-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VOOul6lYfr0HhgZfASfCqv/xrL5Ccf2uhU/qt3jttDKsmj3SsquGqW5x1jlDYbqk mpbG6qlclVbC6cFxZXEkbw== 0001201800-05-000335.txt : 20051213 0001201800-05-000335.hdr.sgml : 20051213 20051213160050 ACCESSION NUMBER: 0001201800-05-000335 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20051030 FILED AS OF DATE: 20051213 DATE AS OF CHANGE: 20051213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERLEY INDUSTRIES INC /NEW CENTRAL INDEX KEY: 0000047035 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 232413500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05411 FILM NUMBER: 051261110 BUSINESS ADDRESS: STREET 1: 101 NORTH POINTE BOULEVARD CITY: LANCASTER STATE: PA ZIP: 17601-4133 BUSINESS PHONE: 7177358117 MAIL ADDRESS: STREET 1: 101 NORTH POINTE BOULEVARD CITY: LANCASTER STATE: PA ZIP: 17601-4133 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY MICROWAVE SYSTEMS INC DATE OF NAME CHANGE: 19900510 FORMER COMPANY: FORMER CONFORMED NAME: HERLEY INDUSTRIES INC DATE OF NAME CHANGE: 19831103 10-Q 1 hrly10q-oct2005.txt 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 quarterly period ended: October 30, 2005 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 (I.R.S. Employer Identification of incorporation or organization) Number) 101 North Pointe Boulevard, Lancaster, Pennsylvania 17601 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (717) 735-8117 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) [ X ] Yes [ ] No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act [ ] Yes [ X ] No As of December 6, 2005 - 14,473,375 shares of Common Stock. HERLEY INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q PAGE ---- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements: Consolidated Balance Sheets - October 30, 2005 and July 31, 2005 2 Consolidated Statements of Income - For the Thirteen weeks ended October 30, 2005 and October 31, 2004 3 Consolidated Statement of Shareholders' Equity- For the Thirteen weeks ended October 30, 2005 4 Consolidated Statements of Cash Flows - For the Thirteen weeks ended October 30, 2005 and October 31, 2004 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17 Item 4 - Controls and Procedures 17 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 6 - Exhibits 18 Signatures 19 Part I - Financial Information Item 1 - Financial Statements HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data)
October 30, July 31, 2005 2005 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents $ 21,165 $ 20,331 Trade accounts receivable 27,695 27,258 Costs incurred and income recognized in excess of billings on uncompleted contracts, including claims 17,415 16,058 Other receivables 1,300 1,414 Inventories, net of allowance of $4,687 in fiscal 2006 and $4,492 in fiscal 2005 56,181 53,668 Deferred taxes and other 3,921 3,782 ---------- ---------- Total Current Assets 127,677 122,511 Property, Plant and Equipment, net 30,023 29,461 Goodwill 70,880 70,831 Intangibles, net of accumulated amortization of $2,127 in fiscal 2006 and $1,680 in fiscal 2005 20,499 20,554 Other Assets 727 744 ---------- ---------- $ 249,806 $ 244,101 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 218 $ 797 Accounts payable and accrued expenses 23,988 24,477 Billings in excess of costs incurred and income recognized on uncompleted contracts 756 538 Income taxes payable 5,225 3,760 Reserve for contract losses 420 630 Advance payments on contracts 4,111 3,966 ---------- ---------- Total Current Liabilities 34,718 34,168 Long-term Debt 4,840 5,000 Other Long-term Liabilities 1,143 1,042 Deferred Income Taxes 6,261 6,254 ---------- ---------- 46,962 46,464 ---------- ---------- Commitments and Contingencies Shareholders' Equity: Common stock, $.10 par value; authorized 20,000,000 shares; issued and outstanding 14,468,875 in fiscal 2006 and 14,389,625 in fiscal 2005 1,447 1,439 Additional paid-in capital 110,302 109,118 Retained earnings 89,907 85,932 Accumulated other comprehensive income 1,188 1,148 ---------- ---------- Total Shareholders' Equity 202,844 197,637 ---------- ---------- $ 249,806 $ 244,101 ========== ========== The accompanying notes are an integral part of these financial statements.
2 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands except per share data)
Thirteen weeks ended October 30, October 31, 2005 2004 ------------- ------------- Net sales $ 41,938 $ 33,590 ------------- ------------- Cost and expenses: Cost of products sold 27,813 22,784 Selling and administrative expenses 8,587 5,802 ------------- ------------- 36,400 28,586 ------------- ------------- Income from operations 5,538 5,004 ------------- ------------- Other income (expense), net Investment income 110 224 Interest expense (83) (79) Foreign exchange gain 113 - ------------- ------------- 140 145 ------------- ------------- Income before income taxes 5,678 5,149 Provision for income taxes 1,703 1,596 ------------- ------------- Net income $ 3,975 $ 3,553 ============= ============= Earnings per common share - Basic $ .28 $ .25 ============= ============= Basic weighted average shares 14,446 14,252 ============= ============= Earnings per common share - Diluted $ .26 $ .24 ============= ============= Diluted weighted average shares 15,240 14,936 ============= ============= The accompanying notes are an integral part of these financial statements.
