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 28, 2001
----------------
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)
3061 Industry Drive, Lancaster, Pennsylvania 17603
- -------------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (717) 397-2777
--------------
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(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 6, 2001 - 11,194,667 shares of Common Stock.
HERLEY INDUSTRIES, INC
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
- ----------------------------------- ----
Item 1 - Financial Statements:
Consolidated Balance Sheets -
October 28, 2001 and July 29, 2001 2
Consolidated Statements of Income -
For the thirteen weeks ended
October 28, 2001 and October 29, 2000 3
Consolidated Statements of Cash Flows -
For the thirteen weeks ended
October 28, 2001 and October 29, 2000 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 10
PART II -OTHER INFORMATION 11
Signatures 12
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
October 28, July 29,
2001 2001
--------- -------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 18,615 $ 13,041
Accounts receivable 13,807 17,047
Costs incurred and income recognized in excess
of billings on uncompleted contracts 2,238 541
Other receivables 158 166
Inventories 34,587 32,768
Income taxes receivable 2,886 --
Deferred taxes and other 2,056 1,973
------- -------
Total Current Assets 74,347 65,536
Property, Plant and Equipment, net 21,121 21,312
Unexpended industrial revenue bond proceeds 1,910 --
Goodwill 26,302 26,302
Intangibles, net of amortization of $115 in 2002
and $104 in 2001 453 464
Available-For-Sale Securities 146 146
Other Investments 786 773
Other Assets 653 64
------- -------
$125,718 $114,597
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 268 $ 213
Accounts payable and accrued expenses 19,345 16,194
Billings in excess of costs incurred and
income recognized on uncompleted contracts 479 531
Income taxes payable -- 1,061
Reserve for contract losses 452 472
Advance payments on contracts 1,412 261
------- -------
Total Current Liabilities 21,956 18,732
Long-term Debt 5,622 2,740
Deferred Income Taxes 4,452 4,452
------- -------
32,030 25,924
------- -------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
11,188,667 at October 28, 2001 and
10,537,289 at July 29, 2001 1,119 1,054
Additional paid-in capital 47,905 45,250
Retained earnings 44,664 42,369
------- -------
Total Shareholders' Equity 93,688 88,673
------- -------
$125,718 $114,597
======= =======
The accompanying notes are an integral part of these financial statements.
2
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands except per share data)
Thirteen weeks ended
-------------------------
October 28, October 29,
2001 2000
------ ------
Net sales $ 23,037 $ 18,094
------ ------
Cost and expenses:
Cost of products sold 15,431 11,239
Selling and administrative expenses 3,748 3,805
Plant closing costs 406 -
------ ------
19,585 15,044
------ ------
Operating income 3,452 3,050
------ ------
Other income (expense):
Investment income 143 124
Interest expense (64) (50)
------ ------
79 74
------ ------
Income before income taxes 3,531 3,124
Provision for income taxes 1,236 1,094
------ ------
Net income $ 2,295 $ 2,030
====== ======
Earnings per common share - Basic $ .21 $ .23
=== ===
Basic weighted average shares 10,695 8,985
====== =====
Earnings per common share - Diluted $ .20 $ .20
=== ===
Diluted weighted average shares 11,695 10,134
====== ======
The accompanying notes are an integral part of these financial statements.
3
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Thirteen weeks ended
------------------------
October 28, October 29,
2001 2000
------ ----
Cash flows from operating activities:
Net income $ 2,295 $ 2,030
------ ------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 952 987
Equity in income of limited partnership (13) (11)
(Increase) decrease in deferred tax assets (83) 39
Increase in deferred tax liabilities - 7
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,240 226
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts (1,697) (634)
Decrease in other receivables 8 53
(Increase) in inventories (1,819) (1,580)
(Decrease) in accounts payable and accrued expenses (566) (513)
(Decrease) in billings in excess of costs incurred and
income recognized on uncompleted contracts (52) -
(Decrease) in reserve for contract losses (20) (120)
Increase in advance payments on contracts 1,151 262
Net change in income taxes 890 (109)
Other, net (614) (1)
------ ------
Total adjustments 1,377 (1,394)
------ ------
Net cash provided by operating activities 3,672 636
------ ------
Cash flows from investing activities:
Investment of unexpended industrial revenue bond proceeds (1,910) -
Acquisition of businesses, net of cash acquired - (5,181)
Capital expenditures (725) (400)
------ ------
Net cash used in investing activities (2,635) (5,581)
------ ------
Cash flows from financing activities:
Proceeds from industrial revenue bond financing 3,000 -
Proceeds from exercise of stock options and warrants 1,600 1,052
Payments of long-term debt (63) (19)
Purchase of treasury stock - (194)
------ ------
Net cash provided by financing activities 4,537 839
------ ------
Net increase (decrease) in cash and cash equivalents 5,574 (4,106)
Cash and cash equivalents at beginning of period 13,041 7,665
------ ------
Cash and cash equivalents at end of period $ 18,615 $ 3,559
====== ======
The accompanying notes are an integral part of these financial statements.
