SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15D OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934 (No Fee Required)
For the transition period from ( ) to ( )
Commission File No. 0-8955
THE CHERRY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2977756
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3600 Sunset Avenue, Waukegan, IL 60087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 662-9200
Not Applicable
(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 report), and (2)
has been subject to such filing requirements for the past 90 days.
( X ) Yes ( ) No
Number of Common Shares outstanding as of August 31, 1998:
7,736,997 shares of Class A Common
4,762,564 shares of Class B Common
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
August 31, February 28,
1998 1998
(Unaudited) (Note 1)
----------- ------------
<S> <C> <C>
ASSETS:
Cash and equivalents $10,267 $9,659
Receivables, net of allowances 56,833 63,332
Inventories (Note 2) 60,168 52,068
Prepaid expenses and other current assets 10,014 9,547
-------- --------
Total Current Assets 137,282 134,606
Land, buildings and equipment, net 175,798 162,961
Investment in affiliates and other assets, net 11,735 12,766
-------- --------
TOTAL ASSETS $324,815 $310,333
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Short-term debt $ 23,648 $ 20,630
Accounts payable 17,928 22,466
Payroll related accruals 13,558 11,635
Other accruals 15,587 13,452
Income taxes, net 1,063 1,385
Current maturities of long-term debt 1,927 1,780
-------- --------
Total Current Liabilities 73,711 71,348
Long-term debt 36,230 33,393
Deferred income taxes, net and deferred credits 23,282 22,138
Stockholders' Equity:
Class A common stock 7,737 7,713
Class B common stock 4,763 4,763
Additional paid-in capital 42,639 42,409
Retained earnings 135,610 127,760
Cumulative translation adjustments 843 809
-------- --------
Total Stockholders' Equity 191,592 183,454
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $324,815 $310,333
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in Thousands except Share Data)
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 107,664 $ 105,776 $ 230,329 $ 220,311
Cost of products sold 77,382 77,775 163,316 159,785
---------- ---------- ---------- ----------
Gross profit 30,282 28,001 67,013 60,526
Engineering, distribution and
administrative expenses 26,964 24,711 53,345 49,262
---------- ---------- ---------- ----------
Earnings from operations 3,318 3,290 13,668 11,264
Other income (expense), net (247) 429 (28) 527
---------- ---------- ---------- ----------
Earnings before interest and taxes 3,071 3,719 13,640 11,791
Interest expense, net 699 677 1,375 1,530
---------- ---------- ---------- ----------
Earnings before income taxes 2,372 3,042 12,265 10,261
Income tax provision 853 1,098 4,415 3,797
---------- ---------- ---------- ----------
Net earnings $ 1,519 $ 1,944 $ 7,850 $ 6,464
========== ========== ========== ==========
Earnings per share
Basic $ .12 $ .16 $ .63 $ .52
========== ========== ========== ==========
Diluted $ .12 .16 .62 .52
========== ========== ========== ==========
Average shares outstanding
Basic 12,499,091 12,444,112 12,491,179 12,436,617
========== ========== ========== ==========
Diluted 12,595,841 12,536,941 12,617,340 12,517,244
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Six Months Ended August 31,
1998 1997
---------------------------
<S> <C> <C>
Net cash provided by operating activities $ 23,593 $ 22,351
Cash flows from investing activities:
Expenditures for land, building and equipment (29,044) (16,498)
Other, net 116 (624)
---------- ---------
Net cash used by investing activities (28,928) (17,122)
---------- ---------
Cash flows from financing activities:
Increase in short-term debt 2,651 987
Increase (decrease) in domestic revolver 3,000 (7,000)
Proceeds from long-term debt 865 2,874
Principal payments on long-term debt (1,097) (1,086)
Other equity transactions 254 238
---------- ---------
Net cash used by financing activities 5,673 (3,987)
---------- ---------
Effect of exchange rate changes on cash flows 270 (409)
---------- ---------
Net increase in cash and equivalents 608 833
Cash and equivalents, at beginning of year 9,659 6,215
---------- ---------
Cash and equivalents, at end of period $ 10,267 $ 7,048
========== =========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
THE CHERRY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of August 31, 1998, and the
condensed consolidated statements of earnings and the condensed consolidated
statements of cash flows for the three and six months ended August 31, 1998 and
1997, have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows at August 31, 1998, and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's February 28, 1998 Annual
Report to Stockholders. The results of operations for the three and six months
ended August 31, 1998 are not necessarily indicative of the operating results
for a full year.
