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| KTEC > SEC Filings for KTEC > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
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:
· current worldwide economic conditions may adversely affect the Company's business and results of operations, and the business of the Company's customers;
· adverse economic conditions, particularly in the food processing industry, either globally or regionally, may adversely affect the Company's revenues;
· the loss of any of the Company's significant customers could reduce the Company's revenues and profitability;
· the Company is subject to pricing pressure from its larger customers which may reduce the Company's profitability;
· the failure of any of the Company's independent sales representatives to perform as expected would harm the Company's net sales;
· the Company may make acquisitions that could disrupt the Company's operations and harm the Company's operating results;
· issues arising during the implementation of the Company's enterprise resource planning ("ERP") system could affect the Company's operating results and ability to manage the Company's business effectively;
· if the Company's ERP system is not implemented properly, it could cause errors in the Company's financial reporting;
· the Company's international operations subject the Company to a number of risks that could adversely affect the Company's revenues, operating results and growth;
· competition and advances in technology may adversely affect sales, prices and the marketability of the Company's products;
· failure of the Company's new products to compete successfully in either existing or new markets;
· the Company's inability to retain and recruit experienced personnel may adversely affect the Company's business and prospects for growth;
· the loss of members of the Company's management team could substantially disrupt the Company's business operations;
· the inability of the Company to protect the Company's intellectual property, especially as the Company expands geographically, may adversely affect the Company's competitive advantage;
· 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 the Company's customer relations;
· the Company's dependence on certain suppliers may leave the Company temporarily without adequate access to raw materials or products;
· the limited availability and possible cost fluctuations of materials used in the Company's products could adversely affect the Company's gross profits; and
· the price of the Company's common stock may fluctuate significantly and this may make it difficult for shareholders to resell common stock when they want or at prices they find attractive.
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 12, 2008, 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 and nutraceuticals. 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 recent 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 worldwide economic conditions have caused many customers to significantly delay or reduce their expenditures for capital equipment, and undertake more stringent and protracted approval processes within their organizations. As a result, the Company's overall financial results thus far in fiscal 2009 have been adversely affected and the Company has taken a variety of cost reduction initiatives. These cost reduction initiatives included a reduction of approximately 7% in its global workforce. The initiatives also included cancellation of fiscal year cash and stock incentive awards, temporary reductions in pay for all U.S. personnel, suspension of 401(k) matching, mandatory leave and other cost reduction measures. The majority of the benefits from these actions are expected to be realized during the second half of fiscal 2009.
During the third quarter of fiscal 2009, the Company completed an agreement to acquire a minority interest in Proditec SAS, a French manufacturer of automated, solid dose pharmaceutical inspection systems. The Company acquired a 15% minority interest for €870,000, or approximately $1.2 million. The Company also acquired an exclusive option to purchase the remaining interest through October 5, 2009.
Current period - third quarter of fiscal 2009
In the third quarter of fiscal 2009, the Company's order volume, net sales, backlog, and net earnings all decreased compared to the corresponding period in the prior fiscal year. Net sales of $26.2 million in the third fiscal quarter of 2009 were $9.6 million, or 27%, lower than net sales of $35.8 million in the corresponding quarter a year ago. International sales were 48% of net sales for the third fiscal quarter of 2009, compared to 45% in the corresponding prior year period. Backlog of $26.2 million at the end of the third fiscal quarter of 2009 represented a $16.0 million, or 38%, decrease from the ending backlog of $42.2 million in the corresponding quarter a year ago. Net earnings for the third quarter of fiscal 2009 were $455,000, or $0.09 per diluted share. Net earnings for the corresponding period last year were $3.0 million, or $0.53 per diluted share. Customer orders in the third quarter of fiscal 2009 of $20.7 million were down $10.0 million, or 33%, compared to orders of $30.7 million in the third quarter of fiscal 2008. Orders decreased across all major geographic areas, product lines and markets. During the third quarter of fiscal 2009, the Company continued to focus on strengthening market share and revenues in its established markets and geographies, developing its presence in the pharmaceutical and nutraceutical market, increasing upgrade system sales, and continuing to expand its global market presence.
First nine months of fiscal 2009
The Company's results for the first nine months of fiscal 2009 also showed a decrease in order volume, net sales and net earnings compared to the corresponding period in the prior fiscal year. Business decreased in all major geographic regions, customer markets and product lines. Net sales of $76.8 million for the first nine months of fiscal 2009 were $17.0 million, or 18%, lower than net sales of $93.9 million in the corresponding period a year ago.
Customer orders in the first nine months of fiscal 2009 of $69.5 million were down $35.6 million, or 34%, compared to the orders of $105.1 million in the first nine months of fiscal 2008. The net loss for the first nine months of fiscal 2009 was $446,000, or $0.09 per diluted share. Net earnings for the corresponding nine-month period last year were $5.2 million, or $0.95 per diluted share. The net loss in the first nine months of fiscal 2009 included pre-tax charges of $890,000 related to a workforce reduction and a $343,000 write-off of previously incurred costs associated with a potential facility expansion. The results for the first nine months of fiscal 2009 also included the effects of certain cost reduction initiatives implemented during fiscal 2009.
