited) Three Months Ended Nine Months Ended ------------------------- ------------------------- 03/01/97 03/02/96 03/01/97 03/02/96 ---------- ---------- ---------- ---------- Net sales $ 9,624 $ 17,232 $ 30,914 $ 47,801 Operating costs and expenses: Cost of goods sold 7,499 10,563 23,976 28,867 Selling and administration 2,742 3,391 9,106 10,828 Restructuring costs -0- -0- 558 373 Research, development and engineering 862 985 3,064 2,762 ---------- ---------- ---------- ---------- Operating income (loss) (1,479) 2,293 (5,610) 4,971 Interest income 219 191 629 469 Interest expense (15) (12) (41) (93) Other income (expense), net (48) (46) (60) (67) ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes (1,323) 2,426 (5,082) 5,280 Provision (benefit) for income taxes (423) 942 (1,626) 2,112 ---------- ---------- ---------- ---------- Income (loss) from continuing operations (900) 1,484 (3,456) 3,168 Discontinued operations: Income from discontinued operations net of income tax provision of $521 for the nine month period ended March 2, 1996 -0- -0- -0- 750 Gain on disposal net of income tax provision of $1,011 for the nine month period ended March 2, 1996 -0- -0- -0- 1,454 ---------- ---------- ---------- ---------- Net income (loss) $ (900) $ 1,484 $ (3,456) $ 5,372 ========== ========== ========== ========== Per common share: Income (loss) from continuing operations $(0.21) $0.34 $(0.79) $ 0.72 Income from discontinued operations -0- -0- -0- 0.49 ---------- ---------- ---------- ---------- Net income (loss) per share $(0.21) $0.34 $(0.79) $ 1.21 ========== ========== ========== ========== Average shares used in computing earnings per share 4,370,000 4,318,000 4,376,000 4,420,000 ========== ========== ========== ========== Dividends per share $.00 $.00 $.00 $ .06 ========== ========== ========== ========== See accompanying notes to condensed consolidated financial statements. 5 UNIT INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the Nine Months Ended March 1, 1997 and March 2, 1996 (amounts in thousands) (unaudited) Nine Months Ended ----------------------- 03/01/97 03/02/96 --------- --------- Cash Flows from Operating Activities: Net income (loss) $ (3,456) $ 5,372 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 2,341 1,530 Deferred income taxes (1) 692 Gain on disposal of assets (1) -0- Gain on sale of business -0- (1,454) Changes in assets and liabilities net of effect of businesses sold and acquired: Accounts receivable 4,673 (1,008) Inventories 1,912 (2,457) Prepaids and other assets (187) (49) Accounts payable and accrued liabilities (1,880) (1,088) Income taxes (1,854) 531 Other liabilities 60 150 --------- --------- Net cash flow provided from operating activities 1,607 2,219 Cash Flows from Investing Activities: Capital expenditures (913) (4,156) Net cash paid for acquisition of Control Systems, Inc. (1,127) -0- Proceeds from asset sales 16 -0- Change in short-term investments -0- 4,919 Net cash proceeds from sale of business -0 12,526 --------- --------- Net cash provided from (used in) investing activities (2,024) 13,289 Cash Flows from Financing Activities: Payments on long-term debt (254) (453) Change in short-term borrowings, net (783) (963) Cash dividends paid -0- (517) Note receivable from sale of business -0- (750) Purchase of company common stock (250) (2,584) Stock option exercise, related tax benefit and other 116 338 --------- --------- Net cash (used in) financing activities (1,171) (4,929) Effect of exchange rate changes on cash and cash equivalents (116) (197) --------- --------- Net increase (decrease) in cash and cash equivalents (1,704) 10,382 Cash and cash equivalents at beginning of year 14,572 4,465 --------- --------- Cash and cash equivalents at end of year $ 12,868 $ 14,847 ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 41 $ 93 Income tax paid, net of refunds $ 231 $ 3,952 See accompanying notes to condensed consolidated financial statements. 6 UNIT INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands) 1. Significant Accounting Policies The condensed consolidated financial statements included herein are based in part on estimates and include such adjustments (consisting solely of normal, recurring adjustments) which management believes are necessary for a fair presentation of the Company's financial position at March 1, 1997 and May 31, 1996, and the results of its operations for the three month and nine month periods ended March 1, 1997 and March 2, 1996. The consolidated financial statements and related notes are condensed and have been prepared in accordance with generally accepted accounting principles applicable to interim periods; consequently, they do not include all generally accepted accounting disclosures required for complete annual financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended May 31, 1996. The results of operations for the period presented are not necessarily indicative of results to be expected for the entire fiscal year. Certain prior year items have been reclassified to conform to the current year presentation. 