form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
_____________________________________________
FORM
10-Q
x QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
for the
quarterly period ended December 31, 2007
or
o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
for the
transition period from ____ to ____
Commission
File No. 0-21820
____________________________________________
KEY
TECHNOLOGY, INC.
(Exact
name of Registrant as specified in its charter)
|
Oregon
(State
or jurisdiction of
incorporation
or organization)
|
93-0822509
(I.R.S.
Employer
Identification
No.)
|
150 Avery
Street
Walla
Walla, Washington 99362
(Address
of principal executive offices and zip code)
(509) 529-2161
(Registrant's
telephone number, including area code)
_____________________________________________
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ý No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.Large accelerated filer ¨Accelerated filer ýNon-accelerated filer
¨
Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No ý
The
number of shares outstanding of the registrant's common stock, no par value, on
January 31, 2008 was 5,552,581 shares.
KEY
TECHNOLOGY, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007
KEY
TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED BALANCE SHEETS
DECEMBER
31, 2007 AND SEPTEMBER 30, 2007
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(in
thousands) |
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
27,729 |
|
|
$ |
27,880 |
|
|
Trade accounts receivable
|
|
|
13,637 |
|
|
|
14,020 |
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
8,535 |
|
|
|
7,104 |
|
|
Work-in-process and sub-assemblies
|
|
|
5,991 |
|
|
|
6,803 |
|
|
Finished goods
|
|
|
5,455 |
|
|
|
4,846 |
|
|
Total inventories
|
|
|
19,981 |
|
|
|
18,753 |
|
|
Deferred income taxes
|
|
|
2,105 |
|
|
|
2,120 |
|
|
Prepaid expenses and other assets
|
|
|
1,602 |
|
|
|
1,954 |
|
|
Total
current assets
|
|
|
65,054 |
|
|
|
64,727 |
|
|
Property,
plant and equipment, net
|
|
|
5,062 |
|
|
|
4,671 |
|
|
Deferred
income taxes
|
|
|
8 |
|
|
|
- |
|
|
Goodwill,
net
|
|
|
2,524 |
|
|
|
2,524 |
|
|
Intangibles
and other assets, net
|
|
|
3,248 |
|
|
|
3,575 |
|
|
Total
|
|
$ |
75,896 |
|
|
$ |
75,497 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
4,133 |
|
|
$ |
5,692 |
|
|
Accrued payroll liabilities and commissions
|
|
|
6,336 |
|
|
|
6,663 |
|
|
Accrued customer support and warranty costs
|
|
|
1,868 |
|
|
|
1,946 |
|
|
Customer purchase plans
|
|
|
1,131 |
|
|
|
651 |
|
|
Income taxes payable
|
|
|
235 |
|
|
|
181 |
|
|
Other accrued liabilities
|
|
|
774 |
|
|
|
798 |
|
|
Customers' deposits
|
|
|
8,103 |
|
|
|
7,850 |
|
|
Total
current liabilities
|
|
|
22,580 |
|
|
|
23,781 |
|
|
Long-term
deferred rent
|
|
|
602 |
|
|
|
601 |
|
|
Other
long-term liabilities
|
|
|
129 |
|
|
|
- |
|
|
Deferred
income taxes
|
|
|
235 |
|
|
|
722 |
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
17,633 |
|
|
|
17,105 |
|
|
Retained earnings and other shareholders' equity
|
|
|
34,717 |
|
|
|
33,288 |
|
|
Total
shareholders' equity
|
|
|
52,350 |
|
|
|
50,393 |
|
|
Total
|
|
$ |
75,896 |
|
|
$ |
75,497 |
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed unaudited consolidated financial
statements.
|
|
KEY TECHNOLOGY, INC. AND
SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in
thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
28,943 |
|
|
$ |
22,609 |
|
|
Cost
of sales
|
|
|
17,476 |
|
|
|
13,889 |
|
|
Gross
profit
|
|
|
11,467 |
|
|
|
8,720 |
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
5,185 |
|
|
|
3,918 |
|
|
Research and development
|
|
|
2,034 |
|
|
|
1,670 |
|
|
General and administrative
|
|
|
2,656 |
|
|
|
1,909 |
|
|
Amortization of intangibles
|
|
|
327 |
|
|
|
327 |
|
|
Total
operating expenses
|
|
|
10,202 |
|
|
|
7,824 |
|
|
Gain
on sale of assets
|
|
|
32 |
|
|
|
37 |
|
|
Earnings
from operations
|
|
|
1,297 |
|
|
|
933 |
|
|
Gain
on sale of investment in joint venture
|
|
|
- |
|
|
|
750 |
|
|
Other
income
|
|
|
307 |
|
|
|
303 |
|
|
Earnings
before income taxes
|
|
|
1,604 |
|
|
|
1,986 |
|
|
Income
tax expense
|
|
|
514 |
|
|
|
420 |
|
|
Net
earnings
|
|
$ |
1,090 |
|
|
$ |
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share
|
|
|
|
|
|
|
|
|
|
-
basic
|
|
$ |
0.20 |
|
|
$ |
0.30 |
|
|
-
diluted
|
|
$ |
0.20 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in per share calculations - basic
|
|
|
5,354 |
|
|
|
5,240 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in per share calculations - diluted
|
|
|
5,501 |
|
|
|
5,361 |
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed unaudited consolidated financial
statements.
