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, 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 November 30, 1999: 10,041,950
<PAGE>
<TABLE>
THE CHERRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<CAPTION>
November 30, February 28,
1999 1999
(Unaudited) (Note 1)
----------- ----------
<S> <C> <C>
ASSETS:
Cash and equivalents $ 6,957 $ 12,458
Receivables, net of allowances 66,786 68,021
Inventories (Note 2) 56,195 53,737
Income taxes, net 3,001 --
Prepaid expenses and other current assets 9,795 9,467
-------- --------
Total Current Assets 142,734 143,683
Land, buildings and equipment, net 170,448 179,317
Investment in affiliates and other assets, net 15,677 13,491
-------- --------
TOTAL ASSETS $328,859 $336,491
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Short-term debt, unsecured $ 13,499 $ 17,458
Accounts payable 21,853 19,683
Payroll related accruals 14,702 12,830
Other accruals 15,172 13,622
Income taxes, net -- 358
Current maturities of long-term debt 1,920 2,301
-------- --------
Total Current Liabilities 67,146 66,252
Long-term debt 64,246 75,389
Deferred income taxes, net 20,692 23,465
Deferred credits 3,673 3,716
Stockholders' Equity (Note 4):
Common stock 12,537 12,522
Additional paid-in capital 43,135 42,994
Retained earnings 156,030 146,612
Accumulated other comprehensive income -- 2,188
-------- --------
211,702 204,316
Less: cost of common stock in treasury (38,600) (36,647)
-------- --------
Total Stockholders' Equity 173,102 167,669
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $328,859 $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 Nine Months Ended
November 30, November 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 127,090 $ 131,187 $ 369,217 $ 361,516
Cost of products sold 92,200 89,980 266,697 253,296
--------- --------- --------- ---------
Gross profit 34,890 41,207 102,520 108,220
Engineering, distribution and
administrative expenses 28,610 27,813 85,800 81,158
--------- --------- --------- ---------
Earnings from operations 6,280 13,394 16,720 27,062
Other income (expense), net 446 42 1,087 14
--------- --------- --------- ---------
Earnings before interest and taxes 6,726 13,436 17,807 27,076
Interest expense, net 1,352 638 3,675 2,013
--------- --------- --------- ---------
Earnings before income taxes 5,374 12,798 14,132 25,063
Income tax provision 1,649 4,608 4,714 9,023
--------- --------- --------- ---------
Net earnings $ 3,725 $ 8,190 $ 9,418 $ 16,040
========= ========= ========= =========
Earnings per share
Basic $ .37 $ .66 $ .93 $ 1.28
========== ========== ========== ==========
Diluted $ .37 $ .65 $ .92 $ 1.27
========== ========== ========== ==========
Average shares outstanding
Basic 10,079,242 12,500,377 10,144,954 12,494,223
========== ========== ========== ==========
Diluted 10,126,510 12,658,676 10,206,718 12,589,733
========== ========== ========== ==========
<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>
Nine Months Ended November 30,
------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 38,036 $ 42,395
Cash flows from investing activities:
Expenditures for land, building
and equipment (28,872) (37,432)
Proceeds from sale of land, building
and equipment 2,180 --
Other, net 154 (213)
---------- ---------
Net cash used in investing activities (26,538) (37,645)
---------- ---------
Cash flows from financing activities:
(Decrease) in short-term debt (3,269) (8,102)
(Decrease) increase in domestic revolver (9,000) 8,000
Proceeds from long-term debt -- 1,373
Principal payments on long-term debt (1,836) (1,624)
Purchase of treasury stock (1,953) --
Other equity transactions 156 269
---------- ---------
Net cash used in financing activities (15,902) (84)
---------- ---------
Effect of exchange rate changes on cash flows (1,097) 893
---------- ---------
Net (decrease) increase in cash and equivalents (5,501) 5,559
Cash and equivalents, at beginning of year 12,458 9,659
---------- ---------
Cash and equivalents, at end of period $ 6,957 $ 15,218
========== =========
<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 November 30, 1999, and the
condensed consolidated statements of earnings for the three and nine months
ended November 30, 1999 and 1998 and the condensed consolidated statements of
cash flows for the nine months ended November 30, 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
November 30, 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 nine months
ended November 30, 1999 are not necessarily indicative of the operating results
for a full year.
