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: October 31, 1999
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, 1999 - 4,547,728 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 -
October 31, 1999 and August 1, 1999 2
Consolidated Statements of Income -
For the thirteen weeks ended
October 31, 1999 and November 1, 1998 3
Consolidated Statements of Cash Flows -
For the thirteen weeks ended
October 31, 1999 and November 1, 1998 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
October 31, August 1,
1999 1999
<S> <C> <C>
--------- ---------
Unaudited Audited
ASSETS
Current Assets:
Cash and cash equivalents $ 1,809,591 $ 2,741,163
Accounts receivable 10,398,719 10,678,638
Other receivables 214,166 212,515
Inventories 20,761,753 19,880,370
Deferred taxes and other 2,983,004 2,703,179
---------- ----------
Total Current Assets 36,167,233 36,215,865
Property, Plant and Equipment, net 18,188,615 21,888,553
Intangibles, net of amortization of $2,336,761 at
October 31, 1999 and $2,137,459 at August 1, 1999 13,374,351 13,573,653
Available-for-sale Securities 147,576 148,105
Other Investments 961,045 947,983
Other Assets 1,253,076 1,282,078
---------- ----------
$ 70,091,896 $ 74,056,237
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 146,201 $ 258,383
Accounts payable and accrued expenses 9,390,056 8,035,211
Income taxes payable 813,342 276,160
Reserve for contract losses 1,333,000 1,505,048
Advance payments on contracts 511,856 438,538
---------- ----------
Total Current Liabilities 12,194,455 10,513,340
Long-term Debt 14,398,708 15,437,390
Deferred Income Taxes 5,572,880 5,143,837
Minority interest 62,062 62,062
---------- ----------
32,228,105 31,156,629
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
4,577,728 at October 31, 1999
and 5,030,283 at August 1, 1999 457,773 503,028
Additional paid-in capital 8,124,842 15,071,964
Retained earnings 29,281,176 27,324,616
---------- ----------
Total Shareholders' Equity 37,863,791 42,899,608
---------- ----------
$ 70,091,896 $ 74,056,237
========== ==========
</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
----------------------
October 31, November 1,
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 16,139,277 $ 11,650,845
---------- ----------
Cost and expenses:
Cost of products sold 9,665,049 6,771,320
Selling and administrative expenses 3,246,001 2,123,773
---------- ----------
12,911,050 8,895,093
---------- ----------
Operating income 3,228,227 2,755,752
---------- ----------
Other income (expense):
Investment income 54,254 103,117
Interest expense (271,921) (101,916)
---------- ----------
(217,667) 1,201
---------- ----------
Income before income taxes 3,010,560 2,756,953
Provision for income taxes 1,054,000 965,000
---------- ----------
Net income $ 1,956,560 $ 1,791,953
========== ==========
Earnings per common share - Basic $ .40 $ .34
=== ===
Basic weighted average shares 4,883,268 5,295,245
========= =========
Earnings per common share - Diluted $ .38 $ .32
=== ===
Diluted weighted average shares 5,176,081 5,538,266
========= =========
</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
--------------------------
October 31, November 1,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,956,560 $ 1,791,953
---------- ----------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 938,311 613,043
(Gain) loss on disposal of property and equipment (18,327) 7,841
Equity in income of limited partnership (13,062) (21,599)
(Increase) in deferred tax assets (90,580) -
Increase in deferred tax liabilities 429,043 318,500
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 279,919 (1,091,654)
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts - (1,271,921)
(Increase) decrease in other receivables (1,651) 1,296
Decrease in prepaid income taxes - 377,448
(Increase) decrease in inventories (881,383) 414,943
(Increase) in prepaid expenses and other (189,245) (170,666)
Increase in accounts payable and accrued expenses 1,354,845 97,419
Increase in income taxes payable 537,182 259,525
(Decrease) in reserve for contract losses (172,048) (59,080)
Increase (decrease) in advance payments on contracts 73,318 (229,590)
Other, net 529 (15,111)
---------- ----------
Total adjustments 2,246,851 (769,606)
---------- ----------
Net cash provided by operating activities 4,203,411 1,022,347
---------- ----------
Cash flows from investing activities:
Acquisition of stock - (6,298,205)
Proceeds from sale of property and equipment 4,124,505 1,250
Capital expenditures (1,116,247) (499,059)
---------- ----------
Net cash provided by (used in) investing activities 3,008,258 (6,796,014)
---------- ----------
Cash flows from financing activities:
Borrowings under bank line of credit - 3,500,000
Proceeds from exercise of stock options 158,873 316,149
Payments under lines of credit (1,000,000) (4,200,000)
Payments of long-term debt (150,864) (8,428)
Purchase of treasury stock (7,151,250) (340,469)
---------- ----------
Net cash used in financing activities (8,143,241) (732,748)
---------- ----------
Net decrease in cash and cash equivalents (931,572) (6,506,415)
Cash and cash equivalents at beginning of period 2,741,163 10,689,193
---------- ----------
Cash and cash equivalents at end of period $ 1,809,591 $ 4,182,778
========== ==========
</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 1,1999) 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 October 31, 1999 and August 1,1999 are summarized as follows:
October 31, 1999 August 1,1999
---------------- -------------
Purchased parts and raw materials $ 10,611,809 $ 9,862,727
Work in process 9,461,143 8,780,767
Finished products 688,801 1,236,876
---------- ----------
$ 20,761,753 $ 19,880,370
========== ==========
3. The following table shows the calculation of basic earnings per share and
earnings per share assuming dilution:
Thirteen weeks ended
----------------------------------
October 31, 1999 November 1, 1998
---------------- ----------------
Numerator:
Net Income $ 1,956,560 $ 1,791,953
========= =========
Denominator:
Basic weighted-average shares 4,883,268 5,295,245
Effect of dilutive securities:
Employee stock options and warrants 292,813 243,021
--------- ---------
Diluted weighted-average shares 5,176,081 5,538,266
========= =========
Earnings per common share - Basic $ .40 $ .34
=== ===
Earnings per common share - Diluted $ .38 $ .32
=== ===
Options and warrants to purchase 2,652,175 shares of common stock, with
exercise prices ranging from $13.88 to $16.46 were outstanding during the first
quarter of fiscal 2000 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 during the period. The options and warrants, which expire at
various dates through September 24, 2009, were still outstanding as of October
31, 1999. 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 were greater than the average market price of
the common shares during the period.
