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 November 30, 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 November 30, 1998:
7,738,663 shares of Class A Common
4,762,564 shares of Class B Common
<PAGE>
THE CHERRY CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
November 30, February 28,
1998 1998
(Unaudited) (Note 1)
----------- ------------
<S> <C> <C>
ASSETS:
Cash and equivalents $ 15,218 $ 9,659
Receivables, net of allowances 66,447 63,332
Inventories (Note 2) 59,791 52,068
Prepaid expenses and other current assets 9,155 9,547
-------- --------
Total Current Assets 150,611 134,606
Land, buildings and equipment, net 178,858 162,961
Investment in affiliates and other assets, net 13,244 12,766
-------- --------
TOTAL ASSETS $342,713 $310,333
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Short-term debt $ 13,538 $ 20,630
Accounts payable 20,772 22,466
Payroll related accruals 15,538 11,635
Other accruals 18,159 13,452
Income taxes, net 2,507 1,385
Current maturities of long-term debt 2,377 1,780
-------- --------
Total Current Liabilities 72,891 71,348
Long-term debt 41,157 33,393
Deferred income taxes, net and deferred credits 26,139 22,138
Stockholders' Equity:
Class A common stock 7,739 7,713
Class B common stock 4,763 4,763
Additional paid-in capital 42,652 42,409
Retained earnings 143,800 127,760
Cumulative translation adjustments 3,572 809
-------- --------
Total Stockholders' Equity 202,526 183,454
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $342,713 $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 Nine Months Ended
November 30, November 30,
----------------- -----------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 131,187 $ 120,167 $ 361,516 $ 340,478
Cost of products sold 89,980 84,528 253,296 244,313
--------- --------- --------- ---------
Gross profit 41,207 35,639 108,220 96,165
Engineering, distribution and
administrative expenses 27,813 25,350 81,158 74,612
--------- --------- --------- ---------
Earnings from operations 13,394 10,289 27,062 21,553
Other income, net 42 296 14 823
--------- --------- --------- ---------
Earnings before interest and taxes 13,436 10,585 27,076 22,376
Interest expense, net 638 714 2,013 2,244
--------- --------- --------- ---------
Earnings before income taxes 12,798 9,871 25,063 20,312
Income tax provision 4,608 3,652 9,023 7,449
--------- --------- --------- ---------
Net earnings $ 8,190 $ 6,219 $ 16,040 $ 12,683
========= ========= ========= =========
Earnings per share
Basic $ .66 $ .50 $ 1.28 $ 1.02
========= ========= ========= =========
Diluted $ .65 $ .49 $ 1.27 $ 1.01
========= ========= ========= =========
Average shares outstanding
Basic 12,500,377 12,451,608 12,494,223 12,441,578
========== ========== ========== ==========
Diluted 12,658,676 12,587,397 12,589,733 12,537,607
========== ========== ========== ==========
<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>
Nine Months Ended November 30,
------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 42,395 $ 41,027
Cash flows from investing activities:
Expenditures for land, building and equipment (37,432) (26,349)
Other, net (213) (1,167)
----------- ----------
Net cash used by investing activities (37,645) (27,516)
----------- ----------
Cash flows from financing activities:
(Decrease) in short-term debt (8,102) (842)
Increase (decrease) in domestic revolver 8,000 (7,000)
Proceeds from long-term debt 1,373 2,857
Principal payments on long-term debt (1,624) (1,543)
Other equity transactions 269 295
----------- ----------
Net cash used by financing activities (84) (6,233)
----------- ----------
Effect of exchange rate changes on cash flows 893 (289)
----------- ----------
Net increase in cash and equivalents 5,559 6,989
Cash and equivalents, at beginning of year 9,659 6,215
----------- ----------
Cash and equivalents, at end of period $ 15,218 $ 13,204
=========== ==========
<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 November 30, 1998, and the
condensed consolidated statements of earnings and the condensed consolidated
statements of cash flows for the three and nine months ended November 30, 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 November 30, 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 nine months
ended November 30, 1998 are not necessarily indicative of the operating results
for a full year.
2. Inventories
Inventory values were as follows:
November 30, February 28,
1998 1998
----------- ----------
Raw materials $ 9,108 $ 9,633
Component parts 10,421 10,897
Work-in-process 18,858 18,412
Finished goods 21,404 13,126
----------- ----------
$ 59,791 $ 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 $10,919 and $6,264 for the
three months ended November 30, 1998 and 1997, respectively, and $18,803 and
$11,090 for the nine months ended November 30, 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.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Third quarter sales of $131.2 million for fiscal 1999 established a new record
and were 9.2 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 19.8 percent over last year. Similar to the first half of the
year, the largest sales gains were registered by automotive products although
sales of computer keyboards increased as well. Third quarter sales by domestic
operations increased 2.7 percent, with sales of computer market products
increasing on stronger sales of power management semiconductors. This was
offset by lower shipments of semiconductors and switches to automotive
customers.