2. Inventories Inventories at March 1, 1997 and May 31, 1996 consisted of the following: March 1, 1997 May 31, 1996 ------------- ------------ Raw materials $5,961 $6,514 Work in process 2,384 2,313 Finished goods 1,327 882 ------ ------ Total inventories $9,672 $9,709 ====== ====== 3. Acquisition of Control Systems, Inc. The Company acquired Control Systems, Inc. ("CSI") on June 3, 1996 in exchange for $1.2 million in cash and 289,000 shares of Company stock valued at $3,977,000. The acquisition has been accounted for by using the purchase method. Accordingly, the results of operations of CSI are included with those of the Company for the three month and nine month periods ended on March 1, 1997. A Current Report on Form 8-K was filed on July 1, 1996 reporting this transaction. 7 Also, a supplemental Current Report on Form 8K/A was filed on August 14, 1996 which provided financial statements and pro forma regarding the acquisition. The unaudited combined results of operations of the Company and CSI for the three month and nine month periods ended March 2, 1996, after giving effect for certain pro forma adjustments, are as follows: Three Months Ended Nine Months Ended 03/02/96 03/02/96 -------- -------- Net sales $20,134,000 $56,058,000 Income from continuing operations 1,402,000 3,119,000 Net income 1,402,000 5,323,000 Pro forma per share data Income from continuing operations $ 0.30 $ 0.66 Net income $ 0.30 $ 1.13 The foregoing unaudited pro forma results reflect three months and nine months amortization of goodwill with an initial carrying value of $4,790,000, resulting from the acquisition of CSI. The Company has determined that the goodwill has an estimated 12-year life and, for purposes of the pro forma adjustments, a 12-year amortization period has been used. 4. Restructuring Charges During the first and second quarters of the current fiscal year, the Company reduced its workforce by 109 and 22 positions, respectively, in response to the steep downturn in the semiconductor equipment market. This workforce reduction represented approximately 26% of the Company's worldwide employment. A restructuring charge of $262,000 was recorded in the first quarter and $296,000 was recorded in the second quarter for costs associated with the consolidation of certain facilities and for additional severance related expenses. In the first and second quarters of the prior fiscal year, restructuring charges of $83,000 and $273,000, respectively, were recorded for expenses associated with the sale of the Autoclave Engineers Group, which was sold in September, 1995. 8 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with Unit Instruments, Inc.'s condensed consolidated financial statements and related notes included herein. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 1, 1997 COMPARED TO THREE MONTHS ENDED MARCH 2, 1996 Sales from continuing operations for the third fiscal quarter ended March 1, 1997 decreased 44% to $9,624,000 from $17,232,000 for the comparable prior year period. This sales decline resulted from lower industry-wide semiconductor equipment orders and shipments. Semiconductor fabrication tools are the primary application for the Company's mass flow controllers (MFCs) and the Company's primary channel of distribution is through the manufacturers of semiconductor processing equipment (OEMs). These OEMs have reported lower sales and a precipitous decline in new orders over the past several quarters. In addition, the OEMs have implemented aggressive inventory reduction programs that have further reduced demand for the Company's products. Also impacted during the quarter were sales of gas distribution systems through CSI because of reduced capital spending by a major semiconductor manufacturer, which represents a substantial portion of CSI's business. The decline in industry activity levels impacted both the Company's domestic and international sales for the period. However, during the third quarter, the Company experienced stronger order activity as compared to the previous quarter. Because the Company only maintains a few weeks of backlog, it is difficult to forecast future sales, but recent order rates would indicate an upward trend. Gross profit margin declined to 22% for the current quarter from 38% for the third fiscal quarter last year. The sharply lower gross profit margin primarily resulted from the corresponding rapid and steep decline in the Company's sales. This resulted in under utilization of manufacturing facilities and reduced labor efficiency, despite a large reduction in the Company's direct labor workforce. Selling, general and administrative ("S,G&A") expenses decreased to $2,742,000 in the third quarter of the current fiscal year from $3,391,000 in the comparable prior year period. As a percent to sales, S,G&A increased to 29% from 20% last year. The reduction in expenses resulted from cost control measures implemented in response to the sharp decline in sales, coupled with selected layoffs of indirect employees. Research, development and engineering expenses ("R&D") decreased by 13% to $862,000, or 9% of sales, for the current quarter, from $985,000, or 6% of sales, for the comparable prior year period. The reduction in R&D expenses was minimized in order to maintain current capabilities of future product development and sustaining engineering. Despite the current industry downturn, the Company believes that the continued timely development of new products and enhancements to its existing products is essential to maintaining its competitive position within the industry. Accordingly, the Company anticipates that such expenses will continue at approximately the same level in subsequent periods. 