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, 1999
[ ] 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, 1999: 10,165,016
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
August 31, February 28,
1999 1999
(Unaudited) (Note 1)
----------- -----------
<S> <C> <C>
ASSETS:
Cash and equivalents $ 7,236 $ 12,458
Receivables, net of allowances 61,866 68,021
Inventories (Note 2) 55,891 53,737
Income taxes, net 3,017 --
Prepaid expenses and other current assets 9,480 9,467
-------- --------
Total Current Assets 137,490 143,683
Land, buildings and equipment, net 175,472 179,317
Investment in affiliates and other assets, net 14,733 13,491
-------- --------
TOTAL ASSETS $327,695 $336,491
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Short-term debt, unsecured $ 8,815 $ 17,458
Accounts payable 21,757 19,683
Payroll related accruals 13,618 12,830
Other accruals 14,969 13,622
Income taxes, net -- 358
Current maturities of long-term debt 2,341 2,301
-------- --------
Total Current Liabilities 61,500 66,252
Long-term debt 67,979 75,389
Deferred income taxes, net 22,145 23,465
Deferred credits 3,910 3,716
Stockholders' Equity:
Common stock 12,533 12,522
Additional paid-in capital 43,100 42,994
Retained earnings 152,305 146,612
Accumulated other comprehensive income 1,251 2,188
-------- --------
209,189 204,316
Less: cost of common stock in treasury (37,028) (36,647)
--------- --------
Total Stockholders' Equity 172,161 167,669
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $327,695 $336,491
======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
</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,
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 118,666 $ 107,664 $ 242,127 $ 230,329
Cost of products sold 85,435 77,382 174,497 163,316
--------- --------- --------- ---------
Gross profit 33,231 30,282 67,630 67,013
Engineering, distribution and
administrative expenses 28,996 26,964 57,190 53,345
--------- --------- --------- ---------
Earnings from operations 4,235 3,318 10,440 13,668
Other income (expense), net 156 (247) 641 (28)
--------- --------- --------- ---------
Earnings before interest and taxes 4,391 3,071 11,081 13,640
Interest expense, net 1,135 699 2,323 1,375
--------- --------- --------- ---------
Earnings before income taxes 3,256 2,372 8,758 12,265
Income tax provision 1,139 853 3,065 4,415
--------- --------- --------- ---------
Net earnings $ 2,117 $ 1,519 $ 5,693 $ 7,850
========= ========= ========= =========
Earnings per share
Basic $ .21 $ .12 $ .56 $ .63
========= ========= ========= =========
Diluted $ .21 $ .12 $ .56 $ .62
========= ========= ========= =========
Average shares outstanding
Basic 10,177,209 12,499,091 10,177,453 12,491,179
========== ========== ========== ==========
Diluted 10,253,477 12,595,841 10,246,649 12,617,340
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<CAPTION>
Six Months Ended August 31,
---------------------------
1999 1998
---------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 29,457 $ 23,593
Cash flows from investing activities:
Expenditures for land, building
and equipment (20,731) (29,044)
Proceeds from sale of land, building
and equipment 2,073 --
Other, net 38 116
--------- --------
Net cash used by investing activities (18,620) (28,928)
---------- ---------
Cash flows from financing activities:
(Decrease) increase in short-term debt (8,192) 2,651
(Decrease) increase in domestic revolver (6,000) 3,000
Proceeds from long-term debt -- 865
Principal payments on long-term debt (996) (1,097)
Purchase of treasury stock (381) --
Other equity transactions 117 254
---------- ---------
Net cash (used) provided by financing activities (15,452) 5,673
----------- ---------
Effect of exchange rate changes on cash flows (607) 270
---------- ---------
Net (decrease) increase in cash and equivalents (5,222) 608
Cash and equivalents, at beginning of year 12,458 9,659
---------- ---------
Cash and equivalents, at end of period $ 7,236 $ 10,267
========== =========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
</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, 1999, and the
condensed consolidated statements of earnings for the three and six months ended
August 31, 1999 and 1998 and the condensed consolidated statements of cash flows
for the six months ended August 31, 1999 and 1998, 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, 1999, 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, 1999 Annual
Report to Stockholders. The results of operations for the three and six months
ended August 31, 1999 are not necessarily indicative of the operating results
for a full year.
