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 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20109
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Kronos Incorporated
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2640942
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
297 Billerica Road, Chelmsford, MA 01824
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(Address of principal executive offices) (Zip Code)
(978) 250-9800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of January 27, 2001, 12,504,613 shares of the registrant's Common
Stock, $.01 par value, were outstanding.
KRONOS INCORPORATED
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Income for the Three
Months Ended December 30, 2000 and January 1, 2000 1
Condensed Consolidated Balance Sheets at December 30, 2000
and September 30, 2000 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 30, 2000 and January 1, 2000 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
UNAUDITED
Three Months Ended
------------------------------
December 30, January 1,
2000 2000
-------------- ------------
Net revenues:
Product .......................................... $ 33,722 $ 36,152
Service .......................................... 31,031 28,456
------------ ------------
64,753 64,608
------------ ------------
Cost of sales:
Product .......................................... 7,797 8,291
Service .......................................... 17,723 16,255
------------ ------------
25,520 24,546
------------ ------------
Gross profit ................................. 39,233 40,062
Operating expenses and other income:
Sales and marketing .............................. 22,302 21,931
Engineering, research and development ............ 7,920 7,016
General and administrative ....................... 4,140 4,154
Amortization of intangible assets ................ 1,734 1,551
Other income, net ................................ (1,153) (1,335)
------------ ------------
34,943 33,317
Income before income taxes ................... 4,290 6,745
Provision for income taxes ............................. 1,501 2,496
------------ ------------
Net income ................................... $ 2,789 $ 4,249
============ ============
Net income per common share:
Basic ........................................ $ 0.23 $ 0.34
============ ============
Diluted ...................................... $ 0.22 $ 0.32
============ ============
Average common and common equivalent shares outstanding:
Basic ........................................ 12,368,715 12,462,471
============ ============
Diluted ...................................... 12,811,696 13,152,909
============ ============
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
UNAUDITED
December 30, September 30,
2000 2000
-------------- --------------
ASSETS
Current assets:
Cash and equivalents .................................................... $ 21,197 $ 23,201
Marketable securities ................................................... 21,833 10,788
Accounts receivable, less allowances of $7,033
at December 30, 2000 and $6,986 at September 30, 2000 ................ 64,512 71,493
Deferred income taxes ................................................... 6,466 5,916
Other current assets .................................................... 14,481 13,750
--------- ---------
Total current assets ............................................. 128,489 125,148
Property, plant and equipment, net ......................................... 36,796 37,082
Marketable securities ...................................................... 16,400 17,450
Excess of cost over net assets of businesses acquired, net ................. 31,526 29,421
Deferred software development costs, net ................................... 14,509 13,788
Other assets ............................................................... 14,133 16,600
--------- ---------
Total assets ...................................................... $ 241,853 $ 239,489
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 6,670 $ 8,278
Accrued compensation .................................................... 18,940 19,879
Accrued expenses and other current liabilities .......................... 14,040 14,339
Deferred professional service revenues .................................. 23,586 23,451
Deferred maintenance revenues ........................................... 51,021 48,483
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Total current liabilities ......................................... 114,257 114,430
Deferred maintenance revenues .............................................. 14,202 15,814
Other liabilities .......................................................... 1,546 1,455
Shareholders' equity:
Preferred Stock, par value $1.00 per share: authorized 1,000,000 shares,
no shares issued and outstanding ..................................... -- --
Common Stock, par value $.01 per share: authorized 20,000,000 shares,
12,634,728 shares issued at December 30, 2000 and September 30, 2000 .. 126 126
Additional paid-in capital .............................................. 20,985 23,842
Retained earnings ....................................................... 100,633 97,844
Accumulated other comprehensive loss .................................... (1,035) (1,366)
Cost of Treasury Stock (222,051 shares and 310,038
shares at December 30, 2000 and September 30, 2000, respectively) .... (8,861) (12,656)
