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: May 2, 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 June 7, 1999 - 5,172,078 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 -
May 2, 1999 and August 2, 1998 2
Consolidated Statements of Income -
For the thirteen and thirty-nine weeks ended
May 2, 1999 and May 3, 1998 3
Consolidated Statements of Cash Flows -
For the thirteen and thirty-nine weeks ended
May 2, 1999 and May 3, 1998 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3 -Quantitative and Qualitative Disclosures About Market Risk 11
PART II -OTHER INFORMATION 12
Signatures 13
<PAGE>
<TABLE>
<CAPTION>
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 2, August 2,
1999 1998
<S> <C> <C>
---------- ----------
Unaudited Audited
ASSETS
Current Assets:
Cash and cash equivalents $ 1,767,963 $10,689,193
Accounts receivable 10,090,609 6,193,947
Costs incurred and income recognized in excess
of billings on uncompleted contracts 5,002,326 1,665,008
Other receivables 213,771 248,298
Prepaid income taxes - 377,448
Inventories 19,527,990 15,068,618
Deferred taxes and other 3,189,267 2,194,004
---------- ----------
Total Current Assets 39,791,926 36,436,516
Property, Plant and Equipment, net 22,234,698 12,549,343
Intangibles, net of amortization of $1,935,725 at
May 2, 1999 and $1,524,393 at August 2, 1998 13,380,794 6,080,218
Available-for-sale Securities 143,330 143,330
Other Investments 927,119 849,324
Other Assets 1,322,732 1,493,798
---------- ----------
$77,800,599 $57,552,529
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 767,557 $ 404,984
Accounts payable and accrued expenses 8,657,049 6,468,183
Income taxes payable 1,027,697 -
Reserve for contract losses 1,086,048 1,145,128
Advance payments on contracts 773,729 1,824,746
---------- ----------
Total Current Liabilities 12,312,080 9,843,041
Long-term Debt 13,613,170 4,110,885
Deferred Income Taxes 6,228,493 3,158,353
Minority Interest 64,136 -
---------- ----------
32,217,879 17,112,279
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
5,171,878 at May 2, 1999
and 5,266,159 at August 2, 1998 517,188 526,616
Additional paid-in capital 19,864,714 20,323,895
Retained earnings 25,200,818 19,589,739
---------- ----------
Total Shareholders' Equity 45,582,720 40,440,250
---------- ----------
$77,800,599 $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 Thirty-nine weeks ended
-------------------- -----------------------
May 2, May 3, May 2, May 3,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
---------- ---------- ---------- ----------
Net sales $ 17,467,640 $ 10,008,148 $ 43,650,646 $ 29,632,618
---------- ---------- ---------- ----------
Cost and expenses:
Cost of products sold 10,661,290 5,861,938 26,352,854 17,348,367
Selling and administrative expenses 3,553,443 2,040,055 8,205,273 6,302,465
------------
---------- ---------- ---------- ----------
14,214,733 7,901,993 34,558,127 23,650,832
---------- ---------- ---------- ----------
Operating income 3,252,907 2,106,155 9,092,519 5,981,786
---------- ---------- ---------- ----------
Other income (expense):
Investment income 62,748 171,599 248,404 406,228
Interest expense (248,830) (120,924) (514,018) (322,046)
------------
---------- ---------- ---------- ----------
(186,082) 50,675 (265,614) 84,182
---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item 3,066,825 2,156,830 8,826,905 6,065,968
Provision for income taxes 1,073,000 734,000 3,089,000 2,063,000
---------- ---------- ---------- ----------
Income before extraordinary item 1,993,825 1,422,830 5,737,905 4,002,968
Extraordinary item - loss on extinguishment
of debt (net of income tax benefit
of $ 68,000) 126,826 - 126,826 -
---------- ---------- ---------- ----------
Net income $ 1,866,999 $ 1,422,830 $ 5,611,079 $ 4,002,968
========== ========== ========== ==========
Earnings per common share - Basic
Earnings before extraordinary item $.38 $.27 $1.09 $.82
Extraordinary loss on extinguishment
of debt .02 - .02 -
--- --- ---- ---
Net earnings per common share - Basic $.36 $.27 $1.07 $.82
=== === ==== ===
Basic weighted average shares 5,185,761 5,200,310 5,249,936 4,876,134
========== ========== ========== ==========
Earnings per common share - Diluted
Earnings before extraordinary item $.35 $.24 $1.02 $.72
Extraordinary loss on extinguishment
of debt .02 - .02 -
--- --- ---- ---
Net earnings per common share - Diluted $.33 $.24 $1.00 $.72
=== === ==== ===
Diluted weighted average shares 5,623,513 5,886,003 5,621,622 5,564,347
========== ========== ========== ==========