4
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's management, the accompanying consolidated
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the consolidated
financial position and results of operations and cash flows for the periods
presented. These financial statements (except for the balance sheet
presented at July 29, 2001) 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. The Company entered into an agreement effective as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common
stock of Terrasat, Inc. ("Terrasat"), a California corporation. The
transaction provides for the payment of $6,000,000 in cash, $3,000,000
which was paid in December 2000 and $3,000,000 to be paid in December 2001.
In addition, the agreement provides for additional cash payments in the
future up to $2,000,000, based on gross revenues through December 31, 2001.
3. On October 19, 2001, the Company received $3,000,000 in proceeds from the
East Hempfield Township Industrial Development Authority Variable Rate
Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds"). The Bonds are
due in varying annual installments through October 1, 2021. The initial
installment of $95,000 is due October 1, 2002 and increases each year until
the final payment of $225,000 in 2021. The interest rate on the Bonds is
reset weekly at the prevailing market rate of the BMA Municipal index. The
initial rate of interest and the rate at October 28, 2001 was 2.1%, which,
after giving effect to a ten year interest rate swap agreement (See Note 4)
becomes a fixed rate of 4.07%. The bond agreement requires a sinking fund
payment on a monthly basis to fund the annual Bonds redemption installment.
Proceeds from the Bonds are being used for the construction of a 15,000
square foot expansion of the Company's facilities in Lancaster PA., and for
manufacturing equipment. The presently unexpended proceeds from the Bonds
are presented as a noncurrent asset on the consolidated balance sheet at
October 28, 2001. As required by the Trust Indenture, these funds have been
invested in a US Government money market portfolio, and are carried at cost
which approximates market.
The Bonds are secured by a letter of credit expiring October 18, 2006 and a
mortgage on the related properties pledged as collateral.
4. The Company recognizes all derivatives on the balance sheet at fair value.
On the date the derivative instrument is entered into, the Company
generally designates the derivative as either (1) a hedge of the fair value
of a recognized asset or liability or of an unrecognized firm commitment
("fair value hedge") or (2) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized
asset or liability ("cash flow hedge"). Changes in the fair value of a
derivative that is designated as, and meets all the required criteria for,
a fair value hedge, along with the gain or loss on the hedged asset or
liability that is attributable to the hedged risk, are recorded in current
period earnings. Changes in the fair value of a derivative that is
designated as, and meets all the required criteria for, a cash flow hedge
are recorded in accumulated other comprehensive income and reclassified
into earnings as the underlying hedged item affects earnings. The portion
5
of the change in fair value of a derivative associated with hedge
ineffectiveness or the component of a derivative instrument excluded from
the assessment of hedge effectiveness is recorded currently in earnings.
Also, changes in the entire fair value of a derivative that is not
designated as a hedge are recorded immediately in earnings. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes relating all
derivatives that are designated as fair value or cash flow hedges to
specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions.
The Company also formally assesses, both at the inception of the hedge and
on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values or cash flows of the hedged item. If it
is determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly effective hedge, the Company will
discontinue hedge accounting prospectively.
In October 2001, the Company entered into an interest rate swap with a bank
pursuant to which it exchanged floating rate interest in connection with
the Bonds discussed in Note 3 on a notional amount of $3,000,000 for a
fixed rate of 4.07% for a 10 year period ending October 1, 2011. The
notional amount reduces each year in tandem with the annual installments
due on the Bonds. The fixing of the interest rate for this period offsets
the Company's exposure to the uncertainty of floating interest rates on the
Bonds, and as such has been designated as a cash flow hedge. The hedge is
deemed to be highly effective and any ineffectiveness will be recognized in
interest expense in the reporting period. The market value of the interest
rate swap was immaterial to the consolidated financial statements as of
October 28, 2001. There was no material hedge ineffectiveness related to
cash flow hedges during the period to be recognized in earnings. There was
no gain or loss reclassified from accumulated other comprehensive income
into earnings during the quarter ended October 28, 2001, as a result of the
discontinuance of a cash flow hedge due to the probability of the original
forecasted transaction not occurring.
