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: April 28, 2002
--------------
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
--------------
--------------------------------------------------------------
(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, 2002 - 14,670,010 shares of Common Stock.
The accompanying unaudited consolidated financial statements have not been
reviewed by an independent public accountant in accordance with professional
standards under SAS 71 for conducting such reviews since the Company was unable
to obtain these services from its previous auditors, Arthur Andersen LLP. The
unaudited consolidated financial statements, included herein, will be reviewed
by independent public accountants concurrently with the Form 10-K for the
fiscal year ending July 28, 2002.
HERLEY INDUSTRIES, INC
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
----------------------- ----
Item 1 - Financial Statements:
Consolidated Balance Sheets -
April 28, 2002 and July 29, 2001 2
Consolidated Statements of Income -
For the thirteen and thirty-nine weeks ended
April 28, 2002 and April 29, 2001 3
Consolidated Statements of Cash Flows -
For the thirty-nine weeks ended
April 28, 2002 and April 29, 2001 4
Notes to Consolidated Financial Statements 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15
PART II -OTHER INFORMATION 16
Signatures 18
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
April 28, July 29,
2002 2001
-------- --------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 13,329 $ 13,041
Accounts receivable 15,796 16,069
Costs incurred and income recognized in excess
of billings on uncompleted contracts 6,670 541
Other receivables 604 160
Inventories 34,614 31,397
Prepaid income taxes 2,244 --
Assets held for sale -- 2,370
Deferred taxes and other 2,701 1,958
-------- --------
Total Current Assets 75,958 65,536
Property, Plant and Equipment, net 23,284 21,312
Unexpended industrial revenue bond proceeds 353 --
Goodwill 21,665 26,302
Intangibles, net of amortization of $135 in 2002
and $104 in 2001 433 464
Available-For-Sale Securities 146 146
Other Investments 253 773
Other Assets 597 64
-------- --------
$122,689 $114,597
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 216 $ 213
Accounts payable and accrued expenses 13,333 15,304
Billings in excess of costs incurred and
income recognized on uncompleted contracts -- 531
Income taxes payable -- 1,061
Reserve for contract losses 481 472
Advance payments on contracts 1,486 261
Liabilities held for sale -- 890
-------- --------
Total Current Liabilities 15,516 18,732
Long-term Debt 5,565 2,740
Deferred Income Taxes 4,452 4,452
-------- --------
25,533 25,924
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
11,642,210 at April 28, 2002 and
10,537,289 at July 29, 2001 1,164 1,054
Additional paid-in capital 51,657 45,250
Retained earnings 44,335 42,369
-------- --------
Total Shareholders' Equity 97,156 88,673
-------- --------
$122,689 $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 Thirty-nine weeks ended
-------------------- -----------------------
April 28, April 29, April 28, April 29,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $ 23,499 $ 18,987 $ 67,552 $ 53,810
-------- -------- -------- --------
Cost and expenses:
Cost of products sold 15,176 12,409 44,554 34,737
Selling and administrative expenses 4,214 4,119 11,247 11,179
Plant closing costs -- -- 406 --
-------- -------- -------- --------
19,390 16,528 56,207 45,916
-------- -------- -------- --------
Income from operations 4,109 2,459 11,345 7,894
Other income (expense), net (31) 152 55 319
-------- -------- -------- --------
Income from continuing operations
before income taxes 4,078 2,611 11,400 8,213
Provision for income taxes 1,386 890 3,876 2,823
-------- -------- -------- --------
Income from continuing operations 2,692 1,721 7,524 5,390
Loss from discontinued operations
(including loss on sale of net assets
of $1,166 in 2002) net of income taxes -- (47) (921) (82)
-------- -------- -------- --------
Income before cumulative effect of change
in accounting principle 2,692 1,674 6,603 5,308
Cumulative effect of adopting SFAS 142 -- -- (4,637) --
-------- -------- -------- --------
Net income $ 2,692 $ 1,674 $ 1,966 $ 5,308
======== ======== ======== ========
Earnings (loss) per common share - Basic
Income from continuing operations $ .23 $ .16 $ .67 $ .54
Loss from discontinued operations -- -- (.08) --
Cumulative effect of adopting SFAS 142 -- -- (.42) --