2. INVENTORIES
Inventory values were as follows:
August 31, February 28,
1998 1998
----------- ----------
Raw materials $ 9,303 $ 9,633
Component parts 11,836 10,897
Work-in-process 20,456 18,412
Finished goods 18,573 13,126
----------- ----------
$ 60,168 $ 52,068
=========== ==========
3. COMPREHENSIVE INCOME
In the first quarter of fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Total
comprehensive income (loss), consisting of net earnings and foreign currency
translation adjustments, net of tax, amounted to $1,805 and ($170) for the three
months ended August 31, 1998 and 1997, respectively, and $7,884 and $4,826 for
the six months ended August 31, 1998 and 1997, respectively.
4. NEW ACCOUNTING STANDARD - FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Adoption of SFAS No. 133 is required in
fiscal years beginning after June 15, 1999, although earlier adoption is
permitted as of the beginning of any fiscal quarter beginning after June 16,
1998. The Statement requires the Company to record all derivative instruments,
including those embedded in other contracts, on the balance sheet at fair value.
Changes in the derivative's fair value must be recognized in current earnings
unless specific hedge accounting criteria are met. If the derivative is a
hedge, depending on the nature of the hedge, changes in fair value of the
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company has not yet determined when it will adopt SFAS No. 133, however,
management does not anticipate that adoption of the Statement will have a
significant effect on earnings or financial position.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Second quarter sales of $107.7 million for fiscal 1999 established a new record
and were 1.8 percent higher than the same quarter of the prior year. The
increase was driven by stronger sales at the Company's international operations,
which grew by 22 percent over last year. Similar to the first quarter, the
largest sales gains were registered by automotive products although sales of
computer keyboards increased as well. Second quarter sales by domestic
operations decreased 9.0 percent, largely the result of the strike at General
Motors which began in early June and ended in late July. The Company estimates
that the strike reduced domestic sales by approximately $8 million. Excluding
the effects of the strike, sales at the domestic operations would have increased
a more modest 2 percent. Domestic sales of computer market products increased
on stronger sales of power management semiconductors. This was offset by lower
shipments of semiconductors used in analog cellular phones. Sales of automotive
switches to domestic customers also decreased, exclusive of the effects of the
strike.
Record sales of $230.3 million for the current year six-month period were 4.5
percent higher than the comparable period of the prior year. Sales by foreign
operations grew 20.8 percent. Increases occurred across all markets and ranged
from 50 percent for automotive products to 4 percent for switch based consumer
products. Domestic sales decreased 4.1 percent, a result that was influenced by
the GM strike. Excluding the effects of the strike, sales would have increased
1.4 percent with higher sales of power management semiconductors to cumputer
customers being somewhat offset by lower sales of semiconductors used in analog
cellular phones.
Consolidated operating profit for the second quarter of the current year was 3.1
percent of sales, which is consistent with the comparable period of the prior
year. The Company experienced higher gross margins at its international
operations largely as a result of increased utilization of those manufacturing
facilities and cost reduction programs. Serving to offset some of this was the
lower utilization of our domestic manufacturing facilities as a result of the GM
strike. The net effect of these developments was a gross margin of 28.1 percent
up from 26.5 percent in the prior year. The Company incurred higher operating
expenses largely from engineering activities for new product development and
marketing efforts to promote those new products. This caused operating expenses
as a percent of sales to increase from 23.4 percent to 25.0 percent.
The year-to-date consolidated operating profit margin of 5.9 percent of sales
for fiscal 1999 is improved from the 5.1 percent level in the prior year on the
strength of the first quarter results.