|
|
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in
thousands) |
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net earnings
|
|
$ |
1,090 |
|
|
$ |
1,566 |
|
|
Adjustments to reconcile net earnings to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Gain on sale of joint venture
|
|
|
- |
|
|
|
(750 |
) |
|
Gain on sale of assets
|
|
|
(32 |
) |
|
|
(37 |
) |
|
Foreign currency exchange (gain) loss
|
|
|
(134 |
) |
|
|
(157 |
) |
|
Depreciation and amortization
|
|
|
676 |
|
|
|
668 |
|
|
Share based payments
|
|
|
381 |
|
|
|
250 |
|
|
Excess tax benefits from share based payments
|
|
|
(250 |
) |
|
|
- |
|
|
Deferred income taxes
|
|
|
151 |
|
|
|
401 |
|
|
Deferred rent
|
|
|
1 |
|
|
|
(13 |
) |
|
Bad debt expense
|
|
|
(4 |
) |
|
|
5 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
494 |
|
|
|
(225 |
) |
|
Inventories
|
|
|
(1,063 |
) |
|
|
402 |
|
|
Prepaid expenses and other current assets
|
|
|
278 |
|
|
|
30 |
|
|
Income taxes receivable
|
|
|
74 |
|
|
|
60 |
|
|
Accounts payable
|
|
|
(1,605 |
) |
|
|
(796 |
) |
|
Accrued payroll liabilities and commissions
|
|
|
(785 |
) |
|
|
(149 |
) |
|
Accrued customer support and warranty costs
|
|
|
(99 |
) |
|
|
150 |
|
|
Income taxes payable
|
|
|
55 |
|
|
|
44 |
|
|
Other accrued liabilities
|
|
|
414 |
|
|
|
49 |
|
|
Customers’ deposits
|
|
|
217 |
|
|
|
804 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
(141 |
) |
|
|
2,302 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property
|
|
|
36 |
|
|
|
43 |
|
|
Purchases of property, plant, and equipment
|
|
|
(710 |
) |
|
|
(52 |
) |
|
Sale of investment in joint venture
|
|
|
- |
|
|
|
750 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
(674 |
) |
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
KEY
TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(in
thousands) |
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
$ |
- |
|
|
$ |
(635 |
) |
|
Excess tax benefits from share based payments
|
|
|
250 |
|
|
|
- |
|
|
Proceeds from issuance of common stock
|
|
|
345 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
595 |
|
|
|
(509 |
) |
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
69 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(151 |
) |
|
|
2,601 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
|
|
|
27,880 |
|
|
|
15,246 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF THE PERIOD
|
|
$ |
27,729 |
|
|
$ |
17,847 |
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$ |
2 |
|
|
$ |
7 |
|
|
Cash paid (refunded) during the period for income taxes
|
|
$ |
237 |
|
|
$ |
(87 |
) |
|
Non cash financing activities:
|
|
|
|
|
|
|
|
|
|
Exchange of shares for statutory withholding
|
|
$ |
428 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Concluded)
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
KEY TECHNOLOGY, INC. AND
SUBSIDIARIES
NOTES TO
CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
THREE MONTHS ENDED DECEMBER 31, 2007
|
1.
|
Condensed
unaudited consolidated financial
statements
|
Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) have been omitted from these condensed
unaudited consolidated financial statements. These condensed
unaudited consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2007. The
results of operations for the three-month period ended December 31, 2007 are not
necessarily indicative of the operating results for the full year.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
In the
opinion of management, all adjustments, consisting only of normal recurring
accruals, have been made to present fairly the Company's financial position at
December 31, 2007 and the results of its operations and its cash flows for the
three-month periods ended December 31, 2007 and 2006.
Certain
reclassifications have been made to prior year amounts to conform to the current
year presentation.
During
the three-month period ended December 31, 2007, the Company granted 13,551
shares of service-based stock awards. The fair value of these ranged
from $27.22 to $31.43 per share based on the fair market value at the grant
date. The restrictions on the grants lapse at the end of the required
service periods ranging from September 2010 through November
2010. The Company also granted 2,000 shares of non-employee
service-based stock awards during the quarter ended December 31,
2007. The shares immediately vested and had a grant date fair value
of $33.40 per share.
Stock
compensation expense included in the Company’s results was as follows (in
thousands):
|
|
|
Three
months ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost
of goods sold
|
|
$ |
82 |
|
|
$ |
31 |
|
|
Operating
expenses
|
|
|
299 |
|
|
|
219 |
|
|
Total
stock compensation expense
|
|
$ |
381 |
|
|
$ |
250 |
|
Stock
compensation expense remaining capitalized in inventory at December 31, 2007 and
2006 was $35,000 and $26,000, respectively.
The calculation of the basic and diluted earnings per share (“EPS”) is as
follows (in thousands except per share data):
|
|
|
For
the three months ended
December
31, 2007
|
|
|
For
the three months ended
December
31, 2006
|
|
|
|
|
Earnings
|
|
|
Shares
|
|
|
Per-Share
Amount
|
|
|
Earnings
|
|
|
Shares
|
|
|
Per-Share
Amount
|
|
|
Basic
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1,090 |
|
|
|
5,354 |
|
|
$ |
0.20 |
|
|
$ |
1,566 |
|
|
|
5,240 |
|
|
$ |
0.30 |
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock options
|
|
|
|
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
Common
stock awards
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
Diluted
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings plus
assumed conversions
|
|
$ |
1,090 |
|
|
|
5,501 |
|
|
$ |
0.20 |
|
|
$ |
1,566 |
|
|
|
5,361 |
|
|
$ |
0.29 |
|
The
weighted-average number of diluted shares does not include potential common
shares which are anti-dilutive, nor does it include performance-based restricted
stock awards if the performance measurement has not been met. The
following potential common shares at December 31, 2007 and 2006 were not
included in the calculation of diluted EPS as they were anti-dilutive or the
performance measurement has not been met:
|
|
|
Three
months ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Common
shares from:
|
|
|
|
|
|
|
|
Assumed
exercise of stock options
|
|
|
- |
|
|
|
86,000 |
|
|
Assumed
lapse of restrictions on:
|
|
|
|
|
|
|
|
|
|
-
Service-based stock grants
|
|
|
- |
|
|
|
- |
|
|
-
Performance-based stock grants
|
|
|
7,200 |
|
|
|
72,810 |
|
|
-
Non-employee stock grants
|
|
|
- |
|
|
|
- |
|
The
options expire on dates beginning in February 2008 through February
2015. The restrictions on stock grants may lapse between February
2008 and November 2010.
The
provision (benefit) for income taxes is based on the estimated effective income
tax rate for the year.
The
Company adopted the provisions of FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, on October 1, 2007. Previously, the Company had
accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards 5, Accounting for Contingencies. As required by
Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes,
the Company recognizes the financial statement benefit of a tax position only
after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At
the adoption date, the Company applied Interpretation 48 to all tax positions
for which the statute of limitations remained open. As a result of the
implementation of Interpretation 48, the Company recognized a decrease of
approximately $250,000 in the liability for unrecognized tax benefits, which was
accounted for as an increase to the October 1, 2007 balance of retained
earnings.
The
amount of unrecognized tax benefits as of October 1, 2007 was approximately
$91,000 which, if ultimately recognized, will reduce the Company’s annual
effective tax rate. There have been no material changes in unrecognized tax
benefits since October 1, 2007.
The
Company is subject to income taxes in the U.S. federal jurisdiction and various
state and foreign jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for the years before 2002.
The
Company is not currently under examination by any U.S. federal, state, or
foreign jurisdictions and there are no expected material changes in the
unrecognized tax benefit liability within the next twelve months.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in other income and expense for all periods
presented. The Company had accrued approximately $37,000 for the payment of
interest and penalties at October 1, 2007. Subsequent changes to accrued
interest and penalties have not been significant.
The
calculation of comprehensive income is as follows (in thousands):
|
|
|
Three
months ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Components
of comprehensive income:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
1,090 |
|
|
$ |
1,566 |
|
|
Other
comprehensive income -
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment, net of tax
|
|
|
89 |
|
|
|
85 |
|
|
Total
comprehensive income
|
|
$ |
1,179 |
|
|
$ |
1,651 |
|
|
6.
|
Contractual
guarantees and indemnities
|
Product
warranties
The
Company provides a warranty on its products ranging from ninety days to five
years following the date of shipment. The majority of product
warranties are for periods between one and two years. Management
establishes allowances for customer support and warranty costs based upon the
types of products shipped, customer support and product warranty
experience. The provision of customer support and warranty costs is
charged to cost of sales at the point of sale, and it is periodically assessed
for adequacy based on changes in these factors.
