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 Quarter Ended March 28, 1999
Commission File No. 0-12942
PARLEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-2464749
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
One Parlex Place, Methuen, Massachusetts 01844
(Address of principal executive offices) (Zip Code)
978-685-4341
(Registrant's telephone number, including area code)
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.
YES X NO
----- -----
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at April 30, 1999 was 4,658,149 shares.
PARLEX CORPORATION
------------------
INDEX
-----
Part I - Financial Information Page
----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - March 28, 1999 and June 30, 1998 3
Consolidated Statements of Income - For the Three Months
And Nine Months Ended March 28, 1999 and March 29, 1998 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended March 28, 1999 and March 29, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
And Results of Operations 7
Part II - Other Information 11
Exhibit Index 12
Signatures 13
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, 1999 and June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
March 28, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,260,255 $ 5,824,233
Short-term Investments 2,760,161 6,789,469
Accounts receivable - net 11,868,181 11,145,750
Inventories:
Raw material 3,265,124 3,413,657
Work in process 6,643,675 5,933,000
Refundable income taxes 3,774 323,626
Deferred income taxes 372,725 372,725
Other current assets 1,471,652 1,706,367
-----------------------------
Total current assets 29,645,547 35,508,827
-----------------------------
Property, plant and equipment:
Land 468,864 468,864
Buildings 7,760,063 7,724,022
Machinery and equipment 29,016,385 27,200,755
Leasehold improvements and other 2,255,258 2,270,658
Construction in progress 12,950,526 4,390,805
-----------------------------
Total 52,451,096 42,055,104
Less accumulated depreciation and
Amortization (24,091,807) (22,031,645)
-----------------------------
Property, plant and equipment - net 28,359,289 20,023,459
-----------------------------
Other assets 545,328 649,198
-----------------------------
Total $58,550,164 $56,181,484
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 121,158 $ 121,158
Bank loan - 310,577
Accounts payable 6,738,489 6,437,169
Accrued liabilities 2,743,018 2,353,800
-----------------------------
Total current liabilities 9,602,665 9,222,704
-----------------------------
Long-term debt 913,959 1,165,751
-----------------------------
Other non-current liabilities 2,310,794 2,247,444
-----------------------------
Minority interest in Parlex (Shanghai) 2,399,683 1,954,472
-----------------------------
Stockholders' equity
Preferred stock -0- -0-
Common stock 486,739 485,065
Additional paid-in capital 23,938,680 23,872,745
Retained earnings 19,951,030 18,268,743
Unrealized gain (loss) on short-term
investments (8,453) 10,192
Cumulative translation adjustments (7,308) (8,007)
Less treasury stock at cost (1,037,625) (1,037,625)
-----------------------------
Total Stockholders' equity 43,323,063 41,591,113
-----------------------------
Total $58,550,164 $56,181,484
=============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months Ended March 28, 1999
and March 29, 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Mar 28, 1999 Mar 29, 1998 Mar 28, 1999 Mar 29, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product sales $15,747,974 $14,210,541 $46,504,334 $42,013,580
License fees and royalties 351,021 85,411 440,407 183,007
-----------------------------------------------------------
Total Revenues 16,098,995 14,295,952 46,944,741 42,196,587
-----------------------------------------------------------
Costs and Expenses:
Cost of products sold 12,112,294 11,268,857 37,683,883 33,123,743
Selling, general and administrative
expenses 2,566,873 1,996,916 6,685,571 5,808,759
-----------------------------------------------------------
Operating costs and expenses 14,679,167 13,265,773 44,369,454 38,932,502
-----------------------------------------------------------
Operating income 1,419,828 1,030,179 2,575,287 3,264,085
Other income 123,545 263,019 378,095 494,085
Interest expense (40,079) (32,985) (172,719) (191,222)
-----------------------------------------------------------
Income before income taxes 1,503,294 1,260,213 2,780,663 3,566,948
Provision for income taxes (410,000) (399,800) (653,165) (1,154,150)
-----------------------------------------------------------
Net income before minority interest 1,093,294 860,413 2,127,498 2,412,798
Minority interest (149,617) (37,463) (445,211) (274,630)
-----------------------------------------------------------
Net income $ 943,677 $ 822,950 $ 1,682,287 $ 2,138,168