2. INVENTORIES
Inventory values were as follows:
November 30, February 28,
1999 1999
----------- -----------
Raw materials $ 6,876 $ 8,171
Component parts 12,176 8,230
Work-in-process 23,002 20,006
Finished goods 14,141 17,330
----------- ----------
$ 56,195 $ 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
$2,474 and $10,919 for the three months ended November 30, 1999 and 1998,
respectively, and $7,230 and $18,803 for the nine months ended November 30, 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
Three Months Ended Switches Computer Switches Eliminations
November 30, 1999 & Modules Semiconductors Keyboards & Controls & Corporate Consolidated
- -------------------- ---------- ------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 42,967 $ 31,899 $ 27,755 $ 24,469 $ -- $ 127,090
Intersegment sales -- 418 -- 343 (761) --
Total net sales 42,967 32,317 27,755 24,812 (761) 127,090
Earnings from operations (109) 2,307 5,822 (397) (1,343) 6,280
Three Months Ended
November 30, 1998
- --------------------
Sales to unaffiliated customers $ 44,979 $ 31,333 $ 29,748 $ 25,127 $ -- $ 131,187
Intersegment sales -- 444 -- 312 (756) --
Total net sales 44,979 31,777 29,748 25,439 (756) 131,187
Earnings from operations 4,686 3,519 6,773 (160) (1,424) 13,394
Nine Months Ended
November 30, 1999
- --------------------
Sales to unaffiliated customers $ 128,460 $ 92,417 $ 77,276 $ 71,064 $ -- $ 369,217
Intersegment sales -- 1,471 -- 898 (2,369) --
Total net sales 128,460 93,888 77,276 71,962 (2,369) 369,217
Earnings from operations 3,059 6,471 13,020 (2,546) (3,284) 16,720
Nine Months Ended
November 30, 1998
- --------------------
Sales to unaffiliated customers $ 120,258 $ 87,379 $ 79,887 $ 73,992 $ -- $ 361,516
Intersegment sales -- 1,314 -- 1,000 (2,314) --
Total net sales 120,258 88,693 79,887 74,992 (2,314) 361,516
Earnings from operations 6,253 7,704 15,570 1,043 (3,508) 27,062
</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 Nine Months Ended
November 30, November 30,
--------------------- ---------------------
(In thousands, except share data) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net earnings available to common
stockholders $3,725 $8,190 $9,418 $16,040
Denominator:
Weighted average shares for
basic EPS 10,079,242 12,500,377 10,144,954 12,494,223
Effect of dilutive securities:
Common stock options 47,268 158,299 61,764 95,510
--------- --------- --------- ---------
Adjusted weighted average shares
and assumed conversions for
diluted EPS 10,126,510 12,658,676 10,206,718 12,589,733
Basic EPS $.37 $.66 $.93 $1.28
Diluted EPS $.37 $.65 $.92 $1.27
</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 313,008 shares outstanding as of November 30, 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 third quarter of fiscal 2000 were $127.1 million, down 3.1 percent
from last year. Domestic sales, which represent approximately 60 percent of the
consolidated total, decreased .5 percent. Although third quarter sales by
foreign operations increased 2.2 percent in local currency, when translated into
U.S. dollars the result was a 6.9 percent decline.
Sales for the Automotive Switches and Modules segment decreased 4.5 percent to
$43.0 million from $45.0 million due primarily to the effects of currency
translation on sales by foreign operations. Sales for the Semiconductor segment
grew 1.8 percent to $31.9 million. For the Computer Keyboard segment, where
more than two-thirds of the sales are by foreign operations, sales decreased 6.7
percent to $27.7 million largely as a result of currency translation. Sales for
the Switches and Controls segment decreased 2.6 percent to $24.5 million as a
result of lower sales of electronic controls.
Record sales of $369.2 million for the first nine months of the current fiscal
year were 2.1 percent higher than the comparable period of the prior year.
Sales for the Automotive Switches and Modules segment grew 6.8 percent to $128.4
million with the prior year effected by a work stoppage at General Motors.
Sales for the Semiconductor segment grew 5.8 percent to $92.4 million. For the
Computer Keyboard segment, sales were down 3.3 percent to $77.3 million
primarily due to foreign currency translation. Sales for the Switches and
Controls segment decreased 4.0 percent to $71.1 million primarily due to lower
sales of electronic controls.
The consolidated operating profit for the third quarter decreased to 4.9 percent
of sales from 10.2 percent for the comparable period last year. Manufacturing
costs rose significantly at the Company's domestic automotive operation as they
encountered difficulties in meeting the production requirements of their
customers. This was the primary cause of the decrease in gross margins to 27.5
percent from 31.4 percent last year. Operating expenses increased as a percent
of sales as the company continued its investment in sales and engineering
resources directed at growing its power management and sensor products.