A
reconciliation of the changes in the Company’s allowances for warranties for the
three months ended December 31, 2007 and 2006 (in thousands) is as
follows:
|
|
|
Three
months ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Beginning
balance
|
|
$ |
1,433 |
|
|
$ |
979 |
|
|
Warranty
costs incurred
|
|
|
(585 |
) |
|
|
(505 |
) |
|
Warranty
expense accrued
|
|
|
418 |
|
|
|
527 |
|
|
Translation
adjustments
|
|
|
14 |
|
|
|
18 |
|
|
Ending
balance
|
|
$ |
1,280 |
|
|
$ |
1,019 |
|
Intellectual
property and general contractual indemnities
The
Company, in the normal course of business, provides specific, limited
indemnification to its customers for liability and damages related to
intellectual property rights. In addition, the Company may enter into
contracts with customers where it has agreed to indemnify the customer for
personal injury or property damage caused by the Company’s products and
services. Indemnification is typically limited to replacement of the items or
the actual price of the products and services. The Company maintains
product liability insurance as well as errors and omissions insurance, which may
provide a source of recovery in the event of an indemnification claim, but does
not maintain insurance coverage for claims related to intellectual property
rights.
Historically,
any amounts payable under these indemnifications have not had a material effect
on the Company’s business, financial condition, results of operations, or cash
flows. The Company has not recorded any provision for future obligations under
these indemnifications. If the Company determines it is probable that
a loss has occurred under these indemnifications, then any such reasonably
estimable loss would be recognized.
Director
and officer indemnities
The
Company has entered into indemnification agreements with its directors and
certain executive officers which require the Company to indemnify such
individuals against certain expenses, judgments and fines in third-party and
derivative proceedings. The Company may recover some of the expenses
and liabilities that arise in connection with such indemnifications under the
terms of its directors’ and officers’ insurance policies. The Company
has not recorded any provision for future obligations under these
indemnification agreements.
Bank
guarantees and letters of credit
At
December 31, 2007, the Company had standby letters of credit totaling $1.7
million, which includes secured bank guarantees under the Company’s credit
facility in Europe and letters of credit securing certain self-insurance
contracts and lease commitments. If the Company fails to meet its
contractual obligations, these bank guarantees and letters of credit may become
liabilities of the Company. This amount is comprised of approximately
$1.3 million of outstanding performance guarantees secured by bank guarantees
under the Company’s European subsidiaries credit facility in Europe, a standby
letter of credit for $150,000 securing certain self-insurance contracts related
to workers compensation and a standby letter of credit for $230,000 securing
payments under a lease contract for a domestic production
facility. Bank guarantees arise when the European subsidiary collects
customer deposits prior to order fulfillment. The customer deposits
received are recorded as current liabilities on the Company’s balance
sheet. The bank guarantees repayment of the customer deposit in the
event an order is not completed. The bank guarantee is canceled upon
shipment and transfer of title. These bank guarantees arise in the
normal course of the Company’s European business and are not deemed to expose
the Company to any significant risks since they are satisfied as part of the
design and manufacturing process.
Purchase
Obligations
The
Company has contractual obligations to purchase certain materials and supplies
aggregating $686,000 by December 31, 2008. As of December 31, 2007,
the Company had purchased $577,000 of materials under contract. The
Company anticipates it will purchase the remaining $109,000 of obligations in
the next twelve months.
|
7.
|
Future
accounting changes
|
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which establishes guidelines
for measuring fair value and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair
value measurements but rather it eliminates inconsistencies in the guidance
found in various prior accounting
pronouncements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. The Company is evaluating the
potential effects of this standard, although the Company does not expect the
adoption of SFAS No. 157 to have a material effect on our financial
position, results of operation, or cash flows.
In
February 2007, the FASB issued Statement 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This Statement permits
entities to elect to measure certain financial instruments and other items at
fair value. The fair value option may be applied on an instrument by
instrument basis, is irrevocable and is applied only to entire
instruments. SFAS 159 requires additional financial statement
presentation and disclosure requirements for those entities that elect to adopt
the standard and is effective for fiscal years beginning after November 15,
2007. The Company does not expect the adoption of SFAS 159 to have a
material effect on its financial position, results of operations or cash
flows.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
From time
to time, Key Technology, Inc. (“Key” or the “Company”), through its management,
may make forward-looking public statements with respect to the Company
regarding, among other things, expected future revenues or earnings,
projections, plans, future performance, product development and
commercialization, and other estimates relating to the Company’s future
operations. Forward-looking statements may be included in reports
filed under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), in press releases or in oral statements made with the approval of an
authorized executive officer of Key. The words or phrases “will
likely result,” “are expected to,” “intends,” “is anticipated,” “estimates,”
“believes,” “projects” or similar expressions are intended to identify
“forward-looking statements” within the meaning of Section 21E of the Exchange
Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the
Private Securities Litigation Reform Act of 1995.
Forward-looking
statements are subject to a number of risks and uncertainties. The
Company cautions investors not to place undue reliance on its forward-looking
statements, which speak only as of the date on which they are
made. Key’s actual results may differ materially from those described
in the forward-looking statements as a result of various factors, including
those listed below:
|
·
|
adverse
economic conditions, particularly in the food processing industry, either
globally or regionally, may adversely affect the Company's
revenues;
|
|
·
|
competition
and advances in technology may adversely affect sales and
prices;
|
|
·
|
failure
of the Company’s new products to compete successfully in either existing
or new markets;
|
|
·
|
the
limited availability and possible cost fluctuations of materials used in
the Company’s products could adversely affect the Company’s gross
profits;
|
|
·
|
the
inability of the Company to protect its intellectual property, especially
as the Company expands geographically, may adversely affect the Company’s
competitive advantage; and
|
|
·
|
intellectual
property-related litigation expenses and other costs resulting from
infringement claims asserted against the Company by third parties may
adversely affect the Company’s results of operations and its customer
relations.
|
More
information may be found in Item 1A, “Risk Factors,” in the Company’s Annual
Report on Form 10-K filed with the SEC on December 14, 2007, which item is
hereby incorporated by reference.