===========================================================
Basic income per share $ .20 $ .18 $ .36 $ .51
===========================================================
Diluted income per share $ .20 $ .17 $ .35 $ .49
===========================================================
Weighted average shares - basic 4,651,506 4,620,229 4,644,652 4,180,671
===========================================================
Weighted average shares - diluted 4,768,882 4,788,906 4,772,496 4,376,368
===========================================================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
PARLEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 28, 1999 March 29, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net Income $ 1,682,287 $ 2,138,168
-----------------------------
Adjustments to reconcile net income to cash
provided by (used for) operating activities:
Depreciation and amortization 2,216,653 1,761,352
Gain on sale of equipment (4,300) (68,572)
Deferred compensation 63,350 61,726
Minority interest 445,211 274,627
Increase(decrease) in cash from:
Accounts receivable - net (722,431) (1,474,671)
Inventories (562,142) (1,934,880)
Refundable income taxes 319,852 0
Other current assets 234,715 (618,463)
Accounts payable 301,320 291,476
Accrued liabilities 389,218 (51,216)
Income taxes payable 0 (398,562)
-----------------------------
Total adjustments: 2,681,446 (2,157,183)
-----------------------------
Net cash provided by (used for) operating activities: 4,363,733 (19,015)
-----------------------------
Investment activities:
Additions to property, plant and equipment (10,552,483) (5,359,472)
Increase in other assets 103,870 (16,060)
Proceeds from the sale of equipment 4,300 77,800
Maturity of investments available for sale 4,010,663 0
-----------------------------
Net cash used for investment activities (6,433,650) (5,297,732)
-----------------------------
Financing activities:
Repayments under revolving credit agreement (251,792) (2,350,000)
Loan payable - Joint Venture (310,577) 800,482
Exercise of stock options and stock offering 67,609 20,525,972
-----------------------------
Net cash provided (used for) by financing activities (494,760) 18,976,454
-----------------------------
Effect of exchange rate changes with cash 699 (2,826)
-----------------------------
Net (decrease) increase in cash and cash equivalents (2,563,978) 13,656,881
Cash and cash equivalents at beginning of period 5,824,233 596,614
-----------------------------
Cash and cash equivalents at end of period $ 3,260,255 $14,253,495
=============================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
PARLEX CORPORATION AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
----------------------------------------------------
1. Management Statement
- ------------------------
The financial statements as reported in Form 10-Q reflect all
adjustments which are, in the opinion of management, necessary to present
fairly the financial position as of March 28, 1999 and the results of
operations and cash flows for the three months and nine months ended March
28, 1999 and March 29, 1998. All adjustments made to the interim financial
statements were of a normal recurring nature.
The Company followed the same accounting policies in the preparation
of this interim financial statement as described in the Company's annual
filing on Form 10-K for the year ended June 30, 1998, and this filing
should be read in conjunction with that annual report.
2. Comprehensive Income
- ------------------------
At the commencement of fiscal year 1999, the Company adopted SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income for the three
months and nine months ended March 28, 1999 and March 29, 1998 are as
follows:
<TABLE>
<CAPTION>
Third Qtr Nine Months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other Comprehensive Income:
Unrealized gain (loss) on short
term investments $(8,989) $ -0- $(18,645) $ -0-
Cumulative translation adjustments 300 (17,419) 699 (3,414)
---------------------------------------------
$ 8,689 $ 17,419 $(17,946) $(3,414)
=============================================
</TABLE>
The accumulated other comprehensive income balance is as follows:
<TABLE>
<CAPTION>
Unrealized gains (losses) Cumulative Trans-
on Short term Investments lation Adjustments Total
----------------------------------------------------------
<S> <C> <C> <C>
Beginning Balance $ 10,192 $(8,007) $ 2,185
Current Period Change (18,645) 699 (17,946)
Ending Balance $ (8,453) $(7,308) $(15,761)
</TABLE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
- ---------------------
The Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with "Factors that May
Affect Future Results" set forth on Page 10 herein and in the Company's
other filings with the U.S. Securities and Exchange Commission.