Consolidated interest expense for the second quarter increased 3.2 percent as a
result of higher average borrowing levels, however, six month interest expense
for the current year is lower by 10.1 percent.
Consolidated other income and expense for the second quarter was an expense of
$.2 versus income of $.4 for the prior year. The current year expense results
primarily from foreign exchange losses and the disposal of some unused
equipment. The same items account for the change in the six-month other income
and expense amounts as well.
The consolidated effective income tax rate of 36.0 percent for the current year
six-month period is below the 37.0 percent rate of the prior year. The rate
decreased primarily from lower state income taxes and higher foreign tax
credits.
Liquidity and Capital Resources
The Company's consolidated debt to capital ratio, net of cash balances increased
to 21.2 percent at August 31, 1998 from 20.1 percent at February 28, 1998.
Consolidated operations generated $23.6 million in cash for the six month period
ended August 31, 1998. Additional cash was provided by net borrowings of $5.4
million, and $.3 from miscellaneous equity transactions.
Of the funds generated above, $29.0 million was invested in buildings and
equipment. Domestic operations invested $19.9 million while foreign locations
invested $9.1 million.
As a result of the above, cash increased to $10.3 million at August 31, 1998
from $9.7 million at February 28, 1998.
Existing credit facilities and bank lines should be sufficient, together with
internally generated cash, to finance the Company's operations.
Future Accounting Changes
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in fiscal years beginning after June 15, 1999. The
Statement permits early adoption as of the beginning of any fiscal quarter after
its issuance and will require the Company to recognize all derivatives on the
balance sheet at fair value. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The Company has not yet
determined when it will adopt the new Statement, however, management does not
anticipate that the adoption of the Statement will have a significant effect on
earnings or financial position.
Market Conditions and Outlook
Capital expenditures are expected to continue at a level of approximately 8
percent to 10 percent of sales. The capital expenditure rate may be revised
further as sales growth estimates are updated. Operations are expected to
generate enough cash to fund capital expenditures.
Since a significant portion of the Company's sales and manufacturing are
overseas, foreign currency translation could have an impact on future sales,
earnings, and financial position of the Company as denominated in U.S. dollars.
The Company selectively enters into forward contracts to hedge certain firm and
anticipated purchase commitments denominated in foreign currencies (primarily
German Marks). At August 31, 1998, the U.S. dollar equivalent of forward
contracts outstanding approximated $5.0 million.
Year 2000 Compliance
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 failures. Specifically, computational errors are a known
risk with respect to dates after December 31, 1999. The Company continues to
assess its computer equipment, business computer systems, manufacturing
equipment and facilities to prepare for the year 2000. Additionally, customer
and supplier relationships are being reviewed to assess and address their plans
to become Year 2000 compliant. The Company is using a six-step approach to Year
2000 compliance suggested by the Automotive Industry Action Group: (1) planning
and awareness; (2) inventory; (3) risk evaluation and prioritization; (4)
remediation (repair, replace or retire); (5) testing; and (6) establishment of
post implementation support and reviews, as required. Because of our
decentralized organizational structure and related systems, customers and
suppliers, Year 2000 project teams and respective leaders are organized by the
three main functional operating entities, which are also geographically
separate. Project teams at each location include representatives from all
functions across the respective entity. Project leaders provide periodic
reports to the corporate headquarters. Steps (1) through (3) above are largely
complete by all project teams. Remediation and testing are now in progress at
all locations. Completion is targeted for February 28, 1999 for two of the
three locations, with substantial completion by December 31, 1998. The third
location is installing new business software scheduled for completion by June
30, 1999 with other compliance activities targeted for completion by December
31, 1998. In case of unforeseen delays in completing this software conversion
on time, repairs to make the existing business software Year 2000 compliant are
part of a contingency plan at the third location.
While the Company's efforts to address Year 2000 issues will involve additional
costs, the Company believes, based upon currently available information, that it
will be able to manage the Year 2000 transition issues within its control
without any material adverse effect on the Company's results of operations, cash
flows and financial position.