3 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) Thirteen weeks ended October 30, 2005 (In thousands except share data)
Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Shares Amount Capital Earnings Income Total ------------- -------- --------- --------- ---------------- --------- Balance at July 31, 2005 14,389,625 $ 1,439 109,118 85,932 1,148 $ 197,637 Exercise of stock options 79,250 8 890 898 Stock option compensation 78 78 Tax benefit upon exercise of stock options 216 216 ------------- -------- --------- --------- ----------- --------- Subtotal 14,468,875 1,447 110,302 85,932 1,148 198,829 ------------- -------- --------- --------- ----------- --------- Net income 3,975 3,975 Other comprehensive income, net of tax: Unrealized gain on interest rate swap 12 12 Foreign currency translation gain 28 28 --------- Comprehensive income 4,015 ------------- -------- --------- --------- ----------- --------- Balance at October 30, 2005 14,468,875 $ 1,447 110,302 89,907 1,188 $ 202,844 ============= ======== ========= ========= =========== ========= The accompanying notes are an integral part of these financial statements.
4 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Thirteen weeks ended October 30, October 31, 2005 2004 -------------- -------------- Cash flows from operating activities: Net income $ 3,975 $ 3,553 -------------- -------------- Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,730 1,149 Stock-based compensation expense 78 - Increase in deferred tax assets (30) - Foreign exchange gain (31) - Changes in operating assets and liabilities: (Increase) decrease in trade accounts receivable (437) 4,126 (Increase) decrease in costs incurred and income recognized in excess of billings on uncompleted contracts, and claims (1,357) 175 Decrease (increase) in other receivables 114 (265) Increase in inventories (2,513) (766) Increase in deferred taxes and other (139) (473) Decrease in accounts payable and accrued expenses (489) (60) Increase (decrease) in billings in excess of costs incurred and income recognized on uncompleted contracts 218 (624) Increase in income taxes payable 1,465 1,041 Decrease in accrual for contract losses (210) (327) Increase (decrease) in advance payments on contracts 145 (231) Other, net 123 160 -------------- -------------- Total adjustments (1,333) 3,905 -------------- -------------- Net cash provided by operating activities 2,642 7,458 -------------- -------------- Cash flows from investing activities: Acquisition of businesses, net of cash acquired - (3,753) Acquisition of technology license (375) - Partial distribution from limited partnership - 10 Capital expenditures (1,820) (2,044) -------------- -------------- Net cash used in investing activities (2,195) (5,787) -------------- -------------- Cash flows from financing activities: Borrowings under bank line of credit 4,000 - Proceeds from exercise of stock options 898 559 Payments of long-term debt (727) (727) Payments under bank line of credit (4,000) - Income tax benefit from exercise of stock options 216 200 -------------- -------------- Net cash provided by financing activities 387 32 -------------- -------------- Net increase in cash and cash equivalents 834 1,703 Cash and cash equivalents at beginning of period 20,331 66,181 -------------- -------------- Cash and cash equivalents at end of period $ 21,165 $ 67,884 ============== ============== The accompanying notes are an integral part of these financial statements.
5 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED) 1. Interim Reporting The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results of operations that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto, and the Company's description of critical accounting policies, included in the Company's 2005 Annual Report on Form 10-K/A Amendment 1 for the fiscal year ended July 31, 2005, as filed with the Securities and Exchange Commission. The unaudited consolidated financial statements include the accounts of Herley Industries, Inc. and its wholly-owned subsidiaries, collectively referred to as the "Company." All significant intercompany accounts and transactions have been eliminated. Certain prior period balances have been reclassified to conform to the current period's financial statement presentation. 2. Acquisitions The Company entered into an agreement as of September 1, 2004 to purchase the majority of the assets and assume the majority of the liabilities of Reliable System Services Corporation of Melbourne, Florida for $3,725,000 in cash, plus acquisition costs of approximately $28,000. The results of operations of RSS are included in the consolidated financial statements from September 1, 2004. The Company operates the business as a wholly-owned subsidiary under the name Herley-RSS, Inc. ("RSS"). RSS was acquired by Herley in order to capitalize on its synergies with Herley's other product lines, particularly in "over the horizon" command and control (C2) systems for drones and targets. RSS designs, develops and produces satellite-based command and control systems for prime defense contractors and entities worldwide. The Company entered into an agreement as of February 1, 2005 to acquire all of the capital stock of Micro Systems, Inc. ("MSI"), Fort Walton Beach, Florida for payments of $21,473,328 in cash, plus acquisition costs accrued of approximately $16,000, and the assumption of certain liabilities. The results of operation of MSI are included in the consolidated financial statements from February 1, 2005. MSI was acquired by Herley in order to capitalize on its synergies with Herley's legacy product lines, consolidate operations, addition of engineers and increase its capabilities in the area of control avionics, and target control systems. MSI is a market leader in the design and manufacturing of command and control systems for operation of unmanned aerial, seaborne and ground targets and missiles. The Company entered into an agreement as of April 1, 2005 to acquire all of the capital stock of Innovative Concepts, Inc. ("ICI"), McLean, Virginia for cash payments of $24,378,330, the assumption of certain liabilities, and a cash advance of $3,250,000 for the repayment of debt assumed. The results of operations of ICI are included in the consolidated financial statements from April 1, 2005. ICI was acquired by Herley in order to capitalize on its tactical data link technology for exchange of digital information. ICI has a successful history of developing and providing wireless communications technology and real-time embedded systems, software, hardware and high-speed processing in support of the defense industry. All of the acquisitions completed by the Company are accounted for in accordance with the provisions of SFAS No. 141, "Business Combinations", which requires that all business combinations be accounted for using the purchase method. For the three acquisitions outlined above, the allocation of the aggregate purchase price (net of cash acquired of approximately $1,463,000), based on a review of the fair value of the assets acquired and liabilities assumed, is as follows (in thousands): 6