Total revenues in the third quarter of the current fiscal year
increased 13% to $16,098,995 from $14,295,952 in the comparable quarter
last year. The increase in total revenues was attributable to an increase
in the volume shipped from each of the Company's various locations.
Revenues were generated primarily from product sales, while some was
derived from licensing and royalty fees.
For the first nine months, revenues were $46,944,741 versus
$42,196,587 reported in the same time period last year. The backlog at
March 28, 1999 was $28 million. The Company is seeing an increase in demand
across its entire product line. Particularly encouraging are new orders for
a variety of new applications in the telecommunication and automotive
segments reflecting widespread acceptance of the Company's flexible circuit
technology.
The cost of products sold as a percentage of revenue in the third
quarter was 75%, an improvement from the 79% reflected in the corresponding
quarter a year ago. Improvement in yields and other measurements of
operational performance were achieved this quarter. In addition, the
Company is beginning to realize cost reductions in the assembly and
finishing operations, which in large part, have been transferred to the
Company's Mexican facility.
For the first nine months of 1999, the cost of products sold as a
percentage of revenue was 80% as compared to 78% last year. The increase in
percentage related to write-offs of inventory arising from a contamination
issue during the first quarter of this year (and discussed in the Form 10-Q
for the quarter ended). Additionally, the recently established Mexican
plant did not become fully operational until this quarter. Prior to this
quarter, the Company was incurring some unabsorbed overhead at this
facility.
Selling, general, and administrative expenses as a percentage of
revenue were 16% in the current quarter versus 14% in the third quarter
last year. The increase was attributable to a provision for incentive
compensation based upon performance for the Company's employees. This
provision is discretionary and is subject to approval by the Company's
Board of Directors.
For the first nine months, selling, general, and administrative
expenses as a percentage of revenue were 14% for both this year and last
year.
Other income in the third quarter of 1999 was $123,545 as compared to
$263,019 in the third quarter last year. Other income in each period has
related primarily to interest income earned on investments. Fewer dollars
were available for investment this year as a result of the Company's
investment in facilities and equipment to increase capacity.
For the first nine months of fiscal 1999, other income was $378,095
versus $494,085 for the same period last year. Last year's "Other Income"
included a gain on sale of equipment. A lower level of interest income and
the absence of any "gain" contributed to the reduction in "other income"
this year.
Interest expense was $40,079 this quarter versus $32,985for the same
period last year. For the first nine months of fiscal 1999, interest
expense was $172,719 as compared to $191,222 for the same period last year.
The increase in interest expense in the third quarter related primarily to
borrowings by the Chinese joint venture.
The above factors resulted in income before taxes of $1,503,294 this
quarter versus $1,260,213 in the third quarter last year. For the first
nine months of fiscal 1999, income before taxes was $2,780,663 and was
$3,566,948 in the same period for fiscal year 1998.
The Company's effective tax rate was 27% and 23% in the third quarter
of 1999 and the first nine months, respectively, of this year. Last year,
the Company's effective tax rate was 32% for both the third quarter and
first nine months. The difference in the rates relates primarily to the mix
of earnings between the United States operations and the Chinese joint
venture. The Company continues to benefit from the income generated by the
Chinese joint venture, which currently is not subject to tax.
After providing for taxes and recognizing the minority interest in
the Chinese joint venture, the Company's net income was $943,677 in the
third quarter of 1999 and $1,682,287 for the first nine months of fiscal
year 1999. This compares to $822,950 and $2,138,168 for the respective time
periods last year.
