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: January 27, 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 March 1, 2002 - 11,521,765 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 -
January 27, 2002 and July 29, 2001 2
Consolidated Statements of Income -
For the thirteen and twenty-six weeks ended
January 27, 2002 and January 28, 2001 3
Consolidated Statements of Cash Flows -
For the twenty-six weeks ended
January 27, 2002 and January 28, 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)
January 27, July 29,
2002 2001
--------------- ----------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 13,381 $ 13,041
Accounts receivable 12,865 16,069
Costs incurred and income recognized in excess
of billings on uncompleted contracts 5,864 541
Other receivables 143 160
Inventories 32,633 31,397
Prepaid income taxes 2,853 -
Assets held for sale 1,374 2,370
Deferred taxes and other 2,270 1,958
---------- ----------
Total Current Assets 71,383 65,536
Property, Plant and Equipment, net 21,905 21,312
Unexpended industrial revenue bond proceeds 1,156 -
Goodwill 21,665 26,302
Intangibles, net of amortization of $125 in 2002
and $104 in 2001 443 464
Available-For-Sale Securities 146 146
Other Investments 368 773
Other Assets 625 64
---------- ----------
$ 117,691 $ 114,597
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 258 $ 213
Accounts payable and accrued expenses 11,413 15,304
Billings in excess of costs incurred and
income recognized on uncompleted contracts 983 531
Income taxes payable - 1,061
Reserve for contract losses 482 472
Advance payments on contracts 1,498 261
Liabilities held for sale 496 890
---------- ----------
Total Current Liabilities 15,130 18,732
Long-term Debt 5,596 2,740
Deferred Income Taxes 4,452 4,452
---------- ----------
25,178 25,924
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
11,431,865 at January 27, 2002 and
10,537,289 at July 29, 2001 1,143 1,054
Additional paid-in capital 49,727 45,250
Retained earnings 41,643 42,369
---------- ----------
Total Shareholders' Equity 92,513 88,673
---------- ----------
$ 117,691 $ 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 Twenty-six weeks ended
-------------------- ----------------------
January 27, January 28, January 27, January 28,
2002 2001 2002 2001
------------- ------------- -------------- -------------
Net sales $ 21,840 $ 17,065 $ 44,053 $ 34,823
---------- ---------- ---------- ----------
Cost and expenses:
Cost of products sold 14,804 11,347 29,378 22,328
Selling and administrative expenses 3,470 3,340 7,033 7,060
Plant closing costs - - 406 -
---------- ---------- ---------- ----------
18,274 14,687 36,817 29,388
---------- ---------- ---------- ----------
Income from operations 3,566 2,378 7,236 5,435
Other income, net 7 93 86 167
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 3,573 2,471 7,322 5,602
Provision for income taxes 1,180 844 2,490 1,933
---------- ---------- ---------- ----------
Income from continuing operations 2,393 1,627 4,832 3,669
Loss from discontinued operations
(including loss on net assets held for sale
of $1,166) net of income tax benefit (777) (23) (921) (35)
---------- ---------- ---------- ----------
Income before cumulative effect of change
in accounting principle 1,616 1,604 3,911 3,634
Cumulative effect of adopting SFAS 142 - - (4,637) -
---------- ---------- ---------- ----------
Net income (loss) $ 1,616 $ 1,604 $ (726) $ 3,634
========== ========== ========== ==========
Earnings (loss) per common share - Basic
Income from continuing operations .21 .16 .44 .38
Loss from discontinued operations (.07) - (.08) -
Cumulative effect of adopting SFAS 142 - - (.42) -
---------- ---------- ---------- ----------
Net earnings (loss) $ .14 $ .16 $ (.07) $ .38
========== ========== ========== ==========
Basic weighted average shares 11,238 10,263 10,964 9,624
========== ========== ========== ==========
Earnings (loss) per common share - Diluted
Income from continuing operations .20 .15 .41 .35
Loss from discontinued operations (.06) - (.08) -
Cumulative effect of adopting SFAS 142 - - (.39) -
---------- ---------- ---------- ----------
Net earnings (loss) $ .13 $ .14 $ (.06) $ .34
========== ========== ========== ==========
Diluted weighted average shares 11,986 11,100 11,828 10,632
========== ========== ========== ==========
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)
Twenty-six weeks ended
January 27, January 28,
2002 2001
------------ ------------
Cash flows from operating activities:
Income from continuing operations $ 4,832 $ 3,669
------------ ------------
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation and amortization 1,913 2,171
Equity in income of limited partnership (40) (34)
(Increase) decrease in deferred tax assets (297) 38
