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 1, 1998
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 1, 1998 - 5,295,540 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 1, 1998 and August 2, 1998 2
Consolidated Statements of Income -
For the thirteen weeks ended
November 1, 1998 and November 2, 1997 3
Consolidated Statements of Cash Flows -
For the thirteen weeks ended
November 1, 1998 and November 2, 1997 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 9
PART II -OTHER INFORMATION 10
Signatures 11
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 1, August 2,
1998 1998
<S> <C> <C>
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,182,778 $ 10,689,193
Accounts receivable 7,285,601 6,193,947
Costs incurred and income recognized in excess
of billings on uncompleted contracts 2,936,929 1,665,008
Other receivables 247,002 248,298
Prepaid income taxes - 377,448
Inventories 14,653,675 15,068,618
Deferred taxes and other 2,364,670 2,194,004
---------- ----------
Total Current Assets 31,670,655 36,436,516
Property, Plant and Equipment, net 12,258,075 12,549,343
Intangibles, net of amortization of $1,616,851 at
November 1, 1998 and $1,524,393 at August 2, 1998 5,987,760 6,080,218
Available-for-sale Securities 143,330 143,330
Other Investments 7,169,128 849,324
Other Assets 1,769,560 1,493,798
========== ==========
$ 58,998,508 $ 57,552,529
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 405,848 $ 404,984
Accounts payable and accrued expenses 6,565,602 6,468,183
Income taxes payable 259,525 -
Reserve for contract losses 1,086,048 1,145,128
Advance payments on contracts 1,595,156 1,824,746
---------- ----------
Total Current Liabilities 9,912,179 9,843,041
Long-term Debt 3,401,593 4,110,885
Deferred Income Taxes 3,476,853 3,158,353
---------- ----------
16,790,625 17,112,279
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized 20,000,000 shares;
issued and outstanding 5,295,540 at November 1, 1998
and 5,266,159 at August 2, 1998 529,554 526,616
Additional paid-in capital 20,296,637 20,323,895
Retained earnings 21,381,692 19,589,739
---------- ----------
Total Shareholders' Equity 42,207,883 40,440,250
========== ==========
$ 58,998,508 $ 57,552,529
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Thirteen weeks ended
November 1, November 2,
1998 1997
<S> <C> <C>
----------- -----------
Net sales $ 11,650,845 $ 10,573,305
----------- -----------
Cost and expenses:
Cost of products sold 6,771,320 6,488,615
Selling and administrative expenses 2,123,773 2,002,796
----------- -----------
8,895,093 8,491,411
----------- -----------
Operating income 2,755,752 2,081,894
----------- -----------
Other income (expense):
Investment income 103,117 91,370
Interest expense (101,916) (136,515)
----------- -----------
1,201 (45,145)
----------- -----------
Income before income taxes 2,756,953 2,036,749
Provision for income taxes 965,000 692,500
----------- -----------
Net income $ 1,791,953 $ 1,344,249
=========== ===========
Earnings per common share - Basic $ .34 $ .30
=========== ===========
Basis weighted average shares 5,295,245 4,535,898
=========== ===========
Earnings per common share - Diluted $ .32 $ .26
=========== ===========
Diluted weighted average shares 5,538,266 5,228,220
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Thirteen weeks ended
November 1, November 2,
1998 1997
<S> <C> <C>
-------------- --------------
Cash flows from operating activities:
Net income $ 1,791,953 $ 1,344,249
-------------- --------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 613,043 443,399
Loss on disposal of equipment 7,841 -
Equity in income of limited partnership (21,599) (41,711)
(Increase) in deferred tax assets - (1,205,226)
Increase in deferred tax liabilities 318,500 1,387,433
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,091,654) (2,263,180)
(Increase) in notes receivable-officers - (34,906)
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts (1,271,921) -
Decrease in other receivables 1,296 19,949
Decrease in prepaid income taxes 377,448 -
Decrease (increase) in inventories 414,943 (222,056)
(Increase) in deferred taxes and other (170,666) (132,770)
Increase in accounts payable and accrued expenses 97,419 557,675
Increase in income taxes payable 259,525 420,270
(Decrease) in reserve for contract losses (59,080) -
(Decrease) in advance payments on contracts (229,590) (1,519)
Other, net (15,111) 359,606
-------------- --------------
Total adjustments (769,606) (713,036)
-------------- --------------
Net cash provided by operating activities 1,022,347 631,213
-------------- --------------
Cash flows from investing activities:
