UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended: November 3, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................. to.....................
Commission File Number 0-5411
HERLEY INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE #23-2413500
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10 Industry Drive, Lancaster, Pennsylvania 17603
- ------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 397-2777
--------------
---------------------------------------------------------------
(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 reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of December 3, 1996 - 3,115,038 shares of Common Stock
<PAGE>
HERLEY INDUSTRIES, INC
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Consolidated Balance Sheets -
November 3, 1996 and July 28,1996 2
Consolidated Statements of Operations For the
fourteen weeks ended November 3, 1996
and the thirteen weeks ended
October 29, 1995 3
Consolidated Statements of Cash Flows For the
fourteen weeks ended November 3, 1996
and the thirteen weeks ended
October 29, 1995 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION 8
Signatures 10
Computation of per share earnings 11
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 3, July 28,
1996 1996
---------- ----------
Unaudited Audited
ASSETS
Current Assets:
Cash and cash equivalents $ 351,746 $ 1,104,445
Accounts receivable 3,805,517 3,249,225
Notes receivable-officers 2,132,365 2,083,543
Other receivables 250,098 124,992
Inventories 8,455,171 8,010,687
Deferred taxes and other 2,078,175 1,689,988
---------- ----------
Total Current Assets 17,073,072 16,262,880
Property, Plant and Equipment, net 12,445,901 12,579,044
Intangibles, net of amortization 4,512,211 4,580,236
Available-for-sale Securities - 4,912,387
Other Investments 3,000,000 3,000,000
Other Assets 1,170,077 1,174,395
========== ==========
$ 38,201,261 $ 42,508,942
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 300,000 $ 300,000
Accounts payable and accrued expenses 5,210,298 5,123,868
Income taxes payable 76,388 166,295
Reserve for contract losses 422,610 489,110
Advance payments on contracts 672,124 1,480,033
---------- ----------
Total Current Liabilities 6,681,420 7,559,306
---------- ----------
Long-term Debt 6,421,000 11,021,000
Deferred Income Taxes 2,246,886 1,923,058
Excess of fair value of net assets of business
acquired over cost, net of amortization 851,958 973,667
---------- ----------
16,201,264 21,477,031
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
10,000,000 shares; issued
2,951,247 at November 3, 1996
and 2,936,122 at July 28, 1996 295,125 293,612
Additional paid-in capital 11,543,672 11,448,827
Retained earnings 10,161,200 9,289,472
---------- ----------
Total Shareholders' Equity 21,999,997 21,031,911
========== ==========
$ 38,201,261 $ 42,508,942
========== ==========
The accompanying notes are an integral part of these financial
statements.
2
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
14 weeks ended 13 weeks ended
November 3, October 29,
1996 1995
--------------- ---------------
Net sales $ 7,507,904 $ 7,062,891
--------------- ---------------
Cost and expenses:
Cost of products sold 5,171,174 4,888,421
Selling and administrative
expenses 1,398,769 1,414,561
--------------- ---------------
6,569,943 6,302,982
--------------- ---------------
Operating income 937,961 759,909
--------------- ---------------
Other income (expense):
Gain on sale of available-for-sale
securities 15,440 55,554
Dividend and interest income 47,955 62,786
Interest expense (129,628) (227,018)
--------------- ---------------
(66,233) (108,678)
--------------- ---------------
Income before income taxes 871,728 651,231
Provision for income taxes - 135,400
--------------- ---------------
Net income $ 871,728 $ 515,831
=============== ===============
Earnings per common and common
equivalent share $.25 $.17
==== ====
Weighted average number of common and
common equivalent shares outstanding 3,462,550 2,960,242
========= =========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
14 weeks ended 13 weeks ended
November 3, October 29,
1996 1995
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 871,728 $ 515,831
---------------- ----------------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 377,224 384,168
(Gain) on sale of marketable securities (15,440) (55,554)
(Increase) in deferred tax assets - (19,291)
Increase in deferred tax liabilities 323,828 103,798
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (609,390) 557,145
(Increase) in notes receivable-officers (48,822) -
(Increase) in other receivables (72,008) (24,327)
Decrease (increase) in inventories (444,484) 702,103
(Increase) in deferred taxes and other (388,187) (54,172)
Increase (decrease) in accounts payable and accrued expenses 86,430 (810,392)
(Decrease) in income taxes payable (89,907) -
(Decrease) in reserve for contract losses (66,500) (183,340)
Increase (decrease) in advance payments on contracts (807,909) 1,007,436
Other, net - 40,000
---------------- ----------------
Total adjustments (1,755,165) 1,647,574
---------------- ----------------
Net cash provided by (used in) operating activities (883,437) 2,163,405
---------------- ----------------
Cash flows from investing activities:
Purchase of available-for-sale securities (159,650) (1,071,498)
Proceeds from sale of available-for-sale securities 5,083,778 2,120,031
Capital expenditures (289,748) (118,327)
---------------- ----------------
Net cash provided by investing activities 4,634,380 930,206
---------------- ----------------
Cash flows from financing activities:
Borrowings under bank line of credit 1,975,000 275,000
Proceeds from exercise of stock options 96,358 -
Payments under lines of credit (6,575,000) (1,475,000)
Payments of long-term debt - (13,370)
Purchase of treasury stock - (1,224,345)
---------------- ----------------
Net cash (used in) financing activities (4,503,642) (2,437,715)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (752,699) 655,896
Cash and cash equivalents at beginning of period 1,104,445 272,755
---------------- ----------------
Cash and cash equivalents at end of period $ 351,746 $ 928,651
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Herley Industries, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - (Unaudited)
1. The consolidated financial statements include the accounts of Herley
Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations and cash
flows for the periods presented. These financial statements (except for the
balance sheet presented at July 28,1996) are unaudited and have not been
reported on by independent public accountants.