The consolidated operating profit for the first nine months decreased to 4.5
percent of sales from 7.5 percent for the comparable period last year with the
higher third quarter manufacturing costs being a major contributor.
Additionally, as noted above, the Company has invested sales and engineering
resources for its power management and sensor products resulting in an increase
in operating expenses as a percent of sales.
Interest expense for the third quarter increased 111.9 percent as a result of
the borrowings used to finance the Company's stock tender offer in December of
the last fiscal year.
Consolidated other income for the current quarter increased as a result of
foreign exchange gains on cross-currency transactions. On a year-to-date basis
the increase is the result of the foreign exchange gains, 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 last year.
The consolidated effective income tax rate of 30.7 percent for the third quarter
is below the 36.0 percent rate of the prior year primarily due to lower taxable
income coupled with an increase in the tax credits available to the Company.
During the third quarter the research and development tax credit was
extended. These same factors have reduced the effective rate for
the first nine months below the rate for the comparable period of the prior
year.
Net earnings for the quarter were $3.7 million, down 54.5 percent from $8.2
million last year. Diluted earnings per share of $.37 decreased 43.1 percent
from $.65 in the prior year. For the first nine months, net earnings decreased
41.3 percent to $9.4 million while diluted earnings per share decreased 27.6
percent to $.92 from $1.27.
8
Liquidity and Capital Resources
The Company's consolidated debt to capital ratio (debt net of cash) declined to
29.6 percent at November 30, 1999, from 33.0 percent at February 28, 1999.
Consolidated net cash flow from operating activities was $38.0 million for the
nine month period ended November 30, 1999.
From the funds generated from operating activities and cash available at the
beginning of the year, $28.9 million was invested in buildings and equipment and
$14.1 million was used to reduce outstanding borrowings. Domestic operations
invested $18.5 million in buildings and equipment while foreign locations
invested $10.4 million. The Company also sold a building receiving proceeds of
$2.1 million. The effect of exchange rate changes decreased cash flow $1.1
million. Cash decreased to $7.0 million at November 30, 1999 from $12.5 million
at February 28, 1999.
Market Conditions and Outlook
Capital expenditures for the balance of the fiscal year 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. 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 November 30, 1999, the U.S. dollar equivalent of forward
contracts outstanding approximated $15.4 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 assessed its
computer equipment, business computer systems, manufacturing equipment and
facilities to prepare for the year 2000. Additionally, customer and supplier
relationships were reviewed to assess and address their plans to become Year
2000 compliant. The Company used 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 by May 31, 1999. 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. Remediation and acceptance testing has been
completed for all areas except for 2 manufacturing machines at one location.
Manual overrides have been developed and tested to keep the machines operating
until full remediation can be completed in January 2000. Post implementation
reviews and January 1 support requirements have been established at all
locations.
While the Company's efforts to address Year 2000 issues have involved additional
costs, the Company believes, based upon currently available information, that it
has managed 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.
9
Although the Company has been 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 initiated
correspondence with all suppliers, service providers and financial institutions
in an effort to determine and assess those parties' readiness for Year 2000.
This involved an on-going process of review, evaluation and follow-up, with
priority given to major or critical suppliers. Contingency plans have been
developed to mitigate any potential disruptions from critical suppliers deemed
to be a medium or high risk, with alternative sourcing and an additional one to
two weeks safety stock of inventory implemented for the end of calendar year
1999. The Company has no 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 have diligently addressed their Year 2000 readiness
and are compliant. However, should problems arise at our customers that would
prevent sales to them, the Company will 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. As of January 6, 2000, the Company
has not experienced any internal or external disruptions to its normal business
operations.
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 November 30, 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 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: January 12, 2000 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> 9-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> NOV-30-1999
<CASH> 6,957
<SECURITIES> 0
<RECEIVABLES> 66,786
<ALLOWANCES> 0
<INVENTORY> 56,195
<CURRENT-ASSETS> 142,734
<PP&E> 418,368
<DEPRECIATION> 247,920
<TOTAL-ASSETS> 328,859
<CURRENT-LIABILITIES> 67,146
<BONDS> 64,246
0
0
<COMMON> 12,537
<OTHER-SE> 160,565
<TOTAL-LIABILITY-AND-EQUITY> 328,859
<SALES> 369,217
<TOTAL-REVENUES> 369,217
<CGS> 266,697
<TOTAL-COSTS> 266,697
<OTHER-EXPENSES> 85,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,861
<INCOME-PRETAX> 14,132
<INCOME-TAX> 4,714
<INCOME-CONTINUING> 9,418
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,418
<EPS-BASIC> .93
<EPS-DILUTED> .92
</TABLE>