2. INVENTORIES
Inventory values were as follows:
August 31, February 28,
1999 1999
----------- ----------
Raw materials $ 7,474 $ 8,171
Component parts 11,506 8,230
Work-in-process 21,724 20,006
Finished goods 15,187 17,330
----------- ----------
$ 55,891 $ 53,737
=========== ==========
3. COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", total comprehensive income, consisting of net
earnings and foreign currency translation adjustments, net of tax, amounted to
$3,332 and $1,805 for the three months ended August 31, 1999 and 1998,
respectively, and $4,756 and $7,884 for the six months ended August 31, 1999 and
1998, respectively.
4. STOCKHOLDERS' EQUITY
On June 17, 1999, the Company's stockholders' approved the charter amendment
reclassifying the two classes of common stock to one class of voting common
stock. The stockholders' equity classifications affected by this change have
been retroactively restated to reflect one class of common stock.
5
<TABLE>
5. SEGMENT INFORMATION
<CAPTION>
Automotive
Switches Computer Switches Eliminations
Three Months Ended August 31, 1999 & Modules Semiconductors Keyboards & Controls & Corporate Consolidated
- ---------------------------------- --------- -------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 41,469 $ 29,809 $ 24,350 $ 23,038 $ -- $ 118,666
Intersegment sales -- 639 -- 255 (894) --
Total net sales 41,469 30,448 24,350 23,293 (894) 118,666
Earnings from operations 1,079 2,033 3,866 (1,726) (1,017) 4,235
Three Months Ended August 31, 1998
- ----------------------------------
Sales to unaffiliated customers $ 32,449 $ 26,076 $ 24,984 $ 24,155 $ -- $ 107,664
Intersegment sales -- 251 -- 275 (526) --
Total net sales 32,449 26,327 24,984 24,430 (526) 107,664
Earnings from operations (1,365) 846 4,713 260 (1,136) 3,318
Six Months Ended August 31, 1999
- --------------------------------
Sales to unaffiliated customers $ 85,493 $ 60,518 $ 49,521 $ 46,595 $ -- $ 242,127
Intersegment sales -- 1,053 -- 555 (1,608) --
Total net sales 85,493 61,571 49,521 47,150 (1,608) 242,127
Earnings from operations 3,168 4,164 7,198 (2,149) (1,941) 10,440
Six Months Ended August 31, 1998
- --------------------------------
Sales to unaffiliated customers $ 75,279 $ 56,046 $ 50,139 $ 48,865 $ -- $ 230,329
Intersegment sales -- 870 -- 688 (1,558) --
Total net sales 75,279 56,916 50,139 49,553 (1,558) 230,329
Earnings from operations 1,567 4,185 8,797 1,203 (2,084) 13,668
</TABLE>
6. EARNINGS PER SHARE RECONCILIATION
Following is a reconciliation of the numerators and the denominators of the
basic and diluted EPS computation.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
--------------------- ---------------------
(In thousands, except share data) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net earnings available to common
stockholders $2,117 $1,519 $5,693 $7,850
Denominator:
Weighted average shares for
basic EPS 10,177,209 12,499,091 10,177,453 12,491,179
Effect of dilutive securities:
Common stock options 76,268 96,750 69,196 126,161
--------- --------- --------- ---------
Adjusted weighted average shares
and assumed conversions for
diluted EPS 10,253,477 12,595,841 10,246,649 12,617,340
Basic EPS $.21 $.12 $.56 $.63
Diluted EPS $.21 $.12 $.56 $.62
</TABLE>
6
7. STOCK BASED COMPENSATION PLANS
In February of 1999 Cherry Semiconductor Corporation ("Cherry Semiconductor"), a
wholly owned subsidiary of the Company, adopted a stock incentive plan for its
officers and key employees. Under the Plan, an aggregate of 1,000,000 shares of
common stock of Cherry Semiconductor have been reserved for issuance with
options for 336,300 shares granted as of August 31, 1999. Cherry Semiconductor
currently has 10.2 million shares of common stock outstanding, all of which are
owned by the Company.