(Decrease) in deferred tax liabilities - (120)
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,204 633
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts (5,323) (818)
Decrease in other receivables 17 192
(Increase) in inventories (1,236) (2,895)
(Increase) in prepaid expenses and other (15) (59)
(Decrease) in accounts payable and accrued expenses (3,891) (1,870)
Increase in billings in excess of costs incurred and
income recognized on uncompleted contracts 452 -
Increase (decrease) in income taxes payable 1,828 (648)
Increase (decrease) in reserve for contract losses 10 (171)
Increase in advance payments on contracts 1,237 3
Other, net (111) (14)
------------ ------------
Total adjustments (2,252) (3,592)
------------ ------------
Net cash provided by operating activities 2,580 77
------------ ------------
Cash flows from investing activities:
Investment of unexpended industrial revenue bond proceeds (1,156) -
Investment in technology license (500) -
Acquisition of businesses, net of cash acquired - (8,373)
Partial distribution from limited partnership 445 -
Capital expenditures (2,435) (1,177)
------------ ------------
Net cash used in investing activities (3,646) (9,550)
------------ ------------
Cash flows from financing activities:
Borrowings under bank line of credit 2,400 1,000
Proceeds from industrial revenue bond financing 3,000 -
Proceeds from exercise of stock options and warrants 2,541 15,968
Payments under lines of credit (2,400) (1,000)
Payments of long-term debt (99) (765)
Purchase of treasury stock (3,717) (194)
------------ ------------
Net cash provided by financing activities 1,725 15,009
------------ ------------
Net cash used in discontinued operations (319) (1,220)
------------ ------------
Net increase in cash and cash equivalents 340 4,316
Cash and cash equivalents at beginning of period 13,041 7,665
------------ ------------
Cash and cash equivalents at end of period $ 13,381 $ 11,981
============ ============
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.
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 by one
cent.
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 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.
In January 2002 the Board of Directors of the Company decided to
discontinue the operations of Terrasat and to seek a buyer for the
business. The Company no longer anticipates that Terrasat will 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. Consequently, the accompanying consolidated
financial statements reflect Terrasat as discontinued operations in
accordance with SFAS No. 144. The assets and liabilities of Terrasat have
been classified in the accompanying balance sheet as "Assets held for
sale", and "Liabilities held for sale." Results of operations and cash
5
flows of Terrasat have been classified as discontinued, for all periods
presented.
The following table shows the components of assets and liabilities of
Terrasat held for sale as of January 27, 2002:
Assets held for sale:
Accounts receivable $ 974
Inventory 400
-------
$ 1,374
=======
Liabilities held for sale:
Accounts payable $ 396
Accrued expenses 100
-------
$ 496
=======
The sale of the assets and liabilities, and the business of Terrasat was
consummated on March 1, 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.
Summarized below are the results of discontinued operations:
Thirteen weeks ended Twenty-six weeks ended
--------------------- ----------------------
January 27, January 28, January 27, January 28,
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 1,323 $ 1,257 $ 2,147 $ 1,593
------ ----- ----- -----
Loss from discontinued operations (11) (2) (229) (9)
Loss on net assets held for sale (1,166) - (1,166) -
Income tax provision (benefit) (400) 21 (474) 26
------ ----- ----- -----
Net loss from discontinued operations $ (777) $ (23) $ (921) $ (35)
====== ===== ===== =====
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 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 interest rate at January 27, 2002 was 1.41%. 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 January 27, 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.
6
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
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
January 27, 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 January 27, 2002 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 in
October 2001, the Company accrued and charged to expense approximately
$406,000 for employee severance and benefits, and lease termination costs.
As of January 27, 2002 the Company paid approximately $328,000 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 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.