Given
these uncertainties, readers are cautioned not to place undue reliance on the
forward-looking statements. The Company disclaims any obligation
subsequently to revise or update forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Overview
General
The
Company and its operating subsidiaries design, manufacture, sell and service
process automation systems that process product streams of discrete pieces to
improve safety and quality. These systems integrate electro-optical
automated inspection and sorting systems with process systems that include
specialized conveying and preparation systems. The Company provides
parts and service for each of its product lines to customers throughout the
world. Industries served include food processing, as well as tobacco,
plastics, and pharmaceuticals. The Company maintains two domestic
manufacturing facilities and a European manufacturing facility located in the
Netherlands. The Company markets its products directly and through
independent sales representatives.
In the
past several years, 40% or more of the Company’s sales have been made to
customers located outside the United States. In its export and
international sales, the Company is subject to the risks of conducting business
internationally, including unexpected changes in regulatory requirements;
fluctuations in the value of the U.S. dollar which could increase or decrease
the sales prices in local currencies of the Company’s products; tariffs and
other barriers and restrictions; and the burdens of complying with a variety of
international laws.
Current
period – first quarter of fiscal 2008
The
results for the first quarter of fiscal 2008 showed continued growth in order
volume, net sales and backlog. Customer orders in the first quarter
of fiscal 2008 of $35.0 million were up 50% over the first quarter of fiscal
2007.
The
orders received during the quarter were an all-time record, up 4% from the
previous record of $33.6 million set in the third quarter of fiscal
2007. This increase in orders is attributable to several factors: the
increasing global concern regarding food safety and security; the continuing
decline of available labor in the food processing industry; the growth of our
business in Latin America; the recovery of our business in Europe; and, finally,
the continued confidence of our customers in the Company’s ability to provide
processing solutions.
Net sales of $28.9 million in the 2008 first fiscal quarter were $6.3 million,
or 28% higher, compared to the corresponding quarter a year
ago. Ending backlog of $36.8 million was also at a record level,
beating the prior record of $36.7 million set in the third fiscal quarter of
2007, and represented a 55% increase over the corresponding quarter a year
ago. Net earnings for the first quarter of fiscal 2008 were $1.1
million or $0.20 per diluted share. Total net earnings for the same
period last year were $1.6 million, or $0.29 per diluted share, which included a
$750,000 gain, or $0.14 per share, from the sale of the Company’s 50% interest
in its InspX joint venture. During the fiscal 2008 first quarter, the
Company continued to focus on its core business and growth
initiatives: to strengthen its presence in the pharmaceutical and
nutraceutical market, to increase upgrade system sales, and to continue to
establish its global market presence.
Additionally,
the Company began work to implement a new global enterprise resource planning
(“ERP”) system. Implementation will be spread over a three-year
period, with an estimated cost of $5.5 million including both internal and
external resources. A significant portion of these implementation
costs will be capitalized. Operating expenses of $124,000 were
incurred during the first quarter of fiscal 2008.
Application of Critical
Accounting Policies
The
Company has identified its critical accounting policies, the application of
which may materially affect the financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require management judgment to make estimates and assumptions in measuring,
at a specific point in time, events which will be settled in the
future. The critical accounting policies, judgments and estimates
which management believes have the most significant effect on the financial
statements are set forth below:
|
|
·
|
Allowances
for doubtful accounts
|
|
|
·
|
Valuation
of inventories
|
|
|
·
|
Allowances
for warranties
|
|
|
·
|
Accounting
for income taxes
|
Management
has discussed the development, selection and related disclosures of these
critical accounting estimates with the audit committee of the Company’s board of
directors.
Revenue
Recognition. The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
provided, the sale price is fixed or determinable, and collectibility is
reasonably assured. Additionally, the Company sells its goods on
terms which transfer title and risk of loss at a specified location, typically
shipping point, port of loading or port of discharge, depending on the final
destination of the goods. Accordingly, revenue recognition from
product sales occurs when all criteria are met, including transfer of title and
risk of loss, which occurs either upon shipment by the Company or upon receipt
by customers at the location specified in the terms of sale. Revenue
earned from services (maintenance, installation support, and repairs) is
recognized ratably over the contractual period or as the services are
performed. If any contract provides for both equipment and services
(multiple deliverables), the sales price is allocated to the various elements
based on objective evidence of fair value. Each element is then
evaluated for revenue recognition based on the previously described
criteria. The Company’s sales arrangements provide for no other
significant post shipment obligations. If all conditions of revenue
recognition are not met, the Company defers revenue recognition. In
the event of revenue deferral, the sale value is not recorded as revenue to the
Company, accounts receivable are reduced by any amounts owed by the customer,
and the cost of the goods or services deferred is carried in
inventory. In addition, the Company periodically evaluates whether an
allowance for sales returns is necessary. Historically, the Company
has experienced few sales returns. If the Company believes there are
potential sales returns, the Company will provide any necessary provision
against sales. In accordance with the Financial Accounting Standard
Board’s Emerging Issues Task Force Issue No. 01-9, “Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor’s Product,” the
Company accounts for cash consideration (such as sales incentives) that are
given to
customers
or resellers as a reduction of revenue rather than as an operating expense
unless an identified benefit is received for which fair value can be reasonably
estimated. The Company believes that revenue recognition is a
“critical accounting estimate” because the Company’s terms of sale vary
significantly, and management exercises judgment in determining whether to
recognize or defer revenue based on those terms. Such judgments may
materially affect net sales for any period. Management exercises
judgment within the parameters of accounting principles generally accepted in
the United States of America (GAAP) in determining when contractual obligations
are met, title and risk of loss are transferred, the sales price is fixed or
determinable and collectibility is reasonably assured. At December
31, 2007, the Company had invoiced $2.1 million compared to $2.3 million at
September 30, 2007 for which the Company has not recognized
revenue.
Allowances for doubtful
accounts. The Company establishes allowances for doubtful
accounts for specifically identified, as well as anticipated, doubtful accounts
based on credit profiles of customers, current economic trends, contractual
terms and conditions, and customers’ historical payment
patterns. Factors that affect collectibility of receivables include
general economic or political factors in certain countries that affect the
ability of customers to meet current obligations. The Company
actively manages its credit risk by utilizing an independent credit rating and
reporting service, by requiring certain percentages of down payments, and by
requiring secured forms of payment for customers with uncertain credit profiles
or located in certain countries. Forms of secured payment could
include irrevocable letters of credit, bank guarantees, third-party leasing
arrangements or EX-IM Bank guarantees, each utilizing Uniform Commercial Code
filings, or the like, with governmental entities where possible. The
Company believes that the accounting estimate related to allowances for doubtful
accounts is a “critical accounting estimate” because it requires management
judgment in making assumptions relative to customer or general economic factors
that are outside the Company’s control. As of December 31, 2007, the
balance sheet included allowances for doubtful accounts of
$419,000. Amounts charged to bad debt expense for the three-month
period ended December 31, 2007 and 2006 were ($4,000) and $5,000,
respectively. Actual charges to the allowance for doubtful accounts
for the three-month period ended December 31, 2007 and 2006 were ($4,000) and
$10,000, respectively. If the Company experiences actual
bad debt expense in excess of estimates, or if estimates are adversely adjusted
in future periods, the carrying value of accounts receivable would decrease and
charges for bad debts would increase, resulting in decreased net
earnings.