-------- -------- -------- --------
Net earnings $ .23 $ .16 $ .18 $ .53
======== ======== ======== ========
Basic weighted average shares 11,559 10,530 11,164 9,926
======== ======== ======== ========
Earnings (loss) per common share - Diluted
Income from continuing operations $ .22 $ .16 $ .62 $ .49
Loss from discontinued operations -- -- (.08) --
Cumulative effect of adopting SFAS 142 -- -- (.38) --
-------- -------- -------- --------
Net earnings $ .22 $ .15 $ .16 $ .49
======== ======== ======== ========
Diluted weighted average shares 12,495 11,045 12,099 10,889
======== ======== ======== ========
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)
Thirty-nine weeks ended
-----------------------
April 28, April 29,
2002 2001
-------- --------
Cash flows from operating activities:
Income from continuing operations $ 7,524 $ 5,390
-------- --------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 2,885 3,393
Loss on sale of fixed assets 68 --
Equity in income of limited partnership (52) (44)
(Increase) decrease in deferred tax assets (743) 39
(Decrease) in deferred tax liabilities -- (120)
Changes in operating assets and liabilities:
Decrease in accounts receivable 273 193
(Increase) decrease in costs incurred and income recognized
in excess of billings on uncompleted contracts (6,129) 146
(Increase) decrease in other receivables (444) 184
(Increase) in inventories (3,217) (5,909)
Decrease in prepaid expenses and other -- 55
Increase in accounts payable and accrued expenses 1,029 556
(Decrease) increase in billings in excess of costs incurred and
income recognized on uncompleted contracts (531) 129
Increase (decrease) in income taxes payable 3,405 (404)
Increase (decrease) in reserve for contract losses 9 (591)
Increase (decrease) in advance payments on contracts 1,225 (576)
Other, net (108) (11)
-------- --------
Total adjustments (2,330) (2,960)
-------- --------
Net cash provided by operating activities 5,194 2,430
-------- --------
Cash flows from investing activities:
Investment of unexpended industrial revenue bond proceeds (353) --
Investment in technology license (500) --
Acquisition of businesses, net of cash acquired -- (8,373)
Proceeds from sale of fixed assets -- 16
Payment of deferred purchase price of acquired business (3,000) --
Partial distribution from limited partnership 573 --
Capital expenditures (4,819) (2,098)
-------- --------
Net cash used in investing activities (8,099) (10,455)
-------- --------
Cash flows from financing activities:
Borrowings under bank line of credit 4,300 2,941
Proceeds from industrial revenue bond financing 3,000 --
Proceeds from exercise of stock options and warrants 3,654 15,980
Payments under lines of credit (4,300) (2,700)
Payments of long-term debt (172) (1,082)
Purchase of treasury stock (3,848) (194)
-------- --------
Net cash provided by financing activities 2,634 14,945
-------- --------
Net cash provided by (used in) discontinued operations 559 (1,569)
-------- --------
Net increase in cash and cash equivalents 288 5,351
Cash and cash equivalents at beginning of period 13,041 7,665
-------- --------
Cash and cash equivalents at end of period $ 13,329 $ 13,016
======== ========
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 accompanying unaudited consolidated financial statements have not been
reviewed by an independent public accountant in accordance with
professional standards under SAS 71 for conducting such reviews since the
Company was unable to obtain these services from its previous auditors,
Arthur Andersen LLP. The unaudited consolidated financial statements,
included herein, will be reviewed by independent public accountants
concurrently with the Form 10-K for the fiscal year ending July 28, 2002.
2. 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.
On August 7, 2001 the Board of Directors declared a 3-for-2 stock split
effected as a stock dividend payable September 10, 2001. All share and per
share data included in this quarterly report have been restated to reflect
the stock split. Due to rounding differences, earnings per share for the
quarter and cumulatively for the year to date may differ in total.
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.
3. 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 which was 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. The targeted gross revenues under the agreement were not achieved,
therefore no addition cash payments are required.