7
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. 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 January 27, 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 twenty-six weeks ended January 28, 2001 and for the fiscal year ended
July 29, 2001 was approximately $310,000, $602,000 and $1,296,000
respectively. Amortization of goodwill charged to discontinued operations
for the quarter and twenty-six weeks ended January 28, 2001 and for the
fiscal year ended July 29, 2001 was approximately $62,000, $83,000 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 Twenty-six weeks ended
-------------------- ----------------------
January 27, January 28, January 27, January 28,
2002 2001 2002 2001
---- ---- ---- ----
Income from continuing operations
as reported $ 2,393 $ 1,627 $ 4,832 $ 3,669
Add goodwill amortization, net of
income tax benefit - 201 - 391
-------- -------- -------- --------
Adjusted income from continuing
operations $ 2,393 $ 1,828 $ 4,832 $ 4,060
======== ======== ======== =========
Earnings per common share-basic:
From continuing operations as reported $ .21 $ .16 $ .44 $ .38
Goodwill amortization - .02 - .04
-------- -------- -------- --------
Adjusted $ .21 $ .18 $ .44 $ .42
======== ======== ======== =========
Earnings per common share-diluted:
From continuing operations as reported $ .20 $ .15 $ .41 $ .34
Goodwill amortization - .02 - .04
-------- -------- -------- --------
Adjusted $ .20 $ .16 $ .41 $ .38
-------- -------- -------- --------
8
Net income (loss):
Thirteen weeks ended Twenty-six weeks ended
-------------------- ----------------------
January 27, January 28, January 27, January 28,
2002 2001 2002 2001
---- ---- ---- ----
Net income as reported $ 1,616 $ 1,604 $ (726) $ 3,634
Add goodwill amortization, net of
income tax benefit - 248 - 452
----- ----- ---- -----
Adjusted net income $ 1,616 $ 1,852 $ (726) $ 4,086
===== ===== ==== =====
Earnings per common share-basic:
As reported $ .14 $ .16 $ (.07) $ .38
Goodwill amortization - .02 - .04
--- --- ---- ---
Adjusted $ .14 $ .18 $ (.07) $ .42
=== === ==== ===
Earnings per common share-diluted:
As reported $ .13 $ .14 $ (.06) $ .34
Goodwill amortization - .02 - .04
--- --- ---- ---
Adjusted $ .13 $ .16 $ (.06) $ .38
=== === ==== ===
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 January 27, 2002 of $125,000. Amortization
expense for the twenty-six weeks ended January 27, 2002 was approximately
$21,000. 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 outstanding (in thousands except per share data):
Thirteen weeks ended
--------------------
January 27, 2002 January 28, 2001
---------------- ---------------
Basic weighted-average shares 11,238 10,263
Effect of dilutive securities:
Employee stock options and warrants 748 837
------ ------
Diluted weighted-average shares 11,986 11,100
====== ======
Options to purchase 2,500 shares of common stock, with an exercise price of
$15.90, were outstanding during the second quarter 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 shares. The options,
which expire November 24, 2006, were still outstanding as of January 27,
2002. Options to purchase 93,000 shares of common stock, with exercise
prices ranging from $12.59 to $14.25, were outstanding during the second
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.
9
Twenty-six weeks ended
----------------------
January 27, 2002 January 28, 2001
---------------- ----------------
Basic weighted-average shares 10,964 9,624
Effect of dilutive securities:
Employee stock options and warrants 864 1,008
------ ------
Diluted weighted-average shares 11,828 10,632
====== ======
Options to purchase 2,500 shares of common stock, with an exercise price of
$15.90, were outstanding during the first six 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 shares. The
options, which expire November 24, 2006, were still outstanding as of
January 27, 2002. Options to purchase 68,125 shares of common stock, with
exercise prices ranging from $13.67 to $14.25, were outstanding during the
first six 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 shares.
As of March 1, 2002, 11,521,765 shares of common stock were outstanding.
8. Supplemental cash flow information is as follows (in thousands):
Twenty-six weeks ended
----------------------
January 27, 2002 January 28, 2001
---------------- ----------------
Cash paid during the period for:
Interest $ 143 $ 161
Income Taxes 309 2,733
Cashless exercise of stock options 7,867 47
Tax benefit related to stock options 5,742 161
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 January 27, 2002 and January 28, 2001
- ----------------------------------------------------------
Net sales from continuing operations for the thirteen weeks ended January 27,
2002 were approximately $21,840,000 compared to $17,065,000 in the second
quarter of fiscal 2001. The sales increase of $4,775,000 (28.0%) is attributable
to increased revenue in defense electronics of $4,800,000; offset by a decrease
of $25,000 in commercial technologies.