9 Interest income and interest expense increased slightly from the prior year comparable periods. A loss from continuing operations before income taxes of $1,323,000 was recorded for the current period, as compared to income from continuing operations of $2,426,000 for the corresponding prior year period. Income tax benefit was provided for at a 32% rate for the third quarter, compared to a provision of 39% for the prior year. The tax rate in both periods is unfavorably impacted by the non-deductibility of goodwill amortization. A net loss of $900,000, or $.21 per share, was recorded for the current fiscal second quarter as compared to net income of $1,484,000, or $.34 per share, for the prior year period. NINE MONTHS ENDED MARCH 1, 1997 COMPARED TO NINE MONTHS ENDED MARCH 2, 1996 Sales from continuing operations for the nine-month period ending March 1, 1997 decreased 35% to $30,914,000, from $47,801,000 for the comparable prior year period. This sales decline is attributable to the industry downturn that started approximately the middle of 1996 and intensified as the year progressed before leveling off towards the end of 1996. Since the Company primarily sells to the manufacturers of semiconductor processing equipment, its sales are directly related to activity levels within this industry segment. In addition, the Company's major customers have been aggressively reducing levels of inventory, which has had a further negative impact on sales. Lastly, the Company has a very limited backlog, because of a short production cycle, which accentuates fluctuations in order rates. Sales of gas distribution systems, through CSI, were down sharply for the nine month period because of reduced capital spending by a major semiconductor manufacturer, which represents a significant portion of CSI's business. The downturn in the semiconductor equipment market has been worldwide and, as such, has negatively impacted both domestic and international sales of the Company. However, recent order activity indicates that sales in the near future may improve from the recent depressed levels. Gross profit margins decreased to 23% for the current nine month period from 40% last year, primarily because of the rapid and steep decline in the Company's sales. This, in turn, has resulted in under utilization of fixed overhead and reduced labor efficiency. In addition to these factors, gross profit margin was negatively impacted by higher warranty expense, which is attributable to higher customer returns and fastener replacement on certain model MFCs. Selling, general and administrative (S,G&A) expenses decreased 16% to $9,106,000 for the nine month period, but climbed as percent of sales to 30% for the current period from 23% last year because of the sharp decline in the Company's sales. Lower S,G&A expenses for the current period primarily resulted from closure, last fiscal year, of the Company's Erie, Pennsylvania corporate office. For the prior year's comparable period, expenses associated with the former corporate office were $822,000. Also contributing to lower expense levels for the current period were certain cost reduction actions and select layoffs of indirect employees. A restructuring charge of $558,000 was incurred during the first half of the current fiscal year for severance related expenses and costs associated with the consolidation of facilities. In last year's comparable period, a restructuring charge of $373,000 was recorded for employee severance expense, legal fees and other expenses associated with the closure of the Erie corporate office. 10 Research, development and engineering expenses increased 11% from the prior year period. The Company believes that the continued timely development of new products and enhancements to its existing products is essential to maintaining its competitive position within the industry. Accordingly, the Company anticipates that such expenses will continue at approximately the same level for subsequent periods. Interest income increased to $629,000 from $469,000 the prior year because of higher cash balances resulting from the divestiture of Autoclave Engineers Group in fiscal 1996. Interest expense declined for the comparative period because of lower levels of borrowing outstanding as all domestic credit facilities were repaid during the second quarter of the prior fiscal year. A loss from continuing operations before income taxes of $5,082,000 was sustained in the current nine month period, primarily because of the precipitous decline in the Company's sales level. For last year's comparable period, income from continuing operations before income taxes was $5,280,000. The tax benefit for the current period was provided for at a 32% rate versus a tax provision of 40% for the prior year period. The tax rate in both periods was negatively effected by the non-deductibility of goodwill amortization. The Company sold its Autoclave Engineers Group on