--------- ---------
Total shareholders' equity ........................................ 111,848 107,790
--------- ---------
Total liabilities and shareholders' equity ........................ $ 241,853 $ 239,489
========= =========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
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December 30, January 1,
2000 2000
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Operating activities:
Net income ................................................................ $ 2,789 $ 4,249
Adjustments to reconcile net income to net cash and equivalents
provided by operating activities:
Depreciation ........................................................ 2,016 1,873
Amoritzation of excess of cost over net assets of businesses acquired 1,735 1,551
Amortization of deferred software development costs ................. 1,919 1,643
Provision for deferred income taxes ................................. (264) (895)
Changes in certain operating assets and liabilities:
Accounts receivable, net ........................................ 6,710 8,591
Deferred maintenance revenue .................................... (522) 467
Accounts payable, accrued compensation
and other liabilities ........................................ (2,722) (8,044)
Long term investment in leases .................................. 2,367 1,128
Other ........................................................... (513) (1,144)
Tax benefit from exercise of stock options .......................... 1,670 2,805
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Net cash and equivalents provided by operating activities .... 15,185 12,224
Investing activities:
Purchase of property, plant and equipment ................................. (1,677) (7,024)
Capitalization of software development costs .............................. (2,813) (2,326)
Increase in marketable securities ........................................ (9,993) (956)
Acquisitions of businesses ................................................ (2,056) (514)
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Net cash and equivalents used in investing activities ........ (16,539) (10,820)
Financing activities:
Net proceeds from exercise of stock option and employee stock
purchase plans ......................................................... 3,055 3,844
Purchase of treasury stock ................................................ (3,800) (8,799)
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Net cash and equivalents used in financing activities ....... (745) (4,955)
Effect of exchange rate changes on cash and equivalents ........................ 95 5
-------- --------
Decrease in cash and equivalents ............................................... (2,004) (3,546)
Cash and equivalents at the beginning of the period ............................ 23,201 20,148
-------- --------
Cash and equivalents at the end of the period .................................. $ 21,197 $ 16,602
======== ========
See accompanying notes to condensed consolidated financial statements.
KRONOS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - General
The accompanying unaudited condensed consolidated financial statements include
all adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the Company's financial position
and results of operations as of and for the interim periods presented pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
the disclosures in these financial statements are adequate to make the
information presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the fiscal year ended September 30, 2000. The results of
operations for the three months ended December 30, 2000 are not necessarily
indicative of the results for a full fiscal year. Certain reclassifications have
been made in the accompanying consolidated financial statements in order to
conform to the fiscal 2001 presentation.
NOTE B - Fiscal Quarters
The Company utilizes a system of fiscal quarters. Under this system, the first
three quarters of each fiscal year end on a Saturday. However, the fourth
quarter of each fiscal year will always end on September 30. Because of this,
the number of days in the first quarter (91 days in fiscal 2001 and 93 days in
fiscal 2000) and fourth quarter (92 days in fiscal 2001 and 91 days in fiscal
2000) of each fiscal year varies from year to year. The second and third
quarters of each fiscal year will be exactly thirteen weeks long. This policy
does not have a material effect on the comparability of results of operations
between quarters.
NOTE C - Newly Issued Accounting Standards:
The Company adopted Financial Accounting Standards Board Statement ("FAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" on October
1, 2000." SFAS 133 requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value is immediately recognized in earnings. The adoption of SFAS 133 by the
Company as of October 1, 2000 had no material effect on Kronos' earnings or
financial position.
At December 30, 2000 the Company holds foreign currency forward exchange
contracts having original durations of less than 12 months. These forward
contracts offset the impact of exchange-rate fluctuations on intercompany
payables due from one of the Company's subsidiaries. At December 30, 2000 the
forward contracts are accounted for as cash flow hedges and have an immaterial
fair value.