</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)
Thirty-nine weeks ended
-----------------------
May 2, May 3,
1999 1998
<S> <C> <C>
----------- -----------
Cash flows from operating activities:
Net income $ 5,611,079 $ 4,002,968
----------- -----------
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,293,323 1,347,259
Loss on disposal of equipment 7,841 -
Extraordinary loss on extinguishment of debt,
net of income taxes 126,826 -
Equity in income of limited partnership (77,795) (96,606)
Minority interest in earnings of consolidated
subsidiary 5,917 -
(Increase) in deferred tax assets - -
Increase in deferred tax liabilities 933,145 556,207
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 226,912 (879,111)
Decrease in notes receivable-officers - 2,100,913
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts (3,337,318) (1,338,184)
(Increase) decrease in other receivables 34,527 (29,064)
Decrease in prepaid income taxes 377,448 -
(Increase) decrease in inventories 1,081,707 (3,628,518)
(Increase) decrease in deferred taxes and other 104,207 (181,361)
(Decrease) in accounts payable and accrued expenses (903,687) 971,311
Increase (decrease) in income taxes payable 569,738 553,261
(Decrease) in reserve for contract losses (59,080) 500,000
(Decrease) in advance payments on contracts (1,284,915) (587,832)
Other, net 40,147 113,206
----------- -----------
Total adjustments 138,943 (598,519)
----------- -----------
Net cash provided by operating activities 5,750,022 3,404,449
----------- -----------
Cash flows from investing activities:
Acquisition of business, net of cash acquired (20,101,475) -
Proceeds from sale of equipment 1,250 1,100
Capital expenditures (1,275,665) (1,284,093)
----------- -----------
Net cash used in investing activities (21,375,890) (1,282,993)
----------- -----------
Cash flows from financing activities:
Net proceeds from public offering of common stock - 7,462,284
Borrowings under bank line of credit 24,500,000 3,950,000
Proceeds from refinance of mortgage note 2,915,000 -
Proceeds from exercise of stock options and warrants 399,494 503,458
Payments under lines of credit (15,450,000) (1,450,000)
Payments of long-term debt (336,153) (1,913,893)
Extinguishment of debt (3,005,600) -
Purchase of treasury stock (2,318,103) (1,110,359)
----------- -----------
Net cash provided by financing activities 6,704,638 7,441,490
----------- -----------
Net (decrease) increase in cash and cash equivalents (8,921,230) 9,562,946
Cash and cash equivalents at beginning of period 10,689,193 1,194,650
----------- -----------
Cash and cash equivalents at end of period $ 1,767,963 $ 10,757,596
=========== ===========
</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. (the "Company") 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 May 2, 1999 and August 2,1998 are summarized as follows:
May 2, 1999 August 2,1998
----------- -------------
Purchased parts and raw materials $ 9,726,251 $ 7,377,882
Work in process 8,676,200 7,303,533
Finished products 1,125,539 387,203
---------- ----------
$19,527,990 $ 15,068,618
========== ==========
3. In February 1999, the Company entered into a new loan agreement with a bank
that provides for a revolving loan in the aggregate principal amount of
$20,000,000 which may be used for general corporate purposes, including
business acquisitions, and a mortgage loan in the amount of $2,915,000. The
revolving credit facility requires the payment of interest only on a monthly
basis and payment of the outstanding principal balance on January 31, 2001.
Interest is set biweekly at 1.65% over the FOMC Target Rate (an aggregate
rate of 6.4% at May 2, 1999). As of May 2, 1999 and August 2, 1998, the
Company had borrowings outstanding of $10,550,000 and $1,500,000,
respectively. 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 May 2, 1999, stand-by letters of credit aggregating
$1,405,638 were outstanding under this facility.
The mortgage loan is for a term of ten years with monthly installments of
$23,359, including interest at a fixed rate of 7.43%, based upon a twenty
year amortization. The loan is secured by a mortgage on the Company's land
and building in Lancaster, Pennsylvania. The proceeds of the mortgage loan
were used to prepay the existing mortgage note having an outstanding balance
of $2,890,000 plus a prepayment premium of $115,600. The prepayment premium
and unamortized debt expenses of $79,226 are reflected as an extraordinary
loss of $126,826 in the quarter ended May 2, 1999 (net of an income tax
benefit of $68,000).