September 22, 1995 and recorded a gain on sale of $1,454,000, net of tax provision of $1,011,000, during the second quarter of the prior fiscal year. In addition, income from this discontinued operation of $750,000 was recorded in the prior year. A net loss of $3,456,000, or $.79 per share, was recorded for the current nine month period as compared to net income of $5,372,000, or $1.21 per share, for the comparable prior year period. FINANCIAL CONDITION On June 3, 1996, the Company acquired all of the outstanding shares of CSI for $1,200,000 cash and 289,000 shares of Company stock valued at $3,977,000. Prior to the acquisition, the Company had advanced cash to CSI of $1,025,000. Cash flow was a negative $1,704,000 for the nine month period ended March 1, 1997. The negative cash flow was considerably less than the accounting loss of $3,456,000 for the period largely due to substantial net reductions of accounts receivable and, to a lesser extent, a decrease in inventory, net of inventory acquired with the CSI purchase. However, the positive cash flow impact of the reduction in receivables and inventories was partially offset by cash used to reduce accounts payable and the net cash used to acquire CSI. Accounts receivable declined from $10,179,000 as of May 31, 1996 to $6,866,000 as of March 1, 1997 because of collections and a decline in replacement receivables due to lower sales. Income taxes payable of $1,141,000, as of May 31, 1996, were eliminated and replaced with income taxes refundable of $713,000, as of March 1, 1997, due to the loss incurred for the period and the capability to deduct such losses against prior years' income via tax loss carryback provisions. Cash and cash equivalents were $12,868,000 as of March 1, 1997. The Company's only debt outstanding is a Japanese Yen denominated credit facility through the Company's Japanese subsidiary 11 for approximately $1,800,000. During the prior fiscal year, the Company entered into a $5 million unsecured credit facility with a major domestic bank. The Company can use any portion of the credit facility for letters of credit and has utilized approximately $2 million for such purpose. No borrowings were outstanding at the end of the current quarter under this credit facility. The Company expects that its current cash resources will be adequate to fund the Company's anticipated near-term capital requirements. FORWARD-LOOKING STATEMENT This quarterly report on Form 10-Q contains certain forward-looking statements made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. In connection with these "safe harbor" provisions, the Company identifies important factors that could cause actual results to differ materially from those contained in any forward- looking statements made by, or on behalf of, the Company. Any such statements are qualified by reference to the following cautionary statements. The Company's businesses operate in a highly competitive market and are subject to many risks and uncertainties. Such risks and uncertainties include, but are not limited to, the Company's dependency on a few large customers, reductions in demand or rescheduling of purchase orders that have occurred because of the severe downturn in the semiconductor industry, customers' desire to return product previously sold due to overstock and/or obsolescence, expenses for extended product warranty, lack of acceptance of the Company's products within their respective markets, the replacement of the Company's products with new technology, the potential change in competitive conditions within the markets served by the Company, the failure to integrate the operations of its Control Systems, Inc. subsidiary with the rest of its operations, the failure to retain key technical and management personnel, material or adverse changes in the Company's operations or business, failure to accurately anticipate demand for the Company's products and the possibility that the trend in increased business activity, as compared to recent reporting periods, will cease. Although the Company believes that the assumptions underlying the forward- looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized. In addition, the business and operations of the Company are within a single industrial segment and are dependent on a few large customers. This concentration on a single market and limited customer base subjects the Company to substantial risks which increase the uncertainty inherent in such forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company, or any other person, that the objectives or plans for the Company will be achieved. 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11.1 - Computation of Earnings per Share (b) No reports on Form 8-K were filed by the Company for the quarter for which this report is filed. (c) Financial Data Schedule 13 UNIT INSTRUMENTS, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirement 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. UNIT INSTRUMENTS, INC. ---------------------- Registrant Date: March 28, 1997 /S/ Michael J. Doyle -------------------- Michael J. Doyle, President and Chief Executive Officer Date: March 28, 1997 /S/ Gary N. Patten ------------------ Gary N. Patten Chief Financial Officer 14