Acquisition of stock (Note 4) (6,298,205) -
Proceeds from sale of equipment 1,250 -
Capital expenditures (499,059) (248,496)
-------------- --------------
Net cash used in investing activities (6,796,014) (248,496)
-------------- --------------
Cash flows from financing activities:
Borrowings under bank line of credit 3,500,000 1,200,000
Proceeds from exercise of stock options 316,149 99,266
Payments under lines of credit (4,200,000) (800,000)
Payments of long-term debt (8,428) (1,052,032)
Purchase of treasury stock (340,469) -
-------------- --------------
Net cash used in financing activities (732,748) (552,766)
-------------- --------------
Net decrease in cash and cash equivalents (6,506,415) (170,049)
Cash and cash equivalents at beginning of period 10,689,193 1,194,650
-------------- --------------
Cash and cash equivalents at end of period $ 4,182,778 $ 1,024,601
============== ==============
</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 inter-company 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 August 2,1998) 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 1, 1998 and August 2,1998 are summarized as follows:
November 1, August 2,
1998 1998
----------- -----------
Purchased parts and raw materials $ 6,817,534 $ 7,377,882
Work in process 7,309,761 7,303,533
Finished products 526,380 387,203
---------- ----------
$ 14,653,675 $ 15,068,618
========== ==========
3. In July 1998, the Company renewed the revolving credit agreement with a
bank that provides for the extension of credit in the aggregate principal
amount of $21,000,000 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, 2000. Interest is set biweekly at 1.65% over the
FOMC Target Rate. 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 1, 1998, stand-by letters of
credit aggregating $1,505,285 were outstanding under this facility.
The agreement contains various financial covenants, including, among other
matters, the maintenance of working capital, tangible net worth, and
restrictions on other borrowings.
4. As of August 21, 1998, the Company entered into an agreement to acquire all
of the issued and outstanding common stock of General Microwave Corp., a
New York corporation, for $18.00 per share and a three-year warrant to
purchase one share of the Company's common stock at an aggregate purchase
price of approximately $23,500,000. The estimated purchase price includes
shares of common stock of General Microwave purchased in the open market,
acquisition of the remaining shares of common stock outstanding, an
estimate of the value of the warrants, and estimated transaction expenses.
The warrant is exercisable at $14.40 per share through January 11, 1999,
and thereafter at $15.60 per share, until expiration. General Microwave
designs, manufactures and markets microwave components and subsystems, and
related electronic test and measurement equipment. The company is
headquartered in Amityville, New York, and operates two other facilities,
one in Billerica, Massachusetts, and one in Israel. The transaction is
subject to the approval of the stockholders of General Microwave Corp. at a
meeting to be held on January 6, 1999, and is expected to close on or about
January 8, 1999. The transaction will be accounted for under the purchase
method. As of December 1, 1998, the Company has acquired 365,600 shares of
General Microwave in the open market for approximately $6,298,000 including
certain acquisition costs.
5
<PAGE>
5. The following table shows the calculation of basic earnings per share and
earnings per share assuming dilution:
Thirteen weeks ended
--------------------------
November 1, November 2,
1998 1997
----------- -----------
Numerator:
Net Income $ 1,791,953 $ 1,344,249
========= =========
Denominator:
Basic weighted-average shares 5,295,245 4,535,898
Effect of dilutive securities:
Employee stock options and warrants 243,021 692,322
--------- ---------
Diluted weighted-average shares 5,538,266 5,228,220
========= =========
Earnings per common share - Basic $ .34 $ .30
=== ===
Earnings per common share - Diluted $ .32 $ .26
=== ===
Options and warrants to purchase 1,967,333 shares of common stock, with
exercise prices ranging from $9.25 to $14.40 were outstanding during the
first quarter of fiscal 1999 but were not included in the computation of
diluted EPS because the exercise prices are greater than the average market
price of the common shares. The options and warrants, which expire at
various dates through August 14, 2008, were still outstanding as of
November 1, 1998. All outstanding options and warrants as of November 2,
1997 were dilutive and included in the denominator.
