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 May 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 May 31, 1999:
5,985,130 shares of Class A Common
4,193,549 shares of Class B Common
<PAGE>
<TABLE>
PART I
ITEM 1. FINANCIAL STATEMENTS
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
May 31, February 28,
1999 1999
(Unaudited) (Note 1)
----------- -----------
<S> <C> <C>
ASSETS:
Cash and equivalents $ 7,955 $ 12,458
Receivables, net of allowances 63,721 68,021
Inventories (Note 2) 52,488 53,737
Income taxes, net 1,203 --
Prepaid expenses and other current assets 8,551 9,467
-------- --------
Total Current Assets 133,918 143,683
Land, buildings and equipment, net 175,977 179,317
Investment in affiliates and other assets, net 13,498 13,491
-------- --------
TOTAL ASSETS $323,393 $336,491
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Short-term debt $ 7,777 $ 17,458
Accounts payable 19,091 19,683
Payroll related accruals 15,423 12,830
Other accruals 13,532 13,622
Income taxes, net -- 358
Current maturities of long-term debt 2,324 2,301
-------- --------
Total Current Liabilities 58,147 66,252
Long-term debt 70,441 75,389
Deferred income taxes, net and deferred credits 25,760 27,181
Stockholders' Equity:
Class A Common stock 7,762 7,759
Class B Common stock 4,763 4,763
Additional paid-in capital 43,018 42,994
Retained earnings 150,188 146,612
Accumulated other comprehensive income 36 2,188
-------- --------
205,767 204,316
Less: cost of common stock in treasury (36,722) (36,647)
-------- --------
Total Stockholders' Equity 169,045 167,669
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $323,393 $336,491
======== ========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in Thousands Except Share Data)
Three Months Ended
May 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Net Sales $ 123,461 $ 122,665
Cost of Products Sold 89,062 85,934
--------- ---------
Gross Profit 34,399 36,731
Engineering, Distribution and
Administrative Expenses 28,194 26,381
--------- ---------
Earnings from Operations 6,205 10,350
Other Income, Net 485 219
--------- ---------
Earnings Before Interest and Taxes 6,690 10,569
Interest Expense, Net 1,188 676
--------- ---------
Earnings before Income Taxes 5,502 9,893
Income Tax Provision 1,926 3,562
--------- ---------
Net Earnings $ 3,576 $ 6,331
========= =========
Earnings per Share
Basic $ .35 $ .51
========== ==========
Diluted $ .35 $ .50
========== ==========
Average Shares Outstanding
Basic 10,177,697 12,483,267
========== ==========
Diluted 10,242,680 12,656,548
========== ==========
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended May 31,
--------------------------
1999 1998
---------- ---------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 19,912 $ 18,686
Cash Flows from Investing Activities:
Expenditures for Land, Buildings (9,977) (15,933)
and Equipment
Other, net 15 (193)
---------- ----------
Net Cash Used by Investing Activities (9,962) (16,126)
---------- ----------
Cash Flows From Financing Activities:
(Decrease) in Short-term Debt (9,294) (2,444)
(Decrease) increase in Domestic Revolver and
Uncommitted Credit Facilities (4,000) 1,000
Principal Payments on Long-term Debt (511) (450)
Equity and Other Transactions (48) 228
---------- ---------
Net Cash (Used) by Financing Activities (13,853) (1,666)
---------- ---------
Effect of Exchange Rate Changes on Cash Flows (600) 201
---------- ---------
Net (Decrease) Increase in Cash and Equivalents (4,503) 1,095
Cash and Equivalents, at Beginning of Year 12,458 9,659
---------- ---------
Cash and Equivalents, at End of Period $ 7,955 $ 10,754
========== =========
<FN>
The accompanying notes are in integral part of the condensed consolidated
financial statements.
</TABLE>
<PAGE>
THE CHERRY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of May 31, 1999, and the
related condensed consolidated statements of earnings and cash flows for the
three months ended May 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 May 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 months ended
May 31, 1999 are not necessarily indicative of the operating results for a full
year.
2. INVENTORIES
Inventory values were as follows:
May 31, February 28,
1999 1999
----------- ----------
Raw materials $ 8,133 $ 8,171
Component parts 8,574 8,230
Work-in-process 21,763 20,006
Finished goods 14,018 17,330
----------- ----------
$ 52,488 $ 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
$1,424 and $6,079 for the three months ended May 31, 1999 and 1998,
respectively.