Record sales of $361.5 million for the current year nine month period were 6.2
percent higher than the comparable period of the prior year. Sales by foreign
operations grew 20.4 percent. Increases occurred across all markets and ranged
from 46.7 percent for automotive products to 8.0 percent for computer keyboards.
Domestic sales decreased 1.8 percent, a result that was influenced by the GM
strike during the second quarter. Excluding the effects of the strike, sales
would have increased 1.9 percent with higher sales of power management
semiconductors to computer customers being somewhat offset by lower sales of
semiconductors and switches to automotive customers.
Consolidated operating profit for the third quarter of the current year was 10.2
percent of sales, up from 8.6 percent in 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. This coupled with a modest improvement in domestic gross
margins resulted in a consolidated gross margin of 31.4 percent up from 29.7
percent in the prior year. The Company incurred higher operating expenses but
they increased only slightly from the prior year as a percent of sales from 21.1
percent to 21.2 percent.
The year-to-date consolidated operating profit margin of 7.5 percent of sales
for fiscal 1999 is improved from the 6.3 percent level in the prior year on the
strength of improved gross margins.
Consolidated interest expense for the third quarter decreased 10.6 percent as a
result of lower average borrowing levels. The year-to-date interest expense for
the current year is lower by 10.3 percent.
Consolidated other income and expense for the third quarter and year-to-date are
below the comparable amounts of the prior year primarily from foreign exchange
losses.
The consolidated effective income tax rate of 36.0 percent for the current year
nine month period is below the 36.7 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 decreased
to 17.1 percent at November 30, 1998 from 20.1 percent at February 28, 1998.
Consolidated operations generated $42.4 million in cash for the nine month
period ended November 30, 1998.
Of the funds generated above, $37.4 million was invested in buildings and
equipment. Domestic operations invested $25.7 million while foreign locations
invested $11.7 million.
As a result of the above, cash increased to $15.2 million at November 30, 1998
from $9.7 million at February 28, 1998.
On November 17, 1998, the Company commenced a "Dutch Auction" self-tender offer
to purchase for cash shares of its Class A and Class B Common Stock. Upon
completion of the transaction the Company purchased 1,771,911 and 569,015 shares
of Class A and Class B Common Stock, respectively. The purchase price of $36.3
million was paid on December 30, 1998 and was financed with funds borrowed under
the Company's multicurrency revolving credit agreement.
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
Although the Company normally experiences a seasonal decline in sales between
the third and fourth quarters, it is expected to be more pronounced this year as
keyboard customers purchase fewer units while they work down their inventories.
The Company is also seeing signs that the slower overall economic conditions
that have been present in Europe for the last few quarters appear to be having
an impact on its business. These factors coupled with flat to slightly lower
sales for domestic operations are expected to result in a greater than normal
seasonal decline in sales and earnings for the fourth quarter. Despite the
anticipated fourth quarter results, the Company expects that the fiscal year
should still be a sales and earnings record continuing its three year trend of
improved results.
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 November 30, 1998, the U.S. dollar equivalent of forward
contracts outstanding approximated $11.5 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 complete
by all project teams. Remediation and testing are now in progress at all
locations. Completion of (4) and (5) is targeted for February 28 and March 31,
1999 for two of the three locations. The third location is installing new
business software scheduled for completion by June 30, 1999 with other
remediation and acceptance testing activities targeted for completion by March
31, 1999. 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 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
<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: January 14, 1999 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> 9-MOS 9-MOS
<FISCAL-YEAR-END> FEB-28-1999 FEB-28-1998
<PERIOD-END> NOV-30-1998 NOV-30-1997<F1>
<CASH> 15,218 13,204
<SECURITIES> 0 0
<RECEIVABLES> 66,447 57,510
<ALLOWANCES> 0 0
<INVENTORY> 59,791 52,059
<CURRENT-ASSETS> 150,611 132,625
<PP&E> 411,496 372,626
<DEPRECIATION> 232,638 212,898
<TOTAL-ASSETS> 342,713 304,714
<CURRENT-LIABILITIES> 72,891 73,878
<BONDS> 41,157 31,259
0 0
0 0
<COMMON> 12,502 12,454
<OTHER-SE> 190,024 167,007
<TOTAL-LIABILITY-AND-EQUITY> 342,713 304,714
<SALES> 361,516 340,478
<TOTAL-REVENUES> 361,516 340,478
<CGS> 253,296 244,313
<TOTAL-COSTS> 253,296 244,313
<OTHER-EXPENSES> 81,158 74,612
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,566 2,519
<INCOME-PRETAX> 25,063 20,132
<INCOME-TAX> 9,023 7,449
<INCOME-CONTINUING> 16,040 12,683
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,040 12,683
<EPS-PRIMARY> 1.28 1.02
<EPS-DILUTED> 1.27 1.01
<FN>
<F1> Restated
</FN>
</TABLE>