The gross profit margin of 32.2% in the thirteen weeks ended January 27, 2002
was lower than the margin of 33.5% in the second quarter of the prior year
primarily due to the continued investment in new product development in the
Company's defense electronics business and a change in product mix.
Selling and administrative expenses for the thirteen weeks ended January 27,
2002 increased approximately $130,000 as compared to the second 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 6) which amounted to
$372,000 in the quarter ended January 28, 2001, of which $62,000 is included in
discontinued operations. Other changes include an increase in legal fees of
$346,000 and net changes in payroll and related costs of $94,000.
Investment income decreased approximately $41,000 from the prior year second
quarter primarily due to lower interest earned on temporary investments of
excess cash. Interest expense increased approximately $45,000 as compared to the
second quarter of fiscal 2001 due to the $3,000,000 financing of the expansion
of the Lancaster facility through industrial revenue bonds and temporary
borrowings of $2,400,000 under the bank line of credit.
Twenty-six weeks ended January 27, 2002 and January 28, 2001
- ------------------------------------------------------------
Net sales from continuing operations for the twenty-six weeks ended January 27,
2002 were approximately $44,053,000 compared to $34,823,000 in the first six
months of fiscal 2001. The sales increase of $9,230,000 (26.5%) is attributable
to increased revenue in defense electronics of $8,097,000; and increased revenue
of $1,133,000 in commercial technologies.
11
The gross profit margin of 33.3% in the twenty-six weeks ended January 27, 2002
was lower than the margin of 35.9% in fiscal 2001 primarily due to the continued
investment in new product development in the Company's defense electronics
business and a change in product mix.
Selling and administrative expenses for the twenty-six weeks ended January 27,
2002 decreased approximately $27,000 in the aggregate as compared to fiscal
2001. In connection with the adoption of SFAS 142 as of July 30, 2001, the
Company ceased amortization of goodwill (See Note 6) which amounted to $685,000
in the twenty-six weeks ended January 28, 2001, of which $83,000 is included in
discontinued operations. Other changes include an increase in legal fees of
$440,000, a net increase in payroll related expenses of $56,000 and various
other changes of $79,000.
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 $328,000 was
paid as of January 27, 2002.
Investment income decreased approximately $22,000 from the prior year primarily
due to lower interest earned on temporary investments of excess cash. Interest
expense increased approximately $59,000 as compared to fiscal 2001 due to the
$3,000,000 financing of the expansion of the Lancaster facility through
industrial revenue bonds and temporary borrowings of $2,400,000 under the bank
line of credit.
Discontinued operations
- -----------------------
In January 2002 the Board of Directors of the Company decided to discontinue the
operations of the Company's telecommunications subsidiary, Terrasat, Inc. and to
seek a buyer for the business. The Company no longer anticipates that Terrasat
will 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. The sale of the assets and
liabilities, and the business of Terrasat was consummated on March 1, 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.
Net sales of Terrasat were approximately $1,323,000 and $1,257,000 for the
thirteen weeks ended January 27, 2002 and January 28, 2001, respectively. The
net loss from discontinued operations was $777,000 in 2002 and $23,000 in 2001.
The results for 2002 includes a loss on net assets held for sale of $1,166,000.
A tax benefit of $400,000 was recognized in 2002, and a tax provision of $21,000
was recorded in 2001.
Net sales of Terrasat were approximately $2,147,000 and $1,593,000 for the
twenty-six weeks ended January 27, 2002 and January 28, 2001, respectively. The
net loss from discontinued operations was $921,000 in 2002 and $35,000 in 2001.
The results for 2002 includes an impairment of assets adjustment of $1,166,000.
A tax benefit of $474,000 was recognized in 2002, and a tax provision of $26,000
was recorded in 2001.
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 and 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.
12
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. 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 January 27, 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
twenty-six weeks ended January 28, 2001 and for the fiscal year ended July 29,
2001 was approximately $310,000, $602,000 and $1,296,000 respectively.
Amortization of goodwill charged to discontinued operations for the quarter and
twenty-six weeks ended January 28, 2001 and for the fiscal year ended July 29,
2001 was approximately $62,000, $83,000 and $208,000 respectively.