Acquisition RSS MSI ICI Effective Date September 1, 2004 February 1, 2005 April 1, 2005 --------------- ------------------ ----------------- -------------- Current assets $ 483 $1,534 $8,759 Property, plant and equipment 72 2,038 681 Other assets - 1 - Intangible assets - 4,400 10,200 Goodwill 3,456 15,148 17,189 Current liabilities (258) (2,436) (9,860) -------- -------- -------- Aggregate purchase price $ 3,753 $ 20,685 $ 26,969 ======== ======== ========
The Company's consolidated financial statements reflect preliminary estimates of the fair value of the ICI assets acquired and liabilities assumed and the related allocations of the purchase price. The final determination of the fair value of liabilities assumed and final allocation of the purchase price is expected to be completed no later than the third quarter of fiscal 2006, and may differ from the amounts included in the accompanying consolidated financial statements. Prior to the acquisition of MSI, MSI had leased one of its two buildings in Fort Walton Beach Florida from MSI Investments, a Florida General Partnership. MSI Investments is owned by four individuals, three of whom are currently employees of MSI. This lease has an original term of 15 years, ending December 31, 2012. The lease costs currently are approximately $278,000 on an annual basis, including the tenant's obligation to pay for insurance and property taxes. The base lease rate is adjusted every January for changes in the consumer price index, using 1997 as the base year. 3. Claims on Major Contracts Claims include amounts in excess of the original contract price (as it may be adjusted for approved change orders) that we seek to collect from our customers for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs and are included in estimated revenues when recovery of the amounts is probable and the costs can be reasonably estimated. Claims receivable in the amount of $2.2 million at October 30, 2005 are included in costs incurred and income recognized in excess of billings on uncompleted contracts on the accompanying Consolidated Balance Sheets. 4. Inventories Inventories at October 30, 2005 and July 31, 2005 are summarized as follows (in thousands):
October 30, 2005 July 31, 2005 ---------------- ------------- Purchased parts and raw materials $ 24,741 $ 23,838 Work in process 33,816 32,026 Finished products 2,311 2,296 -------- -------- 60,868 58,160 Less reserve for excess and obsolete materials 4,687 4,492 -------- -------- $ 56,181 $ 53,668 ======== ========
5. Goodwill and Other Intangible Assets The Company adopted the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets" on July 30, 2001. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment and written down and charged to results of operations in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The adoption of SFAS No. 142 resulted in the Company's discontinuation of amortization of its goodwill and certain intangible assets. An annual impairment test is performed in the fourth quarter of each fiscal year and any future impairment of goodwill will be charged to operations. The change in the carrying amount of goodwill for the three months ended October 30, 2005 is as follows (in thousands):
Balance at July 31, 2005 $ 70,831 Foreign currency translation adjustment 49 -------- Balance at October 30, 2005 $ 70,880 ========
7 Intangible Assets consist of the following (in thousands):
October 30, July 31, Estimated 2005 2005 useful life ----------- ---------- ----------- Trademarks (acquired with MSI and ICI) $2,800 $2,800 Indefinite Technology (acquired with EWST and MSI) 12,421 12,421 10-15 years Drawings 800 800 15 years Patents 568 568 14 years Backlog 3,125 3,125 2-5 years Non-compete 31 31 5 years Foreign currency translation adjustment 206 189 ------- ------- 19,951 19,934 Accumulated amortization 2,127 1,680 ------- ------- 17,824 18,254 Technology license (for millimeter wave applications; purchased from Xytrans) 2,675 2,300 (see below) ------- ------- $20,499 $20,554 ======= =======
The Company entered into a license and development agreement ("agreement") on April 7, 2005 to license millimeter wave technology for military applications from Xytrans, Inc. Xytrans focuses on providing high-frequency transceiver and outdoor unit design for the wireless broadband network market. The technology acquired includes exclusive access to a portfolio of patents and trade secrets that improve the cost and performance of millimeter wave subsystems that are used in weapons and radar systems. In January 2005, the Company had made a deposit payment of $1,000,000 in connection with this proposed transaction. The deposit payment was secured by a note receivable, which was cancelled upon execution of the agreement. The agreement provided for an additional payment on execution of $1,000,000, and for certain additional contingent payments, of up to $4,500,000. These contingent payments are subject to achievement of a series of development milestones on a US Government missile program, and / or receipt by the Company of a single contract award using millimeter wave technology valued at a minimum of $6,000,000, amongst other requirements. The agreement also provides for the payment of royalties ranging from 1% to 4% of sales of products including relevant millimeter wave technology, starting at the earliest January 1, 2006, and generally ending 4 years later. In the fourth quarter of fiscal 2005, Xytrans had achieved certain of the development milestones on the missile program discussed above, and the Company made additional contingent payments totaling $300,000. In the first quarter of fiscal 2006, additional contingent payments totaling $375,000 were made by the Company. The investment in this licensed technology of $2,675,000 as of October 30, 2005 is included in the accompanying Consolidated Balance Sheets under the caption "Intangibles." After further development of this technology, and / or at the commencement of sales of products using the millimeter wave technology, the Company will begin to amortize a portion of the costs associated with this agreement against the related revenues, and may allocate some of the value of this technology to the specific patents acquired. In the event that some of the value is allocated to specific patents, then that value would be amortized over the remaining life of the patent. At this point, the portion of this technology investment that should be allocated to any particular patent is not estimatable. The carrying amount of intangibles is reviewed for recoverability when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recovered. Amortization expense for the thirteen weeks ended October 30, 2005 and October 31, 2004 was approximately $447,000 and $95,000, respectively. Estimated aggregate amortization expense for each of the next five fiscal years, is as follows (in thousands):
