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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 JUNE 30, 1999
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-9965
KEITHLEY INSTRUMENTS, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-0794417
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28775 AURORA ROAD, SOLON, OHIO 44139
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 248-0400
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 X NO
--- ---
As of August 5, 1999 the Registrant had outstanding 4,484,829 Common
Shares, without par value, and 2,692,528 Class B Common Shares, without par
value.
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS.
KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands of Dollars)
(Unaudited)
JUNE 30, SEPTEMBER 30,
----------------- ------------
1999 1998 1998
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 13,530 $ 2,412 $ 9,321
Accounts receivable and other, net 15,244 18,155 17,586
Inventories:
Raw materials 3,888 7,512 5,997
Work in process 4,082 4,198 3,163
Finished products 2,213 3,912 2,490
-------- -------- --------
Total inventories 10,183 15,622 11,650
Other current assets 3,949 3,206 3,770
-------- -------- --------
Total current assets 42,906 39,395 42,327
-------- -------- --------
Property, plant and equipment, at cost 38,422 42,825 39,334
Less-Accumulated depreciation 25,767 26,187 24,723
-------- -------- --------
Total property, plant and equipment, net 12,655 16,638 14,611
-------- -------- --------
Other assets 14,538 15,368 14,079
-------- -------- --------
Total assets $ 70,099 $ 71,401 $ 71,017
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,518 $ 6,357 $ 6,191
Accrued payroll and related expenses 5,401 4,815 4,203
Other accrued expenses 5,854 5,985 6,902
Income taxes payable 3,636 2,106 4,591
-------- -------- --------
Total current liabilities 20,409 19,263 21,887
-------- -------- --------
Long-term debt 3,000 12,265 6,099
Other long-term liabilities 3,799 3,928 4,289
Shareholders' equity:
Paid-in-capital 9,182 8,867 9,074
Earnings reinvested in the business 39,563 27,636 29,870
Cumulative translation adjustment (11) 205 429
Unamortized portion of restricted stock (250) (436) (283)
Common shares held in treasury, at cost (5,593) (327) (348)
-------- -------- --------
Total shareholders' equity 42,891 35,945 38,742
-------- -------- --------
Total liabilities and shareholders' equity $ 70,099 $ 71,401 $ 71,017
======== ======== ========
The accompanying notes are an integral part of the financial statements.
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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In Thousands of Dollars Except for Per Share Data)
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $ 25,947 $ 28,578 $ 71,215 $ 89,897
Cost of goods sold 9,962 12,135 28,520 38,182
Selling, general and administrative expenses 9,976 12,111 27,962 36,499
Product development expenses 2,682 3,088 7,760 10,271
Gain on sale of business -- -- (4,808) --
Special charges -- -- -- 335
Net financing (income) expenses (30) 248 (104) 816
-------- -------- -------- --------
Income before income taxes 3,357 996 11,885 3,794
Income taxes (benefit) (1,255) 329 1,506 1,252
-------- -------- -------- --------
Net income $ 4,612 $ 667 $ 10,379 $ 2,542
======== ======== ======== ========
Basic earnings per share $ 0.63 $ 0.08 $ 1.38 $ 0.33
======== ======== ======== ========
Diluted earnings per share $ 0.61 $ 0.08 $ 1.35 $ 0.32
======== ======== ======== ========
Cash dividends per Common Share $ 0.033 $ 0.031 $ 0.099 $ 0.094
======== ======== ======== ========
Cash dividends per Class B
Common Share $ 0.026 $ 0.025 $ 0.079 $ 0.075
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
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KEITHLEY INSTRUMENTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
Cash flows from operating activities:
Net income $ 4,612 $ 667 $ 10,379 $ 2,542
Expenses not requiring outlay of cash (1,077) 944 478 3,197
Gain on sale of business -- -- (4,808) --
Changes in working capital (1,791) 1,007 (714) 1,931
Other operating activities 1,049 (595) 813 (200)
-------- -------- -------- --------
Net cash provided by operating activities 2,793 2,023 6,148 7,470
-------- -------- -------- --------
Cash flows from investing activities:
Payments for property, plant, and equipment (409) (503) (914) (2,349)
Sale of assets 200 -- 9,147 --
Payments made for sale of business (115) -- (1,136) --
Other investing activities-net 32 19 51 92
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (292) (484) 7,148 (2,257)
-------- -------- -------- --------
Cash flows from financing activities:
Net decrease in short term debt -- -- -- (16)
Net borrowing (repayment) of long term debt (3,000) (1,041) (3,056) (5,085)
Cash dividends (222) (229) (685) (679)
Other transactions-net (1,734) 104 (5,137) 1,311
-------- -------- -------- --------
Net cash used in financing activities (4,956) (1,166) (8,878) (4,469)
-------- -------- -------- --------
Effect of exchange rate changes on cash (71) 6 (209) (59)
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents (2,526) 379 4,209 685
Cash and cash equivalents at beginning of period 16,056 2,033 9,321 1,727
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 13,530 $ 2,412 $ 13,530 $ 2,412
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Income taxes $ 497 $ 344 $ 2,874 $ 855
Interest 62 238 145 748
DISCLOSURE OF ACCOUNTING POLICY
For purposes of this statement, the Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.