Liquidity and Capital Resources
As of January 27, 2002 and July 29, 2001, working capital was $56,253,000 and
$46,804,000, respectively, and the ratio of current assets to current
liabilities was 4.72 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 $1,498,000 at January 27, 2002, and $261,000 at July 29, 2001.
Net cash provided by continuing operations during the period was approximately
$2,080,000 as compared to $77,000 in the prior fiscal year. Significant items
contributing to the sources of funds include income from operations of
$6,745,000 (adjusted for depreciation and amortization), higher collections of
accounts receivable of $3,204,000, increases in advanced payments on contracts
of $1,237,000, and an increase of $1,828,000 in income taxes. Offsetting these
increases are additional costs incurred on uncompleted contracts of $5,323,000,
an increase in inventory of $1,236,000, and a decrease in accounts payable and
accrued expenses of $3,891,000.
Net cash used in investing activities consists of the investment of unexpended
proceeds of approximately $1,156,000 from the industrial revenue bond funding,
$2,435,000 for capital expenditures, and $500,000 for a license of certain
technology; offset by a partial distribution from the limited partnership of
$445,000.
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 ( 3.55% at January 27, 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
January 27, 2002 and July 29, 2001. During the period the Company borrowed and
repaid $2,400,000 under the credit facility for working capital needs. Stand-by
letters of credit were outstanding in the amount of $5,238,000 under the credit
facility at January 27, 2002.
13
During the period ended January 27, 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
$2,541,000 from the exercise of common stock options by employees.
The Company received 201,273 shares of common stock during the period valued at
$3,717,000 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 and existing credit facilities. At
January 27, 2002, the Company had cash and cash equivalents of approximately
$13,381,000. A significant portion of the Company's revenue for fiscal 2002 will
be generated from its existing backlog of sales orders. The adjusted backlog of
orders (to reflect the discontinued business of Terrasat, Inc.) at January 27,
2002 was in excess of $80,000,000. 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 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 $24,762,000 available
under its bank credit facility, net of outstanding stand-by letters of credit of
$5,238,000.
Future payments required on long-term debt are as follows (in thousands):
Twelve months Industrial Capital
ended Mortgage revenue lease
January Total note bonds obligations
------------- ----- -------- ---------- -----------
2003 $ 258 $ 78 $ 95 $ 85
2004 207 83 100 24
2005 204 89 105 10
2006 207 97 110 -
2007 219 104 115 -
Future 4,759 2,284 2,475 -
------ ------ ------ ----
$5,854 $2,735 $3,000 $119
====== ====== ====== ====
Stand-by letters of credit expire as follows:
During
fiscal
year Amount
------ ------
2002 $ 333
2003 1,450
2004 3,065
2005 115
2006 275
14
Minimum annual rentals under noncancellable operating leases are as follows (in
thousands):
During
fiscal
year Amount
------ ------
2002 $ 655
2003 951
2004 807
2005 781
2006 803
Future 2,572
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 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 January 27, 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 January 27,
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. and Ben Robinson filed an
amended complaint against us in the United States District Court for the
Eastern District of New York. The Company acquired Robinson Laboratories in
January 2000. The core allegations 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 and affirmative defenses and counterclaims in this matter denying
the material allegations of the amended complaint. The Company also filed
counterclaims against both Robinson Laboratories and Robinson. In these
counterclaims, the Company's core allegations concern Robinson's misconduct
(1) in connection with the manner he attempted to satisfy Robinson
Laboratories' earn out requirements; (2) misrepresentations made in
connection with the asset purchase agreement; (3) wrongdoing as the
Company's 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 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 this year. 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:
(a) The Registrant held its Annual Meeting of Stockholders on January 10,
2002.
(b) Three directors were elected at the Annual Meeting of Stockholders as
follows:
Class II - To serve until the Annual Meeting of Stockholders in 2004
or until their successors are chosen and qualified:
Name Votes For Votes Withheld
---- --------- --------------
Myron Levy 8,492,775 1,648,417
John A. Thonet 10,100,428 40,764
Dr. Alvin M. Silver 10,108,900 32,292
ITEM 5 - OTHER INFORMATION:
None
16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
10.1 Amendment to Loan Agreement dated February 15, 2001 between
Registrant and Allfirst Bank, successor to The First National
Bank of Maryland.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of fiscal
2001.
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: March 8, 2002
18