The loan 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 January 4, 1999, the Company completed the acquisition of all of the
issued and outstanding common stock of General Microwave Corp., a New York
corporation, including outstanding stock options, for $18.00 per share and
966,675 three-year warrants to purchase one share of the Company's common
stock, at an aggregate purchase price of approximately $24,556,000. The
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 fair market value of the warrants
based on the trading price of similar warrants currently on the market, and
transaction expenses. The warrants are exercisable at $15.60 per share of
5
<PAGE>
common stock of the Company and expire in January 2002.
The aggregate purchase price is calculated as follows (in thousands, except
share and per share data):
365,600 shares previously acquired in the open market $ 6,273
848,675 shares at $18.00 per share 15,276
118,000 stock options at $18.00 per share,
net of exercise price 1,279
966,675 Warrants at $1.50 1,450
Transaction expenses 278
------
Purchase price $24,556
======
The cash portions of the acquisition were financed through available cash
equivalents and borrowings under the Company's line of credit.
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 has been accounted for under the purchase method. Accordingly,
the consolidated balance sheet includes the assets and liabilities of
General Microwave at May 2, 1999, and the consolidated statements of income
include the results of General Microwave operations from January 4, 1999.
The allocation of the purchase price will be revised when additional
information concerning asset and liability valuations is obtained.
Adjustments, which could be significant, will be made during the allocation
period based on detailed reviews of the fair values of assets acquired and
liabilities assumed and could result in a substantial change in the excess
of cost over the fair value of net assets acquired.
The Company is currently negotiating the sale of General Microwave's
property in Amityville, New York with the intentions of relocating the plant
to nearby leased facilities. The Company plans to use the net proceeds of
approximately $4,100,000, which approximates the net carrying value, from
the sale to reduce outstanding bank debt.
On the basis of a pro forma consolidation of the results of operations as if
the acquisition had taken place at the beginning of fiscal 1998, unaudited
consolidated net sales, net income, and earnings per share for the thirteen
and thirty-nine weeks ended May 3, 1998 would have been approximately
$15,934,000, $1,582,000, and $0.27, and $46,401,000, $5,034,000, and $0.90,
respectively; and for the thirty-nine weeks ended May 2, 1999 would have
been approximately $52,964,000, $5,357,000, and $.95, respectively. The pro
forma information includes adjustments for additional depreciation based on
the estimated fair market value of the property, plant, and equipment
acquired, and the amortization of intangibles arising from the transaction.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transaction been
effected at the beginning of fiscal 1998.
5. Supplemental cash flow information is as follows:
May 2, 1999 May 3, 1998
----------- -----------
Cash paid during the period for:
Interest $ 496,922 $ 220,673
Income Taxes 1,271,058 980,630
Cashless exercise of stock options 228,353 54,250
Warrants issued for business acquired 1,450,000 -
Tax benefit related to stock options 210,000 1,195,721
6
<PAGE>
6. The following table shows the calculation of basic earnings per share and
earnings per share assuming dilution:
Thirteen weeks ended
--------------------
May 2, 1999 May 3, 1998
----------- -----------
Numerator:
Net Income $ 1,866,999 $ 1,422,830
========= =========
Denominator:
Basic weighted-average shares 5,185,761 5,200,310
Effect of dilutive securities:
Employee stock options and warrants 437,752 685,693
--------- ---------
Diluted weighted-average shares 5,623,513 5,886,003
========= =========
Earnings per common share - Basic $ .36 $ .27
=== ===
Earnings per common share - Diluted $ .33 $ .24
=== ===
Options and warrants to purchase 2,543,703 shares of common stock, with
exercise prices ranging from $13.15 to $16.46 were outstanding during the
third 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 during the period. The options and warrants,
which expire at various dates through August 14, 2008, were still
outstanding as of May 2, 1999. Options and warrants to purchase 1,425,278
shares of common stock, with exercise prices ranging from $13.69 to $14.40
were outstanding during the third quarter of fiscal 1998 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.
Thirty-nine weeks ended
-----------------------
May 2, 1999 May 3, 1998
----------- -----------
Numerator:
Net Income $ 5,611,079 $ 4,002,968
========= =========
Denominator:
Basic weighted-average shares 5,249,936 4,876,134
Effect of dilutive securities:
Employee stock options and warrants 371,686 688,213
--------- ---------
Diluted weighted-average shares 5,621,622 5,564,347
========= =========
Earnings per common share - Basic $ 1.07 $ .82
==== ===
Earnings per common share - Diluted $ 1.00 $ .72
==== ===
Options and warrants to purchase 2,617,119 shares of common stock, with
exercise prices ranging from $11.44 to $16.46 were outstanding during the
first nine months 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 during the period. The options and warrants,
which expire at various dates through August 14, 2008, were still
outstanding as of May 2, 1999. Options and warrants to purchase 1,425,278
shares of common stock, with exercise prices ranging from $13.69 to $14.40
were outstanding during the first nine months of fiscal 1998 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.