Valuation of
inventories. Inventories are stated at the lower of cost or
market. The Company’s inventory includes purchased raw materials, manufactured
components, purchased components, work in process, finished goods and
demonstration equipment. Write downs of excess and obsolete
inventories are made after periodic evaluation of historical sales, current
economic trends, forecasted sales, estimated product lifecycles and estimated
inventory levels. The factors that contribute to inventory valuation
risks are the Company’s purchasing practices, electronic component obsolescence,
accuracy of sales and production forecasts, introduction of new products,
product lifecycles and the associated product support. The Company
actively manages its exposure to inventory valuation risks by maintaining low
safety stocks and minimum purchase lots, utilizing just in time purchasing
practices, managing product end-of-life issues brought on by aging components or
new product introductions, and by utilizing inventory minimization strategies
such as vendor-managed inventories. The Company believes that the
accounting estimate related to valuation of inventories is a “critical
accounting estimate” because it is susceptible to changes from period to period
due to the requirement for management to make estimates relative to each of the
underlying factors ranging from purchasing to sales to production to after-sale
support. At December 31, 2007, cumulative inventory adjustments to
lower of cost or market totaled $1.9 million compared to $1.8 million as of
September 30, 2007. Amounts charged to expense to record inventory at
lower of cost or market for the three-month period ended December 31, 2007 and
2006 were $87,000 and $15,000, respectively. Actual charges to the
cumulative inventory adjustments upon disposition or sale of inventory were
$16,000 and $435,000 for the three-month period ended December 31, 2007 and
2006, respectively. If actual demand, market conditions or product
lifecycles are adversely different from those estimated by management, inventory
adjustments to lower market values would result in a reduction to the carrying
value of inventory, an increase in inventory write-offs, and a decrease to gross
margins.
Long-lived
assets. The Company regularly reviews all of its long-lived
assets, including property, plant and equipment, and amortizable intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. If the total of projected
future undiscounted cash flows is less than the carrying amount of these assets,
an impairment loss based on the excess of the carrying amount over the fair
value of the assets is recorded. In addition, goodwill is reviewed
based on its fair value at least annually. As of December 31, 2007,
the Company held $10.8 million of property, plant and equipment, goodwill and
other intangible assets, net of depreciation and amortization. There
were no changes in the Company’s long-lived assets
that
would result in an adjustment of the carrying value for these
assets. Estimates of future cash flows arising from the utilization
of these long-lived assets and estimated useful lives associated with the assets
are critical to the assessment of recoverability and fair values. The
Company believes that the accounting estimate related to long-lived assets is a
“critical accounting estimate” because: (1) it is susceptible to
change from period to period due to the requirement for management to make
assumptions about future sales and cost of sales generated throughout the lives
of several product lines over extended periods of time; and (2) the potential
effect that recognizing an impairment could have on the assets reported on the
Company’s balance sheet and the potential material adverse effect on reported
earnings or loss. Changes in these estimates could result in a
determination of asset impairment, which would result in a reduction to the
carrying value and a reduction to net earnings in the affected
period.
Allowances for
warranties. The Company’s products are covered by standard
warranty plans included in the price of products ranging between 90 days and
five years, depending upon the product and contractual terms of
sale. The majority of product warranties are for periods between one
and two years. The Company establishes allowances for warranties for
specifically identified, as well as anticipated, warranty claims based on
contractual terms, product conditions and actual warranty experience by product
line. Company products include both manufactured and purchased
components and, therefore, warranty plans include third-party sourced parts
which may not be covered by the third-party manufacturer’s
warranty. Ultimately, the warranty experience of the Company is
directly attributable to the quality of its products. The Company
actively manages its quality program by using a structured product introduction
plan, process monitoring techniques utilizing statistical process controls,
vendor quality metrics, a quality training curriculum for every employee and
feedback loops to communicate warranty claims to designers and engineers for
remediation in future production. The Company believes that the
accounting estimate related to allowances for warranties is a “critical
accounting estimate” because: (1) it is susceptible to significant
fluctuation period to period due to the requirement for management to make
assumptions about future warranty claims relative to potential unknown issues
arising in both existing and new products, which assumptions are derived from
historical trends of known or resolved issues; and (2) risks associated with
third-party supplied components being manufactured using processes that the
Company does not control. As of December 31, 2007, the balance sheet
included warranty reserves of $1.3 million, while $585,000 of warranty charges
were incurred during the three-month period ended December 31, 2007, compared to
warranty reserves of $1.0 million as of December 31, 2006 and warranty charges
of $505,000 for the three-month period then ended. If the Company’s
actual warranty costs are higher than estimates, future warranty plan coverages
are different, or estimates are adversely adjusted in future periods, reserves
for warranty expense would need to increase, warranty expense would increase and
gross margins would decrease.
Accounting for income
taxes. The Company’s provision for income taxes and the
determination of the resulting deferred tax assets and liabilities involves a
significant amount of management judgment. The quarterly provision
for income taxes is based partially upon estimates of pre-tax financial
accounting income for the full year and is affected by various differences
between financial accounting income and taxable income. Judgment is
also applied in determining whether the deferred tax assets will be realized in
full or in part. In management’s judgment, when it is more likely
than not that all or some portion of specific deferred tax assets, such as
foreign tax credit carryovers, will not be realized, a valuation allowance must
be established for the amount of the deferred tax assets that are determined not
to be realizable. At December 31, 2007, the Company had valuation
reserves of approximately $510,000 consisting of $450,000 for deferred tax
assets related to the sale of the investment in the InspX joint venture and the
valuation reserve for notes receivable and contingent payments; and a net
$60,000 for combined U.S., Australian and Chinese deferred tax assets and
liabilities, primarily related to net operating loss carryforwards in those
foreign jurisdictions. There were no other valuation allowances at
December 31, 2007 due to anticipated utilization of all the deferred tax assets
as the Company believes it will have sufficient taxable income to utilize these
assets. The Company maintains reserves for estimated tax exposures in
jurisdictions of operation. These tax jurisdictions include federal,
state and various international tax jurisdictions. Potential income
tax exposures include potential challenges of various tax credits,
export-related tax benefits, and issues specific to state and local tax
jurisdictions. Exposures are typically settled primarily through
audits within these tax jurisdictions, but can also be affected by changes in
applicable tax law or other factors, which could cause management of the Company
to believe a revision of past estimates is appropriate. During fiscal
2007 and thus far in fiscal 2008, there have been no significant changes in
these estimates other than the adoption of FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes, as discussed further in this
section. Management believes that an appropriate liability has been
established for estimated exposures; however, actual results may differ
materially from these estimates. The Company believes that the
accounting estimate related to income taxes is a “critical accounting estimate”
because it relies on significant management judgment in making assumptions
relative to temporary and permanent timing differences of tax effects, estimates
of future earnings, prospective application of changing tax laws in
multiple
jurisdictions,
and the resulting ability to utilize tax assets at those future
dates. If the Company’s operating results were to fall short of
expectations, thereby affecting the likelihood of realizing the deferred tax
assets, judgment would have to be applied to determine the amount of the
valuation allowance required to be included in the financial statements
established in any given period. Establishing or increasing a
valuation allowance would reduce the carrying value of the deferred tax asset,
increase tax expense and reduce net earnings.