In August 2001, the FASB issued SFAS No 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment of long-lived assets and for long- lived
assets to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of by
sale. SFAS 144 also supersedes the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of, but retains the requirement of Opinion 30 to
report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, by abandonment, or in a distribution to owners) or is
classified as held for sale. The provisions of this statement were adopted
by the Company effective on July 30, 2001.
5
In January 2002 the Board of Directors of the Company determined that
Terrasat would no longer be able to generate sufficient returns to justify
continued investment due to the overcapacity in the telecom industry and
deteriorating economic conditions in Terrasat's primary markets and
therefore decided to discontinue the operations of Terrasat and to seek a
purchaser for the business. Consequently, the accompanying consolidated
financial statements reflect Terrasat as discontinued operations in
accordance with SFAS No. 144. Accordingly, the consolidated balance sheet
includes certain assets and liabilities of Terrasat at July 29, 2001 as
"Assets held for sale", and "Liabilities held for sale", and the
consolidated statement of income includes the results of Terrasat
operations from July 30, 2001 to April 28, 2002 as "Loss from discontinued
operations". Cash flows of Terrasat have been classified as "Net cash
provided by (used in) discontinued operations".
The sale of certain assets and liabilities, and the business of Terrasat
was consummated on March 1, 2002, effective the close of business January
27, 2002, to certain current employees of Terrasat for cash and a note
which approximates the value of the net assets held for sale as of January
27, 2002 of $878,000.
Summarized below are the results of discontinued operations:
Thirteen weeks ended Thirty-nine weeks ended
--------------------- -----------------------
April 28, April 29, April 28, April 29,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ - $ 1,290 $ 2,147 $ 2,883
---- ----- ----- -----
Loss from discontinued operations - (38) (229) (47)
Loss on net assets held for sale - - (1,166) -
Income tax provision (benefit) - 9 (474) 35
---- ----- ----- -----
Net loss from discontinued operations $ - $ (47) $ (921) $ (82)
==== ===== ===== =====
4. 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 was 2.1%, which, after giving effect to a ten year
interest rate swap agreement (See Note 5) becomes a fixed rate of 4.07%.
The interest rate at April 28, 2002 was 1.83%. 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 April 28, 2002. 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.
5. 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
6
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 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 4 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
April 28, 2002. 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 April 28, 2002 as a result of the
discontinuance of a cash flow hedge due to the probability of the original
forecasted transaction not occurring.
6. In connection with the plant closings in Anaheim, CA and Nashua, NH in
October 2001, the Company accrued and charged to expense approximately
$406,000 for employee severance and benefits, and lease termination costs.
As of April 28, 2002 the Company paid approximately $338,000 of these
costs.
7. 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 will not be
amortized into results of operations, but instead will be reviewed for
impairments, which will be charged to results of operations in the periods
in which the recorded value of goodwill 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 connection with the adoption of SFAS 142, the Company was required to
assess goodwill for impairment within six months of adoption, and completed
its assessment in the second quarter of fiscal 2002.
The Company operates as a single integrated business and as such has one
operating segment which is also the reportable segment as defined in SFAS
131. Within the operating segment, the Company has identified two
components as reporting units as defined under SFAS 142, defense
electronics and commercial technologies.
7
The Company has determined the carrying value of each reporting unit by
assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of July 30, 2001. The
Company has determined that an impairment of goodwill in the commercial
technologies unit has occurred. Accordingly, a transition adjustment in the
amount of $4,637,000 has been recorded as of July 30, 2001 as a cumulative
effect of a change in accounting principle. There is no tax benefit
associated with the adjustment since the impaired goodwill is not
deductible for income tax purposes.
There was no impairment in the remaining goodwill at April 28, 2002 of
approximately $21,665,000 related to the defense electronics reporting unit
based on current market capitalization of the Company. An annual impairment
test will be performed in the fourth quarter of each fiscal year and any
future impairment of goodwill will be charged to operations.