7
<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 1999 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 May 2, 1999 and May 3, 1998
- ------------------------------------------------
Net sales for the thirteen weeks ended May 2, 1999 were approximately
$17,468,000 compared to $10,008,000 in the third quarter of fiscal 1998. The
sales increase of $7,460,000 (74.5%) is primarily attributable to revenue
generated by General Microwave of $6,702,000, and the balance to increased
volume in flight instrumentation and microwave products.
Gross profit margin of 39.0% for the thirteen weeks ended May 2, 1999 was lower
than the third quarter in the prior year of 41.4%. The net change reflects lower
margins generated from the added General Microwave revenues, partially offset by
the higher margins in flight instrumentation products.
Selling and administrative expenses for the thirteen weeks ended May 2, 1999 are
up by $1,513,000 as compared to the third quarter of fiscal 1998, however, as a
percentage of revenue are unchanged. Included in 1999 are selling and
administrative expenses of General Microwave of $1,443,000.
Investment income declined $109,000 from the prior year due to a decrease in
investments, the proceeds of which were used to partially fund the acquisition
of General Microwave. In addition, bank borrowings of $11,400,000 used to fund
the acquisition contributed to an increase in interest expense of $128,000.
Thirty-nine weeks ended May 2, 1999 and May 3, 1998
- ---------------------------------------------------
Net sales for the thirty-nine weeks ended May 2, 1999 were approximately
$43,651,000 compared to $29,633,000 in the comparable prior year period. The
sales increase of $14,018,000 (47.3%) is primarily attributable to revenue
generated by General Microwave of $8,716,000, as well as increased volume in
flight instrumentation products of $3,911,000 and $1,391,000 in microwave
products.
Gross profit margin for the thirty-nine weeks ended May 2, 1999 was 39.6% as
compared to 41.5% in fiscal 1998. The decline in margin of 1.9% is due primarily
to lower margins on microwave components, as well as lower margins generated
from the added General Microwave revenues.
Selling and administrative expenses for the thirty-nine weeks ended May 2, 1999
were $8,205,000 compared to $6,302,000 in the nine months of fiscal 1998, an
increase of $1,903,000. The increase is primarily attributable to the General
Microwave acquisition. As a percentage of revenues, expenses declined from 21.3%
in 1998 to 18.8% in 1999.
Investment income declined $158,000 from the prior year due to a decrease in
investments, the proceeds of which were used to partially fund the acquisition
of General Microwave. In addition, bank borrowings of $11,400,000
8
<PAGE>
used to fund the acquisition resulted in a net increase in interest expense of
$192,000.
Business Acquisition
- --------------------
As of January 4, 1999, the Company completed the acquisition of all of the
issued and outstanding common stock of General Microwave Corp., a New York
corporation, including outstanding stock options, for $18.00 per share and
966,675 three-year warrants to purchase one share of the Company's common stock,
at an aggregate purchase price of approximately $24,556,000. The 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 fair market value of the warrants based on the trading price of
similar warrants currently on the market, and transaction expenses. The warrants
are exercisable at $15.60 per share of common stock of the Company and expire in
January 2002.
The aggregate estimated purchase price is calculated as follows (in thousands,
except share and per share data):
365,600 shares previously acquired in the open market $ 6,273
848,675 shares at $18.00 per share 15,276
118,000 stock options at $18.00 per share,
net of exercise price 1,279
966,675 Warrants at $1.50 1,450
Transaction expenses 278
------
Purchase price $24,556
======
The cash portions of the acquisition were financed through available cash
equivalents and borrowings under the Company's line of credit.
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 has been
accounted for under the purchase method. Accordingly, the consolidated balance
sheet includes the assets and liabilities of General Microwave at May 2, 1999,
and the consolidated statements of income include the results of General
Microwave operations from January 4, 1999. The allocation of the purchase price
will be revised when additional information concerning asset and liability
valuations is obtained. Adjustments, which could be significant, will be make
during the allocation period based on detailed reviews of the fair values of
assets acquired and liabilities assumed and could result in a substantial change
in the excess of cost over the fair value of net assets acquired.