Adoption of FASB
Interpretation 48, Accounting for Uncertainty in Income
Taxes
The
Company adopted the provisions of FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, on October 1, 2007. Previously, the Company had
accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards 5, Accounting for Contingencies. As required by
Interpretation 48, which clarifies Statement 109, Accounting for Income Taxes,
the Company recognizes the financial statement benefit of a tax position only
after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At
the adoption date, the Company applied Interpretation 48 to all tax positions
for which the statute of limitations remained open. As a result of the
implementation of Interpretation 48, the Company recognized a decrease of
approximately $250,000 in the liability for unrecognized tax benefits, which was
accounted for as an increase to the October 1, 2007 balance of retained
earnings.
The
amount of unrecognized tax benefits as of October 1, 2007 was approximately
$91,000 which, if ultimately recognized, will reduce the Company’s annual
effective tax rate. There have been no material changes in unrecognized tax
benefits since October 1, 2007.
The
Company is subject to income taxes in the U.S. federal jurisdiction and various
state and foreign jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for the years before 2002.
The
Company is not currently under examination by any U.S. federal, state, or
foreign jurisdictions and there are no expected material changes in the
unrecognized tax benefit liability within the next twelve months.
The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in other income and expense for all periods
presented. The Company had accrued approximately $37,000 for the payment of
interest and penalties at October 1, 2007. Subsequent changes to accrued
interest and penalties have not been significant.
Results of
Operations
For
the three months ended December 31, 2007 and 2006
New
orders increased by $11.6 million, or 50%, to $35.0 million in the first quarter
of fiscal 2008 compared to the same period a year ago. Orders for
optical systems were strong during the first quarter of fiscal 2008, increasing
$4.1 million, or 38%, to $15.0 million from $10.9 million in the comparable
quarter in fiscal 2007. The increase was driven primarily by orders
for system upgrades. New orders for system upgrades were $6.3
million, up $2.9 million, or 86%, from the same period in the prior fiscal
year. Process system orders increased $7.8 million, or nearly 98%,
during the first quarter of fiscal 2008 to $15.7 million. The
increase in process systems orders from the first quarter of fiscal 2007 was due
to increased orders for vibratory products in both the US and
Europe. Orders for parts and service were $4.3 million, down slightly
from $4.6 million in the same period in the prior year.
Total
backlog increased to a record $36.8 million at the end of the first quarter of
fiscal 2008. Backlog was $13.1 million higher than at the
corresponding point in the prior fiscal year and $100,000 higher than the
previous record of $36.7 million set at the end of June 2007. Backlog
for automated inspection systems was up $3.0 million, or 20%, to $18.1 million
at December 31, 2007 compared to December 31, 2006. Automated
inspection backlog increased by $1.6 million in pharmaceutical systems and by
$1.2 million in system upgrades. Process systems backlog was
significantly higher compared to a year ago, increasing by $10.4 million, or
135%, to $18.2 million at the end of the first quarter of fiscal
2008. The backlog increase for process systems occurred across the
Company’s locations and products. Backlog by product line at December
31, 2007 was 49.3% automated inspection systems,
49.4%
process systems, and 1.3% parts and service, compared to 64.0% automated
inspection systems, 32.7% process systems, and 3.3% parts and service on
December 31, 2006. The swing in backlog to more process systems was
driven by large projects for various customers.
Net sales
increased $6.3 million, or 28%, to $28.9 million in the first quarter of fiscal
2008 over the same quarter a year ago. This was a new record sales
level for a first quarter, up from the previous record of $22.6 million in the
first quarter of fiscal 2007. International sales for the three-month
period were 59% of net sales compared to 44% in the corresponding prior
period. Increases in net sales occurred in automated inspection
systems sales, up $3.1 million or 37%, and process systems sales, up $3.2
million or 33%. Parts and service sales increased 1% over the prior
year quarter. The increase in automated inspection system sales
resulted from upgrade systems, which increased $3.4 million to $5.1 million
during the quarter compared to the same quarter a year ago. The
improvement in process systems sales resulted from increased shipments from the
Company’s Netherlands manufacturing facility, up $1.9 million, or nearly 67%, to
$4.8 million. Automated inspection systems net sales, including
upgrade systems, represented 40% of net sales compared to 38% of net sales in
the first quarter of fiscal 2007. Process systems represented 45% of
net sales, compared to 43% during the first quarter of fiscal 2007, while parts
and service net sales accounted for 15% of the more recent quarter's net sales,
down from 19% in the same quarter a year ago.
Gross
profit for the first quarter of fiscal 2008 was $11.5 million compared to $8.7
million in the corresponding period last year. Gross profit, as a
percentage of sales, increased to 39.6% compared to the 38.6% reported the same
quarter of fiscal 2007. Compared to the 37.5% gross profit margin for
the fourth quarter of fiscal 2007, gross profit margins for the first quarter of
fiscal 2008 increased by 2.1%. The margin improved from both the
prior quarter and the same quarter a year ago primarily a result of increased
efficiency of manufacturing operations, reductions in warranty expenses, and the
increase in sales of higher margin upgrade systems.
Operating
expenses of $10.2 million for the first quarter of fiscal 2008 were 35.2% of
sales compared with $7.8 million, or 34.6%, of sales for the first quarter of
fiscal 2007. Spending increased $2.4 million as a result of higher
research and development spending, increased sales activity, additional general
and administrative expenditures, and higher stock-based and incentive
compensation expenses. As previously announced, the Company plans to
increase spending throughout fiscal 2008 on research and development to continue
to expand capabilities to provide new and innovative solutions. The
Company continues to invest in sales and marketing efforts. These
efforts contributed to an order backlog increase of nearly $6 million during the
first quarter of fiscal 2008. The Company also experienced increased
sales commissions due to a higher mix of sales through our outside sales
representatives. General and administrative expenses during the first
quarter of fiscal 2008 were up compared to the prior year quarter, a result of
meeting new regulatory requirements, increased recruiting expenses and work to
implement a new global enterprise resource planning (“ERP”) system.
Other
income for the first quarter of fiscal 2008 was $307,000 compared to $303,000
for the same period in fiscal 2007, primarily due to interest income and foreign
exchange gains. The first fiscal quarter of 2007 also included a
$750,000 gain from the sale of the Company’s 50% interest in the InspX joint
venture.