Amortization of goodwill charged to continuing operations for the quarter
and thirty-nine weeks ended April 29, 2001 and for the fiscal year ended
July 29, 2001 was approximately $309,000, $911,000 and $1,296,000
respectively. Amortization of goodwill charged to discontinued operations
for the quarter and thirty-nine weeks ended April 29, 2001 and for the
fiscal year ended July 29, 2001 was approximately $63,000, $146,000 and
$208,000 respectively. Pro-forma net income (loss) and earnings (loss) per
share in connection with the adoption of SFAS 142 is as follows (in
thousands except per share data):
Income from continuing operations:
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
April 28, April 29, April 28, April 29,
2002 2001 2002 2001
---- ---- ---- ----
Income from continuing operations
as reported $ 2,692 $ 1,721 $ 7,524 $ 5,390
Add goodwill amortization, net of
income tax benefit - 201 - 592
----- ----- ----- -----
Adjusted income from continuing
operations $ 2,692 $ 1,922 $ 7,524 $ 5,982
===== ===== ===== =====
Earnings per common share-basic:
From continuing operations as reported $ .23 $ .16 $ .67 $ .54
Goodwill amortization - .02 - .06
--- --- --- ---
Adjusted $ .23 $ .18 $ .67 $ .60
=== === === ===
Earnings per common share-diluted:
From continuing operations as reported $ .22 $ .16 $ .62 $ .49
Goodwill amortization - .02 - .05
--- --- --- ---
Adjusted $ .22 $ .17 $ .62 $ .55
=== === === ===
8
Net income :
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
April 28, April 29, April 28, April 29,
2002 2001 2002 2001
---- ---- ---- ----
Net income as reported $ 2,692 $ 1,674 $ 1,966 $ 5,308
Add goodwill amortization, net of
income tax benefit - 242 - 694
----- ----- ----- -----
Adjusted net income $ 2,692 $ 1,916 $ 1,966 $ 6,002
===== ===== ===== =====
Earnings per common share-basic:
As reported $ .23 $ .16 $ .18 $ .53
Goodwill amortization - .02 - .07
--- --- --- ---
Adjusted $ .23 $ .18 $ .18 $ .60
=== === === ===
Earnings per common share-diluted:
As reported $ .22 $ .15 $ .16 $ .49
Goodwill amortization - .02 - .06
--- --- --- ---
Adjusted $ .22 $ .17 $ .16 $ .55
=== === === ===
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 April 28, 2002 of $135,000. Amortization
expense for the thirty-nine weeks ended April 28, 2002 was approximately
$31,000. Estimated annual amortization expense for each of the next five
fiscal years is approximately $41,000.
8. The following table shows the calculation of basic and diluted
weighted-average shares outstanding (in thousands except per share data):
Thirteen weeks ended
--------------------
April 28, 2002 April 29, 2001
-------------- --------------
Basic weighted-average shares 11,559 10,530
Effect of dilutive securities:
Employee stock options and warrants 936 515
------ ------
Diluted weighted-average shares 12,495 11,045
====== ======
There were no anti-dilutive options outstanding during the third quarter of
fiscal 2002. Options to purchase 1,587,792 weighted shares of common stock,
with exercise prices ranging from $9.83 to $13.67, were outstanding during
the third 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 stock.
9
Thirty-nine weeks ended
-----------------------
April 28, 2002 April 29, 2001
-------------- --------------
Basic weighted-average shares 11,164 9,926
Effect of dilutive securities:
Employee stock options and warrants 935 963
------ ------
Diluted weighted-average shares 12,099 10,889
====== ======
Options to purchase 3,077 weighted shares of common stock, with an exercise
price of $17.42, were outstanding during the first nine months of fiscal
2002, but were not included in the computation of diluted EPS because the
exercise price is greater than the average market price of the common
stock. The options, which expire February 4, 2007, were still outstanding
as of April 28, 2002. Options to purchase 353,500 weighted shares of common
stock, with exercise prices ranging from $11.83 to $13.67, were outstanding
during the first nine months 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 stock.
As of June 7, 2002, 14,670,010 shares of common stock were outstanding.