6. Supplemental cash flow information is as follows:
November 1, 1998 November 2, 1997
---------------- ----------------
Cash paid during the period for:
Interest $ 29,110 $ 17,513
Income Taxes 10,300 85,230
Cashless exercise of stock options 34,384 -
Tax benefit related to stock options 93,000 -
6
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
The statements contained in this report which are not historical fact are
"forward-looking statements" that involve various important assumptions, risks,
uncertainties and other factors which could cause the Company's actual results
for 1998 and beyond to differ materially from those expressed in such
forward-looking statements. These important factors include, without limitation,
competitive factors and pricing pressures, changes in legal and regulatory
requirements, technological change or difficulties, product development risks,
commercialization and trade difficulties and general economic conditions, as
well as other risks previously disclosed in the Company's securities filings and
press releases.
Results of Operations
- ---------------------
Thirteen weeks ended November 1, 1998 and Fourteen weeks ended November 2, 1997
- -------------------------------------------------------------------------------
Net sales for the 13 weeks ended November 1, 1998 were approximately $11,651,000
compared to $10,573,000 in the first quarter of fiscal 1998. The sales increase
of $1,078,000 (10.2%) is primarily attributable to increased volume in microwave
components.
Gross profit of 41.9% for the 13 weeks ended November 2, 1997 exceeded that of
the first quarter in the prior year of 38.6% due to higher margins on microwave
components and certain foreign contracts as well as an increase in absorption of
fixed costs due to the overall higher sales volume.
Selling and administrative expenses for the 13 weeks ended November 1, 1998 were
$2,124,000 compared to $2,003,000 in the first quarter of fiscal 1998, an
increase of $121,000. Increases in representative fees of $313,000 and personnel
costs of $79,000 were partially offset by reductions in license fees for MAGIC2
of $227,000, and performance incentives of $46,000.
Business Acquisition
- --------------------
As of August 21, 1998, the Company entered into an agreement to acquire all of
the issued and outstanding common stock of General Microwave Corp., a New York
corporation, for $18.00 per share and a three-year warrant to purchase one share
of the Company's common stock at an aggregate purchase price of approximately
$23,500,000. The estimated purchase price includes shares of common stock of
General Microwave purchased in the open market, acquisition of the remaining
shares of common stock outstanding, an estimate of the value of the warrants,
and estimated transaction expenses. The warrant is exercisable at $14.40 per
share through January 11, 1999, and thereafter at $15.60 per share, until
expiration. General Microwave designs, manufactures and markets microwave
components and subsystems, and related electronic test and measurement
equipment. The company is headquartered in Amityville, New York, and operates
two other facilities, one in Billerica, Massachusetts, and one in Israel. The
transaction is subject to the approval of the stockholders of General Microwave
Corp. at a meeting to be held on January 6, 1999, and is expected to close on or
about January 8, 1999. The transaction will be accounted for under the purchase
method. As of December 1, 1998, the Company has acquired 365,600 shares of
General Microwave in the open market for approximately $6,298,000 including
certain acquisition costs.
Liquidity and Capital Resources
- -------------------------------
As of November 1, 1998 and August 2, 1998, working capital was approximately
$21,758,000 and $26,593,000, respectively, and the ratio of current assets to
current liabilities was 3.20 to 1 and 3.70 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 $1,595,000 at November 1, 1998, and $1,825,000 at August 2, 1998.
7
<PAGE>
Net cash provided by operations during the quarter was approximately $1,022,000.
Net cash used in investing activities consists of the purchase of 365,600 shares
of common stock of General Microwave Corporation in the open market and certain
expenses aggregating approximately $6,298,000 in connection with the acquisition
as discussed above, and $499,000 for capital expenditures.
The Company maintains a revolving credit facility with a bank for an aggregate
of $21,000,000 which expires January 31, 2000. As of November 1, 1998 and August
2, 1998, the Company had borrowings outstanding of $800,000 and $1,500,000,
respectively.
During the quarter ended November 1, 1998, the Company received net proceeds of
approximately $316,000 from the exercise of common stock options and warrants by
employees and acquired 42,500 shares of treasury stock through open market
purchases at a cost of $340,000. Such shares have been retired.
At November 1, 1998, the Company had cash and cash equivalents of approximately
$4,183,000.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.
Year 2000 Readiness
- -------------------
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19",
but may not properly recognize the year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
because of the inability of the system or application to properly read the year
2000 the results could have a material adverse effect on the Company.
A substantial part of the Company's revenues are derived from firm fixed price
contracts with U.S. government agencies, prime contractors or subcontractors on
military or aerospace programs, and many foreign governments. If the Company is
unable to perform under these contracts due to a Year 2000 problem, the customer
could terminate the contract for default. While lost revenues from such an event
are a concern for the Company, the greater risks are the consequential damages
for which the Company could be liable for failure to perform under the
contracts. Such damages could have a material adverse impact on the Company's
results of operations and financial position.