Results of operations for interim periods are not necessarily indicative of
the results of operations for a full year due to external factors which are
beyond the control of the Company.
2. Inventories at November 3, 1996 and July 28,1996 are summarized as follows:
November 3, 1996 July 28,1996
---------------- ------------
Purchased parts and raw materials $ 3,688,398 $ 3,358,256
Work in process 4,683,392 4,580,538
Finished products 83,381 71,893
----------- -----------
$ 8,455,171 $ 8,010,687
========= =========
3. The following is a summary of available-for-sale securities:
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
July 28, 1996
Government bonds $ 3,783,402 $ - $ - $ 3,783,402
Other 1,125,700 - - 1,125,700
--------- ---------- ---------- ---------
Total debt
securities 4,909,102 - - 4,909,102
Equity securities 3,285 - - 3,285
---------- --------- ---------- ---------
$ 4,912,387 $ - $ - $ 4,912,387
========= ========= ========== =========
During the quarter ended November 3, 1996, the Company liquidated all of
its available-for-sale securities and used the proceeds to pay down its
bank debt.
4. In January 1996, the Company entered into a revolving credit agreement with
a bank that provides for the extension of credit in the aggregate principal
amount of $11,000,000 and may be used for general corporate purposes,
including business acquisitions. The facility requires the payment of
interest only on a monthly basis and payment of the outstanding principal
balance on January 31, 1998. Interest is set biweekly at 1% over the bank's
Federal Funds Rate applied to outstanding balances (none at November 3,
1996) up to 80% of the net equity value of available-for-sale securities,
and at the bank's Base Rate (8.25% at November 3, 1996) for outstanding
balances in excess of this limit. The premium rate portion of the facility
would be secured by any available-for-sale securities. The credit facility
also provides for the issuance of stand-by letters of credit with a fee of
1.0% per annum of the amounts outstanding under the facility. At November
3, 1996, stand-by letters of credit aggregating $2,811,846 were
outstanding.
5
<PAGE>
The agreement contains various financial covenants, including, among other
matters, the maintenance of working capital, tangible net worth, and
restrictions on cash dividends.
5. No income tax provision was recorded in the fourteen weeks ended November
3, 1996 due to the decrease in the valuation allowance for net operating
loss carryforwards expected to be realized.
6. Supplemental cash flow information is as follows:
November 3, 1996 October 29, 1995
---------------- ----------------
Cash paid during the period for:
Interest $ 103,594 $ 119,404
Income Taxes 90,310 1,538
6
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of November 3, 1996 and July 28, 1996, working capital was approximately
$10,392,000 and $8,704,000, respectively, and the ratio of current assets to
current liabilities was 2.56 to 1 and 2.15 to 1, respectively.
As is customary in the defense industry, inventory is partially financed by
progress payments. The unliquidated balance of these advanced payments was
approximately $672,000 at November 3, 1996, and $1,480,000 at July 28, 1996, a
reduction of $808,000 during the quarter.
Net cash used in operations during the quarter was approximately $883,000, which
was primarily funded through the reduction in cash and cash equivalents.
Net cash provided from investing activities of approximately $4,634,000 in the
quarter results primarily from the liquidation of all of the Company's
available-for-sale securities. The Company used the proceeds to pay down
$4,900,000 of its long term bank debt.
The Company maintains a revolving credit facility with a bank for an aggregate
of $11,000,000 which expires January 31, 1998. As of November 3, 1996 and July
28, 1996, the Company had borrowings outstanding of $2,350,000 and $6,950,000,
respectively.
At November 3, 1996, the Company had cash and cash equivalents of approximately
$352,000.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, and existing credit facilities.
Results of Operations
Fourteen weeks ended November 3, 1996 and Thirteen weeks ended October 29, 1995
Net sales for the 14 weeks ended November 3, 1996 were approximately $7,508,000
compared to $7,063,000 in the first quarter of fiscal 1996. The sales increase
of $445,000 (6.3%) is attributable to an increase of approximately $714,000 in
microwave components; offset by a decrease of $269,000 in flight instrumentation
products.
Gross profit of 31.1% for the 14 weeks ended November 3, 1996 exceeded that of
the first quarter in the prior year of 30.8% due to an increase of $410,000 in
higher margin foreign sales and an increase in absorption of fixed costs due to
the higher sales volume.