Net
earnings for the quarter ending December 31, 2007 were $1.1 million, or $0.20
per diluted share. Total net earnings for the same period last year
were $1.6 million, or $0.29 per diluted share, which included a $750,000 gain,
or $0.14 per share, from the sale of the Company’s 50% interest in its InspX
joint venture. In the first quarter of fiscal 2008, higher revenues
and better gross margins were also partially offset by higher operating
expenses. The Company anticipates sales in the second quarter of
fiscal 2008 will reflect the Company’s backlog entering the
quarter. Operating expenses are anticipated to remain higher in the
second quarter of fiscal 2008 than the prior year to support the higher sales
levels and the Company’s investments in research and development, as well as the
new ERP system.
Liquidity and Capital
Resources
For the
three months ended December 31, 2007, net cash decreased by $151,000 to $27.7
million on December 31, 2007 from $27.9 million on September 30,
2007. The Company used $141,000 of cash for operating activities
during the three-month period ended December 31, 2007. Investing
activities consumed $674,000 of cash, a result of $710,000 in capital
expenditures, while financing activities generated $595,000 of
cash. The effect of exchange rate changes on cash was a positive
$69,000 during the first three months of fiscal 2008.
Cash used
in operating activities during the three-month period ended December 31, 2007
was $141,000, a decrease of $2.4 million from cash provided by operating
activities in the comparable period in fiscal 2007. The primary
contributor was the change in non-cash working capital. In the first
three months of the prior year, changes in non-cash working capital provided
$369,000 of cash from operating activities. During the first three
months of fiscal 2008, changes in non-cash working capital used $2.0 million of
cash from operating activities. The major changes in current assets
and current liabilities during the first three months of fiscal 2008 were
increased inventories of $1.1 million, relating to higher production levels, and
a decrease in accounts payable of $1.6 million, relating to the timing of vendor
payments. Reductions in accrued payroll liabilities and commissions
of $785,000 due to annual payouts for profit sharing and incentive compensation
plans, net of additional accruals for the current fiscal quarter were offset by
$1.5 million provided by reductions in accounts receivable, prepaid expenses and
other current assets, and increases in other accrued liabilities and customer
deposits.
The net
cash used in investing activities of $674,000 for the first three months of
fiscal 2008 represents a $1.4 million change from the $741,000 net cash
generated from investing activities in the corresponding period a year
ago. The major change in investing activities resulted from $750,000
in proceeds from the sale of the Company’s interest in the InspX joint venture
during the first quarter of fiscal 2007. In addition, the Company’s
investments in property, plant and equipment increased by $658,000 in the first
quarter of fiscal 2008 from the corresponding period a year ago. The
Company did not have any major commitments for capital equipment at December 31,
2007. The Company is engaged in discussions with the Port of Walla
Walla, its current landlord, about the possible long-term lease of a
to-be-constructed office and multi-purpose building near its current facility in
Walla Walla to meet anticipated space requirements. The timing and
outcome of these discussions are not known at this time.
Net cash
provided by financing activities during the first three months of fiscal 2008
was $595,000, compared with net cash used of $509,000 during the corresponding
period in fiscal 2007. The net cash provided by financing activities
during the first three months of fiscal 2008 resulted from excess tax benefits
from share-based payments and proceeds from issuance of common stock for
employee stock option exercises. Financing activities during the
first three months of the prior fiscal year included $635,000 used in the stock
buy-back program partially offset by $126,000 generated from the issuance of
common stock relating to employee stock option exercises. No stock
was purchased under the Company’s stock buy-back program in the first quarter of
fiscal 2008.
The
Company’s domestic credit facility provides for a revolving credit line of up to
$10 million and credit sub-facilities of $3.0 million each for sight commercial
letters of credit and standby letters of credit. The credit facility
matures on June 30, 2009. The credit facility bears interest, at the
Company’s option, of either the bank prime rate minus 1.75% or LIBOR plus 1.0%
per annum. At December 31, 2007, the interest rate would have been
5.5%. The credit facility is secured by all U.S. accounts receivable,
inventory and fixed assets. The credit facility contains covenants
which require the maintenance of a defined net worth ratio, a liquidity ratio
and an EBITDA coverage ratio. The credit facility also restricts
mergers and acquisitions, incurrence of additional indebtedness, transactions,
including purchases and retirements, in the Company’s own common stock, without
the prior consent of the Lender. At December 31, 2007, the Company
had no borrowings outstanding under the credit facility and $380,000 in standby
letters of credit. At December 31, 2007, the Company was in
compliance with its loan covenants, and had received the consent of the lender
for its stock repurchase program.
The
Company’s credit accommodation with a commercial bank in the Netherlands
provides a credit facility for its European subsidiary. This credit
accommodation totals $3.7 million and includes an operating line of the
lesser of $2.2 million or the available borrowing base, which is based on
varying percentages of eligible accounts receivable and inventories, and a bank
guarantee facility of $1.5 million. The operating line and bank
guarantee facility are secured by all of the subsidiary’s personal
property. The credit facility bears interest at the bank’s prime
rate, with a minimum of 3.00%, plus 1.75%. At December 31, 2007, the
interest rate was 7.05%. At December 31, 2007, the Company had no
borrowings under this facility and had received bank guarantees of $1.3 million
under the bank guarantee facility. The credit facility allows
overages on the bank guarantee facility. Any overages reduce the
available borrowings from the operating line.
The
Company’s continuing contractual obligations and commercial commitments existing
on December 31, 2007 are as follows:
|
|
|
|
|
|
Payments
due by period (in thousands)
|
|
|
Contractual
Obligations (1)
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1 –
3 years
|
|
|
4 –
5 years
|
|
|
After
5 years
|
|
|
Operating
leases
|
|
$ |
14,009 |
|
|
$ |
1,472 |
|
|
$ |
2,716 |
|
|
$ |
2,636 |
|
|
$ |
7,185 |
|
|
Purchase
obligations
|
|
|
109 |
|
|
|
109 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total
contractual cash obligations
|
|
$ |
14,118 |
|
|
$ |
1,581 |
|
|
$ |
2,716 |
|
|
$ |
2,636 |
|
|
$ |
7,185 |
|
(1) The
Company also has $93,000 of contractual obligations related to uncertain tax
positions for which the timing and amount of payment can not be reasonably
estimated due to the nature of the uncertainties and the unpredictability of
jurisdictional examinations in relation to the statute of
limitations.
The
Company anticipates that current cash balances and ongoing cash flows from
operations will be sufficient to fund the Company’s operating needs in the near
term. At December 31, 2007, the Company had standby letters of credit
totaling $1.7 million, which includes secured bank guarantees under the
Company’s credit facility in Europe and letters of credit securing certain
self-insurance contracts and lease commitments. If the Company fails
to meet its contractual obligations, these bank guarantees and letters of credit
may become liabilities of the Company. The Company has no off-balance
sheet arrangements or transactions, or arrangements or relationships with
“special purpose entities.”