The most likely reason for a customer to terminate a contract for default would
be due to the Company's inability to manufacture and deliver product under the
contract. Breakdowns in any number of the Company's computer systems and
applications could prevent the Company from being able to manufacture and ship
its products. Examples are failures in the Company's manufacturing application
software, computer chips embedded in engineering test equipment, lack of supply
of materials from its suppliers, or lack of power, heat, or water from utilities
servicing its facilities. The Company's products do not contain computer devices
that require remediation to meet Year 2000 requirements. A review of the
Company's status with respect to remediating its computer systems for Year 2000
compliance is presented below.
For its information technology, the Company currently utilizes a Hewlett Packard
HP3000-based computing environment. The HP3000 hardware is in compliance with
Year 2000 requirements. The Company's financial, manufacturing, and other
software applications related to the HP3000 were updated to comply with Year
2000 requirements during the fiscal year ended August 2, 1998 at a cost of
approximately $350,000. Certain modules have been fully tested, with the
remaining modules to be tested by the end of fiscal 1999. In addition, the
Company utilizes a wide area network ("WAN") to connect its operating facilities
to the HP3000. The WAN has been updated to comply with Year 2000 requirements. A
local area network ("LAN") is used to supplement the HP3000 environment and has
also been upgraded and is fully Year 2000 compliant.
8
<PAGE>
The Company is also reviewing its utility systems (heat, light, phones, liquid
nitrogen, etc.) for the impact of Year 2000, as well as determining the state of
readiness of its material suppliers. The Company has mailed a questionnaire to
its significant suppliers, and will be mailing the questionnaire to its test
equipment manufacturers concerning embedded technology, regarding their
compliance and attempt to identify any problem areas with respect to them. This
process will be ongoing and the Company's efforts with respect to specific
problems identified, and future costs associated with them, will depend in part
upon its assessment of the risk that any such problems may cause a disruption in
manufacturing or other problem which the Company believes would have a material
adverse impact on its operations. However, the Company cannot control the
conduct of its suppliers. Therefore, there can be no guarantee that Year 2000
problems originating with a supplier will not occur. The Company has not yet
developed contingency plans in the event of a Year 2000 failure caused by a
supplier or third party, but would intend to do so if a specific problem is
identified through the process described above. The Company has developed
multiple sources for a substantial portion of its raw material requirements and,
therefore, does not believe there would be a significant disruption in supply.
The information set forth above identifies the key steps taken by the Company to
address the Year 2000 problem. There can be no absolute assurance that third
parties will convert their systems in a timely manner. The Company believes that
its actions will minimize these risks and that any additional cost of Year 2000
compliance for its information and production systems will not be material to
its consolidated results of operations and financial position.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates
and stock prices. The Company has not entered into any derivative financial
instruments to manage the above risks and the Company has not entered into any
market risk sensitive instruments for trading purposes. There have been no
material changes in market risk to the Company since its fiscal year end as
disclosed in the Company's Annual Report Form 10K as of August 2, 1998.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
The Company is not involved in any material legal proceedings.
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) During the quarter for which this report is filed, the
Registrant filed the following reports under Form 8-K:
None
10
<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 14, 1998
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE 13 WEEKS ENDED NOVEMBER 1, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-1-1999
<PERIOD-START> AUG-3-1998
<PERIOD-END> NOV-1-1998
<CASH> 4,182,778
<SECURITIES> 0
<RECEIVABLES> 7,285,601
<ALLOWANCES> 0
<INVENTORY> 14,653,675
<CURRENT-ASSETS> 31,670,655
<PP&E> 27,620,232
<DEPRECIATION> 15,362,157
<TOTAL-ASSETS> 58,998,508
<CURRENT-LIABILITIES> 9,912,179
<BONDS> 0
0
0
<COMMON> 529,554
<OTHER-SE> 41,678,329
<TOTAL-LIABILITY-AND-EQUITY> 58,998,508
<SALES> 11,650,845
<TOTAL-REVENUES> 11,650,845
<CGS> 6,771,320
<TOTAL-COSTS> 8,895,093
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,916
<INCOME-PRETAX> 2,756,953
<INCOME-TAX> 965,000
<INCOME-CONTINUING> 1,791,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,791,953
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.32
</TABLE>