Liquidity and Capital Resources
- -------------------------------
As of March 28, 1999, the Company had cash and short term investments
of approximately $6,000,000, after having expended over $10,500,000 in the
first nine months to pay for its planned facilities expansion and
investment in equipment. The Company has a $10,000,000 unsecured revolving
line of credit, all of which was available at March 28, 1999.
As of April 30, 1999, the Company completed its purchase of the
assets of Hadco's Dynaflex division, located in San Jose, California for
$2,500,000 plus the assumption of certain liabilities. Dynaflex will
operate as a wholly-owned subsidiary of Parlex Corporation. This subsidiary
will satisfy the Company's strategic requirements of a quickturn prototype
capability, while providing a substantive presence in the high tech Silicon
Valley region as well as the entire west coast.
The Company believes that its cash on hand, its anticipated cash flow
from operations, and the amount available under its revolving credit
facility, should be sufficient to meet its foreseeable needs.
The Company has a deferred compensation obligation to the Chairman of
the Board of Directors. Amounts to be paid within one year, if any, are not
deemed to be material.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that these enterprises report selected information about
operating segments in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. SFAS No. 131 will be adopted by the Company
during the fourth quarter of fiscal 1999. This standard is not expected to
have a material effect on its consolidated financial position, results of
operations, or financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 will be adopted by the Company during fiscal year
2000. This standard is not expected to have a material effect on its
consolidated financial position, results of operations or financial
statement disclosures.
Year 2000 Disclosure Statement
- ------------------------------
The Year 2000 will effect the Company's internal computer systems,
and certain external systems with which the Company exchanges any date
related information, its customers, suppliers, banks, insurance companies,
stockholders, etc. In order to properly assess the extent this problem may
have on its operations, the Company has and is continuing to survey its key
suppliers, service providers, and trading partners as to their level of
preparedness and the effect it will have on the Company's operations.
The Company has scheduled its enterprise system to be fully Year 2000
compliant by the second calendar quarter of 1999. Quite apart from the Year
2000 problem, the Company is in the process of replacing its legacy
computer system with a client server system for which both the hardware and
software have been certified as Year 2000 compliant. The total cost of this
project is approximately $800,000, of which approximately $600,000 has been
expended to date.
The Company has inventoried all of its mission critical manufacturing
systems in order to determine any Year 2000 issues that may exist. While
software upgrades will be required, the Company does not believe that any
issues exist which will prevent these systems from operating as expected by
January 1, 2000.
This inventory was completed in the fourth quarter of calendar 1998.
The required remediation of all mission critical systems will be completed
by the end of the second calendar quarter of 1999 and the testing necessary
to validate compliance is scheduled to be completed by August 1999.
The Year 2000 issue does present some risk that the Company's
operations may suffer disruption as a result of either a computer
malfunction or a corruption of date sensitive data. If this does occur, the
Company believes that it most likely will be due to factors external to the
Company. Because of the Company's internal Year 2000 program, the Company
does not believe there is a significant risk of disruption of operations
due to malfunction of its internal systems or equipment.
There can be no assurance that the conversion of the Company's
systems will be successful or the Company's key contractors will have
successful conversion programs, and that any such "Year 2000" compliance
failures will not have a material adverse effect on the Company's business,
results of operations or financial condition.
Quantitative and Quality Disclosures About Market Risk
- ------------------------------------------------------
As of March 28, 1999, the Company is exposed to market risks which
include changes in U.S. and foreign interest rates and fluctuations in
exchange rates.
The Company maintains a portion of its cash and cash equivalents in
financial instruments with purchased maturities of three months or less.
These financial instruments are subject to interest rate risk and will
decline in value if interest rates decrease. Due to the short duration of
these financial instruments, an immediate decrease in interest rates would
not have a material adverse effect upon the Company's financial position.