9. Supplemental cash flow information is as follows (in thousands):
Thirty-nine weeks ended
-----------------------
April 28, 2002 April 29, 2001
-------------- --------------
Cash paid during the period for:
Interest $ 232 $ 224
Income Taxes 475 3,333
Cashless exercise of stock options 8,026 -
Tax benefit related to stock options 6,710 -
10. On April 30, 2002 the Company completed the sale of 3,000,000 shares of
common stock to the public at $23.00 per share and received approximately
$64,830,000 in net proceeds.
10
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, a large percentage of sales are under government
contracts, cost overruns under fixed price contracts, doing business in foreign
markets, customer concentration, competitive factors and pricing pressures,
effective integration of acquired businesses, management of future growth,
recruiting and retaining qualified technical personnel, 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 April 28, 2002 and April 29, 2001
- ------------------------------------------------------
Net sales from continuing operations for the thirteen weeks ended April 28, 2002
were approximately $23,499,000 compared to $18,987,000 in the third quarter of
fiscal 2001. The sales increase of $4,512,000 (23.8%) is attributable to
increased revenue in defense electronics of $6,189,000; offset by a decrease of
$1,677,000 in commercial technologies.
The gross profit margin of 35.4% in the thirteen weeks ended April 28, 2002
exceeded the margin of 34.6% in the third quarter of the prior year primarily
due to a change in product mix as well as operating efficiencies associated with
plant closings in October 2001.
Selling and administrative expenses for the thirteen weeks ended April 28, 2002
were 17.9% of net sales as compared to 21.7% in the third quarter of fiscal
2001. In connection with the adoption of SFAS 142 as of July 30, 2001, the
Company ceased amortization of goodwill (See Note 7) which amounted to $372,000
in the quarter ended April 29, 2001, of which $63,000 is included in
discontinued operations. Other significant changes include an increase in legal
fees of approximately $440,000 primarily related to the Robinson Labs
litigation, incentive compensation under employment contracts of $314,000, and
net reductions in payroll and related costs of $380,000.
Investment income decreased approximately $111,000 from the prior year third
quarter primarily due to lower interest rates earned on temporary investments of
cash reserves, as well as the partial liquidation of the investment in the
limited partnership. Interest expense increased approximately $72,000 as
compared to the third quarter of fiscal 2001 due to the $3,000,000 financing of
the expansion of the Lancaster facility through industrial revenue bonds and
interest on temporary borrowings of $4,300,000 under the bank line of credit.
Thirty-nine weeks ended April 28, 2002 and April 29, 2001
- ---------------------------------------------------------
Net sales from continuing operations for the thirty-nine weeks ended April 28,
2002 were approximately $67,552,000 compared to $53,810,000 in the first nine
months of fiscal 2001. The sales increase of $13,742,000 (25.5%) is
11
attributable to increased revenue in defense electronics of $14,286,000; offset
by a decrease of $544,000 in commercial technologies.
The gross profit margin of 34.0% in the thirty-nine weeks ended April 28, 2002
was lower than the margin of 35.4% in fiscal 2001 primarily due to the
investment in new product development in the Company's defense electronics
business and to product mix.
Selling and administrative expenses for the thirty-nine weeks ended April 28,
2002 were 16.6% of net sales as compared to 20.8% in fiscal 2001. In connection
with the adoption of SFAS 142 as of July 30, 2001, the Company ceased
amortization of goodwill (See Note 7) which amounted to $1,057,000 in the
thirty-nine weeks ended April 29, 2001, of which $146,000 is included in
discontinued operations. Other significant changes include an increase in legal
fees of approximately $880,000 primarily related to the Robinson Labs
litigation, incentive compensation under employment contracts of $394,000, and
net reductions in payroll and related costs of $562,000.
Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which $338,000 was
paid as of April 28, 2002.
Investment income decreased approximately $133,000 from the prior year primarily
due to lower interest rates earned on temporary investments of cash reserves, as
well as the partial liquidation of the investment in the limited partnership.
Interest expense increased approximately $131,000 as compared to fiscal 2001 due
to the $3,000,000 financing of the expansion of the Lancaster facility through
industrial revenue bonds and interest on temporary borrowings of $4,300,000
under the bank line of credit.