NOTE D - Comprehensive Income
For the three months ended December 30, 2000 and January 1, 2000 comprehensive
income consisted of the following (in thousands):
Three Months Ended
------------------------
December 30, January 1,
2000 2000
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Comprehensive income:
Net income ...................... $2,789 $4,249
Cumulative translation adjustment 125 --
Unrealized gains
on .............................. 206 --
available-for-sale securities
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Total comprehensive income .......... $3,120 $4,249
====== ======
NOTE E - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
-------------------------
December 30, January 1,
2000 2000
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Net income (in thousands) ...... $ 2,789 $ 4,249
=========== ===========
Weighted-average shares ........ 12,368,715 12,462,471
Effect of dilutive securities:
Employee stock options ...... 442,981 690,438
----------- -----------
Adjusted weighted-average shares
and assumed conversions ..... 12,811,696 13,152,909
=========== ===========
Basic earnings per share ....... $ 0.23 $ 0.34
=========== ===========
Diluted earnings per share ..... $ 0.22 $ 0.32
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
This discussion includes certain forward-looking statements about
Kronos' business and its expectations. Any such statements are subject to risk
that could cause the actual results to vary materially from expectations. For a
further discussion of the various risks that may affect Kronos' business and
expectations, see "Certain Factors That May Affect Future Operating Results" at
the end of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Revenues. Revenues for the first quarter of fiscal 2001 were $64.8
million as compared to $64.6 million for the first quarter of the prior year.
Revenue growth was flat in the first quarter of fiscal 2001 and 22% in the first
quarter of fiscal 2000. The revenue growth rate experienced in the first quarter
of fiscal 2000 was favorably impacted in part due to demand for new products and
product upgrades as well as related professional services and maintenance
revenues resulting from customers' Year 2000 compliance efforts, and incremental
revenues resulting from acquisitions of dealer territories during calendar 1999.
Kronos has experienced lower growth rates over the past four quarters compared
to historical growth rates. Management has attributed the lower growth rates to
a combination of factors, including the transitory impact on demand for Kronos'
products and services as a result of Year 2000 compliance efforts and the
elongation of Kronos' sales cycle. Management believes that demand for Kronos'
products and services continues to exist and anticipates that the revenue growth
rates over the remainder of the fiscal year will exceed the growth rates
experienced in fiscal 2000.
Product revenues for the quarter declined 7% to $33.7 million as compared
to $36.2 million and product revenue growth of 9% in the first quarter of fiscal
2000. The decline in product revenues is principally attributable to lower than
anticipated revenues from Kronos' independent dealer channel. Management
believes that, given the increased sophistication of Kronos' products and the
related heightened need for pre-sales technological support and other sales
support, the dealer channel's sales cycle requires greater management and
participation by Kronos. To address this trend, management anticipates expending
greater resources to assist the dealer channel in the short term and increasing
Kronos' emphasis on direct sales in the longer term.
Service revenues for the first quarter of fiscal 2001 increased 9% to
$31.0 million as compared to $28.5 million and service revenue growth of 43% in
the first quarter of fiscal 2000. The growth in service revenues in the first
quarter of fiscal 2001 principally reflects an increase in maintenance revenue
from expansion of the installed base and, to a lesser extent, incremental
maintenance revenues resulting from Kronos' acquisitions of various dealer
territories over the past four quarters. The growth in service revenues in the
first quarter of fiscal 2000 principally reflects an increase in maintenance
revenue from expansion of the installed base and the level of services sold to
the installed base, as well as an increase in the level of maintenance contracts
and professional services accompanying new and upgrade sales. Also contributing
to the growth in the first quarter of fiscal 2000 were maintenance and
professional service revenues resulting from Kronos' acquisition of its largest
dealer territory in June 1999.
Gross Profit. Gross profit as a percentage of revenues was 61% in the
first quarter of fiscal 2001, decreasing from 62% in the comparable period of
the prior year. The decrease in margin was directly attributable to lower
product revenues. Service revenue, which generates lower gross margin, has grown
faster than product revenue and represents a greater proportion of total revenue
in the first quarter than in the comparable period of the prior year. Product
gross profit as a percentage of product revenues was 77% in the first quarter of
fiscal 2001 and 2000. Software, which typically generates higher gross profit,
was a greater proportion of product revenues in the first quarter as compared to
the prior year. However, higher software development amortization and production
costs due to lower sales volume offset the effect of this favorable mix. Service
gross profit as a percentage of service revenues was 43% in the first quarter of
2001 and 2000. Management anticipates that product and service gross margin for
the remainder of the fiscal year will be comparable to that experienced in the
first quarter.