5. In connection with the plant closings in Anaheim, CA and Nashua, NH, the
Company accrued and charged to expense approximately $406,000 for employee
severance and benefits, and lease termination costs. As of October 28, 2001
the Company paid approximately $13,000 of these costs.
6. In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142 "Goodwill and Other Intangible Assets" which requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
will be reviewed for impairment and written down and charged to results of
operations in the periods in which the recorded value of goodwill and
certain intangibles is more than its fair value. The provisions of this
statement were adopted by the Company on July 30, 2001. The adoption of
SFAS No.142 resulted in the Company's discontinuation of amortization of
its goodwill as of July 30, 2001. In addition, the Company will be required
to test its goodwill for impairment under the new standard as of the
transition date. This will be completed during the second quarter of fiscal
2002, and could have an adverse effect on the Company's future results of
operations if an impairment occurs. Goodwill is carried on the consolidated
balance sheet at October 28, 2001 at approximately $26,302,000.
Amortization of goodwill for the quarter ended October 29, 2000 and for the
fiscal year ended July 29, 2001 was approximately $313,000 and $1,504,000
respectively. Pro-forma net income and earnings per share in connection
with the adoption of SFAS 142 is as follows (in thousands except per share
data):
6
Thirteen weeks ended
--------------------
October 28, 2001 October 29, 2000
---------------- ----------------
Net Income as reported $ 2,295 $ 2,030
Add goodwill amortization, net of
income tax benefit - 204
--------- ------
Adjusted net income $ 2,295 $ 2,234
===== =====
Earnings per common share-basic:
As reported $ .21 $ .23
Goodwill amortization - .02
---- ---
Adjusted $ .21 $ .25
=== ===
Earnings per common share-diluted:
As reported $ .20 $ .20
Goodwill amortization - .02
---- ---
Adjusted $ .20 $ .22
=== ===
Intangibles, consisting of patents having an estimated useful life of
fourteen years, are carried at an aggregate gross amount of $568,000 with
accumulated amortization at October 28, 2001 of $115,000. Amortization
expense for the period ended October 28, 2001 was approximately $11,000.
Estimated annual amortization expense for each of the next five fiscal
years is approximately $41,000.
7. The following table shows the calculation of basic and diluted
weighted-average shares (in thousands except per share data):
Thirteen weeks ended
--------------------
October 28, October 29,
2001 2000
---- ----
Numerator:
Net Income $ 2,295 $ 2,030
====== ======
Denominator:
Basic weighted-average shares 10,695 8,985
Effect of dilutive securities:
Employee stock options and warrants 1,000 1,149
------ ------
Diluted weighted-average shares 11,695 10,134
====== ======
There were no anti-dilutive options and warrants outstanding during the
first quarter of fiscal 2002. Options and warrants to purchase 12,000
shares of common stock, with an exercise price of $13.67 were outstanding
during the first quarter of fiscal 2001 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.
As of December 6, 2001, 11,194,667 shares of common stock were outstanding.
7
8. Supplemental cash flow information is as follows (in thousands):
Thirteen weeks ended
--------------------
October 28, October 29,
2001 2000
---- ----
Cash paid during the period for:
Interest $ 61 $ 70
Income Taxes 202 1,270
Cashless exercise of stock options 7,798 -
Tax benefit related to stock options 4,837 -
8
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
Certain statements contained in this report are "forward_looking statements"
that involve various important assumptions, risks, uncertainties and other
factors which could cause the Company's actual results to differ materially from
those expressed in such forward_looking statements. Forward-looking statements
can be identified by terminology such as "may", "will","should","expects",
"intends","anticipates","believes","estimates","predicts", "continue", or the
negative of these terms or other comparable terminology. 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, general
economic conditions, the events of September 11, 2001, as well as other risks
previously disclosed in the Company's securities filings and press releases.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
performance or achievements. Further, the Company is under no duty to update any
of the forward-looking statements after the date of this quarterly report to
conform such statements to actual results.
Results of Operations
Thirteen weeks ended October 28, 2001 and October 29, 2000
Net sales for the thirteen weeks ended October 28, 2001 were approximately
$23,037,000 compared to $18,094,000 in the first quarter of fiscal 2001. The
sales increase of $4,943,000 (27.3%) is attributable to increased revenue in all
product areas as follows: $1,177,000 from microwave products, $2,120,000 from
microwave systems, and $1,646,000 from commercial products.
The gross profit margin of 33.0% in the thirteen weeks ended October 28, 2001
was lower than the margin of 37.9% in the first quarter of the prior year
primarily due to the mix in volume with lower margins in commercial and
microwave products. Margins have also been impacted by certain inefficiencies at
the Nashua, NH facility, as well as the continued investment in new product
development related to commercial applications.
Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in the amount of $406,000 of which $13,000 was paid as of
October 28, 2001.
Selling and administrative expenses for the thirteen weeks ended October 28,
2001 decreased approximately $57,000 as compared to the first quarter of fiscal
2001. In connection with the adoption of SFAS 142 as of July 30, 2001, the
Company discontinued the amortization of goodwill (See Note 6) which amounted to
$313,000 in the quarter ended October 29, 2000. The net increase of $256,000 is
primarily attributable to increased personnel and related costs.
Liquidity and Capital Resources
As of October 28, 2001 and July 29, 2001, working capital was $52,391,000 and
$46,804,000, respectively, and the ratio of current assets to current
liabilities was 3.39 to 1 and 3.50 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 $1,412,000 at October 28, 2001, and $261,000 at July 29, 2001.
Net cash provided by operations during the period was approximately $3,672,000
as compared to $636,000 in the prior fiscal year. Significant changes
contributing to the increase include higher collections of accounts receivable
of $3,240,000, increases in advanced payments on contracts of $1,151,000, and a
net change of $890,000 in income taxes. Offsetting these increases are
additional costs incurred on uncompleted contracts of $1,697,000, and an
9
increase in inventory of $1,819,000.
Net cash used in investing activities consists of the investment of unexpended
cash of approximately $1,910,000 from the industrial revenue bond funding, and
$725,000 for capital expenditures.
The Company maintains a revolving credit facility with a bank for an aggregate
of $30,000,000, as amended in February 2001, which expires January 31, 2003.
There were no borrowings outstanding as of October 28, 2001 and July 29, 2001.
During the period ended October 28, 2001, the Company received proceeds of
$3,000,000 from the issuance of industrial revenue bonds in connection with the
financing of the plant expansion in Lancaster PA, and received approximately
$1,600,000 from the exercise of common stock options by employees.
At October 28, 2001, the Company had cash and cash equivalents of approximately
$18,615,000.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.
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. In October 2001, the Company entered into an interest rate
swap with a bank pursuant to which it exchanged floating rate interest in
connection with the Bonds discussed in Note 3 on a notional amount of $3,000,000
for a fixed rate of 4.07% for a 10 year period ending October 1, 2011. The
notional amount reduces each year in tandem with the annual installments due on
the Bonds. The fixing of the interest rate for this period offsets the Company's
exposure to the uncertainty of floating interest rates on the Bonds, and as such
has been designated as a cash flow hedge. The hedge is deemed to be highly
effective and any ineffectiveness will be recognized in interest expense in the
reporting period. The market value of the interest rate swap was immaterial to
the consolidated financial statements as of October 28, 2001. There was no
material hedge ineffectiveness related to cash flow hedges during the period to
be recognized in earnings. There was no gain or loss reclassified from
accumulated other comprehensive income into earnings during the quarter ended
October 28, 2001, as a result of the discontinuance of a cash flow hedge due to
the probability of the original forecasted transaction not occurring.
The Company has not entered into any market risk sensitive instruments for
trading purposes.
10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben
Robinson ("Robinson") filed an amended complaint against the Company
in the United States District Court for the Eastern District of New
York. The core allegations are (i) that the Company has not issued
146,761 (as adjusted) shares of common stock in connection with
certain earn out requirements contained in an asset purchase agreement
dated February 1, 2000; (ii) that the Company breached an employment
agreement with Robinson by terminating his employment in August 2001;
and (iii) that the Company breached a stock option agreement dated
January 31, 2000 with Robinson. On September 17, 2001, the Company
filed an answer and affirmative defenses and counterclaims in this
matter denying the material allegations of the amended complaint. The
Company also filed counterclaims against both RLI and Robinson. In
these counterclaims, the Company's core allegations concern Robinson's
misconduct (i) in connection with the manner he attempted to satisfy
RLI's earn out requirements; (ii) misrepresentations made in
connection with the asset purchase agreement; (iii) wrongdoing as a
Company employee leading to his termination; and (iv) post- Company
employment wrongdoing in connection with a new company. In addition to
seeking a declaratory judgment, the Company also asserted claims for,
among other things, fraud, breach of contract, breach of fiduciary
duty, unfair competition and tortious interference with actual and
prospective contractual relationships. The parties are now engaged in
discovery and expect a trial date in 2002. The Company believes that
it has meritorious defenses to this action.
ITEM 2 - CHANGES IN SECURITIES:
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5 - OTHER INFORMATION:
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of fiscal
2001.
11
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 11, 2001
12