Change in accounting principle
- ------------------------------
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 will not be amortized
into results of operations, but instead will be reviewed for impairments which
will be charged to results of operations in the periods in which the recorded
value of goodwill 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.
Amortization of goodwill charged to continuing operations for the quarter and
thirty-nine weeks ended April 29, 2001 and for the fiscal year ended July 29,
2001 was approximately $309,000, $911,000 and $1,296,000 respectively.
Amortization of goodwill charged to discontinued operations for the quarter and
thirty-nine weeks ended April 29, 2001 and for the fiscal year ended July 29,
2001 was approximately $63,000, $146,000 and $208,000 respectively.
Liquidity and Capital Resources
- -------------------------------
As of April 28, 2002 and July 29, 2001, working capital was $60,442,000 and
$46,804,000, respectively, and the ratio of current assets to current
liabilities was 4.90 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 $1,486,000 at April 28, 2002, and $261,000 at July 29, 2001.
Net cash provided by continuing operations during the thirty-nine weeks ended
April 28, 2002 was approximately $5,194,000 as compared to $2,430,000 during the
comparable period in the prior year. Significant items contributing
12
to the sources of funds include income from operations of $10,409,000 (adjusted
for depreciation and amortization), increases in accounts payable and accrued
expenses of $1,029,000, income taxes of $3,405,000, and advanced payments on
contracts of $1,225,000. Offsetting these increases are an increase in costs
incurred and income recognized in excess of billings on uncompleted contracts of
$6,129,000, and an increase in inventory of $3,217,000.
Net cash used in investing activities consists of the investment of unexpended
proceeds of approximately $353,000 from the industrial revenue bond funding,
$4,819,000 for capital expenditures, $500,000 for a license of certain
technology, and the $3,000,000 deferred payment of the Terrasat purchase price;
offset by a partial distribution from the limited partnership of $573,000.
The Company maintains a revolving credit facility with a bank for an aggregate
of $30,000,000, which expires January 31, 2004. The revolving credit facility
requires the payment of interest only on a monthly basis and payment of the
outstanding principal balance on January 31, 2004. Interest is set at 1.65% over
the FOMC Federal Funds Target Rate ( 3.40% at April 28, 2002). There is a fee of
15 basis points per annum on the unused portion of the credit line in excess of
$20,000,000 payable quarterly. There were no borrowings outstanding as of April
28, 2002 and July 29, 2001. During the thirty-nine weeks ended April 28, 2002,
the Company borrowed and repaid $4,300,000 under the credit facility for working
capital needs. Stand-by letters of credit were outstanding in the amount of
$5,240,000 under the credit facility at April 28, 2002.
During the thirty-nine weeks ended April 28, 2002, 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
$3,654,000 from the exercise of common stock options by employees.
The Company received 206,756 shares of common stock during the period valued at
$3,848,000 in exchange for payroll taxes due from employees upon the exercise of
stock options.
The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds, its existing unsecured credit facility,
and the approximately $64,830,000 net proceeds from the sale of 3,000,000 shares
of common stock to the public on April 30, 2002 (Note 10). At April 28, 2002,
the Company had cash and cash equivalents of approximately $13,329,000. A
significant portion of the Company's revenue for fiscal 2002 will be generated
from its existing backlog of sales orders. The backlog of orders at April 28,
2002 was in excess of $83,000,000. All orders included in backlog are covered by
signed contracts or purchase orders. Nevertheless, contracts involving
government programs may be terminated at the discretion of the government. In
the event of the cancellation of a significant amount of government contracts
included in the Company's backlog, the Company will be required to rely more
heavily on cash reserves and its existing credit facility to fund its
operations. The Company is not aware of any events which are reasonably likely
to result in any cancellation of its government contracts. The Company has
$24,760,000 available under its bank credit facility, net of outstanding
stand-by letters of credit of $5,240,000, and cash reserves at April 30, 2002 of
approximately $79,000,000 including the proceeds from the sale of common stock
to the public. In addition, the Company is negotiating an increase in its
unsecured bank credit facility from $30,000,000 to $50,000,000
Future payments required on long-term debt are as follows (in thousands):
13
Twelve months Industrial Capital
ended Mortgage revenue lease
April Total note bonds obligations