Net Operating Expenses. Net operating expenses as a percentage of
revenues were 54% and 52% in the first quarter of fiscal 2001 and 2000. The
increase in operating expenses in the first quarter as compared to the prior
year was attributable to increases in program and infrastructure costs incurred
to support anticipated increases in business volume, product development efforts
and amortization of intangible assets related to acquisitions. Sales and
marketing expenses as a percentage of revenues were 34% in the first quarter of
fiscal 2001 and 2000. Management anticipates sales and marketing expenses as a
percentage of revenues to increase in the second quarter of fiscal 2001, but at
a lower rate than the comparable period of the prior year. Engineering, research
and development expenses as a percentage of revenues were 12% in the first
quarter of fiscal 2001 as compared to 11% in the first quarter in the prior
year. Engineering expenses of $7.9 million and $7.0 million in the first quarter
of fiscal 2001 and 2000, respectively, are net of capitalized software
development costs of $2.8 million and $2.3 million, respectively. The growth in
engineering, research and development expenses this year resulted principally
from the continuing research, design and development of software and hardware
technology. General and administrative expenses as a percentage of revenues were
6% in the first quarter of fiscal 2001 and 2000. Amortization of intangible
assets as a percentage of revenues was 3% and 2% in the first quarter of fiscal
2001 and 2000, respectively. The increase in amortization expense is principally
related to various dealer territory acquisitions completed in the past four
quarters. Kronos amortizes these costs over the assets estimated remaining
economic lives. Other income, net is principally attributable to interest income
earned from Kronos' cash as well as investments in its marketable securities and
lease portfolio.
Income Taxes. The provision for income taxes as a percentage of pretax
income was 35% and 37% in the first quarter of fiscal 2001 and 2000,
respectively. The lower effective income tax rate experienced in fiscal 2001 was
principally attributable to tax benefits resulting from Kronos' investment tax
credits. Management anticipates the effective income tax rate for the remainder
of the fiscal year will be comparable to the rate experienced in the first
quarter.
Liquidity and Capital Resources
Working capital as of December 30, 2000, amounted to $14.2 million as
compared to $10.7 million at September 30, 2000. During fiscal 2000 Kronos'
working capital was reduced as Kronos' funded its investment in its corporate
headquarters facility and other property, plant and equipment, as well as the
repurchase of common shares under Kronos' stock repurchase program and, to a
lesser extent, payments related to acquisitions of dealer territories. Cash and
equivalents and marketable securities amounted to $59.4 million as of December
30, 2000 and $51.4 million as of September 30, 2000.
Cash generated from operations amounted to $15.2 million in the first
quarter of fiscal 2001 as compared to $12.2 million in the first quarter of
fiscal 2000. The increase is principally attributable to a smaller decline in
accrued compensation and deferred professional services in the Q1 of fiscal 2001
as compared Q1 of fiscal 2000. Cash used for property, plant and equipment
decreased to $1.7 million in the first quarter of fiscal 2001 from $7.0 million
in the first quarter of fiscal 2000. Fiscal 2000 investments in property, plant
and equipment included approximately $5.0 million related to the construction of
Kronos' corporate headquarters campus. Kronos' use of cash for acquisition of
businesses in Q1 of fiscal 2001 was principally related to the acquisition of a
dealer territory in November 2000.
Under Kronos' stock repurchase program, Kronos repurchased 61,000
common shares in the first quarter of fiscal 2001 at a cost of $2.3 million. The
common shares repurchased under the program are used for Kronos' employee stock
option plans and employee stock purchase plan. Cash provided by operations was
more than sufficient to fund investments in capitalized software development
costs, property, plant and equipment and stock repurchases. Kronos believes it
has available adequate cash and investments and operating cash flow to fund its
investments in property, plant and equipment, software development costs, cash
payments related to acquisitions and any additional stock repurchases for the
foreseeable future.