The accompanying notes are an integral part of the financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. MANAGEMENT REPRESENTATION
The consolidated financial statements at June 30, 1999 and 1998 and for the
three month periods then ended have not been examined by independent
accountants, but in the opinion of the management of Keithley Instruments,
Inc. (the "Company), all adjustments necessary to a fair statement of the
consolidated balance sheet, consolidated statement of income and
consolidated statement of cash flows for those periods have been included.
All adjustments included are of a normal, recurring nature.
B. EARNINGS PER SHARE DENOMINATOR
The weighted average number of shares and share equivalents used in
determining basic earnings per share and diluted earnings per share was
7,314,087 and 7,502,593 for the quarter ended June 30, 1999, respectively,
and 7,856,302 and 8,041,919 for the quarter ended June 30, 1998,
respectively. The weighted average number of shares and share equivalents
used to determine basic earnings per share and diluted earnings per share
was 7,543,887 and 7,709,199 for the nine months ended June 30, 1999,
respectively, and 7,776,752 and 8,028,510 for the nine months ended June
30, 1998, respectively. Both Common Shares and Class B Common Shares are
included in calculating the weighted average number of shares outstanding.
C. SALE OF ASSETS
On November 9, 1998, the Company sold certain assets used in the operation
of its Quantox product line to KLA-Tencor Corporation for $9,147 in cash.
The agreement, which was effective October 31, 1998, included the sale of
the Quantox inventory, certain machinery, equipment and other tangible
personal property. The Company retained the accounts receivable. The sale
resulted in a pretax gain of $4,808, or $.39 per share after taxes.
D. FAVORABLE INCOME TAX ADJUSTMENT
During the third quarter of fiscal 1999, the Company recorded a favorable
income tax adjustment of $2,195, or $.29 per share. The adjustment resulted
from settlements of prior years' tax liabilities and the release of certain
valuation reserves due to improved profitability from U.S. operations.
E. SPECIAL CHARGES
Special charges of $335 for the second quarter of fiscal 1998 relate to
cost reductions announced in February 1998 for the Company's semiconductor
business, net of $10 for the reversal of personnel related expenses
previously accrued for the Keithley MetraByte operation relocation.
F. DUTCH AUCTION AND STOCK REPURCHASE PROGRAM
On November 11, 1998, the Company commenced a tender offer to repurchase up
to 2,000,000 of its Common Shares, or approximately 25 percent of the
outstanding Common Shares and Class B Common Shares combined. The offer was
conducted through a procedure commonly known as a "Dutch Auction" in which
shareholders could tender their shares at prices not in excess of $7.00 nor
less than $5.75 per share. The offer expired on
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December 10, 1998, and resulted in the purchase of 405,733 Common
Shares at $7.00 per share plus expenses of approximately $1.00 per
share.
At the conclusion of the Dutch Auction, the Company's Board of Directors
approved a program to repurchase up to 1,000,000 Common Shares on the open
market over a two-year period. The shares repurchased under both the Dutch
Auction and the stock repurchase program are expected to be held as
treasury stock, and from time to time, may be reissued in settlement of
stock options and the Company's employee stock purchase plan. During the
third quarter the Company purchased 217,670 Common Shares at an average
price of $8.19 per share including commissions. Since commencing the tender
offer in November 1998, the Company has purchased under both buy back plans
a total of 704,003 Common Shares, which constitutes 9 percent of the
combined Common and Class B Common Shares at the start of buy back
programs, at an average price of $8.02 per share including commissions.