The Company implemented a new global enterprise resource planning ("ERP") system during the third quarter of fiscal 2009. Capital expenditures of approximately $2.8 million related to the ERP implementation were incurred during the first nine months of fiscal 2009.
Application of Critical Accounting Policies
The Company has identified its critical accounting policies, the application of
which may materially affect its 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:
· Revenue recognition
· Allowances for doubtful accounts
· Valuation of inventories
· Long-lived assets
· 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 collectability 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. Sales of system upgrades are recognized as revenue upon completion of the conversion of the customer's existing system when this conversion occurs at the customer site. 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 collectability is reasonably assured. At June 30, 2009, the Company had invoiced $2.4 million compared to $2.9 million at September 30, 2008 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 collectability 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 June 30, 2009, the balance sheet included allowances for doubtful accounts of $398,000. Amounts charged to bad debt expense for the nine-month periods ended June 30, 2009 and 2008 were $123,000 and $7,000, respectively. Actual charges to the allowance for doubtful accounts for the nine-month periods ended June 30, 2009 and 2008 were $39,000 and $163,000, 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, service and repair parts, work in process, finished goods and demonstration equipment. Write downs for excess and obsolete inventories are made after periodic evaluation of historical sales, current economic trends, forecasted sales, estimated product lifecycles and estimated inventory levels. The factors that contribute to inventory valuation risks are the Company's purchasing practices, electronic component obsolescence, accuracy of sales and production forecasts, introduction of new products, product lifecycles and the associated product support. The Company actively manages its exposure to inventory valuation risks by maintaining low safety stocks and minimum purchase lots, utilizing just in time purchasing practices, managing product end-of-life issues brought on by aging components or new product introductions, and by utilizing 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 June 30, 2009, cumulative inventory adjustments to lower of cost or market totaled $1.9 million compared to $1.7 million as of September 30, 2008. Amounts charged to expense to record inventory at lower of cost or market for the nine-month periods ended June 30, 2009 and 2008 were $395,000 and $312,000, respectively. Actual charges to the cumulative inventory adjustments upon disposition or sale of inventory were $201,000 and $419,000 for the nine-month periods ended June 30, 2009 and 2008, 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 June 30, 2009, the Company held $19.9 million of property, plant and equipment and intangible assets, net of depreciation and amortization, and goodwill. 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 the products ranging from 90 days to five years, depending upon the product and contractual terms of sale. The Company establishes allowances for warranties for specifically identified, as well as anticipated, warranty claims based on contractual terms, product conditions and actual warranty experience by product line. Company products include both manufactured and purchased components and, therefore, warranty plans include third-party sourced parts which may not be covered by the third-party manufacturer's warranty. Ultimately, the warranty experience of the Company is directly attributable to the quality of its products. The Company actively manages its quality program by using a structured product introduction plan, process monitoring techniques utilizing statistical process controls, vendor quality metrics, a quality training curriculum for every employee, and feedback loops to communicate warranty claims to designers and engineers for remediation in future production. 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 June 30, 2009, the balance sheet included warranty reserves of $2.0 million, while $2.8 million of warranty charges were incurred during the nine-month period ended June 30, 2009, compared to warranty reserves of $1.4 million as of June 30, 2008 and warranty charges of $1.7 million for the nine-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 June 30, 2009, the Company had valuation reserves of approximately $450,000 for deferred tax assets for capital loss carryforwards and the valuation reserve for notes receivable related to the sale of the investment in the InspX joint venture, and offsetting amounts for U.S. and Chinese deferred tax assets and liabilities, primarily related to net operating loss carry forwards in the foreign jurisdictions that the Company believe will not be utilized during the carryforward period. There were no other valuation allowances at June 30, 2009 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 2008 and thus far in fiscal 2009, there have been no significant changes in these estimates. 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 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.
The federal Research and Development Credit ("R&D credit") expired on December 31, 2007. During the first quarter of fiscal 2009, the Emergency Economic Stabilization Act of 2008 was enacted. As part of the legislation, the existing R&D credit was retroactively renewed and extended to December 31, 2009. Due to this change in tax
law, the Company recorded approximately $160,000 of additional R&D tax credits in the first quarter of fiscal 2009 related to R&D expenditures incurred during fiscal 2008. In the third quarter of fiscal 2009, the Company reduced income tax expense by approximately $165,000 due to changes in the estimate of the Company's effective tax rate for fiscal 2009.
Adoption of New Accounting Principles
On October 1, 2008, Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements," and Statement 159, "The Fair Value Option for Financial Assets and Financial Liabilities" became effective for the Company. In the second quarter of fiscal 2009, Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities" became effective for the Company. Adoption of these pronouncements did not have a significant effect on the Company's financial statements.
Results of Operations
For the three months ended June 30, 2009 and 2008
Net sales decreased $9.6 million, or 27%, to $26.2 million in the third quarter of fiscal 2009 from $35.8 million in net sales recorded in the corresponding quarter a year ago. International sales for the three-month period were 48% of net sales compared to 55% in the corresponding prior year period. Decreases in . . .
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