2006 $ 1,788 2007 1,788 2008 1,782 2009 1,782 2010 1,502
8 6. Product Warranties The Company warrants its products generally for a period of one year. Product warranty costs are accrued based on historical claims expense. Accrued warranty costs are reduced as warranty repair costs are incurred. The following table presents the change in the accrual for product warranty costs for the three months ended October 30, 2005 (in thousands):
Thirteen weeks ended October 30, 2005 October 31, 2004 ---------------- ---------------- Balance at beginning of period $ 799 $ 580 Provision for warranty obligations 141 156 Warranty costs charged to the reserve (164) (155) ------- ------- Balance at end of period $ 776 $ 581 ======- =======
7. Litigation The Company is involved in various legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. See the discussion in Part II, Item 1 - "Legal Proceedings". 8. Comprehensive Income The components of comprehensive income are as follows (in thousands):
Thirteen weeks ended October 30, October 31, 2005 2004 ----------- ------------ Net income $ 3,975 $ 3,553 Unrealized gain (loss) on interest rate swap 12 (34) Foreign currency translation gain 28 115 -------- -------- Comprehensive income $ 4,015 $ 3,634 ======== ========
The components of accumulated other comprehensive income is as follows (in thousands):
October 30, 2005 July 31, 2005 ---------------- ------------- Unrealized loss on interest rate swap $ (43) $ (55) Foreign currency translation gain 1,231 1,203 --------- --------- Accumulated other comprehensive income $ 1,188 $ 1,148 ========= =========
9. Stock-Based Compensation The Company has various fixed stock option plans which are described in Note M of the Company's 2005 Annual Report on Form 10-K/A Amendment 1 that provide for the grant of stock options to eligible employees and directors. Effective August 1, 2005, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard 123R ("SFAS 123R") using the modified prospective application method. This standard requires the Company to measure the cost of employee services received in exchange for equity share options granted based on the grant-date fair value of the options. The cost is recognized as compensation expense over the vesting period of the options. Under the modified prospective application method, compensation cost included in operating expenses in the thirteen weeks ended October 30, 2005 is approximately $78,000 and includes: (a) compensation cost of stock options granted prior to but not yet vested as of August 1, 2005 (based on grant-date fair value estimated in accordance with the provisions of SFAS 123), and (b) compensation cost for all options granted subsequent to July 31, 2005 (based on grant-date fair value estimated in accordance with the new provisions of SFAS 123R). Operating income and income before taxes were reduced by approximately $78,000 for the quarter, while net income was reduced by approximately $55,000, or less than $0.01 per basic and diluted share. Income tax benefits relating to the exercise of stock options during the thirteen weeks ended October 30, 2005 and October 31, 2004 amounting to $216,000 and $200,000, respectively, are classified as a financing cash 9 inflow in the Company's Consolidated Statements of Cash Flows. Prior to the adoption of SFAS 123R the Company presented all income tax benefits related to stock-based compensation as an operating cash inflow. As of October 30, 2005, there were 3,664,780 stock options outstanding. At October 30, 2005, the aggregate value of unvested options, as determined using a Black-Scholes option valuation model was approximately $752,000 (net of estimated forfeitures). During the quarter ended October 30, 2005, the Company granted 10,500 non-qualified stock options, with a fair value of approximately $72,000 (net of estimated forfeitures), and 2,000 options were forfeited. New option grants made after July 31, 2005, as well as option grants issued prior to that date have been valued using a Black-Scholes option valuation model. Prior to adopting SFAS 123R on August 1, 2005, the Company's equity based employee compensation expense under the various stock option plans was accounted for under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under the modified prospective application method, results for prior periods have not been restated to reflect the effects on implementing SFAS 123R. Therefore, for the thirteen weeks ended October 31, 2004, no option based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the underlying common stock price on the date of grant. The following table which is presented for comparative purposes, provides the pro forma information as required by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123," and illustrates the effect on net income and earnings per common share for the period presented as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to stock based employee compensation prior to August 1, 2005:
Thirteen weeks ended October 31, 2004 ---------------- Net income - as reported $ 3,553 Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (180) ----------- Net income - pro forma $ 3,373 =========== Earnings per share - as reported Basic $ .25 Diluted .24 Earnings per share - pro forma Basic $ .24 Diluted .23
The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of stock options issued during the quarter ended October 30, 2005 using the Black-Scholes option valuation model are as follows:
Thirteen weeks ended October 30, October 31, 2005 2004 ---------- ---------- Weighted average fair value of options granted $ 6.86 $ 4.00 Expected life (years) 3.66 3.69 Expected volatility .44 .44 Risk-free interest rate 4.28% 3.80% Expected dividend yield zero zero
The expected life of options granted in the thirteen weeks ended October 30, 2005 and October 31, 2004 was based on the Company's historical share option exercise experience using the historical expected term from vest date. The expected volatility of the options granted is determined using historical volatilities based on historical stock prices. The risk-free interest rate is determined using the yield available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the options. The Company has never paid a dividend, and as such the dividend yield is zero. 10 The following table summarizes the non-qualified stock option activity during the thirteen weeks ended October 30, 2005:
Weighted Aggregate Average Intrinsic Number Price Range Exercise Value (1) of shares per share Price (in thousands) --------- ------------ ---------- -------------- Outstanding July 31, 2005 3,735,530 $4.06 - 20.45 $ 14.41 Granted 10,500 18.57 18.57 Exercised (79,250) 4.31 - 19.83 11.33 $ 683 Cancelled (2,000) 19.83 19.83 40 -------------- ------------------- ------------- Outstanding October 30, 2005 3,664,780 $4.06 - 20.45 $ 14.49 11,394 Exercisable October 30, 2005 3,481,280 $ 11,394 (1) Excludes 1,578,000 vested options with an exercise price greater than the closing stock price of $16.55 as of October 30, 2005.