During the second quarter of fiscal 1999, the Company reissued 58,393
treasury shares in settlement of shares purchased through the Company's
employee stock purchase plan.
G. COMPREHENSIVE INCOME
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which
establishes rules for reporting comprehensive income and its components.
The Company's only item of other comprehensive income is foreign currency
translation adjustments recorded in shareholders' equity. The adoption of
SFAS 130 did not impact the Company's net income or total shareholders'
equity. Comprehensive income for the three and nine months ended June 30,
1999 and 1998 is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 4,612 $ 667 $ 10,379 $ 2,542
Foreign currency translation
adjustments (123) 45 (440) (45)
-------- -------- -------- --------
Comprehensive income $ 4,489 $ 712 $ 9,939 $ 2,497
======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(In Thousands of Dollars)
RESULTS OF OPERATIONS
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
Net income for the third quarter of fiscal 1999 before a favorable adjustment
for income taxes was $2,417 or $0.32 per share, and was a record high excluding
gains on the sales of two businesses recorded in prior quarters. The current
quarter's net income improved significantly from $667, or $0.08 per share, in
the prior year's third quarter. Net income for the 1999 third quarter including
the tax adjustment was $4,612, or $0.61 per share. The income tax adjustment
resulted from settlements of prior years' tax liabilities and the release of
certain valuation reserves due to improved profitability from U.S. operations.
Net sales of $25,947 increased 15 percent from the prior year's third quarter
after excluding sales of the Radiation Measurements Division (RMD) which was
sold in the fourth quarter of fiscal 1998 and the Quantox product line sold in
the first quarter of fiscal 1999. Sales of the Company's products serving the
semiconductor industry accounted for the majority of the increase. Excluding RMD
and Quantox in prior periods, orders for the third quarter of $31,038 increased
43 percent from the prior year's quarter and were the second highest in the
Company's history. Strong orders for the Company's products serving the
semiconductor industry and the wireless communications industry accounted for
the increase. Geographically, orders were up 40 to 45 percent in all major
regions, except from the Pacific Basin region which was up approximately 20
percent. Order backlog grew $3,592 during the quarter to a record $15,707 at
June 30, 1999.
Cost of goods sold as a percentage of net sales improved by 4.1 percentage
points to 38.4 percent from 42.5 percent. The absence of RMD and the Quantox
product, whose cost of goods sold were higher, and higher volume from the
remaining businesses caused the improvement. The Company's hedging activities
decreased cost of goods sold for the quarter by 0.4 percentage points versus no
effect on cost of goods sold in the prior year's quarter.
Selling, general and administrative expenses of $9,976, or 38.4 percent of net
sales, for the third quarter decreased $2,135, or 18 percent, from $12,111, or
42.3 percent, in the prior year's quarter. The decrease was due to the absence
of costs for RMD and Quantox in the 1999 quarter, as well as cost reduction
actions taken over the last 18 months.
Product development expenses of $2,682 decreased $406, or 13 percent, from
$3,088 in the prior year's quarter. Excluding development costs for RMD and
Quantox in the prior year's quarter, product development expenses increased 4
percent due to increased investments for new products which will service the
semiconductor industry, as well as new data acquisition products.
The Company generated net financing income during the quarter of $30 versus
expense of $248 in the prior year. Lower average debt levels resulting in lower
interest expense combined with income earned on significantly higher cash and
cash equivalents accounted for the improvement.
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NINE MONTHS ENDED JUNE 30, 1999 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1998
Net income for the nine months ending June 30, 1999, was $10,379, or $1.35 per
share on a diluted basis. Excluding the gain on the sale of Quantox of $3,090,
or $.39 per share, and a favorable income adjustment of $2,195, or $.29 per
share, net income was $5,094, or $.66 per share, compared to $2,542, or $.32 per
share for the nine-month period last year.