----- ----- ---- ----- -----------
2003 $ 216 $ 79 $ 95 $ 42
2004 214 84 100 30
2005 197 92 105 -
2006 209 99 110 -
2007 221 106 115 -
Future 4,724 2,249 2,475 -
----- ----- ----- ----
$ 5,781 $ 2,709 $ 3,000 $ 72
===== ===== ===== ====
Stand-by letters of credit expire as follows:
During
fiscal
year Amount
---- ------
2002 $ 266
2003 1,519
2004 3,065
2005 115
2006 275
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
---- ------
2002 $ 333
2003 944
2004 800
2005 777
2006 803
Future 2,572
Critical Accounting Policies
- ----------------------------
Revenue under certain long-term, fixed price contracts is recognized using the
percentage of completion method of accounting. Revenue recognized on these
contracts is based on estimated completion to date (the total contract amount
multiplied by percent of performance, based on total costs incurred in relation
to total estimated cost at completion). Prospective losses on long-term
contracts are based upon the anticipated excess of inventoriable manufacturing
costs over the selling price of the remaining units to be delivered and are
recorded when first reasonably determinable. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance. Actual losses could differ from those estimated due to changes in
the ultimate manufacturing costs. Risks and uncertainties inherent in the
estimation process could affect the amounts reported in our financial
statements. The key assumptions used in the estimate of costs to complete relate
to labor costs and
14
indirect costs required to complete the contract. The estimate of rates and
hours as well as the application of overhead costs is reviewed on a regular
basis. If our business conditions were different, or if we used different
assumptions in the application of this and other accounting policies, it is
likely that materially different amounts would be reported on our financial
statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in interest rates.
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 4 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 April 28, 2002. 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 April 28,
2002, 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.
15
PART II - OTHER INFORMATION
-----------------
ITEM 1 - LEGAL PROCEEDINGS:
In August 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson filed an
amended complaint against the Company in the United States District Court for
the Eastern District of New York. The Company acquired substantially all of the
assets of RLI by Agreement dated February 1, 2000. The core allegations in the
Amended Complaint are (1) that the Company has not issued certain shares of
common stock in connection with certain earn out requirements contained in an
asset purchase agreement dated February 1, 2000; (2) that the Company breached
an employment agreement with Robinson by terminating his employment; and (3)
that the Company breached a stock option agreement with Robinson. In September
2001, the Company filed an answer, 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 in
connection with (1) the manner he attempted to satisfy Robinson Laboratories'
earn out requirements; (2) misrepresentations made in connection with the asset
purchase agreement; (3) wrongdoing as an employee leading to his termination;
and (4) post-employment wrongdoing in connection with a new company. In addition
to seeking a declaratory judgment, the Company has 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. Both parties filed Motions for Summary Judgment on certain
claims, and are awaiting rulings by the Court. The trial is scheduled to begin
on July 22, 2002. We believe that we have meritorious defenses to this action.
On March 12, 2002, Titan Wireless Inc. ("Titan") filed a complaint in the
California Superior Court for San Diego County against Robinson Laboratories
Inc., Robinson Satellite Communications, Ben Robinson and the Company. On or
about April 13, 2002, the Company removed the action to the United States
District Court for the Southern District of California where the action is
presently pending. The Complaint seeks damages for breach of contract and breach
of warranty relating to allegedly defective low noise amplifiers primarily sold
by Robinson Laboratories and/or Robinson Satellite Communications prior to the
Company's purchase of Robinson Laboratories' assets in February 2000. Titan also
contends that the Company has assumed liability for these alleged breaches. On
May 9, 2002 the Company filed an Answer, Affirmative Defenses and Crossclaims
against Robinson Laboratories, Inc. and Ben Robinson. The Company is vigorously
defending this lawsuit.
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
16
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 third quarter of fiscal
2002.
17
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, Chief Executive Officer
BY: /S/ Anello C. Garefino
-----------------------------------
Anello C. Garefino
Principal Financial Officer
DATE: June 11, 2002
18