Options outstanding and exercisable by price range as of October 30, 2005, with expiration dates ranging from April 12, 2006 to May 2, 2015 are as follows:
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------------- Weighted Average Weighted Weighted Range of Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price ------------------ ----------- ---------------- -------------- ----------- -------------- $ 4.06 - 9.30 761,580 3.8 $ 8.41 761,580 $ 8.41 9.54 - 13.10 1,115,500 5.0 11.93 1,115,500 11.93 14.25 - 17.42 46,200 4.6 16.01 46,200 16.01 17.98 - 17.98 873,000 6.8 17.98 700,000 17.98 18.39 - 20.45 868,500 5.4 19.52 858,000 19.53 --------- ---- --------- --------- --------- $ 4.06 - 20.45 3,664,780 5.3 $ 14.49 3,481,280 $ 14.30 ========= =========
As of October 30, 2005, the total future compensation cost related to nonvested options not yet recognized in the consolidated statement of income was approximately $977,000 ($752,000 net of estimated forfeitures) and the weighted average period over which these options are expected to be recognized was 2.5 years. 11 10. Earnings Per Share ("EPS") The following table shows the components used in the calculation of basic earnings per share and earnings per share assuming dilution (in thousands):
Thirteen weeks ended October 30, October 31, 2005 2004 ----------- ----------- Numerator: Net Income $ 3,975 $ 3,553 ========= ========= Denominator: Basic weighted-average shares 14,446 14,252 Effect of dilutive securities: Employee stock options 794 684 --------- --------- Diluted weighted-average shares 15,240 14,936 ========= ========= Stock options not included in computation 969 737 ========= =========
The number of stock options not included in the computation of diluted EPS relates to stock options having exercise prices ranging from $17.98 to $20.45 which are greater than the average market price of the common shares during the period, and therefore, are anti- dilutive. The options, which were outstanding as of October 30, 2005, expire at various dates through February 4, 2015. 11. Geographic Information The Company operates as a single integrated business and as such has one operating segment. Geographic net sales for the first quarter, based on place of contract performance, were as follows (in thousands):
Thirteen weeks ended October 30, October 31, 2005 2004 ------------ ----------- United States $ 37,776 $ 28,696 Israel 3,111 3,034 England 1,051 1,860 -------- --------- $ 41,938 $ 33,590 ======== =========
Net property, plant and equipment by geographic area was as follows (in thousands):
October 30, 2005 July 31, 2005 ---------------- ------------- United States $ 24,711 $ 24,318 Israel 4,617 4,376 England 695 767 -------- -------- $ 30,023 $ 29,461 ======== ========
12 12. Supplemental cash flow information is as follows (in thousands):
Thirteen weeks ended October 30, 2005 October 31, 2004 ---------------- ---------------- Net cash paid during the period for: Interest $ 75 $ 79 Income taxes (112) 98
13. New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 151 "Inventory Costs, an amendment of APB No. 43, Chapter 4" ("SFAS 151.") SFAS 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005. Management adopted this standard on August 1, 2005, and has determined that the adoption of SFAS 151 did not have a material impact on the consolidated financial position, result of operations or cash flows of the Company. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS No 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. Management adopted this standard on August 1, 2005, and has determined that the adoption of SFAS 153 did not have a material impact on the consolidated financial position, result of operations or cash flows of the Company. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123R.") SFAS 123R is effective for publicly-traded companies for interim or annual periods beginning after June 15, 2005, supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Management adopted this standard on August 1, 2005. See Note 9 for a discussion of the impact on the consolidated financial position, result of operations and cash flows of the Company upon adoption of SFAS 123R. In March of 2005, the SEC issued Staff Accounting Bulletin No. 107 "Share-Based Payment," ("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff's views regarding the valuation of share-based payment arrangements. The Company has incorporated SAB 107 in the implementation and adoption of SFAS 123R. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations - An Interpretation of SFAS No. 143." This Interpretation provides additional guidance as to when companies should record the fair value of a liability for a conditional asset retirement obligation when there is uncertainty about the timing and (or) method of settlement of the obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect the adoption of FASB Interpretation No. 47 to have a material impact on its consolidated financial position, results of operations or cash flows. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections" ("SFAS 154.") SFAS 154 replaces APB Opinion No. 20 "Accounting Changes" and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial Statements." SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS 154 also provides that a correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors for fiscal years beginning after December 15, 2005. The Company does not expect that the adoption of SFAS 154 will have a material impact on its consolidated financial position, results of operations or cash flows. 