Selling and administrative expenses for the 14 weeks ended November 3, 1996 were
$1,399,000 compared to $1,415,000 in the first quarter of fiscal 1996, a
decrease of $16,000 which is attributable primarily to a reduction in personnel
costs.
Other (expense) for the 14 weeks ended November 3, 1996 is $42,000 lower than
the first quarter in the prior year due to a decrease in interest expense of
$97,000 as the result of lower borrowing levels; offset by decreases in dividend
and interest income of $15,000 and net gains on available-for-sale securities of
$40,000.
No income tax provision was recorded in the first quarter fiscal 1997 due to the
decrease in the valuation allowancefor net operating loss carryforwards expected
7
<PAGE>
to be realized. A valuation allowance has been provided previously to reduce
deferred tax assets to their net realizable value for amounts which management
believes may expire unutilized. The uncertainty that past performance will be
indicative of future earnings due to the unpredictable nature of the industry in
which the Company operates was a determining factor in assessing the need for a
valuation allowance.
8
<PAGE>
Herley Industries, Inc. and Subsidiaries
PART I I - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
In May and June 1994, the Company was served with two class action
complaints against the Company and certain of its officers and directors in the
United States District Court for the Eastern District of Pennsylvania. The
claims were made under Section 10(b) and 20(a) of the Securities Exchange Act of
1934 and Rule 10b-5 thereunder. One of the claims is also based upon alleged
negligence. The claims relate to the Company's acquisition of Carlton
Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc. The
claims were combined into one matter and a consolidated Complaint. In April,
1995, the Court certified that the claims based on the Securities Exchange Act
may proceed as a Class Action pursuant to Rule 23(b) (3), but without prejudice
to the rights of the parties thereafter to seek modification of the Class or
revocation of leave to proceed. The Court refused to certify the negligence
claim as a Class Action. In May, 1995, the parties negotiated a settlement of
all claims in consideration for a payment of $450,000 subject to Notice to the
Class and Court approval. The Stipulation of Settlement was approved by the
Court on October 15, 1996. In November 1996 payment of the settlement was made
pursuant to the Stipulation and Order.
In May, 1995, the Company was served with a Class Action Complaint against
the Company and its Chief Executive Officer in the United States District Court
for the Eastern District of Pennsylvania. The claim was made under Section 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5 thereunder.
The claim relates to the Company's settlement of the Litton Action in the Essex
Superior Court of Massachusetts and alleges, inter alia, that there was
insufficient disclosure by the Company of its true potential exposure in that
claim. Cross motions for summary judgment have been filed and are pending before
the Court. The Company believes it has a meritorious defense and intends to
vigorously defend against the action.
ITEM 2 - CHANGES IN SECURITIES:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 11: Computation of per share earnings.
(b) During the quarter for which this report is filed, the
Registrant filed the following reports under Form 8-K:
None
9
<PAGE>
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERLEY INDUSTRIES, INC.
-----------------------
Registrant
BY: /S/ Myron Levy
-------------------------
Myron Levy, President
BY: /S/ Anello C. Garefino
---------------------------
Anello C. Garefino
Principal Financial Officer
DATE: December 3, 1996
10
HERLEY INDUSTRIES, INC.
AND SUBSIDIARIES
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Fourteen weeks ended Thirteen weeks ended
November 3, 1996 October 29, 1995
---------------- ----------------
<S> <C> <C>
Net Income $ 871,728 $ 515,831
======== ========
Weighted average shares outstanding:
Shares outstanding from beginning of period 2,936,122 3,015,988
Shares issued for options exercised 4,121 -
Treasury shares acquired - (156,330)
Common equivalents - options and warrants 522,307 100,584
--------- ---------
Weighted average common and common
equivalent shares outstanding 3,462,550 2,960,242
========= =========
Earnings per common and
common equivalent share: $ .25 $ .17
=== ===
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE 14 WEEKS ENDED NOVEMBER 3, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-3-1997
<PERIOD-START> JUL-29-1996
<PERIOD-END> NOV-3-1996
<CASH> 351,746
<SECURITIES> 0
<RECEIVABLES> 3,805,517
<ALLOWANCES> 0
<INVENTORY> 8,455,171
<CURRENT-ASSETS> 17,073,072
<PP&E> 24,093,569
<DEPRECIATION> 11,647,668
<TOTAL-ASSETS> 40,148,390
<CURRENT-LIABILITIES> 6,681,420
<BONDS> 0
0
0
<COMMON> 295,125
<OTHER-SE> 21,704,872
<TOTAL-LIABILITY-AND-EQUITY> 40,148,390
<SALES> 7,507,904
<TOTAL-REVENUES> 7,507,904
<CGS> 5,171,174
<TOTAL-COSTS> 6,569,943
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 129,628
<INCOME-PRETAX> 871,728
<INCOME-TAX> 0
<INCOME-CONTINUING> 871,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 871,728
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