5
<PAGE>
4. Supplemental cash flow information is as follows:
October 31, 1999 November 1, 1998
---------------- ----------------
Cash paid during the period for:
Interest $ 267,598 $ 29,110
Income Taxes 98,146 10,300
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 fiscal 2000 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 October 31, 1999 and November 1, 1998
- ----------------------------------------------------------
Net sales for the 13 weeks ended October 31, 1999 were approximately $16,139,000
compared to $11,651,000 in the first quarter of fiscal 1999. The sales increase
of $4,488,000 (38.5%) is primarily attributable to revenue generated by General
Microwave of $4,054,000, which was acquired in the second quarter of fiscal
1999, and increased volume in microwave products of $1,580,000, offset by a
reduction in flight instrumentation products of $1,146,000.
Gross profit of 40.1% for the 13 weeks ended October 31, 1999 declined from that
of the first quarter in the prior year of 41.9%, despite the increased
absorption of fixed costs from the higher sales volume, due to slightly lower
margins on microwave products.
Selling and administrative expenses for the 13 weeks ended October 31, 1999 were
$3,246,000 compared to $2,124,000 in the first quarter of fiscal 1999, an
increase of $1,122,000. Included in the quarter are selling and administrative
expenses of General Microwave of $1,050,000.
Liquidity and Capital Resources
- -------------------------------
As of October 31, 1999 and August 1, 1999, working capital was approximately
$23,973,000 and $25,703,000, respectively, and the ratio of current assets to
current liabilities was 2.97 to 1 and 3.44 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 $512,000 at October 31, 1999, and $439,000 at August 1, 1999.
Net cash provided by operations during the quarter was approximately $4,203,000
as compared to $1,022,000 in the first quarter of fiscal 1999. The increase in
cash provided by operations was primarily due to decreases in the Company's
working capital.
Net cash provided by investing activities consists of the net proceeds of
$4,125,000 from the sale of the General Microwave facility in Amityville, N.Y.,
offset by $1,116,000 incurred for capital expenditures.
The Company has a revolving loan agreement with a bank for an aggregate of
$20,000,000 which expires January 31, 2001. As of October 31, 1999 and August 1,
1999, the Company had borrowings outstanding of $11,500,000 and $12,500,000,
respectively.
During the quarter ended October 31, 1999, the Company received net proceeds of
approximately $159,000 from the exercise of common stock options by employees
and acquired 477,000 shares of treasury stock through open market purchases at a
cost of $7,151,000. Such shares have been retired. The Company has acquired an
aggregate of 823,050
7
<PAGE>
shares under the 1,250,000 share buyback programs approved by the Board of
Directors.
At October 31, 1999, the Company had cash and cash equivalents of approximately
$1,810,000.
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 requirements at its facilities in Lancaster, PA
and Woburn, MA, 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. All modules have been fully tested and are compliant. 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. The
financial and operational systems of GMC in Farmingdale, NY have also been
reviewed and tested and are in compliance with Year 2000 requirements.
The Company has also reviewed 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 and test equipment manufacturers. The
Company has received responses to its questionnaire from its major suppliers and
test equipment manufacturers regarding their compliance and attempts to identify
any problem areas with respect to their systems and equipment. No major problems
have been identified. 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 developed multiple
sources for a substantial portion of its raw material requirements and has
obtained Year 2000 compliance statements from its critical suppliers, 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
8
<PAGE>
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 1, 1999.
As of October 31, 1999, the Company holds an investment in the common stock of a
public company that is exposed to price risk with a cost basis and a fair market
value basis of $143,330.
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 13, 1999
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE 13 WEEKS ENDED OCTOBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-30-2000
<PERIOD-START> AUG-2-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,809,591
<SECURITIES> 0
<RECEIVABLES> 10,398,719
<ALLOWANCES> 0
<INVENTORY> 20,761,753
<CURRENT-ASSETS> 36,167,233
<PP&E> 36,296,666
<DEPRECIATION> 18,108,051
<TOTAL-ASSETS> 70,091,896
<CURRENT-LIABILITIES> 12,194,455
<BONDS> 0
0
0
<COMMON> 457,773
<OTHER-SE> 37,406,018
<TOTAL-LIABILITY-AND-EQUITY> 70,091,896
<SALES> 16,139,277
<TOTAL-REVENUES> 16,139,277
<CGS> 9,665,049
<TOTAL-COSTS> 12,911,050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271,921
<INCOME-PRETAX> 3,010,560
<INCOME-TAX> 1,054,000
<INCOME-CONTINUING> 1,956,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,956,560
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.38
</TABLE>