13 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, 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. Business Overview We are a leading supplier of microwave products and systems to defense and aerospace entities worldwide. Our primary customers include large defense prime contractors (including Raytheon, Northrop Grumman, Lockheed Martin and Boeing), the U.S. Government (including the Department of Defense, NASA and other U.S. Government agencies) and international customers (including the German, Japanese, Turkish, British, Norwegian and South Korean militaries, and suppliers to international militaries). We are a leading provider of microwave and selected millimeter wave technologies for use in command and control systems, flight instrumentation, weapons sensors, high power amplifiers, electronic warfare systems, mobile datacom systems, and radar threat and electronic countermeasure simulation systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices and systems for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the F-16 Falcon, the F/A-18E/F Super Hornet, the EA-6B Prowler, the EA-18 Growler, the AH-64D Apache Longbow, AEGIS class destroyers, the AMRAAM missile, unmanned aerial vehicles (UAVs), as well as high priority national security programs such as National Missile Defense and the Trident II D-5 missile. Results of Operations Thirteen weeks ended October 30, 2005 and October 31, 2004 - ---------------------------------------------------------- Net sales for the thirteen weeks ended October 30, 2005 were approximately $41,938,000, as compared to $33,590,000 in the thirteen weeks ended October 31, 2004, an increase of $8.3 million (24.9%). Our two acquisitions completed in the third quarter of fiscal 2005, MSI and ICI, accounted for approximately $9.2 million of net sales for the quarter ended October 30, 2005. We experienced an approximate $900,000 net decrease in net sales at our other operations. Some of the larger changes contributing to this net decrease in Net sales included the following: - -- A decline of $2.2 million at our two US microwave component businesses, principally due to (i) lower shipments at one operation attributable to that facilities' resources being committed to a major electronic warfare upgrade program for the US Navy, and (ii) at the second operation the absence this year of a large contract that accounted for substantial sales in the prior year's first quarter; - -- A decrease of approximately $800,000 in revenues recognized by EWST, our UK subsidiary. During the first quarter of fiscal 2005, EWST had a number of contracts that were at a stage where comparatively higher direct costs were being incurred. As EWST uses the percentage of completion method for revenue recognition, these comparatively higher value/ higher direct cost contracts last year, and the reduced direct costs in the first quarter of fiscal 2006, accounted for the reduction in revenue recognized in the first quarter of fiscal 2006. offset by - -- An increase in sales at CTI of approximately $1.2 million, most of which was attributable to commercial telecom components; and - -- An increase in sales at our Lancaster operation of $1.1 million, which includes $2.2 million in revenue in connection with a claim due to customer delays and changes in specifications and designs under a major program offset by decreases in overall sales volume. 14 The gross profit margin in the thirteen weeks ended October 30, 2005 was 33.7% compared to 32.2% in the first quarter of fiscal 2005, an increase of 1.5%. Excluding the impact of our two acquisitions completed in the third quarter of fiscal 2005 (MSI and ICI), the increase in gross profit margins would have been less. All of the improvement in gross margin in the first quarter of fiscal 2006 is attributable to the favorable impact at our Lancaster operation of the $2.2 million of estimated costs incurred and income recognized in connection with a claim due to customer delays and changes in specification and designs under a major program. Selling and administrative expenses for the thirteen weeks ended October 30, 2005 were 20.5% of net sales as compared to 17.3% in the first quarter of fiscal 2005, an increase approximately $2.8 million. Large increases during the period included: - -- Increases of approximately $2.3 million attributable to our two acquisitions completed in the third quarter of fiscal 2005 (MSI and ICI); - -- An increase of approximately $500,000 attributable to legal costs primarily associated with a continuing investigation by the U.S. Attorneys' office in Pennsylvania which, inter alia, involves pricing under two contracts with the U.S. Department of Defense relating to voltage control oscillators and a contract relating to powerheads. Operating income for the first quarter of fiscal 2006 was $5.5 million or 13.2% of net sales, as compared to $5.0 million or 14.9% of net sales in the prior year. The decrease in operating income as a percentage of net sales is primarily attributable to the 3.2% increase in selling and administrative costs as a percentage of net sales, offset by the 1.5% improvement in gross margin percentage (for the reasons outlined above) and by the beneficial impact of the $8.3 million increase in revenue for the quarter. Our foreign operations contributed $215,000 in operating income for the quarter as compared to $562,000 in the first quarter of fiscal 2005. The decline in operating income occurred at the Company's U.K. subsidiary. Provision for income taxes for the first quarter of fiscal 2006 was $1,703,000, representing an effective tax rate of approximately 30%, as compared to an effective tax rate of 31% in the prior year's first quarter (and an effective rate of 28% for the whole of fiscal year 2005.) The comparatively lower effective tax rate for fiscal year 2005 included the recognition of certain tax benefits for Research & Development tax credits which were realized in fiscal 2005. Liquidity and Capital Resources - ------------------------------- As of October 30, 2005 and July 31, 2005, working capital was $92,959,000 and $88,343,000, respectively, and the ratio of current assets to current liabilities was 3.7 to 1 and 3.6 to 1, respectively. As is customary in the defense industry, inventory is partially financed by customer deposits and progress payments. The un-liquidated balance of these deposits and payments was approximately $4,111,000 at October 30, 2005, and $3,966,000 at July 31, 2005. Net cash provided by operations during the thirteen weeks ended October 30, 2005 was approximately $2,642,000 as compared to $7,458,000 during the comparable period in the prior year. Income from operations (adjusted for depreciation, amortization, and foreign exchange losses) was $5,674,000 in the first three months of the current fiscal year versus $4,702,000 in the similar period in the prior year, an increase of approximately $972,000. Significant items contributing to the overall decrease in cash provided by operations include the following: 1. a decrease of approximately $4.6 million in cash generated from collection of accounts receivable during the first three months of fiscal 2006 versus fiscal 2005. The largest impact was from a major contract at our Lancaster facility in connection with an upgrade for US Navy aircraft. The job was largely shipped during fiscal 2004 and early in fiscal 2005, which resulted in increased collections of accounts receivable in the first quarter of fiscal 2005; 2. an increase of approximately $2.5 million in the amount of cash invested in inventories during the first quarter of fiscal 2006 attributable to the ramping up of production on several programs transitioning from engineering development to manufacturing, and the purchase of long lead materials as well as quantity buys for several new contracts; 3. an increase of approximately $1.5 million in the amount of cash invested in costs incurred and income recognized in excess of billings on uncompleted contracts, including $2.2 million of estimated costs incurred and income recognized in connection with a claim due to customer delays and changes in specification and designs under a major program; offset primarily by an increase of approximately $800,000 in cash generated from billings in excess of costs incurred and income recognized on uncompleted contracts during the course of the three month period; and 15 Net cash used in investing activities includes capital expenditures of $1,820,000 including $584,000 at the Company's CTI facility for the purchase of equipment used for the production of millimeter wave products relating to the Xytrans license agreement. In June 2002, the Company entered into a new $50,000,000 Revolving Credit Loan Agreement with two banks on an unsecured basis which may be used for general corporate purposes, including business acquisitions. The revolving credit facility requires the payment of interest only on a monthly basis and payment of the outstanding principal balance on January 31, 2007 (as amended). The Company may elect to borrow up to a maximum of $5,000,000 with interest based on the Federal Funds Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on the ratio of total liabilities to tangible net worth, as those terms are defined in the agreement. The Federal Funds Target Rate and the LIBOR rate was 3.75% and 4.09%, respectively, at October 30, 2005. There is a fee of 15 basis points per annum on the unused portion of the $45,000,000 LIBOR based portion of the credit facility payable quarterly. There are no borrowings under the line at October 30, 2005 and July 31, 2005. Stand-by letters of credit were outstanding in the amount of approximately $11,103,000 under the credit facility at October 30, 2005, and $10,703,000 at July 31, 2005. The agreement contains various financial covenants, including, among other matters, minimum tangible net worth, total liabilities to tangible net worth, debt services coverage, and restrictions on other borrowings. The company is in compliance with all covenants at October 30, 2005. The Company believes that presently anticipated future cash requirements will be provided by internally generated funds, its existing unsecured credit facility, and existing cash reserves. A significant portion of our revenue for fiscal 2006 will be generated from our existing backlog of sales orders. The backlog of orders at October 30, 2005 was approximately $132 million. 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. As of October 30, 2005, the Company has approximately $38,897,000 available under its bank credit facility, net of outstanding stand-by letters of credit of approximately $11,103,000, and cash reserves of approximately $21,165,000. Disclosure Regarding Contractual Obligations and Commitments - ------------------------------------------------------------ Accounting standards require disclosure concerning the Company's obligations and commitments to make future payments under contracts, including interest, such as debt and lease agreements, and other contingent commitments, such as standby letters of credit. The following table summarizes the Company's contractual obligations and other contingent commitments, including interest, at July 31, 2005 (in thousands):
Within 2-3 4-5 After 5 Obligations Total 1 Year Years Years Years ------------ ----- ------- ----- ----- ----- Mortgage Note $ 2,571 $ 124 $ 270 $ 308 $ 1,869 Industrial Revenue Bonds 3,811 220 442 442 2,707 EWST Note 606 606 - - - Operating Lease Obligations 17,095 2,876 5,629 3,655 4,935 Purchase Obligations 22,038 17,739 3,106 1,063 130 ------- ------- ------- ------- ------- 46,121 21,565 9,447 5,468 9,641 Standby Letters of Credit 10,703 2,327 7,989 325 62 ------- ------- ------- ------- ------- Total Contractual Obligations $56,824 $23,892 $17,436 $ 5,793 $ 9,703 ======= ======= ======= ======= =======