On the basis of a pro forma consolidation of the results of operations as if the
acquisition had taken place at the beginning of fiscal 1998, unaudited
consolidated net sales, net income, and earnings per share for the thirteen and
thirty-nine weeks ended May 3, 1998 would have been approximately $15,934,000,
$1,582,000, and $0.27, and $46,401,000, $5,034,000, and $0.90 respectively; and
for the thirty-nine weeks ended May 2, 1999 would have been approximately
$35,496,000, $3,490,000, and $.62, respectively. The pro forma information
includes adjustments for additional depreciation based on the estimated fair
market value of the property, plant, and equipment acquired, and the
amortization of intangibles arising from the transaction. The pro forma
financial information is not necessarily indicative of the results of operations
as they would have been had the transaction been effected at the beginning of
fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
As of May 2, 1999 and August 2, 1998, working capital was approximately
$27,480,000 and $26,593,000, respectively, and the ratio of current assets to
current liabilities was 3.23 to 1 and 3.70 to 1, respectively.
9
<PAGE>
As is customary in the defense industry, inventory is partially financed by
progress payments. The unliquidated balance of these advanced payments was
approximately $774,000 at May 2, 1999, and $1,825,000 at August 2, 1998.
Net cash provided by operations during the period was approximately $5,750,000.
Net cash used in investing activities consists of the acquisition of General
Microwave Corporation, in part for cash of approximately $20,101,000 as
discussed above under "Business Acquisition"; and $1,276,000 for capital
expenditures.
Net cash provided by financing activities was approximately $6,705,000.
The Company maintains a revolving credit facility with a bank for an aggregate
of $20,000,000, as amended in February 1999, which expires January 31, 2001. Net
borrowings for the period were $9,050,000 which was used to partially finance
the acquisition of General Microwave. As of May 2, 1999 and August 2, 1998, the
Company had borrowings outstanding of $10,550,000 and $1,500,000, respectively.
In February 1999, the Company prepaid the existing mortgage on its facilities in
Lancaster, PA at a premium of $115,600. The mortgage which was at an annual
interest rate of 10.4% had an outstanding balance of $2,890,000. The new
mortgage of $2,915,000 is for a term of ten years with monthly installments of
$23,359, including interest at a fixed rate of 7.43%, based on a twenty year
amortization.
During the period ended May 2, 1999, the Company received net proceeds of
approximately $400,000 from the exercise of common stock options and warrants by
employees and acquired 188,350 shares of treasury stock through open market
purchases at a cost of $2,203,000. The Company also acquired 25,091 shares of
common stock valued at $343,053 in connection with certain "stock-for-stock"
exercises of stock options by which certain employees elected to surrender
"mature" shares owned in settlement of the option price, and related tax
obligations of $114,700. Such exercises are treated as an exercise of a stock
option and the acquisition of treasury shares by the Company. All such treasury
shares have been retired.
At May 2, 1999, the Company had cash and cash equivalents of approximately
$1,768,000.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities. In May
1999, the Company completed, shipped and billed a contract in the amount of
$4,773,000, net of commissions. Upon collection of this receivable, the Company
intends to pay down its bank debt. In addition, the Company is currently
negotiating the sale of General Microwave's property in Amityville, New York
with the intentions of relocating the plant to nearby leased facilities. The
Company also plans to use the net proceeds of approximately $4,100,000 from the
sale to reduce outstanding bank debt.
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
10
<PAGE>
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. 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 General Microwave have also been reviewed
and tested and are in compliance with Year 2000 requirements.
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 and test equipment manufacturers. The
Company has mailed a questionnaire to its significant suppliers and test
equipment manufacturers regarding their compliance and attempts to identify any
problem areas with respect to their systems and equipment. 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.
11
<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
12
<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: June 9, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE 13 WEEKS ENDED MAY 2, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-01-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> MAY-02-1999
<CASH> 1,767,963
<SECURITIES> 0
<RECEIVABLES> 10,090,609
<ALLOWANCES> 0
<INVENTORY> 19,527,990
<CURRENT-ASSETS> 39,791,926
<PP&E> 38,864,322
<DEPRECIATION> 16,629,624
<TOTAL-ASSETS> 77,800,599
<CURRENT-LIABILITIES> 12,312,080
<BONDS> 0
0
0
<COMMON> 517,188
<OTHER-SE> 45,065,532
<TOTAL-LIABILITY-AND-EQUITY> 77,800,599
<SALES> 17,467,640
<TOTAL-REVENUES> 17,467,640
<CGS> 10,661,290
<TOTAL-COSTS> 14,214,733
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 248,830
<INCOME-PRETAX> 3,066,825
<INCOME-TAX> 1,073,000
<INCOME-CONTINUING> 1,993,825
<DISCONTINUED> 0
<EXTRAORDINARY> (126,826)
<CHANGES> 0
<NET-INCOME> 1,866,999
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.33
</TABLE>