The Company's Chinese joint venture, Parlex (Shanghai), has an
outstanding bank loan that bears interest at a rate of 125 basis points
over the Singapore Interbank Offer Rate ("SIBOR") and is therefore affected
by changes in market interest rates. However, Parlex (Shanghai) has the
option to pay the balance in full at any time without penalty. As a result,
the Company believes that the market risk is not material.
The Company also has a revolving line of credit agreement which bears
interest at the bank's corporate base rate which is also affected by
changes in market interest rates. As of March 28, 1999, no monies were
borrowed under this line of credit. The Company has the option to repay
borrowings at anytime without penalty and therefore believes that the
market risk is not material.
The Company owns a 50.1% equity interest in a joint venture located
in Shanghai, China. Sales are typically denominated in the local currency
(functional currency), thereby creating exposure to changes in exchange
rates. The changes in the Chinese/U.S. exchange rate may positively or
negatively impact the joint venture's sales, gross margins and retained
earnings. Based upon the current volume of transactions in China and the
stable nature of the exchange rate between China and the U.S., the Company
does not believe the market risk is material.
Factors That May Affect Future Results
- --------------------------------------
This Quarterly Report on Form 10-Q contains certain forward-looking
statements as defined under the Federal Securities Laws. The Company's
actual results of operations may differ significantly from those
contemplated by such forward-looking statements as a result of various risk
factors beyond its control, including, but not limited to, economic
conditions in the electronics industry, particularly in the principal
industry sectors served by the Company, changes in customer requirements
and in the volume of sales to principal customers, competition and
technological change.
PART II - OTHER INFORMATION
---------------------------
Items 1-5 THESE ITEMS ARE INAPPLICABLE
Item 6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - See Exhibit Index
(b) Reports on Form 8-K - No reports on Form 8-K
were filed by the Company for the quarter ended
March 28, 1999.
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.
PARLEX CORPORATION
------------------
By: /s/ Peter J. Murphy
--------------------------------
Peter J. Murphy
President
By: /s/ Steven M. Millstein
--------------------------------
Steven M. Millstein
Vice President of Finance
(Principal Accounting and
Financial Officer)
Date May 12, 1999
------------------------------
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ----
11 Statement Regarding Computation of Per Share Earnings 14
27 Financial Data Schedule 15
EXHIBIT 11
PARLEX CORPORATION AND SUBSIDIARIES
Computation of Net Income Per Common Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
Mar 28, 1999 Mar 29, 1998 Mar 28, 1999 Mar 29, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Basic Earnings Per Share $.20 $.18 $.36 $.51
Weighted Average
Number of Shares Outstanding 4,651,506 4,620,229 4,644,652 4,180,671
Diluted Earnings Per Share $.20 $.17 $.35 $.49
Weighted Average Number
of Shares Outstanding 4,651,506 4,620,229 4,644,652 4,180,671
Effective of Dilutive Stock
Options 117,376 168,677 127,844 195,697
Adjusted Weighted Average
Number of Shares Outstanding 4,768,882 4,788,906 4,772,496 4,376,368
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains a summary of financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-28-1999
<CASH> 3,260,255
<SECURITIES> 2,760,161
<RECEIVABLES> 12,158,521
<ALLOWANCES> 290,340
<INVENTORY> 9,908,799
<CURRENT-ASSETS> 29,645,547
<PP&E> 52,451,096
<DEPRECIATION> 24,091,807
<TOTAL-ASSETS> 58,550,164
<CURRENT-LIABILITIES> 9,602,665
<BONDS> 0
0
0
<COMMON> 486,739
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 58,550,164
<SALES> 46,504,334
<TOTAL-REVENUES> 46,944,741
<CGS> 37,683,883
<TOTAL-COSTS> 44,369,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,719
<INCOME-PRETAX> 2,780,663
<INCOME-TAX> 653,165
<INCOME-CONTINUING> 1,682,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,682,287
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