The benefits awarded under the Plan shall consist of stock options with exercise
prices which may not be less than fair market value on the date of grant. The
exercise price, term and other conditions applicable to each option granted
under the plan are generally determined by the Compensation Committee of the
Board of Directors of the Company at the time of the grant of each option and
may vary with each option granted.
8. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Sales for the second quarter of fiscal 2000 were a record $118.7 million, up
10.2 percent from last year's strike-affected second quarter. The Company
estimates that a work stoppage against General Motors in June and July of 1998,
reduced last year's domestic automotive switch and module sales by $6.0 million
and semiconductor sales by $2.0 million.
Sales for the Automotive Switches and Modules segment increased 27.8 percent to
$41.5 million from $32.4 million due in large part to the nonrecurrence of the
strike. Sales for the Semiconductor segment grew 14.3 percent to $29.8 million
with a 17.0 percent increase in sales of power management products coupled with
recovery of volumes lost to the strike accounting for the change. For the
Computer Keyboard segment, sales decreased 2.5 percent to $24.4 million on
slightly lower sales of standard keyboards. Sales for the Switches and Controls
segment decreased 4.6 percent to $23.0 million with reduced sales of switch
products being partially offset by growth in sensor products.
Record sales of $242.1 million for the first half of the current fiscal year
were 5.1 percent higher than the comparable period of the prior year. Sales for
the Automotive Switches and Modules segment grew 13.6 percent to $85.5 million.
Sales for the Semiconductor segment grew 8.0 percent to $60.5 million on a 15.0
percent increase in sales of power management products and recovery of volume
lost to the strike. For the Computer Keyboard segment, sales were down 1.2
percent to $49.5 million on the lower second quarter sales of standard
keyboards. Sales for the Switches and Controls segment decreased 4.6 percent to
$46.6 million for the reasons noted above.
The consolidated operating profit for the second quarter increased to 3.6
percent of sales from 3.1 percent for the comparable period last year.
Manufacturing costs rose commensurate with sales resulting in gross margins for
both periods of approximately 28.0 percent. Although the company continued its
investment in sales and engineering resources directed at growing its power
management and sensor products, the overall increase in operating costs for the
quarter was held below the sales increase resulting in the slightly improved
operating profit.
The consolidated operating profit for the first six months decreased to 4.3
percent of sales from 5.9 percent for the comparable period last year. The more
modest increase in sales for the six month period was outpaced by increases in
manufacturing and operating expenses as the Company has continued investing in
manufacturing improvements and product development.
Interest expense for the first quarter increased 62.4 percent as a result of the
borrowings used to finance the Company's stock tender offer last December.
Consolidated other income for the current quarter and year to date increased
primarily due to higher earnings at the Company's Japanese joint venture, a gain
on the sale of a building at the Company's Waukegan campus coupled with a loss
on the disposal of some unused equipment in last year's second quarter.
The consolidated effective income tax rate of 35.0 percent for the current year
period is slightly below the 36.0 percent rate of the prior year primarily due
to increased foreign tax credits.
Net earnings for the quarter were $2.1 million, up 39.4 percent from $1.5
million last year. Diluted earnings per share of $.21 increased 75 percent from
$.12 in the prior year. For the first six months, net earnings decreased 27.5
percent to $5.7 million while diluted earnings per share decreased 9.7 percent
to $.56 from $.62.
Liquidity and Capital Resources
8
The Company's consolidated debt to capital ratio (debt net of cash) declined to
29.5 percent at August 31, 1999, from 33.0 percent at February 28, 1999.
Consolidated net cash flow from operating activities was $29.5 million for the
six month period ended August 31, 1999.
From the funds generated from operating activities and cash available at the
beginning of the year, $20.7 million was invested in buildings and equipment and
$15.2 million was used to reduce outstanding borrowings. Domestic operations
invested $13.9 million in buildings and equipment while foreign locations
invested $6.8 million. The Company also sold a building receiving proceeds of
$2.1 million. The effect of exchange rate changes decreased cash flow $607
thousand. Cash decreased to $7.2 million at August 31, 1999 from $12.5 million
at February 28, 1999.