Although the Company is committed to making its operations Year 2000 compliant,
it is possible that the Company may be adversely affected by problems
encountered by key customers and suppliers. The Company has initiated
correspondence with all suppliers, service providers and financial institutions
in an effort to determine and assess those parties' Year 2000 compliance status.
This involves an on-going process of review, evaluation and follow-up, with
priority given to major or critical suppliers. Contingency plans, as needed,
may develop from the results of our surveys and most likely will include
alternative sourcing. The Company is not likely to develop contingency plans
relating to its customers' compliance status. In most cases, our major
customers are much larger entities with greater financial resources than the
Company. Based upon correspondence from them, we believe they are diligently
addressing Year 2000 and will be compliant. However, should problems arise at
our customers that would prevent sales to them, the Company would likely respond
by taking action to reduce costs during the period of reduced demand. The
Company cannot predict the likelihood or extent of a significant disruption in
the business of its customers and suppliers or of the economy as a whole, either
of which could have a material adverse effect on the Company.
Certain statements in the foregoing Market Conditions and Outlook and Year 2000
Compliance sections and elsewhere in this Form 10-Q are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve risks and uncertainties that could significantly impact
future results. A discussion of these risks and uncertainties is contained in
the Company's Form 10-K for the year ended February 28, 1998, filed with the
Securities and Exchange Commission.
<PAGE>
THE CHERRY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders was held on June 17, 1998.
(b) Eight directors were elected and received the following Class B
stockholder votes:
For Withheld
--------- --------
1. Peter B. Cherry 4,384,857 2,538
2. Alfred S. Budnick 4,384,857 2,538
3. Thomas L. Martin, Jr. 4,384,757 2,638
4. Robert B. McDermott 4,384,757 2,638
5. Peter A. Guglielmi 4,384,857 2,538
6. Charles W. Denny 4,384,857 2,538
7. W. Ed Tyler 4,384,857 2,538
8. Henry J. West 4,384,857 2,538
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ---------------------------------
27 Article 5 Financial Data Schedule
(b) Reports on Form 8-K
On June 18, 1998, the Registrant filed a report on Form 8-K under item
5, other events. A press release dated June 17, 1998, announcing first
quarter earnings and the impact of the General Motors strike was
incorporated by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE CHERRY CORPORATION
(Registrant)
DATE: October 13, 1998 By: Dan A. King
-----------
Dan A. King
Vice President of Finance
and Administration,
Treasurer and Secretary
(Duly authorized officer and
principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated statement of income and condensed consolidated balance
sheet and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> FEB-28-1999 FEB-28-1998
<PERIOD-END> AUG-31-1998 AUG-31-1997<F1>
<CASH> 10,267 7,048
<SECURITIES> 0 0
<RECEIVABLES> 56,833 53,250
<ALLOWANCES> 0 0
<INVENTORY> 60,168 53,741
<CURRENT-ASSETS> 137,282 122,440
<PP&E> 404,353 360,405
<DEPRECIATION> 228,555 204,397
<TOTAL-ASSETS> 324,815 290,902
<CURRENT-LIABILITIES> 73,711 66,812
<BONDS> 36,230 31,613
0 0
0 0
<COMMON> 12,500 12,448
<OTHER-SE> 179,092 160,692
<TOTAL-LIABILITY-AND-EQUITY> 324,815 290,902
<SALES> 230,329 220,311
<TOTAL-REVENUES> 230,329 220,311
<CGS> 163,316 159,785
<TOTAL-COSTS> 163,316 159,785
<OTHER-EXPENSES> 53,345 49,262
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,636 1,694
<INCOME-PRETAX> 12,265 10,261
<INCOME-TAX> 4,415 3,797
<INCOME-CONTINUING> 7,850 6,464
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,850 6,464
<EPS-PRIMARY> .63 .52
<EPS-DILUTED> .62 .52
<FN>
<F1> Restated.
</FN>
</TABLE>
