Keithley
Instr. Q3 '96
| Keithley
Instr. Q3 '96
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SYNOPSIS)* By Debora Tidwell (MF Debit) Keithley Instruments Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KEI)") else Response.Write("(NYSE: KEI)") end if %> UNION CITY, Ca., July 22, 1996/FOOLWIRE/ --- Keithley Instruments released their Q3 1996 earnings this morning. The company reported sales of $29.4 million and earnings of $0.10 per share, well below the $0.20 per share analysts were expecting.
Last quarter was difficult for Keithley. The company issued a press release two weeks ago stating that orders, sales, and earnings for Q3 were going to be below their prior expectations. The reason behind their less-than-expected Q3 results is that they shipped about $2 million less than anticipated, mostly related to their new Quantox offering. Expenses were in line with the sales they had expected. The lost gross margin on those $2 million of lower sales caused their earnings shortfall.
A greater immediate concern to them, however, is the overall state of the semiconductor capital equipment industry. The company explained that experts seem to be revising their semiconductor industry numbers downward frequently. At the Semicon West trade show last week they mentioned that they listened to a presentation where the presenter began by saying "There's been a lot of turmoil in this industry." And, when he put a slide up of the growth for the semiconductor industry, he commented that the prepared materials handed out were different than the slide show because the prepared materials were done two months ago and his slides were prepared two weeks ago. In addition, he said he wanted to revise downward further, from the information included in the slide show, due to information he had received in the last week and he expected to revise down further again in August. The message to everyone was that lots of change is coming very quickly and it isn't clear what the depth of the downturn or its duration will be.
The company commented that some industry analysts are now predicting a contraction in the semiconductor industry in 1996. Companies making DRAMs are particularly hard hit. Equipment manufacturers like Keithley began to see a significant reduction of orders in the second calendar quarter of 1996 and some analysts now are predicting continued decline through 1996, with some order stabilization in 1997 at that lower level.
At Keithley, their order rate continued to hold up until late May. While fiscal Q2 APT orders were not great, orders were much stronger in April. It appeared to them that the inconsistent order flow might just be a timing issue. However, by the end of May, their May orders for APT equipment ended up well below April's levels and the decline in APT orders continued in June.
Orders for the quarter were $27.5 million, which was down 6% from the prior year and slightly less than last quarter. Versus last year, orders were up in their instruments division and their radiation measurements division, but down in other divisions. Their APT business, which serves the semiconductor industry, ended up down 25% in the quarter versus last year. Metrabyte was also down double digits in orders.
Geographically, orders were down in the US, flat in Europe, and up in the Pacific basin. In their APT business, they continue to have low orders as the semiconductor companies delay the start of new fabs and reduce their capital purchases. The nervousness in the industry they talked about in Q1 and Q2 is now confirmed with a downturn. It shows that no one knows how long or severe this downturn will be, but it is looking to Keithley like maybe a year of lower business follows for their APT division. Backlog at the end of the quarter was $10.6 million and was down $2 million from the beginning of the quarter.
Sales were disappointing at $29.4 million, which was up 1% over the prior year. Their gross margin percent increased slightly over last year, but was down 2% from the prior quarter, which is what they had expected. Product development was $4.7 million for the quarter, up 21% and was at 15.9% of sales, compared to the 13.3% for Q3 last year. Most of this increase in product development continues to be for Quantox. Their SG&A expense was up 3% and came in at 40.8% of sales, up from last year's 40.2%.
Income before taxes was $1,006,000, which was down 49% from last year and was at 3.4% of sales. Income from their current businesses was about $4 million pre-tax for the quarter and that was up 8% over last year However, within their current businesses, Metrabyte lost money in Q3. They spent about $3 million in new businesses in the quarter, that was up $1.3 million over last year's spending. Again, over half of that continues to be Quantox. The tax rate for the quarter is 24% versus 25% in 1995. They now expect a 28% tax rate for the full year 1996 and that adjustment was reflected year-to-date in Q3.
Looking at year-to-date, their sales are up 11%, pre-tax earnings are up 12%, and earnings per share are at $0.43 versus $0.42 last year. Accounts receivable were $19 million and DSO is running about 53 days, up about 1 day from last quarter. Inventories were at $18.4 million and the turns have declined to about 2.7 times at cost. Inventories are up about $1.9 million during the quarter, $1.1 million of the increase was for the Quantox product. Their total debt at June 30th was $11.4 million and the debt to capital is at 22%.