Excluding RMD and Quantox, net sales of $71,215 decreased 5 percent from the
nine-month period last year. Orders, excluding RMD and Quantox, for the
nine-month period were up 10 percent from last year due to very strong orders
for the Company's semiconductor capital equipment products. Geographically,
orders were up in the United States and Europe, but flat in the Pacific Basin
region.
Cost of goods sold as a percentage of net sales decreased to 40.0 percent from
42.5 percent for the nine-month period last year. RMD and Quantox product line's
cost of goods sold were higher as a percentage of net sales than the Company's
other businesses and the absence of these sales caused the improvement. The
effect of foreign exchange hedging on cost of goods was immaterial in both
periods.
Selling, general and administrative expenses of $27,962 decreased $8,537, or 23
percent, from $36,499 in the same period last year. The majority of the
decreased can be attributed to the absence of RMD and only one month's costs for
Quantox in the current year's nine-month period. Additionally, the Company's
cost reduction actions taken over the last 18 months also lowered costs.
Product development expenses of $7,760, or 10.9 percent of net sales, decreased
$2,511, or 24 percent, from $10,271, or 11.4 percent of net sales, in the prior
year. Excluding development costs for RMD and Quantox in all periods, product
development expenses decreased $235, or 3 percent.
Special charges of $335 in last year's nine-month period relate to cost
reductions announced in February 1998 for the Company's semiconductor business,
net of $10 for the reversal of personnel related expenses previously accrued for
the Keithley MetraByte operation relocation.
The Company generated net financing income of $104 for the current year's
nine-month period versus $816 of expense last year. Lower average debt levels
resulting in lower interest expense combined with income earned on significantly
higher cash and cash equivalents accounted for the improvement.
The Company's effective tax rate was 12.7 percent for the nine-month period
ended June 30, 1999, and was the result of a combination of three factors: the
gain on the sale of the Quantox product line recorded at the statutory rate
including state and local taxes, a tax benefit resulting from the release of
certain valuation reserves due to the settlement of prior years' tax liabilities
and improved profitability in the Company's U.S. operations, and an estimated
24.3 percent rate applied on the Company's normal operating earnings. The rate
of 24.3 percent is lower than the statutory rate due to the utilization of
certain tax credits. The tax rate for last year's nine-month period was 33.0
percent.
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LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations was $2,793 for the third quarter and $6,148 for
the nine months ended June 30, 1999. Cash provided by investment activities for
the nine months includes $9,147 received for the sale of the Company's Quantox
product line. Cash used in financing activities includes $3,056 for the pay down
of long-term debt and $5,647 to purchase 704,003 Common Shares through the Dutch
Auction and the Company's on-going stock repurchase program. The Company also
received $431 and reissued 58,393 common Shares through the Company's employee
stock purchase plan. (See Note F.) Total debt of $3,000 at June 30, 1999,
decreased $3,099 from the beginning of the fiscal year. The total
debt-to-capital ratio was 6.5 percent at June 30, 1999 compared with 13.6
percent at September 30, 1998.
The Company expects to finance capital spending, the stock repurchase program
and working capital requirements with cash provided by operations. At June 30,
1999, the Company had available unused lines of credit with domestic and foreign
banks aggregating $27,188, of which $5,188 were short term and $22,000 were long
term.
OUTLOOK
The Company's overall expense levels for the next few quarters are expected to
be reasonably consistent with those of the past two quarters. Due to the
increase in backlog at the end of the third quarter, management anticipates some
improvement in sales and earnings from operations in the fourth quarter over
those of the third quarter.
The effective tax rate from the Company's normal operating activities, excluding
the gain on the sale of the Quantox product line and the favorable income tax
adjustment, is expected to approximate 24 percent for the 1999 fiscal year. The
Company's effective tax rate for fiscal 2000 should be closer to the statutory
rate as the majority of the Company's tax credits will have been utilized.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain information included above in the last paragraph of the Liquidity and
Capital Resources section and the Outlook section of Management's Discussion and
Analysis of Financial Condition and Results of Operations relating to
expectations of cash flows, the Company's cost structure, sales and earnings
growth for the fourth quarter, the tax rate for fiscal 1999 and 2000, and future
financial results constitute "forward-looking" statements, as that term is
defined in the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Some of the factors that may affect
future results are discussed below.