<TABLE>
4. SEGMENT INFORMATION
<CAPTION>
Automotive
Switches Computer Switches Eliminations
Three Months Ended May 31, 1999 & Modules Semiconductors Keyboards & Controls & Corporate Consolidated
- ------------------------------- --------- -------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 44,024 $ 30,709 $ 25,171 $ 23,557 $ -- $ 123,461
Intersegment sales -- 414 -- 300 (714) --
Total net sales 44,024 31,123 25,171 23,857 (714) 123,461
Earnings from operations 2,089 2,131 3,332 (423) (924) 6,205
<CAPTION>
Three Months Ended May 31, 1998
- -------------------------------
Sales to unaffiliated customers $ 42,830 $ 29,970 $ 25,155 $ 24,710 $ -- $ 122,665
Intersegment sales -- 619 -- 413 (1,032) --
Total net sales 42,830 30,589 25,155 25,123 (1,032) 122,665
Earnings from operations 2,932 3,339 4,084 943 (948) 10,350
</TABLE>
5. 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 May 31 1999 1998
- ------------------------- ----------- -----------
(In thousands, except share data)
<S> <C> <C>
Numerator:
Net earnings available to common stockholders $3,576 $6,331
Denominator:
Weighted average shares for basic EPS 10,177,697 12,483,267
Effect of dilutive securities:
Common stock options 64,983 173,281
----------- -----------
Adjusted weighted average shares
and assumed conversions for diluted EPS 10,242,680 12,656,548
Basic EPS $.35 $.51
Diluted EPS $.35 $.50
</TABLE>
6. SUBSEQUENT EVENT
On June 17, 1999, the Company stockholders' approved the charter amendment
reclassifying the two classes of common stock to one class of voting common
stock. There were 10,183,482 shares outstanding on that date.
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 315,000 shares having been granted as of May 31, 1999. Cherry
Semiconductor currently has 10.2 million shares 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Sales for the first quarter of fiscal 2000 were a record $123.5 million, up .6
percent from last year's record first quarter. Sales for the Automotive
Switches and Modules segment grew 2.8 percent to $44 million and represented
just over one-third of the Company's total sales. Sales of the Semiconductor
segment grew 2.5 percent to $30.8 million with a 12.6 percent increase in sales
of power management products being somewhat offset by a 1.8 percent decrease in
sales of automotive products. For the Computer Keyboard segment, sales were
virtually unchanged at $25.2 million while sales for the Switches and Controls
segment decreased 4.7 percent to $23.6 million.
The consolidated operating profit for the first quarter decreased to 5.0 percent
of sales from 8.4 percent for the comparable period last year as the relatively
flat sales resulted in lower utilization of our manufacturing resources.
Additionally, the Company continued to increase the sales and engineering
resources directed at growing its power management product line.
Interest expense for the first quarter increased 75 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 increased primarily due to
higher earnings at the Company's Japanese joint venture and investment grant
income.
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 $3.6 million, down 43.5 percent from $6.3
million last year. Diluted earnings per share of $.35 decreased 30 percent from
$.50 in the prior year.
Liquidity and Capital Resources
The Company's consolidated debt to capital ratio declined to 30.0 percent at May
31, 1999, from 33.0 percent at February 28, 1999. Consolidated operations
generated $19.9 million in cash for the three month period ended May 31, 1999.
From the funds generated from operations, $10.0 million was invested in
buildings and equipment and $13.8 million was used to reduce outstanding
borrowings. Domestic operations invested $6.7 million in buildings and
equipment while foreign locations invested $3.3 million. The effect of exchange
rate changes decreased cash flow $600 thousand. Cash decreased to $8.0 million
at May 31, 1999 from $12.5 million at February 28, 1999.
Existing credit facilities and bank lines should be sufficient, together with
internally generated cash, to finance the Company's operations.
Market Conditions and Outlook
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 May 31, 1999, the U.S. dollar equivalent of forward contracts
outstanding approximated $12.5 million.
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.
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 have been completed at three of the four locations with
remaining areas scheduled for completion by July 31, 1999. The fourth location
is installing new business software scheduled for completion by September 1,
1999, with remediation and acceptance testing of remaining critical areas
targeted for completion by July 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
fourth location. These repairs are also substantially completed.
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' 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. 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.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk at May 31, 1999 from that
reported in Form 10-K for the year ended February 28, 1999.
<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
On April 19, 1999, the Registrant filed a report on Form 8-K report
under Item 5, Other Events. Amendments and extensions to various credit and
note agreements were included in the filing.
<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: July 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)
<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> 3-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> MAY-31-1999
<CASH> 7,955
<SECURITIES> 0
<RECEIVABLES> 63,721
<ALLOWANCES> 0
<INVENTORY> 52,488
<CURRENT-ASSETS> 133,918
<PP&E> 416,002
<DEPRECIATION> 240,025
<TOTAL-ASSETS> 323,923
<CURRENT-LIABILITIES> 58,147
<BONDS> 70,441
0
0
<COMMON> 12,525
<OTHER-SE> 156,520
<TOTAL-LIABILITY-AND-EQUITY> 323,393
<SALES> 123,461
<TOTAL-REVENUES> 123,461
<CGS> 89,062
<TOTAL-COSTS> 89,062
<OTHER-EXPENSES> 28,194
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,255
<INCOME-PRETAX> 5,502
<INCOME-TAX> 1,926
<INCOME-CONTINUING> 3,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,576
<EPS-BASIC> .35
<EPS-DILUTED> .35
</TABLE>