Overall Q3 was not very good. They were disappointed with order levels and not shipping more Quantox, and in Metrabyte's performance.
The capital expenditure deferrals by semiconductor manufacturers and Keithley's own lateness in getting Quantox units in the field are making it more difficult for them to close new Quantox and APT orders. While they are very pleased to have shipped their first Quantox unit during the quarter and continue to be optimistic about its future, they booked on one new order for Quantox during the quarter. Lateness in delivering beta units has hurt them and their overall program is running 6 months behind schedule.
They shipped their 2nd customer Quantox unit early in July, will ship another unit by the end of this week and, at $500,000 a unit, they think they are still in line to ship the $3-4 million. To do that, they will need additional orders. Going into Q4, they had a backlog of 3 orders. One has already shipped, one is shipping and then they have one scheduled to ship in August. Those 3 orders come to approximately $1.7 million. That means that they will need another $1.3 million, or roughly 3 units of orders and shipments in Q4 to meet the $3 million. They still expect to do it, but obviously they are running out of time. They are not inventory constrained and they can turn around a Quantox order, currently, within 2 to 2.5 weeks unless there is an unusual configuration or some unusual test requirements prior to shipment.
Evaluations by the beta unit partners have not been completed and, therefore, Keithley is not yet able to use their references. They believe that those references, as well as ones they will get from other customers, will be an important part of generating new business for Quantox. They think the beta unit users will be in a position to be references for them within the next 6-8 weeks. In addition, they are finding that, and they expect that, the people who have units already will be used as references as well. They will have some meaningful and powerful add-on options for Quantox available in the January timeframe.
Keithley still hopes to achieve what they told analysts before -- that they will be disappointed if they didn't have at least $3-4 million in sales for Quantox by the end of this fiscal year, September 30th. Overall, Quantox is proceeding slowly but steadily. At Semicon West last week, new customers' enthusiasm seemed high. It is also good to report that their beta unit users are seeing more and more value in the Quantox as they use it.
In additiona to the Quantox product, they did the US introduction of their next generation of parametric test system, the S600 that they have been working on for a couple of years. It was very well received at Semicon West in San Francisco last week. Both current and potential customers' interest in the 600 was strong. Hewlett-Packard, as well, introduced a next generation parametric tester at the show. Keithley feels that the S600 has significant advantages over the HP product. They expect to ship the S600 early in the 1997 calendar year (that's a couple of months later than prior expectations) and be able to benchmark it against HP at HP accounts. That will enable them to put pressure on the HP accounts. However, at the trade show, the interest from people who are already HP customers was high for Keithley and they were able to get conversations in a way that they were never able to before. They acquired a company in March called Turner Engineering. Turns out that the kind of product offering that they had, coupled with Keithley's product is taking them into HP accounts already, so that is an uplift over where they otherwise might have been. So, they have a couple of factors working in their favor.
Keithley Metrabyte's orders and sales are declining and Metrabyte is becoming more of a drain on their earnings. As they said before, operational effectiveness had not improved the way the wanted at Metrabyte in the last 18 months. They have changed some priorities in the short term with the addition of a new person to the management team on March 1st. While they expect less-than-acceptable performance from Metrabyte for at least the next several quarters, they feel that the long-term opportunities for them in the world of process measurements are still very attractive.
Their instruments division continues to do very well in orders and sales. The integration of their acquisition of IST into the radiation measurements division is progressing as planned. They also continued to make good progress on their network measurements new business venture as the introduction of new products is now scheduled for late this calendar year.
Although it is early in Q4 and sales are dependent on order levels it now looks like their Q4 earnings will be below last year's Q4 and it may be difficult to even meet the $0.10 per share earned in Q3. One of the issues for Q4 they are facing is the gross margin percentage. They expect to ship more Quantox and the gross margin on Quantox is much less than their normal margins. This is due to initial start-up costs and some other factors, but will improve and approach Keithley's typical margins with the add-on options being introduced in the January timeframe. Overall, in the company, they have stopped hiring and are reducing non-sales-related discretionary spending. They are also reviewing all capital expenditures.
While industry conditions over the short term are weak, they believe the long term outlook for the semiconductor industry remains particularly strong. They continue to feel confident that the investments they are making now in new products and in new businesses will contribute significantly and increasingly to their future growth. The company expressed thanks to shareholders for their loyalty and patience. They believe the fundamentals for significant long term growth in the electronics industry and the semiconductor industry are unchanged. They also believe that the greatest growth will come to companies, like Keithley, who are able to stay focused and committed to that industry. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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