Certain Factors That May Affect Future Operating Results
Except for historical matters, the matters discussed in this Quarterly
Report on Form 10-Q are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Act"). Kronos desires to
take advantage of the safe harbor provisions of the Act and is including this
statement for the express purpose of availing itself of the protection of the
safe harbor with respect to all forward looking statements that involve risks
and uncertainties.
Kronos' actual operating results may differ from those indicated by
forward looking statements made in this Quarterly Report on Form 10-Q and
presented elsewhere by management from time to time because of a number of
factors including the potential fluctuations in quarterly results, timing and
acceptance of new product introductions by Kronos and its competitors, the
ability to attract and retain sufficient technical personnel, competitive
pricing pressure, the dependence on Kronos' time and attendance product line,
and the dependence on alternate distribution channels and on key vendors, as
further described below and in Kronos' Annual Report on Form 10-K for the fiscal
year ended September 30, 2000, which are specifically incorporated by reference
herein.
Potential Fluctuations in Quarterly Results. Kronos' quarterly
operating results may fluctuate as a result of a variety of factors, including
the purchasing patterns of its customers, mix of products and services sold, the
timing of the introduction of new products and product enhancements by Kronos
and its competitors, market acceptance of new products, competitive pricing
pressure and general economic conditions. Kronos historically has realized a
relatively larger percentage of its annual revenues and profits in the fourth
quarter and a relatively smaller percentage in the first quarter of each fiscal
year, although there can be no assurance that this pattern will continue. In
addition, while Kronos has contracts to supply systems to certain customers over
an extended period of time, substantially all of Kronos' product revenue and
profits in each quarter result from orders received in that quarter. If
near-term demand for Kronos' products weakens or if significant anticipated
sales in any quarter do not close when expected, Kronos' revenues for that
quarter will be adversely affected. Kronos believes that its operating results
for any one period are not necessarily indicative of results for any future
period.
Product Development and Technological Change. Continual change and
improvement in computer software and hardware technology characterize the
markets for frontline labor management systems. Kronos' future success will
depend largely on its ability to enhance the capabilities and increase the
performance of its existing products and to develop new products and interfaces
to third party products on a timely basis to meet the increasingly sophisticated
needs of its customers. Although Kronos is continually seeking to further
enhance its product offerings and to develop new products and interfaces, there
can be no assurance that these efforts will succeed, or that, if successful,
such product enhancements or new products will achieve widespread market
acceptance, or that Kronos' competitors will not develop and market products
which are superior to Kronos' products or achieve greater market acceptance.
Dependence on Alternate Distribution Channels. Kronos markets and sells
its products through its direct sales organization, independent dealers and
OEMs. In Q1 of fiscal 2001, approximately 14% of Kronos' revenue was generated
through sales to dealers and OEMs. A reduction in the sales efforts of Kronos'
major dealers and/or OEMs, the termination or changes in their relationships
with Kronos, or the failure of Kronos to monitor and incent its independent
dealers and OEMs, could have a material adverse affect on the results of Kronos'
operations.
Attracting and Retaining Sufficient Technical Personnel for Product
Development, Support and Sales. Kronos has encountered intense competition for
experienced technical personnel for product development, technical support and
sales and expects such competition to continue in the future. Any inability to
attract and retain a sufficient number of qualified technical personnel could
adversely affect Kronos' ability to produce, support and sell products in a
timely manner.
Competition. The frontline labor management industry is highly
competitive. Technological changes such as those allowing for increased use of
the Internet may also create the potential for new entrants. Although Kronos
believes it has core competencies that are not easily obtainable by competitors,
maintaining Kronos' technological and other advantages over competitors will
require continued investment by Kronos in research and development and marketing
and sales programs. There can be no assurance that Kronos will have sufficient
resources to make such investments or be able to achieve the technological
advances necessary to maintain its competitive advantages. Increased competition
could adversely affect Kronos' operating results through price reductions and/or
loss of market share.
PART II. OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
fiscal quarter ended December 30, 2000.
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.
KRONOS INCORPORATED
By /s/ Paul A. Lacy
Paul A. Lacy
Vice President of Finance
and Administration
(Duly Authorized Officer and
Principal Financial Officer)
February 9, 2001