Although the Company operates in a single industry segment, certain of its
products and product lines are sold into the semiconductor industry. Growth in
demand for semiconductors, new technology and pricing drive the demand for new
semiconductor capital equipment. Historically, sales and order levels for this
business have been volatile which can affect revenue and earnings for the
Company.
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The Company's business relies on the development of new high technology products
and services to provide solutions to customer's complex measurement needs. This
requires anticipation of customers' changing needs and emerging technology
trends. The Company must make long-term investments and commit significant
resources before knowing whether its expectations will eventually result in
products that achieve market acceptance. The Company incurs significant expenses
developing new products that may or may not result in significant sources of
revenue and earnings in the future.
In many cases the Company's products compete directly with those offered by
other manufacturers. If any of the Company's competitors were to develop
products or services that are more cost-effective or technically superior,
demand for the Company's product offerings could slow.
The Company's cost structure is comprised of costs that are directly related to
the level of sales, as well as costs that are fixed and do not fluctuate based
on quarterly sales levels. The Company's ability to maintain its cost structure
or to further improve its cost structure depends on its ability to control those
costs that are fixed or semi-variable.
The Company pays taxes in several jurisdictions throughout the world. The
Company utilizes available tax credits and other tax planning strategies in an
effort to minimize the Company's overall tax liability. The Company's actual tax
rate for fiscal 1999 or 2000 could change from what is currently anticipated due
to changes in various country's tax laws or changes in the Company's overall tax
planning strategy.
The Company currently has ten subsidiaries or sales offices located outside the
United States, and non-U.S. sales made up approximately half of the Company's
revenue in the first nine months of fiscal 1999. The Company's future results
could be adversely affected by several factors, including the length and
severity of the Asian financial crisis, changes in foreign currency exchange
rates, changes in a country's or region's political or economic conditions,
trade protection measures, import or export licensing requirements, unexpected
changes in regulatory requirements and natural disasters.
The Company recognizes the need to ensure that Year 2000 hardware and software
issues will not adversely impact its operations. With regard to the Company's
own information systems, a substantial portion of Year 2000 information
technology compliance has been achieved in connection with the Company's ongoing
program to upgrade its key information and operational systems. The Company is
in the process of replacing the one remaining key system that is not Year 2000
compliant and believes this system will be ready for operation prior to the year
2000, and that any related costs will not have a material impact on the results
of operations, financial condition or cash flows of future periods. With regard
to the Company's own products, all products currently being sold have been
evaluated for Year 2000 compliance. Most have been found to be ready for the
Year 2000 change. Any exceptions have been identified and alternative solutions
for continuing use of these products have been noted. The cost of identifying
and modifying products for Year 2000 compliance did not have a material effect
on the results of operations, financial condition or cash flows of future
periods and any future costs are not expected to have a material impact. Lastly,
the Company has surveyed its base of key suppliers to determine if their systems
(insofar as they relate to the Company's business) comply with Year 2000
requirements. The Company is now monitoring their performance to process orders
and deliver products as the Year 2000 approaches. There can be no assurance that
the systems of other companies with which Keithley Instruments, Inc. does
business will be able to
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adequately address the Year 2000 issue. If it is determined that any third party
may not be ready, the Company will develop a contingency plan. While management
does not expect that the failure of any third party to be fully compliant by
2000 would significantly affect results of operations, financial condition or
cash flows of future periods, there can be no assurance that any such failure
will not have an adverse effect on the Company's operations.
The Company has modified its systems to accommodate the Euro. The cost of these
modifications was immaterial to the Company's results of operations. Although
difficult to predict, any competitive implications and any impact on existing
financial instruments are expected to be immaterial to the Company's results of
operations, financial condition or cash flows of future periods.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibits are filed herewith:
Exhibit
Number Exhibit
------ -------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule (EDGAR version only)
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
quarterly period ended June 30, 1999.
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.
KEITHLEY INSTRUMENTS, INC.
(Registrant)
Date: August 13, 1999 /s/ Joseph P. Keithley
-------------------------
Joseph P. Keithley
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 /s/ Mark J. Plush
--------------------
Mark J. Plush
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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