Market Conditions and Outlook
Capital expenditures are expected to continue at a level of approximately 8
percent to 9 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 and still maintain an
acceptable debt to capital ratio. In September, the Company increased its
Multicurrency Credit Facility from $65 million to $75 million. Existing credit
facilities and bank lines should be sufficient, together with internally
generated cash, to finance the Company's operations.
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, 1999, the U.S. dollar equivalent of forward
contracts outstanding approximated $14.0 million.
Year 2000 Readiness
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. Year 2000 project teams
and leaders are organized at each of the Company's four primary operating
entities, which manage their respective business computer systems, facilities,
customers and suppliers under our decentralized organization structure. 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 have been completed by all project
teams. Remediation (step 4) and acceptance testing (step 5) of critical
business systems were completed at three of the four locations in the first
quarter of the current fiscal year. The fourth location completed remediation
and acceptance testing of new business software on October 1, 1999. As a result
of the successful installation of new Year 2000 compliant software at the
remaining location, the contingency plan to repair its existing business
software to make it Year 2000 compliant is no longer needed and further repairs
have been discontinued. Some manufacturing, engineering and test equipment (18
in total) is scheduled for remediation and acceptance testing in October and
November. This will complete remediation and acceptance testing for all areas.
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
9
effort to determine and assess those parties' readiness for Year 2000.
This involves an on-going process of review, evaluation and follow-up, with
priority given to major or critical suppliers. Contingency plans, as needed,
are being developed to mitigate any potential disruptions from critical
suppliers deemed to be a medium or high risk. Alternative sourcing and an
additional one to two weeks safety stock of inventory is under consideration for
the end of calendar year 1999. 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 their Year 2000 issues 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
Readiness 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, 1999, filed with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk at August 31, 1999 from that
reported in Form 10-K for the year ended February 28, 1999.
10
<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, 1999.
(b) Eight directors were elected and received the following Class B
stockholder votes:
For Withheld
-------- -------------
1. Peter B. Cherry 3,720,235 1,341
2. Alfred S. Budnick 3,720,235 1,341
3. Thomas L. Martin, Jr. 3,720,235 1,341
4. Robert B. McDermott 3,720,235 1,341
5. Peter A. Guglielmi 3,720,235 1,341
6. Charles W. Denny 3,720,235 1,341
7. W. Ed Tyler 3,720,235 1,341
8. Henry J. West 3,720,235 1,341
(c) Class B stockholders approved the amendment to the 1995 Stock Incentive
Plan with the following votes:
For Against Withheld Broker Non-Votes
- ------------ ---------------- ----------- ------------------
3,371,516 52,529 1,369 296,162
(d) A majority of each class of common stock approved the proposal to
eliminate the two classes of stock, authorize a new class of voting common
stock and reclassify each issued share of Class A common and Class B common
into one share of the new common stock. Voting results for each class of
common stock were as follows:
Class A common stock:
For Against Withheld
- ------------ ---------- --------
5,162,136 3,841 959
Class B common stock:
For Against Withheld Broker Non-Votes
- ------------ ----------- -------- ----------------
3,422,350 2,212 852 296,162
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
None
11
<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 12, 1999 By: /s/ Dan A. King
-----------------
Dan A. King
Vice President of Finance
and Administration,
Treasurer and Secretary
(Duly authorized officer and
principal financial officer)
12
<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>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> AUG-31-1999
<CASH> 7,236
<SECURITIES> 0
<RECEIVABLES> 61,866
<ALLOWANCES> 0
<INVENTORY> 55,891
<CURRENT-ASSETS> 137,490
<PP&E> 423,003
<DEPRECIATION> 247,531
<TOTAL-ASSETS> 327,695
<CURRENT-LIABILITIES> 61,500
<BONDS> 67,979
0
0
<COMMON> 12,533
<OTHER-SE> 159,628
<TOTAL-LIABILITY-AND-EQUITY> 327,695
<SALES> 242,127
<TOTAL-REVENUES> 242,127
<CGS> 174,497
<TOTAL-COSTS> 174,497
<OTHER-EXPENSES> 57,190
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,552
<INCOME-PRETAX> 8,758
<INCOME-TAX> 3,065
<INCOME-CONTINUING> 5,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,693
<EPS-BASIC> .56
<EPS-DILUTED> .56
</TABLE>