Future Accounting
Changes
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements,” which establishes guidelines
for measuring fair value and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair
value measurements but rather it eliminates inconsistencies in the guidance
found in various prior accounting
pronouncements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. The Company is evaluating the
potential effects of this standard, although the Company does not expect the
adoption of SFAS No. 157 to have a material effect on our financial
position, results of operation, or cash flows.
In
February 2007, the FASB issued Statement 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This Statement permits
entities to elect to measure certain financial instruments and other items at
fair value. The fair value option may be applied on an instrument by
instrument basis, is irrevocable and is applied only to entire
instruments. SFAS 159 requires additional financial statement
presentation and disclosure requirements for those entities that elect to adopt
the standard and is effective for fiscal years beginning after November 15,
2007. The Company does not expect the adoption of SFAS 159 to have a
material effect on its financial position, results of operations or cash
flows.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
|
The
Company has assessed its exposure to market risks for its financial instruments
and has determined that its exposures to such risks are generally limited to
those affected by the value of the U.S. dollar compared to the Euro and to a
lesser extent the Australian dollar, Mexican Peso and Chinese Renminbi
(RMB).
The terms
of sales to European customers are typically denominated in either Euros or U.S.
dollars. The terms of sales to customers in Australia are typically
denominated in their local currency. The Company expects that its standard terms
of sale to international customers, other than those in Europe and Australia,
will continue to be denominated in U.S. dollars, although as the Company expands
its operations in Latin America and China, transactions denominated in those
countries’ local currencies may increase. For sales transactions
between international customers, including European customers, and the Company’s
domestic operations, which are denominated in currencies other than U.S.
dollars, the Company assesses its currency exchange risk and may enter into
forward contracts to minimize such risk. At December 31, 2007, the
Company was not a party to any currency hedging transaction. As of
December 31, 2007, management estimates that a 10% change in foreign exchange
rates would affect net earnings before taxes by approximately $290,000 on an
annual basis as a result of converted cash, accounts receivable, loans to
foreign subsidiaries, and sales or other contracts denominated in foreign
currencies.
As of
December 31, 2007, the Euro gained a net of 2.3% in value against the U.S.
dollar compared to its value at September 30, 2007. During the
three-month period ended December 31, 2007, changes in the value of the Euro
against the U.S. dollar ranged between a 1.6% gain and a 2.5% gain for the
period. Other currencies also gained in value against the U.S.
dollar. The effect of these fluctuations on the operations and
financial results of the Company were:
|
·
|
Translation
adjustments of $89,000, net of income tax, were recognized as a component
of comprehensive income as a result of converting the Euro denominated
balance sheet of Key Technology B.V. and Suplusco Holding B.V. into U.S.
dollars and, to a lesser extent, the Australian dollar balance sheet of
Key Technology Australia Pty. Ltd., the RMB balance sheet of Key
Technology (Shanghai) Trading Co. Ltd., and the Peso balance sheet of
Productos Key Mexicana.
|
|
·
|
Foreign
exchange gains of $134,000 were recognized in the other income and expense
section of the consolidated statement of operations as a result of
conversion of Euro and other foreign currency denominated receivables,
intercompany loans and cash carried on the balance sheet of the U.S.
operations, as well as the result of the conversion of other
non-functional currency receivables, payables, and cash carried on the
balance sheet of the European, Australian, Chinese, and Mexican
operations.
|
The U.S.
dollar weakened during the three-month period ended December 31, 2007 and the
U.S. dollar is still in a relatively weak position on the world
markets. A relatively weaker U.S. dollar on the world markets makes
the Company’s U.S.-manufactured goods relatively less expensive to international
customers when denominated in U.S. dollars or potentially more profitable to the
Company when denominated in a foreign currency. On the other hand,
materials or components imported into the U.S. may be more
expensive. A relatively weaker U.S. dollar on the world markets,
especially as measured against the Euro, may favorably affect the Company’s
market and economic outlook for international sales. The Company’s
Netherlands-based subsidiary transacts business primarily in Euros and does not
have significant exports to the U.S.
Under the
Company’s credit facilities, the Company may borrow at the lender’s prime rate
between minus 175 basis points on its domestic credit facility and plus 175
basis points on its Euorpean credit facility. At December 31, 2007,
the Company had no borrowings which had variable interest
rates. During the three-month period then ended, interest rates
applicable to its variable rate credit facilities ranged from 5.5% to
7.05%. At December 31, 2007, the rate was 5.5% on its domestic credit
facility and 7.05% on its European credit facility. As of December
31, 2007 management estimates that a 100 basis point change in these interest
rates would not affect net income before taxes because the Company had no
borrowings outstanding under its variable interest rate facilities.
The
Company’s management, with the participation of its Chief Executive Officer and
Corporate Controller, have evaluated the disclosure controls and procedures
relating to the Company at December 31, 2007 and concluded that such controls
and procedures were effective to provide reasonable assurance that information
required to be disclosed by the Company in reports filed or submitted by the
Company under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. There were no changes in the
Company’s internal control over financial reporting during the quarter ended
December 31, 2007 that materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
The
following table provides information about purchases made by or on behalf of the
Company during the quarter ended December 31, 2007 of equity securities
registered by the Company under Section 12 of the Securities Exchange Act of
1934.
Issuer Purchases of Equity
Securities
|
Stock Repurchase Program
(1)
|
|
Period
|
|
Total
Number of Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
October
1 - 31, 2007
|
|
|
0 |
|
|
|
|
0 |
|
|
|
November
1 - 30, 2007
|
|
|
0 |
|
|
|
|
0 |
|
|
|
December
1 - 31, 2007
|
|
|
0 |
|
|
|
|
0 |
|
|
|
Total
|
|
|
0 |
|
|
|
|
0 |
|
411,748
|
|
(1)
|
The
Company initiated a stock repurchase program effective November 27,
2006. The Company may purchase up to 500,000 shares of its own
common stock under the program.
|
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
SIGNATURES
|
|
SIGNATURES
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
|
|
|
KEY
TECHNOLOGY, INC.
|
|
|
(Registrant)
|
|
|
|
|
Date:
February 8, 2008
|
By /s/ David M.
Camp
|
|
|
David M.
Camp
|
|
|
President and Chief Executive
Officer
|
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
Date:
February 8, 2008
|
By /s/ James R.
Brausen
|
|
|
James R.
Brausen
|
|
|
Corporate
Controller
|
|
|
(Principal Financial Officer
and Principal Accounting Officer)
|
|
|
|
KEY TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2007
EXHIBIT
INDEX
Exhibit
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
23