Other than the ordinary course fulfillment of open purchase orders and placement of new purchase orders, there have been no other significant changes to the Company's contractual obligations table since July 31, 2005. New Accounting Pronouncements - ----------------------------- See Note 13 of Notes to Consolidated Financial Statements - (Unaudited) for the discussion on recent accounting pronouncements. 16 Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company's exposures to market risk have not changed significantly since July 31, 2005. Item 4: Controls and Procedures (a) Evaluation of disclosure controls and procedures. The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the "Exchange Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. The Company's management, with participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the design, operation and effectiveness of the Company's disclosure controls and procedures and have concluded, based on such evaluation, that such controls and procedures were effective at providing reasonable assurance that required information will be disclosed in the Company's reports filed under the Exchange Act as of October 30, 2005. (b) Changes in internal controls. There were no changes in the Company's internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended October 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 1 - Legal Proceedings: On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson ("Robinson") filed an Amended Complaint against Herley Industries, Inc. ("Herley"). Although the Amended Complaint sets forth fifteen counts, the core allegations were that Herley (i) failed to issue 97,841 shares of common stock in connection with certain earn out requirements contained in an Asset Purchase Agreement dated February 1, 2000; (ii) breached an Employment Agreement with Robinson by terminating his employment on August 5, 2001; and (iii) breached a Stock Option Agreement dated January 31, 2000. On September 17, 2001, Herley filed an Answer, Affirmative Defenses and Counterclaims in this matter and also filed Counterclaims against both RLI and Robinson. On August 5, 2002, a jury trial commenced. The original jury verdict in 2002 and various subsequent court actions in the State of New York awarded various damages to both parties, although these findings were subject to appeal. On June 28, 2004, Herley filed suit against Ben Robinson and Frank Holt in New Hampshire asserting claims for fraudulent conveyance and piercing the corporate veil, so as to hold Robinson personally liable for the legal fees incurred by Herley in defending RLI's claims discussed above. In response, Robinson took steps to collect damages awarded to him under the 2002 jury verdict. On July 27, 2004, Herley paid $1,594,621 (including interest) to Ben Robinson, and this charge was reflected in Herley's Statement of Operating Income for the period ended July 31, 2004. By Order dated February 8, 2005, the Superior court of Hillsborough County, New Hampshire, granted Ben Robinson's and Frank Holt's Motion for Summary Judgment in the New Hampshire action. By Order Dated February 17, 2005, the Court ruled upon the parties' cross-petitions for attorneys' fees, granting all petitions in their entirety. Herley was awarded $2,146,882 against RLI under the Asset Purchase Agreement. RLI was awarded $54,426 against Herley for its successful defense of an indemnity by Herley. Ben Robinson was awarded $259,295 against Herley under the Lease Agreement. On June 3, 2005, Herley reached an agreement in principle with Robinson, RLI and Holt under which Herley agreed to pay Robinson $260,000 for the attorneys fees awarded to him by the New York Court in one of the previous actions. Further, all claims, counterclaims and appeals in the New York and New Hampshire actions, as well as all claims and counterclaims in a separate proceeding docketed as Herley Industries, Inc. v. RH Laboratories, Inc., Stephen Robinson and Michael Gravelese, would be dismissed with prejudice pursuant to this agreement in principle. Based upon this agreement in principle, the Company recorded a provision in the third quarter of fiscal 2005 to account for this settlement, and the settlement was paid in the fourth quarter of fiscal 2005. The Company is involved in various other legal proceedings and claims which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such litigation will not have a material adverse effect on the Company's financial position or results of operations. Item 2 - Changes In Securities: None 17 Item 3 - Defaults Upon Senior Securities: None Item 4 - Submission Of Matters To A Vote Of Security Holders: None Item 5 - Other Information: None Item 6 - Exhibits 31 Certifications pursuant to Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 18 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, Acting Chief Financial Officer DATE: December 13, 2005 19 EX-31 2 hrly10qoct05-ex31.txt CERTIFICATIONS EXHIBIT 31 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) I, Myron Levy, Vice Chairman of the Board and Chief Executive Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Herley Industries, Inc. ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fiscal quarter ended October 30, 2005 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 13, 2005 By: /s/ Myron Levy Name: Myron Levy Title: Vice Chairman of the Board and Chief Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) I, Anello C. Garefino, Acting Chief Financial Officer, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Herley Industries, Inc. ("the registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a- 15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fiscal quarter ended October 30, 2005 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 13, 2005 By: /s/ Anello C. Garefino Name: Anello C. Garefino Title: Acting Chief Financial Officer EX-32 3 hrly10qoct05-ex32.txt CERTIFICATIONS EXHIBIT 32 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Herley Industries, Inc. (the "Company") on Form 10-Q for the quarter ended October 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myron Levy, Vice Chairman of the Board and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) Such Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 13, 2005 By: /s/ Myron Levy Name: Myron Levy Title: Vice Chairman of the Board and Chief Executive Officer CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Herley Industries, Inc. (the "Company") on Form 10-Q for the quarter ended October 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Anello C. Garefino, Acting Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) Such Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: December 13, 2005 By: /s/ Anello C. Garefino Name: Anello C. Garefino Title: Acting Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----